Vera Bradley, Inc. — FY2016 Form 10-K
Business and reporting period. Vera Bradley designs and sells handbags, accessories, travel, home and related products through company-operated stores and e-commerce (Direct) and wholesale retailers (Indirect). The fiscal year was 52 weeks, ended January 30, 2016. The filing also reports fiscal fourth-quarter results.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net revenue | $502.6 million | $509.0 million |
| Gross profit / margin | $281.2 million / 55.9% | $269.0 million / 52.9% |
| SG&A / revenue | $236.8 million / 47.1% | $208.7 million / 41.0% |
| Operating income / margin | $46.7 million / 9.3% | $64.1 million / 12.6% |
| Net income | $27.6 million | $38.4 million |
| Diluted continuing-operations EPS | $0.71 | $1.00 |
| Operating cash flow | $43.3 million | $103.8 million |
| Capital expenditures | $26.3 million | $37.1 million |
- Revenue declined 1.3%; comparable sales, including e-commerce, fell 10.6%. Direct revenue rose 4.7% to $351.3 million, largely from new stores, while Indirect revenue fell 12.7% to $151.3 million.
- Gross margin improved 3.0 percentage points, reflecting sourcing efficiencies, greater sales of made-for-outlet products, less promotion and fewer liquidation sales. Higher SG&A, including store, marketing and compensation costs, more than offset the gross-profit improvement.
- Cash and equivalents were $97.7 million, down from $112.3 million. Working capital was $187.1 million; total assets were $380.7 million and shareholders’ equity was $285.3 million.
- No borrowings were outstanding under the $125 million revolving credit facility at year-end; the full amount was available. The facility matures in 2020 and is subject to financial and other covenants, which the Company reported it was meeting. The Company also had $221.0 million of future operating lease payments and $42.4 million of purchase obligations.
Fiscal fourth quarter
For the 13 weeks ended January 30, 2016, revenue was $154.1 million, gross profit $89.6 million, operating income $25.4 million and net income $15.7 million. In the comparable prior-year quarter, revenue was $152.6 million, gross profit $80.0 million, operating income $25.9 million and net income $17.3 million. The fourth quarter is typically the Company’s largest sales and operating-income quarter due to holiday demand.
Material changes, outlook and risks
- Revenue mix shifted toward Direct: it represented 69.9% of revenue versus 65.9% in FY2015. Store count increased to 150 (110 full-line and 40 outlet); comparable sales continued to decline, following a 7.6% decrease in FY2015.
- Fiscal 2016 included $3.4 million of restructuring charges for closing the New Haven manufacturing facility and $3.1 million of other comparability-related charges. Combined charges were $6.5 million pretax and $4.2 million after tax. The Company expected the closure to reduce annual operating costs by about $12 million beginning in FY2016’s fourth quarter. Store asset impairment charges were $2.8 million.
- Operating cash flow fell substantially, in part because working-capital changes used cash, including inventory and accounts payable movements. The Company repurchased $31.2 million of shares during the year and had $45.9 million remaining under its $50 million repurchase authorization at year-end.
- Management described FY2016 as the second year of a multi-year turnaround focused on product, distribution and marketing. For FY2017 it planned four full-line and six outlet store openings, approximately $20 million of capital expenditures, about 100 additional department-store locations, and a fall 2016 e-commerce platform redesign. It slowed full-line openings in response to comparable-sales trends. The filing does not provide a clear numerical revenue or earnings forecast.
- Key risks include persistent comparable-sales declines and uncertainty around the turnaround and brand strategy; fashion and inventory misjudgments; competition and promotional pressure; store leases and mall traffic; reliance on Asian sourcing, contract manufacturers and one distribution center; and e-commerce, cybersecurity and systems disruptions. Legal matters were described as routine, with no expected material adverse effect. The auditors issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-sales declines moderate and new stores and digital investments generate profitable incremental sales.
- Whether higher gross margin is sustainable while revenue is weak and SG&A remains elevated.
- Whether the projected $12 million annual manufacturing savings materialize, and whether further restructuring or store impairments arise.
- How operating cash flow, inventory levels, share repurchases and substantial lease commitments affect liquidity; confirm covenant compliance and facility availability.
- Whether the FY2017 store-opening, department-store expansion and website-redesign plans proceed as described; the filing provides no numerical earnings guidance.