Vera Bradley Swings to Profit

Profit driven by operational efficiencies and better sales of high-margin products

Source: Vera Bradley
Source: Vera Bradley

Accessible luxury brand Vera Bradley Inc. (NASDAQ: VRA) reported its Q1 FY17 financial results on June 1st, 2016. Vera Bradley, with its wide offerings of handbags, accessories and travel and leisure items, constantly strives to engage with its customers through frequent releases of new designs. Read more about its financial performance below.

The Company’s net revenue grew 4% to $105.2 million for the first quarter ended April 30th, 2016, compared to $101.1 million in the prior year quarter ended May 2, 2015. The Company swung to a profit of $2.4 million, or $0.06 per diluted share, from a net loss of $4.1 million, or $0.10 per diluted share. The prior year results included charges of $4.2 million, which includes $2.1 million liability from the closure of its Indiana manufacturing facility, $1.5 million of severance and restructuring charges, and $0.6 million charges related to income tax adjustment. Excluding these, the Company’s net income in Q1 FY17 totaled $0.1 million, or $0.00 per diluted share.

The Y-o-Y improvement in diluted EPS during Q1 FY17 was mainly on account of a 220 basis point gross profit growth, driven by sourcing and operational efficiencies and better sales of higher-margin made-for-outlet (MFO) products.

E-commerce proves to be a laggard

During Q1 FY17, the Company’s Direct segment revenues increased by 3.6% to $72.9 million from $70.4 million in the year-ago quarter. As with most other luxury retailers, online sales once again played spoilsport. Comparable sales, including online sales, fell 6.7%, reflecting a 3.8% decline in comparable store sales and an 11.0% decrease in online sales. Comparable sales during Q1 FY17 were hit by declines in both store and e-commerce traffic. Moreover, online sales were negatively impacted by lower promotional activity. On the brighter side, Vera Bradley’s comparable sales were offset by new store growth during the quarter under review. The Company opened 11 full-line and 7 factory outlet stores in the past year.

Indirect segment revenues grew by 5.1% to $32.2 million from $30.7 million in the prior year first quarter, mainly due to better sales from non-department store key accounts and product launch timing in the specialty channel. This was partially offset by lower orders from the Company’s specialty retail accounts.

Vera Bradley’s gross profit for Q1 FY17 jumped to $59.7 million, or 56.7% of net revenues, compared to $55.1 million, or 54.5% of net revenues, in the year-ago quarter. Gross profit percentage improved 220 basis points as compared to the year-ago quarter.

During Q1 FY17, the Company’s SG&A expenses totaled $56.4 million, or 53.6% of net revenues, compared to $55.1 million, or 54.5% of net revenues, in the prior year first quarter,  mainly due to new store expenses.

During the quarter under review, operating income grew to $3.9 million, or 3.7% of net revenues, compared to $0.9 million, or 0.9% of net revenues, in the prior year first quarter. Of this, the Company’s Direct segment’s operating income was $12.1 million, or 16.6% of sales, compared to $11.5 million, or 16.3% of sales, in the year-ago period. The Indirect segment’s operating income was $12.6 million, or 39.1% of sales, compared to $11.1 million, or 36.0% of sales in the year-ago quarter.

Stock repurchases

During Q1 FY17, the Company repurchased approximately $5.7 million shares (approximately 354,000 shares) of its common stock for an average price of $16.05, as part of its $50 million share repurchase plan. This brings the total repurchases to approximately $9.8 million, or approximately 637,000 shares, at an average price of $15.42 so far.

Guidance for Q1 FY17

For Q1 FY17, the Company expects net revenues to range between $118 million to $123 million and gross profit percentage to range between 58.0% to 58.5%. The Company expects comparable sales growth in Q2 FY17 on account of its new fall product assortment, opening of its SoHo flagship store, and the launch its new digital flagship, verabradley.com.

Vera Bradley’s SG&A, as a percentage of net revenues, is expected to range between 51.3% to 51.8%, while diluted EPS is expected to be between $0.13 to $0.15 based on diluted weighted-average shares outstanding of 37.1 million and an effective tax rate of 37.9%.

Despite the slump in consumer spending and the dull retail outlook in the U.S. and other international markets, Vera Bradley is looking to buck the trend of poor comp sales seen among luxury retailers. The company is expected to complete its brand transformation over the next few months, explore additional licensing, and tap international growth opportunities to drive sales of its high-margin products.

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