Vera Bradley: February temperatures hurt sales; Fundamentals erode.

Expect 1Q14 guide miss

3/11/2014
Companies mentioned:

Vera Bradley (VRA) - $28.26

Why Read?

Since February 14
th
, VRAs stock has run up nearly 17%. We believe this run up has been caused by
momentum investors piggy backing on FMR 13G filing. We believe these weak investors will get
crushed when the company reports its 4Q13 earnings and provides weak 1Q14 guidance during their
4Q13 conference call at 8:00am EST March 19
th
, 2014.
"""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""""

! Blame it on the weather: During February 29% of stores were at least -5 degrees below their
historical average, while 40% of outlet stores were at least -5 degrees below their historical
average. Average temperatures vs. historical averages among stores were -2.1 degrees in
November, -0.6 degrees in December, -3.7 degrees in January, and -3.8 degrees in February. In
tandem with negative channel checks, increased promotions, and pattern misses; we believe
VRA will not only miss 4Q13 sales guidance but also be forced to lower guidance for 1Q14.

! Declining productivity: Management has mentioned new store openings performing below
expectations. Traffic has been historically higher in the outlet channel which was effected more
during 4Q13/1Q14 by poor weather while lower sales per square feet will contribute to
continued weakness. Expect management to cite poor traffic for 1QTD14 on 4Q13 conference
call.

! Segment shift towards lower profitability: Indirect channel has stabilized and improved
since 3Q12 on a 4-quarter trailing basis. Meanwhile, the direct channel continues to erode
margins, showing a consistent downward trend since 4Q11. As sales mix continues to shift
towards the lower margin direct and outlet businesses, we expect the negative margin impact to
continue to accelerate.

! New CEO ignored by analyst community: Analyst community has been distant from the
story, while company skipped ICR 2014, and has not provided any public commentary since
3Q13 earnings release.

! Estimates: We expect VRA to earn $144.8mn in revenue during 4Q13E and report $0.45 EPS
(Consensus: $146.8mn & $0.46 EPS). For 1Q14E, we expect VRA to earn $120.3mn in
revenue and $0.19 EPS (Consensus: $123.0mn & $0.22). For FY14E, we expect VRA to earn
$508.9mn in revenue and $1.31 EPS (Consensus: $544.9mn and $1.50 EPS).

(Continued on next page)

#


Blame it on the weather:

During the 3Q13 earnings conference call, management lowered 4Q13 guidance based upon poor traffic
and customer response during the beginning of 4Q13.

Our guidance reflects our expectation that the challenging consumer environment will continue, as well
as the softness in the consumer response to our overall merchandise assortment. We expect this to result
in continued weak traffic and an increase in the level of planned promotional activity. Kevin Sierks,
Interim CFO, 3Q13 conference call

Full Price Temperature Data November December January February
Deviation from historical Average (degrees) -2.1 -0.7 -3.6 -3.7
Percentage at least 5 degrees lower 1% 5% 33% 29%
*Source: Accuweather.com, full data in appendix

Outlet Temperature Data November December January February
Deviation from historical Average (degrees) -2.5 -0.1 -4.5 -4.1
Percentage at least 5 degrees lower 0% 13% 40% 40%
*Source: Accuweather.com, full data in appendix


We expect poor weather in November had an impact on the poor pattern launches and traffic/sales in
general. Compared to historical averages, the weather in December sequentially improved vs. November
but as seen in the above chart, the severity of weather increased substantially in January and February.

We consider the weather concerns for VRA to be well known for 4Q13 but expect its impacts have not
been fully priced into 1Q14. Additionally, we expect management to lower guidance for 1Q14 based
upon continued poor weather across the store fleet causing reduced traffic.



(Continued on next page)










$


Channel checks showing weakness:

VA: Tysons: Feb. 16
th
(Presidents Day wknd) PA: King of Prussia: Feb. 15
th
(Presidents Day wknd)


We observed weak traffic over the important Presidents Day weekend. Sales associates were quick to
promote their cross body purses (lower ASP SKU) and promotional items. In addition, we did not see a
single full price tote purchase during our checks.

PA: King of Prussia Feb. 9
th
($1 Flip flops with beach towel purchase) IL: Oakbrook Mall: Feb. 22
nd



%


On the weekend of February 9
th
, VRA ran a horribly timed $1 flips flops with purchase of beach towel
promotion in hopes of driving traffic. It failed. During this weekend, many parts of the country remained
covered in snow and shoppers were not in the beach-buying mood. In comparison, Old Navy, runs their
$1 flip flop sale in late June/early July, which is a consistent traffic driver. We remain disappointed at
managements ineptitude in planning their promotions and expect this to continue to remain a drag on
gross margins.


Declining Productivity:


















Vera Bradley has increased its store count from 21 full priced stores in FY08 to 84 full priced stores and
15 outlet stores as of 4Q13. The first outlet store was added in 4Q10. Currently the company is hoping
to open 14-20 stores per year. Unfortunately, new store openings are performing below expectations and
will continue to create a drag on comparable store sales as new doors enter the comparable store sales
base.

as we look at those stores, we've also opened that aren't in our comp base yet, they're still opening soft
and at the low end of kind of our range of expectation or even slightly below that. So it's not that the
existing or the class of older doors is necessarily performing poorer than the newer doors. Kevin
Sierks, Interim CFO, 3Q13 conference call

(Continued on next page)

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In only 1 out of the last 11 quarters has Vera Bradley improved its weighted trailing 4-quarter sales per
square foot. In fact the trend has only accelerated in the last 3 quarters. We expect this to continue as
more direct sales pass through the outlet stores.

Segment shift towards lower profitability:
















Promotional activity combined with a shift towards increased focus on the direct segment and outlet
sales has created gross margin headwinds.



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Meanwhile, the direct segments operating margin has continued in one direction: down. We expect this
trend to continue as the new CEO, Robert Wallstrom, continues to focus on the higher traffic outlet
stores (only slightly positive traffic) and continues to throw any chance at margin recapture under the
bus.



















All of the focus on the direct business has neglected growing sales in the highly profitable Indirect
segment. We expect Indirect sales to continue to decrease as 3
rd
party merchants remain cautious in new
orders. Management has guided to 3400 doors specialty retailer doors at the end of 4Q13, compared to
3300 at the end of 4Q10, hardly an improvement.
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New CEO ignored by Wall Street analyst community:

We believe Wall Street is out of touch with Vera Bradley and the new CEO Robert Wallstrom. Many of
the analysts on the 3Q13 call had their associates take the call, odd for a community usually ready and
willing to make nice with new management leadership. It is also worth noting that some of the analysts
who cover VRA also covered SKS where Wallstrom was most recently President of their OFF 5
th
Ave
outlet division, so this is even more surprising.

Wrap-Up:

Vera Bradley has a new management team and we expect that they sandbagged guidance for 4Q13.
What they didnt count on was continued weakness during 1Q14 and will most likely guide below
expectations blaming the weather despite deeper fundamental issues occurring at the company.

Since February 14
th
, VRAs stock has run up nearly 17%. We believe this run up has been caused by
momentum investors piggy backing on the FMR 13G filing. We believe these weak investors will get
crushed when the company reports its 4Q13 earnings and provides weak 1Q14 guidance.



(Weather data appendix on next page)



















+
Full Price Store Address Nov Dec Jan Feb
214 SummlL 8oulevard - 8lrmlngham, AL 33243 -3.0 1.0 -8.0 -2.0
3111 WesL Chandler 8oulevard - Chandler, AZ 83226 3.0 1.0 4.0 4.0
2302 L. Camelback 8d # 118A - hoenlx, AZ 83016 3.0 1.0 4.0 4.0
843 MarkeL SLreeL - San lranclsco, CA 94103 1.0 0.0 6.0 0.0
1182 8osevllle arkway - 8osevllle, CA 93678 0.0 -3.0 2.0 1.0
336 SanLana 8ow - San !ose, CA 93128 1.0 -2.0 4.0 1.0
773 Amerlcana Way - Clendale, CA 91210 2.0 1.0 4.0 2.0
8403 ark Meadows CenLer urlve - Lone 1ree, CC 80124 3.0 -2.0 0.0 -5.0
362 WesLfarms Mall - larmlngLon, C1 06032 -1.0 0.0 -1.0 -3.0
7 8ackus Avenue - uanbury, C1 06810 -3.0 0.0 -4.0 -7.0
310 ChrlsLlana Mall - newark, uL 19702 -3.0 1.0 -5.0 -4.0
3101 CA 8oulevard, SulLe 8-133 - alm 8each Cardens, lL 33410 0.0 6.0 -1.0 4.0
8888 SW 136Lh SLreeL, SulLe 433A - Mlaml, lL 33176 2.0 5.0 0.0 4.0
4200 Conroy 8oad, Space L119 - Crlando, lL 32839 2.0 5.0 -2.0 3.0
2223 norLh WesL Shore 8oulevard - 1ampa, lL 33607 1.0 6.0 -4.0 2.0
3333 8uford urlve Space 2033u - 8uford, CA 30319 0.0 3.0 -6.0 1.0
4400 Ashford uunwoody 8oad - ALlanLa, CA 30346 -3.0 3.0 -5.0 1.0
3300 eachLree 8oad nL - ALlanLa, CA 30326 -3.0 3.0 -5.0 1.0
1430 Ala Moana 8oulevard - Ponolulu, Pl 96814 -1.0 1.0 0.0 2.0
101 !ordan Creek kwy. - WesL ues Molnes, lA 30266 -1.0 -5.0 -5.0 -9.0
120 Crland Square urlve - Crland ark, lL 60462 -4.0 -4.0 -8.0 -10.0
20330 n. 8and 8oad - ueer ark, lL 60010 -3.0 -5.0 -8.0 -11.0
417 Cakbrook CenLer - Cak 8rook, lL 60323 -3.0 -5.0 -8.0 -11.0
833 n Mlchlgan Avenue Space 6073 - Chlcago, lL 60611 -4.0 -4.0 -8.0 -10.0
4999 Cld Crchard CenLer - Skokle, lL 60077 -3.0 -6.0 -10.0 -12.0
4120 W !efferson 8oulevard - lorL Wayne, ln 46804 -3.0 -2.0 -8.0 -10.0
8702 keysLone Crosslng - lndlanapolls, ln 46240 -5.0 -2.0 -8.0 -10.0
3068 W 119Lh SLreeL - Leawood, kS 66209 n/a n/a n/a n/a
3000 Shelbyvllle 8oad, Space 1303 - Loulsvllle, k? 40207 -3.0 1.0 -7.0 -6.0
800 8oylsLon SLreeL Space # 149 - 8osLon, MA 02199 -2.0 -2.0 -2.0 -3.0
1243 WorcesLer SLreeL - naLlck, MA 01760 -1.0 0.0 -1.0 -5.0
73 Mlddlesex 1urnplke, SLe 1031 - 8urllngLon, MA 01803 -3.0 -2.0 -1.0 -6.0
230 CranlLe SL - 8ralnLree, MA 02184 -2.0 -1.0 -1.0 -2.0
10300 LlLLle aLuxenL arkway - Columbla, Mu 21044 -2.0 3.0 -6.0 -3.0
2367 Annapolls Mall 8oad - Annapolls, Mu 21401 -4.0 -1.0 -7.0 -6.0
7101 uemocracy 8oulevard - 8eLhesda, Mu 20817 -3.0 2.0 -4.0 -1.0
823 uulaney valley 8oad - 1owson, Mu 21204 -2.0 4.0 -6.0 -4.0
27440 novl 8oad - novl, Ml 48377 -3.0 -3.0 -7.0 -9.0
2800 W 8lg 8eaver 8oad - 1roy, Ml 48084 -3.0 -4.0 -7.0 -9.0
228 8rlarwood Clrcle - Ann Arbor, Ml 48108 -3.0 -3.0 -9.0 -11.0
1160 SouLhdale CenLer - Ldlna, Mn 33433 -1.0 -8.0 -8.0 -12.0
288 SouLh Avenue - 8loomlngLon, Mn 33423 -1.0 -8.0 -8.0 -12.0
2428 SalnL Louls Callerla - SalnL Louls, MC 63117 -3.0 -2.0 -4.0 -9.0

,
Store Address Nov Dec Jan Feb
6910 layeLLevllle 8oad, SulLe 173 - uurham, nC 27713 -2.0 5.0 -2.0 1.0
4400 Sharon 8oad - CharloLLe, nC 28211 -3.0 4.0 -4.0 1.0
Cne 8lverslde Square - Packensack, n! 07601 -1.0 2.0 -3.0 -3.0
1400 Wlllowbrook Mall - Wayne, n! 07470 -2.0 0.0 -5.0 -6.0
363 Menlo ark Mall - Ldlson, n! 08837 -2.0 -1.0 -4.0 -5.0
3710 8ouLe 9 - lreehold, n! 07728 -2.0 1.0 -6.0 -5.0
300 8ouLe 73 SouLh, SulLe C-2 - MarlLon, n! 08033 -3.0 1.0 -5.0 -5.0
400 Commons Way - 8rldgewaLer, n! 08807 -2.0 -1.0 -4.0 -5.0
140 SmlLh Paven Mall - Lake Crove, n? 11733 -2.0 1.0 -3.0 -3.0
160 WalL WhlLman Mall 8oad - PunLlngLon SLaLlon, n? 11746 -3.0 0.0 -4.0 -4.0
43 Cole SLreeL - ?onkers, n? 10710 -2.0 0.0 -3.0 -3.0
373 LasLvlew Mall - vlcLor, n? 14364 -4.0 -1.0 -4.0 -5.0
630 Cld CounLry 8oad - Carden ClLy, n? 11330 -3.0 0.0 -4.0 -4.0
1 CrossgaLes Mall 8oad - Albany, n? 12203 -3.0 -1.0 -3.0 -4.0
8133 lashlon urlve - nanueL, n? 10934 -1.0 2.0 -3.0 -3.0
7873 MonLgomery 8oad - ClnclnnaLl, CP 43236 -5.0 1.0 -7.0 -7.0
26300 Cedar 8oad Space #1130 - 8eachwood, CP 44122 -6.0 -2.0 -7.0 0.0
1901 norLhwesL Lxpressway - Cklahoma ClLy, Ck 73118 -2.0 -4.0 0.0 -4.0
7021 SouLh Memorlal urlve - 1ulsa, Ck 74133 -2.0 -3.0 -2.0 -5.0
301 SouLh Pllls vlllage - lLLsburgh, A 13241 -3.0 2.0 -6.0 -5.0
303 ark ClLy CenLer - LancasLer, A 17601 -4.0 -1.0 -7.0 -8.0
1000 8oss ark Mall urlve - lLLsburgh, A 13237 -4.0 2.0 -6.0 -5.0
160 norLh Culph 8oad, Space 1184l - klng of russla, A 19406 -3.0 0.0 -6.0 -6.0
Cne rovldence lace, Space 4310 - rovldence, 8l 02903 n/a n/a n/a n/a
7613 W larmlngLon 8oulevard - CermanLown, 1n 38138 -4.0 -1.0 -5.0 -4.0
4023 Plllsboro lke, SulLe 303 - nashvllle, 1n 37213 -4.0 1.0 -6.0 -3.0
1604 SouLh unlverslLy urlve - lorL WorLh, 1x 76107 -2.0 -4.0 -1.0 -3.0
1132 8aybrook Mall - lrlendswood, 1x 77346 -4.0 -3.0 -3.0 -1.0
1201 Lake Woodlands urlve - 1he Woodlands, 1x 77380 -4.0 -3.0 -4.0 -1.0
13900 La CanLera arkway - San AnLonlo, 1x 78236 -1.0 -1.0 -1.0 2.0
1443 Maln SLreeL - SouLhlake, 1x 76092 -3.0 -4.0 -1.0 -3.0
2601 resLon 8oad, SulLe 1036 - lrlsco, 1x 73034 -5.0 -6.0 -2.0 -4.0
8687 n CenLral Lxpressway SLe 778 - uallas, 1x 73223 -4.0 -4.0 0.0 -3.0
838 MarkeL SLreeL - Allen, 1x 73013 -1.0 -2.0 1.0 -1.0
7400 San edro Avenue, Space 364 - San AnLonlo, 1x 78216 -1.0 -1.0 -1.0 2.0
16333 SouLhwesL lreeway, SulLe 660 - Sugar Land, 1x 77479 -4.0 -3.0 -3.0 -1.0
2901 S CaplLal of 1exas Pwy. - AusLln, 1x 78746 -3.0 -2.0 -1.0 0.0
8001-A 1ysons Corner CenLer - McLean, vA 22102 -3.0 2.0 -4.0 -1.0
2030 8ellevue Square - 8ellevue, WA 98004 3.0 -1.0 2.0 -1.0
3706 n. CenLerpark Way - Clendale, Wl 33217 -2.0 -5.0 -8.0 -10.0
!"#$"%&' )#*+ ,$-.*#$&"/ 0'+1'#".2#'- 34'5#''-6 -2.1 -0.7 -3.6 -3.7


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Outlet Store Address Nov Dec Jan Feb
10801 Corkscrew 8oad, SulLe 332 - LsLero, lL 33928-9444 1.0 4.0 -1.0 3.0
8200 vlneland Avenue Space # 313 - Crlando, lL 32821-6813 3.0 5.0 -1.0 3.0
3461 lacLory Shops 8oulevard - LllenLon, lL 34222-4111 3.0 5.0 -3.0 2.0
1630 remlum CuLleLs 8oulevard - Aurora, lL 60302 -4.0 -7.0 -8.0 -16.0
303 LlghLhouse lace - Mlchlgan ClLy, ln 46360 -5.0 -6.0 -9.0 -13.0
Cne remlum CuLleLs 8oulevard - WrenLham, MA 02093 n/a n/a n/a n/a
18327 CuLleL 8oulevard, Space 726 - ChesLerfleld, MC 63003 -4.0 -2.0 -4.0 -9.0
200 1anger Mall urlve - 8lverhead, n? 11901 -2.0 0.0 -3.0 -3.0
276 8ed Apple CourL - CenLral valley, n? 10917 -3.0 0.0 -3.0 -6.0
1911 Leesburg Crove ClLy 8oad - Crove ClLy, A 16127 -5.0 -1.0 -7.0 -8.0
18 WesL LlghLcap 8oad SLe 1223 - oLLsLown, A 19464 -3.0 0.0 -6.0 -6.0
221 Cpry Mllls urlve - nashvllle, 1n 37214-2434 -4.0 1.0 -6.0 -3.0
3939 lP-33 SouLh, SulLe 208 - San Marcos, 1x 78666-3934 -2.0 -2.0 -2.0 1.0
29300 PempsLed 8oad, SulLe 207 - Cypress, 1x 77433 -4.0 -3.0 -4.0 -1.0
2700 oLomac Mllls Clrcle - Woodbrldge, vA 22192 -5.0 2.0 -4.0 -2.0
241 lorL Lvans 8oad nL - Leesburg, vA 20176 -3.0 2.0 -6.0 -4.0
!"#$"%&' )#*+ ,$-.*#$&"/ 0'+1'#".2#'- 34'5#''-6 -2.5 -0.1 -4.5 -4.1
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