Vera Bradley, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Thirteen weeks ended August 2, 2014; year-to-date period covers the 26 weeks ended August 2, 2014. Comparisons are to the corresponding periods ended August 3, 2013. Unaudited results; amounts below are in millions except per-share data.
Business context
Vera Bradley designs and sells handbags, accessories, luggage, eyewear, stationery, and gifts through Direct and Indirect channels. At quarter-end, Direct included 89 full-line and 20 factory outlet stores; Indirect served approximately 3,000 specialty retail doors, along with other accounts. The company opened one full-line and four outlet stores during the quarter and introduced a limited product selection in 70 Macy’s stores in July.
Key financial results
| Metric | Q2 FY2015 | Q2 FY2014 | 26 weeks FY2015 | 26 weeks FY2014 |
|---|---|---|---|---|
| Net revenue | $120.1 | $125.4 | $233.6 | $248.4 |
| Gross profit / margin | $64.1 / 53.3% | $71.8 / 57.2% | $124.6 / 53.3% | $140.2 / 56.5% |
| Operating income / margin | $12.8 / 10.6% | $24.1 / 19.2% | $23.6 / 10.1% | $39.3 / 15.8% |
| Net income | $7.6 | $15.0 | $14.2 | $24.1 |
| Diluted EPS | $0.19 | $0.37 | $0.35 | $0.59 |
| Operating cash flow | — | $32.8 | $27.0 |
Quarter revenue declined 4.2%; year-to-date revenue declined 6.0%. Q2 Direct revenue grew 5.2% to $78.9 million, while Indirect revenue fell 18.2% to $41.2 million. Total comparable sales declined 5.3% in Q2, including a 9.3% increase in e-commerce; comparable sales excluding e-commerce fell 14.2%. Year-to-date comparable sales declined 6.4%.
Q2 operating income fell 47.0% and net income fell 49.2% year over year. Gross margin pressure reflected overhead deleveraging and increased online promotions. SG&A rose 7.1% in Q2, driven by strategic-plan investments, new stores, management additions, marketing, and e-commerce initiatives. For the first half, SG&A dollars edged down 0.5%, but rose as a share of revenue to 44.1% from 41.7%.
Cash, debt, and liquidity
- Cash and cash equivalents were $79.1 million at August 2, 2014, versus $59.2 million at February 1, 2014.
- Current assets were $247.4 million and current liabilities $52.3 million; working capital was approximately $195.1 million.
- Operating cash flow of $32.8 million funded $12.2 million of capital expenditures. Cash increased $19.9 million during the first half.
- The company reported $125.0 million of borrowing availability under its revolving credit facility and stated it was in compliance with its covenants. The filing does not state a period-end debt balance clearly in the presented balance sheet; cash flows show no facility borrowing or repayment during the first half.
Outlook, commentary, and risks
Management expected fiscal 2015 capital expenditures of approximately $40 million, including about $20 million for campus consolidation. It stated that operating cash flow and available credit should cover working-capital needs, anticipated capital expenditures, share repurchases, and debt payments for the foreseeable future; no earnings or revenue guidance was provided in the supplied filing text.
On September 9, 2014, after quarter-end, the board authorized up to $40 million of share repurchases through October 2016, and the credit agreement was amended to permit repurchases up to that amount. The effective tax rate rose to 40.3% for Q2 and 39.6% year to date, primarily reflecting state tax matters, including an incremental reserve for an ongoing state income tax audit. Management said ordinary-course claims and contingencies were not reasonably expected to have a material adverse effect.
Key disclosed risks include misjudging fashion trends or consumer demand, excess or misallocated inventory, adverse economic conditions, execution of growth and store plans, higher material or labor costs, and disruption at the company’s single distribution facility. Management cited weak traffic and product underperformance as contributors to comparable-sales declines; severe weather also affected first-half comparisons.
Investor facts to verify
- Whether comparable-sales trends and product performance improved, especially in stores and Indirect accounts.
- Whether margin pressure from promotions and overhead deleveraging continued, and whether strategic investments produced results.
- Actual campus-consolidation spending versus the approximately $40 million fiscal-year capital expenditure estimate.
- The status and financial impact of the state income tax audit reserve.
- Any share repurchases made under the post-quarter $40 million authorization and their effect on cash and liquidity.