Vera Bradley, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended May 2, 2020 (fiscal 2021 first quarter), compared with the thirteen weeks ended May 4, 2019. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Business context and results
Vera Bradley designs and sells handbags, travel goods, accessories and gifts through its own stores and digital channels, wholesale partners, and licensing. Results include Pura Vida, in which the company acquired a 75% interest in July 2019; the prior-year comparison does not include Pura Vida.
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net revenue | $69.3 | $91.0 |
| Gross profit / margin | $34.2 / 49.3% | $50.5 / 55.5% |
| Operating loss | $(25.6) | $(3.6) |
| Net loss | $(15.5) | $(2.4) |
| Net loss attributable to Vera Bradley, Inc. | $(15.3) | $(2.4) |
| Basic and diluted loss per share | $(0.66) | $(0.07) |
| Cash used in operating activities | $(24.7) | $(5.2) |
| Capital expenditures | $2.2 | $3.4 |
Revenue fell 23.9%. Vera Bradley Direct revenue declined 48.2% to $36.8 million, and Indirect revenue declined 43.5% to $11.2 million. Pura Vida contributed $21.2 million; it had no contribution in the prior-year period. Direct e-commerce sales increased 20.5% year over year. Gross margin decreased 6.2 percentage points. Management attributed pressure to product mix and shipping costs, as well as $1.3 million of charges from cancelled purchase orders related to COVID-19.
Direct reported a $11.0 million operating loss, versus $8.4 million operating income a year earlier; Indirect operating income was $2.8 million, versus $7.7 million; and Pura Vida reported a $0.8 million operating loss, including $2.4 million of intangible amortization. Consolidated operating loss also included $16.6 million of unallocated corporate expenses. The company recorded $3.8 million of store impairment charges and $1.5 million of technology re-platforming charges. The reported loss per share includes a $6.8 million redeemable noncontrolling-interest redemption-value adjustment in the EPS calculation.
Financial position and liquidity
At May 2, 2020, cash and cash equivalents were $82.3 million, short- and long-term investments totaled $2.8 million, and revolving debt was $60.0 million. The company reported $15.0 million of remaining availability under its $75.0 million asset-based credit facility. At February 1, 2020, there were no borrowings and facility availability was $75.0 million. Current assets were $261.7 million and current liabilities $69.2 million. Inventory was $132.9 million, up from $123.6 million at fiscal year-end.
Operating cash use was $24.7 million. Investing activities provided $19.7 million, mainly reflecting net investment maturities and sales; financing activities provided $37.4 million, including $60.0 million of credit-facility borrowings and offset in part by the $18.7 million Pura Vida earn-out payment. The credit facility matures September 7, 2023; the company said it was in compliance with its covenants at quarter-end.
COVID-19, outlook and risks
COVID-19 materially reduced consumer demand, traffic and sales amid travel restrictions, factory disruptions and store closures. All Vera Bradley stores temporarily closed March 19; the annual outlet sale was cancelled. The company furloughed about 80% of its workforce during the quarter, reduced compensation and other costs, suspended share repurchases, managed inventory and worked with landlords and vendors to preserve liquidity.
After quarter-end, phased store reopenings began May 5. By the end of May, 18 of 83 full-line stores and 40 of 64 factory stores were open, and about 65% of associates remained furloughed. Management expected nearly all stores to reopen by the end of June, barring setbacks. For 27 stores open at least two weeks, aggregate revenue through May 31 was about 75% of prior-year sales, with reduced staffing and hours; management cautioned against extrapolating from the limited data. First-quarter Vera Bradley e-commerce revenue increased year over year and continued to exceed prior-year performance in May. Management gave no full-year revenue or earnings guidance in this filing.
Management expected fiscal 2021 capital expenditures of approximately $8 million to $10 million and said cash, investments, operating cash flow and borrowing capacity should meet foreseeable needs, while cautioning that pandemic-related cash requirements could be substantial and were difficult to predict. Key risks include renewed closures or weak demand, supply and shipping disruptions, further store or intangible-asset impairments, and additional borrowing costs. The filing also describes a licensing-related lawsuit seeking at least $10 million and a California wage-and-hour class action; the company denies liability and cannot estimate potential losses for either matter.
Important facts for investors to verify
- Whether store reopenings, consumer demand and digital sales sustained or improved after the limited May data reported.
- Cash burn, inventory levels, rent deferrals and borrowing availability as pandemic conditions evolved.
- Whether gross margin and operating costs recover from COVID-related charges, lower sales and fixed-cost deleverage.
- Whether Pura Vida performs as expected and how the remaining 25% interest’s put/call and redemption-value adjustments affect future results and equity.
- Potential future impairment charges and developments in the Vesi and California employment lawsuits.