Focus Article: Vera Bradley (VRA)

Vera Bradley, Inc. (VRA) $31.04

The Company:

Located in Fort Wayne, Indiana, Vera Bradley is a designer of quilted luggage, handbags and accessories for women that include everything from wallets to iPad covers. The company was founded in March 1982 by Patricia R. Miller and Barbara Bradley Baekgaard and is named after Ms. Bradley Baekgaard’s grandmother, who had modeled for Elizabeth Arden in the 1930s. The company operates a small number of stores (48 regular stores and 8 outlet stores) and mostly sells its products through 3,300 specialty retailers. The target audience is teens and young women. Based on Twitter chatter I have been seeing on the company over the last week, it looks like the primary customers are teens and they appear to be loyal to the brand, often buying more than one product from the company.

The company indicated in its last annual report that their long-term goal is to get to 300 stores by opening 14 to 20 new stores annually. It costs the company about $360,000 to open a new store. With annual sales of $1.1 to $1.3 million per store and operating margins of 20%, the payback period for new stores is less than 1.5 years. Beyond growing its store footprint, the company also has the opportunity to get into women’s apparel and expand internationally.

The company manages to generate between $610 to $720 in sales per gross square foot, which puts it ahead of sales at Guess? (GES), J. Crew and Limited Brands (LTD) but well behind top 5 retailers Coach (COH) and Lululemon (LULU) with their $1,800 in revenue per square foot. There has been some speculation that as the company rolls out its own stores it would end up cannibalizing sales from its wholesale channel. While there may be some decrease in sales at the 3,300 retailers the company currently sells through, I doubt there will be a huge impact on sales through the wholesale channel as the company mostly sells through college bookstores, luggage stores and small independent retailers instead of through national chains like Macy’s (M), Nordstrom (JWN) or J.C Penny (JCP). In contrast the company’s stores are at this point located in prime shopping centers like Santana Row in San Jose and Westfield San Francisco Center in the San Francisco bay area.

Business Statistics & Financials:

For the fiscal year ended January 28, 2012, net revenues for Vera Bradley increased 26% to $460.8 million, from $366.1 million in the prior year. By segment, direct revenues increased 49% to $225.3 million, with comparable-store sales increasing 10.9% compared to fiscal 2011, and indirect revenues increased 9.5% to $235.6 million. For the fourth quarter, indirect revenue did decline 0.75% year-over-year to $53.3 million, while direct revenue grew 46%.

The company expects to earn between $1.68 to $1.71 per share in fiscal 2013. The company has generally tended to guide low and then beat expectations. Taking the low end of the their earnings estimate, the company currently trades for a forward P/E ratio of 18.5. Vera Bradley expects to grow net income in the “high teens” long-term. Running a 10 year DCF model by using a 16% net income growth rate, a 10% discount rate and a 2% terminal rate, I get a price of $50.38 for the company. A consistent 16% income growth rate is very difficult to achieve over a 10 year period. If I assume the company only manages to grow at 16% per year for 5 years and use a 2% terminal growth rate (probably too low), I get a value of $32.19/share, which is much closer to the current stock price.

As you can see from the competitors table below, the company does trade at a discount to most peers in the retail space on an EV/EBITDA basis while sporting operating margins that are much higher than most retailers.

Competitors:

Insider Buying:

Four insiders purchased stock on the open market over the last six months as listed below. You can view a list of all insider transactions for Vera Bradley here.

Risk Factors:

There are a number of risk factors both at the micro and macro level that could impact the price of Vera Bradley. There have been claims by some professional investors that management has been managing earnings by consistently guiding low and then beating those low expectations. There have also been claims of the company reporting inflated revenue numbers through “channel stuffing“.

The company faces execution risk as it attempts to grow from 56 stores to 300 stores. The drop in the wholesale channel in Q4 may be a harbinger for further declines as the company continues to focus on its direct channel. Finally the consumer segment the company targets is both fickle in its tastes and likely to be the hardest hit in the next recession.

Conclusion:

While the company is trading at a discount to its intrinsic value as well as its peers and has a lot of potential to grow both domestically as well as internationally, given some of the risks involved, I would like to see a larger margin of safety before I invest in the company. Further due diligence is also required to explore some of the risks mentioned above.