Vera Bradley, Inc. quarterly report, Q3 FY2014

Vera Bradley, Inc. — Form 10-Q Summary

Reporting period: Thirteen and thirty-nine weeks ended November 2, 2013; comparisons are to the periods ended October 27, 2012. Financial statements are unaudited. Vera Bradley designs, produces, markets, and retails women’s accessories through Direct and Indirect segments.

Financial performance

Metric13 weeks ended Nov. 2, 2013Year-over-year change39 weeks ended Nov. 2, 2013Year-over-year change
Revenue$130.1 millionDown 6.0%$378.5 millionEssentially flat
Gross profit / margin$71.9 million / 55.3%Margin down 2.7 percentage points$212.2 million / 56.1%Margin down 0.5 percentage points
Operating income / margin$24.2 million / 18.6%Down 12.3%; margin down 1.3 points$63.4 million / 16.8%Down 9.6%; margin down 1.7 points
Net income$15.2 millionDown 14.2%$39.4 millionDown 10.0%
Diluted EPS$0.37Compared with $0.44$0.97Compared with $1.08

Quarterly Direct revenue rose 7.1% to $68.9 million, helped by additional stores, while comparable-store sales fell 6.5%. Indirect revenue fell 17.3% to $61.2 million as specialty-retailer orders declined. For the 39-week period, Direct revenue increased 15.0% and Indirect revenue decreased 15.0%. Store count grew from 75 to 99 year over year. Quarterly gross margin pressure reflected a greater mix of lower-margin products and increased promotions.

Cash flow, balance sheet, and liquidity

  • Cash and cash equivalents were $13.7 million at November 2, versus $9.6 million at February 2, 2013. Inventory was $150.5 million, up from $131.6 million.
  • For the 39 weeks, operating cash flow was $34.8 million, compared with $22.2 million a year earlier. Investing cash outflow was $15.4 million, versus $32.1 million; financing cash outflow was $15.3 million, versus $9.4 million of inflow.
  • Capital expenditures were $15.4 million year to date. Management expected fiscal 2014 capital expenditures of approximately $25 million, including about $6 million for design-center, distribution-center, and corporate-office expansions.
  • No debt was outstanding at November 2, compared with $15.1 million at February 2. The company reported $125 million of borrowing availability under its revolving credit agreement and said it was in compliance with its covenants.
  • Management said operating cash flow and available borrowing capacity should be sufficient for working capital, anticipated capital expenditures, and debt payments for the foreseeable future.

Management commentary, outlook, and risks

  • Management cited lower store traffic, an underperforming product offering, and reduced e-commerce traffic and average transaction size as factors in quarterly Direct weakness. Specialty-retailer order declines weighed on Indirect sales.
  • Cost controls and lower variable compensation reduced quarterly SG&A, but year-to-date SG&A rose 2.5%, partly reflecting store-opening costs and expense deleveraging.
  • The company opened four full-price stores and one outlet store during the quarter, introduced responsive website design, launched a Vera Bradley for Disney collection, and realigned resources to support key Indirect accounts.
  • The filing provides capital expenditure expectations but no revenue or earnings guidance. Management cautioned that interim results may not indicate full-year results.
  • Disclosed risks include weaker consumer spending, difficulty anticipating demand and fashion trends, brand and talent risks, execution of growth and store-opening plans, comparable-store sales, and raw-material and labor costs. Management said there was no material change to previously disclosed risk factors or market risks.
  • Claims and contingencies arise in the ordinary course of business; management did not believe they were reasonably likely to materially affect the company. Disclosure controls were assessed as effective, with no reported material change in internal control over financial reporting.
  • The filing includes a November 11, 2013 employment agreement and related equity awards for Robert Wallstrom; investors should review the separate exhibits for the terms and leadership context.

Important facts for investors to verify

  • Whether Direct-store growth and online initiatives can offset falling comparable-store sales and weaker specialty-retailer orders.
  • Whether product mix and promotional activity continue to pressure gross margin and segment profitability.
  • Inventory growth, seasonal sell-through, and the assumptions behind the approximately $25 million fiscal 2014 capital expenditure plan.
  • Availability and covenant terms of the $125 million credit facility, despite no borrowings at period-end.
  • Terms and implications of the Robert Wallstrom employment and equity agreements filed as exhibits.