Vera Bradley’s strategy of improving its brand image by reducing the amount of clearance sales has led to continued underperformance and undervaluation, increasing the likelihood of an activist investor emerging with questions.

Vera Bradley, which designs handbag and related accessories for women, launched a new three-year strategy in mid-2017 with the aim of “moving to a significantly less clearance-driven business model combined with a meaningful reduction in SGA expenses.” The move accelerated the decline in sales, from $454 million in fiscal 2017 to $416 million in 2018. While the firm’s sales finally grew during the first three quarters of the 2019 fiscal year, its operating income declined from $15.4 million to $2.2 million, largely due to higher SGA expenses.

As a result, the company’s shares have underperformed both the S&P 500 Index and the S&P 500 Apparel, Accessories, and Luxury Goods Index. Over the past two years, Vera Bradley stock has shed 7.8% of its value, while the S&P 500 Apparel surged 35% and the S&P 500 grew by 23%. This has left the company undervalued relative to peers. According to Activist Insight Vulnerability, Vera Bradley trades at a price-to-Ebitda ratio of 9.6, while its peer median at 11.3. Its enterprise value-to-Ebitda is 4.4, while peers Steve Madden and Rocky Brands trade at 15.4 and 8.1, respectively.

After the second year of the strategy overhaul, progress on SGA costs leaves much to be desired. Activist Insight Vulnerability data shows that SGA costs are 52.6% of total sales compared with 43% for the median peer. In the 39 weeks ended November 2, 2019, SGA costs jumped to 54.4% of sales. The firm’s operating margin is 3% compared with 7.7% for the median peer, according to Activist Insight Vulnerability.

An activist investor might seek a review of the current strategy led by CEO Robert Wallstrom and demand a leadership change. The stock price has lost 63% since Wallstrom was appointed CEO in 2013, as his previous five-year strategy of expanding the company’s retail footprint was dropped in favor of the current one. An activist might ask for a strategic review with a view to a sale, particularly since the M&A environment in apparel and luxury has been hot, with Michael Kors acquiring Versace and LVMH snapping up Tiffany’s.

The biggest hindrance for an activist is the 28.6% stake held by the family of founder Barbara Bradley. Eric Beder, an analyst at Small Cap Consumer Research, told Activist Insight Vulnerability that the stock is “cheap” but the company would be a “tough takeover target,” in part because of the founding family’s clout.

Indeed, the company lists the family’s concentrated ownership in its risk factors, saying this “may limit [unaffiliated shareholders’] ability to influence corporate matters, and the interests of [the founding family] may not coincide with our interests or your interests.” Another issue is the company’s staggered board and lack of majority vote standard in uncontested elections. At the same time, a hostile takeover might be destined to fail, given that the board can implement a poison pill without shareholder approval and the company does not provide the right to act by written consent or call special meetings.

Yet the board might benefit from a refreshment. The average tenure is 12 years compared with 7.4 for the Russell 3000 average, according to Activist Insight Governance. Directors Richard Baum and Frances Philip received between 33.5% and 36.5% of votes against their re-election at the last annual meeting in June, with many shareholders citing their contribution to the firm’s poor corporate governance.

The company’s nomination deadline for the 2020 annual meeting expired on February 2 and an activist willing to make a move would have to wait until next year.