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Why Shares of Vince Holding Corp. Plunged Today

By Timothy Green – Jun 5, 2015 at 1:33PM

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A solid quarter was overshadowed by extremely weak guidance for the full year.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of apparel company Vince Holding Corp (VNCE) tumbled on Friday after the company provided disappointing guidance when it reported its first-quarter earnings, despite beating analyst estimates across the board. At noon, the stock was down about 16.5%.

So what: Vince reported strong first-quarter earnings, but the results were overshadowed by the poor guidance. During the first quarter, sales rose by 12% year-over-year to $59.8 million, just edging out the average analyst estimate. The wholesale segment grew by 2.6%, while the direct-to-consumer segment surged by 33.6%. The company reported net income of $0.06 per share, up from $0.04 per share during the first quarter of 2014 and a penny better than analyst expectations.

Despite these solid results, CEO Jill Granoff explained in the company's press release that the domestic wholesale business is expected to drag down results during the rest of 2015. While Vince still expects double-digit growth in its retail, e-commerce, international, and licensing businesses, a double-digit decline in the domestic wholesale business will lead to almost no revenue growth and earnings that are well below analyst expectations.

Vince expects to report revenue between $340 million and $350 million in 2015, compared to $340 million in 2014. Net income is expected to be between $0.85 and $0.90 per share, lower than the $0.93 per share the company reported in 2014, and much lower than the $1.03 per share analysts were expecting.

Now what: Based on the new earnings guidance, shares of Vince trade at a forward P/E ratio of 14-15 after the decline in the stock price today. Prior to yesterday's earnings, the stock was trading at about 15 times the consensus estimate for 2015 earnings, so the steep decline in the stock price today seems justified.

It's unclear exactly how long the issues plaguing Vince's domestic wholesale business will persist, but the rest of the business is doing well, and the company still expects to post operating margins in the high-teens in 2015. However, with future growth prospects clouded by the company's poor outlook, 14-15 times earnings seems a bit expensive to me.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. We Fools may not 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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