Description

Investment thesis

• Vera Bradley (VRA) is valued like a distressed retailer

• 0.7x price to tangible book value, 1.0x net current asset value (pre-IFRS 16 basis) and 0.26x EV/sales

• I think the risks of bankruptcy or dilution are much lower than for a distressed retailer due to the company owning its own brand and the higher margins that come with that

• At a 10% operating margin, the company would be trading at 2.6x EBIT

• While current visibility is low, the strong balance sheet ensures that current shareholders can hold out for better times

• Over the medium- to long-term, the company will achieve higher margins or will sell out to somebody that believes they can get higher margins

• In a sale scenario or simply in a case where the market prices in a recovery of operating margins, I think it is unlikely that the company would be valued below 0.5x sales or $9.16/share, 86% above today’s levels

Company overview

Vera Bradley (78% of consolidated sales) manufacturers women’s handbags, luggage, backpacks and other accessories. The company was founded in 1982 and IPO’ed in 2010 as a growth story through store base expansion. Today the company sells through 60 full-line stores (≈20% of sales), 80 factory outlet stores (≈40% of sales), its own ecommerce sites (≈25% of sales) and through 1,700 wholesale doors and third-party ecommerce sites (≈15% of sales). Historically the brand was best known for its quilted tote bags. Today the company has three key product areas: 1) backpacks for high school and college students, 2) the quilted tote for women aged 30 to 45, and its 3) travel business (duffle bags and luggage). VRA has the #1 selling duffle bag for women in the US. Half of sales are of products made from cotton.

In 2019 the company acquired Pura Vida (22% of consolidated sales) for $75m. Pura Vida sells bracelets, jewelry and accessories primarily online but also wholesale and through a store in San Diego.

History

The company grew rapidly after the 2010 IPO. Sales/sqft peaked at almost $1,100 in 2012, EBIT margins peaked at 21%. At the time, the company had 65 full-price stores and 11 outlet stores. Three years later, there were 110 full-price stores and 40 outlet stores. Revenues have consistently declined since then. It seems clear now that the company’s growth plans were too ambitious. Not only did store productivity decrease, but there was also a significant decrease in wholesale revenues (the Indirect segment). It seems that the store expansion hurt relationships with long-term wholesale partners.

However, the company is still generating gross profit margins in the 50s. Sales productivity is still respectable. The company still has a whole business which has lower fixed costs than a retail business. This is not a department store generating $150 sales/sqft. I believe these metrics show that the company has the potential to generate much higher operating margins at current sales levels.

Capitalization and balance sheet

The balance sheet has currently no debt and $25m in cash. However, this understates the strong balance sheet a little bit due to high inventory levels this year and the working capital build before the holiday quarter. I estimate that the company will have $40m in cash by fiscal year end this January.

Ownership and capital allocation

The founding family owns about 18% of the company.

Over the last 9 years, the company repurchased $132m of stock (86% of current mcap). While this was obviously bad timing, I still consider it a positive as it shows that the company is being run for shareholders and it increases the likelihood of a company sale or a future buyback.

Valuation

Fiscal 2023 has been very difficult for the apparel sector and for VRA. Despite this difficult environment the company is still guiding towards positive operating margins for this year. Given the bloated inventories across the space I could certainly envision negative operating margins for next fiscal year. However, I wouldn’t consider this a tragedy for VRA given the strong balance sheet and the very low valuation. Inventories have rarely been as high as this year and the year should be regarded as a one-off and not used for valuations. Even if VRA gets back to only 5% EBIT margins after that, the company would still be trading at only 5x EV/EBIT.

Catalyst

• End of tax loss selling (near-term)

• Working capital unwind (near-term)

• Industry recovery (mid- to long-term)