Vera Bradley: A Risky Transformation (NASDAQ:VRA)
Times were not good for the lifestyle brand owner Vera Bradley (Nasdaq: Vera). Back in December of 2021, I wrote an article that took a bullish stance on the company. Although I I acknowledge that the company has a mixed operating history, and the financial performance available for the first half of fiscal 2022 was encouraging. Revenues, profits and cash flows were higher year over year. Add on top of that how cheap the stock is, not just on an absolute basis, but also in comparison to similar companies, and I can’t help but rate the company a ‘Buy’.
Since then, the company’s shares have fallen 17.4%. This is a far cry from the 17.6% increase the S&P 500 saw over the same time period. In my opinion, this disparity has not quite returned Unjustified. The company’s revenues took a hit, and final performance was mixed. Management has implemented a program aimed at improving operations. But while earnings and cash flows have improved since then, we haven’t seen any positive impact on the company’s bottom line. The good news is that stocks are still very cheap. But there’s no denying that there’s a lot of risk in this play.
One positive thing is that in the coming days, we should receive additional data about the health of the organization. That’s because, before the market opens on June 12, management is expected to report financial results covering the first quarter of fiscal 2025. Before that point, analysts are expecting much of the same. This means shrinking revenues but improving profitability year-on-year. This creates a somewhat complex situation that would result in either significant upside for long-term investors or significant downside, depending on whether management’s initiatives go as planned or not. The value investor in me is tempted by the speculative, but attractive, opportunity. For investors who don’t mind taking risks, this could be an interesting prospect to consider.
Mixed results
As I mentioned at the beginning of this article, Vera Bradley is a lifestyle branding company. Basically, its focus is on promoting two different brands. The first of these brands is the Vera Bradley brand of the same name, while the other is Pura Vida. The first of these, Vera Bradley, is a designer of women’s handbags, luggage, travel items, fashion and home accessories, and more. As of the end of fiscal year 2024, the company had 43 full-line stores and 81 dedicated stores for these products. In addition, the company also sells these products to approximately 1,600 specialty retail locations throughout the United States. Examples include department stores, third-party e-commerce sites, liquidators, and more. It also generates some royalties from licensing the brand name to its clients. The other brand, Pura Vida, is a digital native brand that focuses on bracelets, jewelry, clothing, and more. In addition to selling its products online, Vera Bradley sells Pura Vida products to wholesale retailers, department stores and other customers.
Over the past few years, Vera Bradley’s financial performance has been mixed. Revenues fell from $540.5 million in 2022 to $500 million in 2023. By 2024, revenues fell further to $470.8 million. This pain was driven by two factors. First, the number of locations the company operates during this period decreased from 145 to 124. Additionally, comparable store sales have declined in two of the past three years. In 2023, the sales decline was 9.5%. In 2024, it reached 7.1%. Combined, this represents an overall comparable store sales decline of 15.9%.
Usually, retailers suffer greatly when sales decline. This is because low-margin, asset-intensive companies experience significant margin contraction during periods of weak revenue. But that wasn’t quite the case when it came to Vera Bradley. As the first chart in this article shows, the company’s net earnings and cash flows declined from 2022 to 2023. But in 2024, the company saw some improvements. Net income increased from negative $59.7 million to positive $7.8 million. This was largely a result of a $63.8 million swing in the company’s favor when it came to impairment charges. However, there is more to the story than that.
As you can see, in 2024, the company’s gross profit was $256.4 million. This was higher than the $238.9 million reported one year earlier. Management attributed this to lower domestic and foreign shipping expenses year-over-year, lower supply chain costs, the sale of previously reserved inventories, and lower inventory reserve fees year-over-year. This was not the only improvement the company saw. From 2023 to 2024, Vera Bradley saw its selling, general and administrative costs decline from $265 million to $241.5 million. This 8.9% decrease was mostly due to a decrease in employee-related expenses as the company reduced the number of its employees. It is worth noting that the improvement would have been greater had it not been for the increase in incentive compensation. But this is largely due to one-time severance costs related to the retirement of its CEO and due to the transition of its CFO. Other profitability metrics also improved during this time period. Operating cash flow went from negative $13.4 million to positive $48 million. If we adjust for changes in working capital, we get an increase from $10.4 million to $50.2 million. Finally, the company’s EBITDA expanded from just $1.5 million to $29.8 million.
When it comes to the full fiscal year 2025, management expects revenue to remain within range. They expect total sales of between $460 million and $480 million. Operating cash flow is expected to decline to between $22 million and $24 million. But this may be due to working capital changes rather than other operational changes. Meanwhile, net income should reach between $16.3 million and $19.2 million. Given the uncertainty around these metrics, I think valuing the company based on 2023 and 2024 data would make more sense.
Following this approach, you can see how the stock is priced in the chart above. Using 2024 numbers, Vera Bradley looks pretty cheap. Then, in the table below, I compared the company to five similar companies. On a price-to-operating cash flow basis, I found that only one of the five companies ended up being cheaper than our candidate. The same is also true when using the EV to EBITDA approach.
a company | Price/operating cash flow | Value added/EBITDA |
Vera Bradley | 4.8 | 5.5 |
Oxford Industries (OXM) | 6.7 | 11.2 |
lakeland industries (lakeland) | 22.5 | 12.5 |
Superior Group of Companies (SGC) | 5.3 | 11.5 |
Movado Group (MOV) | 7.4 | 5.6 |
Jerash Holding (JRSH) | 4.3 | 4.0 |
Of course, the picture can always change. As I mentioned at the beginning of this article, management is expected to announce financial results for the first quarter of fiscal year 2025 before the market opens on June 12. Analysts’ current expectations are for total revenues to reach approximately $90.4 million. If this turns out to be true, it would mean a 4.2% year-over-year decline compared to the $94.4 million reported in the first quarter of 2024. Although revenues are expected to decline, profits are expected to rise. Earnings per share should come out to about $0.11. This is significantly higher than the $0.15 loss per share generated in the first quarter of 2024. This would translate into net income of $3.4 million, compared to the $4.7 million loss reported last year. Analysts did not provide estimates when it comes to other profitability metrics. But in the table below, you can see some of these things during the first quarter of last year. In all likelihood, these things should improve as well.
He stays away
In my view, Vera Bradley is a very risky play. The stock is cheap and there has been some good progress in the company’s bottom line. If the company can stabilize its operations, such that its store count eventually becomes flat and comparable store sales no longer decline, the upside could be significant. But if we don’t see these things materialize, the end result could be additional pain for investors. Obviously, this is not the kind of opportunity for those who cannot handle risks. For those who can, it can be a strong possibility. Of course, once earnings are announced, you’ll have a better idea of ​​where things stand. But absent some major changes, this will only dispel short-term concerns. Given these factors, I keep the company at an accommodating ‘buy’ rating, recognizing that it is truly speculative.
Editor’s Note: This article discusses one or more securities that are not traded on a major U.S. exchange. Please be aware of the risks associated with these stocks.