Shares of Vince Holding Corp. (VNCE) plunged following the release of its third quarter results.
While the third quarter results were slightly stronger than anticipated, the fact that the company did not raise the full year guidance, thereby essentially cutting the fourth quarter outlook, was disappointing to investors.
Given the premium valuation, shares are extremely vulnerable to an unexpected slowdown in growth or earnings, as became evident following the earnings release. Even after the latest sell-off, shares offer no imminent appeal yet.
Third Quarter Recap
Vince posted 20.0% growth in third quarter revenues, which came in at $102.9 million. The company still relies heavily on wholesales revenues, which were up by 17.3% to $78.9 million as direct-to-consumer sales rose by a more impressive 30.2% to $24.0 million amidst 10 new store openings. Reported sales, which came in above the hundred million mark, beat estimates at $99.3 million.
Much of this growth resulted from a greater number of selling points as comparable store sales were up 5.2%, with comparable sales growth coming in at 8.0% including the e-commerce operations.
Gross margins for the overall business expanded by 50 basis points to 49.2% of sales thanks to increased scale, which has partially been offset by higher promotions. Selling, general and administrative expenses plunged by 310 basis points to 25.1% of sales, resulting from the fact that the company incurred one-time expenses last year relating to the IPO.
Backing out the IPO related costs last year reveals that operating costs were actually up some 60 basis points versus last year, which is disappointing with the company citing an increase in strategic investments during the conference call. This results in adjusted operating margins being roughly flat versus last year, although GAAP margins saw a big increase on the back of costs incurred last year.
All of this pushed up earnings, which were held back to some degree on the back of a very high 40.9% effective tax rate, with net after-tax earnings coming in at $13.3 million versus a small loss last year. On a per share basis, earnings came in at $0.35 per share, which was two cents higher than anticipated.
Fourth Quarter Outlook
Vince now sees annual sales of $335 to $345 million, which at the midpoint of the guidance implies that sales could come in around 95 million. Analyst anticipated a full year sales guidance of $345 million, which implies that fourth quarter sales have been seen around $100 million. The outlook calls for a rather steep decline in sequential sales, which is disappointing.
The company now expects that this year's adjusted earnings are seen between $0.90 and $0.94 per share. At the midpoint of the guidance, fourth quarter earnings are seen at $0.25 per share. Analysts have been anticipating that full year earnings would come in at the high end of the full year guidance, as the outlook is again disappointing, especially when comparing to the earnings just reported in the third quarter.
This guidance implies that both sales and earnings are anticipated to fall on a sequential basis, as the company says on the conference call that it remains ¨cautiously¨ optimistic for the final quarter of the year, while it believes it is still on track to meet long-term revenue and earnings growth targets. It seems that there are few facts on which the company can base this optimism for long-term growth, given the dismal short-term outlook.
A Premium Valuation
Vince ended the quarter with essentially no cash holdings on the balance sheet as the debt load of $122.5 million resulted in a fair bit of leverage. Annualizing the current levels of profitability, it would take the company roughly 2 to 2.5 years of current profitability to pay off all this debt. Using more commonly used ratios like adjusted EBITDA would result in much lower leverage ratios.
With 38 million shares outstanding, which have plunged to just $30 per share, the valuation of the equity has plunged to some $1.14 billion as well, valuing the entire business at around $1.25 billion.
Based on the full year outlook for sales at around $340 million, the business is valued at 3.7 times annual sales. Based on guided earnings of roughly $35 million, equity in the business is valued at around 32-33 times earnings, even after the latest sell-off, resulting in rather steep multiples.
This summer, Vince outlined its strategy, which details how the company aims to create a global, dual gender and diverse brand.
The brand, which is still focused largely on wholesale and women's clothing in the US, has large ambitions outside of the US, in terms of clothing for males and the direct-to-consumer channel.
The wholesale side of the business caters Vince's clothing at prominent wholesale partners such as Nordstrom (NYSE:JWN), Saks Fifth Avenue and Bloomingdales, among others.
The company's brand is still relatively unknown, although the affinity and purchase intent of customers is very high creating solid customer loyalty. The anticipated growth abroad and across distribution and product channels should create a global multi-channel lifestyle brand in the long run. In the conference call, management stressed the strong conversions behind the reported sales growth with traffic being flat.
In September, I last checked the prospects for a prospective investment in Vince. Compared to the second quarter, Vince has demonstrated solid sequential growth in revenues and earnings, as the disappointing guidance for the final quarter has been the key driver behind the latest sell-off.
As a matter of fact, the company has reiterated the full year outlook, which it released at the second quarter earnings release. Given the strong third quarter results, the market has been disappointed with the lack of a raise of the full year guidance. Given the mood on the conference call, it does not appear that Vince is conservative, rather it seems to indicate that growth is disappointing at the moment.
Given the premium valuation, I urged investors to be cautious already back in September, as I have the same advice today based on the latest results despite the long-term goals for 15-20% sales growth and even quicker earnings growth.
Given this long-term outlook a 25 times multiple is the absolute maximum which I am willing to pay which translates into a $25 targeted entry point at the very maximum using a mix of 2014 and 2015's anticipated earnings. Even if shares were to fall to $25, I would have to reconsider my opinion at the time, based on the circumstances at the time, before blindly buying into the shares. Arguably, shares are still not appealing based on this reasoning at the moment in my eyes.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.