For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. districts and its congressional representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
That's why this week and every week from here on out, I'll make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.
For this week's round of what I like to call "Better Know a Stock," I'd like to take a closer look at Vera Bradley (Nasdaq: VRA ) .
What Vera Bradley does
Vera Bradley designs and markets women's accessories, most notably handbags, through stand-alone stores, online, and through a network of 3,300 retailers. Trust me, if you're not familiar with what Vera Bradley makes, ask your wife, mom, sister, girlfriend, or any female you know!
In Vera Bradley's most recent quarter, the company reported a 15.6% increase in total sales as profits rose 11%. The company opened 19 stand-alone stores over the past year and experienced a 34.2% jump in revenue. Comparable-store sales, which excludes stores that opened or closed within the past year, rose 4.3%. Online sales, which are included in its direct sales segment, also rose by 26%. Indirect segment sales, meaning those items sold through its network of retailers, rose 1.3% to $58 million.
Whom it competes against
If you've ever gone shopping, you understand that there's absolutely no end to the amount of competition that exists for women's accessories. From high-end to low-end, Vera Bradley faces constant challenges. However, what's really the concern for Vera Bradley, and other accessory companies, isn't competition from one another, but lackluster consumer spending and rising cotton prices.
Two of Vera Bradley's primary competitors, Coach (NYSE: COH ) and Fifth & Pacific (NYSE: FNP ) , are feeling the pangs of fickle consumer spending in recent months. Coach shares were hammered two weeks ago after the handbag maker widely missed same-store sales growth estimates in North America, which it blamed on weakening consumer confidence. Fifth & Pacific, owner of the popular Lucky and Juicy Couture brands, has seen a steady decline in comparable Juicy Couture sales, and recently reported a quarterly loss.
However, not all hope is lost. Consumer appetite for Michael Kors (NYSE: KORS ) , which makes handbags as well as other accessories, appears to be insatiable – even in Europe. Comparable-store sales rose a staggering 36.1% in the latest quarter as operating income more than doubled.
After reviewing Vera Bradley's prospects, I've decided to join the majority of CAPS members and make a CAPScall of outperform on the company.
Vera Bradley won't be without its challenges. Rising labor and cotton prices threaten to eat into margins, and weak consumer spending in Europe and North America could significantly reduce the company's expansion plans. However, why I like Vera Bradley is the exact same reason I've been a bull on True Religion Apparel (Nasdaq: TRLG ) for quite some time. Vera Bradley recently crossed the 50% barrier in that it's producing more in sales from its owned stores and its e-commerce segment than through its indirect sales stream. Owned and operated stores allow for better cost control and, most important, higher margins. That's why I've been a True Religion optimist, and that's why Vera Bradley should be able to crank out robust margins for years to come.
Personally, I'd like to see Vera Bradley continue to open stores and remove its reliance on its network of retailers. Also, it wouldn't hurt if the company added some cash to its balance sheet in case of a sharp economic downturn (at the moment, the company has just $6 million in cash on hand). All things considered, Vera Bradley looks like a long-term winner for my CAPS portfolio.
You can follow this selection, as well as all previous CAPScalls I've made, by clicking here to be immediately whisked away to my CAPS portfolio.
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