Which Fashion Retailer to Buy?

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Women and shopping! These two are inseparable. Given this magnetic relationship, the women's accessories business should keep prospering in the future, especially if the future is anything like the most recent past with the industry's double digit returns and reasonable valuations. Recently, I stumbled across Vera Bradley (NASDAQ: VRA), the 30-year old designer and maker of highly functional accessories for women including handbags, accessories, travel and leisure items. Since 2008, Vera has delivered top-notch ROIC to shareholders. In the last 6 months, the share price has gained nearly 26%. Should this iconic name in the accessories business make its way to the top of our wish list now, or should it be stuffed into your wife's purse to be considered for another day?

Vera Bradley is reaching its consumers via its 48 full-price stores, eight US outlet stores, seven Japanese pop-up stores and via its website with more than 43 million visits in 2011. In addition, it also sells its products via indirect channel as well, to 3,300 specialty retailers in the US and other e-commerce sites. This indirect channel accounted for 51.1% of the total revenue in 2011. The good thing is that no single account took more than 3% of the total indirect revenue, and the majority of customers in the indirect channel has been with the company for more than 5 years. The presence of Vera Bradley has mainly been in the eastern area of the US, however, Vera intended to expand its operations by opening 14-20 new stores annually during each of the next 5 years. The two main product segments, which bring the majority of its revenue to the company, have been handbags (43.1%) and accessories (32.2%), whereas travel and leisure items only accounted for 15.2% of its total sales. 

Even though Vera gained nearly 26% in the last 6 months, it was a total loser compared to its competitors including Coach (NYSE: COH) and Michael Kors Holdings (NYSE: KORS) for its 5-year share performance.

<img src="/media/images/user_14219/screen-shot-2012-12-06-at-34533-pm_large.png" />

In the last 5 years, Michael Kors is the best performer, delivering more than a 108% gain for its shareholders, whereas Coach lost 6.11% and Vera lost more than 32%.

Recently, Vera announced its impressive third quarter results. Its net revenue for the third quarter was $138.3 million, 14.2% higher than the third quarter last year. The net income jumped nearly 37% to $17.7 million, translating into $0.44 EPS, a growth of 37.5% compared to Q3 2011. During the past year, Vera has opened 17 full-price stores and 3 outlet stores, and it reported comparable sales growth of 7.1%. Even with the impressive third quarter results, Vera plunged 9.5% to $23.72 per share after hours. The reason for the significant daily drop was the softer Q4 guidance than analysts’ expected. The company estimated to have $147 million to $152 million in revenue, and EPS of $0.55 to $0.57, whereas analysts expected $160 million in revenue and $0.60 in EPS. According to Vera, the full year EPS would be in the range of $1.69 - $1.71. At the price of $23.72, its P/E would be 13.8x – 14x.

Compared to Coach and Michael Kors, Vera is not a outstanding player. 

<table> <tbody> <tr> <td> <p> </p> </td> <td> <p><strong>VRA</strong></p> </td> <td> <p><strong>COH</strong></p> </td> <td> <p><strong>KORS</strong></p> </td> </tr> <tr> <td> <p><strong>Net margin (%)</strong></p> </td> <td> <p>11.9</p> </td> <td> <p>21.45</p> </td> <td> <p>14.2</p> </td> </tr> <tr> <td> <p><strong>ROIC (%)</strong></p> </td> <td> <p>34.9</p> </td> <td> <p>54.2</p> </td> <td> <p>43.7</p> </td> </tr> <tr> <td> <p><strong>D/E</strong></p> </td> <td> <p>0.2</p> </td> <td> <p>0</p> </td> <td> <p>0</p> </td> </tr> <tr> <td> <p><strong>EV/EBITDA</strong></p> </td> <td> <p>10.56</p> </td> <td> <p>9.36</p> </td> <td> <p>21</p> </td> </tr> <tr> <td> <p><strong><span>Div</span> <span>yield</span> (%)</strong></p> </td> <td> <p>N/A</p> </td> <td> <p>1.8</p> </td> <td> <p>N/A</p> </td> </tr> </tbody> </table>

Even with the consistent high return on invested capital and net margin, the ROIC of the other two were much higher. Over the trailing twelve months, its ROIC was 34.9% whereas Coach’s and Michael Kors’ are 54.2% and 43.7%, respectively. Among the three, only Coach is paying dividends with a 1.8% dividend yield. All of the three companies are conservative, employing no or little debt. Michael Kors seems to be priced expensively, with 21x EV/EBITDA, whereas Vera and Coach are quite reasonably priced, at 10.56x and 9.36x EV/EBITDA, respectively.

Foolish Bottom Line

All three companies have delivered significantly high returns consistently over the years. Among the three, I would pick Coach to generate the highest return with the lowest EV/EBITDA valuation, in addition to its dividend. Vera seems to be a decent pick too, with its reasonable valuation. However, Michael Kors should be approached with care by investors because of its high EV multiple.  


hoangquocanh has no positions in the stocks mentioned above. The Motley Fool owns shares of Coach. Motley Fool newsletter services recommend Coach. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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