An increasing focus on innovative products and collaborations with major brands could catalyze the financial prospects of Vera Bradley Inc. (VRA, Financial).
The luggage and handbag retailer is seeking to increase its total addressable market through collaborations in new markets, while producing a broader range of products to increase its appeal among consumers.
It is also investing in improving the online and in-store customer experience through a variety of initiatives that could lead to increasing brand loyalty.
Having fallen 16% in the last year, the stock appears to offer turnaround potential.
Investing in the customer experience
The company’s investments in its digital operations could strengthen customer engagement levels. In the most recent quarter, for example, it launched a new mobile-friendly product detail page on its website that better showcases its products and reduces page load times. It is also ramping up the use of greater personalization and improved storytelling in its email campaigns. This has led to higher open rates and engagement, while full-price revenue attributable to email has also improved. Alongside this, the increasing use of insights gained from customer data to determine its marketing mix could produce a higher return on investment in the future.
Investments in the shopping experience within its stores could lead to improving customer loyalty. For example, Vera Bradley rolled out a new customer service model to its full-line store associates in the most recent quarter. This led to a four percentage point increase in customer satisfaction scores. As part of its investment in the store network, the company is expanding three of its highest-volume factory stores this year, while continuing to open factory stores.
A focus on innovation
Further investments in innovative products could improve the company’s differentiation versus sector peers. For example, it continues to add lightweight, high-performance fabrics to its mix of products, while also testing new styles that offer greater functionality. It is also planning to launch limited edition collections that increase its brand exposure.
Partnerships with major brands also have the potential to raise awareness of the company among a wider range of consumers. For example, in March it launched, in partnership with Disney (DIS, Financial), a limited-edition collection that has resonated with customers. It also recently announced a collaborative drink wear and accessories collection with Starbucks (SBUX, Financial) Asia Pacific. This is expected to expand the company’s reach to international consumers who may be unfamiliar with its products.
Threats
The impact of tariffs on Vera Bradley’s financial outlook is expected to be negative. In the most recent quarter, the gross margin declined 60 basis points as a result of tariffs placed on imports from China. For the full year, the company expects there to be a 20 basis point decline in the gross margin.
Since the company manufactures 25% of its products in China and there is potential for additional tariffs on imports from the world’s second-largest economy, its short-term financial future could be uncertain. This could lead to weaker investor sentiment.
In response to the tariffs, Vera Bradley is working to become more efficient. As part of this initiative, it is embarking on a two-year project to revamp its supply chain and the system it uses within stores. The conversion is expected to lead to an enhancement in the customer experience as well as improved productivity. Alongside this, it is reducing the range of its products that are manufactured in China in order to avoid tariffs on a greater portion of goods sold in the U.S.
Outlook
In the next fiscal year, Vera Bradley is guiding for a 9% increase in earnings per share. This helps to justify its forward price-earnings ratio of 17.6.
The investments being made in enhancing the customer experience through an improved digital offering and better in-store shopping experience could lead to a higher degree of brand loyalty.
Its focus on innovation, in terms of new products and collaborating with major brands, could lead to a competitive advantage versus peers.
Having underperformed the S&P 500 by 20% in the last year, Vera Bradley could offer improving investment prospects over the long run.
Disclosure: The author has no positions in any stocks mentioned.
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