Vera Bradley, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the 13 weeks ended April 30, 2016; compared with the 13 weeks ended May 2, 2015. Vera Bradley designs and sells handbags, luggage, accessories, and gifts through Direct and Indirect channels.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net revenue | $105.2 million | $101.1 million |
| Gross profit / margin | $59.7 million / 56.7% | $51.7 million / 51.1% |
| Operating income (loss) / margin | $3.9 million / 3.7% | $(5.0) million / (4.9)% |
| Net income (loss) | $2.4 million; $0.06 diluted EPS | $(4.1) million; $(0.10) diluted EPS |
| Cash used in operating activities | $4.0 million | $0.8 million |
| Capital expenditures | $5.6 million | $7.5 million |
- Revenue increased 4.0%. Direct revenue rose 3.6% to $72.9 million; Indirect revenue rose 5.1% to $32.2 million.
- Direct comparable sales, including e-commerce, declined 6.7%: e-commerce fell 11.0% and comparable store sales fell 3.8%. Non-comparable stores contributed $7.1 million of revenue.
- Gross margin improved 5.6 percentage points. Management cited sourcing and operational efficiencies, including benefits from the domestic manufacturing closure, and a higher share of made-for-outlet products.
- SG&A declined 2.1% to $56.4 million, or 53.6% of revenue versus 57.0%. Other income fell to $0.6 million from $0.9 million.
- Segment operating income was $12.1 million for Direct and $12.6 million for Indirect. Unallocated corporate expenses were $20.9 million.
Financial position and liquidity
- At April 30, 2016, cash and cash equivalents were $51.8 million and short-term investments were $30.0 million, totaling $81.8 million in cash and investments. Cash and equivalents were $97.7 million at January 30, 2016; the quarter-end decline included the purchase of the certificate of deposit.
- Current assets were $237.6 million and current liabilities were $54.0 million. Inventory was $113.4 million, broadly unchanged from fiscal year-end.
- The company had no borrowings under its $125 million credit facility and reported $125 million of borrowing availability. It was in compliance with financial and other covenants. Facility maturity is July 2020; the agreement is secured and includes restrictive covenants.
- Cash used in investing activities was $35.6 million, including the $30 million short-term investment. Cash used in financing was $6.3 million, including $5.7 million of share repurchases.
Material changes, outlook, and risks
- The prior-year quarter included approximately $5.9 million of restructuring and other operating charges, including costs related to closing the New Haven manufacturing facility; the prior-year net loss also reflected approximately $6.5 million of total charges, including tax-related items. These items make the year-over-year profit improvement less directly comparable.
- The New Haven facility closure transferred production to third-party manufacturers. Management expects annual operating-cost savings of approximately $12 million; the filing says no closure-related liabilities remained.
- Management expected fiscal 2017 capital expenditures of approximately $20 million and said operating cash flow and available credit should meet foreseeable working-capital, capital-spending, repurchase, and debt needs. No full-year revenue or earnings guidance is provided in the supplied filing text.
- Strategic initiatives included new and relocated stores, modernized store design and branding, refreshing cotton and non-cotton assortments, expanding department-store productivity, opening a Hong Kong sourcing office, and a planned September 2016 launch of a redesigned e-commerce platform.
- Management highlighted risks including continued comparable-sales declines, execution of the strategic plan and multichannel model, consumer demand and traffic, brand strength, store operations, talent retention, and data-security or systems disruptions. It reported no material change to previously disclosed risk factors and no claims or contingencies management considered reasonably likely to materially harm financial condition, results, or cash flows.
Important facts for investors to verify
- Whether negative comparable sales, particularly e-commerce, stabilize and whether new stores can offset declines in the established business.
- Whether gross-margin gains and the expected $12 million annual savings persist, separating ongoing improvements from the prior-year restructuring comparison.
- Whether operating cash flow improves after the quarter’s tax payments and whether inventory, capital spending, and store investments remain controlled.
- How the planned website relaunch, assortment changes, and department-store strategy affect sales and profitability.
- Whether share repurchases remain consistent with liquidity needs and the credit agreement’s covenants; $40.2 million remained under the repurchase authorization at quarter-end.