Vera Bradley, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended November 3, 2018 (13 weeks), with year-to-date results for the 39 weeks ended that date. Comparisons are to the periods ended October 28, 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 Direct channels (stores and e-commerce) and Indirect channels (retailers, other accounts and licensing). At quarter-end it operated 102 full-line stores and 57 factory outlets.
| Metric | Third quarter 2018 | Third quarter 2017 | 39 weeks 2018 | 39 weeks 2017 |
|---|---|---|---|---|
| Net revenue | $97.7 million | $114.1 million | $297.9 million | $322.6 million |
| Gross profit / margin | $57.2 million / 58.5% | $63.8 million / 55.9% | $171.5 million / 57.6% | $179.8 million / 55.7% |
| Operating income (loss) | $5.3 million | $0.5 million | $15.4 million | $(0.6) million |
| Net income (loss) | $4.2 million | $0.4 million | $12.1 million | $(1.5) million |
| Diluted EPS | $0.12 | $0.01 | $0.34 | $(0.04) |
| Operating cash flow | Not separately presented | Not separately presented | $11.6 million | $7.5 million |
Financial position and liquidity
- At November 3, cash and cash equivalents were $62.3 million; short- and long-term investments totaled $69.3 million, for combined cash and investments of $131.6 million. Cash and cash equivalents were $68.8 million at February 3, 2018.
- Total assets were $353.0 million and shareholders’ equity was $289.9 million. Inventory was $96.3 million, versus $87.8 million at February 3.
- No borrowings were outstanding. The new asset-based revolving credit facility provides up to the lesser of $75 million or borrowing-base availability; reported availability was $75 million. It matures September 7, 2023, is secured by substantially all relevant assets, and contains covenants, including a conditional fixed-charge coverage requirement.
- For the 39 weeks, investing cash use was $6.5 million, including $6.6 million in capital expenditures; financing cash use was $11.5 million, including $10.8 million of share repurchases. Cash declined $6.4 million to $62.3 million.
Material changes versus the prior comparable periods
- Quarterly revenue fell 14.4%; comparable sales declined 16.5%, including a 24.8% e-commerce decline and 13.1% comparable-store decline. Direct revenue fell 11.7% and Indirect revenue fell 21.7%. Management attributed Direct pressure partly to a shift in promotional events and reduced clearance activity; Indirect sales reflected lower orders from specialty and key accounts.
- Year-to-date revenue decreased 7.7%. Comparable sales declined 9.9%, including a 23.2% e-commerce decline and 4.9% comparable-store decline.
- Gross margin improved 2.6 percentage points in the quarter and 1.9 points year to date. Management cited less clearance activity, more full-price selling, channel mix and lower product costs; year-to-date results also benefited from freight and shipping savings. Lower revenue nevertheless reduced gross profit dollars.
- Operating income improved substantially, while SG&A decreased 18.3% in the quarter and 13.6% year to date. Comparisons benefited from prior-year store impairments, severance, consulting and other restructuring-related charges that did not recur, as well as current expense reductions. The prior-year 39-week period also included a net loss.
- The company adopted ASC 606 in fiscal 2019 using the modified retrospective method; prior-year figures were not recast. Adoption reduced reported quarterly revenue by $1.0 million and net income by $0.5 million, but increased year-to-date revenue by $1.9 million and net income by $0.9 million versus prior U.S. GAAP. This limits period-to-period comparability.
Outlook, management commentary, risks and unusual items
- Vision 20/20 is intended to turn around the business through product, pricing and cost initiatives. Management expected fiscal 2019 revenue to be $38–$43 million below fiscal 2018 levels as a result of these initiatives. It targeted up to $30 million in annual SG&A reductions versus a fiscal 2017 base, with approximately $25 million expected by fiscal 2019 year-end.
- The company forecast closing up to 45 full-line stores by fiscal 2021, primarily as leases expire; 12 had been closed since fiscal 2018. Two underperforming full-line stores closed during the quarter. Fiscal 2019 capital expenditures were expected to be approximately $8 million.
- Management said reduced clearance activity in full-line stores and on the main website exceeded 70% year over year, while comparable full-price selling in those channels increased by over 10%. Initiatives also included digital-focused marketing and customizable bags.
- No Vision 20/20 charges were recorded in the current quarter or year-to-date period; $16.7 million of pre-tax charges had been recognized in fiscal 2018. The prior-year comparison also included other charges.
- On November 29, 2018, the board authorized up to $50 million of share repurchases from December 14, 2018 through December 14, 2020. The prior program was completed November 27, after quarter-end.
- Risks highlighted include continued comparable-sales declines, execution of the turnaround and multi-channel strategy, consumer demand and competition, brand strength, store performance, talent retention, data security, and potential tariffs and margin pressure. A 2016 payment-card incident remained subject to state inquiries, including ongoing discussions with Indiana; claims were expected to be insured, with $15 million of cyber coverage above a $0.1 million deductible. Management did not expect remaining matters to have a material adverse effect.
- Adoption of the new lease standard was planned for February 3, 2019. Because the company leases all retail stores, it expected a material increase in balance-sheet assets and liabilities; the impact on results and cash flows was still being evaluated.
Most important facts for investors to verify
- Whether comparable sales—especially e-commerce—stabilize, and whether reduced promotions and higher full-price selling can support revenue and margins.
- Progress against the fiscal 2019 revenue impact estimate, SG&A savings targets, and planned store closures.
- How much reported performance reflects sustainable operating improvement versus prior-year charges not recurring and ASC 606 timing effects.
- Inventory levels, operating cash generation, repurchases, and continued access to the borrowing base under the secured credit facility.
- The eventual balance-sheet impact of lease accounting and developments in the payment-card incident and other contingencies.