Another momentum play, that seems to be a consumer spending favorite as the economy recovers, is Vera Bradley (NASDAQ:VRA). The trading statistics I follow on a daily basis are pointing to further gains in the name. Perhaps the rebound is tied to an expected splurge in spending on the company’s trendy bag items, linked to the latest $1.9 trillion coronavirus rescue package being debated in Congress. Vera manufactures and sells women's handbags, luggage and travel items, fashion accessories like bracelets, plus, home and gift products.
What’s interesting to me is the stock declined from $50 in 2011, all the way to a quote near $3 last year at its panic selling bottom. However, the company continues to earn a solid rate of profits, it retains a conservative balance sheet, and the stock valuation looks quite reasonable around $10 a share in March.
Image Source: Company Website
Price to trailing business fundamentals is highlighting a still decent buy opportunity. Considering the market is at all-time high valuations on P/Es, sales, cash flow and tangible book value, Vera Bradley is a breath of fresh air. 2020’s panic-induced sell-off opened the biggest bargain in Vera over the last decade. And, the early 2021 quote remains an attractive buy proposition. Using a decade-long average valuation of the four basic ratios, Vera can be argued as having a “fair value” closer to $17 today.
Price to projected 1-year forward EPS by Wall Street consensus is a below normal multiple vs. the last 24 months. Then, when you compare the ultra-low 9x P/E estimate against the S&P 500 equivalent around 25x earnings for 2021, what’s not to like about the relative valuation picture?
Business Returns and Margins
Profit margins and cash returns are better than the peer group averages listed by Seeking Alpha. The group is based on similar market caps in the apparel, accessories and luxury goods sector. Gross margin for Vera is a leading ratio compared to Superior Group of Companies (SGC), Lakeland Industries (LAKE), Delta Apparel (DLA), Movado Group (MOV), and Vince Holding (VNCE).
Total liabilities vs. assets is more conservative than peers, as is the cash flow ratio vs. total debt. The cash flow to debt reading of 1.3x means Vera Bradley could be debt-free in 9 months, just by directing cash coming in the door each day from operations toward debt reduction. How many other brand-name U.S. companies have a similarly liquid business setup? Not many is the answer. The end result of super-low leverage is any pickup in consumer demand created by the coronavirus recovery underway, or juiced by another massive stimulus spending law, will generate tons of cash flow and profits for Vera.
At the end of October, Vera Bradley held $77 million in cash and $271 million in current assets, with inventories and receivables added. Against just $207 million in total liabilities, shareholders own an A+ balance sheet for liquidity and financial flexibility. With the equity capitalization standing at $330 million using the current $10 share quote, the company has been smartly reinvesting some of its surplus cash to buy back shares at the busted stock price in 2020-21.
Powerful Technical Momentum
On the price and volume charts below, I have drawn several of my favorite momentum indicators. You can review the steep drop in early 2020, punctuating years of decline. After zig-zagging and consolidating during the initial phase of rebound between $4 and $8 a share for six months, a higher stairstep $7-9 range developed after the November election. It appears a $10+ price is beginning to discount another round of taxpayer checks and growing disposable income in coming months for hundreds of millions of Americans.
The Accumulation/Distribution Line, Negative Volume Index, and On Balance Volume readings have improved robustly since September, in combination. The last time all three indicators were moving up strongly at the same time (with NVI about its 255-day exponential moving average) as price was above concurrently rising 50-day and 200-day average trends was March 2018, just before the quote jumped 60% over five months. I have circled in green the technical buy signal similarities below, both the December 2020 and March 2018 instances.
Vera Bradley is a well-liked consumer products company, with sound financials, expanding profitability, and a terrific momentum setup. I own a number of shares with covered calls expiring in March, at strike prices at-the-money to slightly out-of-the-money.
Another bullish argument for ownership comes from a higher-than-normal short interest position. With short covering proving supportive of price since January, if better operating results are on deck, the extra equity demand could propel Vera toward $15 soon. You can review the short interest ratio as a percentage of traded float below, measured against the same peer group.
Assuming the operating business expands dramatically in 2021, Vera Bradley could trade above $15 this year, to as high as $20 if Wall Street analysts become enamored with the investment story. Given the slow economic expansion and business growth from Vera, a $10-12 price zone may be the next step, before better quotes in 2022.
The downside should be limited to $6-8 a share. The two most clear investment risks are coronavirus problems linger throughout the year (keeping consumer spending suppressed), or the general stock market crashes from a big jump in inflation and interest rates (holding Vera Bradley in check). A final risk to consider, fashion is to a degree a fad. While Vera's brand was incredibly popular years ago, competition from new designers is a constant battle needing to be won for shareholders.
In many ways, Vera Bradley is a companion to my Coty (COTY) economic reopening, consumer rebound selection mentioned last month here. Discretionary spending on lower-cost personal items like bags, bracelets, perfume and makeup could witness a resounding demand boost into summertime.
Thanks for reading. This article should be the first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.