Vera Bradley, Inc. — Q2 FY2013 Form 10-Q
Reporting period: The quarter comprised 13 weeks ended July 28, 2012; year-to-date figures cover 26 weeks. Comparisons are with the periods ended July 30, 2011. Vera Bradley sells women’s accessories through Direct channels, including stores and e-commerce, and an Indirect network of approximately 3,300 retailers.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | 26 weeks FY2013 | 26 weeks FY2012 |
|---|---|---|---|---|
| Net revenue | $123.0m | $103.8m | $240.2m | $205.2m |
| Gross profit / margin | $68.6m / 55.8% | $59.6m / 57.5% | $133.9m / 55.7% | $116.1m / 56.6% |
| Operating income / margin | $21.8m / 17.7% | $22.9m / 22.1% | $42.6m / 17.7% | $42.0m / 20.5% |
| Net income | $13.4m | $13.6m | $26.0m | $24.9m |
| Diluted earnings per share | $0.33 | $0.34 | $0.64 | $0.61 |
- Q2 revenue grew 18.5%; Direct revenue rose 37.2% to $65.7m, while Indirect revenue increased 2.6% to $57.3m. Direct growth reflected new stores, e-commerce and 5.3% comparable-store sales growth. Indirect sales benefited from the July Fall Back to Campus collection, after weaker performance in May and June.
- For the first half, revenue increased 17.1%. Direct revenue rose 35.8% to $124.9m; Indirect revenue grew 1.9% to $115.3m. Comparable-store sales increased 4.9% for the half, compared with 14.9% a year earlier.
- Q2 net income declined 1.9% as cost of sales and SG&A grew faster than revenue and other income fell. For the first half, net income increased 4.6%, while operating income rose only 1.5%.
- Gross margin contracted 1.7 percentage points in Q2 and 0.9 points year to date, primarily due to increased promotions. SG&A rose 22.3% in Q2 and 20.1% year to date; as a share of revenue it increased to 38.9% and 39.6%, respectively. Management cited infrastructure costs, store occupancy, and higher corporate personnel and advertising costs.
Cash flow, liquidity and debt
- For the 26 weeks, operating cash flow was $25.5m, versus an $11.8m outflow in the prior-year period. Management attributed the improvement principally to operating asset and liability movements, supply-chain and inventory management, and timing of estimated tax payments.
- Investing cash outflow was $22.7m, primarily capital spending, compared with $6.5m a year earlier. Financing cash outflow was $0.1m. Cash increased $2.7m to $7.6m from January 28, 2012.
- At July 28, current assets were $191.4m and current liabilities $74.0m; inventory was $117.9m, up from $107.0m at fiscal year-end. Total debt was $25.4m, including $25.3m long-term debt and $0.1m current maturities.
- The company had a $125m revolving credit facility, $99.7m of borrowing availability and a 1.30% rate on outstanding borrowings. The facility maturity was extended to June 1, 2017; the company reported covenant compliance. Management believed operating cash flow and available financing would meet foreseeable needs.
Outlook, commentary and risks
- Fiscal 2013 capital expenditures were expected to be approximately $36m, including about $19m for distribution-center expansion. The filing provides no clear earnings or revenue guidance.
- The store base expanded to 70 U.S. full-price and outlet stores from 49 a year earlier. Management cited increased promotional activity, a product portfolio that underperformed in May and June, and higher costs associated with store growth and infrastructure.
- Forward-looking risks include consumer spending and demand shifts, brand strength, execution of growth plans and new-store openings, comparable-store sales, talent retention, and raw-material and labor costs. Management said there was no material change to previously disclosed risk factors.
- Ordinary-course claims and contingencies were disclosed; management did not believe they were reasonably likely to materially affect financial condition, results or cash flows. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Direct-channel growth and new-store productivity can offset the slower Indirect business and decelerating comparable-store sales.
- Whether promotions, occupancy and corporate costs continue to pressure gross and operating margins.
- Execution, timing and returns on the distribution-center expansion and planned $36m fiscal-year capital spending.
- Inventory levels, cash conversion and use of the revolving facility as the business expands.
- Progress in Indirect demand and product assortment, particularly after the reported May–June slowdown.