Retail stocks have struggled during the pandemic. At first, many retail stores were shut down in many parts of the country. Even when stores were allowed to reopen, foot traffic never recovered to previous levels.

Then, as case counts declined and vaccinations increased, there was a boom in retail sales, as there was pent-up demand to shop in stores and consumers were eager to spend their stimulus dollars. As a result, retail shares were among the biggest gainers in the first half of 2021. Since then, the delta variant has created a more gloomy outlook for consumer spending with higher costs eating into discretionary income.    

This has resulted in a sharp pullback for retail stocks. However, there are some good reasons to believe that the dip in retail stocks could be a buying opportunity, given the recent drop in coronavirus cases, reports of improvements in supply chains, declines in shipping rates, and healthy levels of wage growth. Therefore, investors should look to buy the dip in high-quality retail stocks like Vera Bradley (VRA). 

Company Background

VRA is an American luggage and handbag design company. It was founded in Indiana in 1982 by Barbara Bradley Baekgaard and Patricia R. Miller with a line of cotton, luxury handbags. From this, it has expanded into a variety of items including women’s handbags, luggage, fashion, and home accessories. 

Most of its products are sold through its channels including e-commerce, branded retail stores, and outlet stores. And it also sells its products through other retailers. In total, it has about 144 company-owned retail stores and its products are sold in around 2,000 retail locations. The company’s products are well-regarded for their mix of quality, design, and price and are popular among women. 

Like most fashion companies, VRA’s revenues plunged during the onset of the coronavirus pandemic for obvious reasons. However, the company’s recent results have been quite strong and have benefitted from pent-up demand in these categories.

Value

Thus, VRA is quite attractive from a value perspective with a forward P/E of 9.6. This is much cheaper than the market average of 21. It also stands out with other value metrics like a price to sales ratio of 0.6 and a price to free cash flow ratio of 10. 

Further, the stock has experienced a more than 30% pullback due to supply chain issues which have hurt all retail stocks reliant on imports. However, there are already signs that these issues are being worked through, and the world’s supply chains are on the path to recovery. 

Growth

This type of development could cause a sharp move higher in VRA as multiples expand in a more favorable operating environment.

Another reason to feel bullish about VRA is its impressive growth over a 2 year period in a tough environment for retail stocks. Over this period, VRA has increased revenue by 25% and EPS by 15%.

The environment for retail stocks could remain favorable if case counts drop and foot traffic to retail stores rebounds, shipping, and raw material costs decline with supply chains and logistics channels returning to normal, and the economy continues to expand.

POWR Ratings 

Given this combination of growth and value, it’s not surprising that VRA is rated a B according to the POWR Ratings which equates to a Buy rating. B-rated stocks have posted an average annual performance of 19.7% which compares favorably to the S&P 500’s annual performance of 7.1%. 

The POWR Ratings also evaluates stocks by different components to give additional insight on each stock. Interestingly, VRA has an A rating for Momentum, and Momentum stocks tend to do well in seasonally bullish periods of the year like Q4.

The POWR Ratings also provides component grades for other categories like Value, Growth, Stability, Sentiment, Industry, and Quality. To see VRA’s POWR Ratings, click here. 

Putting It All Together

Like most retail stocks, VRA posted spectacular gains from August 2020 to June 2021 as the economy proved to be more resilient than expected, stimulus payments offset a big chunk of the economic damage, and the vaccines gave hope that the situation was improving.

However, this narrative took a big hit with the Delta variant which caused retail foot traffic to decline. Now, that we are on the other side of the outbreak with case counts plummeting. Investors should look to buy high-quality retail stocks like VRA that will benefit.

VRA shares were trading at $10.02 per share on Monday afternoon, up $0.13 (+1.31%). Year-to-date, VRA has gained 25.88%, versus a 20.69% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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