Vera Bradley, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first 39 weeks of fiscal 2017, ended October 29, 2016; comparisons are with the corresponding periods of fiscal 2016. Vera Bradley designs and sells handbags, luggage, accessories, and gifts through Direct and Indirect channels.
Financial performance
| Metric | 13 weeks ended Oct. 29, 2016 | Year-over-year change | 39 weeks ended Oct. 29, 2016 | Year-over-year change |
|---|---|---|---|---|
| Net revenue | $126.7 million | Flat | $351.1 million | +0.7% |
| Gross profit / margin | $72.9 million / 57.6% | Down from 57.9% | $201.0 million / 57.2% | Up from 55.0% |
| Operating income / margin | $11.4 million / 9.0% | Down from $16.8 million / 13.3% | $23.6 million / 6.7% | Up from $21.3 million / 6.1% |
| Net income | $8.8 million | Down 14.5% | $16.3 million | Up 37.6% |
| Diluted EPS | $0.24 | Down from $0.27 | $0.44 | Up from $0.30 |
- Quarterly Direct revenue rose 2.3% to $86.1 million, while Indirect revenue fell 4.6% to $40.6 million. Comparable sales, including e-commerce, declined 5.0%; store comps fell 5.3% and e-commerce sales fell 4.4%.
- For the 39-week period, Direct revenue increased 3.3% to $246.3 million and Indirect revenue decreased 4.9% to $104.8 million. Comparable sales declined 5.7%.
- Quarterly SG&A increased 8.5% to $61.8 million, or 48.8% of revenue versus 45.0%. Higher new-store costs, marketing and advertising, and $0.6 million of store impairments weighed on operating results. Year-to-date impairment charges were $2.2 million.
- Year-to-date gross margin improved mainly from sourcing and operational efficiencies, including savings following the prior-year manufacturing-facility closure, partly offset by product mix and outlet promotions.
Cash, liquidity, and capital allocation
- Cash and cash equivalents were $52.9 million; short-term investments were $30.1 million, for combined cash and investments of $83.0 million at October 29, 2016. Total current assets were $231.0 million and current liabilities were $49.3 million.
- Operating cash flow for the 39 weeks was $26.5 million, compared with $39,000 in the prior-year period. Inventory changes contributed a $17.8 million cash source, while income-tax payments used $11.7 million of cash.
- Investing cash outflow was $47.4 million, including a $30.0 million certificate-of-deposit purchase and $17.4 million of capital expenditures. Financing cash outflow was $23.9 million, including $23.2 million of share repurchases.
- No debt was outstanding, and the company reported $125.0 million available under its credit agreement. It was in compliance with covenants. The facility matures July 15, 2020, and includes restrictive covenants.
- The company repurchased 1.515 million shares for $23.3 million during the 39 weeks; $22.5 million remained under its $50 million repurchase authorization.
Outlook, management commentary, and risks
- Management expected fiscal 2017 capital expenditures of approximately $20 million. The filing does not provide specific revenue or earnings guidance.
- Management described ongoing brand and product initiatives, store refreshes, new store openings, and a redesigned e-commerce platform expected to launch in the first quarter of fiscal 2018. The company opened nine stores during the year to date; it operated 159 stores at quarter-end.
- Management cited lower store traffic and specialty-retailer orders as factors behind weaker comparable and Indirect sales. Quarterly operating income also reflected outlet promotions, new-store investment, marketing, and store impairments.
- A payment-card incident affected some cards used at stores from July 25 through September 23, 2016; online transactions were not affected. The company said the incident was resolved, but anticipated further remediation, legal, and professional costs. Potential card-network reimbursements, fines, and penalties could not be reasonably estimated; cyber insurance coverage was $15 million above a $0.1 million deductible.
- Other notable items: a $1.6 million income-tax reserve release following conclusion of an IRS audit benefited the quarter and year-to-date results. The third-quarter effective tax rate was 22.6%, versus 38.6% a year earlier. Prior-year results included $5.2 million of restructuring and other charges. The company also cautioned that potential changes in U.S. tax and trade policy could affect imported merchandise, most of which is manufactured overseas.
Important facts for investors to verify
- Whether comparable-sales declines and weaker Indirect orders stabilize, and whether new stores can offset pressure in established locations.
- Whether gross-margin improvements persist after outlet promotions, and whether SG&A growth moderates as investments and store impairments affect results.
- The continuing costs and potential liabilities from the payment-card incident, including the extent of insurance recovery.
- Capital-spending execution, cash generation, and the pace of share repurchases relative to available liquidity and credit-agreement restrictions.
- The sustainability of reported earnings growth after considering the tax reserve release, prior-year restructuring charges, and current-year impairment charges.