Vera Bradley, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first half of fiscal 2016, covering the 13 and 26 weeks ended August 1, 2015, respectively. Comparisons are with the periods ended August 2, 2014. The company designs and sells handbags, accessories, luggage, and related products through Direct and Indirect channels.
Key financial results
| Metric | Second quarter 2015 | Second quarter 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net revenue | $120.7 million | $119.0 million | $221.8 million | $231.2 million |
| Gross profit / margin | $66.6 million / 55.1% | $63.4 million / 53.3% | $118.2 million / 53.3% | $123.2 million / 53.3% |
| Operating income / margin | $9.5 million / 7.9% | $13.2 million / 11.1% | $4.5 million / 2.0% | $24.5 million / 10.6% |
| Net income | $5.7 million | $7.6 million | $1.6 million | $14.2 million |
| Diluted EPS | $0.15 | $0.19 | $0.04 | $0.35 |
- Second-quarter Direct revenue rose 7.7% to $83.8 million, while Indirect revenue fell 10.3% to $36.9 million. First-half Direct revenue increased 2.8% to $154.2 million; Indirect declined 16.7% to $67.6 million.
- Comparable sales, including e-commerce, fell 15.0% in the quarter and 15.8% in the first half. Management attributed declines mainly to lower store and online traffic, partly associated with reduced promotional activity.
- Quarterly gross margin improved on a higher mix of made-for-outlet products, lower liquidation sales, reduced promotions, cost reductions, and overhead leverage. First-half gross margin was flat year over year and included $3.4 million of facility-closure charges.
- SG&A rose 13.2% in the quarter and 14.2% in the first half, reflecting marketing, new-store and e-commerce investments; year-to-date results also included severance and a store lease-termination charge. These costs and lower comparable sales pressured operating margins.
Cash, liquidity, and capital
- Cash and cash equivalents were $76.0 million at August 1, 2015, down from $112.3 million at January 31, 2015. Inventory was $103.9 million, up from $98.4 million.
- First-half operating cash flow was a use of $1.0 million, versus $32.8 million provided in the prior-year period. Investing cash outflow was $15.4 million, principally capital expenditures; financing cash outflow was $19.9 million, primarily share repurchases.
- Capital expenditures were $15.4 million for the first half; the company expected approximately $31 million for fiscal 2016.
- No borrowings were outstanding under the $125 million credit facility at quarter-end, and the full $125 million was available. The facility matures July 15, 2020; the company reported compliance with its covenants. The agreement includes financial tests and restrictions, including on stock repurchases and capital expenditures.
- The company repurchased $20.5 million of shares in the first half. After quarter-end, it repurchased 623,633 additional shares at an average $10.47 per share, completing the repurchase program.
Outlook, changes, and risks
- The company closed its New Haven, Indiana, manufacturing facility in the first quarter. Production shifted to third-party suppliers. Management expected approximately $12 million in annual operating-cost savings beginning in the fourth quarter of fiscal 2016.
- Management highlighted product launches, supply-chain diversification, e-commerce improvements, marketing investment, and new-store openings as strategic initiatives. Six full-line and three factory outlet stores opened during the second quarter; 19 stores opened in the first half.
- No full-year revenue or earnings guidance is stated in the provided filing text. The filing cautions that interim results may not indicate full-year performance.
- First-half effective tax rate was 63.8%, versus 39.5% a year earlier, primarily due to discrete items, including increased reserves for uncertain research-and-development tax-credit positions. The second-quarter rate was 39.3%.
- Key risks cited include continued comparable-sales declines, consumer demand and economic trends, execution of the strategic plan and multichannel model, store performance, brand strength, talent retention, and data-security or systems disruptions. Management said there was no material change to previously disclosed risk factors and no material adverse effect was considered reasonably possible from ordinary-course claims and contingencies.
Important facts for investors to verify
- Whether comparable-sales trends and store and e-commerce traffic stabilize, and whether Direct growth can offset continued Indirect weakness.
- Whether planned marketing, store, and e-commerce investments generate returns sufficient to offset higher SG&A and margin pressure.
- Progress in realizing the anticipated $12 million annual savings from the facility closure, and the effect of transferring production to suppliers.
- Cash conversion, inventory levels, planned capital spending, and the impact of completed repurchases on liquidity and share count.
- Potential consequences of tax-reserve changes and the company’s ability to comply with credit-facility covenants.