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Summary

  • Investors in Vince are disappointed with a full year guidance coming in merely in line with expectations.
  • The premium valuation and this year's momentum has pushed up expectations.
  • I remain cautious as well amidst a premium valuation and already fat margins.

Investors in Vince Holdings (NYSE:VNCE) were not happy with the company's results despite the second quarter beat in terms of sales and earnings.

The fact that the full year guidance was only in line with analysts expectations and they did not come in above consensus estimates triggered a sell-off amidst the momentum witnessed in shares so far. Momentum following last year's public offering has pushed up expectations for the company which it failed to deliver on.

Second Quarter Headlines

Vince posted second quarter sales of $89.3 million which is a 20.2% increase compared to the year before. The investment community anticipated Vince to post sales of $83.9 million.

The company posted net earnings of $10.5 million versus a reported loss of a similar amount last year which resulted from public offering related costs. On a continuing basis, earnings came in at $8.4 million last year.

Reported earnings came in at $0.27 per share on a diluted basis thereby beating consensus estimates at $0.24 per share.

Looking Into The Numbers

CEO Jill Granoff was very pleased with the results driven by solid growth in all segments including a 40% increase in the direct-to-consumer segment. Overall comparable store sales rose by 7.1% which was the 19th straight quarter in a row in which the business posted an increase in comparable store sales.

Gross margins improved by a full four percentage points to 49.3% of sales amidst supply chain efficiencies and the greater growth of the direct-to-consumer segment which carries higher margins.

Selling, general and administrative expenses rose by 190 basis points to 27.0% of sales. Excluding costs related to the public offering these costs amounted to 26.3% of sales which was up by 490 basis points compared to last year as the company was busy preparing for the initial public offering.

Outlook For The Year

For the entire year of 2014, Vince now sees sales of $335 to $345 million based on the opening of 8 or 9 additional new stores and comparable store sales growth in the high single-digits, or even the low double-digits.

Adjusted earnings for the year are now seen between $0.90 and $0.94 per share.

The company's outlook is largely in line with consensus estimates with analysts anticipating earnings of $0.92 per share on revenues of $338 million.

Valuation

At the end of the quarter, Vince virtually held no cash while it does have nearly $140 million in debt on its balance sheet, resulting in a fairly leveraged position in comparison to the current profitability.

With little over 38 million shares outstanding, which have fallen to levels around $34 per share, equity in the business is valued around $1.3 billion.

Based on the full year outlook, equity in the business is valued at 3.8 times anticipated sales and about 37 times adjusted earnings.

Steady Growth

Over the past few years Vince has demonstrated healthy revenue growth which has been accompanied by steep losses in the past, but recently Vince is posting healthy net profit margins. Between the calendar year of 2011 and the anticipated results for 2014, Vince is anticipated to roughly double its annual sales.

The profitability of the business has recovered significantly after the business posted huge losses in the past, it is now posting earnings of around 10% of sales on an after-tax basis. Obviously these are quite attractive margins.

Back in June, Vince presented itself at the William Blair conference, outlining its future growth plans. The company presents itself as the leading contemporary fashion brand for luxury essentials and modern style. The company still relies heavily on the wholesale segment although store openings are occurring at a rapid pace and by now.

Additionally, an estimated quarter of total sales are derived from the direct-to-consumer business. Within the wholesale segment, Vince's clothes can be found at the higher end of the wholesale business at companies like Nordstrom (NYSE:JWN), Saks Fifth Avenue and Neiman Marcus, among others.

Final Recommendation

Shares of Vince were sold to the general public at $20 per share back in November of last year as they immediately rose to levels around the $30 mark. A few months later, at the start of the new year shares fell all the way back towards the $23 level amidst the market correction in February.

Shares have steadily recovered and risen towards a high of $39 in recent weeks until the sell-off following the second quarter results.

Following the public offering I checked out the prospects for Vince back at the end of last year. At the time I concluded to be cautious amidst the 43% opening day gains, giving the offering a premium valuation. These gains came after the underwriting syndicate initially priced the offering at a preliminary range of $17 to $19 per share.

Despite the continued progress in terms of sales growth and reported earnings, the valuation remains on the very high side even for a business growing sales at 20% per annum. That being said, I don't see that much room for margin expansion, perhaps there is room for modest margin expansion down the road.

As shares are already trading at close to 40 times anticipating earnings going forward, I have to reiterate the conclusion which I made at the time.

Source: Vince Holding - Luxurious Valuation For Luxury Brand