Vera Bradley: Moving On After A Nice Run

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Vera Bradley x Blessings In A Backpack Event With Dale & Amy Earnhardt

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In spite of nan tribulations being faced by retailer Bed Bath & Beyond (BBBY), successful my ain small bubble I was starting to deliberation that softline businesses had been having a bully moment complete nan past six months. This was because of my ain small bias, reasoning that a mates of nan names that I person been bullish connected successful nan past and I person written astir previously, namely Kontoor Brands (KTB) and Vera Bradley (NASDAQ:VRA), had seen beautiful beardown returns comparative to nan wide market. What I did not recognize was really broad-based nan struggles for clothing makers and others successful nan softlines categories had been. Apart from 2 distressed names I travel for curiosity and information for agelong positions, V.F. Corp (VFC) and Hanesbrands (HBI), I had been reasoning nan assemblage was doing amended complete nan past fewer quarters. So I was amazed erstwhile I realized that Vera Bradley was much of nan affirmative objection successful position of shareholder worth creation. There could easy beryllium dozens of names connected nan floor plan below, but to support it from getting excessively messy, I've constricted it to conscionable 8 mostly good known softline companies that waste items including clothing, bedding, women's bags, and shoes to a reasonably wide swath of consumers, including immoderate successful nan much luxury category.

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Time to Reassess Vera Bradley

On seeing nan benignant of results connected nan floor plan above, I wished it made consciousness to revisit Vera Bradley. The institution is known astir of each for its colorful quilted tote bags, but besides sells luggage, backpacks, and type accessories for illustration sandals and formation towels. It is besides now nan 100% proprietor of Pura Vida, a marque statement of accessories for illustration bracelets, that was an on-line, societal media first type of marque that is now becoming a spot much of a hybrid successful position of having immoderate ceramic and mortar locations. For nan Vera Bradley merchandise, nan products are disposable done immoderate third-party retailers, but nan institution besides has a mini fleet of 60 full-price stores, arsenic good arsenic 80 mill outlet stores, and of people consumers tin bargain on-line.

In early August 2022, erstwhile I past wrote astir Vera Bradley, shares were trading hands for astir $4.25, and I assigned a "buy" standing pinch nan caveat that I did not spot it arsenic a semipermanent holding, arsenic historically nan institution has struggled to clasp margins up. With nan wide problem of excessively overmuch inventory proviso comparative to demand, it was not clear that Vera would beryllium capable to present worth for its shareholders, though I thought it had nan chance, hence my rating. Since then, we person Q3 results released (as of 10/29/2022), mixed pinch immoderate guidance commentary and wide macro-economic information points.

To commencement with, location are 3 information points that I deliberation are cardinal for Vera Bradley from an finance thesis standpoint astatine this juncture. I'll laic retired nan 3 metrics and explicate why I've picked them, and past cheque successful pinch nan Q3 results and spot if guidance is offering immoderate guidance. The first class is income trends, particularly nan income of nan Pura Vida statement of accessories that Vera purchased 75% of successful 2019 and had now bought nan remaining share. This acquisition was intended to bargain growth, but Pura Vida has not had nan type of income maturation that was expected, pinch nan pandemic discourse surely being a morganatic impediment. Secondly, arsenic I touched connected my past article, is operating margin; I find this captious because Vera Bradley has often lagged its peers, and nan banal value has historically had immoderate wide affirmative relationship to its expertise to raise these. Finally, Vera has typically kept a very cleanable equilibrium sheet, pinch minimal to nary debt. However, successful Vera's case, analyzing nan equilibrium expanse is going to beryllium first and foremost astir inventory, and checking for clues astir imaginable early problems pinch margins if inventory is elevated to an alarming level. With that said, its rate position will request to beryllium scrutinized much strongly, since Vera is paying $10 cardinal to complete nan acquisition of Pura Vida.

Looking backmost complete 3 years, successful bid to commencement correct astir nan onset of Covid-19 and proceed from there, location are immoderate absorbing trends done nan astir caller quarter. Starting pinch sales, it is abundantly clear by now that Pura Vida has not been a maturation engine. Whether nan unfortunate of unfortunate timing pinch each of nan pandemic-related autumn retired successful position of proviso chains aliases for different reasons, its segments income person been consistently flat. The amounts successful nan floor plan beneath are successful thousands of US dollars.

Vera Bradley Sales By Quarter pinch Pura Vida segment

Vera Bradley Sales By Quarter pinch Pura Vida conception (author's spreadsheet; information from Vera Bradley SEC filings)

Total gross for Q3 was $124 million, down $10 cardinal complete nan aforesaid play successful 2021 and down from nan anterior 4th by $6.3 million. The gross guidance for Q4 provided connected nan Q3 earnings call, and of people usually nan highest 4th for holiday, was a scope of $136 cardinal to $141 million. Even astatine nan precocious end, it would intelligibly beryllium down from astir $150 cardinal for past year. In summary connected sales, Vera Bradley is not gaining momentum, and nan use of Pura Vida to nan apical statement has not materialized arsenic of yet. In fact, successful Q2, nan institution took an impairment complaint to goodwill and intangible assets to nan tune of $18.2 million, truthful location is simply a realization that this marque hasn't worked retired arsenic good arsenic hoped.

On nan operating separator front, these figures jump astir rather a spot 4th to quarter, and are astir apt only meaningful successful comparison to different akin businesses. In position of conscionable nan earthy information without context, nan operating separator successful Q3 was 4.8%, but we tin spot nan wide inclination and really it stacks up to immoderate others, presented present connected a trailing 12 period basis.

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Obviously a antagonistic operating separator is not typically portion of a look for success, though nan marketplace worth of Vera Bradley has improved successful spite of nan operating separator strain. A bully information of nan reliable situation for nan operating margins originates higher up nan income statement, pinch gross margins nether unit arsenic well. Management has specifically called retired nan challenges of costly freight, moreover if earthy worldly costs from fabric aliases different fibers has moderated.

Lastly, inventory has risen steadily, and does not look to beryllium solely successful mentation for nan vacation quarter, but alternatively to historical highs for a institution whose wide revenues are not increasing and has debased margins.

Vera Bradley inventory by quarter

Vera Bradley inventory by 4th (Author's spreadsheet; information from Vera Bradley SEC filings)

This benignant of inventory build-up does not look to bode good for improving margins successful nan adjacent future. Generally, inventory has been somewhat larger than quarterly revenue, moving betwixt $130 cardinal and $150 million, but now has been complete $160 cardinal for 3 consecutive quarters, pinch an ending worth astatine Q3 for $178.3 million, versus expected income of ~$140 cardinal for nan pursuing quarter.

Management recognizes this is not a awesome position to beryllium in, and John Enwright, nan company's CFO, addressed it straight successful consequence to an expert mobility successful December:

As we benignant of activity done inventories a small spot higher than we would want it to be, we expected this besides would beryllium a small spot different erstwhile we started this year, truthful inventory built. As we detailed, a batch of nan build is associated pinch conscionable nan costs to get inventory from Southeast Asia to Indiana. . . we expect by nan extremity of adjacent twelvemonth getting inventory backmost successful statement to wherever we would usually be, and truthful yet we would expect to spot immoderate free rate travel use adjacent twelvemonth associated pinch that and a simplification successful inventory.

I expect to spot inventory hitting nan brakes pinch meaningful diminution by nan extremity of Q1 (ending successful April 2023). Whether nan institution tin get location without giving up moreover much separator is simply a tricky problem, and successful nan extremity it whitethorn person to unrecorded pinch those debased margins for a while longer.

Impact of Share Buybacks

So pinch nan trifecta of nary existent income growth, operating connected debased margins pinch elevated inventory, what logic could location beryllium connected fundamentals that mightiness explicate nan value action? Offering an mentation connected valuation is astir apt ne'er thing that tin beryllium reduced to a azygous factor, and I do not deliberation that is nan lawsuit here. However, I do want to make judge investors are alert of nan superior allocation strategy astatine work, which consists successful ample portion of a $50 cardinal stock repurchase program.

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Total rate and equivalents person deteriorated beautiful quickly, from $64 cardinal astatine nan extremity of Q1 past twelvemonth to conscionable $25 cardinal astatine Q3, taking nan rate backing each stock from astir $2 to now nether $1. Another $10 cardinal is spoken for successful nan acquisition of nan remaining 25% of Pura Vida. However, a bully chunk of nan rate is tied up successful inventory, and arsenic that corrects itself, 1 hopes nan improvements to rate travel will show up successful a stronger rate equilibrium again. My constituent present for nan infinitesimal is simply that shares person besides travel down astatine a reasonably steep rate, pinch astir an 11% simplification of nan diluted shares since nan opening of 2022, though I would beryllium amazed to spot much added to that number, and americium reasonably definite rate conservation is now nan greater priority. Is nan repurchase programme capable to make a awesome effect to nan marketplace value? Given nan different antagonistic factors going connected astatine nan moment, stock repurchasing is apt playing immoderate domiciled successful supporting nan price, but different factors for illustration nan wide strength successful unit income are astir apt contributing to marketplace sentiment arsenic well.

Options From Here

As overmuch I would for illustration to spot greenish shoots of a turnaround communicative astatine activity here, I personally don't yet spot nan grounds to support that communicative yet. So pinch nan shares having gained immoderate 30% since I suggested them arsenic a speculative bargain successful August, I deliberation nan clip has travel to move to nan sideline and either return profits aliases protect profits pinch trailing stops.

The institution is successful nan mediate of awesome activity changes, not conscionable pinch nan caller CEO Jacqueline Ardrey coming connected committee past fall. Now a full cleaning retired of immoderate apical activity positions was announced successful January, without plans to switch each of them, arsenic good arsenic nan Pura Vida co-presidents leaving pinch nan buyout of their interests. While these eliminations could thief trim costs, it besides could bring immoderate organizational uncertainty, and will require immoderate fantabulous guidance to guideline nan business done these changes while facing nan underlying business challenges, each nether a CEO caller to nan company.

I recognize I person not straight addressed valuation per se, truthful fto maine do truthful concisely now. In my erstwhile article, I had compared Vera Bradley to immoderate different manner and accessories businesses, and thought nan institution had a flimsy undervaluation. In nan intervening months, those comparisons person flipped, and now Vera is presently weighted astatine higher P/E and EV/EBITDA multiples than immoderate of nan names I compared it to, and by a sizeable premium successful immoderate cases.

Vera Bradley valuation versus peers

Vera Bradley valuation versus peers (Author's spreadsheet; information from Seeking Alpha)

I spot nary typical logic to warrant nan premium based connected operations, nor catalysts for nan business, and arsenic a consequence I deliberation it looks afloat weighted if not overvalued. Therefore, I americium updating my rating, and now see it a clasp astatine best, and possibly amended considered arsenic a waste to redeploy to amended opportunities.

This article was written by

Larry Saunders floor plan picture

My master inheritance is successful religion work, but I near that vocation successful 2012. In 2015, I earned an MBA from nan Aix-Marseille University, located successful in Aix-en-Provence successful confederate France. I presently unrecorded and activity successful nan midwest pinch my spouse, children, and a feline who seems to for illustration maine much than she likes anyone other successful our house.

Disclosure: I/we person a beneficial agelong position successful nan shares of KTB either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

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