Vera Bradley, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the 13 and 26 weeks ended July 30, 2016. The company describes the quarter as the second quarter of fiscal 2017. Vera Bradley sells branded accessories through its Direct channel (stores and e-commerce) and Indirect wholesale accounts. At quarter-end, it operated 112 full-line and 44 factory outlet stores.
Financial results
| Metric | 13 weeks ended July 30, 2016 | 13 weeks ended August 1, 2015 | 26 weeks ended July 30, 2016 | 26 weeks ended August 1, 2015 |
|---|---|---|---|---|
| Net revenue | $119.2 million | $120.7 million | $224.4 million | $221.8 million |
| Gross profit; gross margin | $68.4 million; 57.4% | $66.6 million; 55.1% | $128.0 million; 57.1% | $118.2 million; 53.3% |
| Operating income; operating margin | $8.3 million; 7.0% | $9.5 million; 7.9% | $12.2 million; 5.4% | $4.5 million; 2.0% |
| Net income | $5.1 million | $5.7 million | $7.5 million | $1.6 million |
| Diluted earnings per share | $0.14 | $0.15 | $0.20 | $0.04 |
- Quarterly revenue declined 1.2%; Direct revenue grew 4.1% to $87.2 million, while Indirect revenue fell 13.4% to $32.0 million. Comparable sales, including e-commerce, declined 5.7%.
- For the six-month period, revenue grew 1.2%; Direct rose 3.9% and Indirect fell 5.0%. Comparable sales declined 6.1%.
- Gross margin improved in both comparisons, primarily from sourcing and operational efficiencies after the domestic manufacturing facility closure. Quarterly SG&A rose 5.2% to $60.3 million, including $1.6 million of store impairment charges and increased store and severance costs.
- Six-month operating income and net income increased substantially year over year, partly because the prior-year period included $5.2 million of restructuring and other charges. Current-period results included $1.6 million of store impairments.
- Six-month operating cash flow was $15.8 million, versus cash use of $1.0 million in the prior-year period. The improvement reflected inventory timing and higher net income, partly offset by an $11.3 million cash use from income taxes, including the timing of a federal tax payment.
Financial position and capital allocation
- At July 30, 2016, cash and cash equivalents were $55.5 million and short-term investments were $30.1 million, for combined cash and investments of $85.5 million. Current assets were $225.5 million and current liabilities were $45.4 million.
- No credit-facility borrowings were outstanding. The company reported $125.0 million of availability under its $125.0 million facility, was in covenant compliance, and had no material debt balance reported. The facility matures July 15, 2020 and is secured by company and subsidiary assets.
- Cash declined $42.2 million during the six-month period. Investing cash use was $41.6 million, including a $30.0 million certificate-of-deposit purchase and $11.7 million of capital expenditures. Financing cash use was $16.4 million, including $15.7 million of share repurchases.
- The company repurchased 992,131 shares for $15.7 million during the six-month period; $30.2 million remained under its $50.0 million repurchase authorization at quarter-end.
Outlook, commentary, and risks
- Management expected fiscal 2017 capital expenditures of approximately $20.0 million and said cash flows and available financing should cover working capital, expected capital expenditures, repurchases, and debt needs for the foreseeable future. The filing provides no specific revenue or earnings guidance.
- Management expected the New Haven manufacturing facility closure to reduce annual operating costs by approximately $12.0 million; production was transferred to third-party manufacturers, and no closure-related liabilities remained.
- Management was working to modernize product assortments, improve store selling and service, expand selected department-store distribution, and launch a redesigned e-commerce platform later in fiscal 2017.
- Key stated risks include executing the strategic plan, continued comparable-sales declines, maintaining the brand, adapting to consumer demand and fashion trends, performance of the multi-channel model and stores, economic and consumer-spending conditions, talent retention, and data-security or system disruptions.
- The company reported ordinary-course claims and contingencies; management did not consider a material adverse effect probable at the time, while noting outcomes remain uncertain. No material change to previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether comparable-sales declines and weaker Indirect orders persist, and whether new stores can offset those trends.
- Whether gross-margin improvements continue and cover higher SG&A, store impairments, and other operating costs.
- Whether operating cash flow remains adequate after inventory and tax-payment timing effects, planned capital expenditures, and share repurchases.
- Progress and costs associated with the e-commerce platform launch, store expansion, and the expected savings from outsourced manufacturing.
- Credit-facility covenant capacity and any developments in legal, tax, or other contingencies.