A Few Reasons Why Investors Should Stay Away From Vera Bradley

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The fashion apparel and accessories retail segment has been facing tough times of late. As a result, by and large, most apparel retailers are going through a rough patch. Thus, it was not surprising to see yet another retailer reducing its guidance.

When Vera Bradley (NASDAQ: VRA  ) posted its second-quarter results on Sept. 11 and issued a weak forecast for the upcoming quarter and the full fiscal year, any hopes of a turnaround were dashed. Vera is known for its colorful luxury handbags and it is currently trading near its lowest level in two years.

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A Look at the Results
Despite macro-economic headwinds like weak consumer sentiment and tough job and wage trends, Vera managed to deliver better-than-expected share earnings of $0.37 per share against expectations of $0.32. It also clocked revenue of $125.4 million, beating Street expectations of $124.5 million. This, however, wasn't enough to allay negative sentiments due to the weak forecast.

A sluggish employment scenario might lead consumers to restrict spending, which could finally translate into lower store traffic. This, coupled with poor sales of merchandise, led to a decline of 3.7% in comparable-store sales for the company. Vera doesn't see this improving in the upcoming quarter and hence reduced its fiscal 2014 guidance, spooking investors in the process.

Due to the cascading effect of the decline in comps and poor product sales, inventory levels increased to the tune of $143 million from $118 million in the year-ago quarter. This huge build up of inventory for a mere 1.9% revenue increase didn't go down well with investors. To make things worse, Vera expects that this will grow to $155 million-$160 million by the year end. To clear this inventory, Vera Bradley now plans to open more "outlet stores". This means that it will have to resort to discounts which will squeeze margins.

Looking Ahead and Around
In order to be more effective at managing the inventory that is being piled up, Vera plans to cut down its stock keeping units, or SKUs, by 20%. The company has also announced a $26 million investment in its design and distribution centers in order to win back customers.

However, Vera Bradley will find it tough to turn its business around since it faces competition from some of the most well-known names in the industry – Coach (NYSE: COH  ) and Michael Kors (NYSE: KORS  ) – both of which have been doing well as of late.

As per Coach, the North American handbag and accessories market has been expanding at a rate of 10% annually. Americans spent $8.5 billion on bags in 2011 according to Accessories magazine, which is considered an industry bible. In terms of popularity, luxury handbags remain the second-most desirable accessory after shoes and this has helped Coach do well.

Coach delivered in-line earnings in its second-quarter results posted in July. Earnings came in at $0.89 per share and were 3.5% more than the earnings in the same quarter a year ago. On the back of a strong performance in international markets, its revenue increased 6% from last year to $1.22 billion.

The fashion accessories category is a highly fragmented industry with stiff competition among the players. Michael Kors (NYSE: KORS  ) is one such player that also deals in luxury handbags and is doing pretty well. Kors is not affected much by the weakness in the retail sector, as it caters to the relatively affluent section of society.

Kors has been expanding at a pretty brisk rate and it has been gaining market share. In the previous quarter, Kors reported that same-store sales jumped by a staggering 27%, while revenue came in at $640.9 million. Expansion in China should help Kors keep its impressive growth rate intact and also make its business more diversified. The company plans to open 100-125 stores in China going forward as it looks to challenge Coach.

Coach is also making some moves to ward off the competition, and it plans to increase its retail square footage by 9% in 2013 across the world. Coach is also deeply entrenched in China and sales in the country jumped an impressive 35% in the previous quarter.

The brand strength of Kors and Coach, along with their international presences, have helped the two perform well. However, Vera is having a hard time selling its products and it is piling up inventory. Analysts also don't expect much out of the company as earnings are expected to fall 12.40% this year. Shares are down almost 20% year-to-date and lack of demand for Vera's products means that further downside cannot be ruled out.

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Related Tickers

9/28/2016 4:00 PM
VRA $15.45 Down -0.26 -1.65%
Vera Bradley CAPS Rating: **
COH $35.90 Up +0.25 +0.70%
Coach CAPS Rating: ****
KORS $48.24 Up +0.07 +0.15%
Michael Kors Holdi… CAPS Rating: ****