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Third Quarter Fiscal 2024 Results Mixed

Second Quarter Results Reported; Raising Price Target

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Consumer Cyclical

Manufacturing - Apparel & Accessories

Vera Bradley Inc.

Second Quarter Fiscal 2023 Operating Results
Vera Bradley reported results for the fiscal second quarter ended July 30, 2022 that missed expectations. The Company continues to&nbsp;see bifurcation in the spending of the customer base. At Vera Bradley, Direct Full-Price Channel comparable revenues were nearly flat to last year and up double digits to fiscal 2020 as customers with higher household incomes remained engaged and continued to spend. However, inflationary pressures, especially higher gas prices, continued to negatively affect the purchases of customers with lower household incomes as well as traffic and spending in the Vera Bradley factory stores. The Vera Bradley Indirect Channel continued to experience a healthy year-over-year rebound. Pura Vidaâ€™s ecommerce revenues continued to be affected by the shift in social and digital media effectiveness and escalating digital media costs.
For the second quarter of fiscal 2023, consolidated net revenues totaled $130.4 million, compared to $147.0 million in the prior year second quarter ended July 31, 2021. We had projected consolidated revenue of $133 million. Vera Bradley Direct segment revenues totaled $87 million, a 10.4% decrease from $97.1 million last year. Comparable sales declined 13.8% in the second quarter. Vera Bradley Indirect segment revenues totaled $17.3 million, a 2.9% increase over $16.8 million in the prior year second quarter. Pura Vida segment revenues totaled $26 million, a 21.3% decrease from $33.1 million last year.&nbsp;
Logistics costs in the quarter continued to pressure gross margins.&nbsp;Second quarter consolidated gross profit totaled $60.5 million, or 46.4% of net revenues, compared to $80.4 million, or 54.6% of net revenues, in the prior year. On a non-GAAP basis, current year gross profit totaled $67.8 million, or 52.0% of net revenues. The current year gross profit rate was negatively impacted by higher inbound and outbound freight expense, deleverage of overhead costs, and channel mix changes, partially offset by price increases.
Second quarter consolidated SG&amp;A expense totaled $74.0 million, or 56.8% of net revenues, compared to $68.7 million, or 46.7% of net revenues, in the prior year. On a non-GAAP basis, consolidated SG&amp;A expense totaled $64.0 million, or 49.1% of net revenues, for the current year second quarter, compared to $68.0 million, or 46.2% of net revenues, in the prior year. As expected, Vera Bradleyâ€™s non-GAAP SG&amp;A current year expenses were lower than the prior year primarily due to a reduction in variable-related expenses due to the lower sales volume and other cost reduction initiatives. During the quarter, Vera Bradley incurred a $29.3 million charge for impairment of goodwill and intangible assets.
The Companyâ€™s second quarter consolidated operating loss totaled $42.8 million, or 32.8% of net revenues, compared to consolidated operating income of $12.6 million, or 8.6% of net revenues, in the prior year second quarter. On a non-GAAP basis, the Companyâ€™s current year consolidated operating income totaled $3.9 million, or 3.0% of net revenues, compared to $13.4 million, or 9.1% of net revenues, in the prior year.
On a segment basis, Vera Bradley Direct operating income was $10.0 million, or 11.5% of Direct net revenues, for the second quarter, compared to $23.2 million, or 23.9% of Direct net revenues, in the prior year. On a non-GAAP basis, current year Direct operating income totaled $16.2 million, or 18.6% of Direct revenues. Vera Bradley Indirect operating income was $3.9 million, or 22.6% of Indirect net revenues, compared to $5.6 million, or 33.3% of Indirect net revenues, in the prior year. On a non-GAAP basis, current year Indirect operating income totaled $4.9 million, or 28.4% of Indirect net revenues. Pura Vidaâ€™s operating loss was $28.5 million, or 109.6% of Pura Vida net revenues, in the current year, compared to operating income of $3.2 million, or 9.8% of Pura Vida net revenues, in the prior year. On a non-GAAP basis, Pura Vidaâ€™s operating income was $2.6 million, or 9.8% of Pura Vida net revenues, compared to $4.0 million, or 12.1% of Pura Vida net revenues, in the prior year.
For the current year second quarter, Vera Bradley, Inc.â€™s consolidated net loss totaled $29.8 million, or a loss of $0.95 per diluted share. These results included $32.2 million of net after tax charges. On a non-GAAP basis, Vera Bradley, Inc.â€™s consolidated second quarter net income totaled $2.4 million, or $0.08 per diluted share. For the prior year second quarter, Vera Bradley, Inc.â€™s consolidated net income totaled $9.1 million, or $0.26 per diluted share. These results included $0.4 million of net after tax charges related to intangible asset amortization. On a non-GAAP basis, Vera Bradley, Inc.â€™s consolidated second quarter net income totaled $9.5 million, or $0.28 per diluted share. We had estimated net income of $5.1 million, or $0.15 per share.&#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-
Impairment Charges
As mentioned, Vera Bradley&#8217;s results for the fiscal second quarter were negatively impacted by a $29.3 million charge for impairment of goodwill and intangible assets and $7.3 million of inventory related charges. On an after-tax basis, the charges included $18.2 million of Pura Vida goodwill and intangible asset impairment charges, $4.7 million of inventory adjustments associated with the exit of certain technology products and the write-off of excess mask inventory, $4.7 million of severance charges and other employee costs, $2.3 million of consulting fees associated with cost savings initiatives and the CEO search, $0.9 million of purchase order cancellation fees for spring 2023 goods, $0.6 million of store impairment charges, $0.5 million of intangible asset amortization, and $0.3 million of goodMRKT exit costs.
Obviously, given the recent performance of Pura Vida, the potential exists for additional impairment charges. Although the Company reviews goodwill and intangibles quarterly, the&nbsp;actual test is on an annual basis, which is done in the fiscal second quarter. According to management, based on expectations for the business and if the Company performs to these expectations, we shouldn&#8217;t see another write-down.
Pura Vida Brick &amp; Mortar 
 
 During the quarter, Vera Bradley opened a new Pura Vida store in the Irvine Spectrum Center in Irvine, California. And in August, a third location was opened at Broadway at the Beach in Myrtle Beach, South Carolina. Following down the path blazed by the original location opened last year in San Diego&#8217;s Westfield UTC Mall, both new locations are exceeding expectations. The fourth location in Phoenix will open in September. The stores are playing a key role in driving new customer acquisition as Vera Bradley continues to diversify its marketing platforms, and they demonstrate the power a retail presence has in driving digital sales, omnichannel loyalty, and spending. We would note the original San Diego location continues to experience a double-digit differential in its e-commerce business relative to the rest of the country since that store opened.
Looking forward, we expect management to watch closely the comp performance of the San Diego store as it is now reaches an anniversary. Assuming the comps remain favorable, we would anticipate additional new brick and mortar locations for fiscal 2024 and beyond.&nbsp;
Liquidity and Cash Flows 
 
Cash, cash equivalents, and investments as of July 30, 2022 totaled $38.3 million compared to $76.5 million at the end of last yearâ€™s second quarter. The Company had no borrowings on its $75 million ABL credit facility at quarter end.
Total quarter-end inventory was $179.6 million, compared to $148.0 million at the end of the second quarter last year. Current year inventory was higher than the prior year primarily due to approximately $24.0 million of additional inventory in-transit as the Company continues to navigate delays in the supply chain and ensures it has adequate inventory coverage going into the fall and holiday selling periods.&nbsp;A key reason for the lower cash position is due to the inventory build of $31.6 million over last year.
During the second quarter, Vera Bradley used $16.0 million of cash from operations, bringing the six month use of cash to $27.1 million. Capital expenditures in the fiscal second quarter totaled $2.6 million and $4.4 million in the first half of fiscal 2023. For the remainder of the year, we anticipate $4-$5 million of additional spending.
Although cash levels have declined year-over-year, given management&#8217;s current expectations for the back half of fiscal 2023, cash balances should grow by the end of the year, obviously contingent on operating performance.
 Share Repurchases
During the second quarter, the Company repurchased approximately $6.0 million of its common stock (approximately 1.0 million shares at an average price of $6.11), bringing year-to-date purchases through the end of the second quarter to approximately $16.5 million (approximately 2.4 million shares at an average price of $6.84). The Company has $29.3 million of remaining availability under its $50.0 million repurchase authorization that expires in December 2024. We anticipate the level of share repurchases to decline during the second half of fiscal 2023 as the Company takes a more conservative stance on cash given the current economic environment.
CEO Search
 Not much new to report on the CEO transition. Current&nbsp;President and Chief Executive Officer Robert Wallstrom, who is retiring,&nbsp;plans to remain in the CEO role until a successor is named, which is expected by the beginning of 2023. The Board has formed a search committee and a national search is underway. 
 
Updated Projections 
 
 We expect the challenging macroeconomic environment to continue for the balance of the year and anticipate it will take additional time to return the Pura Vida ecommerce business to growth. High gas prices and other inflationary pressures will continue to impact the Vera Bradley factory channel, and there will be continued pressure on gross margin.
The implementation of the $25 million of cost reductions, which are expected to be fully realized in fiscal 2024, will help offset inflationary expense pressures and the recessionary spending behavior from lower income households. Expense savings are being derived across various areas of the company including retail store efficiencies, marketing expenses, information technology contracts, professional services, logistics and operational costs and corporate payroll. In addition, we expect management to continue to evaluate and execute strategic price increases for both brands to offset rising raw material and freight costs. Management noted that in July and August there hasn&#8217;t been an overall further deterioration in the business, suggesting a bottom has been found.
We believe there are a number of potential positive items, especially on the macro side. First is logistics cost. The logistics costs that are flowing through the P&amp;L right now are probably peak levels. The Company is beginning to see logistics costs, particularly the international inbound shipping begin to moderate. The second is gas prices. As gas prices rose significantly since the beginning of the year, it has negatively impacted the Factory business. As gas prices have retreated recently, traffic is showing signs of returning. And the third potential positive is a rebound in Pura Vida, through a combination of the new store openings and a more focused performance marketing plan with the brand.
For the fiscal third quarter, we are projecting revenue of $120 million, down from a prior $123 million. Our net income projection is $3.6 million, or $0.11 per share, compared to a prior $6.6 million, or $0.20 per share. In the third quarter of fiscal 2022, the Company reported revenue of $134.7 million and net income of $5.8 million, or $0.17 per share on a GAAP basis and $0.18 per share on an adjusted basis. For the full year, on a reported basis, we are projecting revenue of $486.8 million and a net loss of $25.4 million, or a loss of $0.78 per share. On a non-GAAP basis, we estimate EPS of $0.24 per share. Previously, we were at revenue of $492.5 million and a net income of $14.7 million, or $0.45 per share.

Vera Bradley Inc. (VRA)

Challenging 2Q23; but Signs of Better Times to Come

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Termination of Research Coverage (VRA)

Reports Fourth Quarter Results (VRA)

Third Quarter Fiscal 2024 Results Mixed (VRA)

Second Quarter Results Reported; Raising Price Target (VRA)

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