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30-Day Delays Pressure Vera Bradley to Turn to Air Freight

Vera Bradley saw total revenues increase to $147 million, up 11.6 percent from a year ago, but below consensus analyst estimates of $153.6 million after supply chain disruptions slowed its business.

Amid the tepid performance, which also included lower-than-expected adjusted earnings per share, the handbags and luggage designer lowered its full-year sales and earnings guidance.

In a Nutshell: In an earnings call, Vera Bradley CEO Rob Wallstrom said second-quarter results across the company were largely impacted by the current supply chain challenges, indicating that the lifestyle brand has seen average delays of 30 days before a full assortment of goods was available for each product launch.

Covid-related port closures as well as factory closures in Indonesia and Vietnam, where the company sources a “mid-teens” percentage of Vera Bradley products, have exacerbated the delivery issues, according to executive vice president and chief financial officer John Enwright.

Wallstrom said the company does not expect this situation to improve in the fall season, anticipating that shipping delays and freight expense increases will continue for the near future.

“It’s been difficult. We’ve moved some of our products with lower average unit retail and higher volume size products via air, which is a very expensive alternative,” Wallstrom said in the call. “We’re trying to really work through the complexity and determine how we manage through that process. Do we move to air? What do we leave on boat? But that’s why I think there’s been a higher flow through of that expense that we anticipated. We did not anticipate using air as predominantly as we have at this point.”

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Time-sensitive items such as holiday patterns would be accelerated for air freight, the CEO said.

Enwright said air freight expenses will be more significant in the second half of the year, including the holiday season, than in the first half.

Given the supply chain challenges, Vera Bradley is assessing changes of country of origin, but those changes wouldn’t be put in motion until after 2022. The company is already in the process of moving sourcing out of Myanmar, with most of that being shifted to Indonesia. After the changes, Enwright anticipates the majority of products would still come from Southeast Asia.

Total quarter-end inventory was $148 million, up 8.7 percent compared to $136.2 million at the end of the second quarter last year. Inventory for the Vera Bradley brand was “flat to down,” according to Enwright. The company’s Pura Vida jewelry brand was the primary culprit for the inventory increase, the company said.

Management expects year-over-year inventory should be down by approximately 5 percent by the end of the fiscal year.

Gross margins were negatively impacted by two major forces: higher inbound and outbound freight expenses, as well as higher tariffs from previously duty-free countries that Vera Bradley sources from, where duty-free status expired at the beginning of the calendar year.

Gross margin was 54.6 percent of net revenues, down 5.8 percentage points from 60.4 percent of net revenues, in the prior period. A year earlier, the company expanded its year-over-year consolidated gross profit rate by approximately 3 percentage points through cotton mask sales, which was not replicated in 2021.

Net capital spending for the second quarter and six months totaled $1.8 million and $2.3 million, respectively.

Cash, cash equivalents and investments as of July 31, 2021 totaled $76.5 million compared to $77.1 million at the end of last year’s second quarter. The company has a debt-free balance sheet, with no borrowings on its $75 million asset-based lending credit facility at quarter end.

Vera Bradley now expects consolidated net revenues of $550 million to $565 million for the full year, down from the initial guidance of $555 million to $575 million. Earnings per share estimates dipped slightly to a range of 80 cents to 95 cents from a previous estimate of 85 cents to $1.

Consolidated gross margins are now expected to be between 54.6 percent to 55.3 percent, down from initial estimates of 56 percent to 57 percent.

The company isn’t officially providing quarterly guidance, but expects year-over-year revenues to increase in the high single digits for Vera Bradley, and by over 20 percent for Pura Vida.

Net Sales: Net revenues were$147 million, up 11.6 percent from the $131.8 million generated in 2020’s second quarter. On a comparable basis, the lifestyle brand said sales were down 1.3 percent from pre-pandemic second quarter revenue levels, and Pura Vida sales were up nearly 7 percent on a two-year basis.

In the Vera Bradley direct segment, revenues totaled $97.1 million, a 19.6 percent increase over $81.2 million a year ago.

Revenues at the Vera Bradley indirect segment, which covers wholesale sales, totaled $16.8 million, a 5.1 percent decrease from $17.7 million in the prior year second quarter, reflecting a reduction in orders primarily related to a lower volume of mask sales, partially offset by a rebound in specialty and key account orders in other product categories that were negatively impacted by Covid-19 in 2020.

Pura Vida segment revenues totaled $33.1 million, a 0.8 percent increase over $32.8 million in the prior year.

Net Earnings: For the current year second quarter, Vera Bradley’s consolidated net income totaled $9.1 million, or 26 cents per diluted share. These results included $400,000 of net-after-tax charges related to intangible asset amortization.

The total comes out 25.4 percent ahead of last year, when the backpacks and accessories seller brought in consolidated net income of $7.2 million, or 42 cents per diluted share. These results included $3.7 million of net-after-tax charges, comprised of $1.5 million of intangible asset amortization, $1.1 million of IT re-platforming expenses, as well as $1.1 million for a change in the income tax estimate related to first quarter charges.

On an adjusted basis, Vera Bradley’s consolidated second quarter net income totaled $9.5 million, or 28 cents per diluted share, a 12.8 percent dip from the $10.9 million consolidated net income in the year prior, or 32 cents per diluted share.

The company’s second-quarter consolidated operating income totaled $12.6 million, or 8.6 percent of net revenues, compared to $17.5 million, or 13.3 percent of net revenues, in the prior year second quarter.

CEO’s Take: Wallstrom offered commentary on some of company’s product segments.

“Sales of our travel products have indeed been robust exceeding our 2019 levels,” Wallstrom said. “On the other hand, although the overall back-to-school market has been strong, sales for non-tech and accessory elements (products that aren’t laptop, tablet and phone cases) did not return to pre-pandemic levels. Similarly, we saw growth in our back-to-campus business over 2020, but sales did not exceed the 2019 levels.”