Vera Bradley, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Thirteen weeks ended July 30, 2011; year-to-date (YTD) figures cover the twenty-six weeks ended that date. Comparatives are the periods ended July 31, 2010. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
Vera Bradley designs, markets, and sells women’s accessories through its Indirect segment (independent and select national retailers) and Direct segment (company-operated stores, e-commerce, Japanese pop-up stores, and its annual outlet sale). At quarter-end, the company had 43 full-price and six outlet stores, compared with 31 and two, respectively, a year earlier. It also sold through approximately 3,300 independent retailers.
Financial performance
| Metric | Q2 2011 | Q2 2010 | YTD 2011 | YTD 2010 |
|---|---|---|---|---|
| Revenue | $103.8 | $80.1 | $205.2 | $165.1 |
| Gross profit | $59.6 | $46.8 | $116.1 | $95.6 |
| Operating income | $22.9 | $9.7 | $42.0 | $27.0 |
| Net income | $13.6 | $9.2 | $24.9 | $26.0 |
| Diluted EPS | $0.34 | $0.26 | $0.61 | $0.73 |
| Gross margin | 57.5% | 58.5% | 56.6% | 57.9% |
| Operating margin | 22.1% | 12.1% | 20.5% | 16.3% |
- Q2 revenue rose 29.6%; Indirect revenue increased 18.1% to $55.9 million and Direct revenue increased 46.3% to $47.9 million. Direct growth reflected new stores, e-commerce, and 10.5% comparable-store sales growth. The timing of the annual outlet sale reduced the quarter’s year-over-year comparison.
- YTD revenue increased 24.3%. Comparable-store sales rose 14.9% YTD, versus 26.0% in the prior-year period. Direct represented 44.8% of YTD revenue, up from 38.5%.
- Gross margin declined in both periods, attributed primarily to higher input costs and operational-cost alignment; YTD, a shift toward higher-margin Direct revenue partly offset the pressure.
- Operating income growth reflected revenue leverage and lower prior-year corporate expenses. The prior-year quarter included $6.1 million of bonuses associated with restricted-stock awards, as well as higher IPO-readiness professional fees in the broader prior-year comparison.
- YTD reported net income fell 4.3% despite higher operating income, largely because the current period included corporate income taxes. Vera Bradley converted from an S corporation to a C corporation in October 2010. The filing’s pro forma 2010 YTD C-corporation net income was $15.8 million, compared with reported 2010 net income of $26.0 million; these figures are not directly comparable without considering the tax-status change.
Cash flow, debt, and liquidity
- YTD operating cash flow was negative $11.8 million, compared with positive $23.1 million a year earlier. The company attributed the $34.9 million decline mainly to cash use from accrued liabilities, accounts receivable, and inventory.
- YTD capital expenditures were $6.5 million, versus $4.8 million. Cash and cash equivalents fell to $0.8 million at July 30, 2011, from $14.0 million at January 29, 2011.
- Total debt was $71.7 million, including $71.45 million under the credit agreement. The $125 million revolving facility had $53.6 million of borrowing availability; its weighted-average borrowing rate was 1.2749%. The company reported compliance with its financial covenants.
- Management said operating cash flows and available credit should fund working capital, planned capital expenditures, and debt payments for the foreseeable future. The current ratio was approximately 3.2, based on reported current assets of $180.6 million and current liabilities of $56.3 million; cash itself was limited.
Outlook, risks, and unusual items
- Management cited growth opportunities from new stores, underpenetrated markets, broader product offerings, and the Japan launch, and expected these opportunities to support meaningful growth for the remainder of fiscal 2012. The filing provides no specific revenue or earnings guidance.
- Fiscal 2012 capital expenditures were expected to be approximately $15 million. Management did not expect Direct expansion to materially change working-capital needs or require materially higher borrowing in the near term.
- Risks highlighted include economic weakness and consumer spending, changing fashion preferences, brand strength, execution of growth and store openings, comparable-store sales, talent retention, and raw-material and labor costs.
- In June 2011, the company sold certain life insurance policies on founders who are also directors and officers for $0.7 million, recognizing a $0.1 million gain in other income. Management considered the likelihood of material adverse effects from ordinary-course claims and contingencies remote.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether revenue and comparable-store sales growth can be sustained as the store base expands, and whether Direct growth translates into durable profitability.
- How gross-margin pressure from input costs and operations develops, particularly alongside continued store and Japan expansion.
- Whether working-capital investment—especially inventory and receivables—and low cash balances continue to drive negative operating cash flow.
- How to interpret year-over-year net income and EPS given the S-to-C corporation tax transition and the $6.1 million prior-year bonus item.
- Future borrowing needs, covenant headroom, and the return on the planned approximately $15 million of fiscal 2012 capital expenditures.