How to profit from declining same store sales
Women’s lifestyle brand and retailer Vera Bradley is the latest company to feel the negative sales effects of weaning shoppers off promotions, but the strategic shift has done wonders for the company’s bottom line.
Vera Bradley distributes its handbags and wide range of accessories through its own Web site, a network of retail and outlet stores and 2,700 other retail locations. The company’s same store sales fell 9.5% during the third quarter ended Oct. 31, due to a 2% decline at physical stores and a 19.1% decline in online sales. The addition of 17 full-line stores and 13 outlet stores compared to the third quarter the prior year caused total sales in what the company calls its direct segment to increase 7.9% to $77.9 million. Indirect segment revenues declined 10% to $42.5 million as there was a slight reduction in specialty retail accounts and a lower average order size.
The same store sales weakness was part of an intentional strategy which saw Vera Bradley reduce promotional activity, essentially trading sales for profits, and gross margins expand to 57.9% of sales from 52.5% of sales. The strategy worked better than the company had expected on the top and bottom line. Despite the comp decline, total revenues (including direct and indirect) increased to $126.7 million, from $125.2 million and were better than the company’s guidance range of $120 million to $123 million. Income from continuing operations totaled $10.3 million, or 27 cents a share, exceeding 21 cents the prior year, and guidance in the range of 19 cents to 21 cents.
"We are pleased that better than expected revenue and gross profit percentage performance, along with disciplined expense management, drove EPS well above our guidance, despite a rather challenging retail environment,” said Vera Bradley CEO Robert Wallstrom. "We are most proud of our year-over-year 540 basis point gross profit percentage improvement in the quarter, largely driven by various sourcing efficiencies, our made-for-outlet products, and reduced promotional activity. In our full-line stores and on Verabradley.com, we eliminated our hyper-promotions of 60% to 70% off and pared back our promotional days by approximately 50% during the third quarter."
The company hasn’t totally abandoned promotional efforts. The day it reported third quarter results the company was offering 30% off an entire full price purchase online and in stores.
"Customers are responding to our new product offerings. We believe we have the product, distribution, and marketing initiatives in place to achieve our fourth quarter financial plan and to continue improving our momentum into fiscal 2017,” Wallstrom said.
By pursuing a more rational promotional strategy, the company expects its fourth quarter gross margin to expand even further, increasing to a range of 58.3% to 58.7% of sales compared to a prior year rate of 52.4%. The planned improvement reflects sourcing efficiencies from lower product costs combined with expense savings from closing a domestic manufacturing facility. Margins are also expected to benefit as higher margins products made specifically for outlet stores comprise a larger percentage of the overall sales mix and it relies less on liquidation sales.