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Zacks Investment Research downgraded Vera Bradley Inc (VRA - Snapshot Report) to a Zacks Rank #5 (Strong Sell) on Dec 14. Weak margins and comps in the third quarter of fiscal 2014 and tempered expectations for fiscal 2014 led to the downgrade.

Why the Downgrade?

On Dec 11, Vera Bradley, known for its colorful luxury handbags, reported third quarter of fiscal 2014 (ending Nov 2, 2013) results. The company struggled amid a challenging macro-economic environment. Though both revenue and earnings beat the Zacks Consensus Estimates, they declined on a year-over-year basis. Also, Vera Bradley slashed its outlook for fiscal 2014. In fact, the company cut its guidance for the third time this fiscal year.

Comparable store sales decreased 6.5% in the quarter due to underperformance of the products and less traffic at 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 17.3%. E-commerce revenues fell 7.8% as a result of lower traffic and lower average transaction size.

Management believes that the decline in traffic trends has been taking a toll on the company’s results in the last few quarters. This 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.

Gross margin declined 270 basis points to 55.3% in the third quarter due to sales of lower-margin products as well as increased promotional activity. Operating margin also declined 130 basis points to 18.6% in the reported quarter.

Outlook Slashed

The uncertain consumer environment forced the company to lower its outlook for fiscal 2014. Vera Bradley now expects net sales in the range of $523 million to $528 million for fiscal 2014, lower than prior expectations of $535 million to $540 million. The company also slashed its earnings outlook and now expects earnings per share in the range of $1.41 to $1.44 per share compared with the prior range of $1.47 to $1.52 per share.

This retailer witnessed sharp downward estimate revisions for the fourth quarter and fiscal 2014 after announcing its third quarter fiscal 2014 results. The Zacks Consensus Estimate for the fourth quarter decreased 19.6% and that for fiscal 2014 went down 4.7% over the last 7 days.

Other Stocks to Consider

Not all stocks are performing as poorly as Vera Bradley. Some better-ranked retailers worth considering include Bon-Ton Stores Inc (BONT), Citi Trends Inc. (CTRN - Analyst Report) and Harris Teeter Supermarkets Inc. . While Bon-Ton Stores sports a Zacks Rank #1 (Strong Buy), Citi Trends and Harris Teeter carry a Zacks Rank #2 (Buy).

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