Handbag and fashion accessories firm Vera Bradley (NYSE:VRA) focuses on selling merchandise that it categorizes as accessible fashion. This has helped the company develop a loyal following, but there is much growth potential as the company operates a very small domestic store base. Unfortunately, the stock valuation already reflects much of this growth potential.
VRA’s sales jumped 29% to $109.4 million. Indirect sales improved 6% to account for 49% of total sales and consist of selling Vera Bradley merchandise to more than 3,000 independent retailers in the U.S., as well as online sites such as Overstock.com (Nasdaq:OSTK). The rest of the top line is considered direct sales and consists of revenue from 41 namesake stores. Direct sales jumped 61% on new store openings and same-store sales shot ahead 22.1%.
Operating income jumped 48% to $26.5 million on lower product costs and operating cost growth that was held below the sales growth rate. Operating income reached an impressive 24.2% of sales. However, a large rise in income tax expense sent net income down 17.7% to $14.2 million, or 35 cents per diluted share, though this still came in firmly ahead of analyst estimates.
Full-year sales growth was equally impressive, rising 26.7% to $366.1 million, as indirect sales grew 11% to account for 58.7% of sales. Direct sales again jumped significantly, increasing 57% to account for the rest of sales as comparable sales improved 25.8%. Operating income grew 17% to $53.3 million while net income increased 7% to $46.2 million, or $1.25 per diluted share. Excluding items to align its corporate structure to publicly-trade status, the company stated earnings were $1.20 per diluted share.
The company didn’t provide forward guidance, but analysts currently expect sales for the coming year to grow more than 16%, and reach just over $430 million. Earnings are pegged at $1.28 per share on the recurrence of higher income taxes given the shift from an “S” corporation to a “C” corporation when the company first went public in late 2010.
Vera Bradley has developed a loyal following in a crowded market that includes larger rivals such as Coach (NYSE:COH) and Liz Claiborne (NYSE:LIZ), as well as Gucci and Prada brands sold at retailers like Saks (NYSE:SKS) and Nordstrom (NYSE:JWN). Vera is somewhat differentiated given its merchandise is more affordable in comparison and therefore appeals to a wider market segment, but there are also a wide array of rivals in this market segment.
At a forward P/E of 27, the earnings valuation is quite high. Free cash flow generation is similar to net income and also means the free cash flow multiple is rich. Growth opportunities are substantial in the direct channel as the company only operates 41 stores. Coach operates more than 300 stores to demonstrate the expansion potential. At the lofty valuation, much future growth is already discounted into the share price, though from an operating standpoint the growth remains impressively high. (So you’ve finally decided to start investing. But what should you put in your portfolio? Find out here. See How To Pick A Stock.)