Vera Bradley(US:VRA)2021-12-08 20:58PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Vera Bradley, Inc. as of October 30, 2021, including the Balance Sheets, Statements of Operations, Statements of Comprehensive Income, Statements of Shareholders' Equity, Statements of Cash Flows, and accompanying notes, providing a detailed view of the company's financial position and performance Condensed Consolidated Balance Sheets The balance sheet as of October 30, 2021, shows a slight increase in total assets to $520.7 million compared to $513.8 million at January 30, 2021, driven by increases in cash and inventories, while total liabilities decreased slightly from $169.1 million to $162.6 million, and total shareholders' equity increased to $327.4 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Oct 30, 2021 | Jan 30, 2021 | | :--- | :--- | :--- | | Total Current Assets | $277,315 | $259,683 | | Cash and cash equivalents | $74,784 | $64,175 | | Inventories | $148,265 | $141,416 | | Total Assets | $520,742 | $513,787 | | Total Current Liabilities | $78,538 | $77,426 | | Total Liabilities | $162,593 | $169,071 | | Total Shareholders' Equity | $327,448 | $314,907 | Condensed Consolidated Statements of Operations For the thirteen weeks ended October 30, 2021, net revenues increased to $134.7 million from $124.8 million year-over-year, but operating income decreased to $8.0 million from $12.2 million, and net income attributable to Vera Bradley, Inc. fell to $5.8 million from $8.9 million, while for the thirty-nine-week period, net revenues grew significantly to $390.9 million, driving net income attributable to Vera Bradley, Inc. up to $12.7 million from just $0.8 million in the prior year Statement of Operations Summary (in thousands, except per share data) | Metric | Thirteen Weeks Ended Oct 30, 2021 | Thirteen Weeks Ended Oct 31, 2020 | Thirty-Nine Weeks Ended Oct 30, 2021 | Thirty-Nine Weeks Ended Oct 31, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net revenues | $134,735 | $124,849 | $390,877 | $325,903 | | Gross profit | $72,278 | $73,831 | $211,803 | $187,640 | | Operating income | $7,952 | $12,164 | $18,641 | $4,089 | | Net income attributable to Vera Bradley, Inc. | $5,778 | $8,874 | $12,683 | $753 | | Diluted EPS | $0.17 | $0.26 | $0.37 | $0.02 | Condensed Consolidated Statements of Cash Flows For the thirty-nine weeks ended October 30, 2021, net cash provided by operating activities was $19.2 million, a significant improvement from $1.6 million in the prior-year period, with net cash used in investing activities at $3.2 million, a shift from $18.0 million provided in the prior year, and net cash used in financing activities at $5.4 million, resulting in the company's cash and cash equivalents increasing by $10.6 million to end the period at $74.8 million Cash Flow Summary (in thousands) | Cash Flow Activity | Thirty-Nine Weeks Ended Oct 30, 2021 | Thirty-Nine Weeks Ended Oct 31, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $19,211 | $1,630 | | Net cash (used in) provided by investing activities | $(3,173) | $17,995 | | Net cash (used in) provided by financing activities | $(5,415) | $6,201 | | Net increase in cash and cash equivalents | $10,609 | $25,848 | | Cash and cash equivalents, end of period | $74,784 | $75,765 | Notes to the Condensed Consolidated Financial Statements The notes provide detailed explanations of the company's accounting policies and financial statement components, including its structure with two lifestyle brands (Vera Bradley and Pura Vida) and three reportable segments (VB Direct, VB Indirect, Pura Vida), as well as details on revenue recognition, lease obligations, earnings per share calculations, debt facilities, and segment-level financial performance - The company operates two distinct lifestyle brands, Vera Bradley and Pura Vida, and is organized into three reportable segments: Vera Bradley Direct (VB Direct), Vera Bradley Indirect (VB Indirect), and Pura Vida3841 Segment Net Revenues - Thirteen Weeks Ended Oct 30, 2021 (in thousands) | Segment | Net Revenues | | :--- | :--- | | VB Direct | $86,646 | | VB Indirect | $20,913 | | Pura Vida | $27,176 | | Total | $134,735 | Segment Operating Income - Thirteen Weeks Ended Oct 30, 2021 (in thousands) | Segment | Operating Income | | :--- | :--- | | VB Direct | $17,825 | | VB Indirect | $7,341 | | Pura Vida | $1,794 | | Total Segment Operating Income | $26,960 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results for the third quarter of fiscal 2022, highlighting a 7.9% increase in net revenues to $134.7 million, covering the ongoing impacts of the COVID-19 pandemic and supply chain disruptions, which have led to shipping delays and increased freight expenses, detailing the performance of its three segments: VB Direct sales grew 10.8%, Pura Vida sales increased 11.7%, while VB Indirect sales decreased 6.4%, and noting that despite revenue growth, operating income declined due to lower gross margins from increased shipping costs and the expiration of GSP duty-free status Executive Summary and External Factors The company faced significant supply chain disruptions, including shipping delays and increased freight expenses, which are expected to continue, with the expiration of the GSP duty-free status also contributing to higher costs, but despite these challenges, strategic progress was made, including product collaborations (Harry Potter, Disney, Hello Kitty), expansion of apparel and jewelry collections, and the launch of a Canadian website for Vera Bradley and the first Pura Vida retail store - The company is experiencing supply chain disruptions causing delivery delays and increased freight expenses, which are expected to persist. Higher tariffs are also impacting costs due to the expiration of the GSP duty-free status137 - Strategic initiatives in Q3 included expanding product collaborations (Disney, Harry Potter), launching a Canadian e-commerce site, and opening the first Pura Vida retail store in San Diego138143 Results of Operations For the third quarter (13 weeks ended Oct 30, 2021), consolidated net revenues rose 7.9% to $134.7 million, with VB Direct revenue growing 10.8% driven by an 18.3% increase in comparable store sales, while Pura Vida revenue increased 11.7%, and VB Indirect revenue fell 6.4% due to lower mask sales, leading to a gross margin decline from 59.1% to 53.6%, primarily due to higher shipping costs, GSP expiration, and lapping high-margin mask sales from the prior year, and SG&A expenses increasing 4.5% to $64.5 million, consequently, operating income fell to $8.0 million from $12.2 million year-over-year Q3 Net Revenues by Segment (in millions) | Segment | Q3 FY2022 | Q3 FY2021 | % Change | | :--- | :--- | :--- | :--- | | VB Direct | $86.6 | $78.2 | +10.8% | | VB Indirect | $20.9 | $22.3 | -6.4% | | Pura Vida | $27.2 | $24.3 | +11.7% | | Total | $134.7 | $124.8 | +7.9% | - Gross profit margin decreased to 53.6% from 59.1% in the prior year, negatively impacted by increased shipping expenses (155 bps), GSP duty-free status expiration (95 bps), and lapping higher-margin mask sales (230 bps)166 - SG&A expenses increased by $2.8 million (4.5%) to $64.5 million, primarily due to the non-recurrence of prior-year COVID-19 expense reduction measures167 - For the thirty-nine weeks, net revenues increased 19.9% to $390.9 million, and operating income rose to $18.6 million from $4.1 million in the prior year, largely due to lapping the temporary store closures from 2020180188 Liquidity and Capital Resources The company's primary liquidity sources are cash on hand ($74.8 million at quarter-end), investments, and operating cash flow, with a $75.0 million asset-based revolving credit agreement with no outstanding borrowings, and for the first nine months of fiscal 2022, net cash from operations was $19.2 million, with projected capital expenditures for the full fiscal year between $6.0 million and $8.0 million - The company ended the quarter with $74.8 million in cash and cash equivalents and no debt outstanding under its $75.0 million revolving credit facility16199 Cash Flow Summary - Thirty-Nine Weeks Ended (in thousands) | Activity | Oct 30, 2021 | Oct 31, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $19,211 | $1,630 | | Net cash (used in) provided by investing activities | $(3,173) | $17,995 | | Net cash (used in) provided by financing activities | $(5,415) | $6,201 | - Projected capital expenditures for fiscal 2022 are expected to be between $6.0 million and $8.0 million205 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that as of October 30, 2021, there have been no material changes in the market risks previously disclosed in its Annual Report on Form 10-K for the fiscal year ended January 30, 2021 - There were no material changes to the company's market risk disclosures as of October 30, 2021220 Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of October 30, 2021, with no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, these controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period221 - No material changes were made to the company's internal control over financial reporting during the most recent fiscal quarter222 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in a lawsuit filed by Vesi Incorporated in August 2019, alleging breach of fiduciary duty and other claims, seeking damages of at least $10.0 million, which the company is vigorously defending, while a separate class action lawsuit filed by Chidimma Igboakaeze in April 2020 regarding California labor code violations was settled in the first quarter of fiscal 2022 for an immaterial amount - The company is defending a lawsuit from Vesi Incorporated seeking damages of at least $10.0 million related to its licensing business. The company has filed a motion for summary judgment and is awaiting a court decision224 - A class action lawsuit in California (Chidimma Igboakaeze) concerning labor code violations was settled for an immaterial amount during the first quarter of fiscal 2022225 Item 1A. Risk Factors This section highlights material updates to the company's risk factors, including new risks identified such as potential adverse effects from disruptions in distribution systems and worldwide ports, like those caused by COVID-19, which could lead to increased freight costs and inventory shortages, and the inability to attract and retain a sufficient number of qualified retail and distribution center employees amidst intense competition and high turnover, amplified by the pandemic - The company identifies new risks related to disruptions in its distribution systems and worldwide ports, noting that events like the COVID-19 pandemic have caused shipping container shortages and backlogs, which could lead to increased costs and missed sales228229 - The company highlights the risk of being unable to attract and retain sufficient retail and distribution center employees due to intense competition and high turnover, exacerbated by the COVID-19 pandemic230 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the third quarter, the company repurchased 214,030 shares of its common stock at an average price of $9.90 per share under its 2018 Share Repurchase Program, with $30.8 million remaining available as of October 30, 2021, and subsequent to the quarter's end, in December 2021, the board approved a new $50.0 million share repurchase program, effective December 13, 2021, and expiring in December 2024 Share Repurchases - Thirteen Weeks Ended Oct 30, 2021 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Aug 29 - Oct 2, 2021 | 97,403 | $9.98 | | Oct 3 - Oct 30, 2021 | 116,627 | $9.83 | | Total | 214,030 | $9.90 | - As of October 30, 2021, $30.8 million remained available under the 2018 Share Repurchase Program109234 - A new $50.0 million share repurchase program was approved by the board in December 2021, set to expire in December 2024233 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, which include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, as well as Inline XBRL instance and taxonomy documents - Exhibits filed include CEO and CFO certifications (302 and 906) and Inline XBRL data files236