Vera Bradley, Inc. — Form 10-Q Summary
Reporting period: Thirteen and thirty-nine weeks ended November 2, 2013; comparisons are to the periods ended October 27, 2012. Financial statements are unaudited. Vera Bradley designs, produces, markets, and retails women’s accessories through Direct and Indirect segments.
Financial performance
| Metric | 13 weeks ended Nov. 2, 2013 | Year-over-year change | 39 weeks ended Nov. 2, 2013 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $130.1 million | Down 6.0% | $378.5 million | Essentially flat |
| Gross profit / margin | $71.9 million / 55.3% | Margin down 2.7 percentage points | $212.2 million / 56.1% | Margin down 0.5 percentage points |
| Operating income / margin | $24.2 million / 18.6% | Down 12.3%; margin down 1.3 points | $63.4 million / 16.8% | Down 9.6%; margin down 1.7 points |
| Net income | $15.2 million | Down 14.2% | $39.4 million | Down 10.0% |
| Diluted EPS | $0.37 | Compared with $0.44 | $0.97 | Compared with $1.08 |
Quarterly Direct revenue rose 7.1% to $68.9 million, helped by additional stores, while comparable-store sales fell 6.5%. Indirect revenue fell 17.3% to $61.2 million as specialty-retailer orders declined. For the 39-week period, Direct revenue increased 15.0% and Indirect revenue decreased 15.0%. Store count grew from 75 to 99 year over year. Quarterly gross margin pressure reflected a greater mix of lower-margin products and increased promotions.
Cash flow, balance sheet, and liquidity
- Cash and cash equivalents were $13.7 million at November 2, versus $9.6 million at February 2, 2013. Inventory was $150.5 million, up from $131.6 million.
- For the 39 weeks, operating cash flow was $34.8 million, compared with $22.2 million a year earlier. Investing cash outflow was $15.4 million, versus $32.1 million; financing cash outflow was $15.3 million, versus $9.4 million of inflow.
- Capital expenditures were $15.4 million year to date. Management expected fiscal 2014 capital expenditures of approximately $25 million, including about $6 million for design-center, distribution-center, and corporate-office expansions.
- No debt was outstanding at November 2, compared with $15.1 million at February 2. The company reported $125 million of borrowing availability under its revolving credit agreement and said it was in compliance with its covenants.
- Management said operating cash flow and available borrowing capacity should be sufficient for working capital, anticipated capital expenditures, and debt payments for the foreseeable future.
Management commentary, outlook, and risks
- Management cited lower store traffic, an underperforming product offering, and reduced e-commerce traffic and average transaction size as factors in quarterly Direct weakness. Specialty-retailer order declines weighed on Indirect sales.
- Cost controls and lower variable compensation reduced quarterly SG&A, but year-to-date SG&A rose 2.5%, partly reflecting store-opening costs and expense deleveraging.
- The company opened four full-price stores and one outlet store during the quarter, introduced responsive website design, launched a Vera Bradley for Disney collection, and realigned resources to support key Indirect accounts.
- The filing provides capital expenditure expectations but no revenue or earnings guidance. Management cautioned that interim results may not indicate full-year results.
- Disclosed risks include weaker consumer spending, difficulty anticipating demand and fashion trends, brand and talent risks, execution of growth and store-opening plans, comparable-store sales, and raw-material and labor costs. Management said there was no material change to previously disclosed risk factors or market risks.
- Claims and contingencies arise in the ordinary course of business; management did not believe they were reasonably likely to materially affect the company. Disclosure controls were assessed as effective, with no reported material change in internal control over financial reporting.
- The filing includes a November 11, 2013 employment agreement and related equity awards for Robert Wallstrom; investors should review the separate exhibits for the terms and leadership context.
Important facts for investors to verify
- Whether Direct-store growth and online initiatives can offset falling comparable-store sales and weaker specialty-retailer orders.
- Whether product mix and promotional activity continue to pressure gross margin and segment profitability.
- Inventory growth, seasonal sell-through, and the assumptions behind the approximately $25 million fiscal 2014 capital expenditure plan.
- Availability and covenant terms of the $125 million credit facility, despite no borrowings at period-end.
- Terms and implications of the Robert Wallstrom employment and equity agreements filed as exhibits.