Vera Bradley, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Second quarter and first half of fiscal 2023, comprising the 13 and 26 weeks ended July 30, 2022. Comparisons are with the corresponding 2021 periods. Amounts are in U.S. dollars.
Business context and results
Vera Bradley operates the Vera Bradley Direct and Indirect businesses and Pura Vida. In the quarter, it operated 64 full-line and 79 factory outlet stores; Pura Vida had two retail stores. Quarterly revenue fell 11.3% year over year, to $130.4 million.
| Metric | Q2 FY2023 | Q2 FY2022 | First half FY2023 | First half FY2022 |
|---|---|---|---|---|
| Revenue | $130.4m | $147.0m | $228.8m | $256.1m |
| Gross profit | $60.5m | $80.4m | $113.0m | $139.5m |
| Gross margin | 46.4% | 54.6% | 49.4% | 54.5% |
| Operating income (loss) | $(42.8)m | $12.6m | $(51.1)m | $10.7m |
| Net income (loss) attributable to Vera Bradley, Inc. | $(29.8)m | $9.1m | $(36.7)m | $6.9m |
| Diluted earnings (loss) per share | $(0.95) | $0.26 | $(1.15) | $0.20 |
Q2 SG&A was $74.0 million, or 56.8% of revenue, versus $68.7 million, or 46.7%. Q2 operating margin was (32.8%), compared with 8.6% in the prior-year quarter.
Segments and material changes
- Vera Bradley Direct: Q2 revenue declined 10.4% to $87.0 million. Comparable sales fell 13.8%, including a 20.1% comparable-store decline, partly offset by 3.1% e-commerce growth. Segment operating income fell to $10.0 million from $23.2 million.
- Vera Bradley Indirect: Q2 revenue grew 2.9% to $17.3 million, while operating income declined to $3.9 million from $5.6 million. The revenue increase reflected orders from certain key accounts.
- Pura Vida: Q2 revenue fell 21.3% to $26.0 million, primarily due to lower e-commerce sales and weaker social and digital media effectiveness. The segment recorded an operating loss of $28.5 million, including goodwill and brand impairment charges.
For the first half, revenue decreased 10.7%. Direct comparable sales declined 12.7%; Indirect revenue rose 6.9%; and Pura Vida revenue fell 23.8%. Management cited reduced store traffic and conversion, lower digital marketing effectiveness, freight and shipping expense, overhead deleverage, and channel mix. Price increases partly offset these pressures.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $38.3 million at July 30, 2022, down from $88.4 million at January 29, 2022.
- First-half operating cash flow was a use of $27.1 million, versus a source of $16.5 million a year earlier. Inventory increased by $34.7 million in the first-half cash flow reconciliation; reported inventory was $179.6 million, compared with $144.9 million at fiscal year-end.
- First-half investing cash use was $4.4 million, including $4.4 million of capital expenditures. Management expects fiscal 2023 capital expenditures of approximately $8 million to $10 million.
- First-half financing cash use was $18.5 million, including $16.5 million of share repurchases. The company repurchased 2.4 million shares during the first half; $29.3 million remained under the program at quarter-end.
- No borrowings were outstanding under the $75 million asset-based revolving credit facility, and the company reported $75 million of availability. The facility matures September 7, 2023; the company reported compliance with its covenants.
- Current assets were $265.5 million and current liabilities were $101.4 million at quarter-end. Total liabilities were $185.6 million, including operating lease liabilities; the filing reports no debt outstanding.
Unusual items, outlook and risks
- The company recorded $29.3 million of Pura Vida impairment charges: $19.4 million for goodwill and $9.9 million for the indefinite-lived brand. Management attributed the valuation decline to lower Pura Vida e-commerce sales amid reduced social and digital media effectiveness. Further impairment is possible if valuation assumptions deteriorate.
- Cost of sales included $5.9 million of non-cash inventory adjustments for exiting certain technology products and excess mask inventory, plus $1.1 million of spring 2023 purchase-order cancellation fees. Together these reduced Q2 gross margin by approximately 560 basis points, according to management.
- Q2 expenses included $5.7 million of severance, including CEO retirement severance, and $2.8 million of consulting costs related to cost savings and the CEO search. The company began targeted cost reductions, expected to be fully realized in fiscal 2024, and expected approximately $1.0 million of related expense in Q3 FY2023. Additional charges may occur.
- Management reported strategic price increases across both brands and plans to continue them through fiscal 2023. It is working to diversify Pura Vida marketing and develop an omnichannel business. The filing provides no clear earnings or revenue guidance.
- Risks include inflation and pressure on discretionary spending, supply-chain delays and costs, tariffs following the expiration of GSP duty-free status, COVID-19 disruption, store and e-commerce performance, and the effectiveness of digital advertising. The company cautions that these factors could materially affect liquidity and results.
- Vesi Incorporated litigation remains pending. The complaint seeks damages of at least $10 million; the company denies liability and is awaiting a decision on its summary judgment motion. The company says it cannot estimate a possible loss or range of loss.
Important facts for investors to verify
- Whether Vera Bradley Direct sales, store traffic and comparable sales stabilize, and whether price increases offset cost and margin pressure.
- Whether Pura Vida’s digital marketing and e-commerce recovery plans improve sales, and whether further goodwill or brand impairment is required.
- Inventory levels, sell-through and cash conversion, given the first-half inventory build and operating cash outflow.
- Progress and realized savings from cost reductions, including the timing and amount of further implementation expenses.
- Cash needs and capital allocation, including continued share repurchases, planned capital expenditures and the September 2023 credit-facility maturity.
- Developments in the Vesi litigation and any change in the company’s ability to assess potential exposure.