Vera Bradley, Inc. is a designer of women's handbags, accessories, luggage and travel items, eyewear, and stationery and gifts. The...

Weekly Superstock Scan 11 Jan 2016 - 15 Jan 2016 - VRA

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Vera Bradley, Inc. is a designer of women's handbags, accessories, luggage and travel items, eyewear, and stationery and gifts. The Company sells its products through two business segments: Direct and Indirect. The Direct business consists of sales of Vera Bradley products through the Company's full-line and factory outlet stores in the United States, verabradley.com, direct-to-consumer eBay sales and the Company's annual outlet sale in Fort Wayne, Indiana. The Indirect business consists of sales of Vera Bradley products to approximately 2,700 specialty retail locations, substantially all of which are located in the United States, as well as department stores, national accounts, third party e-commerce sites, the Company's wholesale business in Japan and third-party inventory liquidation.
Vera Bradley Online Store


Technical



Broke Downward Trend Line with Large Volume
VRA has been trending downwards since middle of April 2014 due to negative comparable growth rates. When VRA released its third quarter 2015 results in December, the good results finally allowed the stock to break the downward trend line with a surge in volume.

Fundamental/ Stock Metrics


Year-on-year growth in Earnings Per Shares
While the chart below does not paint a very positive picture of VRA's earnings which have been trending down, VRA did reported a year-on-year growth in EPS of 29% in its latest quarter, the first positive growth in 6 or more quarters.

Reduced Promotional Activity Boosted Margins and Earnings
In Q3 2015, VRA eliminated their hyper-promotions of 60% to 70% off and reduced their total promotional days during the quarter. Although this negatively impacted their online sales, revenue increased due to new store openings.

The lower level of promotional activity, along side with  sourcing efficiencies, increased sales penetration of higher margin made for outlet products and lower levels of liquidation sales, boosted margin by 540 basis points year-on-year, 

Sustainable Growth Through Product, Distribution and Marketing
In the product are, VRA focused on innovation, newness and diversification. VRA offers new fabrications which are well received by consumers. VRA also started a small collegiate program which is currently in testing mode and focused on 16 universities.

VRA has been expanding their distribution channel through new full-line and factory outlet stores, as well as partnerships with departmental stores. VRA has increased their marketing efforts in 2015 with higher spending on both print and digital media. 

Low Float
The float is only 20 times its daily trading volume. With good results, this will contribute to dramatic price swings to the upside.

High Operating Leverage and Increasing Margins
Based on past quarters' results, my personal estimate is VRA requires a revenue of 100-110 mil to break even. This suggests that VRA may have a low level of variable costs relative to their fixed costs. Therefore as revenue exceeds 100-110 million, we can see a surge in net income, gross margins and earnings per share.

Risk Factors/ Things I do not like 

  • Disappointing comparable sales - Comparable same store sales growth rates has been negative for the past 3 years. Even in the recent quarter, comparable sales fell 9.5%, largely due to falling e-commerce sales. 
  • Tough Environment - There are continuing headwinds in the retail environment, including overall weak mall traffic, increased promotional activity of retailers and abundant supply of bags across brands and price points.
  • Negative EPS growth expected in fourth quarter - Management issued a guidance of fourth quarter EPS between $0.40 to $0.43. Diluted EPS totaled $0.43 in the prior fourth quarter. If the reported EPS is within the guidance, EPS growth will be zero at best.
  • Strong resistance expected at $18-$19 - This level has served as support several times between 2013-2015. It will thus be difficult for price to break through that level.

Potential trade setup

Based on the above analysis, this will be a no trade for me as a superstock since price is unlikely to breakout in the next quarter. Also, the company is in an industry that is too competitive that I am not confident that the growth experienced this quarter can be sustained.

Since the momentum is still strong at the moment, there is still opportunity to make a short-term profit by buying the gap just below $14 and selling close to the previous high. 


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Updates on Previous Scans


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All information in The Trader Diaries (TTD) does not constitute to investment advice or recommendation to buy, sell or hold. Readers are advised to consult their financial advisors prior to making any investment or pursuing any investment strategy. TTD will not be liable for any losses resulted from information published or shared from the blog.