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VRA > SEC Filings for VRA > Form 10-K on 3-Apr-2013All Recent SEC Filings

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Form 10-K for VERA BRADLEY, INC.


3-Apr-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion in conjunction with the consolidated financial statements and accompanying notes and the information contained in other sections of this report, particularly under the headings "Risk Factors," "Selected Financial Data" and "Business." This discussion and analysis is based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. The statements in this discussion and analysis concerning expectations regarding our future performance, liquidity, and capital resources, as well as other non-historical statements in this discussion and analysis, are forward-looking statements. See "Forward-Looking Statements." These forward-looking statements are subject to numerous risks and uncertainties, including those described under "Risk Factors." Our actual results could differ materially from those suggested or implied by any forward-looking statements.

Executive summary

Below is a summary of our strategic progress and financial highlights:

Strategic Progress

We successfully opened 20 new full-price and outlet stores during the year in both current and underpenetrated markets.

We continued to build on our positive momentum at Dillard's and are now in all 284 locations, as of the launch of the Spring assortment in the fourth quarter.

Nearly 62 million people visited VeraBradley.com, a 45% increase over the prior year. We consistently rank among the top in number of annual website visits compared to our most closely related peer companies.

We adjusted our release cadence to better align with when our customer shops.

In November, we completed the expansion of our distribution center, doubling the capacity to 400,000 square feet to better serve our customer base.

We contributed approximately $1 million to the Vera Bradley Foundation supporting breast cancer research.

Our August event at the iconic Stage at Isetan Shinjuku location in Tokyo further demonstrated that our customer base in Japan enjoys the brand and product in a similar way as in the U.S.

Financial Highlights

Net revenues increased 17.4% to $541.1 million in fiscal 2013 compared to $460.8 million in fiscal 2012.

Direct segment sales increased 29.9% to $292.6 million in fiscal 2013 compared to $225.3 million in fiscal 2012. Comparable store net sales for fiscal 2013 increased 3.4%.

Indirect segment sales increased 5.5% to $248.6 million in fiscal 2013 compared to $235.6 million in fiscal 2012.

Gross profit was $308.3 million (57.0% of net revenue) in fiscal 2013 compared to $257.6 million (55.9% of net revenue) in fiscal 2012.

Selling, general and administrative expenses were $204.4 million (37.8% of net revenue) in fiscal 2013 compared to $169.4 million (36.8% of net revenue) in fiscal 2012.

Operating income was $110.1 million (20.4% of net revenue) in fiscal 2013 compared to $96.2 million (20.9% of net revenue) in fiscal 2012.


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Net income was $68.9 million in fiscal 2013 compared to $57.9 million in fiscal 2012.

Diluted net income per share increased 18.9% to $1.70 in fiscal 2013 from $1.43 in fiscal 2012.

Cash and cash equivalents were $9.6 million at February 2, 2013.

Cash generated from operations was $51.5 million in fiscal 2013 and was used to fund capital expenditures of $35.9 million and pay down debt by $10 million in fiscal 2013.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures.

Net Revenues

Net revenues reflect revenues from the sale of our merchandise and from distribution and shipping and handling fees, less returns and discounts. Revenues for the Direct segment reflect sales through our full-price and outlet stores, department store locations in Japan, our websites, verabradley.com and verabradley.co.jp, and our annual outlet sale in Fort Wayne, Indiana. Revenues for the Indirect segment reflect sales to Indirect specialty retailers and department stores.

Comparable-Store Sales

Comparable-store sales are calculated based upon our stores that have been open at least 12 full fiscal months as of the end of the reporting period. Remodeled stores are included in comparable-store sales unless the store was closed for a portion of the current or comparable prior period or the remodel resulted in a significant change in square footage. Some of our competitors and other retailers calculate comparable or "same store" sales differently than we do. As a result, data in this report regarding our comparable-store sales may not be comparable to similar data made available by other companies. Non-comparable store sales include sales from stores not included in comparable-store sales. Comparable store sales do not include e-commerce sales.

Measuring the change in year-over-year comparable-store sales allows us to evaluate how our store base is performing. Various factors affect our comparable-store sales, including:

Overall economic trends;

Consumer preferences and fashion trends;

Competition;

The timing of our releases of new patterns and collections;

Changes in our product mix;

Pricing;

The level of customer service that we provide in stores;

Our ability to source and distribute products efficiently;

The number of stores we open and close in any period; and

The timing and success of promotional and advertising efforts.

Gross Profit

Gross profit is equal to our net revenues less our cost of sales. Cost of sales includes the direct cost of purchased and manufactured merchandise, distribution center costs, operations overhead, duty, and all inbound freight costs incurred. The components of our reported cost of sales may not be comparable to those of other retail and wholesale companies.


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Gross profit can be impacted by changes in volume, fluctuations in sales price, operational efficiencies, such as leveraging of fixed costs, promotional activities, such as free shipping, and commodity prices such as cotton, and labor in Asia.

Selling, General, and Administrative Expenses (SG&A)

SG&A expenses include selling; advertising, marketing, and product development; and administrative. Selling expenses include Direct business expenses such as store expenses, employee compensation, and store occupancy and supply costs, as well as Indirect business expenses consisting primarily of employee compensation and other expenses associated with sales to Indirect retailers. Advertising, marketing, and product development expenses include employee compensation, media costs, creative production expenses, marketing agency fees, new product design costs, public relations expenses, and market research expenses. A portion of our advertising expenses may be reimbursed by Indirect retailers, and such amount is classified as other income. Administrative expenses include employee compensation for corporate functions, corporate headquarters occupancy costs, consulting and software expenses, and charitable donations.

Other Income

We support many of our Indirect retailers' marketing efforts by distributing certain catalogs and promotional mailers to current and prospective customers. Our Indirect retailers reimburse us for a portion of the cost to produce these materials. Reimbursement received is recorded as other income. The related cost to design, produce, and distribute the catalogs and mailers is recorded as SG&A expense. Other income also includes proceeds from the sales of tickets to our annual outlet sale and the gain on the sale of certain life insurance policies.

Operating Income

Operating income equals gross profit less SG&A expenses plus other income. Operating income excludes interest income, interest expense, and income taxes.

Income Taxes

Prior to October 3, 2010, we were taxed as an "S" Corporation for federal income tax purposes under Section 1362 of the Internal Revenue Code, and therefore were not subject to federal and state income taxes (subject to exception in a limited number of state and local jurisdictions that do not recognize the "S" Corporation status). On October 3, 2010, our "S" Corporation status automatically terminated and we became subject to corporate-level federal and state income taxes at prevailing corporate rates.


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Results of Operations

The following tables summarize key components of our consolidated results of operations for the last three fiscal years, both in dollars and as a percentage of our net revenues.

The Company utilizes a 52-53 week fiscal year ending on the Saturday closest to January 31. As such, fiscal year 2013 ended on February 2, 2013 and reflected a 53-week period; fiscal years 2012 and 2011 ended on January 28, 2012, and January 29, 2011, respectively and reflected 52-week periods. The inclusion of the 53rd week in fiscal 2013 resulted in incremental net revenues of approximately $4.9 million and approximately $0.02 per diluted share.

                                                             Fiscal Year Ended (1)
                                            February 2,           January 28,           January 29,
($ in thousands)                               2013                  2012                  2011
Statement of Income Data:
Net revenues                               $     541,148         $     460,843         $     366,057
Cost of sales                                    232,867               203,220               156,910

Gross profit                                     308,281               257,623               209,147
Selling, general, and administrative
expenses                                         204,412               169,427               163,053
Other income                                       6,277                 7,975                 7,225

Operating income                                 110,146                96,171                53,319
Interest expense, net                                679                 1,147                 1,625

Income before income taxes                       109,467                95,024                51,694
Income tax expense                                40,597                37,103                 5,496

Net income                                 $      68,870         $      57,921         $      46,198

Percentage of Net Revenues:
Net revenues                                       100.0 %               100.0 %               100.0 %
Cost of sales                                       43.0 %                44.1 %                42.9 %

Gross profit                                        57.0 %                55.9 %                57.1 %
Selling, general, and administrative
expenses                                            37.8 %                36.8 %                44.5 %
Other income                                         1.2 %                 1.7 %                 2.0 %

Operating income                                    20.4 %                20.9 %                14.6 %
Interest expense, net                                0.1 %                 0.3 %                 0.4 %

Income before income taxes                          20.2 %                20.6 %                14.1 %
Income tax expense                                   7.5 %                 8.1 %                 1.5 %

Net income                                          12.7 %                12.6 %                12.6 %

The following tables present net revenues by operating segment, both in dollars and as a percentage of our net revenues, and full-price and outlet store data for the last three fiscal years:

                                                             Fiscal Year Ended (1)
($ in thousands, except as otherwise        February 2,           January 28,           January 29,
indicated)                                     2013                  2012                  2011
Net Revenues by Segment:
Direct                                     $     292,564         $     225,287         $     151,118
Indirect                                         248,584               235,556               214,939

Total                                      $     541,148         $     460,843         $     366,057

Percentage of Net Revenues by
Segment:
Direct                                              54.1 %                48.9 %                41.3 %
Indirect                                            45.9 %                51.1 %                58.7 %

Total                                              100.0 %               100.0 %               100.0 %


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                                                               Fiscal Year Ended
                                          February 2,             January 28,             January 29,
                                             2013                    2012                    2011
Store Data (2):
Total stores open at end of
period                                              76                      56                      39
Comparable-store sales increase
(3)                                                3.4 %                  10.9 %                  25.8 %
Total gross square footage at end
of period                                      155,919                 113,504                  74,426
Average net revenues per gross
square foot (4)                          $       1,083           $       1,042           $         851

(1) Fiscal 2013 consisted of 53 weeks. All other fiscal years presented consisted of 52 weeks.

(2) Includes only our full-price and outlet stores. Our first full-price store opened in September 2007 and our first outlet store opened in November 2009.

(3) Comparable-store sales are the net revenues of our stores that have been open at least 12 full fiscal months as of the end of the period. Increase or decrease is reported as a percentage change of the comparable-store sales for the same period in the prior fiscal year. Remodeled stores are included in comparable-store sales unless the store was closed for a portion of the current or comparable prior period or the remodel resulted in a significant change in square footage. Comparable store sales do not include e-commerce sales. Calculation excludes sales for the 53rd week in fiscal 2013.

(4) Dollars not in thousands. Average net revenues per gross square foot are calculated by dividing total net revenues for our stores that have been open at least 12 full fiscal months as of the end of the period by total gross square footage for those stores.

Fiscal 2013 Compared to Fiscal 2012

Net Revenues

For fiscal 2013, net revenues increased $80.3 million, or 17.4%, to $541.1 million, from $460.8 million for fiscal 2012, primarily due to increased volume and an additional 7 days included in fiscal 2013 compared to fiscal 2012, which added net revenues of $4.9 million.

Direct. For fiscal 2013, net revenues increased $67.3 million, or 29.9%, to $292.6 million, from $225.3 million for fiscal 2012. This growth resulted primarily from a $44.8 million increase in revenues related to additional full-price and outlet stores; a comparable-store sales increase of $3.4 million, or 3.4%, primarily driven by the improved performance of the product assortment and various in-store events to drive traffic; and an $18.9 million increase in e-commerce revenues due to the continued growth in website traffic. The number of our stores grew from 56 at the end of fiscal 2012 to 76 at the end of fiscal 2013.

Indirect. For fiscal 2013, net revenues increased $13.0 million, or 5.5%, to $248.6 million, from $235.6 million for fiscal 2012, due to growth in the number of department store locations and increased sales volume to our specialty retailers.

Gross Profit

For fiscal 2013, gross profit increased $50.7 million, or 19.7%, to $308.3 million, from $257.6 million for fiscal 2012. As a percentage of net revenues, gross profit increased to 57.0% for fiscal 2013, from 55.9% for fiscal 2012. The increase in gross margin was due primarily to operational efficiencies, lower freight expense, positive channel mix, and lower input costs.

Selling, General and Administrative Expenses (SG&A)

For fiscal 2013, SG&A expenses increased $35.0 million, or 20.6%, to $204.4 million, from $169.4 million for fiscal 2012. As a percentage of net revenues, SG&A expenses were 37.8% and 36.8% for fiscal 2013 and fiscal 2012, respectively. The increase as a percentage of net revenues in SG&A expenses was due primarily to increased headcount expenses and increased store operating expenses.


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Other Income

For fiscal 2013, other income decreased $1.7 million, or 21.3%, to $6.3 million, from $8.0 million for fiscal 2012. The decrease in other income was in line with a decrease in associated advertising costs related to mailers for our specialty retailers.

Operating Income

For fiscal 2013, operating income increased $14.0 million, or 14.5%, to $110.1
million, from $96.2 million for fiscal 2012. As a percentage of net revenues,
operating income was 20.4% and 20.9% for fiscal 2013 and fiscal 2012,
respectively (in thousands).



                                                  Fiscal Year Ended
                                           February 2,          January 28,             $              %
                                              2013                 2012              Change         Change
Operating Income:
Direct                                    $      85,059        $      68,097        $  16,962          24.9 %
Indirect                                        101,059               93,042            8,017           8.6 %

                                                186,118              161,139           24,979          15.5 %
Less: Unallocated corporate expenses            (75,972 )            (64,968 )        (11,004 )        16.9 %

Operating income                          $     110,146        $      96,171        $  13,975          14.5 %

Direct. For fiscal 2013, operating income increased $17.0 million, or 24.9%. As a percentage of Direct segment net revenues, operating income in the Direct segment was 29.1% and 30.2% for fiscals 2013 and 2012, respectively. This decrease as a percentage of net revenues in the Direct segment was primarily due to increased store operating expense.

Indirect. For fiscal 2013, operating income increased $8.0 million, or 8.6%. As a percentage of Indirect segment net revenues, operating income in the Indirect segment was 40.7% and 39.5% for fiscals 2013 and 2012, respectively. This increase as a percentage of net revenues in the Indirect segment resulted primarily due to leverage of the relatively fixed SG&A expenses, against sales growth.

Corporate Unallocated. For fiscal 2013, unallocated expenses increased $11.0 million, or 16.9%, primarily as a result of increased corporate personnel and marketing costs.

Interest Expense, Net. For fiscal 2013, net interest expense decreased $0.5 million, or 40.8%, to $0.7 million, from $1.1 million in fiscal 2012. The decrease was due to lower average borrowing levels in fiscal 2013.

Income Tax Expense. For fiscal 2013, we recorded income tax expense of $40.6 million at an effective tax rate of 37.1%, compared to 39.0% for fiscal year 2012. The effective tax rate reduction was primarily related to state income tax credits associated with the completion of our distribution center expansion and discrete items recorded primarily during the third quarter. The impact of these items on the effective tax rate was approximately 1.2% for the fiscal year. During fiscal 2012, there were other permanent items that caused a higher rate which did not recur during fiscal 2013 causing the rate to decrease approximately 0.5% compared to the prior year. The effective tax rate also reflects a loss for the Japanese operations for which a tax benefit was not recognized.


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Fiscal 2012 Compared to Fiscal 2011

Net Revenues

For fiscal 2012, net revenues increased $94.8 million, or 26.0%, to $460.8 million, from $366.1 million for fiscal 2011, primarily due to increased volume.

Direct. For fiscal 2012, net revenues increased $74.2 million, or 49.1%, to $225.3 million, from $151.1 million for fiscal 2011. This growth resulted from a $28.6 million increase in e-commerce revenues due primarily to greater traffic resulting from marketing initiatives, a $39.4 million increase in non-comparable store sales, and a $6.2 million, or 10.9%, increase in comparable-store sales. The number of our stores grew from 39 at the end of fiscal 2011 to 56 at the end of fiscal 2012.

Indirect. For fiscal 2012, net revenues increased $20.6 million, or 9.6%, to $235.6 million, from $214.9 million for fiscal 2011, due to increased sales volume to our specialty retailers, driven by strong demand for carryover patterns, fall product assortment, and the launch of rolling luggage.

Gross Profit

For fiscal 2012, gross profit increased $48.5 million, or 23.2%, to $257.6 million, from $209.1 million for fiscal 2011. As a percentage of net revenues, gross profit decreased to 55.9% for fiscal 2012, from 57.1% for fiscal 2011. The decrease in gross margin was due primarily to higher cotton and labor costs and higher sales of certain retired inventory sold at lower than normal gross margins, partially offset by an overall revenue mix shift toward higher margin, retail-store sales and e-commerce.

Selling, General and Administrative Expenses (SG&A)

For fiscal 2012, SG&A expenses increased $6.3 million, or 3.9%, to $169.4 million, from $163.1 million for fiscal 2011. As a percentage of net revenues, SG&A expenses were 36.8% and 44.5% for fiscal 2012 and fiscal 2011, respectively. The decrease as a percentage of net revenues in SG&A expenses was due primarily to $21.9 million of compensation expense related to restricted-stock awards and a decline in professional fees related to our transition from a private to a public company both of which were included in fiscal 2011. In addition, SG&A expenses declined as a percentage of net revenues due to leverage of our relatively fixed cost structure of the Indirect segment, partially offset by our investment into the Japanese market.

Other Income

For fiscal 2012, other income increased $0.8 million, or 10.4%, to $8.0 million, from $7.2 million for fiscal 2011, due primarily to increased reimbursement of our advertising expenses by our specialty retailers. The increase was due in part to sales of tickets to our annual outlet sale and the gain on the sale of certain life insurance policies.


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Operating Income

For fiscal 2012, operating income increased $42.9 million, or 80.4%, to $96.2 million, from $53.3 million for fiscal 2011. As a percentage of net revenues, operating income was 20.9% and 14.6% for fiscal 2012 and fiscal 2011, respectively. This increase as a percentage of net revenues was due primarily to the $21.9 million of compensation expense related to restricted-stock awards in the prior year. Excluding this compensation expense in the prior year, operating income as a percentage of sales increased due to sales-driven leverage of SG&A on our high growth of net revenues, partially offset by higher cotton and labor prices and our investment into the Japanese market (in thousands):

                                                  Fiscal Year Ended
                                           January 28,          January 29,            $             %
                                              2012                 2011              Change       Change
Operating Income:
Direct                                    $      68,097        $      46,443        $ 21,654         46.6 %
Indirect                                         93,042               91,680        $  1,362          1.5 %

                                                161,139              138,123          23,016         16.7 %
Less: Unallocated corporate expenses            (64,968 )            (84,803 )        19,835         23.4 %

Operating income                          $      96,171        $      53,320        $ 42,851         80.4 %

Direct. For fiscal 2012, operating income increased $21.7 million, or 46.6%, due to an increase in gross profit, offset in part by increased selling expenses related to store operational costs and costs associated with our market entry into Japan.

Indirect. For fiscal 2012, operating income increased $1.4 million, or 1.5%, primarily from an increase in revenue and sales-driven leverage of SG&A, offset in part by a decline in gross margin, as previously discussed.

Corporate Unallocated. For fiscal 2012, unallocated expenses decreased $19.8 million, or 23.4%, primarily as a result of stock-based compensation expense and bonuses paid to recipients of restricted-stock awards in the prior-year period.

Interest Expense, Net

For the fiscal year ended January 28, 2012, net interest expense decreased $0.5 million, or 29.5%, to $1.1 million, from $1.6 million in the fiscal year ended January 29, 2011. The decrease of $0.5 million was due primarily to a write off in the same period of the prior-year of $0.2 million of unamortized debt-issuance costs in connection with the amendment and restatement of the credit agreement. The remaining $0.3 million was attributable to lower average borrowing rates in the fiscal year ended January 28, 2012.

Income Tax Expense

For fiscal 2012, we recorded income tax expense of $37.1 million at an effective tax rate of 39.0%, which is consistent with U.S. federal and state statutory rates. The change in our effective tax rate from fiscal 2011 reflects a more normalized rate due to being subject to corporate-level U.S. federal and state income taxes for the full fiscal year. The effective tax rate also reflects a loss for the Japanese operations for which a tax benefit was not recognized.

For fiscal 2011, we recorded income tax expense of $5.5 million. This expense was comprised of (1) $6.8 million of expense related to activity during the portion of fiscal 2011 that we were a "C" Corporation (October 3, 2010, through January 29, 2011) at an effective tax rate of 51.2% and (2) $0.5 million of state taxes related to taxing jurisdictions that did not recognize our previous "S" Corporation status, offset in part by a one-time deferred tax benefit of $1.8 million recognized upon the termination of our "S" Corporation status. Included in tax expense


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