Vera Bradley Is My UMBC Upset Pick for the Real Money Sweet 16

 | Mar 19, 2018 | 4:00 PM EDT
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Vera Bradley (VRA) may not be the first name that comes to mind when you think of the term "Sweet Sixteen". Maybe "Terrible Ten" or "Forgotten Five" would be more appropriate for VRA, which has done little in terms of stock price performance since going public in 2010. Perhaps that's too nice; in fact VRA has had the stuffing knocked out of it since its $16 IPO, and ultimate ascension to $50 in 2011. Shares now change hands for about $10, and investors seem to have all but forgotten that the company is still publicly traded.

It's certainly not a name that I thought I'd ever be interested in, but much like my wife could not resist the company's bags back in its heyday, I finally could not resist the stock and took an initial position last June. Since then, the company has put up three consecutive positive earnings surprises, including fourth quarter results, which were released last week.

Revenue of $132 million exceeded consensus estimates by about $2 million, while earnings per share was better by a penny at 33 cents. The market's reaction was very interesting; the stock fell 8% the day after the announcement then recovered most of that loss over the next two days.

What I find most intriguing about VRA, the strength of its balance sheet, was reinforced this quarter. The company ended the quarter with $138.4 million, or just under $4 per share in cash and investments, and no debt. That's up from $116.5 million, or $3.21 per share from the same time last year.

What's more, the company continues to buy back stock, to the tune of 934,000 shares over the past year at an average cost $8.47 per share. I am typically a fan of stock buybacks; it can show that management has confidence in turning a wayward ship, like VRA, around. Despite declining sales for five consecutive years, VRA still does a good job of generating cash, while reducing shares outstanding.

I'm not going to sugar coat this story; VRA operates in a difficult retail environment where success or failure are dictated not only by ever-changing consumer tastes, but drastic changes in the way consumers make those purchases. VRA may never again hit the $50 level but at $10, with lots of liquidity and no debt, the company has a fairly long runway in order to rediscover its niche and customer base.

Despite its revenue struggles, it has also remained profitable, albeit at alarmingly declining levels. Theoretically, for its current price of about $10, investors are getting $4 in cash and securities and the rest of the assets, including the brand name, for $6. The company's current enterprise value (Market cap - cash + debt) is just under $250 million, shockingly low for what, despite its declining performance, is a well-recognized brand. This might make an interesting acquisition for a bigger fish looking to build out its brand portfolio, although insiders, which own 44.5% of the company, would have to be on board.

Consensus estimates for next year (42 cents) put the forward price earnings ratio at 24, which does not seem exactly cheap. However, when you consider the amount of liquidity on the books, and fact that the company trades at just 2.05 X net current asset value, it tells a different story.

I'm hoping that down and out VRA becomes RealMoney's version of sixteenth seed UMBC in this year's NCAA Tournament, which against all odds, upset top-seeded Virginia this past Friday, for the biggest upset in NCAA tournament history.

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