Vera Bradley, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Second quarter and first six months of fiscal 2022, ended July 31, 2021. Comparisons are with the corresponding periods ended August 1, 2020. The prior-year comparison was heavily affected by COVID-19 store closures, temporary cost reductions, and unusual mask sales; management says comparable-sales measures are not meaningful for those prior-year periods.
Business context and results
Vera Bradley operates Vera Bradley Direct, Vera Bradley Indirect, and Pura Vida. At quarter-end, it operated 145 Vera Bradley stores: 72 full-line and 73 factory outlet locations. The company owns 75% of Pura Vida, with the remaining 25% classified as redeemable noncontrolling interest.
| Metric | Q2 FY2022 | Q2 FY2021 | First half FY2022 | First half FY2021 |
|---|---|---|---|---|
| Net revenue | $147.0 million | $131.8 million | $256.1 million | $201.1 million |
| Gross profit | $80.4 million | $79.6 million | $139.5 million | $113.8 million |
| Gross margin | 54.6% | 60.4% | 54.5% | 56.6% |
| Operating income (loss) | $12.6 million | $17.5 million | $10.7 million | $(8.1) million |
| Net income (loss) | $9.9 million | $8.3 million | $8.3 million | $(7.2) million |
| Net income (loss) attributable to Vera Bradley, Inc. | $9.1 million | $7.2 million | $6.9 million | $(8.1) million |
| Diluted EPS attributable to common shareholders | $0.26 | $0.42 | $0.20 | $(0.24) |
Q2 revenue increased 11.6%, while first-half revenue increased 27.4%. Q2 operating income fell despite higher revenue, as gross margin declined and prior-year pandemic-related expense savings did not recur. First-half operating results improved from a loss to income, with higher sales, expense leverage, and no repeat of prior-year store impairment charges contributing to the change.
Segments and material changes
- VB Direct: Q2 revenue rose 19.6% to $97.1 million; segment operating income was $23.2 million versus $22.8 million. The sales comparison benefited from stores being open throughout the current quarter versus temporary closures in the prior year. Lower mask sales partly offset the increase.
- VB Indirect: Q2 revenue declined 5.1% to $16.8 million and operating income declined to $5.6 million from $6.5 million, mainly reflecting lower mask-related orders.
- Pura Vida: Q2 revenue increased 0.8% to $33.1 million, while operating income fell to $3.2 million from $4.4 million. Management cited weaker e-commerce marketing effectiveness following Apple’s iOS 14.5 update, which affected Facebook and Instagram marketing.
Q2 gross margin declined 5.8 percentage points, primarily from reduced higher-margin mask sales and increased shipping and duty costs. First-half SG&A was $129.6 million, up 6.3% year over year, but declined as a share of revenue to 50.6% from 60.6%. Current-period other income included legal settlements; the filing does not provide a clear amount attributable to the settlement.
Cash, debt, and liquidity
- Cash and cash equivalents were $75.8 million at July 31, 2021, versus $64.2 million at January 30, 2021. Cash and short-term investments totaled $76.5 million.
- First-half operating cash flow was $16.5 million, compared with cash used of $0.1 million in the prior-year period. Investing activities used $1.7 million; financing activities used $3.2 million. Cash increased $11.6 million during the first half.
- Inventory was $148.0 million, up from $141.4 million at fiscal year-end.
- No borrowings were outstanding under the $75 million asset-based revolving credit facility, and $75 million was available. The facility matures September 7, 2023; the company reported covenant compliance.
- Fiscal 2022 capital expenditures were expected to be approximately $8 million to $10 million. Management stated that available cash, operating cash flow, and credit availability should meet foreseeable working-capital and anticipated capital needs.
Outlook, risks, and unusual items
- The filing provides a capital-expenditure outlook but no specific revenue or earnings guidance. Management cautioned that interim results are not necessarily indicative of full-year results and that COVID-19 could significantly affect liquidity, operating results, and financial condition.
- Vera Bradley reported average product-launch delivery delays of about 30 days, higher freight costs, and increased duties after the Generalized System of Preferences duty-free status expired. The company expects shipping delays and freight expense increases to continue in the near term; reinstatement of GSP status was anticipated but not assured.
- Other identified risks include shipping and port disruptions, product availability and missed sales, difficulty attracting and retaining retail and distribution employees, consumer demand and spending changes, and the continued effects of COVID-19.
- A lawsuit by Vesi seeks damages of at least $10 million, among other relief. The company denies liability and is defending the case; it cannot estimate a possible loss or range. A California employment class action was settled in the first quarter for an immaterial amount.
- No impairment charges were recorded in the first half of FY2022; the prior-year first half included $3.8 million of store impairment charges. Management noted future COVID-19 effects could trigger material asset impairments.
- The company’s annual goodwill impairment test resulted in no charge for fiscal 2022. It also reported no material change in market risks and concluded disclosure controls were effective as of July 31, 2021.
Important facts for investors to verify
- Whether revenue growth and store performance persist after adjusting for the prior-year store-closure comparison and the decline in mask sales.
- Whether shipping delays, higher freight expenses, and sourcing duties continue to pressure gross margins and product availability.
- Whether Pura Vida’s e-commerce performance recovers from the marketing impact of Apple’s privacy update, and whether its wholesale growth is sustainable.
- How much of reported other income came from legal settlements and whether such income is recurring.
- Developments in the Vesi litigation, for which the potential loss is currently not estimable, and any future impairment indicators.
- Execution of the $8 million to $10 million capital-expenditure plan and maintenance of liquidity and credit-facility compliance.
- Interpret EPS comparisons with care: prior-year Q2 common-shareholder EPS included a $6.8 million noncontrolling-interest redemption-value adjustment, making the reported $0.42 comparison less directly comparable with current-year $0.26.