Vera Bradley Profit Falls

Posted: Updated:

Fort Wayne-based Vera Bradley Inc. (Nasdaq: VRA) is reporting fiscal third quarter net income of $6.9 million, compared to $15.2 million during the same period in 2013. Chief Executive Officer Robert Wallstron says the company is in the early stages of a modernization effort aimed at "elevating" product assortment and opening new stores. December 10, 2014

News Release

FORT WAYNE, Ind. - Vera Bradley, Inc. (Nasdaq:VRA) ("Vera Bradley" or the "Company") today announced its financial results for the third quarter and nine months ended November 1, 2014.

Overview of Third Quarter and Year-to-Date Results

Net revenues from continuing operations totaled $125.2 million for the current year third quarter, compared to $128.9 million in the prior year third quarter ended November 2, 2013. Income from continuing operations totaled $8.7 million, or $0.21 per diluted share, for the current year third quarter compared to $15.7 million, or $0.39 per diluted share, in the prior year third quarter.

For the nine months ended November 1, 2014, net revenues from continuing operations totaled $356.4 million, compared to $374.5 million in the prior year nine months ended November 2, 2013. Income from continuing operations totaled $23.5 million, or $0.58 per diluted share, for the current year nine month period compared to $40.2 million, or $0.99 per diluted share, in the comparable prior year period.

Robert Wallstrom, Chief Executive Officer, noted, "We exceeded our earnings per share guidance for the quarter. Our third quarter revenues and gross margin rate were in the mid-range of our guidance; SG&A was favorable to our expectations due to expense control and the timing of certain expenses that will be incurred in the fourth quarter."

Wallstrom continued, "We remain confident that our five-year strategic plan and the steps we are taking to evolve our merchandising, distribution and marketing are the right ones for the future of our business. We are in the early stages of our transformation, and we have made substantial progress over the last three quarters in modernizing and elevating our product assortments, expanding our reach through new store openings, evolving to a 'made-for-outlet' model in our factory outlet stores, enhancing our online presence and growing our department store relationships. We continue to face short-term challenges, such as weak store traffic, but believe we are heading in the right direction and that these efforts will pay off in the years ahead."

"Importantly, we have carefully managed our inventories and ended the quarter with a very solid cash position," Wallstrom added.

Discontinued Operations

In June 2014, the Company entered into a five-year agreement with Mitsubishi Corporation Fashion Company and Look Inc. to import and distribute Vera Bradley products in Japan. As a result of moving to this wholesale business model, the Company exited its direct business in Japan during the third quarter of fiscal 2015 and is accounting for it as a discontinued operation. Income statement numbers referenced in this release reflect the Company's continuing operations.

Third Quarter Results

Current year third quarter net revenues from continuing operations of $125.2 million were in the mid-range of the Company's guidance of $123 million to $128 million. Prior year third quarter revenues from continuing operations totaled $128.9 million.

Current year third quarter Direct segment revenues totaled $77.9 million, a 15.1% increase over $67.7 million in the prior year third quarter. In the Company's stores, third quarter year-over-year net revenues grew 10.4%, reflecting the opening of 11 full-line and 12 factory outlet stores during the past 12 months. Comparable sales (including e-commerce) increased 0.9% for the quarter (reflecting a 13.5% decline in comparable store sales and a 22.2% increase in e-commerce sales). As expected, third quarter comparable store sales were negatively impacted by year-over-year declines in store traffic.

Indirect segment revenues decreased 22.8% to $47.3 million from $61.2 million in the prior year third 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 from continuing operations for the quarter totaled $65.8 million, or 52.5% of net revenues, compared to $71.2 million, or 55.2% of net revenues, in the prior year third quarter. The year-over-year decline in gross margin rate was primarily related to deleveraging overhead costs and modestly increased year-over-year online promotional activity. The third quarter gross margin rate was consistent with guidance of 52.0% to 53.0%.

SG&A expense from continuing operations totaled $53.3 million, or 42.5% of net revenues, in the current year third quarter, compared to $47.6 million, or 36.9% of net revenues, in the prior year third quarter. As expected, SG&A dollars increased over the prior year primarily due to strategic investments including new store expenses, key management additions, marketing and e-commerce initiatives. The SG&A expense rate was below the 43.0% to 44.5% guidance primarily due to cost containment efforts and the timing of approximately $300,000 of expenses which were delayed to the fourth quarter.

Operating income from continuing operations totaled $13.6 million, or 10.9% of net revenues, in the current year third quarter, compared to $24.7 million, or 19.2% of net revenues, in the prior year third quarter.

The effective tax rate was 34.9% for the quarter compared to 36.3% in the prior year third quarter. The year-over-year decrease in the effective rate was due primarily to state tax matters including a reversal of reserves no longer deemed necessary.

YTD Results

Current year net revenues from continuing operations for the nine months totaled $356.4 million, compared to $374.5 million in the same period last year.

Direct segment revenues totaled $227.9 million for the nine months ended November 1, 2014, a 6.7% increase over $213.5 million in the prior year comparable period. In the Company's stores, current year-over-year net revenues grew 6.5%, reflecting the opening of 11 full-line and 12 factory outlet stores during the past 12 months, which was partially offset by a comparable store sales decline. Comparable sales (including e-commerce) fell 4.0% for the nine months (reflecting a 14.0% decline in comparable store sales and a 10.8% increase in e-commerce sales).

For the nine months, Indirect segment revenues decreased 20.2% to $128.5 million from $160.9 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 from continuing operations for the nine months totaled $189.0 million, or 53.0% of net revenues, compared to $209.6 million, or 56.0% of net revenues, in the comparable prior year period. The year-over-year decline in gross margin rate was primarily related to deleveraging overhead costs and increased year-over-year promotional activity.

SG&A expense from continuing operations totaled $154.0 million, or 43.2% of net revenues, in the current year nine months, compared to $148.7 million, or 39.7% of net revenues, in the prior year period.

Operating income from continuing operations totaled $38.1 million, or 10.7% of net revenues, in the current year nine-month period, compared to $64.5 million, or 17.2% of net revenues, in the prior year period.

The effective tax rate was 37.9% for the nine months compared to 37.2% in the prior year nine months.

Cash flow from operating activities for the nine months totaled $56.3 million, compared to $34.8 million for the same period last year. The improvement was driven primarily by a reduction in inventory levels.

Cash and cash equivalents as of November 1, 2014 totaled $90.3 million compared to $1