Vera Bradley, Inc. — Q1 FY2015 Form 10-Q
Reporting period: Thirteen weeks ended May 3, 2014. Vera Bradley designs and sells handbags, accessories, luggage, and related products through its Direct and Indirect businesses. Results are unaudited and compared with the thirteen weeks ended May 4, 2013.
Financial performance and liquidity
| Metric | Q1 FY2015 | Prior-year quarter |
|---|---|---|
| Net revenue | $113.5 million | $123.0 million |
| Gross profit / margin | $60.5 million / 53.3% | $68.5 million / 55.6% |
| Operating income / margin | $10.8 million / 9.5% | $15.2 million / 12.3% |
| Net income | $6.6 million | $9.2 million |
| Diluted earnings per share | $0.16 | $0.23 |
| Cash from operating activities | $27.0 million | $14.9 million |
| Capital expenditures paid | $4.0 million | $5.8 million |
Cash and cash equivalents were $81.5 million at May 3, 2014, versus $59.2 million at February 1, 2014. Current assets were $250.0 million and current liabilities $60.3 million. The company reported $125.0 million of borrowing availability under its revolving credit agreement; the filing does not state a period-end debt balance. It was in compliance with its credit covenants.
Material changes and management commentary
- Revenue declined 7.8%. Direct revenue fell 0.3% to $73.4 million; Indirect revenue fell 18.9% to $40.0 million.
- Total comparable-store sales, including e-commerce, declined 9.4%, versus growth of 10.9% a year earlier. Management cited lower traffic, product-offering underperformance, and severe weather. Comparable e-commerce sales fell approximately 3.2%; comparable-store sales excluding e-commerce fell 14.4%.
- Management attributed the gross-margin decline to overhead deleveraging and increased promotional activity. SG&A fell 7.1% in dollars but rose to 45.2% of revenue from 44.9%, reflecting lower revenue and deleveraging, partly offset by expense management.
- The company opened four full-line stores and one factory outlet store in the quarter. It had 104 stores at quarter-end, compared with 85 a year earlier.
- Operating cash flow increased, primarily because inventory growth was lower. Cash generated from operations funded capital spending; $3.0 million of property and equipment expenditures had been incurred but not paid at quarter-end.
Outlook, risks, and unusual items
- Management expected fiscal 2015 capital expenditures of approximately $40.0 million, including approximately $20.0 million for campus consolidation. It stated that operating cash flow and available financing should cover foreseeable working-capital needs, planned capital spending, and debt payments. No revenue or earnings guidance is provided in the filing text.
- After quarter-end, on June 4, 2014, the company agreed with Mitsubishi Corporation and Look Inc. to move to a wholesale distribution model in Japan and planned to exit its direct Japan business during the third quarter. It expected approximately $2.0 million of pretax exit charges, or $0.03 per share, in discontinued operations; about $1.0 million was a non-cash currency translation loss.
- Key disclosed risks include misjudging fashion trends or consumer demand, weakening consumer spending, difficulty maintaining the brand or executing growth and store plans, retaining key talent, and increases in raw-material or labor costs. Management said ordinary-course claims and contingencies were not reasonably likely to have a material adverse effect.
- Management concluded disclosure controls were effective as of May 3, 2014, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether comparable-store sales and Indirect-channel demand recover, and whether new products improve customer response.
- Execution and total costs of the Japan transition, including the timing and treatment of the anticipated exit charges.
- Progress and spending against the approximately $40.0 million fiscal-year capital-expenditure plan, especially campus consolidation.
- Period-end borrowings, if any, and continued compliance with credit-agreement covenants; the filing reports availability but not a clear debt balance.
- Whether margin pressure from promotions and fixed-cost deleveraging persists.