Vera Bradley, Inc. — Q3 FY2012 Form 10-Q
Reporting period: Thirteen and thirty-nine weeks ended October 29, 2011; comparisons are with the periods ended October 30, 2010. Financial amounts are in U.S. dollars; dollar figures below are in millions unless stated otherwise.
Business context
Vera Bradley designs, markets, and sells women’s accessories through its Indirect business (independent and select retailers) and Direct business (company-operated stores, e-commerce, and its annual outlet sale). At quarter-end it operated 47 full-price and eight outlet stores, versus 34 and four, respectively, a year earlier. It had also entered Japan through pop-up stores and a Japanese-language website.
Financial performance and liquidity
| Metric | 13 weeks ended Oct. 29, 2011 | 13 weeks ended Oct. 30, 2010 | 39 weeks ended Oct. 29, 2011 | 39 weeks ended Oct. 30, 2010 |
|---|---|---|---|---|
| Revenue | $121.1 | $91.6 | $326.3 | $256.7 |
| Gross profit / margin | $65.7 / 54.2% | $51.7 / 56.4% | $181.8 / 55.7% | $147.3 / 57.4% |
| Operating income (loss) / margin | $21.5 / 17.8% | ($0.2) / (0.2)% | $63.5 / 19.5% | $26.8 / 10.4% |
| Net income | $13.0 | $6.0 | $37.8 | $32.0 |
| Diluted EPS | $0.32 | $0.17 | $0.93 | $0.90 |
| Operating cash flow | Not provided for quarterly periods | $6.9 | $36.3 |
- Quarter revenue rose 32.3%; Indirect revenue increased 15.7% to $69.1 million and Direct revenue rose 63.4% to $52.0 million. Direct growth reflected new stores, e-commerce growth, and 7.4% comparable-store sales growth.
- For the 39-week period, revenue increased 27.1%; Indirect revenue rose 13.0% and Direct revenue 51.0%. Comparable-store sales increased 12.0%.
- Gross margin contracted in both comparisons. Management attributed the decline to higher input costs over the year and inventory-management actions, including lower receipts that reduced supply-chain cost absorption and increased sales of retired inventory.
- Operating income improved substantially, but comparisons benefited from prior-year IPO-related stock compensation: $15.7 million in the prior-year quarter and $15.8 million plus $6.1 million of related bonus expense over the prior-year 39-week period.
- Cash and cash equivalents were $8.3 million at October 29, 2011, compared with $14.0 million at January 29, 2011. Current assets were $177.0 million and current liabilities $46.0 million. Inventory was $111.1 million, up from $96.7 million at fiscal year-end.
- 39-week operating cash flow fell to $6.9 million, mainly due to payment timing and working-capital movements, including income-tax payments and accounts-receivable changes. Capital expenditures were $11.3 million; investing cash outflow was $11.3 million.
- Total debt was approximately $65.7 million, principally under a $125 million revolving credit agreement maturing October 2015. The rate on borrowings was 1.30%; unused borrowing availability was $59.5 million. The company reported covenant compliance.
Material changes, outlook, and risks
- Management cited strong demand across channels and growth opportunities from expanded product offerings, store openings, and underpenetrated markets. It did not provide quantified revenue or earnings guidance.
- Fiscal 2012 capital expenditures were expected to be approximately $18.5 million, including about $4.5 million for distribution-center expansion.
- The company opened 12 full-price and four outlet stores during the 39-week period. Direct sales growth was partly driven by new stores and e-commerce; the company cautioned that expansion and growth bring execution and management challenges.
- The effective tax rate was 38.9% for the quarter and 39.6% year to date. Japanese subsidiary losses generated no recognized tax benefit; secondary-offering expenses also affected the year-to-date rate. Prior-year comparisons are affected by the S-corporation-to-C-corporation conversion and a one-time tax benefit in the prior-year quarter.
- Other unusual item: in June 2011 the company sold certain life-insurance policies on founders who were also directors and officers to the insureds for $0.7 million, recognizing a $0.1 million gain.
- Management identified risks including weaker consumer confidence or spending, changing demand and fashion trends, retaining key personnel, protecting the brand, executing growth and store openings, sustaining comparable-store sales, and higher raw-material or labor costs. It said there had been no material change to previously disclosed risk factors and no material change in market-risk disclosures.
- Management believed operating cash flow and available credit would be sufficient for foreseeable working-capital, capital-expenditure, and debt needs. Claims and contingencies arose in the ordinary course; management considered a material adverse effect remote. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether revenue and comparable-store growth persist, particularly as Direct sales and the store base expand.
- Whether gross-margin pressure from input costs, inventory actions, and supply-chain absorption eases or continues.
- How much of reported operating-income improvement reflects underlying operations versus prior-year IPO-related compensation and bonus costs.
- Whether working-capital needs—especially inventory and receivables—continue to constrain operating cash flow despite higher earnings.
- Progress and costs of Japan entry, new stores, and the distribution-center expansion; compare actual capital spending with the $18.5 million estimate.
- Availability under the credit facility, debt and covenant compliance, and the tax effects of Japanese operations and the company’s corporate tax status.