When short sellers start circling the wagons, they can drive a
stock down and keep it down for quite some time.
That goes even for a company that has no debt -- and has been
consistently increasing shareholders' equity.
One such company also has high margins and generates
impressively high returns on invested capital. Over the past four
years, this company has maintained a return on invested capital (
) of 35% or higher.
This company is
Vera Bradley (
, which, with a short interest of more than 50%, is one of the
most shorted stocks in the market. While VRA has more than
disappointed investors over the past 12 months, the market could
be offering investors a great entry point for the long term.
The short interest in Vera comes as competition in the women's
accessories market has been heating up. The success of
Michael Kors (
over the past year and a half has kept the short interest
relatively high at Vera. But Kors appears to be much more of a
than to Vera. Rising inventory levels had also managed to catch
short sellers' attention. This was a result of too many Vera
products flooding the market, but a refocus on strategy should
improve inventory management.
Any sign of a turnaround over the next several quarters could
well spur a short-covering rally, with the days to cover (that
is, how many days it would take for all shorts to cover their
position based on average trading volume) at 35. So once the
market realizes that Vera is for real, then the short squeeze
could be fierce.
Vera is a leading designer and retailer of accessories for
women. The company is best known for its handbags, and bills
itself as a lifestyle brand. Its products are in the accessible
luxury category, which appeals to a larger clientele base. The
company has a cultlike following. This comes as the company's
products offer immense versatility.
New designs are released frequently to keep the brand fresh
and encourage customers to shop for the company's latest
offerings. This allows the brand to appeal to all
Irrespective of how the short-sellers feel, there is money to
be made in Vera. The investment thesis is supported by three
pillars. First, shares are extremely undervalued, and the company
is incredibly cheap compared with its peers. Second, the company
has a great business and a strong customer base. Third, the
company has no debt.
||Flickr/Jungle Jim's International Market
Vera is best known for its handbags, and bills
itself as a lifestyle brand. Its products are in the
accessible luxury category, which appeals to a larger
While CEO Michael Ray has done a great job in managing the
company, he's not a "retail guy" -- he's more of a "finance guy"
(which shows in how well run the company is financially). Ray is
also the son-in-law to one of Vera's co-founders. Overall, his
decision to retire as CEO is a major tailwind for the
Vera needs to bring in a retail/marketing CEO to increase
sales and better connect with customers. The company's products
are still in favor, as can be seen in Vera's sales, which more
than doubled between 2009 and this year.
The new CEO also needs to reduce the overall merchandise
assortment. Even Ray has acknowledged that the company has too
many patterns, too many styles and too broad a selection. The
company needs to reduce the number of stock keeping units (SKUs)
and improve product line management. The good news is that the
company is aware of this issue and has already cut 20% of the
SKUs from next spring's collection.
There is also a need for the company to expand its outlet
stores, which it has the balance sheet to do. This is where the
company can sell its discontinued items. Vera can then increase
the exposure of its latest items -- not discontinued items -- on
its website. An increase in outlet stores would help drive sales
and move discontinued products.
The company needs a sales outlet strategy that doesn't weaken
the brand, but strengthens it. This is especially true with Vera,
where it has found that its full-price and outlet shops cater to
different clientele. The outlet stores cater to those who don't
mind last year's style at a discount, and the other group favors
the latest and most recent styles.
Vera already has a strong e-commerce business. In the second
quarter, website traffic increased 20% compared with last year.
Vera has had 45 million visitors to its website this year, and
its Facebook page has 1.4 million followers. The retailer now has
more than 2 million customers in its growing database.
Vera has a strong relationship with
. The company invested in Vera Bradley fixtures for more than 100
Dillard's locations. Dillard's has 283 locations across the U.S.,
and the company has shown an increased willingness to support the
Vera Bradley brand.
Vera is also compelling from a valuation perspective, trading
below major peers. Vera trades with a forward price-to-earnings
(P/E) ratio of 10.5, where Coach is at 12.8 and Michael Kors is
22. On an enterprise value/EBITDA (earnings before interest,
taxes, depreciation and amortization) basis, Vera is at 6.6,
compared with Coach's 8 and Kors' 19.
Risks to Consider:
The first risk is that the overall macro environment remains
weak, where the accessible luxury category is consumer
discretionary. The company's handbags are not necessities, and so
their purchase can be delayed. That has had a significant effect
on the company over the past two years.
Action to Take -->
Vera is in the early innings of its long-term growth story, and
investors with patience will be well-rewarded. The company has
high insider ownership, and once a new CEO is appointed, a lot of
uncertainty will be removed. The potential upside is to $30,
which is a price-to-sales multiple of 2 on Wall Street's 2015
sales estimates, driven by a returns to positive comparable store
sales and improvements in its merchandise assortment.
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