Vera Bradley has plans to close as many as 40 stores in the next two years.
During thee women’s accessories brand’s Q3 earnings call, CEO Robert Wallstrom said the company will shutter 10 stores by the end of the fiscal year and announced plans to close 30 more during FY2020 and FY2021.
The company missed both earnings and sales estimates in the period and has narrowed its guidance for the rest of the year. Share prices for the retailer fell by nearly 10 percent as a result.
In a Nutshell: Store closures will affect 10 full-line stores by the end of the current fiscal year. Over the next two years, Vera Bradley will shut down approximately 30 more full-line stores, primarily following lease expirations. Wallstrom left the door open for fewer closures if performance improves in that timeframe. In contrast, Vera Bradley opened six outlet stores over the last 12 months.
Vera Bradley focused heavily on full-price selling throughout the quarter, which it says helped increase gross profit margin. However, sales were also lower than expected compared to company guidance. Vera Bradley brought no debt out of the quarter and its year-over-year inventory count was down 3.8 percent in the quarter for a total value of $96.3 million.
Wallstrom pointed to several different areas of focus that the organization could improve to help bring it out of the downturn. For one, the brand has tapped into product analysis programs to help determine the most successful prints and patterns of past products and has also “tightened guardrails” around categories, patterns and pricing to better represent the “signature attributes” of the brand. Wallstrom said a tight focus on solids and signature patterns has made its product assortment more predictable. Today, just 10 top selling styles represent 30 percent of total revenue.
Vera Bradley also intends to be less reliant on China for production going forward. Instead, the company will turn its focus to Vietnam and Cambodia. As of the end of this year, roughly 57 percent of Vera Bradley products will still be made in China, but Wallstrom said that number will likely decrease to 25 percent over the next year.
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Sales: Net revenue during Q3 was $97.7 million, down 14 percent from the prior year period. This was at the low end of previous guidance, which predicted profits in the realm of $98 million to $103 million in Q3. Comparable sales were down 16.5 percent for the third quarter. Divided further, comparable store sales decreased 13.1 percent and e-commerce sales decreased 24.8 percent. The company owed this in part to an annual sale event being moved from Q3 to Q2 and said like-for-like sales would only be down 9.5 percent for the quarter if that was taken into account.
Earnings: Net income for the quarter totaled $4.2 million and accounted for a $0.12 increase per diluted share. However, annual earnings-per-share guidance has also been narrowed to $0.57 to $0.60 from a previous guidance of $0.55 to $0.62.
Income was markedly higher than last year’s third quarter, due to additional after-tax charges of $7.9 million. If those charges were excluded, net income for last year’s Q3 would have equaled $8.3 million, nearly double the latest results.
Gross profit percentage increased by 170 basis points in the period, which the company says is a reflection of the emphasis it placed on full-price selling, channel mix changes and reduced product cost.
CEO’s Take: Wallstrom acknowledged Vera Bradley had a tough quarter but pointed to several initiatives he believes will lead the company to a more profitable future.
“Third quarter earnings were modestly below our expectations, primarily due to revenues at the low end of our guidance and a gross margin rate that was slightly below our guidance,” Wallstrom said. “Higher-than-expected shipping costs offset some of our margin expansion, which brought our overall margin rate modestly under guidance. SG&A expenses were in line with expectations.”
“During the quarter, we continued to successfully execute against our Vision 20/20 strategy, our comprehensive plan to strengthen our brand and financial health by substantially lowering clearance sales and reducing our expense structure,” Wallstrom continued. “We lowered our clearance selling by over 70 percent, and our full-price business once again grew by double digits over last year. As a result, we are especially pleased with our year-over-year third quarter gross margin rate improvement.”