Vera Bradley Stock Loses Some Of Its Cachet

By Ryan C. Fuhrmann | June 03, 2011 AAA

Handbag and related accessory firm Vera Bradley (Nasdaq:VRA) reported first-quarter profits that disappointed investors on Wednesday. The stock fell dramatically as a result, but still trades at a rather lofty valuation. An expensive valuation won't matter if its merchandise remains popular and continues to grow rapidly, but it's difficult to predict if this will be the case. (For background reading, check out The 4 R's Of Investing In Retail.)

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First-Quarter Recap
Sales jumped 19% to $101.4 million. Direct sales accounted for 43.5% of sales and consist of sales made at Vera Bradley's 45 own stores across the nation. Comparable store sales were particularly strong, rising 22.1%. The rest of sales stem from indirect channels and grew a more moderate 6%. These sales consist of more than 3,000 independent retailers as well as online sites, such as Overstock.com (Nasdaq:OSTK).

Gross profit growth lagged sales and came in at 16%, as higher product costs ate into gross margins. SG&A expenses rose 18% and operating income advanced 10.2% to $19.1 million. Income taxes jumped sharply as Vera Bradley converted from an "S" corporation to a "C" corporation when the company first went public in late 2010. As a result, reported net income fell 33.8% to $11.2 million. Higher share count reduced per-share earnings by 40.4% to 28 cents. This fell below analyst projections.

Outlook
For the full year, Vera Bradley's management expects sales between $430 million and $435 million, for year-over-year growth between 17.5% and 18.8%. It projects diluted earnings in a range of $1.27 and $1.30 per share, or slightly above the $1.25 it reported last year.

Vera Bradley Valuation
Vera Bradley shares fell close to 14% on Thursday, after reporting its first-quarter results after the market close on Wednesday. The market didn't like the earnings miss, and there were also worries about softening sales during the month of May. The fall has lowered the forward earnings multiple, but it is still quite lofty at nearly 32 times, assuming the company hits the high end of its guidance range.

At this valuation, investors expect many more years of rapid growth and assume that Vera Bradley will remain popular among consumers. This could very well happen as Vera Bradley handbags and related accessories and gifts appeal to a wide audience at the middle of the market - the company's rivals, including Coach (NYSE:COH) and Liz Claiborne's (NYSE:LIZ) Kate Spade line, are considered slightly higher end, and tend to sell at high-end retailers such as Saks (NYSE:SKS) and Nordstrom (NYSE:JWN).

However, Very Bradley is a fashion-based brand that could fall out of fashion. Its company release boasts that its items have recently been featured in "Desperate Housewives", "Brothers and Sisters", "Entourage" and "Modern Family", as well as in more than 20 feature-length films. In other words, the company is aware that generating a buzz about its merchandise can be an important sales driver. However, at the stock's current high valuation, there is considerable downside risk for investors should the buzz eventually wear off.

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