Vera Bradley’s Earnings Slump on Higher Promotional Spend

The Retailer’s revenue remained flat due to continued weakness in the specialty channel

v1Accessible luxury brand Vera Bradley Inc. (NASDAQ: VRA) reported its Q3 FY17 financial results on December 7th, 2016.

The Fort Wayne, Indiana-based Company, with its innovative designs, iconic patterns, and brilliant colors in its wide offerings of handbags, accessories and travel and leisure items, constantly strives to engage with its customers through frequent releases of new designs. The Company sells its products through two reportable segments: Direct and Indirect.

The Direct business consists of sales of Vera Bradley products through the Company’s full-line and factory outlet stores in the U.S., verabradley.com, eBay, and its annual outlet sale in Fort Wayne, Indiana. The Indirect business consists of sales of Vera Bradley products to approximately 2,600 specialty retail locations in the U.S. as well as select department stores, third party e-commerce sites, and its wholesale business in Japan. Read more about Vera Bradley’s financial results below.

Q3 FY17 financial highlights

During Q3 FY17, Vera Bradley’s revenue remained flat at $126.7 million compared to the year-ago period, and which was modestly below the Company’s guidance of $128 million to $133 million. Revenue remained flat primarily due to continued weakness in the specialty channel and incremental promotional activity in factory stores. In addition, verabradley.com sales were below expectations, primarily due to reduced levels of retirement product.

During the reporting quarter, gross profit declined to $72.9 million, or 57.6% of net revenues, compared to $73.3 million, or 57.9% of net revenues, in the prior year’s same quarter. The Y-o-Y decline of 30 basis point gross profit percentage was due to increased promotional activity at the Company’s factory stores, which also caused gross profit percentage to fall modestly below the low-end of the guidance range of 58.0% to 58.5%.

SG&A expense was also higher at $61.8 million, or 48.8% of net revenues, in Q3 FY17 compared to $57.0 million, or 45.0% of net revenues, in the prior year’s same quarter. SG&A expenses increased due to expenses related to new stores, incremental marketing, and $0.6 million of store impairment charges. The SG&A expense rate was higher than the Company’s guidance of 47.6% to 48.6% primarily due to lower than expected revenues.

Vera Bradley’s Q3 FY17 operating income was lower at $11.4 million, or 9.0% of net revenues, compared to $16.8 million, or 13.3% of net revenues, in the prior year period. As a result of higher expenses and lower operating income, Vera Bradley’s net income fell to $8.8 million, or $0.24 per diluted share, for Q3 FY17, compared to $10.3 million, or $0.27 per diluted share, in the prior year period. The Q3 FY17 net income included a benefit of $1.6 million, or $0.04 per share, for a federal income tax adjustment related to the release of certain income tax reserves no longer deemed necessary. Excluding these charges, Q3 FY17 net income totaled $7.2 million, or $0.20 per diluted share.

Segmental highlights

Direct segment: This segment’s Q3 FY17 revenues grew 2.3% Y-o-Y to $86.1 million over $84.1 million in the prior year’s comparable period. Comparable sales decreased 5.0%, reflecting a 5.3% decline in comparable store sales and a 4.4% decrease in ecommerce sales, which was more than offset by new store growth. During the past 12 months, the Company opened 4 full-line and 5 factory outlet stores. Q3 FY17 comparable sales were negatively impacted by a Y-o-Y decline in store traffic. Direct operating income was lower at $17.1 million, or 19.9% of sales, compared to $19.3 million, or 22.9% of sales, in the prior year’s same period.

Indirect segment: This segment’s Q3 FY17 revenues decreased 4.6% to $40.6 million from $42.5 million in Q3 FY16, due to lower orders from the Company’s specialty retail accounts, partially offset by higher sales to certain department stores and non-department store key accounts. Indirect operating income fell to $16.9 million, or 41.7% of sales, compared to $19.1 million, or 44.8% of sales, in Q3 FY17.

Other highlights

Cash at hand: Cash and cash equivalents and short-term investments as of October 29th, 2016 totaled $83 million compared to $61.8 million in the year-ago comparable period.

Inventory: As of October 29th, 2016, inventory was lower at $95.7 million compared to $118.2 million in the year-ago same period due to timing of receipts and diligent inventory management.

Capital spending: Net capital spending for Q3 FY16 totaled $5.8 million and was at $17.4 million as of October 29th, 2016.

Licensing agreements in Home, Hosiery, and Swim: Vera Bradley announced on December 07th, 2016, that it has entered into agreements with Peking Handicraft Inc. for decorative bedding, area rugs, and kitchen textiles with distribution beginning in Fall 2017; Renfro Corporation for hosiery, tights, boot liners, and slipper socks with distribution beginning in Fall 2017; and Mainstream Swimsuits Inc. for swimwear and cover-ups with distribution beginning in Spring 2017. These products will be sold in appropriate distribution channels including Vera Bradley stores, verabradley.com, and specialty and chain stores throughout the country.

Vera Bradley will work with the licensing partners in the development and final approval of all product designs. Management does not expect licensing partnerships to have a material impact on the company’s financial performance on the company’s financial performance for FY17 and FY18.

The company had earlier entered into licensing agreements with Lifeguard Press for signature stationery products and Fox Chapel Publishing for coloring activity and design books featuring Vera Bradley’s iconic patterns, which will be available during the holiday season in 2016.

v2Share repurchases: During Q3 FY16, Vera Bradley repurchased approximately $7.6 million of its common stock under its $50 million share repurchase plan (approximately 523,000 shares at an average price of $14.58). This brings year-to-date repurchases under the plan to approximately $23.3 million (approximately 1,515,000 shares at an average price of $15.39) and plan-to-date repurchases to approximately $27.5 million (approximately 1,800,000 shares at an average price of $15.27).

Opening of SoHo flagship store: Vera Bradley expects to improve its performance in the coming quarters due to the opening of its new flagship store in the SoHo neighborhood of New York City, featuring the new logo and fashion lines. The retailer will also refresh other full-line stores, with an emphasis on bringing them up to speed with the new design elements. The Company expects comparable sales growth in Q4 FY17 on account of its new fall product assortment and the launch its new digital flagship, verabradley.com, featuring easier search and navigation, new payment options, the “order online, pick up in store” option, and the ability to expand internationally.

Despite the slump in consumer spending, 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.

Guidance for Q4 FY17 and full year FY17

For Q4 FY17, Vera Bradley lowered its forecasts and now expects revenues of $135 million to $140 million and gross profit percentage to be between the 55.9% to 56.2% range compared to 58.2% in the prior year’s fourth quarter. The decline primarily relates to expected increased promotional activity in the Company’s factory stores. It also expects SG&A as a percentage of net revenues of between 46.1% to 46.7% and diluted EPS to be in the range of $0.23 to $0.25, based on diluted weighted-average shares outstanding of 36.1 million and an effective tax rate of 36.8%.

For FY17, Vera Bradley expects net revenues of between $486 million to $491 million and gross profit percentage in the range of 56.8% to 56.9%. The expected improvement reflects sourcing and operational efficiencies and increased sales penetration of higher-margin made-for-outlet (MFO) products, partially offset by increased promotional activity in the Company’s factory stores as well as product/mix changes.

SG&A as a percentage of net revenues is forecasted at 49.5% to 49.7% compared to 46.6% reported last year. The company forecasts diluted EPS in the range of $0.62 to $0.65, based on diluted weighted-average shares outstanding of 37.0 million and an effective tax rate of 37.1%. Net capital spending is forecasted at approximately $20.0 million compared to $26.3 million in the prior year.

Stock Performance

v3Vera Bradley’s stock ended the day at $12.82, gaining 0.55%, at the close on Thursday, December 8th, 2016, having vacillated between an intraday high of $12.94 and a low of $12.39 during the session. The stock’s trading volume was at 794,844 for the day. The Company’s market cap was at $469.34 million as of Thursday’s close.

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