Vera Bradley: Shares Are Pushing Higher Following Better-Than-Expected Earnings

Vera Bradley  (NASDAQ: VRA  ) , the women's handbags and accessories manufacturer and retailer, has just released its fourth-quarter report to cap off fiscal 2014. The stock has reacted to the results by trading erratically, first moving lower and now sitting higher, so let's look at the report and determine whether this is our opportunity to buy or if we should avoid it for the time being.

Source: Vera Bradley.

The strong results
The fourth-quarter report was released before the market opened on March 19; the results exceeded analyst expectations on both the top and bottom lines and looked like this:

Metric Reported Expected
Earnings Per Share $0.48 $0.46
Revenue $157.52 million $146.86 million

Source: Benzinga.

Source: Vera Bradley's Instagram.

Earnings per share decreased 22.6% and revenue decreased 3.1% year over year, as comparable-store sales declined a hideous 10.2%. E-commerce sales fell 7.2% and the company stated that the weakness in comparable-store and e-commerce sales was due to slowed traffic, lower transaction sizes, and underperformance of its product offerings -- and those are three things you do not want to hear from a retailer. Gross profit dropped 11.6% to $83.26 million, and the gross margin took an enormous hit, declining 500 basis points to 52.9%. These are pretty dismal results, regardless of what analysts were expecting, and it's clear that Vera Bradley could not compete during the holiday season.

A lackluster year ahead
In the fourth-quarter report, Vera Bradley also provided its outlook on fiscal 2015, and this was the weakest area of the report. Here's what the company expects versus its fiscal 2014 results:

Metric Fiscal 2015 Outlook Fiscal 2014 Results
Earnings Per Share $1.20-$1.30 $1.45
Revenue $545 million-$565 million $536.02 million
Gross margin 53%-54% 55.1%

Source: Vera Bradley.

Source: Vera Bradley's Instagram.

This outlook calls for earnings per share to decrease 10.4%-17.2%, revenue to increase 1.7%-5.4%, and gross margin to decline 110-210 basis points compared with fiscal 2014. This news was mixed compared with analyst expectations, which called for earnings per share of $1.50 on revenue of $547.09 million.

"We continue to face external headwinds and certain challenges within the business, and fiscal 2015 will be a year of transition for Vera Bradley," the company said in a statement.

I do not believe in investing in companies that have continually showed negative growth, or ones that are restructuring or are in a transitional period, so I would recommend avoiding Vera Bradley indefinitely; we can always revisit the company's financials in the future to see if its transition was successful and then reevaluate the possibility of an investment.

Not alone in its struggles
Coach
  (NYSE: COH  )  is one of Vera Bradley's largest competitors, and the market didn't welcome its recent earnings release. Here's an overview of the second-quarter report released on Jan. 22:

Metric Reported Expected
Earnings Per Share $1.06 $1.11
Revenue $1.42 billion $1.48 billion

Source: Benzinga.

Source: Coach's Instagram.

Earnings per share decreased 13.8% and revenue decreased 5.3% year over year, as sales in North America, its largest region, fell 9%. Coach noted increased competition and weak traffic in its stores as the primary reasons for its underperformance, and this has been an ongoing issue. Gross profit decreased 9.4% to $982.7 million, and the gross margin took a beating, declining 300 basis points to 69.2%. The company didn't provide guidance for the next quarter, but analysts expect another set of negative growth. Coach's stock has fallen about 6% since its earnings release, and I believe investors should avoid it at all costs, no matter how "inexpensive" it becomes.

The dominant player in the industry
Michael Kors 
(NYSE: KORS  ) is Vera Bradley's and Coach's biggest challenge in the industry today, as it has become a consumer favorite. Unlike the others, Michael Kors has continued to grow at an incredible rate, which is reflected in its earnings. Here's what the company accomplished in its third-quarter report released on Feb. 4:

Metric Reported Expected
Earnings Per Share $1.11 $0.86
Revenue $1.01 billion $859.94 million

Source: Benzinga.

Source: Michael Kors' Instagram.

Earnings per share increased 73.4% and revenue increased 59% year over year, led by 27.8% growth in comparable-store sales, marking an incredible 31st consecutive quarter of positive comparable-store-sales growth. Gross profit increased 61.6% to $619.5 million, and the gross margin expanded 100 basis points to 61.2%; the expansion of the gross margin was very impressive, especially when you consider that the retail environment during the holiday season was highly promotional.

Michael Kors also provided its outlook on the quarter ahead, which calls for earnings growth of 26%-30%, revenue growth of 32%-34%, and comparable-store-sales growth of 15%-20%. Hitting those targets would result in another record quarter for the company. In summary, Michael Kors has continued to impress the market, and I believe it's the best investment option in the industry today, even after the large rally in its shares. 

The Foolish bottom line
Vera Bradley's "better-than-expected" results were very weak in reality, and its outlook on the year ahead shows little promise for it to get back on the growth path. Its stock has reacted by moving higher, but the evidence suggests this may be Mr. Market behaving irrationally . For these reasons, I would avoid Vera Bradley indefinitely and go with a company experiencing success in the industry, such as Michael Kors.

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