Vera Bradley(US:VRA)2019-12-11 21:24markdown [Financial Information](index=5&type=section&id=PART%20I.%20FINANCIAL%20INFORMATION) [Financial Statements](index=5&type=section&id=Item%201.%20Financial%20Statements%20(unaudited)) This section presents the unaudited condensed consolidated financial statements, reflecting the significant impact of the Pura Vida acquisition and ASC 842 adoption [Condensed Consolidated Balance Sheets](index=5&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Total assets increased to $532.0 million, and liabilities rose to $209.6 million, primarily due to the Pura Vida acquisition and ASC 842 adoption Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | Nov 2, 2019 | Feb 2, 2019 | | :--- | :--- | :--- | | **Assets** | | | | Cash and cash equivalents | $25,999 | $113,493 | | Inventories | $133,964 | $91,581 | | Operating right-of-use assets | $116,571 | $— | | Intangible assets, net | $58,772 | $— | | Goodwill | $44,604 | $— | | **Total assets** | **$532,026** | **$362,148** | | **Liabilities & Equity** | | | | Short-term operating lease liabilities | $22,162 | $— | | Long-term operating lease liabilities | $115,706 | $— | | Earn-out liability | $21,901 | $— | | **Total liabilities** | **$209,645** | **$67,445** | | Redeemable noncontrolling interest | $30,333 | $— | | Total shareholders' equity | $292,048 | $294,703 | [Condensed Consolidated Statements of Operations](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Net revenues increased 30.5% to $127.5 million due to the Pura Vida acquisition, but operating income declined to a $1.5 million loss due to acquisition-related expenses Statement of Operations Highlights (in thousands, except per share data) | Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 | | :--- | :--- | :--- | :--- | :--- | | Net revenues | $127,501 | $97,688 | $338,289 | $297,904 | | Gross profit | $67,870 | $57,152 | $185,671 | $171,508 | | Operating (loss) income | $(1,476) | $5,343 | $2,227 | $15,447 | | Net income attributable to Vera Bradley, Inc. | $139 | $4,226 | $3,588 | $12,138 | | Diluted EPS attributable to Vera Bradley, Inc. | $0.00 | $0.12 | $0.10 | $0.34 | [Condensed Consolidated Statements of Cash Flows](index=11&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash used in operating activities was $9.2 million, while investing activities used $67.0 million, primarily due to the Pura Vida acquisition Cash Flow Summary (in thousands) | Activity | Thirty-Nine Weeks Ended Nov 2, 2019 | Thirty-Nine Weeks Ended Nov 3, 2018 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(9,235) | $11,603 | | Net cash used in investing activities | $(67,010) | $(6,540) | | Net cash used in financing activities | $(11,248) | $(11,502) | | **Net decrease in cash and cash equivalents** | **$(87,494)** | **$(6,437)** | [Pura Vida Acquisition Details](index=28&type=section&id=12.%20Acquisition%20of%20Pura%20Vida) The company acquired a 75% interest in Pura Vida for $75 million cash, allocating $44.6 million to goodwill and $58.8 million to intangible assets - Completed the acquisition of a **75% ownership interest in Pura Vida** on July 16, 2019, for cash consideration of approximately **$75 million**, plus a working capital adjustment and a contingent earn-out of up to **$22.5 million**[136](index=136&type=chunk)[137](index=137&type=chunk) Preliminary Purchase Price Allocation (in thousands) | Item | Adjusted Fair Value at Acquisition Date | | :--- | :--- | | Total assets acquired | $147,609 | | Total liabilities assumed | $17,443 | | Goodwill | $44,604 | | Intangible asset, brand | $36,668 | | Other intangible assets | $24,988 | - Pro forma results, assuming the acquisition occurred at the beginning of fiscal 2019, show **net revenues of $133.1 million** and **net income attributable to Vera Bradley, Inc. of $5.3 million** for the third quarter of 2019[149](index=149&type=chunk)[150](index=150&type=chunk) [Segment Reporting](index=33&type=section&id=16.%20Segment%20Reporting) The company now operates three segments: VB Direct, VB Indirect, and Pura Vida, with Pura Vida contributing $25.0 million in revenue but reporting an operating loss due to acquisition charges Segment Performance - Q3 2019 (in thousands) | Segment | Net Revenues | Operating Income (Loss) | | :--- | :--- | :--- | | VB Direct | $78,397 | $14,675 | | VB Indirect | $24,087 | $9,324 | | Pura Vida | $25,017 | $(4,483) | | **Total Segment** | **$127,501** | **$19,516** | | Unallocated corporate expenses | N/A | $(20,992) | | **Consolidated Operating Loss** | **$127,501** | **$(1,476)** | [Management's Discussion and Analysis (MD&A)](index=35&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses Q3 financial results, highlighting the Pura Vida acquisition's impact on revenue growth and operating loss, alongside strong core brand performance and stable liquidity [Results of Operations (Q3 FY2020 vs Q3 FY2019)](index=41&type=section&id=Results%20of%20Operations%20-%20Q3%20FY2020) Q3 net revenues increased 30.5% to $127.5 million, driven by Pura Vida, but gross margin declined and SG&A expenses rose, resulting in a $1.5 million operating loss - **VB Direct segment comparable sales increased 4.7%**, reflecting a **6.9% increase in e-commerce** and a **4.0% increase in comparable store sales**[188](index=188&type=chunk) - **Gross profit was negatively impacted by $6.2 million (4.9% of net revenues)** from the amortization of the inventory step-up adjustment related to the Pura Vida acquisition[191](index=191&type=chunk) - **SG&A expenses increased by $17.5 million**, primarily due to **Pura Vida operating expenses ($11.4 million)**, **intangible asset amortization ($2.5 million)**, and **accretion of the earn-out liability ($1.8 million)**[192](index=192&type=chunk) - The Pura Vida segment reported an **operating loss of $4.5 million**, which included **$6.2 million for inventory step-up** and **$2.5 million for intangible asset amortization**[197](index=197&type=chunk) [Liquidity and Capital Resources](index=44&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity from cash, investments, and an undrawn $75.0 million credit facility, despite cash usage for operations and the Pura Vida acquisition - Primary liquidity sources are cash on hand, investments, and operating cash flow, with access to a **$75.0 million asset-based revolving credit agreement**, which had no borrowings outstanding[219](index=219&type=chunk) - **Net cash used in operating activities was $9.2 million** for the 39-week period, a decrease from **$11.6 million provided in the prior year**, primarily due to a **$22.0 million use of cash for inventory**[227](index=227&type=chunk) - **Net cash used in investing activities was $67.0 million**, primarily due to the acquisition of Pura Vida[229](index=229&type=chunk) [Market Risk Disclosures](index=47&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) There have been no material changes to the market risks disclosed in the Annual Report on Form 10-K for the fiscal year ended February 2, 2019 - As of November 2, 2019, there was **no material change in the market risks** from those described in the Annual Report on Form 10-K for the fiscal year ended February 2, 2019[243](index=243&type=chunk) [Controls and Procedures](index=47&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective, excluding the newly acquired Pura Vida business from internal control assessment as permitted by SEC guidance - The CEO and CFO concluded that the Company's **disclosure controls and procedures were effective** as of November 2, 2019[244](index=244&type=chunk) - The company has excluded the acquired Pura Vida business from its **assessment of the effectiveness of internal control over financial reporting** for the year of acquisition, as allowed by SEC guidance[246](index=246&type=chunk) [Other Information](index=48&type=section&id=PART%20II.%20OTHER%20INFORMATION) [Legal Proceedings](index=48&type=section&id=Item%201.%20Legal%20Proceedings) The company is involved in a lawsuit filed by Vesi Incorporated seeking at least $10.0 million in damages, with the company denying liability and filing a counterclaim - In August 2019, Vesi Incorporated filed a lawsuit against the Company related to its licensing business, alleging **breach of fiduciary duty and other torts**[248](index=248&type=chunk) - The complaint seeks **damages of not less than $10.0 million**. The Company denies liability, intends to vigorously defend itself, and has filed a counterclaim[248](index=248&type=chunk) [Risk Factors](index=48&type=section&id=Item%201A.%20Risk%20Factors) New risk factors from the Pura Vida acquisition include integration challenges, compliance issues, potential impairment of goodwill and intangibles, and future financial obligations from a Put/Call agreement - The Pura Vida acquisition introduces risks such as **failure to perform as planned**, **difficulties in assimilating employees and operations**, and **diversion of management resources**[250](index=250&type=chunk)[252](index=252&type=chunk) - A significant portion of Pura Vida's assets are **goodwill ($44.6 million)** and **other intangible assets ($61.7 million)**, which could be subject to **impairment write-offs**, adversely affecting financial results[252](index=252&type=chunk) - A **Put/Call Agreement for the remaining 25% of Pura Vida** could require the company to purchase this interest after five years, representing a **potentially significant future financial obligation**[254](index=254&type=chunk)[255](index=255&type=chunk) [Share Repurchases](index=49&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased 388,833 shares for $3.9 million during Q3 FY2020, with $38.1 million remaining under the program expiring in December 2020 Share Repurchases in Q3 2020 | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Dollar Value Remaining Under Program | | :--- | :--- | :--- | :--- | | Aug 4 - Aug 31, 2019 | 87,192 | $10.37 | $41,120,594 | | Sep 1 - Oct 5, 2019 | 189,894 | $9.66 | $39,285,941 | | Oct 6 - Nov 2, 2019 | 111,747 | $10.47 | $38,115,675 | | **Total for Quarter** | **388,833** | **$10.05** | **$38,115,675** | - The company purchased an aggregate of **$3.9 million of its common stock** during the thirteen weeks ended November 2, 2019[257](index=257&type=chunk)