Vera Bradley, Inc. — FY2018 Form 10-K
Business context and reporting period. Vera Bradley designs and sells handbags, travel goods, accessories, home products, and gifts through Direct channels (stores and e-commerce) and Indirect wholesale, department-store, and licensing channels. The fiscal year ended February 3, 2018 was 53 weeks; FY2017 ended January 28, 2017 and had 52 weeks. FY2018’s extra week added about $4.1 million in revenue and $0.01 to diluted EPS.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net revenue | $454.6 million | $485.9 million | Down 6.4% |
| Gross profit / margin | $254.0 million / 55.9% | $276.0 million / 56.8% | Margin down 0.9 percentage points |
| SG&A | $239.8 million / 52.7% of revenue | $249.2 million / 51.3% | Expense down 3.8%; ratio increased |
| Operating income / margin | $15.0 million / 3.3% | $28.2 million / 5.8% | Down 46.9% |
| Net income | $7.0 million | $19.8 million | Down 64.5% |
| Diluted EPS | $0.19 | $0.53 | Down 64.2% |
| Operating cash flow | $42.6 million | $65.2 million | Down $22.5 million |
- Channel trends: Direct revenue declined 1.0% to $351.8 million; comparable sales fell 6.7%, including a 9.3% decline in e-commerce and 5.5% decline in comparable stores. Indirect revenue fell 21.3% to $102.9 million, mainly from lower specialty-retailer and key-account orders.
- Margins and expenses: Gross margin was pressured by outlet promotions, inventory adjustments, and channel mix, partly offset by lower product costs. SG&A fell in dollars through lower employee-related and advertising expenses, but deleveraged against lower sales. Store impairment charges were $6.3 million versus $12.7 million in FY2017.
- Cash, liquidity, and debt: Cash and cash equivalents were $68.8 million; short- and long-term investments totaled $69.7 million, making cash and investments $138.4 million. Working capital was $201.7 million. The company had no borrowings and $125 million available under its revolving credit facility; it reported compliance with covenants. Operating cash flow was $42.6 million, capital expenditures were $11.8 million, and inventory declined $14.4 million.
Material changes, outlook, and management commentary
- Management launched its three-year Vision 20/20 turnaround plan, targeting fewer clearance sales, a narrower and more disciplined assortment, and lower SG&A. The company expects these product and pricing actions to reduce FY2019 revenue by $30–$50 million from FY2018.
- Management targets up to $30 million in annual SG&A reductions versus the FY2017 base, excluding specified charges, with $20–$25 million expected to be realized by the end of FY2019. These are targets, not guaranteed results.
- The company forecasts closing up to 45 additional full-line stores by the end of FY2021, primarily as leases expire. It closed five full-line and one outlet store in FY2018; it planned no new full-line stores and six new outlet stores for FY2019. FY2019 capital expenditures were estimated at approximately $10 million.
- FY2018 included $19.5 million of Vision 20/20-related and other charges, or $12.3 million after tax, and a separate $2.1 million provisional net tax charge related to the Tax Act. FY2018’s effective tax rate was 54.4%, versus 29.5% in FY2017; the prior year included a $1.6 million tax benefit from releasing reserves.
- Operating cash flow decreased from FY2017, notably reflecting lower net income and an $18.2 million use of cash from accounts payable, partly offset by inventory reductions. The company repurchased $7.9 million of shares in FY2018; $13.4 million remained authorized at year-end.
Risks, contingencies, and unusual items
- Key risks include continued comparable-sales declines, execution of Vision 20/20, brand and fashion relevance, competition and discounting, mall traffic, and dependence on discretionary consumer spending.
- The company has $203.6 million of future minimum operating lease payments, including $32.8 million due in less than one year. Planned store closures may create additional costs; potential closures are not reflected in the disclosed lease schedule until agreements are reached.
- A 2016 payment-card incident affected some cards used at stores from July 25 to September 23, 2016; online transactions were not affected. The incident was reported resolved, but additional payment-network claims, fines, or penalties remained possible and could not be reasonably estimated. The company maintained $15 million of cyber insurance subject to a $0.1 million deductible.
- Other notable risks include store-asset impairment, sourcing and raw-material costs, reliance on Asian manufacturers and a single distribution center, data-security and technology disruptions, and the Tax Act’s still-provisional accounting effects. Management said routine legal proceedings were not expected to have a material aggregate impact.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective as of February 3, 2018.
Important facts for investors to verify
- Whether Vision 20/20 delivers the planned expense savings while restoring full-price sales, and how the expected FY2019 revenue decline compares with actual results.
- Trends in comparable sales, e-commerce traffic and conversion, and Indirect customer orders, particularly given persistent declines across channels.
- Gross-margin performance and the extent of future promotions, inventory markdowns, and store impairment charges.
- Cash generation, working-capital movements, investment liquidity, credit-facility covenant headroom, and the implications of substantial lease commitments.
- Final Tax Act accounting and any additional payment-card incident claims, penalties, or insurance recoveries.