Handbag maker Vera Bradley, Inc. (NASDAQ:VRA) recently took a nasty plunge, after the company followed up its better-than-expected fourth quarter earnings with bleak guidance for the current quarter. Yet I believe that Vera’s recent drop represents a buying opportunity for patient long-term investors, and in this article I’ll outline Vera’s strengths, weaknesses and growth prospects in the coming year.
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A wild, colorful, patterned ride
Fort Wayne, Indiana-based Vera Bradley, Inc. (NASDAQ:VRA) is primarily known for its iconic patterned bags. However, the company also sells other accessories and travel items, and more recently, baby products. Its products are available in a combination of 3,500 retail partners, which include 65 standalone Vera Bradley stores and 11 outlet locations. Although the company is primarily based in the United States, it also operates seven locations in Japan.
Between 2008 and 2012, the company doubled its annual revenue from $239 million to $541 million, and it nearly tripled its net earnings from $24 million to $69 million. Yet the stock went on a wild ride, losing over half of its value since peaking at $50 in 2011.
Some investors blame Vera Bradley for capping its own growth with a secondary offering in 2011, which diluted its shareholder base by approximately 15% – resulting in slower earnings per share growth.
Fourth Quarter
For its fourth quarter, Vera Bradley, Inc. (NASDAQ:VRA) earned $0.62 per share, or $25.1 million, a 25% increase from the prior year quarter. Its earnings topped both its own prior forecast for $0.55 to $0.57 per share, as well as the analyst consensus estimate of $0.57 per share.
Revenue rose 21% to $162.6 million, also topping the $153.18 million analysts were expecting.
Sales Growth
Direct revenues, generated from the company’s retail stores, outlets and websites, rose 27% to $103.3 million – comprising nearly two-thirds of its top line.
Vera Bradley, Inc. (NASDAQ:VRA)’s brick and mortar stores posted 31% sales growth, thanks to 17 new stores and three new outlet locations. However, same-store sales slid by 0.4%.
The company’s full-price retail stores enjoyed higher store traffic, which contributed to a 24% increase in gross profits to $94.1 million. Gross margin also expanded by 150 basis points to 57.9%, which the company attributed to lower freight costs and better operational efficiency.
E-commerce sales grew by 23%, in line with the rapid online growth demonstrated by many of the company’s industry peers. During the full fiscal year, over 62 million people visited Vera Bradley’s website – a 45% increase over the prior year quarter. Vera Bradley’s social media presence continues to grow as well – it claimed 1.4 million Facebook fans over the fiscal year.
Meanwhile, indirect revenues – which are generated from third party retailers – rose 11%, which was primarily attributed to strong sales throughout its winter season, and the addition of several new Dillard’s, Inc. (NYSE:DDS) retail points.
Rising expenses
Unfortunately, rising SG&A (sales, general & administrative) expenses rose 90 basis points during the quarter, now accounting for 34.3% of total revenues.
This surge in SG&A expenses was caused by the launch of its new Baby segment, which began operating during the fourth quarter.
Investors are right to question the company’s expense levels, which are exacerbated by its 169.7% plunge in free cash flow and 67.98% slide in cash reserves. On a brighter note, long term debt declined by 47.23%.
Vera Bradley, Inc. (NASDAQ:VRA) finished 2013 with $9.6 million in cash, but is shouldering $15.1 million in total debt. Therefore, reducing debt and expenses – while boosting bottom line growth and free cash flow – should be a top priority.
However, the company plans to expand heavily in fiscal 2014 by opening 23 new stores, up from 20 new locations in 2013. If successful, the expansion will push Vera Bradley’s store count up to 99, allowing the company to edge closer to its stated long-term goal of opening 300 stores in North America.
Although Vera’s new stores are expected to generate stronger top line growth in the coming year, they might also weigh down its expenses and increase its outstanding debt.
The road ahead
Although Vera Bradley, Inc. (NASDAQ:VRA)’s fourth quarter earnings came in ahead of analyst expectations, its outlook was extremely soft. For the first quarter of fiscal 2014, the company expects to earn a diluted $0.20 to $0.22 per share, missing the analyst consensus of $0.35 per share, and also lower than the $0.31 per share it earned a year earlier. Revenue is expected to grow roughly 3.2% to a range between $120 to $122 million.
Investors were unimpressed by the retailer’s mediocre outlook, and the stock slid nearly 8% on March 14.
However, panicked investors overlooked the fact that Vera Bradley’s full year outlook was brighter, albeit merely in line with analyst estimates. The company expects earnings to rise 9% to $1.85 per share, while revenue is forecast to rise 8% to 9%. E-commerce sales are expected to accelerate, boosting gross margins by 50 basis points, while SG&A expenses stabilize.
New brands and partners
The company’s new Baby line, which caused the aforementioned surge in expenses in the fourth quarter, offers diaper bags, clothes, blankets, changing pads and tops, which may help it reach a new slice of its target female demographic – mothers who still enjoy a sprinkle of affordable luxury in their domestic lives.
In addition, a new partnership with Disney will also allow Vera Bradley to sell special edition Disney bags at its theme parks and cruise ships, increasing its brand exposure.
The Foolish Bottom Line
Vera Bradley’s main competitors are handbag giant Coach Inc. (NYSE:COH) and Fifth & Pacific Companies Inc (NYSE:FNP), which owns Juicy Couture and Kate Spade. How does Vera measure up fundamentally against these rivals?
| Forward P/E | Price to Sales (ttm) | Price to Book | Return on Equity (ttm) | Debt to Equity | Profit Margin | Qty. Earnings Growth (Y-O-Y) | Qty. Revenue Growth (Y-O-Y) | |
| Vera Bradley | 11.06 | 1.69 | 4.72 | 43.28% | 7.77 | 12.73% | 25.00% | 20.90% |
| Coach | 12.22 | 2.85 | 6.74 | 53.18% | 1.09 | 21.31% | 1.50% | 3.80% |
| Fifth & Pacific | 44.76 | 1.50 | N/A | N/A | N/A (total debt 406.29M) | -4.95% | -75.10% | 8.80% |
| Advantage | Vera Bradley | Fifth & Pacific | Vera Bradley | Coach | Coach | Coach | Vera Bradley | Vera Bradley |
Source: Yahoo Finance, March 15
Right away, we can see Fifth & Pacific Companies Inc (NYSE:FNP) is the weakest of the bunch, with negative margins and terrible declines in bottom line growth. Coach Inc. (NYSE:COH) is hanging in there, but it lacks any fundamental characteristics of a growth stock.
Meanwhile, Vera Bradley, Inc. (NASDAQ:VRA) rises above its competitors with extremely strong revenue and earnings growth, as well as a fairly robust return on equity ratio and decent margins. Better yet, the stock is the cheapest by a simple P/E valuation, despite exhibiting the best top and line growth – that makes it an undervalued growth stock in my book.
Buffett always said, “be greedy when others are fearful” – and right now, investors are plenty fearful of Vera Bradley, simply due to its weak first quarter guidance. Vera’s full-year forecast is intact, as are its long-term prospects – making it an attractive stock for patient investors.
The article Is Vera Bradley a Veritable Value? originally appeared on Fool.com and is written by Leo Sun.
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