Vera Bradley, Inc. — Q3 FY2018 Form 10-Q
Reporting period: Thirteen weeks ended October 28, 2017; year-to-date figures cover 39 weeks. Comparisons are with the periods ended October 29, 2016. Financial statements are unaudited.
Business context
Vera Bradley designs and sells handbags, luggage, travel items, accessories, and gifts through Direct channels (stores, e-commerce, and its outlet sale) and Indirect wholesale, third-party, and licensing channels. At quarter end it operated 112 full-line and 52 factory outlet stores; it also sold through approximately 2,400 specialty retail locations.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | 39 weeks FY2018 | 39 weeks FY2017 |
|---|---|---|---|---|
| Revenue | $114.1m | $126.7m | $322.6m | $351.1m |
| Gross profit / margin | $63.8m / 55.9% | $72.9m / 57.6% | $179.8m / 55.7% | $201.0m / 57.2% |
| Operating income (loss) | $0.5m | $11.4m | $(0.6)m | $23.6m |
| Net income (loss) | $0.4m | $8.8m | $(1.5)m | $16.3m |
| Diluted EPS | $0.01 | $0.24 | $(0.04) | $0.44 |
- Quarterly revenue declined 9.9%; year-to-date revenue declined 8.1%. Comparable sales, including e-commerce, fell 7.4% in the quarter and 7.7% year to date.
- Q3 Direct revenue fell 3.4% to $83.2m; Indirect revenue fell 23.8% to $30.9m. Year-to-date Direct revenue declined 2.0% and Indirect declined 22.4%.
- Q3 gross margin fell 1.7 percentage points. Management cited outlet promotions, inventory adjustments, and channel mix, partly offset by lower product costs. SG&A rose 2.7% to $63.5m and increased to 55.7% of revenue from 48.8%.
- Operating cash flow was $7.5m for the 39 weeks, down from $26.5m. Capital expenditures were $8.9m; cash used in investing was $15.7m and cash used in financing was $6.8m. Cash decreased $15.1m to $71.3m.
- At October 28, cash and investments totaled approximately $108.1m: cash and cash equivalents $71.3m, short-term investments $21.7m, and long-term investments $15.1m. Current assets were $235.0m and current liabilities $50.1m.
- No borrowings were outstanding under the $125m credit facility; the full amount was available. The company reported compliance with covenants. Long-term liabilities were $26.3m.
Material changes and management commentary
- Q3 operating results included $12.6m of pre-tax Vision 20/20 charges ($7.9m after tax), including $5.9m store impairments, $2.9m severance, $2.3m consulting, $0.9m inventory adjustments, and $0.6m other charges. Year-to-date Vision 20/20 charges were $14.9m pre-tax.
- Management launched Vision 20/20, a three-year turnaround plan focused on restoring full-price sales, reducing clearance, streamlining products, reducing corporate costs, and closing underperforming stores. The company expects FY2019 revenue to be $30m–$50m below FY2018 levels due to the initiatives; it targets up to $30m in annual SG&A reductions versus the FY2017 base, with $20m–$25m expected by the end of FY2019. Up to 50 stores may close by FY2021.
- Management expects a further $1.0m–$1.5m of pre-tax Vision 20/20 restructuring charges in the remainder of FY2018 and does not expect a material revenue impact in the current fiscal year. FY2018 capital expenditures were expected to total approximately $10m–$12m.
- The board subsequently authorized extending the share repurchase program through December 31, 2018. The company repurchased $6.3m of shares year to date; $15.1m remained authorized at quarter end.
Risks, contingencies, and unusual items
- Q3 comparable sales weakness reflected lower store and e-commerce traffic; e-commerce sales fell 8.6% in the quarter. Indirect sales were pressured by lower orders and fewer specialty retail accounts.
- A 2016 payment-card incident affecting some in-store card transactions was described as resolved, but possible payment-card company reimbursements, fines, penalties, or other claims could not be reasonably estimated. The company had $15m of cyber insurance above a $0.1m deductible and cautioned that the matter could materially affect results.
- An October 2017 credit-agreement amendment changed certain financial covenant thresholds and investment restrictions. The facility is secured by company and subsidiary assets and includes restrictions on capital expenditures, distributions, and stock repurchases, among other matters.
- The company expects adoption of the new lease standard to materially increase balance-sheet assets and liabilities; the financial impact was still under evaluation. Revenue-standard adoption was planned for FY2019, with the company still assessing effects.
- Q3 effective tax rate was 38.5%, versus 22.6% a year earlier, partly because a prior-year $1.6m tax-reserve release did not recur. The year-to-date effective tax rate was (298.1)% on a pre-tax loss, reflecting permanent and discrete items, including stock-compensation tax shortfalls.
Important facts for investors to verify
- Whether the Vision 20/20 revenue and cost-reduction targets are achieved, and the timing and costs of store closures and restructuring.
- Whether comparable-sales declines, particularly in e-commerce and Indirect channels, continue or stabilize.
- How much of operating performance is recurring after impairment, severance, consulting, inventory, and other restructuring charges.
- Future cash generation, investment balances, capital spending, and compliance with amended credit-facility covenants.
- Any material claims, assessments, or insurance recoveries related to the payment-card incident.