Shares of women's accessory maker Vera Bradley (VRA 7.76%) jumped again in September on second-quarter 2018 profits that exceeded management's guidance. The stock is now up 39% year to date. While profits are ultimately all that matters, Vera Bradley has been increasing its bottom line while actual sales continue to decline. That makes the fashion company a high-risk investment as long as that trend remains intact.
The struggle is real
Investors in the handbag and luggage company may be seeing green this year, but an improving profitability story is masking some real problems with the business. The top and bottom lines are on divergent paths, with overall sales in decline even while profits rise.
|
Metric |
1H 2018* |
1H 2017 |
YOY % Increase (Decrease) |
|---|---|---|---|
|
Net revenue |
$200.2 million |
$208.6 million |
(4%) |
|
Cost of sales |
$85.9 million |
$92.6 million |
(7.2%) |
|
Selling, general, and admin expenses |
$104.5 million |
$117.5 million |
(11.1%) |
|
Earnings (loss) per share |
$0.22 |
($0.05) |
N/A |
Data source: Vera Bradley quarterly earnings. Chart by author. *For the six months ended August 4, 2018.
Management set out to trim business expenses last year, and that is leading to bigger earnings. After the strong second-quarter showing, Vera Bradley raised full-year guidance to $0.55 to $0.62 from the previous range of $0.40 to $0.50. The problem is that while expenses are falling, overall sales are also in retreat. In fact, that has been a problem at Vera Bradley for some time. Revenue is down 16.5% over the last five years, so the decline year to date isn't a new development.
Comparable sales were down 0.5% at physical stores and down 22.2% online, averaging out to a 6.4% decline in the last quarter. A handful of new store openings in the last year helped offset lower traffic and volume of purchases.
Image source: Getty Images.
An uphill battle
Those are some ugly numbers, but the sales drop was by design. Part of Vera Bradely's past struggles had to do with discounting and promotional activity. While that helps get foot traffic in the door, it trains consumers to time purchases coinciding with sales events and diminishes the value of the brand. Vera Bradely and other fashion names like Coach and Kate Spade parent Tapestry have set out to change things.
The strategy? Wean shoppers off of sales events. Comparable sales, especially those online, are down sharply this year as the company scales back its number of clearance items. While the result is double-digit drops in online sales and slightly less foot traffic in-store, management says full-price selling was up over 20% for the first six months of the year.
Besides overhead cuts, Vera Bradley also is taking less of a hit on promotional activity. On one hand, that's a good thing because, in spite of higher pricing, Vera Bradley has a loyal fan base willing to pay up. However, double-digit price hikes arguably are scaring shoppers off, as indicated by the continued slide in overall sales because of less foot traffic.
The latter point will eclipse the former by the end of 2018. Vera Bradley's stock is rebounding as it cuts the bloat and raises prices, but that blueprint will eventually hit a ceiling. With sales volumes deteriorating and rising handbag and accessory prices only partially offsetting that, earnings increases have limited upside. As the company moves beyond its comparable low-profit-margin 2017 figures, things could turn ugly for the stock if overall sales don't turn a corner soon. To rekindle interest in the brand, that could mean resuming sales events to woo shoppers back, sticking Vera Bradley right back where it started.
