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Michael Loeb
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  • Wall Street's Disappointment Doesn't Have To Be Yours  0 comments
    Sep 9, 2013 2:34 PM | about stocks: VRA

    Wednesday September 11th, Vera Bradley (NASDAQ:VRA) will release quarterly earnings for what is traditionally a light quarter for retailers. This is a company which is heavily shorted, and many on Wall Street expect this former IPO darling to stumble, which is entirely possible, in the short-term. I'm no soothsayer, so I can't say Vera Bradley will be here in the long-run with any more certainty than most people, but I do believe the company serves a valuable and growing niche in this country: the price-conscious, fun-loving baby boomer. So, long-term I see good reason for this company to succeed. But in the short-term, there are plenty of things Wall Street monitors, some of which matter and some of which don't.

    The stuff that matters:

    Cash conversion cycle ratios (Days Sales Outstanding, Days Inventory Outstanding, and Payables Outstanding). These matter because the first two ratios tell us how popular Vera's inventory is. If Vera's inventory can't be sold fast enough, Vera will have a difficult time replenishing inventory, which is a good problem to have. If inventory is tough to sell, then they have to mark down inventory or accept looser credit terms, which gets to the DSO measure. If looser credit terms are extended to customers just to make a sale, that hurts the business's ability to reinvest in itself because it has to wait a longer period of time to get the cash it has earned. Vera was widely criticized for increasing its inventory levels over 40% last quarter, so look out for any increases in inventory above and beyond any increases in sales. In fact, one would hope inventory growth would be lower than sales growth to make up for last quarters inventory growth.

    Other important commentary to look for is progress in opening new stores. Vera has planned to open 300 stores from the current 70 or so. Check to see if the pace of store openings makes this goal of 300 stores feasible within the next several years.

    eCommerce is all the rage, and Vera has revamped its online presence. Revenues should be growing strongly in this segment, but always good to check.

    Perhaps most important in my eyes would be any signal on when a CEO to replace Michael Ray will be chosen. This has created a lot of short-term negativity around the stock, when I see it as potentially a huge positive to have a professional CEO replace the founder's son-in-law at the helm.

    At the end of the day, it will be important to see Vera generate some earning which translate into cash. If they can achieve 10% or better earnings growth at a 12-13 times earnings valuation, I will be a happy man, and I will put more money where my mouth is as this company's story plays out.

    Disclosure: I am long VRA, COH, C, AFL, MDLZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: VRA
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