Vera Bradley Earnings Dip

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Fort Wayne-based Vera Bradley Inc. (Nasdaq: VRA) is reporting fiscal second quarter net income of $7.6 million, compared to $15 million during the same period the previous year. Chief Executive Officer Robert Wallstron says the company will continue to open new full-line and factory outlet stores, which will feature "made-for-outlet" product lines. September 10, 2014

News Release

FORT WAYNE, Ind. - Vera Bradley, Inc. (Nasdaq:VRA) ("Vera Bradley" or the "Company") today announced its financial results for the second quarter and six months ended August 2, 2014.

Net revenues totaled $120.1 million for the current year second quarter, compared to $125.4 million in the prior year second quarter ended August 3, 2013. Net income totaled $7.6 million, or $0.19 per diluted share, for the current year second quarter compared to net income of $15.0 million, or $0.37 per diluted share, in the prior year second quarter.

For the six months ended August 2, 2014, net revenues totaled $233.6 million, compared to $248.4 million in the prior year six months ended August 3, 2013. Net income totaled $14.2 million, or $0.35 per diluted share, for the current year six month period compared to net income of $24.1 million, or $0.59 per diluted share, in the comparable prior year period.

Robert Wallstrom, Chief Executive Officer, noted, "We achieved our earnings per share guidance for the quarter and are reconfirming our EPS guidance for the full year. Second quarter sales were at the high end of our expectations, and, as a percent of sales, SG&A expenses were at the low end of our target."

"Even though the short-term continues to be challenging, I am very pleased with the progress we are making against our long-term product, distribution, and marketing strategies. We are evolving and modernizing our product assortments, expanding our reach through opening new full-line and factory outlet stores, transitioning to a 'made-for-outlet' format in our factory outlet stores, enhancing our online presence, and intensifying and focusing our marketing efforts. We carefully managed our inventories and ended the quarter with a strong cash position and no debt. Importantly, we have assembled the talented and experienced leadership team that will drive the execution of our five-year strategic plan."

Second Quarter Results

Current year second quarter net revenues of $120.1 million were at the top end of the Company's guidance of $113 million to $120 million. Prior year second quarter revenues totaled $125.4 million.

Current year second quarter Direct segment revenues totaled $78.9 million, a 5.2% increase over $75.0 million in the prior year second quarter. In the Company's stores, second quarter year-over-year net revenues grew 3.5%, reflecting the opening of nine full-line and six outlet stores during the past 12 months, which was partially offset by a comparable store sales decline. Total company comparable sales fell 5.3% for the quarter (which includes a 14.2% decline in store sales, partially offset by a 9.3% increase in e-commerce sales, including direct-to-consumer eBay sales). Going forward, the Company will include eBay sales in its comparable sales calculations; refer to the attached schedule for historical comparable sales data adjusted to include eBay sales. Excluding eBay, total company comparable sales fell 8.8% for the quarter. As expected, second quarter comparable sales were negatively impacted by year-over-year declines in traffic and underperformance of the product offering.

Indirect segment revenues decreased 18.2% to $41.2 million from $50.4 million in the prior year second quarter, primarily due to lower orders from the Company's specialty retail accounts as well as a reduction in the number of specialty retail accounts.

Gross profit for the quarter totaled $64.1 million, or 53.3% of net revenues, compared to $71.8 million, or 57.2% of net revenues, in the prior year second quarter. The year-over-year decline in gross margin rate was primarily related to overhead costs deleveraging and modestly increased year-over-year online promotional activity. The second quarter gross margin rate was slightly below guidance of 53.5% to 54.0%, primarily due to a modest increase in online promotional activity.

SG&A expense totaled $51.8 million, or 43.1% of net revenues, in the current year second quarter, compared to $48.3 million, or 38.6% of net revenues, in the prior year second quarter. As expected, SG&A dollars increased over the prior year primarily due to investments related to achieving the five-year strategic plan including key management additions, new store expenses, and marketing and e-commerce initiatives. The SG&A expense rate was at the low end of the 43.0% to 44.5% guidance primarily due to cost containment efforts and sales at the high end of guidance.

Operating income totaled $12.8 million, or 10.6% of net revenues, in the current year second quarter, compared to operating income of $24.1 million, or 19.2% of net revenues, in the prior year second quarter.

The effective tax rate was 40.3% for the quarter compared to 37.7% in the prior year second quarter. The year-over-year increase in the effective rate was due primarily to state tax matters including an incremental reserve related to an ongoing state income tax audit.

Six Month Results

Current year net revenues for the six months totaled $233.6 million, compared to $248.4 million in the same period last year.

Direct segment revenues totaled $152.4 million for the six months ended August 2, 2014, a 2.5% increase over $148.7 million in the prior year comparable period. In the Company's stores, current year-over-year net revenues grew 4.5%, reflecting the opening of nine full-line and six outlet stores during the past 12 months, which was partially offset by a comparable store sales decline. Total company comparable sales fell 6.4% for the six months (which includes a 14.3% decline in store sales, partially offset by a 5.0% increase in e-commerce sales, including eBay). Excluding eBay sales, total company comparable sales fell 9.1% for the six months.

For the six months, Indirect segment revenues decreased 18.6% to $81.2 million from $99.7 million in the prior year, primarily due to lower orders from the Company's specialty retail accounts as well as a reduction in the number of specialty retail accounts.

Gross profit for the six months totaled $124.6 million, or 53.3% of net revenues, compared to $140.2 million, or 56.5% of net revenues, in the comparable prior year period. The year-over-year decline in gross margin rate was primarily related to overhead costs deleveraging and increased year-over-year promotional activity.

SG&A expense totaled $103.1 million, or 44.1% of net revenues, in the current year six months, compared to $103.6 million, or 41.7% of net revenues, in the prior year period.

Operating income totaled $23.6 million, or 10.1% of net revenues, in the current year six-month period, compared to operating income of $39.3 million, or 15.8% of net revenues, in the prior year period.

The effective tax rate was 39.6% for the six months compared to 38.2% in the prior year six months.

Cash flow from operations for the six months totaled $32.8 million, compared to $27.0 million for the same period last year. The improvement was driven primarily by a reduction in inventory levels.

Cash and cash equivalents as of August 2, 2014 totaled $79.1 million compared to $9.3 million at the end of last year's second quarter. The Company had no debt outstanding at August 2, 2014. Quarter-end inventory was $112.0 million, below guidance of $118 million to $128 million and compared to $142.9 million last year. Net capital spending for the six months totaled $12.2 million.

Recent Events

On June 4, 2014, the Company entered into a five-year agreement with Mitsubishi Corporation Fashion Company and Look Inc. to im