2023-05-18 08:28:15 ET
Summary
- Vera Bradley's figures for the latest financial year looked pretty bad, but things could get better for the company.
- A corporate restructuring, cost-cutting drive, and sales strategy are beginning to show positive results, and its improved outlook is encouraging.
- With a decline in share price, its market multiples also look more competitive. I am upgrading it to Hold from the earlier Sell rating.
Bag manufacturer Vera Bradley (VRA) is down by 7.5% since I last wrote about it in late February. At the time I had put a Sell rating on the stock based on the fact that its financials had limited potential to show improvement in the foreseeable future. Since then it has released its full-year numbers and also its outlook for the current financial year. Here I take a look at these figures, to answer what they mean for its first-quarter results due shortly in the first week of June.
Sales remain challenged
First, let's take a look at the challenges evident in Vera Bradley's numbers. Its fiscal year 2023, ending January 28, 2023, definitely did not look good. The company reported a 7.5% decline in revenues and also clocked losses on both an operating and net basis. While the company's revenue trajectory has been poor for much of the past decade, it has been able to remain profitable except the last year it was not able to manage that either.
To be fair though, it might have remained profitable if it were not for huge expenses on account of its acquisition of bracelet manufacturer PureVida and also management restructuring. That said, the point remains that in a year when its sales already sagged, the challenged earnings numbers were an additional drag.
Positive changes underway
Now, however, some positives too are visible. Firstly the company is undergoing a huge management change. It appointed a new CEO, Jackie Ardrey, late last year and is now also appointing a new CFO, besides cutting 25 corporate positions . This corporate restructuring itself could yield cost savings later on, but even otherwise, the first signs of an improvement in the company's performance are beginning to show.
In Q4 of fiscal 2023, its revenue declined by 1.7% year-on-year [YoY). While a softening in sales is not good news, that the extent of the fall is much smaller than it was in the past three quarters is notable. And it was not sure good luck with any kind that drove this improvement either. Ardrey notes in the financial release "We focused on driving revenues in the fourth quarter through targeted, strategic promotions on seasonal, giftable, and key items. As a result, total Company fourth quarter revenues outperformed our guidance…". It had expected Q4 revenues to be between USD 136 to 141 million, instead, they came in at USD 147 million. It appears that Vera Bradley's sales growth strategy has borne fruit in the latest quarter, which is encouraging.
The company's USD 25 million plan to reduce costs and increase efficiencies also seems to be working. In fiscal 2023 its operating costs declined by 4.3%. Notably, the company was also able to keep it inventory levels in check during the year. In Q4 of Fiscal 2023, in particular, it saw a dramatic decline in inventory levels compared to the previous three quarters and even dropped by 1.8% YoY.
Outlook for fiscal year 2024
With all the improvements underway, the company's fiscal 2024 outlook expects betterment in sales trends going forward. It sees revenues in the range of USD 490 to 510 million for the year. This means, that the sales can decline by up to 2% or rise by up to 2% in the current fiscal year. Reasonably, we can expect it to come in at the midpoint of the range provided, which gives a flat sales figure from fiscal 2023. On its own, this outlook looks a bit underwhelming but however we look at it, the fact is that it is an improvement over the last year.
However, Vera Bradley has given us no visibility on reported earnings numbers. Instead what we do have is non-GAAP operating profit and EPS projections, which are set to look significantly improved in the current year. It expects the non-GAAP operating income to increase by over 58% considering the midpoint of the range provided and an 87.5% increase in the corresponding diluted EPS number.
Overall the outlook indicates that we can expect some improvements in Vera Bradley's numbers in Q1 of fiscal 2024. In fact, analysts expect a small growth in sales during the quarter, which would be the first such in five quarters. The outlook also indicates that we can see an uptick in the non-GAAP earnings figures.
The market multiples
The stock's non-GAAP forward price-to-earnings (P/E) ratio that's not bad at all right now at 12.1x compared to the 13.8x for the consumer discretionary sector. Both its trailing twelve months [TTM] price-to-sales ratio at 0.33x and forward P/S at 0.32x are also competitive compared to the sector at 0.81x and 0.82x respectively.
Based on the expected improvement in Vera Bradley's fundamentals and its market multiples, I am more positively inclined towards the stock now. It is true that the US economy is sluggish right now , which can throw up unwanted surprises, a point the company mentions as a risk factor . But on the positive side, unemployment is low and inflation is coming off which can balance out the effects of subdued growth to some extent. So while there could still be a risk to the company's outlook, there is still reason to be hopeful.
What next?
When the company reported a return to profits in the third quarter last year, along with the initial top management changes, the stock saw a significant rise. That could happen again if its first quarter figures for this year come in strong. An increase in sales is already expected, and the projections for non-GAAP earnings are also encouraging. A decline in inflation and its own cost-cutting drive can give a further fillip to both earnings and margins. But that remains to be seen. From a clear weakening in financials, however, Vera Bradley now has a chance at improvement. Further, with a fall in its stock price, the market multiples are more in its favour as well. As a result, it is a wait-and-watch for me. I am upgrading it to a Hold rating.
For further details see:
Vera Bradley: Improved Financials Expected