Vera Bradley: Battered but Not Out

 | Jun 07, 2013 | 1:30 PM EDT  | Comments
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I have not done a whole lot of investing within the retail sector recently as I have preferred to target a lot of my investments to the energy and technology sectors in 2013.

I have more extensive interest in these sectors and I have enjoyed a lot of success investing in these sectors over the years. Both sectors also appeared to being left out of the rally and undervalued earlier in the year before the recent rotation commenced.

I do look to other sectors, however, for value and growth plays. I have had a lot of luck over the last decade buying the retailing shares when they hit a temporary rough patch. In the last year, I have scored solid successes with Deckers Outdoors (DECK), Best Buy (BBY), American Eagle (AEO) and Coach (COH) when they experienced temporary pull backs. Retail stock investors seem to abandon these equities on one bad quarter or any sort of guidance that does not meet expectations; consumers can be fickle as well. These factors also lend to stocks that get oversold on occasion. One retailer I like right now in this vein is Vera Bradley (VRA).

The stock got hammered Wednesday on tepid guidance and the announcement that the company's CEO is retiring. This women's accessory retailer is down 25% from its highs earlier in the year and has fallen to $20.50 a share. VRA is also down 60% from its post IPO highs in the spring of 2011 (See Chart)

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The company is still increasing revenues at a solid pace, however,  and has plenty of opportunities to grow its store base and online sales. The stock sports a valuation that discounts that growth. Patient investors should pick up the shares as I believe the stock could hit $30 within the next 12 to 18 months as it expands its store footprint and it delivers against its growth plans.

Let's look at what is causing the VRA stock to decline and then look at the company's longer-term prospects. First, we will examine the bad news. The stock has lost 60% of its value over the last two years. Its CEO is also leaving the company once a replacement can be found. In addition, Vera Bradley only showed 1% same store sales growth this quarter as management cited a "challenging" retailing environment.

VRA then issued guidance for the second quarter that was slightly below expectations. This obviously was a lot for shareholders to digest and the stock had a significant sell-off Thursday, although the stock did bounce back 5% from its lows of the day.

Longer term, the outlook for VRA appears much brighter. Lost in the spate of bad news was the fact that company slightly beat quarterly expectations on both the top and the bottom lines. Online revenues are still posting double digit revenue gains year on year and the stock sells for 12x this year's expected earnings. The retailer should still sport high single digit sales increases for the year as the company plans to add significantly to its store count -- Vera Bradley distributes its products to 3,300 retail locations but has less than 100 stores of its own.

This is a solid brand at a good price and they should see a secular comeback as the economy continues to recover. They also have plenty of room to continue to expand their store count and continue their success with growing online revenues.

Finally, a new CEO could be just the catalyst to turn the company around. As the chart below shows, Vera Bradley has had great success in substantially growing their sales over the past five years. Unfortunately these sales increases have not resulted in commensurate cash flow or earnings growth. A new leader could help rationalize its product lines, hone its marketing message and translate sales growth more efficiently into earnings and cash flow. I have to agree with Jefferies that VRA is offering a great long term entry point for patient investors.

 

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