Shares of Vera Bradley (VRA) took a beating in after-hours trading on Wednesday. Just like many of its competing retailers the company saw and foresees difficult market circumstances for the remainder of the year.
As the long-term growth story appears to remain intact, and there are no reasons for immediate stress given the healthy balance sheet and current profitability, the current valuation might provide an interesting long-term entry point.
Vera Bradley generated second-quarter revenue for its fiscal 2014 of $125.4 million, up 1.9% on the year before. Revenues came in ahead of consensus estimates of $124.7 million.
The company reported diluted earnings per share of $0.37, up 11.6% on the year before. Earnings comfortably beat consensus estimates at $0.32 per share was well.
CEO Michael Ray commented on the performance over the past quarter, "We managed through considerable headwinds in the second quarter, yet delivered results in line with our expectations."
Looking Into The Results..
There was quite a mixed picture in terms of revenue growth. Direct revenue rose by 14.2% to $75.0 million on the back of store openings. At the same time, comparable-store sales fell by 3.7% due to lower traffic and poor product offerings.
E-commerce revenue growth of merely 1.4% was poor as well as traffic growth was offset by a lower conversion rate. Indirect sales fell 12.2% to $50.4 million as specialty retailers were cautious with their orders given the difficult external environment.
Despite cautious sales results, Vera Bradley managed to boost gross margins by 140 basis points to 57.2% of total revenues. Margin expansion was driven by fewer incentives offered to retailers
Selling, general and administrative expenses fell by 30 basis points to 38.6% of total revenue driven by cost containment efforts and lower incentive-based payments.
All in all, operating income rose by 150 basis points to 19.2% of total revenue.
..And Looking Ahead
Third-quarter revenue is seen between $128 and $130 million. This implies that third-quarter revenue is seen up 2.9% on the second quarter. However, revenue is seen down 6.7% on the year before implying further weakness in comparable sales.
Gross margins are seen down 280 to 300 basis points for the quarter as the company has to increase promotional activity to drive traffic and sales. Consequently, diluted earnings per share are seen between $0.33 and $0.35 per share.
Full-year revenue is seen between $535 and $540 million, while gross margins are expected to fall by 100 to 125 basis points. Diluted earnings per share are seen between $1.47 and $1.52 per share.
The full-year guidance falls way short of the company's own guidance of revenue of $570 to $575 million, issued as recently as June. At the time, Vera Bradley saw annual earnings per share of $1.74 to $1.78.
Vera Bradley ended its second quarter with $9.3 million in cash and equivalents. The company operates without the assumption of debt, for a modest net cash position.
Revenues for the first six months of the year came in at $248.4 million, up 3.4% on the year before. Net earnings fell to $24.1 million in the meantime.
Factoring in losses of up to 10% in after-hours trading, with shares exchanging hands at $17.50, the market values Vera Bradley at some $710 million, or operating assets at $700 million. This values the company at 1.3 times annual revenue and around 12 times annual earnings.
Some Historical Perspective
Vera Bradley went public in October of 2010 when shares were sold to the general public at $16 per share. Shares swiftly rose to highs of $50 in May of 2011, before things turned South.
Shares have fallen to lows of $20 in 2012 and have continued to trade in a $20-$30 trading range ever since. In after hours trading, shares are now trading around $17.50. At these levels shares are trading just 10% above the offer price almost three years ago.
Between the fiscal year of 2010 and 2013, Vera Bradley has nearly doubled its annual revenue, expected to fall slightly towards $540 million in 2014. Diluted earnings per share rose by 20% in the meantime to an expected $1.50 for this year.
Yet it is the outlook for the third quarter and remainder of the year that is spooking investors, as Vera Bradley also sees poor traffic and spending trends, in a competitive environment.
Add to this a 21% increasing in inventory levels, ballooning to $143 million, and red flags are going off with investors. A 21% build up in inventories is a severe mismatch with 2% revenue growth.
As such, not only sales but gross margins will come under pressure as the company desperately needs to sell some inventory. On the positive side, while Vera Bradley acknowledges it has too much inventory, it thinks the quality is still healthy.
As a result the company will cut its stock keeping units by 20%. While the disappointing sales results are understandable, sales results fall way short of high-end competition from Coach (COH) and Michael Kors (KORS), which are still doing fine.
The company acknowledges that its product offering underperformed in a weak external environment. While the company remains cautious for the remainder of the year, it continues to see long-term appeal.
Back in March of this year, I last took a look at the company's prospects when shares where exchanging hands at $23 per share. I concluded that although the pace of growth has come down, the company continues to remain on a growth path, reaming a long-term growth play.
At $23 per share I concluded that shares offered long-term appeal. In the meantime shares have lost another quarter of their value. While the environment has become tougher, the valuation remains appealing to me. The company remains solidly profitable and has a healthy balance sheet. The current worries about slower sales, increasing inventories and cautious earnings provide an interesting opportunity at this point.