Taking The Plunge On Vera Bradley: Should You?

Wunderlich Securities has upgraded handbag maker Vera Bradley, Inc. (NASDAQ: VRA) to Buy from Hold and raised its price target to $24 from $15. Subsequently, the stock jumped roughly 7 percent.

"We believe the company is nearing the next major round of upside catalysts which will amply demonstrate that Vera Bradley is on the cusp of material improvements," analyst Eric Beder wrote in a note to clients.

The Handbag Space

Additionally, the analyst views the handbag segment as "ripe for improving returns," citing industry leaders like Coach Inc (NYSE: COH) and Michael Kors Holdings Ltd (NYSE: KORS) have "shifted their domestic focus to less discounting." This strategic shift by the handbag market leaders should allow stronger returns across the sector, and Beder believes Vera Bradley could also benefit from the trend.

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The analyst noted that the company's online should drive leverage and comps, while new products and fabrications will drive stronger results and "further validate the company's shift into a lifestyle driven handbag player."

On the margin front, although Beder doesn't expect the company to register close to peak operating margins of 19.2 percent (from FY13), "management is highly confident that it can begin to leverage SG&A when the company achieves positive comps." In addition, the company recorded 300 bp growth in FY16 gross margins of 55.9 percent despite 10.6 percent drop in comps.

Additional Catalysts

The report highlighted that material short interest a key catalyst.

"With over 40 percent of VRA stock currently shorted, we believe even a hint of positive news will result in strong returns for VRA; we believe, with the company nearing a shift to positive same store sales and material upgrade to the e-commerce and store shopping experience and a significantly more diversified product offering, that there is the potential for a 'short squeeze.'"

According to Tipranks, Eric Beder has a success rate of 39 percent and ranked 3,054 out of 3,809 analysts.

At time of writing, Vera Bradley was up 6.87 percent at $19.90. They have gained 21.7 percent this year and outperformed the benchmark S&P 500 index, which has fallen 1.72 percent.

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