Vera Bradley's Shares Slip Following Its Earnings Release

Vera Bradley released third-quarter results after the market closed on Dec. 11, beating on both the top and bottom lines; however, fourth-quarter guidance came in below expectations. The weak guidance caused an initial decline in the stock after-hours, but shares rose the next day -- only to fall once again. Let's take a look at the report to see what exactly is going on, and what you should do from here.

The designer
Vera Bradley is a leading designer and retailer of handbags and accessories for women. Its offerings are aimed at all age ranges, from young girls and teens to mothers and grandmothers. Its products are sold through its company-owned locations and website, as well as at more than 3,400 specialty retailers, select department stores, and third-party e-commerce sites. The company is also very active in supporting breast cancer research, through the Vera Bradley Foundation for Breast Cancer. 

Source: VeraBradley.com. 

The results
Vera Bradley's recent earnings that exceeded analyst expectations. Here's an overview:

Source: Vera Bradley earnings report. 

EPS decreased 15.9% and revenue fell 5.9%, due to comparable-store sales declining 6.5%. Gross profit fell 10.3% to $71.9 million as the company's gross margin declined 270 basis points to 55.3%. Management has stated that the negative results are due to decreased customer traffic, underperformance of the company's product offerings, and "a persistently challenging retail environment." Retail is a very difficult industry right now, and it does not seem like Vera Bradley can navigate it successfully. 

Dismal guidance
While earnings beat the consensus estimates, management's guidance for the fourth quarter came in much weaker than expected:

Source: Vera Bradley earnings report. 

The new outlook calls for earnings per share to decrease 24.2%-29% and revenue to fall 7.8%-10.8%, and its gross margin to decline 340 to 380 basis points. As investors, we want to put our money to work in companies that are growing, not struggling. With this in mind, I wouldn't touch Vera Bradley until its next report, and even longer if it continues to guide toward year-over-year declines.

Consumer favorite
Michael Kors Holdings'  high-quality products and immense popularity have propelled it to the top of the luxury market over the last two years and its stock has reacted accordingly by rising over  240%. It reported second-quarter earnings in early November and the results exceeded expectations; here's an overview of that report:

Earnings per share grew 44.9% and revenue rose 38.9% year-over-year, driven by comparable-store sales rising 22.9%. Gross profit increased 42.4% to $449.9 million, helped by the company's gross margin expanding 150 basis points to 60.8%. The better-than-expected results from the first and second quarters and strong guidance going forward caused management to increase its full-year outlook in the report. This is bad news for Vera Bradley, because it proves that the consumer demand is there, but not for its products. Overall, Michael Kors has continued its rise as the new global luxury powerhouse and I believe it is the brand to own in the space, not Vera Bradley.

King of Spade(s)
Kate Spade, one of the many brands owned by Fifth & Pacific , has shown increasing popularity with women in the handbag and accessories market alongside Michael Kors; this has added to the competition Vera Bradley has been facing. Fifth & Pacific's recent quarter missed analyst estimates, but did show strength among this key brand; here's an overview of the results:

Earnings per share increased 40% and revenue rose 18.1%; this was driven by Kate Spade's incredibly strong revenue growth of 76.4% year-over-year to $180 million, which included a 31% increase in direct-to-consumer comparable sales. The brand has been so strong that management announced they are considering changing the company's very popular store on Fifth Avenue, in New York, into a Kate Spade store. On top of this idea, the company will be expanding the store count to take full advantage of its growing market share. With Michael Kors domination and Kate Spade's increasing presence, Vera Bradley is in a very difficult situation, and not one investors should want to get involved in. 

The Foolish bottom line
Vera Bradley is a struggling company within a very cut-throat industry. It has not been able to navigate the market efficiently and has been continually losing share to brands like Michael Kors and Kate Spade. I would stay away from Vera Bradley for now and wait to see if it can turn things around in its next quarterly report. If you are looking for an investment in this industry today, you should look to Michael Kors or Fifth & Pacific.