Can Vera Bradley Stitch Itself Back Together?

Just a year and a half ago, things looked so promising for Vera Bradley (NASDAQ: VRA  ) . The handbag company had gone public in the fall of 2010, and by May 2011 its stock had risen 104%, to over $50 per share. Since then, however, times haven't been so great for Vera, and after its latest earnings call, executives have lowered guidance for the year. Are the company's hardships simply due to a tough climate for retail, or is something else at play here?

Not-so stylish sales
There doesn't appear to be a lot of positivity on Vera's latest quarterly income statement. Revenue dropped 5.9% and comparable store sales were down 6.5%, largely due to soft mall traffic. As sales fell, so did Vera's ability to hold onto profits- operating income fell 12.2% to $24.2 million, and its profit margin tumbled from 19.1% of Vera's revenue to 18.6%. At the bottom line, net income plummeted 14% compared to the year before, to $15.2 million.

Even metrics that are gaining prominence in the overall retail industry, like online purchases, took a hit within Vera Bradley's business model this quarter. E-Commerce sales dropped 8%, because of lower traffic and lower average transaction size than usual. That said, there wasn't all bad news on the financials- new CEO Robert Wallstrom explained that traffic from mobile devices was increasing- the amount of users buying Vera products on their phones was up 10% from the year before, and took up close to half of the quarter's overall traffic.

Meet the new CEO
The market may also be uneasy about Vera Bradley right now because Wallstrom has only been CEO for a little over a month. That's not to say he doesn't have an impressive track record - Wallstrom has 30 years of experience in the retail industry under his belt. Most recently, he served as President of Saks Fifth Avenue's clearinghouse-turned-retailer OFF Fifth, spurring on a 50% boost in sales for the brand, as well as increasing the fledgling brand's profitability by 100%.

At first, Wall Street took kindly to Wallstrom's arrival- Vera's stock jumped 4.7%, from $23.12 to $24.22 on Nov. 5, the day of the announcement. A week later, the handbag biz was selling at over $25 a share, its highest point within the past three months.

Despite Wallstrom's noteworthy professional past, it's still a bit too soon to tell what exactly he has in store for the Vera brand. At Saks OFF Fifth, he focused on maximizing brand value and turning the company into a growth vehicle. By the end of his tenure, the brand had expanded from a base of 40 stores to 71 locations.

In Vera's case, the company simultaneously appears to be trimming some major fat as well as unveiling new promotional options. The company is now implementing at more selective approach to its previously widespread specialty gift locations, with plans to reduce it base by 400 retailers. At the same time, the company has aligned itself with some pretty strategic partnerships- namely, Disney. The Vera Bradley for Disney Collection opened at the Florida World of Disney Store in September, and according to Wallstrom, that's not the last investors will hear of a Vera-Disney collaboration.

Should you buy into that patchwork handbag?
As Wallstrom's tenure progresses, the market may have a legitimate reason for enthusiasm, but for now it appears to be biding time and waiting for something more tangible. His previous accomplishments are impressive, but they also involved expanding a company with a more diversified product line, and therefore more variation in revenue streams as opposed to strictly handbags and related accessories. Wallstrom has his work cut out for him right now, and if Vera can't generate respectable revenue during the holidays, the company's stock market woes will be far from over.

No Pitch


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