October 21, 2010, 7:46 am

VRA - Vera Bradley

Analysis


2010-10-14
VRA - Vera Bradley

VRA - Vera Bradley plans on offering 12.65 million shares(assuming over-allotments) at a range of $14-$16. Insiders will be selling 8.65 million shares in the deal making of the majority of shares offered. Baird and Piper Jaffray are leading the deal, Wells Fargo, KeyBanc, and Lazard are co-managing. Post-ipo VRA will have 40.5 million shares outstanding for a market cap of $608 million on a pricing of $15. Ipo proceeds will go to insiders as VRA shifts from an 'S' corporation to a public company.

Co-Founder Barbara Bradley Baekgaard will own 26% of VRA post-ipo.

From the prospectus:

'Vera Bradley is a leading designer, producer, marketer and retailer of stylish and highly-functional accessories for women.'

28 year old VRA primarily sells women's handbags.

I like the company description from VRA: 'Our brand vision is accessible luxury that inspires a casual, fun and family-oriented lifestyle.' Wonder how much they paid a marketing agency to come up with that line? 'accessible luxury' means fashion at a reasonable price.

VRA's bags seem to be defined as a bit flashy with a myriad of colors and designs. Pricepoints range from $20-$80 with most of the handbags in the $50-$60 range.

Handbags can be viewed here:

http://www.verabradley.com/category/Category/Handbags/641/pc/638.
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Indirect and direct sales channels.

Indirect - 3,300 independent retailers sell VRA handbags and accessories, nearly all in the US. In 2005/2006 VRA shifted most of manufacturing offshore.

Direct - 31 Vera Bradley branded stores, two outlets, verabradley.com and annual outlet sale at Indiana HQ. First store was opened in 2007. Same store sales increases have been quite impressive of late. 2009 saw a 36% same store sales increase and first 6 months of current fiscal year has seen an additional 26% same store sales increase.

Currently indirect revenues account for approximately 60% of total revenues while direct revenues make up 40%. Expect direct revenues to annually increase as a % of revenues as VRA opens new stores.

Growth plans - VRA believes that there is support in the US for up to 300 retail stores. VRA plans on opening 9 full priced and 3 outlet stores in 2011, 14-16 stores in 2012 and 14-20 stores annually thereafter. Very aggressive growth plans when one considers they've just 31 full price stores currently.

Handbags make up 52% of revenues, accessories 32%. Accessories include wallets, ID cases, eyeglass cases, cosmetics, paper and gift products and eyewear.

Competitors include Coach, Nine West, Liz Claiborne and Dooney & Bourke.

Financials

One red mark on this deal is the existence of $80 million in net debt post-ipo.

Fiscal year ends 1/31 annually.

40% tax rate. In number below I plugged in the 40% tax rate for 2010. Pre-ipo VRA has been a pass through 'S' Corporation and did not pay corporate income taxes.

VRA has been profitable since at least 2005.

With the global economic slowdown growth was negligible from 2007-2009. First 2 quarters of 2010(FY ending 1/31/11) have been outstanding however. As noted above same store sales growth has been very impressive recently and indirect sales channels have also been quite strong. The impressive first two quarters of the current fiscal year have been strong enough alone to recommend this deal in range.

2010(ending 1/31/11) - Revenues should grow 27% to $367 million. Gross margins strong at 59%. Operating margins of 19%. Plugging in debt servicing and taxes, net margins at 11%. EPS of $1.02. On a pricing of $15, VRA would trade 15 X's 2010 earnings.

2011 - Aggressive store opening plans for 2011 should help boost revenues. I would be uncomfortable plugging in recent same store sales increases going into 2011. It could happen of course, but I'd rather scale that back to mid single digits as opposed to the 20%+ same store sales increases of the past 18 months. In addition forecasting for 2011 is difficult until we see the holiday 2010 numbers early next year.Revenues should increase by 15%-20% in 2011 to $435 million. Gross margins should remain roughly the same at 59%. Economies of scale do kick in a bit, improving operating margins to 20%-21%. Net after tax margins of 12%. EPS of $1.25-$1.30. On a pricing of $15, VRA would trade 12 X's 2011 earnings.

Conclusion - Based on recent growth and impressive same store sales increases, the range here looks quite attractive. Deal should definitely work off pricing. Longer term success will be determined by VRA's aggressive store opening plans. If these stores are a 'hit' and same store sales continue to be solid, pricing range here will be left far behind in a few years. If VRA ends up adding to their debt to fund lackluster new store opening there will be problems. That will be decided later however. Short and mid-term, this deal looks priced to work in the $14-$16 range.

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