Increasing tariffs, higher shipping costs and a challenging handbag market contributed to a 36% drop in Vera Bradley Inc.’s second-quarter earnings.
The Fort Wayne-based handbag and accessories company reported earnings of $5.9 million, or 17 cents per share, for its fiscal second quarter ended Aug. 3, down from $9.3 million, or 26 cents per share, for the same period last year.
The results included $2.8 million of after-tax charges, with half a million of that related to a re-platforming of the company’s information technology systems and the rest to its acquisition of 75% interest in Creative Genius, Inc.
Vera Bradley’s second-quarter revenue rose 5% to $119.8 million from $113.6 million for the prior-year period.
“Vera Bradley’s comparable sales, full-price selling, and customer count were once again up in the quarter, and we successfully managed our expenses,” Rob Wallstrom, the company’s chief executive officer, said in a statement.
“However, retail remains challenging, particularly in the Indirect channel as our partners continue to feel the pressure of a difficult environment, and our total sales fell slightly below our expectations. In addition, gross margins continue to be pressured by increasing tariffs and higher shipping costs.”
Vera Bradley’s second-quarter revenue included $5.4 million from Creative Genius, which does business as Pura Vida Bracelets. Its acquisition of a 75% stake in the La Jolla, California-based company closed July 16.
“We continued to strengthen Vera Bradley’s position as a unique lifestyle brand with our second-quarter acquisition of a majority interest in Pura Vida Bracelets,” Wallstrom said in the statement. “We will share resources and knowledge to grow our brands together.
“Pura Vida is a great strategic fit for us due to their strong expertise in branding and social marketing strategies, as well as robust competencies in e-commerce and subscription-model selling,” he said. “And, Pura Vida has already started to utilize Vera Bradley’s infrastructure and back office support capabilities to nurture its growth.”
The company reported progress with a Vision 20/20 plan it had announced, which established goals to restore full-price selling and reduce clearance revenues drastically while minimizing customer base erosion; driving cash from operations, and reducing its selling, general and administration costs.
“The first stage of Vision 20/20 was to restore brand and company health, and we continue to build upon the progress we have made thus far,” Wallstrom said.
“During the first half of this year, we once again improved the quality of sales in our full-line stores and on verabradley.com by increasing comparable full price selling in these two channels by approximately 10%,” he said. “This is on top of a 20-plus percent increase in the first six months of last year.”
During its second year of a three-year journey with Vision 20/20, the company will focus on expanding its customer base and increasing its profit margin in order to grow sales, he said.
Key areas of focus for Vera Bradley’s 2020 fiscal year, according to Wallstrom, include:
Growth: “Our goal is to return to positive comparable sales growth this year, and we are off to a solid start in the first half, with comparable sales up 3.3%, in line with our expectations and despite a challenging North American handbag market,” he said.
“This improvement is being driven by compelling, innovative product supported by targeted marketing and customer engagement. Customer count is up year-over-year.”
Operational Excellence: “During the second quarter, we began a two-year process of re-platforming our ERP (enterprise resource planning) and other key information systems to become more streamlined, nimble, and efficient in our technology and business processes,” he said.
Ownership: “We will continue to reinforce our culture as an ownership-based model, where every Associate can drive significant value creation through their individual and team efforts.”
Wallstrom told securities industry analysts during a conference call with them on Vera Bradley’s second-quarter earnings the company will start to see gross margin benefits during the fourth quarter from relocating its China production.
But, improved sourcing efficiencies will be more than offset by the impact of higher China tariffs, he said.
Vera Bradley was importing some products from China that had been excluded from tariffs, which will be affected by new tariffs imposed between Sept. 1 and Dec. 15.
“So by the end of the year, if there are no changes, we will have incremental tariffs for 100% of our purchases out of China,” Wallstrom said.
Vera Bradley’s China exposure had dropped to 25% of its products from 54% last year.