Vera Bradley, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the unaudited 13 weeks ended May 4, 2013 (first quarter of fiscal 2014), compared with the 13 weeks ended April 28, 2012. Vera Bradley designs, markets, and sells women’s accessories through Direct channels—including stores and e-commerce—and Indirect wholesale channels. At quarter-end, it operated 72 full-price and 13 outlet stores and sold through approximately 3,400 specialty retailers.
Financial results and liquidity
Unless otherwise noted, amounts are in millions of dollars. Income and cash-flow figures are for the quarter; balance-sheet comparisons are with February 2, 2013.
| Metric | May 4, 2013 | Comparable period / prior balance-sheet date |
|---|---|---|
| Revenue | $123.0 | $117.2; up 5.0% |
| Gross profit / margin | $68.5 / 55.6% | $65.3 / 55.7% |
| SG&A | $55.2 / 44.9% of revenue | $47.2 / 40.3% |
| Operating income / margin | $15.2 / 12.3% | $20.8 / 17.8% |
| Net income | $9.2 | $12.6 |
| Diluted EPS | $0.23 | $0.31 |
| Operating cash flow | $14.9 | $30.7 |
| Capital expenditures | $5.8 | $11.5 |
| Cash and cash equivalents | $8.2 | $9.6 at February 2, 2013 |
| Total debt | $5.1 | $15.1 at February 2, 2013 |
| Shareholders’ equity | $203.5 | $194.3 at February 2, 2013 |
Current assets were $195.0 million and current liabilities $51.5 million. The company reported $5.0 million outstanding under its $125 million revolving credit agreement, with $120 million available; the rate on borrowings was 1.30%. It was in compliance with its credit covenants at quarter-end. Operating cash flow funded capital expenditures and $10 million of net debt repayment; cash declined $1.4 million during the quarter.
Material changes versus the prior comparable quarter
- Direct revenue rose 24.4% to $73.7 million, reflecting $8.2 million from new stores, $5.1 million of e-commerce growth, and a 0.9% comparable-store sales increase. Website traffic grew 23%.
- Indirect revenue fell 14.9% to $49.3 million, which management attributed to lower specialty-retailer orders amid an uncertain consumer environment.
- The store count increased from 62 to 85 year over year. The company opened seven full-price and two outlet stores during the quarter.
- Gross margin was nearly unchanged, but SG&A rose 17.0% and increased as a share of revenue. Operating income fell 27.0%; management cited higher corporate advertising and personnel costs, store start-up costs, outlet promotions, and fixed costs spread over weaker Indirect and comparable full-price sales.
- Operating cash flow was lower by $15.8 million, primarily due to operating asset and liability movements, including increased inventory. Inventory was $138.9 million, up from $131.6 million at February 2, 2013.
- Direct segment operating income increased to $17.0 million from $15.4 million, while Indirect segment operating income decreased to $17.7 million from $22.4 million. Unallocated corporate expenses increased to $19.5 million from $17.0 million.
Outlook, commentary, risks, and unusual items
- Management expected fiscal 2014 capital expenditures of approximately $20 million, including new-store build-outs and systems investments, including the e-commerce platform. No full-year revenue or earnings guidance is provided in the supplied filing text.
- Management said operating cash flow and available credit or other financing should be sufficient for working capital, anticipated capital expenditures, and debt payments for the foreseeable future.
- On June 5, 2013, CEO Michael Ray informed the board of his plan to retire. He would remain CEO until a successor was in place; the board was searching for a successor.
- Key disclosed risks include weaker consumer confidence or spending, difficulty predicting demand and fashion trends, sustaining comparable-store sales, executing growth and new-store plans, maintaining the brand, retaining key talent, and higher raw-material or labor costs.
- The company reported ordinary-course claims and contingencies, including product liability, legal, employee-benefit, and environmental matters; management did not believe these were reasonably likely to materially adversely affect financial condition, results, or cash flows.
- Management stated that there was no material change in market risks or risk factors from its latest Form 10-K. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Direct-channel growth and e-commerce gains can offset continued weakness in Indirect orders, and whether comparable-store sales improve from the reported 0.9% increase.
- Whether elevated SG&A, store expansion costs, and weaker segment margins stabilize as the expanded store base matures.
- Inventory levels, turnover, and subsequent operating cash flow, given inventory growth and the year-over-year cash-flow decline.
- Execution and funding of the approximately $20 million fiscal 2014 capital-spending plan, alongside debt repayment and liquidity needs.
- CEO succession developments and any resulting changes to strategy or operating plans.
- Future covenant compliance and credit availability; the agreement is secured by substantially all company assets and includes financial and other restrictive covenants.