Business context and reporting period
Vera Bradley, Inc. designs, markets and sells handbags, accessories, and travel and leisure products through Direct and Indirect channels. This 10-K reports fiscal 2013, ended February 2, 2013, compared principally with fiscal 2012, ended January 28, 2012. Fiscal 2013 had 53 weeks versus 52 weeks in fiscal 2012; the extra week contributed approximately $4.9 million of revenue and $0.02 of diluted EPS. The filing’s fourth quarter was 14 weeks; the prior-year fourth quarter was 13 weeks.
Key financial metrics
Amounts are in millions, except per-share data and percentages.
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net revenue | $541.1 | $460.8 |
| Gross profit / margin | $308.3 / 57.0% | $257.6 / 55.9% |
| Operating income / margin | $110.1 / 20.4% | $96.2 / 20.9% |
| Net income | $68.9 | $57.9 |
| Diluted EPS | $1.70 | $1.43 |
| Operating cash flow | $51.5 | $51.5 |
| Capital expenditures | $35.9 | $18.8 |
- Revenue increased 17.4%; Direct revenue rose 29.9% to $292.6 million, while Indirect revenue grew 5.5% to $248.6 million. Direct represented 54.1% of revenue, up from 48.9%.
- Comparable-store sales increased 3.4%, down from 10.9% in FY2012. Direct growth also reflected new stores and higher e-commerce sales.
- SG&A rose 20.6% to $204.4 million and increased to 37.8% of revenue from 36.8%. Operating income grew 14.5%, but operating margin declined by 0.5 percentage points.
- Cash and cash equivalents were $9.6 million at year-end. Working capital was $145.6 million. Inventory increased to $131.6 million from $107.0 million.
- Debt totaled $15.1 million, including $15.0 million borrowed under the revolving credit facility; $110.0 million of facility availability remained. The company reported compliance with its covenants.
- Quarterly FY2013 fourth-quarter revenue was $162.6 million, operating income $40.0 million, and net income $25.1 million, versus $134.5 million, $32.7 million, and $20.1 million, respectively, in the prior-year quarter. Fourth-quarter gross profit was $68.4 million versus $75.9 million.
Material changes versus the prior comparable period
Direct-channel expansion was the principal growth driver: the company ended the year with 76 U.S. full-price and outlet stores, compared with 56 a year earlier, and expanded its Japanese department-store presence to 15 locations. E-commerce activity also increased. Annual gross margin improved, attributed by management to operational efficiencies, lower freight and input costs, and favorable channel mix. However, higher store and headcount costs and corporate personnel and marketing expenses pressured operating margin. Comparable-store sales growth slowed substantially. The distribution center expansion was completed, and capital spending rose sharply; operating cash flow was essentially flat year over year, with inventory growth and lower accounts payable among the offsets.
Outlook, risks and unusual items
- Management planned approximately 20 new stores annually for the next five fiscal years and stated that the U.S. market could support at least 300 full-price stores. FY2014 capital expenditures were expected to be approximately $20 million, including store build-outs and systems investment.
- Management said operating cash flow and available credit were expected to cover working capital, anticipated capital expenditures, and debt payments for the foreseeable future. No specific revenue or earnings guidance is provided in the supplied filing text.
- Key risks include consumer-demand and fashion misjudgments, sustaining comparable-store sales, brand execution, store expansion, competition, and international expansion. The company also highlighted reliance on overseas suppliers and contract manufacturers, cotton and freight cost volatility, and dependence on a single distribution center.
- Operating leases represented substantial fixed commitments: $161.7 million of future lease payments were shown in the contractual-obligations table, in addition to purchase obligations. The credit facility is secured by substantially all company assets and has variable-rate borrowing costs.
- Japanese operations incurred losses; the company recorded a valuation allowance because realization of related tax benefits was uncertain. FY2013’s effective tax rate was 37.1%, compared with 39.0% in FY2012.
- The filing reported routine legal proceedings and stated their aggregate outcome was not expected to materially affect the company. The independent auditor gave an unqualified opinion and reported effective internal control over financial reporting. The company paid no cash dividends and did not anticipate doing so in the foreseeable future.
Important facts for investors to verify
- How much reported growth reflects store openings, e-commerce, comparable-store performance, and the extra fiscal week—and whether slower comparable-store growth persists.
- Whether inventory growth converts to sales without increased discounting, obsolescence, or margin pressure.
- Whether the expanded distribution center and planned store openings generate adequate returns while controlling SG&A and lease commitments.
- Progress and profitability in Japan, including the timing and likelihood of realizing tax benefits from operating losses.
- The sustainability of gross-margin gains given sourcing, cotton, freight, labor, and foreign-market risks.