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Vera Bradley, Inc. (NASDAQ:VRA) is a retailer and wholesaler of women's fashion accessories primarily sold in the United States. Currently trading at $23.79, we believe there to be significant upside to $35 in the long term on a fundamental basis, yet possibly bumping up against short term resistance at $25 from a technical perspective. A majority of the data in this article can be found in the most recent quarterly report.

Opportunities

The valuation is cheap. VRA is trading at 12x forward earnings compared to the clothing and accessory industry overall, which is trading at 19x forward earnings. The 1-Year EPS growth rate for the industry is 4.3% while Vera Bradley has grown EPS at close to a 28% clip.

The shares are heavily shorted with 9.6M shares short as of May 15, 2012. This is 47.8% of the total float - an amazing number. Insiders own 52% of the shares and the short ratio is 11 days. An earnings beat a few weeks ago had the company trading above $27 in after market action, but Spain's banks found a way to spoil the party. When the market realizes what a value opportunity exists in VRA, the shares should rebound in short order.

Strengths

The company has beat analyst consensus estimates for six of the seven quarters it's been a public company.

TTM revenues were over $476M with 15.6% quarterly revenue growth year-over-year. For a company with a market cap south of $1B with revenue growth at these levels and the Vera Bradley brand name recognition, it is certain that the shares will experience a rebound when investors take the time to look more closely.

Weaknesses

When compared to Deckers Outdoor Corp. (NYSE:DECK) at 13.4% and Crocs, Inc. (NASDAQ:CROX) at 11.44%, VRA has similar profit margins (12.5%) but a higher forward multiple (11.8x). DECK, CROX and Iconix Brand Group, Inc. (NASDAQ:ICON) all trade at multiples below 10. Value investors have plenty of options to choose from as do consumers, is VRA the right choice?

With success primarily in the US, VRA has not shown it can grow sales internationally. This can also be viewed as an opportunity if the company can right the ship in time to capitalize on the growing Chinese middle class.

Threats

Coach, Inc. (NYSE:COH) remains the ultimate competitor and Tiffany & Co. (NYSE:TIF) is making its way into the luxury bag segment, so the market in the developed world is beginning to look a bit more crowded. Michael Kors Holdings Ltd. (NYSE:KORS), Fossil, Inc. (NASDAQ:FOSL), and Guess Inc. (NYSE:GES) are other popular names experiencing a rise in sales of handbags.

Technical Analysis

VRA has moved above a significant downtrend but still faces some sticking points on its journey higher. The daily chart has price breaking above the existing downtrend which was preceded by a bullish divergence in the RSI at oversold levels. VRA is now trading at the 50-day moving average. This area of resistance also includes the most recent reaction high ($25.04 on May 29) as well as a significant low made during the third week of August 2011 ($24.83), so some fairly stiff resistance could be in play. Look for volume to accompany any move higher to measure the conviction held in these higher levels.

(click to enlarge)stockcharts.com

The weekly chart shares several key characteristics with the daily action as it also sports a bullish divergence in the RSI and is coming off of oversold levels. Resistance also exists as the aforementioned $24.83 low and the shorter term moving average at which it currently trades. Again, watch for how the stock continues to trade around $25 and what type of volume it sees as to the next possible short term move.

(click to enlarge)

Conclusion

With 2012 earnings estimates at $1.43 per share and the Clothing and Accessories industry trading as a whole at 19x forward earnings, we believe the minimum price VRA should trade at by the end of the year will be $27.17. This assumption is based on VRA being just an "average" accessory company - an average accessory company with "spectacular" earnings growth - and we believe the upside for the stock to be above $35 in the near future. The major catalysts for a move higher include the extremely high short ratio combined with the ability for the company to consistently beat analyst expectations. Eventually this stock will trade at a multiple it deserves, in the meantime you should use this opportunity to take advantage and pick up shares at current levels. We have.

Source: Vera Bradley: Profit Is In The Bag