Vera Bradley - Long-Term Growth Story Remains Intact

| About: Vera Bradley (VRA)

Shares of Vera Bradley (NASDAQ:VRA) are seeing a decent correction in Thursday's trading session. Shares of the designer, producer and marketer of accessories for women, fell some 9.2% on the day. On Wednesday after the close, Vera Bradley reported a disappointing set of fourth-quarter results.

Fourth Quarter Results

Vera Bradley generated fourth-quarter revenues of $162.6 million for its fiscal year of 2013. Total revenues were up 21% compared to the year before.

Direct revenues, which make up almost two-third of total revenues, rose 27% to $103.3 million. Store revenues rose 31%, fully attributable to the opening of 17 new normal stores and three outlet stores, while comparable same-store sales fell by 0.4%.

E-commerce sales rose 23% on strong web traffic growth. In total some 62 million people visited the company's website for the whole fiscal year of 2013. Indirect revenues rose some 11% as a result of a decent winter season and the addition of Dillard's (NYSE:DDS) doors.

Gross profits rose 24% to $94.1 million as gross margins expanded by some 150 basis points to 57.9%. Positive operating leverage and strong growth at "full-priced" stores boosted margins.

The margin expansion was partially undone by a 90 basis point increase in selling, general & administrative expenses. These expenses rose to 34.3% of total revenues due to the launch of the Baby division. The first collection has now become available.

Consequently, net income rose 25% to $25.1 million, or $0.62 per diluted share. Earnings came in ahead of consensus estimates of $0.57 per share, and the company's own guidance for earnings of $0.55-$0.57 per share.

Looking Into Fiscal 2014

For the current first quarter, Vera Bradley expects revenues of $120-$122 million. At the midpoint of the guidance, revenues are expected to increase by merely 3.2% compared to last year's first quarter revenues of $117.2 million.

Diluted earnings per share are expected to fall to $0.20-$0.22 per share. This compares to first quarter earnings of $0.31 per share last year, and consensus estimates of $0.35 per share.

For the full year of its fiscal 2014, Vera Bradley anticipates annual revenues of $585-$590 million, on which it expects to earn $1.83-$1.88 per share. The full-year guidance comes in line with consensus estimates of $1.87 per share.


Vera Bradley ended its fiscal year of 2013 with $9.6 million in cash and equivalents. The company operates with $15.1 million in short- and long-term debt, for a net debt position of $5.5 million.

The company generated annual revenues of $541.1 million for the fiscal year of 2013, up 17.4% on the year before. Earnings rose to $68.9 million, or $1.70 per diluted share.

Factoring in Thursday's declines, the market values Vera Bradley around $916 million. This values the company at 1.7 times annual revenues and 13-14 times annual earnings.

The company does not pay a dividend at the moment.

Some Historical Perspective

Vera Bradley went public as recent as October of 2010. The company was sold to the public around $16 per share, but demand for hot IPOs and impressive growth rates sent shares quickly to $40 later that year. Shares actually peaked around $50 during spring of 2011, but have gradually lost half of their value ever since.

Between the calendar year of 2008 and 2012, Vera Bradley more than doubled its annual revenues from $239 million to $541 million. Net earnings almost tripled, expanding from $24 million to $69 million over the same time period. In the meantime the shareholder base of the company diluted by some 15%, resulting in slower earnings per share growth.

Investment Thesis

Vera Bradley ended its fiscal year of 2013 on a strong note, which came as a surprise as the company warned for a poor fourth quarter back in December of 2012. That warning sent shares 14% lower at the time, toward $24 per share.

Fourth-quarter earnings comfortably beat the lowered own guidance and analysts estimates. Full-year revenues came in ahead of the guided $526-$531 million. So far the good news. The guidance for the current first quarter of its fiscal 2014 is outright terrible, while the full year guidance is in line with consensus estimates. Given the poor first-quarter guidance, risks are obviously still toward the downside.

A key gauge for many retailers, and especially those whose valuation largely is derived from future growth, is the same-store sales growth rate. Comparable sales growth came in at 9.3% in the fourth quarter Vera Bradley's fiscal 2012, to slow down to 3.4% for the full year of 2013. For the final quarter of the year, sales actually fell by 0.4% on the year before. Despite the though conditions, Vera Bradley guides for single digit positive sales growth in the coming year.

At the same time, the company continues to expand operations by opening new stores. The company plans to open 23 new stores in the coming year, which compares to 20 store openings over the past year. These openings will be a key driver for revenue growth into the coming year.

The full-year guidance calls for 8 to 9% growth in total revenues. The resulting operating leverage and faster growing e-commerce sales will increase gross margins by an expected 50 basis points, while selling, general and administrative costs are expected to stabilize. Consequently, earnings are expected to increase a similar 9% to $1.85 per share.

After the latest sell-off, shares are exchanging hands at around $22.50 per share. This values the firm at around 1.6 times fiscal 2014's annual revenues and 12-13 times annual earnings. Despite the significant slowdown in growth, the company is still openings stores, growing revenue and ultimately its earnings. The company is still very much a growth play, although the pace of growth has come down a lot.

I reiterate my stance. Despite the growth slowdown, the long-term growth profile remains intact. Valued at 12-13 times annual earnings, shares continue to offer long-term appeal.

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.

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