A Buying Opportunity Which You Shouldn't Miss

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

Shares of Vera Bradley (NASDAQ: VRA) are trading roughly 30% down from highs reached back in October. Lowered guidance and a management shakeup have seemingly shaken up investors. But has this pullback offered investors an attractive entry point to this well known brand?

Why is VB down 30%?

Vera Bradley is down on fears of slowing growth. Last quarter, the company lowered earnings guidance 5% -- from earnings per share of $1.83 - $1.88 to $1.74 - $1.78. This triggered a prompt 12% sell-off.

There is also speculation of some problems with management. CFO Jeffrey Blade resigned in January. The ominous "effective immediately" resignation from Indianapolis Business Journal's "2011 CFO Of The Year" left investors scratching their heads. Now, CEO Michael Ray has announced that he is going to retire. Investors tend to get the jitters when two of your top officers leave the company in the same year.

The good

While growth is slowing, Vera Bradley is still growing

<img alt="" src="http://media.ycharts.com/charts/e86dc2d03eac88d3b95096a0b8606594.png" />

VRA Revenue TTM data by YCharts

Revenue continued to climb in the most recent quarter, beating analyst estimates. Management has been able to grow this metric over the past three years at an average of 23% a year.

The above chart also gives a glimpse into the company's strong financial position. The company has virtually no long-term debt -- just $5 million. Compare that to the company's cash position of $8 million. Total current assets add up to $195 million, although most of that is inventory. But compared to total current liabilities -- $51 million -- it looks solid.

Unfortunately, net income hasn't kept pace with revenue. While some metrics -- like operating margin -- remain historically high, Vera Bradley's margins are improving.

<img alt="" src="http://media.ycharts.com/charts/b03d2da41313d62fc875025241296235.png" />

VRA Operating Margin TTM data by YCharts

Initiatives like a growing online presence -- now 23% of revenue -- are leading to the improving margins. But going forward, management has cautioned that margins may take another dip. Inventory is high, and prices may be lowered to clear this inventory out.

Attractive entry?

Currently Vera Bradley carries a P/E ratio of 13. This is lower than Coach's (NYSE: COH) P/E of 15 and Michael Kors(NYSE: KORS) P/E of 31. But not only is Vera Bradley's P/E the lowest, it has also fallen the most.

<img alt="" src="http://media.ycharts.com/charts/e423e5d8cff5f00ae39dd6ca35762abe.png" />

VRA PE Ratio TTM data by YCharts

It may be hard to compare these three companies in terms of price to earnings since all three are growing at different rates and would naturally require different valuations.

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>P/E</strong></td> <td><strong>Forward P/E</strong></td> <td><strong>Projected Earnings Growth</strong></td> <td><strong>PEG</strong></td> </tr> <tr> <td>Vera Bradley</td> <td>13.42</td> <td>11.28</td> <td>16%</td> <td>0.82</td> </tr> <tr> <td>Coach</td> <td>15.43</td> <td>13.86</td> <td>10%</td> <td>1.30</td> </tr> <tr> <td>Michael Kors</td> <td>31.48</td> <td>19.38</td> <td>38%</td> <td>0.83</td> </tr> </tbody> </table>

Coach is a top stock for many investors given the company's history of growth. Over the past five years, it has grown revenue 57%, net income 36%, and free cash flow 46%. Vera Bradley, meanwhile, has grown revenue 89% and net income 51%, though free cash flow has plummeted 90%. Given Vera Bradley's more attractive five-year PEG ratio, investors who love Coach for growth can love Vera Bradley more.

Kors' earnings are slated to grow the most this year, which is why it sports a higher valuation. In the most recent quarter, revenue was up 57%, and earnings per share more than doubled. Additionally, the company has a huge cash position -- $473 million -- and no debt. Looking at these numbers, a compelling case could also be made for Kors.

Kors is trading close to its 52-week high. Next quarter is expected to be a little weak. Patient investors might want to wait for a pullback. Likewise, Coach is also trading near highs. The stock has been a little volatile over the past year -- twice dropping over 20%. Another drop could come soon. In contrast, Vera Bradley has already pulled back.


When you read statements like "waiting for an attractive entry point"...this is it. As we've seen, Vera Bradley is trading off of highs. But everything we've looked at points to continued growth. Seems like a good time to initiate a position or add to an existing position in the company.

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Jon Quast has no position in any stocks mentioned. The Motley Fool recommends Coach. The Motley Fool owns shares of 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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