Vera Bradley: Stock Rise Likely to Continue After Earnings Release (NASDAQ:VRA)

When I checked out handbag maker Vera Bradley (NASDAQ:VRA) last time around, in May, its prospects looked vastly improved even from late 2022. This led me to an upgrade of the stock’s rating to Stay away from the Old Sale. but it is first quarter (Q1 FY24) the numbers that followed soon after got a big thumbs up from investors, leading to a now significant 27% since I wrote and an even bigger rise year to date (see chart below). continuation).

With FY24 second-quarter numbers set to be released late next week, here’s a look at what’s motivating Vera Bradley and whether stocks can continue on their upward journey.

the story so far

First, a quick look at financial developments since I last wrote about it. The first quarter of the company’s fiscal 24 year, which ends in April On September 29, 2023, it continued to show weakness in the face of “challenging traffic trends in March and April,” as the company says. This resulted in a 4.2% year-over-year (YoY) decline in net income, a reported operating loss of $6.4 million, and a reported diluted loss per share of $0.15.

Still, these numbers have positive aspects:

• The net revenue contraction is particularly disappointing considering that it widened from the 1.7% drop in the fourth quarter of FY23. However, it is still an improvement over the 7.5% drop seen in the fiscal year 23 as a whole.
• It’s also worth noting that the company closed 19 full-line stores and two outlets (although it opened five more) in the past 12 months. Also, it is encouraging that bracelet maker Pura Vida, whose acquisition was completed in January of this year, has seen a small increase in revenue, its first in five quarters.
• The 54.8% gross profit margin appears healthy on its own and is also significantly better than what was seen in the fourth quarter of FY23 (40.8%) and the first quarter of FY23 (53.3 %) due to a reduction in cost of sales.
• The loss per share is similarly less than what we saw in the first quarter of fiscal year 23 ($0.21).

All told, it looks like Vera Bradley’s numbers are showing some signs of recovery, continuing the story from last time when she was still struggling for air. However, these numbers clearly indicate little reason to be optimistic about stocks.

positive outlook

Aside from his share buybacks, I think the real upside is his earnings outlook, even as he maintains his FY24 revenue guidance at $490-510 million. Assuming it hits the midpoint means that revenue will be flat from FY23.

– Gross profit margin

But we’ve already seen a drop in cost of revenue in the first quarter of FY24 of 7.25% year-over-year, continuing the trend seen in the corresponding period last year. This is likely to continue for the remainder of the year as well, due to stable revenues and an upwardly revised gross profit margin.

In its initial guidance, the company only listed “reduced inbound freight charges” as a favorable impact on margin. This has now been expanded to “reduced freight expenses year over year, cost reduction initiatives, and the direct sale of previously reserved inventory…”. As a result, Vera Bradley has increased its gross profit margin slightly to 52.8-53.8% from the previous expectation of 52.6-53.6%.

– Operating benefits

But that’s not all when it comes to costs or benefits. It has also reduced estimates for non-GAAP selling, general and administrative expenses (SG&A) or operating costs. They are now expected to be in the range of $237-247 million, a 1.3% year-over-year decline assuming the actual data is in the midpoint of the range. Their initial guidance was $241 million to $251 million, which would have meant essentially unchanged numbers.

However, the impact on operating profit, with operating income expected to be in the range of $24-28 million, compared to the previous range of $17.3-21.7 million. At the midpoint of the latest guidance range, this represents a total increase of 111.4% over the FY23 figure.

Operating margin is expected to proportionately double to 5.4% this year from FY23. It is also an appreciable increase from the 3.9% expected under initial guidance. It’s still lower than the company’s margins before the pandemic, but still an improvement from last year, when Vera Bradley reported an operating loss.

I’d like to add here that the company underperformed on its operating income target last year, which is a risk factor. In the first quarter of fiscal 23, I expected operating income to be in the range of $18.8 million to $25 million; instead, it ended the year with non-GAAP operating income of $12.3 million.

The gap might be smaller in FY24, considering last year it went through significant restructuring and streamlined costs, but I’m not denying any spillover impact this year. Especially since we haven’t seen any operating profit in the last quarter.

-EPS

This earnings improvement directly from gross earnings is expected to flow into non-GAAP diluted EPS, with a whopping 158% year-over-year increase expected in FY24. The guidance range for consolidated diluted EPS is between 0.57 and $0.67, which is also a notable 37.8% increase over initial guidance.

The turnaround in earnings per share is expected to start in the second quarter of fiscal 24, with analysts expecting a figure of $0.12 on average. However, for the same reasons as operating income, I would also be wary of the EPS figure.

Competitive market multiples

Interestingly, Vera Bradley’s market multiples look competitive despite the recent stock price rally. Its non-GAAP forward price-earnings (P/E) ratio is 11.9 times, which is not only lower than the corresponding figure of 14.6 times for the consumer discretionary sector, but also lower than the five-year rate on the share itself. average figure of 13.95x. The GAAP forward P/E is similarly lower than the sector (see table below).

While these numbers indicate that there is at least a 20% upside right now, I am wary of the fact that he underperformed compared to his outlook last year. Even considering that future analyst estimates are at the lower end of the company’s guidance range, there may be a silver lining. Maybe not 20%, but its tangible book value per share of $7.5 alone indicates a 10% increase.

Whats Next?

Vera Bradley expects the slow but steady improvements to lead to significant earnings growth by the end of its fiscal 24 year. However, the turnaround is expected to have started in the second quarter of fiscal 24, according to analyst estimates. .

At the same time, it’s essential to remember that last year the company underperformed on its own prospects. While it is true that a significant restructuring was taking place at the time, an operating loss in the last quarter is also not encouraging. Still, there is something to be said for its market multiples, which are trading below their previous averages and those of the consumer discretionary sector.

However, for now, I expect only a 10% increase in the share price. Once it hits that mark, any further increases will depend on the company’s performance in the second quarter of fiscal 24 and beyond. I am upgrading VRA to Buy.