Vera Bradley Is Still Poised for a Major Rebound

I've been touting Vera Bradley since last May, when it sat at south of $5. At that time, its fiscal 2020 estimate was set at $0.70 putting its forward price-to-earnings at just 6.1-times. Since then, and despite Covid-related shutdowns, VRA has performed well on fundamentals and as a stock. As of 4 p.m. on Friday, the shares sold for $7.98, up 63.5% from my recommended buy price. Last May, I also noted the juicy premiums available for selling VRA's Nov. 20, 2020 expiration date puts. Anyone who shorted those $5.00 and/or $7.50 strike price puts saw them expire worthless. That's the best-case scenario for option sellers. Ten contracts of the $5 strike would have netted $1,400. The same number of contracts on the $7.50 strike would have led to a hefty $3,000 gain if simply held through expiration and allowed to expire. What happened on fundamentals from May through the present? April quarter results showed a big loss as the stores were closed due to virus-related issues. That should not have surprised anybody. What did shock investors, though, was the company's quick return to profitability. End of July numbers showed an unexpectedly strong 42 cent profit. That compared with just 17 cents year over year. When those earnings were released the shares popped up from just over $5 to $8.65 (see chart below). Traders apparently were skeptical if that trend was sustainable, though. By Sept. 30, VRA was back at $6.05 giving us a second chance to buy in cheap. When fiscal Q3 was announced VRA once again handily beats estimates, earning adjusted profits of 30-cents, 25% above expectations. After an initial move higher Vera inexplicably gave back some ground, dipping to $7.12 intraday. Go figure. Afterwards VRA has slowly edged higher, hitting $8.32 on Dec. 28, 2020. As of Friday, VRA fetched just $7.98. That represents just 8.2-times Value Line's 98 cent estimate for its fiscal 2021 earnings per share (FY ends Jan. 31, 2022). VRA has a lot going for it. 2020 EPS will be the highest since 2014. A further 36.1% profit surge is expected next year. The firm is net debt-free (corporate cash exceeds total debt). VRA now trades at a discount to book value. Previous years' peaks have come with the stock selling for three-to-seven times book value. Vera's multiple is now just a fraction of its 18.3-times typical valuation. Even a partial reversion-towards-the-mean valuation of 15.5-times forward earnings justifies a 12-month target price of about $15.19. That implies year-ahead upside of greater than 90%. That goal is not far fetched. VRA peaked between $12.83 and $39.48 during each of the eight years stretching from 2012 through 2019. It hit $11.91 last January just ahead of the Covid-crisis. With profits now higher and rising, there's no reason to think VRA won't be $15 - $25 within 12 to 24 months. Yahoo Finance is in general harmony with my optimistic mood on VRA. It agrees with the idea that fiscal 2021 EPS will be much improved. VRA's seasonally weak Q1 is the key to that profit surge. It figures to be a loss of just 14 cents this time around against the shutdown impacted loss of 66 cents a year earlier. The company's next quarterly report is due for release on Mar. 10, 2021. If VRA hasn't jumped significantly before then, it might just be the catalyst to unleash the stock's next big uptick. Option-minded players who already booked gains on VRA's Nov. 2020 puts might wish to initiate new short positions in its Aug. 20, 2021 expiration date $7.50, $10 or even $12.50 puts. Actual option prices on Friday, with VRA at $7.98, are shown below. Worst-case, forced purchase prices dipped to either $6.05, $7.00 or $7.50 depending on the strike prices employed. Margins of safety ranged from 6%, on the more aggressive deep-in-the-money $12.50s, to as high as 24.1% on the conservative $7.50 strike. Owning VRA at a $6.05 net purchase price would have been a winning position for all but six months dating back more than eight full years. Option buyers have been willing to pay relatively high premiums for the right to buy VRA at $10 - $15 through Aug. 20, 2021. Owners of Vera Bradley shares willing to cap potential gains can capture $1.05 by selling $10 covered calls, at least 55-cents for its $12.50s. $15 strike price Aug. calls are fetching around 30 to 35 cents per share. Those are all excellent synthetic dividends over the 222-day holding period through expiration day. Even the lowest strikes mentioned offer total upside to $11.05 from $7.98. Any move to $10 or higher would provide a rise of $3.07 per share or 38.4% from the trade inception price. Pocketing $1.05 on a $7.98 stock equals 13.15% in downside protection, plus the same percentage in immediate income. Selling $12.50 calls would allow for up to $5.07 per share maximum gains of 63.5%. Getting called away at $15, plus $0.30 in premium, would get you to $15.30, up 91.7% from the trade inception price. Note, too, that the potential gains for these covered call writers are raw numbers for the 222-days, not annualized rates. Vera Bradley was a market darling not that long ago. Improving fundamentals can lead to that happening again. Buy some VRA shares. Consider selling naked puts or covered calls also if you are comfortable using options.

Vera Bradley Is Still Poised for a Major Rebound

I've been writing about VRA for a while, and here's why it's still got a good move in store.

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