Vera Bradley, Inc. — Form 10-Q Summary
Business context and period. Vera Bradley designs and sells handbags, luggage, accessories, and gifts through Direct channels (stores and e-commerce) and Indirect channels (wholesale, retail partners, and licensing). This unaudited report covers the thirteen weeks ended April 29, 2017, the first quarter of fiscal 2018, compared with the thirteen weeks ended April 30, 2016.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net revenue | $96.1 million | $105.2 million |
| Gross profit / margin | $52.7 million / 54.8% | $59.7 million / 56.7% |
| Operating income (loss) / margin | ($4.8) million / (5.0)% | $3.9 million / 3.7% |
| Net income (loss) | ($4.0) million | $2.4 million |
| Diluted EPS | ($0.11) | $0.06 |
| Operating cash flow | ($9.9) million | ($4.0) million |
Direct revenue declined 5.6% to $68.8 million; comparable sales fell 12.5%, including a 22.0% e-commerce decline and a 7.8% comparable-store decline. Indirect revenue declined 15.3% to $27.3 million. Segment operating income was $6.8 million for Direct and $9.4 million for Indirect, before $21.1 million in unallocated corporate expenses.
At April 29, 2017, cash and cash equivalents were $74.4 million, short-term investments $9.5 million, and long-term investments $17.5 million, totaling approximately $101.4 million. Total assets were $362.3 million and total liabilities $83.0 million. Inventories were $105.4 million, up from $102.3 million at January 28, 2017. The company had no debt outstanding and reported $125.0 million of borrowing availability under its credit agreement; it was in compliance with covenants. Operating cash use was $9.9 million; capital expenditures were $3.4 million and share repurchases were $1.2 million.
Changes and management commentary
- Revenue decreased 8.6% year over year. Management attributed Direct weakness primarily to lower store and e-commerce traffic; the website platform conversion also affected e-commerce sales. Indirect sales were pressured by lower orders and fewer specialty retail accounts.
- Gross margin fell 1.9 percentage points, primarily due to channel mix and increased factory-outlet promotions. SG&A rose 2.5% to $57.8 million and increased as a share of revenue to 60.1%, reflecting lower sales and $1.3 million of severance charges, primarily for the former CFO.
- Net loss included the severance charges, equal to $0.8 million after tax, or $0.02 per diluted share. The effective tax rate was 15.0%, versus 36.5% in the prior-year quarter; management cited the relative effect of permanent and discrete items, including a stock-compensation tax shortfall.
- Management reported a new verabradley.com platform launched in February, continued store renovations, three new factory outlet stores, and licensing initiatives. Approximately 19 additional full-line store renovations were planned for the remainder of fiscal 2018.
Liquidity, outlook, risks, and unusual items
Management said available cash, investments, operating cash flows, and the credit facility should be sufficient for foreseeable working-capital, capital-expenditure, repurchase, and debt needs. Fiscal 2018 capital expenditures were expected to be approximately $10 million to $15 million. The filing provides no specific revenue or earnings guidance, and cautions that first-quarter results are not necessarily indicative of the full year.
The company disclosed a payment-card incident involving possible exposure of payment-card data used at stores from July 25 through September 23, 2016; online transactions were not affected. The incident was resolved, but potential card-network reimbursements, fines, penalties, or other claims could not be reasonably estimated and could materially affect results. The company maintained $15 million of cyber insurance above a $0.1 million deductible and expected coverage to offset most specified expenses.
Other relevant items include a $50 million share-repurchase authorization expiring in December 2017, with $20.1 million remaining at quarter-end. The company said adoption of the new lease standard is expected to materially increase balance-sheet assets and liabilities; the impact of the new revenue standard was still under evaluation. Forward-looking risks include continued comparable-sales declines, execution of the strategic plan and multi-channel model, changing consumer demand, and data-security risks.
Important facts for investors to verify
- Whether comparable-sales weakness, particularly e-commerce and specialty wholesale trends, persists or improves.
- Whether gross-margin pressure and SG&A deleverage continue, and how much of the quarterly loss was attributable to severance.
- Operating cash use, inventory levels, and the timing of supplier payments and income-tax payments.
- Any developments in payment-card claims, assessments, insurance recoveries, or related costs.
- Execution and costs of planned store renovations, new stores, and the $10–$15 million fiscal 2018 capital-expenditure plan.
- Available liquidity and compliance with credit-facility covenants, including any future borrowing or repurchase restrictions.