case 6 Vera Bradley in 2015: Can Its Turnaround Strategy Reverse Its Continuing Decline? DAVID L. TURNIPSEED University of South Alabama JOHN E. GAMBLE Texas A&M University–Corpus Christi Vera Bradley had grown rapidly since the mid-2000s with a strategy keyed to offering a distinctive line of colorful, patterned women’s luggage, handbags, and accessories sold in department stores, in company-owned full-price retail stores and factory outlet stores, and over the Internet. As the mid-2010s approached, the company’s standing seemed less certain as competition intensified in the market for ladies’ handbags and accessories. Its meteoric growth had stalled in fiscal 2014, with revenues slipping by only 1 percent but net income declining by nearly 15 percent. This decline in revenues and profits came on the heels of the company’s rollout of its new strategic plan in early 2014 that would focus the company on a product line of a limited assortment of the highest-quality ladies’ handbags and accessories, expanded distribution channels with an emphasis on outlets and e-commerce, and an enhanced marketing approach. By 2015, the company’s strategic plan had failed to produce the desired results, with fiscal 2015 net revenues slipping 4.1 percent, from $530.9 million in fiscal 2014 to $509 million in fiscal 2015. In addition, operating income had fallen by 33 percent, and net income dropped 35 percent, from $58.8 million in fiscal 2014 to $38.4 million in fiscal 2015. The strategic plan appeared to match the company’s external market conditions and internal situation, but it provided little uniqueness since Vera Bradley’s rivals were all competing with similar strategies. Vera Bradley’s management believed that the quality of the plan, coupled with the company’s management expertise, would yield a competitive advantage. Robert Wallstrom, Vera Bradley’s chief executive officer, commented shortly after the new strategic plan was announced that the company’s strategies and talented and seasoned team of retail executives would reverse the company’s recent decline in revenue and profits and return it to an impressive growth trajectory.1 Company History The inspiration for Vera Bradley occurred in 1982 when two traveling friends, Barbara Bradley Baekgaard and Patricia Miller, observed that passersby in the Hartsfield Atlanta International Airport all had similar, bland luggage and that a market for colorful, stylish luggage might exist. Almost immediately upon their return to Fort Wayne, Indiana, the two women began creating colorful, quilted fabric duffle bags from their homes. They named the company after Barbara Baekgaard’s mother, Vera Bradley, and initially focused only on duffle bags, handbags, and sports bags. As consumer interest in the brand grew, the company developed additional assortments of patterns and products to reach a broader range of customers. The focus of the company’s merchandising was changed to highlight Vera Bradley as a lifestyle brand. The company enhanced its marketing function to work collaboratively with the design group in 2012 to improve the product development to market process. In 2014, the company designed, manufactured, marketed, and retailed accessories for women, including luggage, purses, wallets, cell phone and Copyright © 2015 by David L. Turnipseed. All rights reserved Case 6 Vera Bradley in 2015: Can Its Turnaround Strategy Reverse Its Continuing Decline?  321 computer covers, jewelry, a wide variety of bags, lunch sacks, scarves, beach accessories, and baby clothing. As the company grew, Vera Bradley’s management realized the importance of a strong infrastructure and began strengthening its supply chain capabilities and IT systems early on. These improvements resulted in significant cost savings and a more flexible and scalable operating structure. In 2005, the company shifted its production from primarily domestic manufacturing to global sourcing, which was substantially more cost-effective. A new state-of-the-art distribution facility was built in Roanoke, Indiana, in 2007 and was expanded in 2013 to approximately 400,000 square feet, which was double its original size. Vera Bradley’s products were initially sold wholesale to department stores and other retailers specializing in women’s accessories. The company also maintained specialty retailer accounts that marketed Vera Bradley bags and other distinctive items as corporate gifts. By 2014, the company’s products were sold through indirect department store and specialty retailer channels and through direct channels that included the Internet, full-price retail stores, and factory outlet stores. As of February 2014, the company had about 3,100 indirect retail partners, with about 30 percent of the indirect retailers accounting for over 70 percent of the indirect revenue in 2013. The company entered into direct sales in 2006 with the launch of an e-commerce site in the United States, and in 2007 it opened its first retail store. Vera Bradley launched an e-commerce site in Japan in 2012. The company operated 96 full-price retail stores in the United States in 2015. Vera B ­ radley retail stores were about 1,800 square feet in size and were designed to reflect the casual comfort of a home. The company also operated 29 factory outlet stores in the United States. Its seven retail stores in Japan had been closed by 2015. Vera Bradley executed its initial public offering in October 2010 and was listed on the ­NASDAQ with the symbol “VRA.” According to Vera ­Bradley’s management, the company’s direct competitors were manufacturers and marketers of handbags and accessories, such as Coach, Michael Kors, and Kate Spade. Miller and Baekgaard had been honored by the U.S. Small Business Administration as “Outstanding Women Entrepreneurs” and by the Indiana Historical Society as “Indiana Living Legends.” The Vera Bradley Foundation for Breast Cancer had pledged over $35 million to the Indiana University Melvin and Bren Simon Cancer Center to support cancer research. Exhibit 1 presents a financial summary for Vera Bradley for fiscal 2011 through fiscal 2015. The company’s balance sheets for fiscal 2014 and fiscal 2015 are presented in Exhibit 2. Overview of the Handbag and Leather Accessories Market in 2015 The handbag and leather accessories market was estimated at approximately $96 billion in 2013, with the largest markets being the United States with 36 percent of industry sales, Europe with 21 percent of industry sales, Japan with 16 percent of industry sales, and China with 11 percent of industry sales. The retail market for global luxury goods was affected significantly by general economic conditions, with consumers curtailing expenditures for luxury goods in general during recessions and economic slowdowns. For example, the poor general economic conditions between 2006 and 2010 contributed to a 0.6 percent annual decline in industry sales during those years. Continued growth in China and other emerging markets was expected to increase the sales of luxury goods by 7.8 percent annually through 2015. Euromonitor predicted that by 2018, the AsiaPacific region would be the largest market in the world for luxury goods. This growth was due primarily to China but also to other emerging Asian markets such as Indonesia, Malaysia, and India. Emerging markets, especially China and India, were expected to provide a major boost to the luxury goods market because of rapidly increasing wealth levels and standard-of-living gains. China surpassed Japan in 2010 as the third-largest luxury market, with sales of luxury goods approaching $32 billion. The Chinese market for luxury goods was predicted to increase substantially over the next several years, which would make it possibly the world’s largest market for luxury goods. 322  Part 2 Cases in Crafting and Executing Strategy EXHIBIT 1 Financial Summary for Vera Bradley, Inc., Fiscal 2011–Fiscal 2015 (dollar amounts in thousands, except per share and store data) Fiscal Year Ended January 31, 2015 February 1, 2014 February 2, 2013 Consolidated statement of income data Net revenues Cost of sales Gross profit Selling, general, and administrative expenses Other income Operating income Interest expense, net Income before income taxes Income tax expense Net income Basic weighted-average shares outstanding Diluted weighted-average shares outstanding Basic net income per share Diluted net income per share $ 508,990 239,981 269,009 208,675    3,736 64,070    407 63,663 22,828 $ 38,449 40,568 40,632 $0.95 $0.95 $ 536,021 240,589 295,432 205,957 4,776 94,251 382 93,869 35,057 $ 58,812 40,599 40,648 $1.45 $1.45 $ 541,148 232,867 308,281 204,412    6,277 110,146 679 109,467 40,597 $ 68,870 40,536 40,571 $1.70 $1.70 $ 460,843 203,220 257,623 169,427    7,975 96,171    1,147 95,024 37,103 $ 57,921 40,507 40,542 $1.43 $1.43 $ 366,057 156,910 209,147 163,053    7,225 53,319 1,625 51,694    5,496 $ 46,198 36,813 36,851 $1.25 $1.25 Net revenues by segment Direct Indirect Total $ 335,602 173,388 $ 508,990 $ 326,217 209,804 $ 536,021 $ 292,564 248,584 $ 541,148 $ 225,287 235,556 $ 460,843 $ 151,118 214,939 $ 366,057 Store data Total stores open at end of year Comparable-store sales (decrease) increase Total gross square footage at end of year Average net revenues per gross square foot 125 (7.6)% 278,779 $  760 Consolidated balance sheet data Cash and cash equivalents Working capital Total assets Long-term debt, including current portion Shareholders’ equity $ 112,292 204,648 377,284 — 284,471 99 (1.3)% 207,096 $887 $ 59,215 186,543 332,927 — 255,147 76 9.8% 156,310 $1,083 $   9,603 145,641 277,319 15,095 194,255 January 28, January 29, 2012 2011 56 24.9% 113,504 $1,042 $   4,922 106,234 219,513 25,184 124,007 39 34.8% 74,426 $851 $ 13,953 91,919 206,039 67,017 64,322 Source: Vera Bradley, Inc., 10-K report, 2014, 2015. The most valuable luxury leather-goods brands in terms of annual revenues were Louis Vuitton, Gucci, Hermès, and Cartier. Luxury brands, in general, relied on creative designs, high quality, and brand reputation to attract customers and build brand loyalty. Price sensitivity for luxury goods was driven by brand exclusivity, customer-centric marketing, and, to a large extent, some emotional sense of status and value. The market for luxury goods was divided into three main categories: haute couture, traditional luxury, and the growing submarket “accessible luxury.” The apex of the market was haute couture with its very high-end “custom” product offering that catered to the extremely wealthy. Leading brands in the traditional-luxury category included such fashion design houses as Prada, Burberry, Hermès, Gucci, Polo Ralph Lauren, Calvin Klein, and Louis Vuitton. Some of these luxury goods makers also Case 6 Vera Bradley in 2015: Can Its Turnaround Strategy Reverse Its Continuing Decline?  323 EXHIBIT 2 Vera Bradley, Inc.’s Balance Sheets, Fiscal 2014–Fiscal 2015 (in thousands) Fiscal Year Ended Assets  Current assets:  Cash and cash equivalents  Accounts receivable, net  Inventories  Prepaid expenses and other current assets  Deferred income taxes  Total current assets Property, plant, and equipment, net Other assets  Total assets Liabilities and shareholders’ equity  Current liabilities:  Accounts payable  Accrued employment costs  Other accrued liabilities  Income taxes payable  Total current liabilities Long-term debt Deferred income taxes Other long-term liabilities  Total liabilities Commitments and contingencies Shareholders’ equity:  Preferred stock; 5,000 shares authorized, no shares issued or outstanding  Common stock; without par value; 200,000 shares authorized, 40,695 and 40,607 shares issued and outstanding, respectively  Additional paid-in capital  Retained earnings Accumulated other comprehensive loss Treasury stock  Total shareholders’ equity  Total liabilities and shareholders’ equity January 31, 2015 February 1, 2014 $112,292 31,374 98,403 9,100 13,320 267,697 109,003   584 $377,284 $ 59,215 27,718 136,923 9,952 13,094 246,902 84,940 1,085 $332,927 $32,906 14,595 15,548    – 63,049    – 5,297 24,467 92,813 $ 27,745 10,586 20,403 1,625 60,359 – 4,643 12,778 77,780 – – – – 80,992 216,451 (15) (12,957) 284,471 $277,284 78,153 178,002 (1,008)   – 255,147 $332,927 Source: Vera Bradley, Inc., 10-K report, 2014, 2015. broadened their appeal with diffusion lines in the accessible-luxury market to compete with Coach, DKNY, and other lesser luxury brands. For example, while Dolce & Gabbana (D&G) dresses sold for $1,000 to $1,500, dresses of similar appearance under the D&G affordable luxury brand were priced at $400 to $600. Giorgio Armani’s Emporio Armani line and Gianni Versace’s Versus lines typically sold for about 50 percent less than similar-looking items carrying the marquee labels. Profit margins on marquee brands approximated 40 to 50 percent, while most diffusion brands carried profit margins of about 20 percent. Luxury goods manufacturers believed that the diffusion brands’ lower profit margins were offset by the opportunity for increased sales volume, the growing size of the accessible-luxury market, and the protected margins available on such products by sourcing production to low-wage countries. In 2013, Bain & Company reported that online sales were continuing to grow 324  Part 2 Cases in Crafting and Executing Strategy faster than the rest of the market, with 28 percent annual growth for the year, reaching almost $14 billion. Online sales were about 5 percent of total luxury sales. Industry sales in the United States had become more dependent on the success of diffusion lines in the accessible-luxury category. Although primary traditional-luxury consumers in the United States were among the top 1 percent of wage earners, with household incomes of $300,000 or more, consumers who earned substantially less also aspired to own products with higher levels of quality and styling. The growing desire for luxury goods among middleincome consumers was thought to be a result of a wide range of factors, including effective advertising and television programming that promoted conspicuous consumption. The demanding day-to-day rigor of a two-income household was another factor, suggested as urging middle-income consumers to reward themselves with luxuries. An additional factor contributing to rising sales of luxury goods in the United States was the “trade up, trade down”2 shopping strategy, whereby consumers would balance their spending by offsetting gains made with lowerpriced necessities purchased at major retailers (e.g., Walmart and Target) to enable more discretionary spending for luxury goods. Vera Bradley’s Strategic Plan for 2015–2019 In March 2014, Vera Bradley announced a comprehensive five-year strategic plan designed to improve the company’s competitive standing, financial performance, and long-term shareholder value. The company’s plan focused on three key areas: product, distribution channels, and marketing. Product Strategy Vera Bradley’s major product categories in 2014 were handbags; accessories such as wallets, wristlets, eyeglass cases, cosmetics cases, and paper and gifts; and travel and leisure items such as duffle bags, garment bags, rolling luggage, and travel cosmetics cases. The company’s new strategic emphasis was on improving its product assortment by focusing on its core designs, with “halo” products used to expand price points without creating an overly broad product line. The strategy would put the greatest focus on the company’s strongest product categories such as travel items, backpacks, bags, and accessories. However, the company planned to invest in emerging growth and brand-enhancing opportunities that would strengthen the future product core, such as scarves and jewelry. Management also intended to add products targeted to career-focused women to expand the customer base. Vera Bradley planned to limit the number of signature patterns launched each year and add more solids to the pattern assortment to better showcase the signature patterns. The company’s product release strategy involved the introduction of two to four patterns per season that were used in each of its key product categories. Production of poor-­ selling patterns was to be quickly discontinued, with remaining inventory sold through the company’s website, outlet stores, and annual outlet sale. Also, management decided to develop new products with a predetermined life cycle in mind and alter product launch campaigns based on the potential of the product. In prior years, all products utilized a similar launch strategy and were intended to be marketed as long as demand permitted. The percentage of Vera Bradley’s net revenues accounted for by each major product category is presented in Exhibit 3. Distribution Channels Vera Bradley’s strategic plan intended to utilize a tightly integrated multichannel distribution strategy that included department stores and specialty retailers, full-line stores, factory outlet stores, and e-commerce. The company believed that its legacy gift channel would remain important, but it planned to reduce the product assortment in the channel. Vera Bradley’s long-term strategic objective was to expand to 300 full-price retail stores and 100 factory outlet stores. Vera Bradley planned to add approximately 20 to 25 new stores per year for between 2016 and 2020. By 2019, the company expected that approximately 40 percent of the products sold in factory outlet stores would be designed specifically for the outlet channel. Management expected that 70 percent of the factory outlet items would be unique to the factory outlet channel by 2019. The company Case 6 Vera Bradley in 2015: Can Its Turnaround Strategy Reverse Its Continuing Decline?  325 EXHIBIT 3 Vera Bradley’s Net Revenue Contributions by Major Product Category, Fiscal 2013–Fiscal 2015 Fiscal Year Ended Net Revenues: Handbags Accessories Travel Home Other* Total† January 31, 2015 February 1, 2014 February 2, 2013 $230,978 116,031 109,112 17,721 35,148 $508,990 $223,699 133,605 116,251 20,270 37,071 $530,896 $222,984 143,946 116,576 18,162   33,999 $535,667 *Includes primarily home, merchandising, freight, and licensing revenues. †Excludes net revenues generated by the annual outlet sale. Source: Vera Bradley, Inc., 10-K report, 2015. believed this made-for-outlet (MFO) strategy would boost gross margins in the factory outlet channel. E-commerce was also intended to be a key distribution channel and provide support for the Vera Bradley brand and marketing strategies. The goal was for the e-commerce experience to mirror the in-store shopping experience by segregating the full-line and factory outlet products onto different sites. Vera Bradley’s website was upgraded in 2013, which allowed the company to ship to 15 countries. Additional enhancements made to the website in 2015 resulted in over 73 million hits in fiscal 2015. The company placed greater focus on department store relationships and continued to explore other expansion opportunities in department store space, especially since department stores were the largest handbag channel for career professionals. As of January 2015, Vera Bradley products were sold in about 2,700 specialty retail outlets. The top 30 percent of those outlets accounted for approximately 70 percent of revenue from the indirect segment. Marketing The marketing objective for the company was to make Vera Bradley an aspirational brand for consumers, convey the Vera Bradley brand personality, and generate excitement around new product launches. In 2015, the company used retention advertising to keep the brand fresh in the minds of its present customers and to provide them with news of the season product launches and new products. New customer acquisition advertising—primarily print (Vogue, Seventeen, Elle, InStyle, Better Homes and Gardens, and Real Simple) and digital—was designed to increase brand awareness and attract new customers. Vera Bradley intended for its marketing approach to expand its customer base while strengthening its connections with loyal customers. The majority of its advertising expenditures were to be allocated to fresh, new products and halo assortments building upon the brand equity of established lines. The company believed its iconic products and styles needed little reinforcement with consumers through additional advertising expenditures. Vera Bradley’s Competitive Resources and Capabilities Vera Bradley’s new strategy was based on competencies that were closely related to success in the markets for handbags, luggage, and women’s accessories. The company believed it had a well-­ developed ability to understand the needs and wants of its customers, valuable product design skills, marketing and brand-building expertise, and 326  Part 2 Cases in Crafting and Executing Strategy strong distribution capabilities. Other capabilities that enabled the company’s strategy included site-­ location expertise and manufacturing efficiencies. Product Development Vera Bradley had implemented a fully integrated, cross-functional product development process that aligned its design, market research, merchandise management, sales, marketing, and sourcing functions. The company’s product development teams in New York City and Roanoke, Indiana, combined an understanding of target customers’ needs with knowledge of approaching color and fashion trends to design new collections as well as totally new product categories that would fit well in their markets. The development cycle for new products for the Vera Bradley portfolio began about 12 to 18 months in advance of their release. Each new pattern included the design of an overall print, a fabric backing that complemented the pattern, and three sizes of coordinating trim materials. Vera Bradley also collaborated with independent designers to create unique patterns for each season, but the company retained final approval of all patterns and designs. All new patterns, including the print, fabric backing, and coordinating trim, were protected by a copyright. The company believed that great designs were fundamental to its product development and were a central part of its brand development and growth strategies. Vera Bradley routinely updated its classic styles and actively pursued new lines and brand extensions to increase its product offerings. Vera Bradley’s product development group attended major trend shows in Europe and the United States, subscribed to trend-monitoring services, and engaged in comparison shopping to monitor fashion trends and customer needs. Product development personnel were also responsible for assortment planning, pricing, forecasting, promotional development, and product life-cycle management. Forecasting was based on seasonal market research and in-store testing. Seasonal market data were obtained through seasonal in-store testing by releasing test products in full-price stores and evaluating their success in the marketplace prior to introducing the product on a larger scale. Product Launch Process Vera Bradley introduced two to three new patterns each season that were incorporated into the designs of a wide range of products, including handbags, accessories, and travel and leisure items. P ­ roducts were manufactured from cotton-quilted fabric, micro-leather, faux leather, and leather. The seasonal product assortments could be classic styles, updates of older designs, or totally new product introductions. Patterns were discontinued at regular intervals to keep the assortment current and fresh and to focus the inventory investment on top-performing patterns. The remaining inventory of retired products was sold primarily through the company’s website, factory outlet stores, and annual outlet sale. Site Location Vera Bradley’s management believed that ample opportunity for expansion existed since none of its geographic markets had been saturated. The company saw expansion of company-operated fullprice and factory outlet stores as complementary to its indirect channels since the visibility of Vera Bradley retail stores increased brand awareness and bolstered its brand image. The site-location process involved analyzing area economic conditions, the specific location within a shopping center, the size and shape of the space, and the presence of desirable co-tenants. Management attempted to achieve a balanced mix of moderate and high-end retailers and co-tenants that shared Vera Bradley’s target customers to encourage high levels of traffic. The ideal fullprice store size was about 1,800 square feet, but the company could work with spaces as small as 1,000 square feet. Depending on the market strategy and relevant economic factors, spaces as large as 2,800 square feet could be used. Opening expenses for new locations averaged about $400,000 to provide for space renovation costs, initial inventory, and preopening expenses. New full-price stores generated, on average, $1 million in net revenues during the first 12 months. New factory outlet stores produced an average of $2.6 million in net revenue during the first 12 months. The typical payback period for recovering the company’s initial investment in a new location was approximately 12 months. Case 6 Vera Bradley in 2015: Can Its Turnaround Strategy Reverse Its Continuing Decline?  327 Profiles of Vera Bradley’s Chief Rivals Coach, Inc. In 2014, Coach operated 332 full-price stores and 207 factory outlet stores in North America and maintained over 1,000 wholesale department store accounts. The company operated 198 stores in Japan and 277 stores in other Asian nations. Coach products were also available in 183 locations in other international markets. Coach also operated e-commerce websites in the United States, Canada, Japan, and China, and had informational websites in over 20 other countries. Coach viewed its websites as a key communication vehicle for promoting traffic in Coach’s retail stores and department store locations and for building brand awareness. With approximately 76 million online visits to its e-commerce websites in fiscal 2014, Coach’s online store provided a virtual showcase environment where customers could browse selected offerings of the latest styles and colors. Coach’s e-commerce strategy also included invitation-only factory flash sites and third-party flash sites. In addition to its direct retail businesses, Coach had built a strong presence globally through Coach boutiques located within select department stores and specialty retailer locations in North America and through 280 distributoroperated shops in Asia, Latin America, the Middle East, Australia, and Europe. Coach was one of the most recognized fine-­ accessories brands in the United States and in its targeted international markets. The company offered attractively priced, premium lifestyle accessories to a loyal and growing customer base, and it provided consumers with well-made, appealing, and innovative products. Coach’s product offerings of fine accessories and gifts for women and men included handbags, men’s bags, women’s and men’s small leather goods, footwear, outerwear, watches, weekend and travel accessories, scarves, sunwear, fragrances, jewelry, and related accessories. Continuing development of new categories had further established the signature style and distinctive identity of the Coach brand. With its licensing partners, the company offered watches, footwear, eyewear, and fragrances bearing the Coach brand name in select department stores and specialty retailer locations. Coach’s Strategic Initiatives in 2015 Coach’s strategic plan was to sustain growth in the global business by focusing on four key strategic initiatives. The company planned to move from a leading international accessories company to a global lifestyle brand encompassing a wide range of accessories for men and women. Coach management believed that men’s products, particularly in North America and Asia, created a unique growth opportunity. Coach capitalized on men’s products by opening new standalone and dual-gender stores and broadening the men’s assortment in existing stores. The company also intended to raise brand awareness and market share in markets where Coach was underpenetrated, most notably in Europe, Asia, and Central and South America. Finally, the company planned to accelerate the development of its digital programs and capabilities in North America and worldwide, reflecting the changing global consumer shopping behavior. In addition to the four key initiatives underway in late-2014, Coach announced its Transformational Plan to bolster its brand equity and restore its former growth and profit margins. Coach’s execution of this plan required $500 million in capital improvements for store locations in 2015 and 2016. In addition, the plan would close about 70 underperforming stores in the United States in 2015, realign inventory levels, and increase annual advertising by $50 million. A summary of the company’s financial performance for fiscal 2010 through fiscal 2014 is presented in Exhibit 4. Michael Kors Holdings In 2015, Michael Kors was among the leading American luxury lifestyle brands, with sales in 74 countries and a product line focused on handbags, accessories, footwear, and apparel. The company’s design team was personally led by Michael Kors, who directed the team in conceptualizing and designing all of the company’s products. Michael Kors had been recognized with numerous awards, including the Council of Fashion Designers (CFDA) Women’s Fashion Designer of the Year (1999), the CFDA Men’s Fashion Designer of the Year (2003), the Accessories Council Excellence (ACE) Accessory Designer of the Year (2006), and the CFDA Lifetime Achievement (2010) awards. Michael Kors’s strategy involved the design, manufacturing, and marketing of two primary 328  Part 2 Cases in Crafting and Executing Strategy EXHIBIT 4 Financial Summary for Coach, Inc., Fiscal 2010–Fiscal 2014 (dollar amounts in thousands, except per share data) Fiscal Year Ended Net sales Gross profit Selling, general, and expenses Operating income Net income Net income: Per basic share Per diluted share Weighted-average basic shares outstanding Weighted-average diluted shares outstanding Dividends declared per common share June 28, 2014 June 29, 2013 June 30, 2012 July 2, 2011 July 3, 2010 $4, 806,226 3,296,963 2,176,889 1,120,074 781,336 $5,075,390 3,698,148 2,173,607 1,524,541 1,034,420 $4,763,180 3,466,078 1,954,089 1,511,989 1,038,910 $4,158,507 3,023,541 1,718,617 1,304,924 880,800 $3,607,636 2,633,691 1,483,520 1,150,171 734,940 $2.81 $2.79 277,790 $3.66 $3.61 282,494 $3.60 $3.53 288,284 $2.99 $2.92 294,877 $2.36 $2.33 311,413 280,379 286,307 294,129 301,558 315,848 $1.350 $1.238 $0.975 $0.675 $0.375 Source: Coach Inc., 2014 10-K. collections: the Michael Kors luxury collection and the MICHAEL Michael Kors accessible-luxury collection. The Michael Kors luxury line was introduced in 1981 and was sold in the company’s retail stores and in luxury department stores throughout the world, including Bergdorf Goodman, Saks Fifth Avenue, Neiman Marcus, Holt Renfrew, ­Harrods, Harvey Nichols, and Printemps. The Michael Kors collection included accessories, handbags, footwear, and apparel, including ready-to-wear and small leather goods. The MICHAEL Michael Kors accessible-luxury line was added in 2004 to capitalize on the brand strength of the Michael Kors collection in order to meet the significant demand for moderately priced luxury goods. Although the MICHAEL Michael Kors collection was focused on accessories, it also offered footwear and apparel, and was designed to appeal to younger customers. The MICHAEL Michael Kors collection was carried in the company’s lifestyle stores as well as in leading department stores throughout the world, including Bloomingdale’s, Nordstrom, Macy’s, Harrods, Harvey Nichols, Galeries Lafayette, Lotte, Hyundai, Isetan, and Lane Crawford. As of 2015, Michael Kors operated in three market segments: retail, wholesale, and licensing. In fiscal 2015, the retail segment accounted for approximately 48.8 percent of total revenue. As of March 2015, the retail segment included 509 retail stores in North America, up from 395 in December 2013. Michael Kors also had 183 international retail stores in Europe and Japan. The company had an additional 194 retail stores, including concessions, which were operated by licensed partners. The wholesale segment comprised about 2,541 department and specialty stores in North America and approximately 1,497 international department and specialty stores. In fiscal 2015, licensing produced approximately 4 percent of total revenue and consisted primarily of royalties on licensed products and geographic licenses. A financial summary for Michael Kors holdings for fiscal 2011–fiscal 2015 is presented in Exhibit 5. The exhibit also presents the number of stores at the end of each period and comparable-store sales growth per year for 2011 through 2015. Michael Kors’s Strategic Initiatives in 2015 Michael Kors’s business strategy was focused on Case 6 Vera Bradley in 2015: Can Its Turnaround Strategy Reverse Its Continuing Decline?  329 EXHIBIT 5 Financial Summary for Michael Kors Holdings, Fiscal 2011–Fiscal 2015 (dollar amounts in thousands, except per share and store data) Fiscal Year Ended Statement of operations data Net sales Licensing revenue Total revenue Cost of goods sold Gross profit Selling, general, and administrative expenses Depreciation and amortization Impairment of long-lived assets Total operating expenses Income from operations Other income Interest expense, net Foreign currency loss (gain) Income before provision for income taxes Provision for income taxes Net income Net income applicable to preference shareholders Net income available for ordinary shareholders Weighted-average ordinary shares outstanding: Basic Diluted Net income per ordinary share: Basic Diluted Operating data Comparable-retail-store sales growth Retail stores, including concessions, at end of period March 28, 2015 March 29, 2014 March 30, 2013 March 31, 2012 April 2, 2011 $4,199,666 171,803 4,371,469 1,723,818 2,647,651 1,251,431 $3,170,522 140,321 3,310,843 1,294,773 2,016,070 926,913 $2,094,757    86,975 2,181,732 875,166 1,306,566 621,536 $1,237,100    65,154 1,302,254 549,158 753,096 464,568 $757,800   45,539 803,339 357,274 446,065 279,822 138,425    822 1,390,678 1,390,678 (3,117) 215    4,052 1,256,973 79,654   1,332 1,007,899 1,008,171 — 393    131 1,007,647 54,291     725 676,552 630,014 -1,524    1,363 627,127 37,554    3,292 505,414 247,682 — 1,495    (2,629) 248,816 25,543   3,834 309,199 136,866 — 1,861   1,786 133,219 374,800 881,023    — 346,162 661,485     — 229,525 397,602    — 101,452 147,364    21,227 60,713 72,506 15,629 $881,023 $ 661,485 $ 397,602 $ 126,137 $ 56,877 202,680,572 205,865,769 202,582,945 205,638,107 196,615,054 201,540,144 158,258,126 189,299,197 140,554,377 179,177,268 $4.35 $4.28 $3.27 $3.22 $2.02 $1.97 $0.80 $0.78 $0.40 $0.40 10.3% 26.2% 40.1% 39.2% 48.2% 526 405 304 237 166 Source: Michael Kors Holdings 2015 Annual Report. increasing brand awareness, expanding the retail store base in North America, increasing comparablestore sales, and expanding internationally. The company’s management planned to increase the North American retail store base to about 400 locations in the long term. Newly added stores were to be located in high-traffic street and mall locations in highincome demographic areas. The new stores would be consistent with the company’s successful retail store formats to reinforce the Michael Kors brand image and generate strong sales per square foot. The company also planned to increase wholesale sales in 330  Part 2 Cases in Crafting and Executing Strategy North America by increasing the number of shopin-shops. Michael Kors believed that its proprietary shop-in-shop fixtures were effective in projecting its brand image within department stores and enhancing the presentation of Michael Kors merchandise. The company intended to increase global comparable-store sales by increasing the size and frequency of purchases by existing customers and attracting new customers. Management initiatives to achieve those goals included increasing the size of existing stores, creating more stimulating store environments, and offering new products such as logo products, footwear, small leather goods, and fashion jewelry. Michael Kors planned to continue international expansion in targeted regions in Europe and other international markets and to continue to leverage existing European and Japanese operations to drive continued expansion. Plans included increasing international retail stores, including concessions, wholesale locations, and shopin-shop conversions at select department stores. Michael Kors’s Financial Performance in 2015 Sales at existing Michael Kors stores fell 5.8 percent in the fourth quarter of fiscal 2015, which ended on March 28, 2015. North American stores experienced a 6.7 percent decline in sales, and revenues in Europe dropped by 5.6 percent. The company’s shares had declined by more than 50 percent during 2015. Investors were concerned about Michael Kors’s aggressive opening of new retail stores and selling more products through department stores, which could lead to overexposure and damage to its brand. In addition, its projected revenues of $4.7 billion to $4.8 billion for fiscal 2016 were far short of investor expectations of $5.05 billion. Kate Spade & Company Kate Spade, a former accessories editor at Mademoiselle, decided in 1993 to launch a company focused on what she believed were the ideal handbag styles. Her initial designs were clustered around just six silhouettes, as she combined sleek, utilitarian shapes and colorful palettes in an entirely new way. In 2015, Kate Spade & Company was organized under three lifestyle brands that were marketed globally through multiple channels. The company’s kate spade new york brand was its marquee global brand of ladies’ handbags, apparel, and accessories, and was sold in company-owned specialty retail stores in the United States and other countries and in U.S. and foreign factory outlet stores. The company’s Kate Spade Saturday line was a stylish, casual line of handbags and accessories, and was primarily sold in companyowned locations in the United States. The company’s Jack Spade brand of men’s leather bags and accessories was also primarily sold in the United States. Kate Spade closed the company-owned Kate Spade Saturday and Jack Spade stores. Kate Spade Saturday was absorbed into kate spade new york as a label, and Jack Spade was reimaged as an e-commerce and retail partner brand. In 2015, Kate Spade operated 93 domestic retail stores, 32 foreign specialty retail stores, 57 domestic outlet stores, and 14 foreign outlets. Kate Spade & Company also owned the Adelington Design Group, a private-brand jewelry design and development group that marketed brands through department stores. The company had owned the Juicy Couture and Lucky Brand apparel businesses, which were divested in late 2013 and early 2014, respectively. The company received $195 million from the sale of Juicy Couture and $225 million from the sale of Lucky Brand. Kate Spade also had a license for the Liz C ­ laiborne New York brand, available at QVC, and Lizwear, which was distributed through the club store channel. Kate Spade & Company’s Strategic Initiatives in 2015 In 2014, Kate Spade’s management team was focused on aggressively expanding the business, identifying new opportunities, and continuing the company’s positive growth trend. Management planned to increase the profit margin by adding additional product category licenses, which would enable the company to enter new product lines quickly and with minimal investment. As the company grew, management intended to evaluate appropriate business models for international expansion. Kate Spade’s management believed that being able to concentrate solely on Kate Spade & Company would enhance the company’s progress. Kate Spade made significant progress in geographic expansion and expansion of their product categories in fiscal 2014. Net sales increased 49 percent, and international sales increased by 47 percent, driven largely by Japan and Southeast Asia. The company launched its UK e-commerce site to help strengthen its European presence. In 2015, Kate Spade announced a partnership with Walton Brown, Case 6 Vera Bradley in 2015: Can Its Turnaround Strategy Reverse Its Continuing Decline?  331 a subsidiary of Asia’s premier fashion retail and brand management group, to boost their China sales. Also in 2015, Kate Spade launched a children’s wear line, which opened up a totally new demographic, and the company announced a global licensing agreement with Fossil Group for watches. The company established four product categories: women’s, men’s, children’s, and home. In 2013, total revenue for Kate Spade brands increased by 61 percent, to $743 million. The company continued its industry-leading growth in fiscal 2014, with total revenue for Kate Spade brands increasing by 42 percent percent, to $1.139 billion (up from $743 million in 2013). Exhibit 6 presents a financial summary for Kate Spade & Company for 2010 through 2014. EXHIBIT 6 Financial Summary for Kate Spade & Company, 2010—2014 (dollar amounts in thousands, except per share data) Net sales Gross profit Operating income (loss) Income (loss) from continuing operations(a)(b) Net income (loss)(b) Working capital Total assets Total debt Total stockholders’ (deficit) equity Per common share data: Basic  Income (loss) from continuing operations Net income Diluted  Income (loss) from continuing operations Net income Weighted-average shares outstanding, basic Weighted-average shares outstanding, diluted(c) 2014 2013 2012 2011 2010 $1,138,603 680,271 33,472 76,726 $803,371 496,590 20,215 (32,165) $544,765 339,932 (36,022) (52,687) $569,820 309,983 (140,335) 101,144 $670,826 293,203 (126,134) (164,328) 159,160 221,705 926,338 410,743 199,611 72,995 206,473 977,511 394,201 (32,482) (74,505) 36,407 902,523 406,294 (126,930) (171,687) 124,772 950,004 446,315 (108,986) (251,467) 39,043 1,257,659 577,812 (24,170) $0.61 $(0.27) $(0.48) $1.07 $(1.74) $1.26 $0.60 $(0.68) $(1.81) $(2.67) $0.60 $(0.27) $(0.48) $0.91 $(1.74) $1.25 126,264 $0.60 121,057 $(0.68) 109,292 $(1.35) 94,664 $(2.67) 94,243 109,292 120,692 94,243 127,019 121,057 (a) During 2014, 2013 and 2012, we recorded pretax charges of $42.0 million, $10.6 million and $43.2 million, respectively, related to our streamlining initiatives, which are discussed in Note 13 of Notes to Consolidated Financial Statements. During 2013, we recorded a pretax non-cash impairment charge of $6.1 million related to our former investment in the Mexx business. During 2014 and 2013, we recorded pretax non-cash impairment charges of $1.5 million and $3.3 million, respectively, in our Adelington Design Group segment related to the TRIFARI trademark. During 2012, we recorded a pretax gain of $40.1 million related to the KSJ Buyout (see Note 2 of Notes to Consolidated Financial Statements). During 2011, we recorded a pretax gain of $287.0 million related to the sales of: (i) the global trademark rights for the LIZ CLAIBORNE family of brands; (ii) the trademark rights in the US and Puerto Rico for MONET; (iii) the Dana Buchman trademark; and (iv) the trademark rights related to our former Curve brand and selected other smaller fragrance brands. During 2010, we recorded non-cash pretax impairment charges of $2.6 million primarily within our Adelington Design Group segment principally related to merchandising rights of our LIZ CLAIBORNE and former licensed DKNY Jeans brands. (b) During 2014, we recorded a net benefit of $87.4 million resulting from the reversal of reserves for uncertain tax positions due to the expiration of the related statutes of limitations. (c) Because we incurred losses from continuing operations in 2013, 2012 and 2010, outstanding stock options, nonvested shares and potentially dilutive shares ­issuable upon conversion of the Convertible Notes are antidilutive. Accordingly, basic and diluted weighted average shares outstanding are equal for such periods. Source: Kate Spade & Company 2014 Annual Report. 332  Part 2 Cases in Crafting and Executing Strategy Vera Bradley’s Performance in Fiscal 2016 In 2016, Vera Bradley’s strategic direction seemed adrift as its first-quarter 2016 revenues and earnings slipped further. Comparable store sales fell 22.3 percent, and e-commerce sales declined by 9.7 percent. Overall, first-quarter 2016 net revenues of $101.1 million fell by 9 percent, from $112.2 million in the same period in fiscal 2015. Also during the quarter, the company posted a net loss from continuing operations of $4.1 million. The company’s “management also announced plans to close its manufacturing plant in Indiana ENDNOTES 1 As quoted in “Vera Bradley Announces Fourth ­Quarter and Fiscal Year 2015 Results,” Globe Newswire, March 11, 2015. 2 As quoted in “Stores Dancing Chic,” Houston ­Chronicle, May 6, 2000. during 2016, unless business conditions required an earlier closing. The Indiana plant manufactured about 5 percent of Vera Bradley’s products and employed about 250. According to Vera Bradley’s CEO Wallstrom, the costs of domestic manufacturing were 90 percent greater than for goods produced in overseas factories. The company estimated costs of about $6.5 million associated with the closing but forecast a reduction in operating costs of about $412 million per year, beginning in fiscal 2016. It was expected that production from the plant would be shifted to third-party manufacturers. Team Project Guidelines for Comprehensive Case Analysis 1. Table of contents. (5 points) 2. Introduction or an executive summary-one page. (10 pts) 3. External analysis: a. Perform the Five forces Analysis of Competitive pressures in this industry. (50 pts) – b. Identify and explain the Key Driving Forces of the industry. (How is the market place changing?) (10 pts) c. Construct a Strategic Group Map for the industry. (20 pts) d. What does it take to succeed in this industry? Identify at least 3 Key Success Factors. (15 pts) 20 points is assigned for the organization of the paper, its presentation of the materials (e.g., graphs, charts, etc.), and its adherence to the stated guidelines.
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