Why Shares of Vera Bradley Inc. Are Out of Fashion Today

By Markets Fool.com

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

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What: Shares of Vera Bradley slumped on Wednesday after the company fell short of analyst estimates when it reported first-quarter earnings. At 11:30 Wednesday morning, the stock was down about 10%.

So what: Vera Bradley reported revenue $101.4 million, down 9.9% year-over-year and about $4 million shy of analyst estimates. Comparable-store sales declined by 22.3% year-over-year during the quarter, while e-commerce sales decreased by 9.7%, with new store growth partially offsetting these declines. CEO Robert Wallstrom stated in the company's press release, "We are not attracting enough new customers to the brand, and traffic and sales are still very challenging."

On a non-GAAP basis, Vera Bradley broke even for the quarter, missing analyst estimates by two cents. This is down from a non-GAAP net income of $0.17 per share in the first quarter of 2014. On a GAAP basis, the company lost $0.10 per share, compared to a net income of $0.16 per share in the first quarter of 2014.

Vere Bradley's guidance also left a lot to be desired. The company expects revenue between $480 million and $495 million for the full year, down from $509 million during 2014. Selling, general, and administrative costs are expected to rise to between 46.8% and 47.4% of revenue, compared to 41% in 2014, leading to a non-GAAP EPS between $0.64 and $0.74. Vera Bradley's earnings have been in decline for the past two years, and the company now expects to extend that streak to three years.

Now what: The success of Vera Bradley depends on the strength of its brand, and its brand is currently in trouble. The huge declines in comparable-store sales and in e-commerce sales point to a company having serious issues attracting customers.

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When the brand is clicking with consumers, companies like Vera Bradley can generate extremely high margins. In 2012, for example, the company managed an operating margin of 20.3%, pulling in $110 million in operating income. But margins can also quickly collapse if the company is forced to discount in order to sell merchandise, or if store traffic dries up. In 2014, while revenue was down only about 6% from 2012, operating profit slumped 42%, bringing the operating margin down to 12.6%.

Management has a long-term vision of turning Vera Bradley into a $1 billion business with high-teen operating margins, but with the way things are currently going, I wouldn't hold my breath. Investors considering buying Vera Bradley on this dip, pointing to its low P/E ratio, should be aware of how quickly earnings for a fashion company like Vera Bradley can evaporate.

The article Why Shares of Vera Bradley Inc. Are Out of Fashion Today originally appeared on Fool.com.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.