Vera Bradley Profit Slips

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Fort Wayne-based Vera Bradley Inc. (Nasdaq: VRA) is reporting fiscal third quarter net income of $15.2 million, compared to $17.7 million during the same period the previous year. Chief Executive Officer Robert Wallstron says a "persistently challenging retail environment" is leading the company to lower its fourth quarter outlook.

December 11, 2013

News Release

Fort Wayne, Ind. -- Vera Bradley, Inc. (Nasdaq:VRA) (the "Company") today announced its financial results for the fiscal 2014 third quarter ended November 2, 2013. The Company reported net revenues of $130.1 million for the current year third quarter, compared to $138.3 million in the third quarter of fiscal 2013, a decrease of 6.0%. Diluted earnings per share for the quarter were $0.37, compared to $0.44 in the third quarter of fiscal 2013.

Robert Wallstrom, Chief Executive Officer, stated, "While third quarter sales and earnings results were in line with our expectations, based on recent trends we are lowering our fourth quarter outlook. Although we face a persistently challenging retail environment, we are working diligently to make improvements in our organization that will enable us to stabilize the business and generate more consistent sales and earnings growth over the long term. "

Mr. Wallstrom continued, "Upon joining the Company I have come to more fully appreciate Vera Bradley's rich history as an authentic American brand with a highly loyal customer following. I see tremendous opportunity to broaden our customer base, enter new markets, and expand the product offering. Over the next several months I will be evaluating several areas of the business, focusing on the product assortment and the indirect and direct distribution channels, including e-commerce, in order to develop a strategic plan that will drive improved financial performance and increase long-term shareholder value."

Direct segment revenues increased 7.1% to $68.9 million, driven by growth across the Company's full-price and outlet stores. Third quarter year-over-year net revenues in the Company's stores grew 18%, primarily as a result of the opening of 20 full-price and four outlet stores during the past 12 months. Comparable-store sales decreased 6.5% during the quarter primarily due to lower traffic and underperformance of the product offering. E-commerce revenue decreased 7.8% compared to the prior year, as a result of both lower traffic and lower average transaction size. Indirect segment revenues decreased 17.3% to $61.2 million, primarily due to cautious ordering from the Company's specialty retailers.

Gross profit for the current year third quarter decreased 10.3% to $71.9 million, resulting in a gross margin rate of 55.3%, compared to 58.0% in the prior year third quarter. The decrease in gross margin was primarily due to sales of lower-margin product accounting for a higher percentage of total net revenues in the current quarter, as well as increased promotional activity year-over-year.

SG&A expense totaled $48.8 million in the current year third quarter, compared to $53.6 million in the prior year third quarter. SG&A as a percentage of net revenues decreased 125 basis points, to 37.5%, compared to 38.7% in the prior year, primarily a result of expense management measures, as well as reductions in variable compensation expense associated with company performance.

Operating income totaled $24.2 million, or 18.6% of net revenues, in the current year third quarter, compared to operating income of $27.6 million, or 19.9% of net revenues, in the prior year third quarter.

The effective tax rate was 36.9% for the current year third quarter, compared to 35.2% in the prior year third quarter. The increase was primarily related to discrete items recorded in last year's third quarter, which were partially offset by a lower net operating loss in Japan for the thirteen weeks ended November 2, 2013.

Net income for the current year third quarter totaled $15.2 million, or $0.37 per diluted share, from $17.7 million, or $0.44 per diluted share, in the prior year third quarter.

Year-to-Date Results

For the thirty-nine weeks ended November 2, 2013, net revenues were flat at $378.5 million compared to $378.6 million for the thirty-nine weeks ended October 27, 2012. Direct segment revenues increased 15.0% to $217.6 million, with a comparable-store sales decline of 3.5%. Indirect segment revenues decreased 15.0% to $160.9 million.

For the thirty-nine weeks, current year operating income totaled $63.4 million, or 16.8% of net revenues, compared to operating income of $70.2 million, or 18.5% of net revenues, in the comparable prior year period.

The effective tax rate for the thirty-nine weeks ended November 2, 2013 was 37.7%, compared to 37.2% for the same prior year period. The increase was primarily related to discrete items recorded during the prior year third quarter, which were partially offset by a lower net operating loss in Japan.

Net income for the current year totaled $39.4 million, or $0.97 per diluted share, compared to $43.7 million, or $1.08 per diluted share for the same period in the prior year.

Cash flow from operations for the thirty-nine weeks ended November 2, 2013 totaled $34.8 million, compared to $22.2 million for the same period in the prior year.

Cash and cash equivalents as of November 2, 2013 was $13.7 million, and there was no interest bearing debt outstanding. Inventory was $150.5 million, which was lower than the Company's original expectations as a result of the timing of finished good shipments from suppliers.

Outlook

The Company's fiscal year 2013 was a 53-week year, with the incremental fifty-third week contributing approximately $4.9 million in sales and $0.02 to diluted earnings per share for both the fourth quarter and full-year results.

For the fourth quarter of fiscal 2014, the Company expects net revenues to range from $145 to $150 million, compared to $162.6 million in the fourth quarter of fiscal 2013. The gross margin rate for the current year fourth quarter is expected to decline between 340 and 380 basis points from last year's fourth quarter.

Diluted earnings per share are expected to be in a range of $0.44 to $0.47. The earnings per share estimate assumes an effective tax rate of 38% and fully diluted weighted average shares outstanding of 40.6 million.

For fiscal 2014, the Company expects net revenues to range from $523 to $528 million, and diluted earnings per share to be in a range of $1.41 to $1.44. The earnings per share guidance includes an effective tax rate of 38% and fully diluted weighted average shares outstanding of 40.6 million.

The Company expects inventory to be approximately $160 million as of February 1, 2014.

Call Information

A conference call to discuss fiscal 2014 third quarter results is scheduled for today, December 11, 2013, at 4:30 p.m. Eastern Time. A broadcast of the call will be available via Vera Bradley's Investor Relations section of its website, www.verabradley.com. In addition, a replay of the call will be available shortly after the conclusion of the call and remain available through December 25, 2013. To access the recording, listeners should dial (877) 870-5176, and enter the access code, 2985655.

About Vera Bradley, Inc.

Vera Bradley is a leading designer of women's handbags and accessories, luggage and travel items, eyewear, stationery and gifts. Founded in 1982 by friends Barbara Bradley Baekgaard and Patricia R. Miller, the brand's iconic designs and versatile styles offer women of all ages a colorful way to accessorize every look. Vera Bradley offers a unique, multi-channel sales model as well as a focus on service and a high level of engagement with fans. The Company generates net revenues by selling products through two reportable segments: Direct and Indirect. The Direct business consists of sales of Vera Bradley products through the Company's ful