Vince Holdings (VNCE) Is A Complete Mess
In the stock market, a stock that looks cheap but keeps going down is known as a "falling knife".
If that's the case, Vince Holdings (VNCE) could be considered a "falling broadsword"!
When the stock first showed up in the Magic Formula screens on March 23 at $17, it had fallen over 54% since peaking over $37 last November.
Since then, an almost unreal string of negative news has sent the stock tumbling even more, dropping an additional 76% into "penny stock" territory, today trading right at about $4.
What in the world happened, and at these levels, has the stock finally reached the point where it can bottom out and start going up again? Could Vince actually represent value here?
The Story Was Good...
Vince is an upscale apparel and accessories company. They design and market clothing, shoes, and handbags. Most sales are for women's products, about 88% in 2014.
76% of the company's sales are through the wholesale channel, where they can be found in over 2,400 stores. Vince's main partners are Nordstrom, Saks, and Neiman Marcus, which each account for over 10% of sales, with the 3 combined driving over 50% of sales. The bulk of wholesale is done in the United States, with just 9% of the segment's sales coming internationally.
The company also entered the direct-to-consumer (D2C) channel about 7 years ago, and today has about 40 Vince-branded stores, as well as an e-commerce website. Management has long said they believe that the U.S. can support up to 100 Vince stores, so they are less than halfway to that target.
For years, Vince looked like the next up-and-coming fashion brand. From 2011 through last year, Vince grew its revenues at a compound annual rate of nearly 25%, while growing operating income at an equally impressive 22% per year. With under $350 million in sales, and big international and D2C opportunities, Vince looked like an intriguing investment. The stock IPO'd in 2013 at $20, rose 43% on its first day, and continued to climb up near $40. Investors remembering the explosive performance of similar companies like Michael Kors (KORS) piled into VNCE. Things were going well.
... And Then It All Came Crashing Down
Things started falling apart last December.
After reporting good Q3 earnings, management guided to lower-than-expected full year results. The stock fell 19%. The poor momentum off this continued for the next several months, with the stock sliding down under $20.
In March, after reporting Q4, Vince again disappointed the Street with its 2015 revenue forecast. The stock fell another 15%. It was the same story after the Q1 report in June... another guidance cut, another 25% haircut to the stock.
Things came to a head in late June/early July. Sun Capital, which owns over 55% of Vince, had clearly had enough and began the process of cleaning house. On June 25, the CFO was ousted and replaced by Mark Brody, former CFO of Sun. A few weeks later, on July 13, CEO Jill Granoff was shown the door. In this transition, Vince also lost its Chief Creative Officer, general counsel, and SVP of retail! What a house cleaning!
To the surprise of no one, the company performed poorly through the turmoil. In the most recent quarter, sales were down 10% year-over-year - 22% in the wholesale segment. The company took a $14.4 million dollar write-down to basically clear out its 2015 inventory. In another embarrassing development, Vince had to renegotiate a $23 million debt repayment to a Sun Capital affiliate, pushing it back a year due to weakening cash flows.
Given all this, it is no surprise the stock has fallen as far as it has. But has the storm passed and sunnier days lie ahead?
Is There Value In Vince Going Forward?
Ok, so Vince is down in the dumps. The stock also carries an incredibly high earnings yield of 25.8% and free cash flow yield exceeding 30%. That is extraordinarily cheap. Is there actually value here?
IF Vince can stabilize its sales, AND its margins (down almost 1,000 basis points last quarter), AND generate enough cash flow to pay that $23 million redemption they got delayed, all while operating in a leadership vacuum, then MAYBE the stock can get back to $6 within the next year. On the other hand, the downside really is $0 here.
The reason for that is because Vince's financial health is quite concerning. The company carries almost no cash, but has $82 million in total debt. Given the firm's sales issues, free cash flow has been slipping precipitously, and I don't see this improving any time soon. In such a highly competitive industry, good management is paramount to success, and Vince has essentially NO leadership at all right now!
Simply put, Vince is just one to avoid. The stock is too risky at any price right now.
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