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Zacks Investment Research downgraded Vera Bradley Inc (VRA - Snapshot Report) to a Zacks Rank #5 (Strong Sell) on Sep 19. Tempered expectations for fiscal 2014 despite decent second quarter fiscal 2014 results led to the downgrade.

Why the Downgrade?

On Sep 11, Vera Bradley, known for its colorful luxury handbags, reported its second quarter of fiscal 2014 (ending Aug 3, 2013) results. The company struggled amid a challenging macro-economic environment and somehow managed to deliver better-than-expected positive earnings and in-line revenue growth. Earnings and revenues also increased on a year-over-year basis. However, Vera Bradley slashed its outlook for fiscal 2014. In fact, the company cut its guidance for the second time this fiscal year.

Comparable store sales decreased 3.7% in the quarter due to underperformance of the products and less traffic at the stores. Traffic reduced owing to the difficult macroeconomic retail environment. This also led to cautious ordering from specialty retailers, which lowered the company’s indirect revenues by 12.2%.

Management believes that the decline in traffic trends will take a toll on the third quarter results and will eventually impact fiscal 2014 results. Though the company has taken initiatives to drive performance, these are expected to reap benefits over the long term.

The uncertain consumer environment forced the company to lower its outlook for fiscal 2014. Vera Bradley now expects net sales in the range of $535 million to $540 million for fiscal 2014 lower than prior expectations of $570 million to $575 million. The company also slashed its earnings outlook and now expects earnings per share in the range of $1.47 to $1.52 per share compared with the prior range of $1.74 to $1.78 per share. Vera Bradley also expects gross margin to decline 100 to 125 basis points from fiscal 2013 levels.

This retailer witnessed sharp downward estimate revisions after announcing its second quarter fiscal 2014 results. Estimate revisions witnessed a downward trend for the third quarter and fiscal 2014. The Zacks Consensus Estimate for the third quarter decreased 30.6% and that for fiscal 2014 went down 14.9% over the last 30 days.

Other Stocks to Consider

Not all stocks are performing as poorly as Vera Bradley. Retailers worth considering include Christopher & Banks Corp (CBK - Snapshot Report), Citi Trends Inc. (CTRN - Analyst Report) and Destination Maternity Corp . While Christopher and Citi Trends hold a Zacks Rank #1 (Strong Buy), Destination Maternity holds a Zacks Rank #2 (Buy).

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