Vera Bradley, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first half of fiscal 2014, ended August 3, 2013. Comparisons are with the 13 and 26 weeks ended July 28, 2012. Amounts below are in millions unless stated otherwise.
Business context and reporting period
Vera Bradley designs, markets, and sells women’s accessories through its Direct and Indirect segments. Direct includes company-operated stores, e-commerce, and other direct channels; Indirect primarily serves specialty retailers and other wholesale accounts. At quarter-end, the company operated 80 full-price and 14 outlet stores, versus 70 stores a year earlier.
Financial performance and liquidity
- Second quarter: Revenue rose 1.9% to $125.4 million. Gross profit was $71.8 million (57.2% margin), operating income was $24.1 million (19.2% margin), and net income increased to $15.0 million, or $0.37 per diluted share.
- First half: Revenue increased 3.4% to $248.4 million. Gross profit was $140.2 million (56.5% margin); operating income declined 7.9% to $39.3 million (15.8% margin); net income declined to $24.1 million from $26.0 million, and diluted EPS was $0.59 versus $0.64.
- Cash flow: First-half operating cash flow was $27.0 million, compared with $25.5 million a year earlier. Investing cash outflow was $12.0 million, primarily property and equipment purchases; financing cash outflow was $15.3 million. Cash ended at $9.3 million.
- Balance sheet: Cash and current assets were $9.3 million and $209.8 million, respectively; current liabilities were $56.7 million. Working capital was approximately $153.1 million. Inventories were $142.9 million, up from $131.6 million at fiscal year-end.
- Debt and liquidity: The company had no debt outstanding at August 3, after repaying its long-term debt. It had $125 million available under its revolving credit agreement and reported covenant compliance. The facility matures June 1, 2017.
Material changes versus the prior comparable period
- Quarterly Direct revenue increased 14.2% to $75.0 million, but comparable-store sales fell 3.7%. Growth reflected additional stores and e-commerce; management cited weaker product performance and lower store traffic as factors in the comparable-store decline. Website traffic grew 20% in the quarter.
- Quarterly Indirect revenue declined 12.2% to $50.4 million, reflecting continued lower specialty-retailer orders; department-store sales partly offset the decline.
- First-half Direct revenue rose 19.0% to $148.7 million, while Indirect revenue fell 13.5% to $99.7 million. Comparable-store sales declined 1.8% for the first half.
- Gross margin improved in both periods, primarily because the company provided fewer incentives to specialty retailers. First-half SG&A rose 9.0% to $103.6 million, with its share of revenue increasing to 41.7% from 39.6%; cited drivers included lower Indirect revenue, store expense deleverage, and added employee costs.
- First-half operating income fell despite higher revenue, reflecting higher SG&A and lower Indirect segment operating income. Quarterly operating income increased 10.4%.
- The company opened 18 stores in the first half, versus 14 in the prior-year period, and announced design-center and distribution-center expansions near Fort Wayne.
Outlook, commentary, risks, and contingencies
- Management expected fiscal 2014 capital expenditures of approximately $30 million, including about $10 million for design-center and distribution-center expansions. The filing provides no specific revenue or earnings guidance.
- Management stated that operating cash flow and available credit were expected to be sufficient for working capital, anticipated capital expenditures, and debt payments for the foreseeable future.
- Identified risks include changes in consumer spending and preferences, difficulty responding promptly to demand and fashion trends, brand and talent risks, execution of growth and store-opening plans, comparable-store sales performance, and raw-material and labor costs.
- The company reported ordinary-course claims and contingencies, including product-liability, legal, employee-benefit, and environmental matters; management did not believe they were reasonably likely to materially affect financial condition, results, or cash flows. No material change in previously reported risk factors or market risks was disclosed.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the sharp decline in Indirect sales and specialty-retailer orders continues, and whether Direct growth can offset it.
- Trends in comparable-store sales, store traffic, and product performance, particularly as the store base expands.
- Whether gross-margin improvement persists and whether SG&A growth and store-cost deleverage pressure operating margins.
- Inventory growth relative to sales, planned capital spending, and execution and returns from the announced facility expansions.
- That the company remained debt-free at quarter-end while retaining the reported $125 million of revolving borrowing availability.