Why Vera Bradley Has Reason to Be Cautious

Women's accessory maker Vera Bradley's (Nasdaq: VRA  ) strong third-quarter results came in as a pleasant surprise and may actually lead you to think there is still room for discretionary spending, even in this glum economic scenario.

The company reported a robust increase in revenue on a year-on-year basis, but let's take a Foolish look why its cautious fourth-quarter stance is a natural outcome and should not be a major cause for worry.

Commendable numbers
Vera Bradley delivered a stellar performance when its revenues went up to $121.1 million from $91.6 million in the year-ago quarter -- a whopping 32% increase. This was mainly driven by a 63% rise in direct net revenues and a 55% increase in e-commerce revenue. The company more than doubled its profits as net income went up to $13 million from $6 million reported last year, a sure sign of Vera Bradley's strong brand loyalty and customer retention ability. Comparable store sales, a vital sign of a retailer's financial stability as it excludes newly opened locations which usually generate higher revenue, was also up 7.4%. And the gift-giving of the holiday season should continue to lift sales further.

Vera Bradley is part of an industry where other high-end retailers continue to do quite well. Close competitor Coach (NYSE: COH  ) reported a 14% rise in net income in its latest quarterly earnings release, while Jones Group (NYSE: JNY  ) saw its net income grow by a robust 42%.

The sore areas
There are two problems that have been much talked about since Vera Bradley's third-quarter earnings release: its drop in gross margins and guarded fourth-quarter outlook. Let me try to find out how much they may affect you as a potential investor.

Gross margin is down because of the company's efforts to control inventory by selling off certain outdated products. Products have to be continually updated to stand out against others in the competitive holiday sales scenario, and Vera Bradley has done just that. Inventory control is a common practice as a part of supply chain management. For instance, the Jones Group has also tightened inventory as a strategic move to counter falling demand.

As for the fourth quarter guidance, I would have a problem if Vera Bradley lowered its outlook, but the company has merely tapered it to the lower end of analyst expectations. Given the current economic environment, this doesn't seem to me to be the worst thing in the world.

The Foolish bottom line
And that is exactly why Vera Bradley should be an interesting stock to watch for the long run. It has a lot going in its favor, courtesy a strong e-commerce presence and strong holiday sales at its direct and indirect outlets.

Fool contributor Subhadeep Ghose does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Coach. Motley Fool newsletter services have recommended buying shares of Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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