Vera Bradley reported first-quarter EPS of $0.16, which beat our $0.12 number, the Street’s $0.13, and guidance of $0.11-$0.13, on better-than-expected SG&A ($0.05), gross margin ($0.02), and tax rate ($0.01), offset by lower revenue (-$0.04). The company reduced its second-quarter and full-year outlook below the Street. We believe management is taking the right steps to reinvigorate the brand, but these changes will be iterative and take time.
The sales shortfall was driven by traffic decreases, specifically from new customers. Vera Bradley believes that it needs to create more-relevant product to attract new customers, and this is the primary impetus for an acceleration of new product introductions.
The company entered into a 5-year agreement with Mitsubishi and Look Inc. to import and distribute the Vera Bradley brand in Japan. Vera Bradley entered the region by itself three years ago and is presently in 13 department stores, which will all be exited in the third quarter. The first new point of distribution should open in October with a target of 25 locations by the end of the 5-year agreement. Exiting the current operation will cause the company to incur a $0.03-per-share pretax charge in the third quarter that will be reflected in discontinued operations.
Vera Bradley announced a plan to enter roughly 70 Macy’s locations in mid-July. Initially the brand will be given roughly 100 square feet (versus 300-400 square feet at Dillards), although we expect both the space and door count will be expanded over time.
Severe weather negatively affected comps by at least 100 basis points. However, dissimilar to many other retailers, the company did not see a pickup in trends in the April period. Inventory decreased 9% during the quarter (versus sales down 8%) and the midpoint of second-quarter inventory guidance is down 14% (versus sales down 7%). Inventory investment will continue to shift away from the traditional cotton quilted patterns into other various designs and fabrications, and the company is planning conservatively until sales stabilize.
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