I'm Left Holding the Bag With Vera Bradley. But Not For Long

Former "Stocks Under $10" -- and current Sarge -- holding Vera Bradley VRA revealed third-quarter financial results and to say they weren't lousy would be dishonest. Vera Bradley, of "healthy balance sheet" fame, posted an adjusted loss per share of $0.27 ($0.46 unadjusted loss) on revenue of $80.578 million. The top line print reflected a year-over-year contraction of almost 30%, while falling more than $18 million short of estimates. The adjusted bottom-line print missed by more than $0.30.

At first glance, this is nothing short of a disaster. Wall Street took their pound of flesh, and the stock sold off sharply, giving up 11.9% on the day. I did add to my long position significantly, which brought my net basis down to $4.85. CEO Jackie Ardrey, whom I have always had a high opinion of, commented in the press release:

“The third quarter was extremely challenging as we remained in the early stages of ‘Project Restoration’, our strategic initiative to transform our business model and transition Vera Bradley’s brand positioning. With the current consumer mindset focused on value, we have more work ahead of us on our repositioning journey. Importantly, we’ve made meaningful adjustments to our assortment and value proposition in response to results and customer feedback. I'm pleased to report that we are seeing steady progress with several green shoots that have continued in the fourth quarter to date.”

Operations

As revenue contracted 29.9% to $80.578 million, the cost of those sales also decreased, by 28.9% to $36.969 million. This left a gross profit of $43.609 million (-30.8%) on a gross margin of 54.1%, which was down from 54.8% for the year-ago comparison. After accounting for operating expenses and a small amount of other operating income, the unadjusted operating loss printed at negative $10.474 million, down from the year-ago comp of $6.786 million in income. After accounting for interest and taxes, unadjusted net loss hit the tape at negative $12.8 million, down from $5.118 million. This works out to a fully diluted unadjusted loss of $0.46, down from $0.16. After adjusting for impairment charges, income tax adjustments, "Project Restoration" expenses, severance, and consulting fees, adjusted EPS printed at a loss of $0.27, down from earnings of $0.19 for the year-ago period.

Segment Performance

Vera Bradley Direct generated revenue of $52.5 million (-27.4%), comp sales were -27.2%. Weakness was experienced across all channels. VRA has closed five full-line stores, but opened five outlet stores over the past 12 months. Operating income printed at $2.1 million, down from $15.7 million.

Vera Bradley Indirect generated revenue of $18 million (-27.9%). The drop in sales was primarily due to a decline in specialty and key account orders as well as liquidation sales. Operating income printed at $6.1 million, down from $9 million.

Pura Vida... generated revenue of $10.1 million (-42.9%), comp sales were -27.2%. The drop was due to decreased e-commerce and wholesale orders. Operating income / loss printed at $-2.7 million, down from negative $0.6 million.

Guidance

For the full year, Vera Bradley sees revenue of roughly $385 million, which would be down from $470.8 million for the year prior. Wall Street had actually been around $375 million, so this is lousy, but not as lousy as it looks. Full year gross profit margin is seen at 52.5%, down from 54.5%, selling, general, and administrative expenses are projected at $213 million, which would be down from $234.7 million. Full-year operating income / loss is seen at a loss of $9 million vs. income of $22.6 million for the fiscal year prior. Capital spending is projected at $13 million, up from $3.8 million. This all leaves a projected $0.25 loss per share for the full year, and that measures up poorly against earnings of $0.55 for last year.

Fundamentals

For the first nine months of the fiscal year, Vera Bradley has generated operating cash loss of $35.757 million. Tack on capital spending of $6.05 million and you have free cash loss of $41.807 million. The company has repurchased $21.179 million worth of common stock year to date, including $5.3 million for the third quarter despite the negative cash flows. Just my opinion, but this may have been an ill-advised move.

Turning to the balance sheet, the firm's cash position is down to $13.711 from $77.303 million as recently as February. Inventories stand at $131.314 million, up from $118.278 million, as recently as February. That leaves current assets of $184.785 million. Current liabilities add up to $59.766 million, which includes no short-term debt. That leaves current and quick ratios of 3.09 and 0.89. That puts a lot of pressure on the firm to move those inventories at prices close to their valuation on this balance sheet.

Total assets amount to $358.975 million, of which only a tiny amount is intangible in nature. Total liabilities less equity comes to $133.777 billion, most of which is in the form of long-term leases. There is no debt whatsoever on this balance sheet, though the rapid decrease in cash on hand is alarming.

My Thoughts

The board of directors on Wednesday approved an additional $30 million share repurchase authorization. I must say that with negative cash flows and a dwindling cash position, that, in my opinion, is close to madness. I love that there is no debt on the balance sheet, but that can only take a company so far. CFO Michael Schwindle did address the withering cash position during the call on Wednesday: "Now relative to prior years, we did have an inventory receipt acceleration of approximately $10 million from fourth quarter into third quarter, which increased inventory and decreased cash relative to the prior year, but this will reverse in our fourth quarter."

Downgrade

I know, I gave you this name only a couple of weeks ago when it was trading at $5.80. I even gave you a $6.30 pivot and a $7.90 target. I did not see anything like this coming down the pike. Hopefully my winners have outnumbered my losers for you, but this one is a loser. I am downgrading Vera Bradley to an outright "sell" and I am cancelling my target price.

Yes, I did mention that I took down a chunk on Wednesday. This is merely how I am working my way out of the position as I turn it from an intended investment into an exercise in risk management. I will be short-term trading this name as I get myself out of the name. As for VRA, Jackie Ardrey now has to show us. The benefit of the doubt has been burned.

At the time of publication, Guilfoyle was long VRA equity.