This Handbag Maker Stands Out from the Rest

By Tom Gibbs - June 6, 2012 | Tickers: COH, DDS, FNP, KORS, VRA | 0 Comments

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So-called “lifestyle brands” often receive a considerable amount of heat from investors for being over-hyped pushers of commoditized consumer products.  As such, the stocks are often prone to disproportionately wild swings in per share price upon the release of negative catalysts – i.e. lower updated revenue/earnings guidance, slower new store growth projections, etc. 

Handbag and accessories designer and retailer Vera Bradley (NASDAQ: VRA) is not immune to the characterization.  With a short interest that represents nearly 50% of the stock’s float, there is a wide population of investors that see little robustness in the retailer’s long-term growth prospects.  An often-significant driver behind the pessimism surrounding such a lifestyle brand is the fact that a large portion of the purchase price is intangible brand value.  This holds true for Vera Bradley stock, which sells for more than 5x its net asset base, yet contains a very loyal following of a core female consumer group that is difficult to measure both on a quantitative and qualitative basis.

Due to a weakened revenue guidance update Vera shares have taken a significant hit, and have recently hit a new 52-week low below $19/share (June 4^th, 10 A.M.).  After such a mass sell-off, the cheapness of the stock should garner some attention for the continued strength of its brand growth.  As the price remains at historical lows, investors are increasingly paying less for the aforementioned brand intangibles.

Vera Bradley stock will outperform other peers in its retailing group over the mid-term for the following reasons:

1. Solid Organic Growth

Vera Bradley has maintained significant top and bottom line growth since its 2010 IPO.  The funds have been used to fuel a rapid expansion in all three of its distribution platforms – direct brick-and-mortar retail, e-commerce, and indirect sales through specialty retailers.  With 56 locations in the United States, the corporation’s brick-and-mortar store base has more than doubled over the past three years.  The projection for 16-18 stores per year over the next several years will continue to drive the total domestic store base by an average of more than 20% per year. 

Combined with Vera Bradley’s robust same store sales metrics (3 year average near 25%), direct sales hit $225.3 million in 2012, up from $91.1 million two years previously.  Despite the swift growth in top the line, there is still significant room for future performance improvement.  The majority of the corporation’s brick-and-mortar locations are placed in high traffic areas in populous states – Florida, California, Texas, New York – there is plenty of room to move around the fringe. 

New organic growth will also be driven by the corporation’s international and indirect sales divisions.  Vera began expanding internationally through Japanese partnerships last year (it operates seven pop-up stores in the nation), and without a pre-established base of stores in the world’s most troublesome economic zones, the corporation can continue to expand incrementally overseas through projects in the highest returning regions. 

Vera recently announced a partnership with Dillard’s (NYSE: DDS) department stores, which will sell a collection of the retailer’s handbags/accessories in thirty-five locations this summer.  The agreement between the two retailers also calls for the brand penetration to hit 65 Dillard’s stores this fall, which will drastically boost the awareness of the still relatively small Vera Bradley brand.  Although Dillard’s has had a rather difficult time rebounding from the recent recessionary trough period, the department store chain is beginning to build up steam -- top line and comparable store sales growth have been positive (in the low single digits) over the past two consecutive years. 

2. Product Diversification

It is positive to note that Vera Bradley not only enjoys a meaningful degree of diversification in its sales channel mix, but also in its product portfolio.  Over the past three years the corporation has supplemented its historic reliance on its famous handbags with the licensing of the brand value to other product categories:

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A handful of supplementary items including smartphone/laptop cases and covers, sun and reading glasses, and office supplies have not only levered and built awareness of the Vera brand, but have also offered a hedge against the huge rise in soft commodity costs.  The 100% cotton-made handbag line has had an effect on gross margins, which declined slightly to 55.9% in 2012 from 57.1% in 2011, yet the contribution from newly introduced products has hedged commodity costs enough to allow for operational efficiency gains to boost overall profitability.  Despite the decrease in gross margins, for instance, operating margins increased by more than 625 basis points over the past year to hit 20.9% in 2012.  This compares to the huge margin hit experienced by pure apparel players in the fashion sector – Abercrombie & Fitch, Gap, American Eagle Outfitters, and Aeropostale have not enjoyed their 600 basis point average declines in gross margins over the past three years. 

3. Relatively Inexpensive

The primary driver behind Vera Bradley pessimism has been its slowing comparable store sales growth and its newly-lowered revenue guidance update.  Revenue estimates for the upcoming year of $535 - $540 million (original guidance was for $540 - $545 million) represents a 16-17% top line increase from 2011 levels.  Despite the slower growth projections (year-over-year 2011 revenue growth was 25.9%) the recent drop in Vera Bradley stock price might be overdone.  As compared with other upscale handbag and accessory players in the field including Coach (NYSE: COH), Juicy Couture and Lucky Brand owner Fifth and Pacific (NYSE: FNP), and Michael Kors (NYSE: KORS), Vera is bargain-priced.

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Investors should keep an eye focused on Vera Bradley shares as they continue through their period of pessimism.  The huge rebound in business experienced by apparel and fashion retailers and the lofty multiples of the stocks in the sector indicate that investors are willing to ante up for the expected mid-term growth.  Vera Bradley has exemplified its growth potential since its 2010 IPO, it has a well-diversified product and distribution channel mix, and it is relatively young in the brick-and-mortar space and therefore has the freedom to pick and choose the most favorable locations for future outlets.  With average analyst price estimates in the mid-$30s (may get a minute downgrade due to recent revenue update), the market is not pricing in the corporation’s upcoming growth prospects.  Look out for a rebound in Vera shares!

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