Vera Bradley - Strong Third Quarter Is Overshadowed By Weak Fourth Quarter Forecast

| About: Vera Bradley (VRA)
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Shares of Vera Bradley (VRA) lost some 14% of their value over the past trading week. The designer, producer and marketer of handbags and accessories issued a disappointing fourth quarter guidance on Wednesday after the close.

Third Quarter Results

Vera Bradley reported third quarter revenues of $138.3 million, up 14.2% on the year before. Growth was driven by a 7.1% increase in comparable store sales, and new store openings. Revenues came in ahead of consensus estimates of $135.3 million.

Direct sales rose 23.6% to $64.3 million. Outlet stores reported a 44% increase in sales, driven by 17 new store openings and another three openings of outlet stores. E-commerce sales grew merely 1.2% due to reduced levels of discounting, which negatively impacted sales.

Gross profits rose 22.2% to $80.2 million, as gross margins rose 380 bass points to 58.0%, mainly driven by operational efficiencies. Higher margins were partially offset by a 130 basis point increase in selling, general & administrative expenses.

The company reported net income of $17.7 million, up 36.9% compared to last year. Diluted earnings per share rose a similar fashion to $0.44 per diluted share. Net margins rose 210 basis points to 12.8%. Net earnings comfortably beat consensus estimates of $0.38 per share. CEO Michael C. Ray commented on the results:

We are pleased with the strength of our operating results in the third quarter. Our brand and product offerings continue to resonate with consumers resulting in meaningful growth across our business segments. Our ongoing success is a tribute to the strength of our brand, our distinctive products, our talented team and retail partners, and our loyal customers.


For the fourth quarter of its fiscal 2013, Vera Bradley expects revenues of $147 to $152 million. This represents a 8.1% growth rate over the third quarter. Gross margins for the quarter are expected to increase by 130 basis points on positive sales leverage. The company expects to earn between $0.55 and $0.57 per diluted share.

The guidance fell short of analysts expectations. On average, analysts expected the company to guide for earnings of $0.60 per diluted share on revenues of $159.5 million.

For the full year of its fiscal 2013, revenues are expected to come in between $526 and $531 million. Full year earnings per share are estimated to come in between $1.63 and $1.65 per diluted share.


Vera Bradley ended its third quarter with $4.5 million in cash and equivalents. The company operates with $35.4 million in short- and long-term debt for a net debt position of $31 million.

For the first nine months of its fiscal 2013, Vera Bradley generated revenues of $378.6 million. The company net earned $43.7 million, or $1.08 per diluted share for the time period.

Factoring in last week's losses, the market values the firm at $968 million. This values the firm at 6.5 times annual revenues and 14-15 times annual earnings.

The company does currently not pay a dividend.

Some Historical Perspective

Year to date, shares of Vera Bradley have lost a quarter of their value. Shares started the year at $31 per share in January and rose to highs of $38 in March. Shares steadily fell back to lows of $20 during the summer on the back of poor guidance. Shares did recover to levels around $30 in October, in anticipation of a good shopping season, and are currently exchanging hands at $24 per share.

Shares of Vera Bradley were sold to the public at $16 in the Autumn of 2010. Shares peaked at $50 in May of 2011 but have halved from that point in time. Between its fiscal 2009 and 2013, the company more than doubled annual revenues from $238.6 million to an estimated $528.5 million. Annual earnings rose from $23.7 million, to an estimated $65.6 million.

Investment Thesis

Investors are not pleased with Vera Bradley's releases over the past week, and the outlook in particular. The midpoint of fourth quarter revenues implies that revenues will increase by roughly 11% on the year before, compared to a 14.2% increase in annual revenues in the third quarter. The performance in the third quarter beat estimates, as a slow start caused by hurricane Sandy was more than offset by strong Black Friday sales.

The forecast for the final quarter is quite disappointing. Guided earnings of $0.55-$0.57 per share in the final quarter are impacted by Sandy and increased investments in Japan. Combined, these factors will impact earnings by $0.02 per share. The revenue guidance of $526-$531 million, comes in $5 million lower than the previous guidance.

Besides external factors, Vera Bradley suffered from some operational disruptions. The company ordered $15 million more in inventory as a result of issues in the planning process. Vera Bradley should be able to offload the excess inventory in coming quarters without too much impact on operations or too steep discounts.

Shares offer value after the recent sell-off. The company continues to open new stores, and merchandise is already offered at 230 Dillard's (DDS) locations. The valuation at 15 times annual earnings remains appealing given the strong balance sheet, strong same store sales growth, and continued store openings.

Long-term holders can buy on this dip.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.