Vera Bradley, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended February 1, 2020 (52 weeks). This is an annual report, not a standalone fourth-quarter filing; quarterly results are noted below. Pura Vida results are consolidated from July 17, 2019, so the annual comparison includes a partial year of Pura Vida and is not like-for-like.
Business context and performance
Vera Bradley sells handbags, travel goods, accessories and home products through direct retail and e-commerce, wholesale and licensing channels. The company acquired a 75% interest in digitally native accessories brand Pura Vida in July 2019, adding a third reportable segment.
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net revenue | $495.2 million | $416.1 million |
| Gross profit / margin | $271.8 million / 54.9% | $238.6 million / 57.3% |
| Operating income / margin | $19.5 million / 3.9% | $27.1 million / 6.5% |
| Net income | $15.2 million | $20.8 million |
| Net income attributable to Vera Bradley, Inc. | $16.0 million | $20.8 million |
| Diluted earnings per share | $0.47 | $0.59 |
| Operating cash flow | $20.6 million | $43.6 million |
| Capital expenditures | $13.3 million | $8.1 million |
Revenue rose 19.0%, reflecting the acquired Pura Vida business and 5.9% growth in Vera Bradley Direct. Vera Bradley comparable sales increased 3.4%, comprising 7.4% growth in e-commerce and 2.0% growth in comparable stores. Vera Bradley Indirect revenue declined 7.1% to $81.8 million, reflecting fewer orders and retail accounts. Pura Vida contributed $65.9 million in revenue for its partial-year period and recorded a $3.2 million segment operating loss.
FY2020 fourth-quarter revenue was $156.9 million, gross profit $86.1 million, operating income $17.2 million, net income $12.9 million, and diluted EPS $0.37. The fourth quarter was the strongest revenue and earnings quarter, consistent with the company’s holiday-season pattern.
Financial position, cash and debt
At February 1, 2020, cash and cash equivalents were $49.9 million; short- and long-term investments totaled $23.9 million; working capital was $131.4 million; and total assets were $535.1 million. Cash, cash equivalents and investments totaled $73.8 million, versus $156.6 million a year earlier. The decline primarily reflects the $76.0 million cash paid for the Pura Vida acquisition, including subsequent purchase consideration.
Operating cash flow fell to $20.6 million, with cash uses from inventory, accrued liabilities and taxes contributing to the decline. Year-end debt outstanding was zero, with $75.0 million available under the asset-based revolving credit facility. After year-end, the company drew $60.0 million of that facility. Lease liabilities were $135.1 million at year-end; undiscounted operating lease obligations totaled $158.1 million.
Material changes and unusual items
- Gross margin decreased 2.4 percentage points. The Pura Vida inventory fair-value step-up added $8.3 million to cost of sales (1.7 percentage points of revenue); other pressures included shipping costs, promotional and clearance activity, and China tariffs. Improved full-price selling partly offset these effects.
- Operating income declined 28.1%, despite higher revenue. FY2020 operating results included Pura Vida purchase-related charges, including inventory step-up and intangible amortization, and $3.0 million of technology re-platforming charges. Management estimated these items together reduced diluted EPS by $0.35.
- The Pura Vida purchase price included approximately $75.0 million at closing, a working-capital adjustment, and an earn-out estimated at $18.4 million at year-end, which was paid after year-end. A put/call agreement covers the remaining 25% interest, generally exercisable after the fifth anniversary.
- Share repurchases were $11.3 million during FY2020. The repurchase program was suspended after year-end amid the pandemic.
- The company adopted lease accounting standard ASC 842 in FY2020, recognizing substantial right-of-use assets and lease liabilities; prior-year balance-sheet figures were not recast.
Outlook, risks and contingencies
Management’s pre-pandemic plans included up to six new Vera Bradley outlet stores in FY2021, no planned full-line store growth, further full-line store closures, and approximately $8.0 million in FY2021 capital expenditures. The company also planned continued product, digital marketing and systems initiatives. These plans were made before COVID-19 and the filing does not provide a reliable quantified FY2021 earnings or revenue forecast.
COVID-19 had already led to temporary closure of Vera Bradley full-line and outlet stores, cancellation of the 2020 annual outlet sale, and reduced sales. Management said the duration and financial impact could not be reasonably estimated. The company warned of possible material adverse effects on liquidity, results and financial condition, as well as supply-chain delays and higher freight costs.
Other significant risks include execution and integration of the Pura Vida acquisition; potential impairment of $44.3 million of goodwill and $61.7 million of acquired intangible assets (gross carrying value); fashion and comparable-sales risk; store lease obligations and further closures; tariffs and sourcing concentration; and dependence on contract manufacturers and distribution facilities. A lawsuit filed by Vesi seeks at least $10.0 million in damages; the company denies liability, is defending the matter, and says it cannot estimate a possible loss. Deloitte issued unqualified opinions on the financial statements and on internal control; the acquired Pura Vida business was excluded from the year-end internal-control assessment.
Most important facts for investors to verify
- How COVID-19 store closures and weaker consumer demand affected subsequent-period revenue, cash burn and liquidity; also confirm the status and terms of the $60.0 million credit-facility draw.
- Whether Vera Bradley’s comparable-sales recovery continues and whether Indirect-channel declines stabilize, separating organic performance from Pura Vida contributions.
- Pura Vida’s ongoing profitability, integration progress, final purchase accounting and impairment-test assumptions; confirm the earn-out payment and potential future put/call obligation.
- Whether margins recover as inventory step-up expense, promotions, tariffs and freight costs change, and whether technology re-platforming stays within expected cost and schedule.
- The outcome and financial exposure, if any, from the Vesi litigation, and the scale and timing of planned store closures and associated costs.