Vera Bradley, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2019, the 13 weeks ended May 5, 2018; comparisons are with the 13 weeks ended April 29, 2017, unless noted. Amounts are in U.S. dollars.
Business context and results
Vera Bradley designs and sells handbags, travel goods, accessories, home products, and gifts through its Direct and Indirect segments. At quarter-end, it operated 105 full-line stores and 55 factory outlets; its Indirect channel served approximately 2,400 specialty retail locations.
| Metric | Quarter ended May 5, 2018 | Prior-year quarter |
|---|---|---|
| Revenue | $86.6 million | $96.1 million |
| Gross profit / margin | $48.6 million / 56.1% | $52.7 million / 54.8% |
| SG&A | $50.7 million | $57.8 million |
| Operating loss | $1.9 million | $4.8 million |
| Net loss / diluted loss per share | $1.4 million / $0.04 | $4.0 million / $0.11 |
| Operating cash flow | $(1.8) million | $(9.9) million |
- Revenue fell 9.9%. Direct revenue declined 4.8% to $65.5 million; Indirect revenue declined 22.9% to $21.1 million.
- Comparable sales fell 8.5%, including a 21.0% decline in e-commerce and a 3.8% decline in comparable store sales.
- Gross margin improved 1.3 percentage points. Management attributed the improvement to reduced clearance, stronger full-price selling, channel mix, lower product costs, and freight savings; outlet promotions partly offset the gains.
- Segment operating income was $7.3 million Direct and $8.3 million Indirect. Corporate unallocated expenses were $17.5 million.
Balance sheet and liquidity
- Cash and cash equivalents were $61.4 million; short- and long-term investments totaled $70.9 million. Combined cash and investments were $132.3 million.
- Current assets were $240.5 million and current liabilities $34.3 million. Inventory was $86.2 million.
- No borrowings were outstanding under the $125 million credit facility, and the full amount was available. The company reported compliance with its covenants. The facility is secured by company assets and contains financial and other restrictions.
- Investing cash outflow was $5.0 million, including $3.7 million of capital expenditures; financing cash outflow was $0.5 million. Cash declined $7.3 million during the quarter.
Material changes and accounting comparability
- Net loss improved by $2.7 million year over year, but the comparison includes the prior-year quarter’s $1.3 million severance charge, which did not recur.
- ASC 606 was adopted using the modified retrospective method in fiscal 2019. The filing reports a $0.5 million adjustment to beginning retained earnings. The new standard increased current-quarter reported revenue by $1.6 million and benefited operating results by about $1.0 million. Under prior GAAP, current-quarter revenue would have been $85.0 million and net loss $2.2 million. Prior-year results were not recast.
- SG&A fell 12.2%, reflecting lower employee-related and advertising costs, expense management, and the absence of prior-year severance expense; new-store costs partly offset savings.
Outlook, management commentary, and risks
- Under its Vision 20/20 turnaround plan, management expected fiscal 2019 revenue to be $30 million to $50 million below fiscal 2018, reflecting product, pricing, and reduced-clearance initiatives.
- Management targeted annual SG&A reductions of up to $30 million versus fiscal 2017 levels, with $20 million to $25 million expected by the end of fiscal 2019. It planned to close up to 45 full-line stores by fiscal 2021; nine had closed since fiscal 2018. Four factory outlets opened and four underperforming full-line stores closed during this quarter.
- Fiscal 2019 capital expenditures were expected to be approximately $10 million. Management said available cash, investments, operating cash flow, and credit availability should fund foreseeable needs.
- Management reported reduced clearance activity by more than 75% in full-line stores and on the main website, alongside high-single-digit growth in comparable full-price selling there. It also reported nearly 300 million marketing impressions, over 20 million more than a year earlier.
- The 2016 payment-card incident may still result in additional claims, fines, or penalties that the company cannot estimate; it maintains $15 million of cyber insurance above a $0.1 million deductible and expects coverage to offset most related costs.
- Other risks include execution of the turnaround, continued comparable-sales declines, consumer demand and competitive pressures, brand and channel performance, and data security. The filing said adoption of the new lease standard is expected to materially increase balance-sheet assets and liabilities.
Important facts for investors to verify
- Whether sales and comparable-sales trends improve, especially in e-commerce and the Indirect channel, as clearance reductions continue.
- Whether the planned revenue impact and SG&A savings under Vision 20/20 track management’s stated ranges, including store closures and related costs.
- How results compare under consistent revenue-accounting treatment, given ASC 606’s reported $1.6 million current-quarter revenue benefit.
- Whether operating cash flow, inventory, and the $132.3 million cash-and-investment position remain adequate while the company funds capital spending and its turnaround.
- Whether further payment-card claims or penalties arise and are covered by insurance, and how lease accounting changes reported liabilities.