Vera Bradley, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended May 2, 2015 (the first quarter of fiscal 2016). Comparisons are with the thirteen weeks ended May 3, 2014, unless otherwise noted. Vera Bradley sells handbags, accessories, travel goods and other products through Direct and Indirect channels.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net revenue | $101.1 million | $112.2 million |
| Gross profit / margin | $51.7 million / 51.1% | $59.8 million / 53.3% |
| SG&A | $57.6 million | $50.0 million |
| Operating income (loss) | $(5.0) million | $11.3 million |
| Net income (loss) | $(4.1) million; $(0.10) per diluted share | $6.6 million; $0.16 per diluted share |
| Cash from operating activities | $(0.8) million | $27.0 million |
| Capital expenditures | $7.5 million | $4.0 million |
Revenue fell 9.9%. Direct revenue declined 2.4% to $70.4 million; comparable sales, including e-commerce, decreased 16.9%. Indirect revenue fell 23.3% to $30.7 million. Gross margin contracted 2.2 percentage points, while SG&A rose 15.1% and increased to 57.0% of revenue from 44.6%. The effective tax rate was 18.1%, versus 38.6%.
At May 2, cash and cash equivalents were $96.6 million, down from $112.3 million at January 31, 2015. Inventory was $101.8 million, up from $98.4 million. Total current assets were $253.1 million and current liabilities were $59.1 million. The balance sheet reports no borrowings; the company disclosed $125.0 million of borrowing availability under its revolving credit agreement. Total liabilities were $92.2 million.
Material changes and management commentary
- Direct comparable sales weakness reflected lower store and online traffic and less online promotional activity. Direct sales were partly supported by $9.4 million of revenue from non-comparable stores, including ten additional stores.
- Indirect sales were pressured by lower specialty-retailer reorders, fewer specialty accounts, and the timing of the summer product launch; management said approximately $3.7 million of revenue would shift into the second quarter.
- Operating results included approximately $3.4 million of charges related to closing the New Haven, Indiana manufacturing facility and approximately $3.1 million of other comparability-affecting charges. Management expects the facility closure to reduce annual operating costs by approximately $12.0 million beginning in the fourth quarter of fiscal 2016; production is to move to third-party suppliers.
- Management cited product diversification, a higher mix of made-for-outlet products, supply-chain flexibility, store openings, a new full-line store design and increased marketing as strategic initiatives. Five full-line and five factory outlet stores opened during the quarter.
- Management expected fiscal 2016 capital expenditures of approximately $31.0 million and said cash flow and available financing were expected to meet foreseeable needs. No full-year revenue or earnings guidance is provided in the supplied filing text.
Liquidity, capital and risks
Operating cash flow deteriorated to a $0.8 million use from $27.0 million provided in the prior-year quarter, primarily reflecting lower earnings and an inventory increase. Investing used $7.5 million; financing used $7.4 million, primarily for share repurchases. The company repurchased 424,849 shares for approximately $7.2 million during the quarter, with approximately $19.9 million remaining under its $40.0 million authorization.
At May 2, the company was in breach of the credit agreement’s fixed-charge coverage covenant. Lenders waived the breach and related default by agreement dated June 10, 2015. The company reported compliance with all other covenants. The filing identifies risks including execution of its strategic plan and multichannel model, consumer spending and demand, comparable-sales declines, store performance, brand strength, talent retention, and data security or systems disruptions. Management stated that normal-course claims and contingencies were not reasonably likely to have a material adverse effect.
Key facts for investors to verify
- Whether comparable-sales trends improve and the stated $3.7 million Indirect revenue timing shift materializes.
- Progress toward the expected $12.0 million annual cost reduction, including transition of manufacturing to third parties and any associated costs.
- Compliance with the fixed-charge coverage covenant after the June 10 waiver, and the terms or duration of any subsequent waiver or amendment.
- Cash use, inventory levels, planned $31.0 million fiscal 2016 capital expenditures, and the pace of share repurchases.
- The effect of restructuring and other unusual charges on reported margins and operating results.