vra 4q13 earning web preview

8/12/2019 VRA 4Q13 Earning Web Preview

1/10

Vera Bradley: February temperatures hurt sales; Fundamentals erode.Expect 1Q14 guide miss

3/11/2014Companies mentioned:

Vera Bradley (VRA) - $28.26

Why Read?

Since February 14th, VRAs stock has run up nearly 17%. We believe this run up has been caused bymomentum investors piggy backing on FMR 13G filing. We believe these weak investors will getcrushed when the company reports its 4Q13 earnings and provides weak 1Q14 guidance during their

4Q13 conference call at 8:00am EST March 19th, 2014."""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""

! Blame it on the weather: During February29% of stores were at least -5 degrees below theirhistorical average, while 40% of outlet stores were at least -5 degrees below their historicalaverage. Average temperatures vs. historical averages among stores were -2.1 degrees inNovember, -0.6 degrees in December, -3.7 degrees in January, and -3.8 degrees in February. Intandem with negative channel checks, increased promotions, and pattern misses; we believeVRA will not only miss 4Q13 sales guidance but also be forced to lower guidance for 1Q14.

! Declining productivity: Management has mentioned new store openings performing belowexpectations. Traffic has been historically higher in the outlet channel which was effected moreduring 4Q13/1Q14 by poor weather while lower sales per square feet will contribute tocontinued weakness. Expect management to cite poor traffic for 1QTD14 on 4Q13 conferencecall.

! Segment shift towards lower profitability: Indirect channel has stabilized and improvedsince 3Q12 on a 4-quarter trailing basis. Meanwhile, the direct channel continues to erodemargins, showing a consistent downward trend since 4Q11. As sales mix continues to shifttowards the lower margin direct and outlet businesses, we expect the negative margin impact tocontinue to accelerate.

! New CEO ignored by analyst community: Analyst community has been distant from thestory, while company skipped ICR 2014, and has not provided any public commentary since3Q13 earnings release.

! Estimates:We expect VRA to earn $144.8mn in revenue during 4Q13E and report $0.45 EPS(Consensus: $146.8mn & $0.46 EPS). For 1Q14E, we expect VRA to earn $120.3mn inrevenue and $0.19 EPS (Consensus: $123.0mn & $0.22). For FY14E, we expect VRA to earn$508.9mn in revenue and $1.31 EPS (Consensus: $544.9mn and $1.50 EPS).

(Continued on next page)


2/10 #

Blame it on the weather:

During the 3Q13 earnings conference call, management lowered 4Q13 guidance based upon poor trafficand customer response during the beginning of 4Q13.

Our guidance reflects our expectation that the challenging consumer environment will continue, as wellas the softness in the consumer response to our overall merchandise assortment. We expect this to result

in continued weak traffic and an increase in the level of planned promotional activity. Kevin Sierks,

Interim CFO, 3Q13 conference call

Full Price Temperature Data November December January February

Deviation from historical Average (degrees) -2.1 -0.7 -3.6 -3.7

Percentage at least 5 degrees lower 1% 5% 33% 29%

*Source: Accuweather.com, full data in appendix

Outlet Temperature Data November December January FebruaryDeviation from historical Average (degrees) -2.5 -0.1 -4.5 -4.1

Percentage at least 5 degrees lower 0% 13% 40% 40%

*Source: Accuweather.com, full data in appendix

We expect poor weather in November had an impact on the poor pattern launches and traffic/sales ingeneral. Compared to historical averages, the weather in December sequentially improved vs. Novemberbut as seen in the above chart, the severity of weather increased substantially in January and February.

We consider the weather concerns for VRA to be well known for 4Q13 but expect its impacts have not

been fully priced into 1Q14. Additionally, we expect management to lower guidance for 1Q14 basedupon continued poor weather across the store fleet causing reduced traffic.



3/10


4/10 %

On the weekend of February 9th, VRA ran a horribly timed $1 flips flops with purchase of beach towelpromotion in hopes of driving traffic. It failed. During this weekend, many parts of the country remainedcovered in snow and shoppers were not in the beach-buying mood. In comparison, Old Navy, runs their$1 flip flop sale in late June/early July, which is a consistent traffic driver. We remain disappointed atmanagements ineptitude in planning their promotions and expect this to continue to remain a drag ongross margins.

Declining Productivity:

Vera Bradley has increased its store count from 21 full priced stores in FY08 to 84 full priced stores and15 outlet stores as of 4Q13. The first outlet store was added in 4Q10. Currently the company is hopingto open 14-20 stores per year. Unfortunately, new store openings are performing below expectations andwill continue to create a drag on comparable store sales as new doors enter the comparable store salesbase.

as we look at those stores, we've also opened that aren't in our comp base yet, they're still opening soft

and at the low end of kind of our range of expectation or even slightly below that. So it's not that the

existing or the class of older doors is necessarily performing poorer than the newer doors. Kevin

Sierks, Interim CFO, 3Q13 conference call


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In only 1 out of the last 11 quarters has Vera Bradley improved its weighted trailing 4-quarter sales persquare foot. In fact the trend has only accelerated in the last 3 quarters. We expect this to continue asmore direct sales pass through the outlet stores.

Segment shift towards lower profitability:

Promotional activity combined with a shift towards increased focus on the direct segment and outletsales has created gross margin headwinds.

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Meanwhile, the direct segments operating margin has continued in one direction: down. We expect thistrend to continue as the new CEO, Robert Wallstrom, continues to focus on the higher traffic outletstores (only slightly positive traffic) and continues to throw any chance at margin recapture under thebus.

All of the focus on the direct business has neglected growing sales in the highly profitable Indirectsegment. We expect Indirect sales to continue to decrease as 3rdparty merchants remain cautious in neworders. Management has guided to 3400 doors specialty retailer doors at the end of 4Q13, compared to3300 at the end of 4Q10, hardly an improvement.

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Disclaimer:The information contained herein reflects the views of Consumer Fox as of the date of publication. These viewsare subject to change without notice at any time subsequent to the date of issue. All information provided in this presentation

is for informational purposes only and should not be deemed as investment advice or a recommendation to purchase or sellthe securities mentioned or to invest in any specific security or investment product. While the information presented herein isbelieved to be reliable, no representation or warranty is made concerning the accuracy of any data presented. In addition,there can be no guarantee that any projection, forecast or opinion in this presentation will be realized. All trade names, trade-marks, service marks, and logos herein are the property of their respective owners who retain all proprietary rights over theiruse. This presentation is confidential and may not be reproduced without prior written permission from Consumer Fox. Itshould be noted that Consumer Fox has no position in any security of the company mentioned in the report/presentation.

vra 4q13 earning web preview

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