Most shorted US stock: Vera Bradley, but analysts still say 'buy'

Although its shares hold the questionable honor of being the most shorted US stock, Vera Bradley’s (NASDAQ:VRA) fundamentals seem fine. At least they don’t give the picture of being a massively shorted stock.

But analysts and shortsellers often differ greatly on their opinion of a stock, as I wrote previously about the headphone maker Skullcandy  (NASDAQ:SKUL). Skullcandy was for a while the most shorted US stock, but analysts have maintained a firm buy rating on the stock.

There is similar story to tell with Vera Bradley. Vera Bradley is a US based retailer/wholeseller, selling colorful bags, purses, backpacks and other accessories for young women. While 73.5 percent of the stock’s float is sold short, 73 percent of analysts covering the company rate it as buy.

Let me point out a few of the good and bad things about Vera Bradley.

It is always positive to see revenues growing. It is even more positive to see that they are growing at a rate of more than 15 percent on average. Even though sales growth has slowed down from the hectic 32 percent Y-o-Y pace at this time last year, Vera Bradley’s historical sales growth is still impressive. Furthermore, analysts believe the average growth will be close to 14 percent for the coming 5 quarters. Not too bad of a consensus estimate!

What might be a little more worrying is the fact that same-store sales (SSS) growth, a key measure for retailers, has dropped dramatically since the early years of trading. This in itself could be a reason for shorting the stock, but the consensus still sees the SSS at around 4.3 percent to 5.3 percent in the coming quarters, which is not too bad either.

Earnings
Last quarter, Vera Bradley reported negative y-o-y EPS growth of nearly 2 percent. Furthermore the company’s management lowered the full-year guidance for 2012. Consequently the stock dropped nearly 8 percent in the market, but has gained roughly 40 percent since. 

Even though the company missed last quarter’s earnings expectations, earnings have been consistently around thirty cents a share for the past 7 quarters. Furthermore, Vera Bradley has been profitable in every single quarter since inception of trading. Analysts are expecting y-o-y EPS growth to be consistent around 20 percent in the coming quarters, which Is quite enviable for most retailers.

For a company being so heavily shorted, I would at least expect poor earnings to be a part of the problem. Here it is not the case, unless the 2 percent EPS drop last quarter really did offend investors so badly.

VRA vs. Peers
Having looked at both top and bottom line, let us compare a few measures with Vera Bradley’s peers, starting with the margins.

Vera Bradley’s margins are not too bad either when compared to some of the company’s peers. Coach (NYSE:COH)   is the only company beating Vera Bradley on all three levels. For the past quarters Vera Bradley’s margins have been fairly stable and will likely continue at the same levels. 

Compared to most of its peers, Vera Bradley comes at a higher price per earnings as well as having a higher PEG ratio.

Vera Bradley, furthermore, seems to have significant amount of capital tied up in inventories, much more than most of its peers. Should sales growth not pan out as analysts expect, this could become a real problem for the company.

So, should you buy or should you sell?

Personally I don’t see Vera Bradley as a screaming sell opportunity like other short-sellers. On the other hand I don’t see it as the optimal stock to buy either. With the most recent price increases Vera Bradley is trading at a FY1 P/E of 18.4 vs. 13.4 end of August. So, I see the point that investors expect a correction in stock price in the shorter term, as valuations seem high. However, JP Morgan recently highlighted Vera Bradley as ‘on of JPM’s Best Equity Near-Term Ideas’ raising its target price on the stock to USD 34.

So, with massive short interest, reduced full year guidance and recent surge in stock price, I agree that Vera Bradley isn’t likely to outperform in the short run. Longer term, this retailer might however be an interesting candidate, should analysts’ consensus materialize.