Please ensure Javascript is enabled for purposes of website accessibility

The Biggest Threat to Vera Bradley Stock

By Daniel B. Kline - May 2, 2016 at 2:12PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The company has been working on its physical stores and department-store relationships. But is it neglecting e-commerce?

Vera Bradley (VRA 1.71%) had a decent fiscal 2016, but one aspect of its sales indicates potential problems ahead.

A near-laser focus on growing physical retail distribution through its own stores and with partners such as Dillard's (DDS 12.43%), has left it to somewhat neglect its online business. That may not matter much at the moment, given that its products lend themselves better to being bought in places where they can be handled. But going forward, as chains such as Dillard's continue to struggle in the face of online competition, and digital technology improves product viewing, the focus on brick and mortar could come back to bite shareholders.

Bad big numbers but signs of hope
The handbag, luggage, and accessories company reported total revenue of $502.6 million for fiscal 2016, falling from $509 million the previous year. That resulted in earnings per share of $0.71, which includes net after-tax charges of $4.2 million. Without those one-time charges, earnings would have been $31.8 million, or $0.82 per diluted share. These figures represent a drop from $40.8 million or $1 per diluted share in fiscal 2015.

Distinctive handbags are a big part of the Vera Bradley line. Image source:

However, CEO Robert Wallstrom seemed to be pleased with the numbers, even though they were down on a bottom-line level.

We took a very disciplined approach to enhancing gross profit in fiscal 2016, and we are especially proud of our 370-basis-point gross profit percentage increase for the year. This improvement was largely driven by sourcing efficiencies, our made-for-outlet ("MFO") products, and substantially reduced promotional activity. We eliminated our hyper-promotions of 60% to 70% off and pared back the number of days on which we ran promotions by nearly 20% for the year.

That all sounds nice, but these efforts may not matter at all if the company can't rev up its digital sales. If it doesn't, Vera Bradley remains very vulnerable to the shifting shopping habits of American consumers.

How bad are the company's digital sales?
In 2016, Vera Bradley saw its e-commerce sales fall 13.2%. That followed fiscal 2015 online sales growth of 3.9%.

The retailer doesn't break out its e-commerce sales by dollar. Instead, it lumps them into its direct sales category. That's not uncommon, but it does suggest that the category ranks lower in importance than the company's efforts to enhance its brick-and-mortar distribution, specifically by growing its large department-store relationships and by adding more of its own shops.

This effort has included shifting focus away from

During the company's Q4 2016 earnings call, Wallstrom said that "e-commerce sales were once again negatively affected by reduced promotional activity," according to the transcript. Later in the call, when he was discussing the company's multiyear turnaround, the CEO again acknowledged an effort at "meaningfully reducing our promotional activity, particularly on" 

That might make sense in the short term, as physical stores clearly generate the bulk of its sales, but in the long run it could be a major miscalculation.

It's a clear focus on stores
Over and over in his remarks, Wallstrom talked about strengthening the company's distribution through its own stores and through partners. That concept is reinforced in the company's most recent annual report, where it said it intended to "place a greater emphasis on our department-store relationships and explore other expansion opportunities in the department-store space."
Those remarks were meant to show that the company was moving away from focusing on specialty retail in favor of bigger department stores. But, the fact that digital sales -- even ones made through a partner -- were not mentioned as a focus is a bit troubling.
It's not all bad
Wallstrom may be somewhat ignoring the Internet, but it's possible that this is a case of a CEO who's shoring up the company's finances before he addresses its long-term future. The problem -- and it's an issue for all brands that sell in competition with their retail partners -- is that increasing the focus on isn't likely to be something Dillard's or other department stores are happy about.
To appease its partners -- the indirect-sales channel, which accounted for 30% of its fiscal 2016 sales -- Vera Bradley has to tread lightly when pushing its own direct-sales channels. That may not be a big problem for its physical stores, which tend to be located in high-traffic malls, but it is a drag on e-commerce growth.
This e-commerce weakness has to be addressed in the next phase of its turnaround. If it isn't, it leaves the company vulnerable to lost sales as consumer preferences change.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Vera Bradley, Inc. Stock Quote
Vera Bradley, Inc.
$5.95 (1.71%) $0.10
Dillard's, Inc. Stock Quote
Dillard's, Inc.
$265.03 (12.43%) $29.29

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.