Business context and reporting period
Vera Bradley, Inc. designs and sells handbags, travel goods, accessories, home products, and gifts through its Direct and Indirect channels. This Form 10-K covers the 52-week fiscal year ended January 28, 2017 (fiscal 2017); the fourth-quarter figures below are unaudited. Fiscal 2018 is expected to have 53 weeks.
At year-end, the company operated 113 full-line and 46 factory outlet stores, and sold through approximately 2,600 specialty retail locations and more than 730 department-store locations.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net revenue | $485.9 million | $502.6 million |
| Gross profit / margin | $276.0 million / 56.8% | $281.2 million / 55.9% |
| Operating income / margin | $28.2 million / 5.8% | $46.7 million / 9.3% |
| Net income | $19.8 million | $27.6 million |
| Diluted EPS | $0.53 | $0.71 |
| Cash from operations | $65.2 million | $43.3 million |
- Revenue fell 3.3%. Direct revenue rose 1.1% to $355.2 million, while Indirect revenue declined 13.6% to $130.8 million.
- Comparable sales declined 7.0% (comparable store sales down 7.1%; e-commerce sales down 6.7%). New-store revenue partly offset the comparable-sales decline.
- Gross margin improved 0.9 percentage points, primarily from sourcing efficiencies and lower costs following the domestic manufacturing facility closure. SG&A increased 5.2% to $249.2 million, or 51.3% of revenue, including higher store impairment and new-store costs.
- Cash and cash equivalents were $86.4 million; short-term investments were $30.2 million. Working capital was $193.1 million. The company reported no borrowings and had $125.0 million available under its revolving credit facility.
- Investing cash outflow was $50.8 million, including a $30.0 million certificate-of-deposit investment and $20.8 million of capital expenditures. Financing cash outflow was $25.7 million, mainly share repurchases.
- There was no long-term debt outstanding. Future minimum operating lease payments totaled $222.2 million; purchase obligations were $54.0 million, primarily inventory.
Fourth-quarter results
Fiscal 2017 fourth-quarter revenue was $134.8 million, versus $154.1 million in the prior-year quarter. Operating income was $4.7 million versus $25.4 million, and net income was $3.5 million versus $15.7 million. The quarter included $10.5 million of store impairment charges.
Material changes versus the prior comparable period
- Annual revenue declined $16.7 million, continuing a multi-year contraction; comparable sales improved from a 10.6% decline in fiscal 2016 to a 7.0% decline in fiscal 2017, but remained negative.
- Indirect revenue continued to contract, primarily due to lower specialty-retailer orders. Specialty retail locations had fallen to approximately 2,600 from a fiscal 2013 peak of approximately 3,600.
- Operating income fell 39.6% and net income fell 28.3%. Fiscal 2017 included $12.7 million of store impairment charges, compared with $2.8 million in fiscal 2016.
- Operating cash flow increased by $21.9 million, mainly reflecting inventory and accounts-payable timing. Cash and short-term investments together rose to $116.5 million from $97.7 million.
- Fiscal 2017 included a $1.6 million tax benefit from releasing reserves after an IRS audit concluded. Fiscal 2016 included $5.2 million of restructuring and other charges, including costs from closing the New Haven manufacturing facility.
Outlook, commentary, risks, and unusual items
- Management described fiscal 2017 as the third year of its turnaround plan, focused on product, distribution, and marketing. The company launched updated branding and a new e-commerce platform in February 2017.
- Fiscal 2018 plans include approximately $10–$15 million in capital expenditures, six new factory outlet stores, no new full-line stores, and relocation or closure of up to 15 underperforming full-line stores over two years. Management said it was slowing store expansion pending comparable-sales improvement.
- Management identified risks including continued comparable-sales declines, changing consumer preferences, brand execution, mall traffic, competition and promotional pressure, reliance on Asian suppliers and contract manufacturers, and dependence on a single distribution facility.
- A payment-card incident involved unauthorized access to the retail payment-processing system. Cards used at stores from July 25 through September 23, 2016 may have been affected; online transactions were not affected. The company said the incident was resolved, but potential assessments, fines, and other losses could not be estimated. It maintained $15 million of cyber insurance above a $0.1 million deductible.
- The company recorded $12.7 million of store impairment charges based on weak performance and projected results at certain locations; further impairments may occur if store forecasts are not achieved. The filing provides no clear numerical earnings or revenue guidance.
- Deloitte issued an unqualified opinion on the fiscal 2017 financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Important facts for investors to verify
- Whether comparable-sales trends, especially store and e-commerce traffic, stabilize and whether the turnaround initiatives improve demand.
- Whether Indirect-channel contraction continues and how specialty-retailer order trends affect revenue and margins.
- How much of the $12.7 million impairment is nonrecurring, and whether store closures or relocations generate additional charges or lease costs.
- The eventual financial and customer impact of the payment-card incident, including insurance recoveries and any payment-card-company or regulatory assessments.
- Cash generation and capital allocation, including the remaining share-repurchase authorization and the company’s substantial operating-lease commitments.
- Execution of fiscal 2018 store, digital-platform, and capital-spending plans, including the effect of the 53-week fiscal year on comparisons.