Vera Bradley Is No Match for Coach and Michael Kors

Vera Bradley rose steeply after reporting earnings on Wednesday. However, investors interested in the sector may find better alternatives in Michael Kors and Coach.

Mar 19, 2014 at 7:33PM

Captura De Pantalla

Source: Vera Bradley.

Vera Bradley (NASDAQ:VRA) rose 7.4% on Wednesday after investors welcomed its latest earnings release. However, when considering the company´s financial performance and valuation ratios versus competitors such as Coach (NYSE:COH) and Michael Kors (NYSE:KORS), Vera Bradley doesn't look like the best bet in the sector.

The power of reduced expectations
The numbers Vera Bradley reported for the fourth quarter of fiscal 2014 weren't particularly encouraging on their own merits. But expectations were quite low leading to the report, and that was probably one of the reasons investors reacted so positively to the announcement.

Net revenues for the quarter ended on Feb. 1 declined by 3% to $157.5 million, versus $162.5 million in the same period of the prior year. Comparable-store sales declined by a worrisome 10.2% during the quarter, and e-commerce revenues fell by 7.2% versus the prior year. According to management:

The decreases in comparable store and e-commerce sales were due to year-over-year declines in traffic, a lower average transaction size, and underperformance of the product offering. Severe winter weather also negatively affected store traffic during the quarter.

Increased promotional activities, inventory writedowns, and an unfavorable product mix had a negative impact on profit margins during the quarter: Gross profit margin fell to 53.9% of revenues, versus 57.9% in the same period in the previous year.

Operating margin was also down during the quarter, at 19.6% of revenues versus 24.6% in the fourth quarter of fiscal 2013.

Falling sales and reduced profit margins delivered a double hit to earnings. Net income during the quarter came in at $19.4 million, versus $25.1 million in the year-ago period, and earnings per diluted share fell to $0.48 from $0.62.

Excluding inventory writedowns of $0.07 per share, adjusted net income per share came in at $0.55. This was better than the $0.46 per share forecasted on average by Wall Street analysts, so adjusted earnings per share managed to beat those modest expectations.

On the other hand, forward guidance wasn't particularly encouraging. Management is expecting sales during the coming quarter to be between $116 million and $120 million, lower than the $123.1 million forecasted on average by Wall Street analysts.

The same goes for earnings per share. The company is expecting between $0.11 and $0.13 in the first quarter of fiscal 2015, versus an average analyst estimate of $0.22 per share.

CEO Robert Wallstrom is forecasting a challenging period for Vera Bradley in the coming year: "We continue to face external headwinds and certain challenges within the business, and fiscal 2015 will be a year of transition for Vera Bradley."

Michael Kors for growth and Coach for Value
When comparing Vera Bradley versus competitors such as Coach and Michael Kors, the company doesn't look like the best option in the sector.

Michael Kors trades at a considerable valuation premium to both Coach and Vera Bradley, but the company's performance in recent years has been nothing short of extraordinary. Michael Kors has produced compounded sales growth of 47.5% per year through the last five years, and performance remains remarkably strong as of the last quarter.

Michael Kors reported an explosive increase of 59% in revenues during the fourth quarter of 2013 to $1 billion, and demand was notoriously healthy across the board. Retail sales grew 51.3% to $503.4 million, driven by a 27.8% increase in comparable-store sales and 98 net new store openings. Wholesale sales increased 68.2% to $461.4 million, and licensing revenue jumped 59% to $47.4 million.

As for Coach, the company has been losing market share versus Michael Kors lately, and comparable-store sales in the key North America region fell by 9% during the company's fiscal 2014 second quarter. On the other hand, Coach is performing remarkably well in China, with total sales growing near 25% versus the prior year and comparable-store sales rising "at a double-digit rate" during the period.

The company needs to reinvigorate performance in the U.S., and management is betting on a refreshed collection from incoming creative director Stuart Vevers to achieve that goal. In any case, the stock trades at materially cheaper levels than Micheal Kors and Vera Bradley when looking at ratios like P/E and forward P/E.

Besides, Coach's dividend yield of 2.7% sets it apart from its competitors, which don't pay any dividends.

Vra

Data Source: FinViz.

Bottom line
Vera Bradley's steep rise seems to be mostly related to depressed expectations before the earnings report, as the company's performance was not particularly strong, and guidance was materially lower than expected.

Investors looking for a high-quality growth leader in the sector may want to consider Michael Kors instead;,while those who are more inclined toward value investing could prefer Coach and its attractive valuation ratios complemented by dividend distributions.

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Andrés Cardenal owns shares of Coach and Michael Kors Holdings. The Motley Fool recommends and owns shares of Coach and Michael Kors Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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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