Vera Bradley, Inc. — Q3 FY2013 Form 10-Q
Business context and reporting period. The unaudited quarter covered the 13 weeks ended October 27, 2012; year-to-date (YTD) figures cover 39 weeks. Vera Bradley designs, sells and retails women’s accessories through Direct channels (stores, e-commerce and other company sales) and Indirect wholesale channels. At quarter-end it operated 64 full-price and 11 outlet stores, versus 47 and 8, respectively, a year earlier.
Financial performance
| Metric | Q3 2012 | Q3 2011 | YTD 2012 | YTD 2011 |
|---|---|---|---|---|
| Revenue | $138.3m | $121.1m | $378.6m | $326.3m |
| Gross profit / margin | $80.2m / 58.0% | $65.7m / 54.2% | $214.1m / 56.6% | $181.8m / 55.7% |
| Operating income / margin | $27.6m / 19.9% | $21.5m / 17.8% | $70.2m / 18.5% | $63.5m / 19.5% |
| Net income | $17.7m | $13.0m | $43.7m | $37.8m |
| Diluted EPS | $0.44 | $0.32 | $1.08 | $0.93 |
- Quarterly change: Revenue rose 14.2%; operating income rose 28.1%; net income rose 36.9%. Gross margin expanded 3.8 percentage points.
- YTD change: Revenue rose 16.0%; operating income rose 10.5%; net income rose 15.7%. Operating margin declined 1.0 percentage point despite gross-margin improvement.
- Channel mix: Q3 Direct revenue grew 23.6% to $64.3m and Indirect revenue grew 7.1% to $74.0m. YTD Direct revenue increased 31.4% to $189.2m; Indirect increased 3.9% to $189.4m. Comparable-store sales increased 7.1% in Q3 and 5.7% YTD.
- Cash flow and investment: YTD operating cash flow was $22.2m, versus $6.9m; capital expenditures drove investing cash outflow of $32.1m, versus $11.3m. Financing provided $9.4m, including $10.3m net credit-agreement borrowings. Cash ended at $4.5m, down from $4.9m at fiscal year-end.
- Liquidity and debt: Total debt was $35.4m, including $35.3m long-term debt and $0.1m current portion, versus $25.2m at January 28, 2012. The $125m revolving facility had $89.8m available; outstanding borrowings carried a 1.3% rate. The company reported compliance with debt covenants and amended the facility maturity to June 1, 2017.
- Working capital: Inventory increased to $135.3m from $107.0m at fiscal year-end. Current assets were $205.2m and current liabilities $66.8m.
Changes, outlook and risks
- Quarterly gross-margin improvement reflected freight savings, lower cotton costs and the prior-year sale of retired inventory; it was partly offset by a $1.2m damaged-inventory write-off.
- YTD gross-margin improvement reflected operating efficiencies and favorable channel mix, partly offset by increased promotions. SG&A rose faster than revenue, driven by annualized infrastructure investment and marketing; corporate personnel and marketing costs also increased.
- Management expected FY2013 capital expenditures of approximately $36m, including approximately $18m for distribution-center expansion. No earnings or revenue guidance is provided in the filing text.
- Management said operating cash flow and available credit were expected to cover working capital, planned capital spending and debt payments for the foreseeable future. It stated that Direct expansion was not expected to materially change near-term working-capital needs or require materially higher borrowings.
- The effective tax rate fell to 35.2% for Q3 from 38.9%, and to 37.2% YTD from 39.6%, mainly due to state tax credits and discrete items. These reduced the rate by approximately 4 percentage points for the quarter and 1.5 points YTD.
- Risks cited include weaker consumer confidence or spending, changing demand and fashion trends, brand and talent risks, execution of growth and store openings, sustaining comparable-store sales, and higher raw-material or labor costs. Management reported no material change to previously disclosed risk factors or market risks. It considered ordinary-course claims and contingencies unlikely to have a material adverse effect.
Most important facts for investors to verify
- Whether Direct-channel growth and positive comparable-store sales can continue as the store base expands.
- Whether YTD operating-margin pressure persists, given higher SG&A and corporate costs despite improved gross margin.
- Inventory levels and cash conversion: inventory grew substantially while capital expenditures and expansion spending increased.
- Execution, cost and expected benefits of the distribution-center expansion and planned FY2013 capital expenditures.
- Availability and terms of revolving credit, covenant compliance, and the effect of greater borrowings on liquidity.
- How much of reported earnings growth reflects sustainable operations versus tax credits, discrete tax items and the $1.2m inventory charge.