What: Shares of Vera Bradley (NASDAQ:VRA) soared on Wednesday following the company's third quarter earnings report. Both revenue and earnings for the quarter were above analyst expectations, driven in part by a reduction in promotional activity. At noon Wednesday, the stock was up about 37%.
So what: Vera Bradley reported quarterly revenue of $126.7 million, up 1.2% year over year and about $5.5 million higher than the average analyst estimate. Comparable store sales fell 2% year over year, while e-commerce sales slumped 19.1%, but these declines were offset by the opening of new stores and a 7.9% increase in direct segment revenue.
Vera Bradley cut back on promotional activity during the quarter, eliminating sales where prices are slashed by 60%-70% and reducing the number of promotional days by about 50%. This had a severe negative effect on e-commerce sales, but comparable store sales showed improvement compared to previous quarters despite the shift in strategy. During the second quarter, comparable store sales plunged 15.2%.
Reducing promotions helped Vera Bradley beat analyst estimates for earnings. The company reported EPS of $0.27, up from $0.21 during the same period last year, and $0.07 higher than analyst expectations. Gross margin increased by 540 basis points year over year, allowing the company to boost profits without a big increase in revenue.
Now what: For the fourth quarter, Vera Bradley expects revenue to be between $151 million and $155 million, roughly flat compared to the same period last year. Gross margin is expected to grow by about six percentage points year over year to a range of 58.3%-58.7%, but an increase in SG&A costs will lead to EPS between $0.40 and $0.43, compared to EPS of $0.43 during the fourth quarter of last year. Guidance for both revenue and earnings were slightly above analyst expectations.
Vera Bradley's quarter was far from a blowout, but the company's ability to curtail promotional activity while improving its comparable store sales trend seems to have boosted investor confidence. Vera Bradley stock has been in decline for much of the past five years as the company has struggled with falling revenue and profit, but the third quarter may mark a turning point for the company.
Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. 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.