Vera Bradley, Inc. — Form 10-Q Summary
Business context and period. Unaudited results cover the 13 and 39 weeks ended November 2, 2019, the third quarter and first three quarters of fiscal 2020. Vera Bradley sells handbags, travel goods, accessories, and gifts through direct and wholesale channels. Results now include Pura Vida, acquired July 16, 2019; prior-year results do not, so reported growth is not fully comparable.
Financial performance
| Metric | 13 weeks ended Nov. 2, 2019 | 13 weeks ended Nov. 3, 2018 | 39 weeks ended Nov. 2, 2019 | 39 weeks ended Nov. 3, 2018 |
|---|---|---|---|---|
| Revenue | $127.5m | $97.7m | $338.3m | $297.9m |
| Gross profit / margin | $67.9m / 53.2% | $57.2m / 58.5% | $185.7m / 54.9% | $171.5m / 57.6% |
| Operating income (loss) / margin | $(1.5)m / (1.2)% | $5.3m / 5.5% | $2.2m / 0.7% | $15.4m / 5.2% |
| Net income (loss), consolidated | $(1.0)m | $4.2m | $2.3m | $12.1m |
| Net income attributable to Vera Bradley | $0.1m; $0.00 diluted EPS | $4.2m; $0.12 diluted EPS | $3.6m; $0.10 diluted EPS | $12.1m; $0.34 diluted EPS |
- Quarterly revenue rose 30.5%, including $25.0m from Pura Vida. Vera Bradley Direct revenue increased 6.7%; Indirect revenue declined 0.6%. Comparable sales increased 4.7% (e-commerce +6.9%; comparable stores +4.0%).
- For the 39-week period, revenue increased 13.6%; Direct revenue grew 6.0%, while Indirect revenue fell 5.8%. Comparable sales increased 3.8%.
- Gross margin declined 5.3 percentage points in the quarter and 2.7 points year to date. Inventory purchase-accounting step-up expense reduced gross margin by $6.2m in the quarter and $7.2m year to date. Tariffs on China-sourced goods and higher shipping costs also pressured margin; improved full-price selling, sourcing, and operating efficiencies partly offset the effects.
- Quarterly SG&A rose to $69.4m from $51.9m; as a share of revenue it increased to 54.4% from 53.1%. Key added costs included Pura Vida operations, intangible amortization, earn-out accretion, technology re-platforming, and new stores.
- Cash from operations was $(9.2)m for the 39 weeks, versus $11.6m generated a year earlier. The principal working-capital use included a $22.0m inventory increase, attributed largely to accelerated receipts.
- Investing cash outflow was $67.0m, including $76.0m net cash paid for the acquisition, partly offset by investment maturities and sales. Financing cash outflow was $11.2m, including $9.1m in share repurchases.
Financial position, liquidity, and material changes
- At November 2, 2019, cash and cash equivalents were $26.0m; short- and long-term investments were $9.4m and $13.4m. Cash and investments totaled $48.8m, down from $156.6m at February 2, 2019, principally reflecting the Pura Vida purchase and other cash uses.
- Total assets were $532.0m, including $116.6m of operating right-of-use assets, $58.8m of intangible assets, and $44.6m of goodwill. Inventory was $134.0m versus $91.6m at fiscal year-end.
- The company had no borrowings under its $75m asset-based revolving facility and reported no debt outstanding. The facility was undrawn and available; the company reported compliance with its covenants. Current liabilities included a $21.9m Pura Vida earn-out liability.
- ASC 842 lease adoption added material assets and liabilities; at quarter-end operating lease liabilities totaled $137.9m. Prior-year balance-sheet comparisons were not recast. Lease adoption did not affect reported operating results.
- Share repurchases totaled $9.0m for the 39 weeks; $38.1m remained under the $50m authorization.
Outlook, commentary, risks, and unusual items
- Management said available cash, investments, operating cash flows, and the credit facility should be sufficient for foreseeable working-capital needs, anticipated capital expenditures, and other planned cash uses. Fiscal 2020 capital expenditures were expected to be approximately $13m. The filing provides no earnings or revenue guidance.
- The Pura Vida acquisition cost approximately $75m at closing, with an additional approximately $3m working-capital adjustment. A contingent payment of up to $22.5m, based on calendar 2019 adjusted EBITDA, was expected in the first quarter of calendar 2020; its quarter-end fair value was $21.9m. The purchase-price allocation remained preliminary.
- Vera Bradley owns 75% of Pura Vida; the remaining 25% is subject to put/call rights generally exercisable after the fifth and through the tenth anniversary of closing. The filing warns that acquiring the remaining interest could create a significant future financial obligation.
- Management cited continuing efforts to mitigate China tariffs through sourcing and pricing changes and reduced reliance on China production. Risks include tariffs, consumer demand and comparable-sales weakness, execution of the strategic plan, and Pura Vida performance and integration. Pura Vida-related goodwill and intangible assets could require impairment.
- A lawsuit filed by Vesi Incorporated seeks at least $10m in damages and alleges claims related to Vera Bradley’s licensing business. The company denies liability, is defending the case, and filed a counterclaim; it could not estimate a possible loss or range.
- Other significant quarter items included $1.1m of technology re-platforming charges and $6.2m of inventory step-up expense. Management reported no impairment charges for the periods presented and effective disclosure controls as of November 2, 2019.
Most important facts to verify
- How much of reported revenue growth and future performance is attributable to Pura Vida versus underlying Vera Bradley trends.
- Whether gross-margin pressure from tariffs, freight, and acquisition accounting subsides, and whether comparable-sales growth continues.
- Pura Vida’s profitability, integration progress, final purchase-price allocation, earn-out payment, and potential future put/call obligation.
- Inventory levels and operating cash flow conversion after the substantial inventory build and acquisition-related cash outflow.
- Developments in the Vesi litigation and any change in the company’s ability to estimate potential exposure.