December 21, 2010 - 12:47pm EST by
2010 2011
Price: 41.00 EPS $1.10 $1.25
Shares Out. (in M): 41 P/E 38.0x 34.0x
Market Cap (in $M): 1,650 P/FCF nm nm
Net Debt (in $M): 80 EBIT 70 90
TEV ($): 1,725 TEV/EBIT 25.0x 19.0x
Borrow Cost: NA

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Vera Bradley is another joke of a stock that should also be shorted aggressively.  The company makes all of its profits from its "signature" quilted cotton collection, which many (myself included, but use google to see similar opinions on fashion blogs) find to be be unattractive.  At the very least, this is a style that will have limited appeal by age group and geography.  Yet, even if this brand gets to $1 billion of revenues (from $385 million), it is trading at 18x the earnings that would be attained at that level.


The company currently has 35 stores, and "comps" seem very high based on the very low number of absolute stores and the high number of immature stores in the comp base.  The company has said they can get to 300 stores, so if you take that store base, multiply by $1.5m per store, add $250m of wholesale business (though this should shrink given that is being displaced by the retail outlets), $100m of outlets (generous as the 300 store count should include outlet stores I believe) and $200m of ecommerce (has stayed at 20% of total pretty consistently), you get to $200m at a very generous 20% ebit margin.  The company will have 47 million shares after the current incentive program is disbursed, roughly .75m shares a year for 8 years.  Less the build-out costs and the net debt, this gets you to the 18x eps multiple.


The main cost for this company is cotton, which will compress gross margins 500 bps in 2H11.  Momentum traders do not look that far ahead evidently, but this is the most significant cotton exposure of any retail company that I have found.  In addition, the company is currently buying cotton on the spot market, as their collections are produced 6-9 months ahead of time (buy the cotton, make the fabric, dye it, sew it, etc).


The sell-side has price targets 5-10% below the current price, and the reports that I have read have factual errors (such as the rationale for why new stores won't cannibalize old ones-this is already happening).  In addition, the founders are in their 70's, and it would be "reasonable" (CFO's words) to assume that they will sell more stock at the earliest opportunity.


In any case, this stock came public at $16, printed a very mediocre quarter with comp guidance for the fourth quarter at 10% (versus 33% in Q3), the stock sold off 15% and has since rebounded 40%.  When more shares are issued and the momentum traders lose interest, this stock should be 50-75% lower.


momentum reversal
secondary offering
cotton prices
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