Vera Bradley, Inc. — Form 10-Q Summary
Reporting period: Second quarter of fiscal 2019, the 13 weeks ended August 4, 2018; year-to-date covers 26 weeks. Comparisons are with periods ended July 29, 2017. Amounts below are in U.S. dollars.
Business context
Vera Bradley designs and sells bags, travel goods, accessories, home products, and gifts through Direct channels (stores and e-commerce) and Indirect wholesale, other retail, and licensing channels. At quarter-end it operated 104 full-line and 57 factory outlet stores.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | 26 weeks FY2019 | 26 weeks FY2018 |
|---|---|---|---|---|
| Revenue | $113.6m | $112.4m | $200.2m | $208.6m |
| Gross profit / margin | $65.7m / 57.9% | $63.3m / 56.3% | $114.4m / 57.1% | $116.0m / 55.6% |
| Operating income (loss) / margin | $12.0m / 10.6% | $3.7m / 3.3% | $10.1m / 5.0% | $(1.1)m / (0.5)% |
| Net income (loss) | $9.3m | $2.2m | $7.9m | $(1.9)m |
| Diluted earnings (loss) per share | $0.26 | $0.06 | $0.22 | $(0.05) |
- Quarterly revenue rose 1.1%, while comparable sales declined 4.9%; e-commerce sales fell 23.1% and comparable store sales increased 1.7%. Direct revenue increased 1.9% and Indirect revenue decreased 2.0%.
- For the first half, revenue decreased 4.0% and comparable sales declined 6.4%. Direct revenue fell 1.0%; Indirect revenue fell 13.3%, reflecting lower orders from specialty retailers and key accounts.
- Gross margin improved in both comparisons, attributed to less clearance activity, more full-price selling, freight and shipping savings, product-cost reductions, channel mix, and the non-recurrence of prior-year slow-moving inventory reserves. SG&A fell 10.0% in Q2 and 11.1% year to date, reflecting cost reductions and prior-year charges that did not recur.
- Cash from operations was $16.6m for the first half, compared with cash used of $4.1m a year earlier. Investing used $0.2m and financing used $4.0m; capital expenditures were $5.9m.
- Cash and cash equivalents were $81.1m; short- and long-term investments totaled $63.7m, for combined cash and investments of $144.8m. Inventory was $86.3m. The company had no borrowings at August 4 and reported $125m available under its then-current credit agreement.
Material changes and notable items
- ASC 606 was adopted in fiscal 2019 using the modified retrospective method, with a $0.5m adjustment to opening retained earnings. Prior-year results were not recast. The company stated adoption increased current-period revenue by $1.3m and net income by $0.6m in Q2, and revenue by $2.9m and net income by $1.4m year to date. Timing of shipment recognition, gift-card breakage, royalty accounting, and returns-liability presentation affected comparability.
- Q2 revenue benefited by approximately $6.0m from promotional events shifted from the prior-year third quarter. Six additional factory outlet stores contributed to non-comparable sales, while planned reductions in clearance activity weighed on comparable sales, particularly online.
- Prior-year comparisons included restructuring and other charges: $1.5m in Q2 and $2.8m year to date, including strategic consulting, severance, and a lease termination charge. No Vision 20/20 charges were recorded in the current-year periods.
- The company repurchased 252,201 shares for approximately $3.6m in the first half; $9.8m remained under the repurchase authorization at quarter-end.
Outlook, risks, and contingencies
- Vision 20/20 is intended to restore full-price selling, streamline product offerings, reduce corporate and marketing costs, and close underperforming stores. Management expected fiscal 2019 revenue to be $35m–$45m below fiscal 2018 levels as a result of the initiatives; it targeted up to $30m in annual SG&A reductions versus its fiscal 2017 base, with $21m–$25m expected by the end of fiscal 2019. It planned to close up to 45 full-line stores by fiscal 2021. Fiscal 2019 capital expenditures were expected to be approximately $10m.
- Management said available cash, investments, operating cash flow, and borrowing capacity should meet foreseeable needs. On September 7, 2018, after quarter-end, the company replaced its $125m facility with an asset-based revolving facility capped at the lesser of $75m or borrowing-base availability, with an option to increase commitments by up to $25m. It matures September 7, 2023, is secured by substantially all relevant assets, and includes covenants and a conditional minimum fixed-charge coverage ratio.
- The company identified risks including execution of Vision 20/20, continued comparable-sales declines, brand and channel performance, consumer demand, data security, and potential tariffs. It reported no material change to previously disclosed risk factors.
- Payment-card claims related to the 2016 incident were expected to be covered by $15m of cyber insurance, subject to a $0.1m deductible; discussions with Indiana remained ongoing. Management did not expect remaining matters to materially affect overall financial condition or results. Other ordinary-course claims were also disclosed.
- The upcoming lease accounting standard was expected to materially increase reported assets and liabilities; its effects on results and cash flows were still being evaluated. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether comparable-sales declines, especially online, stabilize as clearance activity is reduced, and whether the promotional calendar shift distorts future comparisons.
- Whether the planned revenue impact and expense savings from Vision 20/20 are achieved without further weakening demand or margins.
- The extent to which reported growth and earnings were affected by ASC 606 timing changes and prior-year restructuring charges.
- Borrowing availability under the new asset-based facility, including borrowing-base limits, covenant triggers, and collateral terms.
- Progress on store closures, capital spending, share repurchases, and the financial impact of lease accounting adoption.
- Resolution and insurance reimbursement of payment-card claims and the outstanding Indiana inquiry.