Individual Case Assignment Work Case 13 individually without any assistance from your team members Your analysis should include the application of at least one concept from each chapter in the text we have studied thus far (including Week 5: Chapter 9). The grading criteria for written case analyses include a(n): Executive summary outlining your strategic analysis and recommendations. For information about what an executive summary entails, please refer to: Synopsis of the major case facts, key problems, and strategic issues that management needs to address. Strategic analysis of those key issues utilizing tools and techniques presented in the text (using tables and charts if appropriate). Conclusion/Recommendations section which focuses on your well-supported action plan to address the strategic issues of the case. All written cases are to be submitted in 12-point font, preferably Times New Roman, and 1.5 lines-spaced with 1-inch margins. The report should incorporate correct form, spelling, grammar, sentence structure, and communication skills. Each written case analysis document should be well-organized, well-written, persuasive, and concise (should not be more than five (5) pages in length) Confirming Pages CASE 13 Vera Bradley in 2014: Will the Company's Strategy Reverse Its Downward Trend? David L. Turnipseed John E. Gamble University of South Alabama Texas A&M University-Corpus Christi V COMPANY HISTORY era Bradley had grown rapidly since the mid2000s 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. 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. tho20598_case13_C188-C199.indd 188 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 duffel bags from their homes. They named the company after Barbara Baekgaard's mother, Vera Bradley, and initially focused only on duffel 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 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 Copyright 2014 by David L. Turnipseed. All rights reserved. 9/26/14 12:40 PM Confirming Pages CASE 13 Vera Bradley in 2014: Will the Company's Strategy Reverse Its Downward Trend? 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. The company operated 84 full-price retail stores in the United States in 2014. Vera Bradley 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 15 factory outlet stores in the United States and 7 full-price retail stores in Japan. Vera Bradley also launched an e-commerce site in Japan in 2012. EXHIBIT 1 C-189 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 2010 through fiscal 2014. The company's balance sheets for fiscal 2013 and fiscal 2014 are presented in Exhibit 2. OVERVIEW OF THE HANDBAG AND LEATHER ACCESSORIES MARKET IN 2014 The handbag and leather accessories market was estimated about $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 Financial Summary for Vera Bradley, Inc., Fiscal 2010-Fiscal 2014 (dollar amounts in thousands, except per share and store data) Fiscal Year Ended Consolidated statement of income data Net revenues Cost of sales Gross profit Selling, general, and administrative expenses Other income Operating income Interest expense, net February 1, 2014 February 2, 2013 January 28, 2012 January 29, 2011 January 29, 2010 $536,021 240,589 295,432 $541,148 232,867 308,281 $460,843 203,220 257,623 $366,057 156,910 209,147 $288,940 137,803 151,137 205,957 4,776 94,251 382 204,412 6,277 110,146 679 169,427 7,975 96,171 1,147 163,053 7,225 53,319 1,625 116,168 10,743 45,712 1,604 (Continued) tho20598_case13_C188-C199.indd 189 9/26/14 12:40 PM Confirming Pages PART 2 C-190 EXHIBIT 1 Cases in Crafting and Executing Strategy (Continued) Fiscal Year Ended 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 Net revenues by segment Direct Indirect Total 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 Consolidated balance sheet data Cash and cash equivalents Working capital Total assets Long-term debt, including current portion Shareholders' equity February 1, 2014 February 2, 2013 January 28, 2012 January 29, 2011 January 29, 2010 93,869 35,057 $ 58,812 109,467 40,597 $ 68,870 95,024 37,103 $ 57,921 51,694 5,496 $ 46,198 44,108 889 $ 43,219 40,599 40,536 40,507 36,813 35,441 40,648 $1.45 1.45 40,571 $1.70 1.70 40,542 $1.43 1.43 36,851 $1.25 1.25 35,441 $1.22 1.22 $326,217 209,804 $536,021 $ 292,564 248,584 $ 541,148 $ 225,287 235,556 $460,843 $ 151,118 214,939 $366,057 $ 96,111 192,829 $288,940 99 76 56 39 27 (5.7)% 3.4% 10.9% 25.8% 36.4% 207,096 156,310 113,504 74,426 50,506 $887 $1,083 $1,042 $851 $615 $ 59,215 186,543 332,927 $ 9,603 145,641 277,319 4,922 106,234 219,513 $ 13,953 91,919 206,039 255,147 15,095 194,255 25,184 124,007 67,017 64,322 $ $ 6,509 61,238 153,752 30,136 77,893 Source: Vera Bradley, Inc., 10-K report, 2014. 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 allow luxury goods sales to increase by 7.8 percent annually through 2015 and reach a staggering $350 billion. Euromonitor predicted that by 2018, the AsiaPacific region would be the largest market in the world tho20598_case13_C188-C199.indd 190 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 standardof-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. 9/26/14 12:40 PM Confirming Pages CASE 13 Vera Bradley in 2014: Will the Company's Strategy Reverse Its Downward Trend? EXHIBIT 2 C-191 Vera Bradley, Inc.'s Balance Sheets, Fiscal 2013-Fiscal 2014 (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: Accrued employment costs Other accrued liabilities Income taxes payable Current portion of long-term debt 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, 40,607 and 40,563 shares issued and outstanding, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total shareholders' equity Total liabilities and shareholders' equity February 1, 2014 February 2, 2013 $ 59,215 27,718 136,923 9,952 13,094 246,902 84,940 1,085 $332,927 $ 9,603 34,811 131,562 11,016 11,348 198,340 77,211 1,768 $277,319 $ 27,745 10,586 20,403 1,625 60,359 4,643 12,778 77,780 $ 14,853 14,162 16,532 7,094 58 52,699 15,037 6,078 9,250 83,064 78,153 178,002 (1,008) 255,147 $332,927 75,675 119,190 (610) 194,255 $277,319 Source: Vera Bradley, Inc., 10-K report, 2014. The most valuable luxury leather-goods brands in terms of annual revenues were Louis Vuitton, Gucci, Herms, 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 tho20598_case13_C188-C199.indd 191 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, Herms, 9/26/14 12:40 PM Confirming Pages C-192 PART 2 Cases in Crafting and Executing Strategy Gucci, Polo Ralph Lauren, Calvin Klein, and Louis Vuitton. Some of these luxury goods makers also 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 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 and more than the luxury sales for Germany. 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 middle-income 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\"1 shopping strategy, whereby consumers would balance their spending by offsetting gains made with lower-priced necessities purchased at major retailers (e.g., Walmart and Target) to enable more discretionary spending for luxury goods. tho20598_case13_C188-C199.indd 192 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 duffel 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, 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 poorselling 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 for fiscal 2012 through fiscal 2014 is presented in Exhibit 3. 9/26/14 12:40 PM Confirming Pages CASE 13 Vera Bradley in 2014: Will the Company's Strategy Reverse Its Downward Trend? EXHIBIT 3 C-193 Vera Bradley's Net Revenue Contributions, by Major Product Category, Fiscal 2012-Fiscal 2014 Fiscal Year Ended February 1, 2014 February 2, 2013 January 28, 2012 40.0% 30.1 14.8 15.1 100.0% 40.4% 31.7 14.7 13.2 100.0% 43.1% 32.2 15.2 9.5 100.0% Handbags Accessories Travel and leisure items Other* Total *Includes primarily home, merchandising, freight, and licensing revenues. Excludes net revenues generated by the annual outlet sale. Source: Vera Bradley, Inc., 10-K report, 2014. 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 13 new full-line stores in fiscal 2015 and accelerate that pace, beginning in fiscal 2016, to add approximately 20 to 25 new stores per year for at least the next four years. The company also planned to add at least seven new outlet stores in fiscal 2015. Management believed that the company could accelerate this growth rate going forward to approximately 10 to 15 new stores per year for at least the next four years. Within three years, 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 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 tho20598_case13_C188-C199.indd 193 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. 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. Marketing The marketing objective for the company was to make Vera Bradley an aspirational brand for consumers and to generate excitement around new product launches. The company hoped that its marketing approach would 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. Its brand-building efforts were focused primarily on advertising in ladies' fashion magazines, directmail and digital communications, and database analytics to better personalize communications with consumers. 9/26/14 12:40 PM Confirming Pages C-194 PART 2 Cases in Crafting and Executing Strategy 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 welldeveloped ability to understand the needs and wants of its customers, valuable product design skills, marketing and brand-building expertise, and 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 also 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 tho20598_case13_C188-C199.indd 194 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 four new patterns each season that were incorporated into the designs of a wide range of products, including handbags, accessories, and travel and leisure items. 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 cotenants. Management attempted to achieve a balanced mix of moderate and high-end retailers and cotenants 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, between 9/26/14 12:40 PM Confirming Pages CASE 13 Vera Bradley in 2014: Will the Company's Strategy Reverse Its Downward Trend? $1.2 million and $1.4 million in net revenues during the first 12 months. The typical payback period for recovering the company's initial investment in a new location was approximately 18 months. PROFILES OF VERA BRADLEY'S CHIEF RIVALS Coach, Inc. In 2013, Coach operated 351 full-price stores and 193 factory outlet stores in North America and maintained over 1,000 wholesale department store accounts. The company operated 191 stores in Japan and 218 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 74 million online visits to its e-commerce websites in fiscal 2013, 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 EXHIBIT 4 C-195 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 distributoroperated shops in Asia, Latin America, the Middle East, Australia, and Europe. Coach was one of the most recognized fineaccessories 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 high-fashion ladies' handbags and accessories were manufactured using a wide range of highquality leathers, fabrics, and materials. Responding to customer demands for both fashion and function, Financial Summary for Coach, Inc., Fiscal 2009-Fiscal 2013 (dollar amounts in thousands, except per share data) Fiscal Year Ended June 29, 2013 June 30, 2012 July 2, 2011 July 3, 2010 June 27, 2009 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 $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 $3.66 3.61 282,494 286,307 $1.238 $3.60 3.53 288,284 294,129 $0.975 $4,158,507 $3,607,636 3,023,541 2,633,691 1,718,617 1,483,520 1,304,924 1,150,171 880,800 734,940 $2.99 2.92 294,877 301,558 $0.675 $2.36 2.33 311,413 315,848 $0.375 $3,230,468 2,322,610 1,350,697 971,913 623,369 $1.93 1.91 323,714 325,620 $0.075 Source: Coach Inc., 10-K report, 2013. tho20598_case13_C188-C199.indd 195 9/26/14 12:40 PM Confirming Pages C-196 PART 2 Cases in Crafting and Executing Strategy Coach offered updated styles and several product categories that met an increasing share of its customers' accessory needs. The company created a sophisticated, modern, and appealing environment to showcase its product collection and reinforce its brand position. The company used a flexible, cost-effective global sourcing model, with independent manufacturers supplying its products, which allowed Coach to get its broad line of products to market rapidly and cost-efficiently. Coach's Strategic Initiatives in 2014 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. Coach believed that these growth strategies would allow the company to produce superior longterm returns on its investments and increased cash flows from operating activities. Coach's management realized that intensified competition, the promotional environment, and the current macroeconomic environment had created a challenging retail market. The company believed that sustained, long-term growth could be achieved by strict cost control, a focus on innovation to enhance productivity, and a brand transformation that would include expanded product offerings and additional distribution. A summary of the company's financial performance for fiscal 2009 through fiscal 2013 is presented in Exhibit 4. Michael Kors Holdings In 2014, 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 tho20598_case13_C188-C199.indd 196 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 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 accessibleluxury 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 2014, Michael Kors operated in three market segments: retail, wholesale, and licensing. In fiscal 2013, the retail segment accounted for approximately 48.7 percent of total revenue. As of March 30, 2013, the retail segment included 231 retail stores in North America and 73 international retail stores in Europe and Japan. The wholesale segment comprised about 2,215 department and specialty stores in North America and approximately 1,034 international department and specialty stores. In fiscal 2013, 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 2010-fiscal 2014 is presented in Exhibit 5. The exhibit also presents the number of stores at the end of each period and comparablestore sales growth per year for 2010 through 2014. 9/26/14 12:40 PM Confirming Pages CASE 13 Vera Bradley in 2014: Will the Company's Strategy Reverse Its Downward Trend? Michael Kors's Strategic Initiatives in 2014 Michael Kors's business strategy was focused on increasing brand awareness, expanding the retail store base in North America, increasing comparable-store EXHIBIT 5 C-197 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 Financial Summary for Michael Kors Holdings, Fiscal 2010-Fiscal 2014 (dollar amounts in thousands, except per share and store data) Fiscal Year Ended March 29, 2014 March 30, 2013 Statement of operations data $3,170,522 $2,094,757 Net sales Licensing revenue 140,321 86,975 Total revenue 3,310,843 2,181,732 Cost of goods sold 1,294,773 875,166 Gross profit 2,016,070 1,306,566 Selling, general, and administrative expenses 926,913 621,536 Depreciation and amortization 79,654 54,291 Impairment of long-lived assets 1,332 725 Total operating expenses 1,007,899 676,552 Income from operations 1,008,171 630,014 Interest expense, net 393 1,524 Foreign currency loss (gain) 131 1,363 Income before provision for income taxes 1,007,647 627,127 Provision for income taxes 346,162 229,525 Net income 661,485 397,602 Net income applicable to preference shareholders Net income available for ordinary shareholders $ 661,485 $ 397,602 Weighted-average ordinary shares outstanding: Basic 202,582,945 196,615,054 Diluted 205,638,107 201,540,144 Net income per ordinary share: Basic $3.27 $2.02 Diluted $3.22 $1.97 Operating data Comparable-retail-store sales growth 26.2% 40.1% Retail stores, including concessions, at end of period 405 304 $ March 31, 2012 April 2, 2011 $1,237,100 65,154 1,302,254 549,158 753,096 $757,800 45,539 803,339 357,274 446,065 $483,452 24,647 508,099 241,365 266,734 464,568 37,554 279,822 25,543 191,717 18,843 3,292 505,414 247,682 1,495 (2,629) 3,834 309,199 136,866 1,861 1,786 210,560 56,174 2,057 (830) 248,816 101,452 147,364 133,219 60,713 72,506 54,947 15,699 39,248 21,227 15,629 8,460 126,137 $ 56,877 April 3, 2010 $ 30,788 158,258,126 189,299,197 140,554,377 179,177,268 140,554,377 179,177,268 $0.80 $0.78 $0.40 $0.40 $0.22 $0.22 39.2% 237 48.2% 19.2% 166 106 Source: Michael Kors Holdings, 10-K report, 2014. tho20598_case13_C188-C199.indd 197 9/26/14 12:40 PM Confirming Pages C-198 PART 2 Cases in Crafting and Executing Strategy high-traffic street and mall locations in high-income 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 North America by increasing the number of shop-in-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. 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 2014, 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. All of the company's brands maintained e-commerce sites for Internet sales. Kate Spade & Company tho20598_case13_C188-C199.indd 198 also owned the Adelington Design Group, a privatebrand 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 Claiborne New York brand, available at QVC, and Lizwear, which was distributed through the club store channel. In 2013, total revenue for Kate Spade brands increased by 61 percent, to $743 million. In the fourth quarter of 2013, the company had its 14th consecutive quarter of annualized comparable-store productivity growth and achieved industry-leading growth across categories. The company added new product categories in its kate spade new york stores that included stationery, desk accessories, and fragrances. The company also expanded globally, with new stores in North America, China, Japan, Brazil, Mexico, Turkey, and the Middle East and international concessions in Japan and France. Kate Spade & Company's Strategic Initiatives in 2014 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. Exhibit 6 presents a financial summary for Kate Spade & Company for 2009 through 2013. At year-end 2013, Kate Spade had 118 specialty retail stores and 42 factory outlet stores in the United States and 22 foreign specialty stores and 9 foreign factory outlet stores. VERA BRADLEY'S PERFORMANCE IN FISCAL 2015 In June 2014, Vera Bradley's strategic direction seemed adrift as its revenues and earnings slipped 9/26/14 12:40 PM Confirming Pages CASE 13 Vera Bradley in 2014: Will the Company's Strategy Reverse Its Downward Trend? EXHIBIT 6 C-199 Financial Summary for Kate Spade & Company, 20092013 (dollar amounts in thousands, except per share data) 2013 Net sales Gross profit Operating loss Income (loss) from continuing operations Net income (loss) Working capital Total assets Total debt Total stockholders' (deficit) equity Per common share data: Basic Income (loss) from continuing operations Diluted Income (loss) from continuing operations Weighted-average shares outstanding, basic Weighted-average shares outstanding, diluted 2012 2011 2010 2009 $1,264,935 $1,043,403 $1,100,508 $1,236,300 $1,489,171 725,581 599,169 598,331 602,875 622,240 (45,513) (52,528) (102,772) (42,832) (169,630) 73,924 (70,221) 138,206 (81,048) (125,372) 72,995 (74,505) (171,687) (251,467) (305,767) 206,473 36,407 124,772 39,043 244,379 977,511 902,523 950,004 1,257,659 1,605,903 394,201 406,294 446,315 577,812 658,151 (32,482) (126,930) (108,986) (24,170) 216,548 $0.61 $(0.64) $1.46 $(0.86) $(1.34) $0.60 121,057 $(0.64) 109,292 $1.22 94,664 $(0.86) 94,243 $(1.34) 93,880 124,832 109,292 120,692 94,243 93,880 Source: Kate Spade & Company, 10-K report, 2013. further. The company's fiscal first-quarter 2015 revenues declined by 12 percent and its net earnings had fallen by 25 percent compared to the same period in fiscal 2014. The declines resulted from an unanticipated decline in sales in company-owned retail stores. Robert Wallstrom stated that the company's \"traditional patterns and products simply are not attracting enough new customers to our brand, and overall traffic is down substantially.\"2 He continued, \"This will be an important year of transition and transformation for Vera Bradley. We believe that the product, distribution and marketing initiatives we previously outlined as part of our long-term strategic plan are absolutely the right ones for the future.\"3 ENDNOTES 1 As quoted in \"Stores Dancing Chic,\" Houston Chronicle, May 6, 2000. tho20598_case13_C188-C199.indd 199 2 As quoted in \"Vera Bradley Announces Fiscal Year 2015 First Quarter Results,\" Global Newswire, June 5, 2014. 3 Ibid. 9/26/14 12:40 PM