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VERA BRADLEY, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
The following discussion summarizes the significant factors affecting the
consolidated operating results, financial condition, liquidity, and cash flows
of our Company as of and for the thirteen weeks ended May 3, 2014 and May 4,
2013. The following discussion should be read in conjunction with our Annual
Report on Form 10-K for the fiscal year ended February 1, 2014, and our
unaudited consolidated financial statements and the related notes included in
Item 1 of this Quarterly Report.
Executive Summary
Below is a summary of our strategic progress and financial highlights:
Strategic Progress
• We opened four new full-line stores and one factory outlet store during
the first quarter in both current and underpenetrated markets.
• We hired key executives in sales, e-commerce, merchandising, and sourcing.
• We implemented omni-customer capabilities so that we can better
understand what our customer is purchasing in all channels.
• We made improvements to our website which we believe will improve
customer acquisition, full-price conversion, and retention.
Quarterly Financial Summary
• Net revenues decreased 7.8% to $113.5 million.
• Direct segment sales decreased 0.3% to $73.4 million. Total
comparable-store net sales declined 9.4%.
• Indirect segment sales decreased 18.9% to $40.0 million.
• Gross profit was $60.5 million (53.3% of net revenue).
• Operating income was $10.8 million (9.5% of net revenue).
• Net income was $6.6 million, or $0.16 per diluted share.
• Cash and cash equivalents were $81.5 million at May 3, 2014.
• Cash generated from operations of $27.0 million was used to fund
capital expenditures of $4.0 million.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of
performance and financial measures.
Net Revenues
Net revenues reflect revenues from the sale of our merchandise and from
distribution and shipping and handling fees, less returns and discounts.
Revenues for the Direct segment reflect sales through our full-line and factory
outlet stores, department store locations in Japan, our websites,
verabradley.com and verabradley.co.jp, and our annual outlet sale in Fort Wayne,
Indiana. Revenues for the Indirect segment reflect sales to specialty retail
partners, department stores, national accounts and third party e-commerce sites.
Comparable-Store Sales
Comparable-store sales are calculated based upon our stores that have been open
at least 12 full fiscal months. Remodeled stores are included in
comparable-store sales unless the store was closed for a portion of the current
or comparable prior period or the remodel resulted in a significant change in
square footage. Total comparable-store sales includes net revenues from our
e-commerce site verabradley.com. Some of our competitors and other retailers
calculate comparable or "same store" sales differently than we do. As a result,
data in this report regarding our comparable-store sales may not be comparable
to similar data made available by other companies. Non-comparable store sales
include sales from stores not included in comparable-store sales.
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Measuring the change in year-over-year comparable-store sales allows us to
evaluate how our store base is performing. Various factors affect our
comparable-store sales, including:
• Overall economic trends;
• Consumer preferences and fashion trends;
• Competition;
• The timing of our releases of new patterns and collections;
• Changes in our product mix;
• Pricing;
• The level of customer service that we provide in stores;
• Our ability to source and distribute products efficiently;
• The number of stores we open and close in any period; and
• The timing and success of promotional and advertising efforts.
Gross Profit
Gross profit is equal to our net revenues less our cost of sales. Cost of sales
includes the direct cost of purchased and manufactured merchandise, distribution
center costs, operations overhead, duty, and all inbound freight costs incurred.
The components of our reported cost of sales may not be comparable to those of
other retail and wholesale companies.
Gross profit can be impacted by changes in volume, fluctuations in sales price,
operational efficiencies, such as leveraging of fixed costs, promotional
activities, such as free shipping, commodity prices, such as cotton, and labor
costs in Asia.
Selling, General, and Administrative Expenses (SG&A)
SG&A expenses include selling; advertising, marketing, and product development;
and administrative. Selling expenses include Direct business expenses, such as
store expenses, employee compensation, and store occupancy and supply costs, as
well as Indirect business expenses consisting primarily of employee compensation
and other expenses associated with sales to Indirect retailers. Advertising,
marketing, and product development expenses include employee compensation, media
costs, creative production expenses, marketing agency fees, new product design
costs, public relations expenses, and market research expenses. A portion of our
advertising expenses may be reimbursed by Indirect retailers, and such amount is
classified as other income. Administrative expenses include employee
compensation for corporate functions, corporate headquarters occupancy costs,
consulting and software expenses, and charitable donations.
Other Income
We support many of our Indirect retailers' marketing efforts by distributing
certain catalogs and promotional mailers to current and prospective customers.
Our Indirect retailers reimburse us for a portion of the cost to produce these
materials. Reimbursement received is recorded as other income. The related cost
to design, produce, and distribute the catalogs and mailers is recorded as SG&A
expense. Other income also includes proceeds from the sales of tickets to our
annual outlet sale.
Operating Income
Operating income equals gross profit less SG&A expenses plus other income.
Operating income excludes interest income, interest expense, and income taxes.
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Results of Operations
The following tables summarize key components of our consolidated results of
operations for the periods indicated, both in dollars and as a percentage of our
net revenues ($ in thousands):
Thirteen Weeks Ended
May 3, May 4,
2014 2013
(unaudited) (unaudited)
Statement of Income Data:
Net revenues $ 113,461 $ 123,033
Cost of sales 52,936 54,567
Gross profit 60,525 68,466
Selling, general, and administrative expenses 51,312 55,227
Other income 1,577 1,951
Operating income 10,790 15,190
Interest expense, net 80 141
Income before income taxes 10,710 15,049
Income tax expense 4,143 5,860
Net income $ 6,567 $ 9,189
Percentage of Net Revenues:
Net revenues 100.0 % 100.0 %
Cost of sales 46.7 % 44.4 %
Gross profit 53.3 % 55.6 %
Selling, general, and administrative expenses 45.2 % 44.9 %
Other income 1.4 % 1.6 %
Operating income 9.5 % 12.3 %
Interest expense, net 0.1 % 0.1 %
Income before income taxes 9.4 % 12.2 %
Income tax expense 3.7 % 4.8 %
Net income 5.8 % 7.5 %
The following tables present net revenues and operating income by operating
segment, both in dollars and as a percentage of our net revenues, and store data
for the periods indicated ($ in thousands, except as otherwise indicated):
Thirteen Weeks Ended
May 3, May 4,
2014 2013
(unaudited) (unaudited)
Net Revenues by Segment:
Direct $ 73,448 $ 73,687
Indirect 40,013 49,346
Total $ 113,461 $ 123,033
Percentage of Net Revenues by Segment:
Direct 64.7 % 59.9 %
Indirect 35.3 % 40.1 %
Total 100.0 % 100.0 %
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Thirteen Weeks Ended
May 3, May 4,
2014 2013
(unaudited) (unaudited)
Operating Income by Segment:
Direct $ 13,449 $ 16,965
Indirect 15,439 17,739
Less: Corporate unallocated (18,098 ) (19,514 )
Total $ 10,790 $ 15,190Operating Income as a Percentage of Net Revenues by Segment:
Direct
18.3 % 23.0 %
Indirect 38.6 % 35.9 %
Store Data (1):
Total stores open at end of period 104 85
Total comparable-store sales (decrease) increase (2) (9.4 )% 10.9 %
Total gross square footage at end of period (all stores) 219,212 176,437
Average net revenues per gross square foot (3) $ 162 $ 226
(1) Includes our full-line and factory outlet stores.
(2) Comparable-store sales are the net revenues of our stores that have been
open at least 12 full fiscal months. Increase or decrease is reported as a
percentage of the comparable-store sales for the same period in the prior
fiscal year. Remodeled stores are included in comparable-store sales unless
the store was closed for a portion of the current or comparable prior
period or the remodel resulted in a significant change in square footage.
Total comparable-store sales includes net revenues from our e-commerce site
verabradley.com.
(3) Dollars not in thousands. Average net revenues per gross square foot are
calculated by dividing total net revenues for our stores that have been
open at least 12 full fiscal months as of the end of the period by total
gross square footage for those stores. Remodeled stores are included in
average net revenues per gross square foot unless the store was closed for
a portion of the period.
Thirteen Weeks Ended May 3, 2014, Compared to Thirteen Weeks Ended May 4, 2013
Net Revenues
For the thirteen weeks ended May 3, 2014, net revenues decreased $9.6 million,
or 7.8%, to $113.5 million, from $123.0 million in the comparable prior-year
period.
Direct. For the thirteen weeks ended May 3, 2014, net revenues in the Direct
segment decreased $0.2 million, or 0.3%, to $73.4 million, from $73.7 million in
the comparable prior-year period. This change resulted primarily from a $6.7
million increase in revenues at our stores due to 19 additional full-line and
factory outlet stores which was partially offset by a total comparable-store
sales decrease of $5.7 million, or 9.4%, and a decrease in total sales at our
annual outlet sale compared to the prior year. The total comparable-store sales
decrease was primarily due to declines in traffic, underperformance of the
product offering, and severe weather in the first two months of the quarter.
Comparable-store sales related to our e-commerce operations decreased by
approximately 3.2% compared to the same period in the prior year, but favorably
impacted our total comparable-store sales by 5.0% due to a smaller percentage
decline in sales from our e-commerce channel, which accounts for approximately
half of total comparable-store sales. Our comparable-store sales excluding
e-commerce decreased 14.4%. The aggregate number of full-line and factory outlet
stores grew from 85 at May 4, 2013, to 104 at May 3, 2014.
Indirect. For the thirteen weeks ended May 3, 2014, net revenues in the Indirect
segment decreased $9.3 million, or 18.9%, to $40.0 million, from $49.3 million
in the comparable prior-year period, primarily due to an increase in key account
orders offset by a decrease in the specialty gift channel.
Gross Profit
For the thirteen weeks ended May 3, 2014, gross profit decreased $7.9 million,
or 11.6%, to $60.5 million, from $68.5 million in the comparable prior-year
period. As a percentage of net revenues, gross profit decreased to 53.3% for the
thirteen weeks ended May 3, 2014, from 55.6% in the comparable prior-year
period. The decrease as a percentage of net revenues was primarily due to
overhead costs deleveraging and increased year-over-year promotional activity.
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Selling, General, and Administrative Expenses
For the thirteen weeks ended May 3, 2014, SG&A expenses decreased $3.9 million,
or 7.1%, to $51.3 million, from $55.2 million in the comparable prior-year
period. As a percentage of net revenues, SG&A expenses increased to 45.2% for
the thirteen weeks ended May 3, 2014, from 44.9% in the comparable prior-year
period. The increase in SG&A expenses as a percent of net revenues was primarily
due to fixed expenses being spread over lower revenues in the Indirect segment
and the deleveraging of store operating expenses, which were partially offset by
expense management measures.
Other Income
For the thirteen weeks ended May 3, 2014, other income decreased $0.4 million,
or 19.2%, to $1.6 million, from $2.0 million in the comparable prior-year
period. The decrease in other income was in line with a decrease in associated
advertising costs related to mailers for our specialty retailers.
Operating Income
For the thirteen weeks ended May 3, 2014, operating income decreased $4.4
million, or 29.0%, to $10.8 million, from $15.2 million in the comparable
prior-year period. As a percentage of net revenues, operating income was 9.5%
and 12.3% for the thirteen weeks ended May 3, 2014 and May 4, 2013,
respectively.
Direct. For the thirteen weeks ended May 3, 2014, operating income in the Direct
segment decreased $3.5 million, or 20.7%. As a percentage of Direct segment net
revenues, operating income in the Direct segment was 18.3% and 23.0% for the
thirteen weeks ended May 3, 2014 and May 4, 2013, respectively.
Indirect. For the thirteen weeks ended May 3, 2014, operating income in the
Indirect segment decreased $2.3 million, or 13.0%. As a percentage of Indirect
segment net revenues, operating income in the Indirect segment was 38.6% and
35.9% for the thirteen weeks ended May 3, 2014 and May 4, 2013, respectively.
Corporate Unallocated. For the thirteen weeks ended May 3, 2014, unallocated
expenses decreased $1.4 million, or 7.3%, primarily due to expense management
measures.
Income Tax Expense
The effective tax rate for the thirteen weeks ended May 3, 2014, was 38.7%,
compared to 38.9% for the thirteen weeks ended May 4, 2013.
Liquidity and Capital Resources
General
Our primary source of liquidity is cash flow from operations. We also have
access to additional liquidity, if needed, through borrowings under our $125.0
million amended and restated credit agreement. Historically, our primary cash
needs have been for merchandise inventories, payroll, store rent, capital
expenditures associated with operational equipment, buildings, information
technology, opening new stores, and debt repayments. The most significant
components of our working capital are cash and cash equivalents, merchandise
inventories, accounts receivable, accounts payable, and other current
liabilities. We do not believe that the expansion of our Direct business or
campus consolidation will materially increase borrowings under our amended and
restated credit agreement in the near term.
We believe that cash flows from operating activities and the availability of
borrowings under our amended and restated credit agreement or other financing
arrangements will be sufficient to meet working capital requirements,
anticipated capital expenditures, and debt payments for the foreseeable future.
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Cash Flow Analysis
A summary of operating, investing, and financing activities is shown in the
following table (in thousands):
Thirteen Weeks Ended
May 3, May 4,
2014 2013
(unaudited) (unaudited)
Net cash provided by operating activities $ 26,957 $ 14,879
Net cash used in investing activities
(4,040 ) (5,811 )
Net cash used in financing activities (606 ) (10,412 )
Net Cash Provided by Operating Activities
Net cash provided by operating activities consists primarily of net income
adjusted for non-cash items, including depreciation, amortization, deferred
taxes, and stock-based compensation, the effect of changes in assets and
liabilities, and tenant-improvement allowances received from landlords under our
store leases.
Net cash provided by operating activities for the thirteen weeks ended May 3,
2014, was $27.0 million, compared to $14.9 million for the thirteen weeks ended
May 4, 2013, an increase primarily due to less growth in inventory.
Net Cash Used in Investing Activities
Investing activities consist primarily of capital expenditures for growth
related to new store openings, buildings, operational equipment, and information
technology investments.
Net cash used in investing activities was $4.0 million and $5.8 million for the
thirteen weeks ended May 3, 2014 and May 4, 2013, respectively; capital
expenditures of $3.0 million were incurred but not paid at May 3, 2014. The $1.2
million increase in capital expenditures was due primarily to the campus
consolidation project, which was not in the prior year, partially offset by the
opening of five stores during the thirteen weeks ended May 3, 2014, compared to
nine stores during the thirteen weeks ended May 4, 2013.
Capital expenditures for fiscal year 2015 are expected to be approximately $40.0
million, which includes approximately $20.0 million related to the campus
consolidation.
Net Cash Used in Financing Activities
Net cash used in financing activities was $0.6 million for the thirteen weeks
ended May 3, 2014. This compares to net cash used in financing activities of
$10.4 million for the thirteen weeks ended May 4, 2013, resulting primarily from
$10.0 million net payments under our amended and restated credit agreement.
Amended and Restated Credit Agreement
On October 4, 2010, Vera Bradley Designs, Inc. entered into an agreement to
amend and restate our credit agreement with JPMorgan Chase Bank, as
administrative agent, and certain other lenders. The amended and restated credit
agreement provides for a revolving credit commitment of $125.0 million and
matures on October 3, 2015. On June 1, 2012, Vera Bradley Designs Inc., entered
into an amendment to the credit agreement. The amendment extends the maturity
date from October 3, 2015, to June 1, 2017. Certain permitted indebtedness
covenants were also amended. All borrowings under the amended and restated
credit agreement are collateralized by substantially all of our assets. The
credit agreement is also guaranteed by the Company. The credit agreement
requires us to comply with various financial covenants, including a fixed charge
coverage ratio of not less than 1.20 to 1.00 and a leverage ratio of not more
than 3.50 to 1.00. The agreement also contains various other covenants,
including restrictions on the incurrence of certain indebtedness, liens,
investments, acquisitions, and asset sales. We were in compliance with these
covenants as of May 3, 2014.
Borrowings under the amended and restated credit agreement bear interest at
either LIBOR plus the applicable margin (ranging from 1.05% to 2.05%) or the
alternate base rate (as defined in the agreement) plus the applicable margin
(ranging from 0.05% to 1.05%). The applicable margin is tied to our leverage
ratio. In addition, we are required to pay a quarterly facility fee (as defined
in the agreement) ranging from 0.20% to 0.45% of the revolving credit
commitment. As of May 3, 2014, the Company had borrowing availability of $125.0
million under the agreement.
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Off-Balance-Sheet Arrangements
We do not have any off-balance-sheet financing or unconsolidated special-purpose
entities.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues, and expenses, as well as the related disclosures of contingent assets
and liabilities at the date of the financial statements. A summary of the
Company's significant accounting policies is included in Note 2 to the Company's
consolidated financial statements in the Company's Annual Report on Form 10-K
for the fiscal year ended February 1, 2014.
Certain accounting policies and estimates of the Company are considered
critical, as these policies and estimates are the most important to the
depiction of the Company's consolidated financial statements and require
significant, difficult, or complex judgments, often about the effect of matters
that are inherently uncertain. Such policies are summarized in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2014.
There was no significant change to any of the critical accounting policies and
estimates described in the Annual Report.
Recently Issued Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) 2014-08, Reporting Discontinued Operations and
Disclosures of Disposals of Components of an Entity. This guidance states that
the disposal of a component of an entity is to be reported in discontinued
operations only if the disposal represents a strategic shift that has (or will
have) a major effect on an entity's operations and financial results. The
pronouncement also requires additional disclosures regarding individually
significant disposals of components that do not meet the criteria to be
recognized as a discontinued operation as well as additional and expanded
disclosures. The guidance is effective for all disposals (or classifications as
held for sale) of components of an entity and all businesses or nonprofit
activities that, on acquisition, are classified as held for sale that occur
within annual periods beginning on or after December 15, 2014, and interim
periods within annual periods beginning on or after December 15, 2015; it is
applied prospectively. Early adoption is permitted, but only for disposals (or
classifications as held for sale) that have not been reported in financial
statements previously issued or available for issuance. The Company does not
expect this standard to have a material impact on the Company's consolidated
financial statements upon adoption.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers,
to clarify the principles used to recognize revenue for all entities. The new
guidance is effective for annual and interim periods beginning after December
15, 2016, with no early adoption permitted. The Company is currently evaluating
the impact, if any, the adoption of this guidance will have on its financial
position, results of operations or cash flows.
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