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The Bottom Fishing Club: Vera Bradley

Mar. 08, 2021 1:37 AM ETVera Bradley, Inc. (VRA) StockCOTY, DLA, LAKE, MOV, SGC, VNCE9 Comments
Paul Franke profile picture
Paul Franke


  • Vera Bradley is set to benefit from economic reopenings, as the coronavirus pandemic fades into summertime.
  • A new round of government stimulus could spike consumer spending on personal items, like those sold by the company.
  • A strong and liquid balance sheet should provide the foundation for robust cash flow and income generation during 2021.
  • Technical trading momentum has been improving rapidly since September.

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

Valuation Story

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

This article was written by

Paul Franke profile picture
Nationally ranked stock picker for 30 years. Victory Formation and Bottom Fishing Club quant-sort pioneer.....Paul Franke is a private investor and speculator with 37 years of trading experience. Mr. Franke was Editor and Publisher of the Maverick Investor® newsletter during the 1990s, widely quoted by CNBC®, Barron’s®, the Washington Post® and Investor’s Business Daily®. Paul was consistently ranked among top investment advisors nationally for stock market and commodity macro views by Timer Digest® during the 1990s. Mr. Franke was ranked #1 in the Motley Fool® CAPS stock picking contest during parts of 2008 and 2009, out of 60,000+ portfolios. Mr. Franke was Director of Research at Quantemonics Investing® from 2010-13, running several model portfolios on the Covestor.com mirror platform (including the least volatile, lowest beta, fully-invested equity portfolio on the site). As of April 2023, he was ranked in the Top 5% of bloggers by TipRanks® for stock picking performance on positions held one year. A contrarian stock picking style, along with daily algorithm analysis of fundamental and technical data have been developed into a system for finding stocks, named the “Victory Formation.” Supply/demand imbalances signaled by specific stock price and volume movements are a critical part of this formula for success. Mr. Franke suggests investors use 10% or 20% stop-loss levels on individual choices and a diversified approach of owning at least 50 well positioned favorites to achieve regular stock market outperformance. The short sale of securities in overvalued, weak momentum stocks as pair trades and hedges is also a part of the Victory Formation long/short portfolio design. "Bottom Fishing Club" articles focus on deep-value candidates or stocks experiencing a major reversal in technical momentum to the upside. "Volume Breakout Report" articles discuss positive trend changes backed by strong price and volume trading action.

Analyst’s Disclosure: I am/we are long VRA, COTY. 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.

This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author's opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author's best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (9)

New product offerings: Compression socks to Vera Bradley core fans should go nicely, 29$/pair. Would like to see insider sales stop.
Real big stretch to compare VRA to LAKE.
@takinstocknsichuashun stretch like their compression socks? 😀
SmallCapKing profile picture
In my decades-long career as a professional small-cap stock manager, I've always bristled at comparing one company to another (or even to the market) to come up with valuation. Each company is unique and different, with unique and different strategies and outlooks. Comparing gross margins, liabilities to assets, and CFO to debt says nothing about valuation. Stocks reflect the discounted future cash flows of a company. So, if we wanted to compare companies for valuation purposes (which is dangerous as it can lead to a tit-for-tat run-up most easily illustrated by the internet bubble of 1999-2000), we'd have to compare future growth prospects. And to do that, we need to know sales opportunities, store opening/closing plans, strategic initiatives, and margin expansion potential. None of that is addressed in this article, so with all due respect, I see nothing in the article that justifies the $20 valuation. In fairness, as a fundamental investor who believes hard work is necessary to be a long-term winner, I don't believe in charts.

That all said, I'm long $VRA. Why? I expect not only a pandemic-reversal turnaround, but also the opportunity to benefit from more secular issues.

Note that the company will likely continue to shrink full price stores (where's that in the company comparisons?), while growing outlets and factory stores. More of their business will be online v. pre-pandemic, especially due to the acquisition of Pura Vida. Pura Vida is an important part of the growth story - as it is expected to grow faster than core Vera Bradley - so an investor better understand what this is and buy into it. It's not a slam dunk. Wish that was mentioned in the article.

$VRA has been a cyclical stock (in a long-term downtrend) due to fashion trends and changes. And we MUST look out, in the coming months, for a big hit from a decline in mask sales. Mask sales got up to 10% of company revenues at very high margins. That obviously won't continue. Where's that in the article? It's critical! However, $VRA should see increased sales as they can refill their Pura Vera inventory, as they can refill their Harry Potter investory, and as they get the benefit next year of a normal back-to-school season.

$VRA has found opportunities to permanently cut costs during the pandemic and will see margins rise post-pandemic v. pre- due to Pura Vida having strong margins and growing faster than the business as a whole. Charli D'Amelio line should help Q1 even further, as Pura Vida's aggressive focus on influencers seems like a sound plan to expand their customer base to a younger audience.

All in, we're looking at a long-term mid+ single-digit grower on the top-line with operating margins that should exceed pre-pandemic levels on gross margins in line with before. If that is correct, we're looking at my EPS estimates of 89c FY21 (Jan '22 year-end) and $1.06 in FY22. Add about 15c to each for free cash flow per share.

Given $VRA's historical avg P/E of 16x and no reason not to expect cyclicality to continue - given it's fashion focus - combined with the fact that EPS growth over the near- to medium-term should approximate this 16x, that seems like a reasonable multiple - regardless of what any other company is trading at! Using that number, I see a fair value of around $17. Be forewarned, though, that there may be continued challenges and even down quarters in the near-term, so a discount may be appropriate.

Follow me on Twitter at @SmallCapKing2 (don't forget the '2')
Paul Franke profile picture
@SmallCapKing I believe I forecasted $17 as a fair value number also in the article, using basic fundamental valuation techniques.

Why didn't (don't) you write this comment as an article on SA?
SmallCapKing profile picture
@Paul Franke

Honestly, I love the dialog on stocks I own or know, but I'm not motivated to write an article with the structure necessary to do it well. Time is better spent calling companies and doing other due diligence. But I do have strong opinions and share them very freely - agree or disagree. I may be sandpaper some time, but I find disagreement and dialog to be the best way to make or save $. I'd love for people to argue I'm wrong on something. No ego. If I realize someone has proven me wrong, frankly I should owe them money!
SmallCapKing profile picture

"Be forewarned, though, that there may be continued challenges and even down quarters in the near-term, so a discount may be appropriate."
I'm not a novice. Strong research pays off. A potential sell-off today may be the buying opportunity, but I want to hear the conference call first.

Follow me on Twitter at @SmallCapKing2 (don't forget the '2')
Xenogears23 profile picture
On my radar now, thanks
Paul Price profile picture
VRA could easily double from its Mar. 5, 2021 closing quote.
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