Vera Bradley, Inc. — Q3 Fiscal 2021 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended October 31, 2020; comparisons are with periods ended November 2, 2019. Unaudited results. Vera Bradley sells through direct and wholesale channels; the consolidated company also includes its 75%-owned Pura Vida business.
Financial performance and liquidity
| Metric | Q3 FY2021 | Q3 FY2020 | 39 weeks FY2021 | 39 weeks FY2020 |
|---|---|---|---|---|
| Net revenue | $124.8m | $127.5m | $325.9m | $338.3m |
| Gross profit / margin | $73.8m / 59.1% | $67.9m / 53.2% | $187.6m / 57.6% | $185.7m / 54.9% |
| Operating income (loss) | $12.2m | $(1.5)m | $4.1m | $2.2m |
| Net income (loss) | $9.0m | $(1.0)m | $1.8m | $2.3m |
| Net income attributable to Vera Bradley, Inc. | $8.9m | $0.1m | $0.8m | $3.6m |
| Diluted earnings per share attributable to Vera Bradley, Inc. | $0.26 | $0.00 | $0.02 | $0.10 |
| Net cash from (used in) operating activities | Not presented by quarter | $1.6m | $(9.2)m |
- Q3 revenue declined 2.1% year over year, while operating income improved by $13.6m. Gross margin rose 5.9 percentage points, reflecting in part the absence of prior-year Pura Vida inventory step-up amortization and strong mask sales, alongside expense reductions.
- For the 39-week period, revenue fell 3.7% and net income attributable to Vera Bradley, Inc. declined to $0.8m. Comparability is affected by Pura Vida being consolidated only from July 17, 2019 in the prior-year period; its year-to-date revenue was $78.4m versus $30.4m for that partial prior-year period.
- At October 31, cash and cash equivalents were $75.8m and investments totaled $1.5m, for combined cash and investments of $77.3m. The company had $30.0m of revolving debt outstanding and $45.0m of remaining availability under its $75.0m asset-based facility. Current assets were $271.9m and current liabilities $79.2m. Operating lease liabilities totaled $122.4m.
- Cash increased $25.8m over the 39 weeks. Investing activities provided $18.0m, including net investment maturities and sales; financing activities provided $6.2m, including $30.0m of net revolver borrowings and the $18.7m Pura Vida earn-out payment. Operating cash flow benefited from timing and deferred rent payments, so it should not be read as an unqualified measure of recurring cash generation.
Material changes and operating drivers
- Q3 segment revenue was $78.2m for VB Direct (down 0.3%), $22.3m for VB Indirect (down 7.2%), and $24.3m for Pura Vida (down 2.8%). Vera Bradley e-commerce revenue rose 48.8%; comparable store sales declined 19.1%. Pura Vida e-commerce rose 17.2%, offset by weaker wholesale sales.
- Masks represented approximately 10% of consolidated revenue in both the Q3 and 39-week periods. For the 39 weeks, VB Direct revenue declined 19.5% and VB Indirect declined 19.8%; the annual outlet sale was cancelled. Vera Bradley e-commerce revenue rose 59.0% for the period.
- Q3 SG&A declined 11.1% to $61.7m. For the 39 weeks, SG&A was nearly flat at $183.6m, but increased as a share of revenue to 56.3% from 54.5%, reflecting sales deleverage, Pura Vida costs, impairment and acquired-intangible amortization.
- Year-to-date results included $3.8m of store asset impairment charges and $1.3m of COVID-related purchase-order cancellation charges. The prior-year 39-week period included $7.2m of Pura Vida inventory step-up amortization. Q3 operating income included $2.3m of Pura Vida intangible amortization.
Outlook, risks and contingencies
- Management gave no revenue or earnings guidance in the provided filing text. It expected fiscal 2021 capital expenditures of approximately $6m–$7m and said available cash, investments, operating cash flow and credit availability were expected to cover foreseeable needs, while cautioning that pandemic-related cash needs remained uncertain.
- COVID-19 caused store closures, reduced traffic and demand, supply-chain constraints and weaker wholesale orders. At quarter-end all factory stores and all but two full-line stores had reopened, generally with reduced hours and enhanced safety measures. Management warned that renewed closures or worsening conditions could materially adversely affect liquidity, results and financial condition, and could prompt additional impairments.
- The company had furloughed approximately 80% of its workforce early in the pandemic, reduced compensation and other costs, and borrowed $60m under its revolver; it had repaid $30m by quarter-end. Substantially all associates had returned from furlough and most compensation reductions had been reinstated.
- The company held $141.6m of inventory, up from $123.6m at February 1, 2020. It identified possible delayed shipments and higher shipping costs, with China expected to account for approximately 20% of fiscal 2021 production.
- Two lawsuits were in discovery: a licensing-related claim seeking at least $10m in specified damages, and a California wage-and-hour class and representative action. The company denied liability and stated it could not estimate a possible loss or range for either matter.
- The 25% Pura Vida noncontrolling interest is redeemable under a put/call arrangement exercisable generally from the fifth through tenth anniversary of acquisition. Its carrying value was $29.1m at quarter-end; the eventual purchase price depends on defined EBITDA-based terms.
Most important facts for investors to verify
- Whether e-commerce momentum and mask demand can offset store traffic weakness and whether mask revenue remains material.
- Whether gross-margin improvement persists after accounting for prior-year acquisition-related inventory amortization and current product mix.
- Whether operating cash flow improves without relying on deferred rent, payment timing or borrowing, and how inventory converts to sales.
- Available borrowing capacity, facility covenants and debt repayment needs if pandemic conditions worsen.
- Potential additional store, goodwill or intangible-asset impairments and the outcomes of the disclosed legal proceedings.
- How the Pura Vida business performs on a comparable basis and the future cost of the redeemable 25% interest.