Vera Bradley, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the 13 weeks ended October 31, 2015 (fiscal 2016 third quarter), with year-to-date comparisons for the 39 weeks ended October 31, 2015. Vera Bradley sells handbags, accessories, travel items and related products through Direct and Indirect channels. At quarter-end, it operated 110 full-line and 40 factory outlet stores; its Indirect business served approximately 2,700 specialty retail locations.
Financial performance and liquidity
Amounts below are in millions, except per-share data and where noted.
| Metric | Quarter ended Oct. 31, 2015 | Prior-year quarter | 39 weeks ended Oct. 31, 2015 | Prior-year 39 weeks |
|---|---|---|---|---|
| Net revenue | $126.7 | $125.2 | $348.5 | $356.4 |
| Gross profit / margin | $73.3 / 57.9% | $65.8 / 52.5% | $191.5 / 55.0% | $189.0 / 53.0% |
| Operating income / margin | $16.8 / 13.3% | $13.6 / 10.9% | $21.3 / 6.1% | $38.1 / 10.7% |
| Net income | $10.3 | $6.9 | $11.8 | $21.1 |
| Diluted earnings per share | $0.27 | $0.17 | $0.30 | $0.52 |
- Quarter revenue rose 1.2%; Direct revenue increased 7.9% to $84.1 million, while Indirect revenue declined 10.0% to $42.5 million. Comparable sales, including e-commerce, fell 9.5%.
- For the 39-week period, revenue decreased 2.2%. Comparable sales declined 13.6%; Direct revenue grew 4.6% with new-store contributions, while Indirect revenue fell 14.2%.
- Cash and cash equivalents were $61.8 million at October 31, down from $112.3 million at January 31. Current assets were $245.6 million and current liabilities $55.7 million. Inventory increased to $118.2 million from $98.4 million.
- Operating cash flow was only $39,000 for the 39 weeks, versus $56.3 million in the prior-year period. Inventory absorbed $19.8 million of cash, compared with a $30.7 million source in the prior year. Capital expenditures were $22.8 million; management expected approximately $28.0 million for fiscal 2016.
- No borrowings were outstanding under the $125 million credit facility, and the full amount was available. The company reported compliance with its covenants. The facility matures July 15, 2020, is secured by company and subsidiary assets, and includes restrictions and financial covenants.
- The company repurchased $27.0 million of shares in the 39-week period, completing its $40 million repurchase program. A new authorization of up to $50 million was approved on December 8, 2015, after quarter-end.
Material changes, outlook and risks
- Quarter gross margin improved primarily through sourcing efficiencies, a greater mix of higher-margin made-for-outlet products, reduced promotions and lower liquidation sales. SG&A rose 7.0% in the quarter, largely reflecting new-store investments; year-to-date SG&A increased 11.7%, also reflecting marketing, severance and store lease termination costs.
- Year-to-date operating income fell 44.1%; the period included approximately $5.9 million of restructuring and other charges. Net income also reflected a higher effective tax rate year over year, including reserves related to prior-year research and development tax credits.
- The company closed its New Haven, Indiana manufacturing facility in the first quarter. It incurred approximately $3.4 million of related charges, included in cost of sales, and expected the closure to reduce annual operating costs by approximately $12 million beginning in fiscal 2016’s fourth quarter. Production was to shift to third-party suppliers.
- Management described continued product diversification, supply-chain flexibility efforts, reduced promotional activity and new-store openings. It did not provide specific revenue or earnings guidance in the supplied filing text; it stated that liquidity and available financing should meet foreseeable working-capital, capital expenditure, repurchase and debt needs.
- Key risks include continued comparable-sales declines, consumer demand and fashion trends, competition, execution of the strategic plan and multi-channel model, store performance, brand strength, talent retention, and data security or systems disruptions. Management reported no material change to previously disclosed risk factors or market risks.
- Japan direct operations were exited in fiscal 2015 and reported as discontinued operations in prior-year comparisons; the company continued Japan sales through a wholesale arrangement.
Important facts for investors to verify
- Whether comparable-sales trends improve, particularly e-commerce and store traffic, and whether reduced promotions can be sustained without further sales pressure.
- Whether the projected $12 million annual savings from the factory closure begin as expected and offset the transition to third-party manufacturing.
- Drivers of the sharp year-to-date operating cash-flow decline, inventory build and cash reduction, alongside planned capital spending and share repurchases.
- Performance of the Indirect channel and specialty retail account base, as well as the cost and returns of new stores and marketing investments.
- Tax reserve developments, credit-agreement covenant headroom and conditions governing the newly approved $50 million repurchase authorization.