1-800-FLOWERS.COM, Inc. — Form 10-Q Summary
Reporting period: Second fiscal quarter and six months ended January 1, 2023. Comparative period ended December 26, 2021. Unless noted, financial amounts below are in millions of dollars.
Business context
The company operates consumer gifting brands across floral and gifts, BloomNet floral services, and gourmet foods and gift baskets. Its business is highly seasonal: management expects the Thanksgiving-to-Christmas period to generate over 40% of annual revenue and all annual earnings. The statements are unaudited interim results; management cautions they are not necessarily indicative of full-year results.
Financial performance
| Metric | Three months ended Jan. 1, 2023 | Three months ended Dec. 26, 2021 | Six months ended Jan. 1, 2023 | Six months ended Dec. 26, 2021 |
|---|---|---|---|---|
| Revenue | $897.9 | $943.0 | $1,201.5 | $1,252.4 |
| Gross profit / margin | $367.8 / 41.0% | $378.5 / 40.1% | $469.2 / 39.1% | $504.0 / 40.2% |
| Operating income / margin | $115.1 / 12.8% | $115.7 / 12.3% | $73.8 / 6.1% | $95.4 / 7.6% |
| Net income | $82.5 | $88.5 | $48.8 | $75.3 |
| Diluted EPS | $1.27 | $1.34 | $0.75 | $1.14 |
| Adjusted EBITDA (non-GAAP) | $131.4 | $133.1 | $103.4 | $127.8 |
For the quarter, revenue declined 4.8%; gross profit fell 2.8%, while gross margin improved 90 basis points. Net income declined 6.7%. For the six-month period, revenue fell 4.1%, gross profit declined 6.9%, and gross margin decreased 110 basis points. Net income declined 35.1%. Higher interest expense and lower operating income contributed to the six-month earnings decline.
- Segment trends: Quarterly revenue fell 12.1% in Consumer Floral & Gifts and 13.4% in BloomNet; Gourmet Foods & Gift Baskets declined 0.4%. For six months, the respective changes were -11.5%, -3.7%, and +1.2%.
- Demand and orders: E-commerce revenue declined 4.5% for the quarter and 5.6% for six months. Orders fell 10.3% and 11.7%, respectively, while average order value rose 6.4% and 6.7% to $90.66 and $87.11.
- Cash flow: Six-month operating cash flow was $193.7 versus $185.8 a year earlier; capital expenditures were $23.8 versus $32.6. Free cash flow, defined by the company as operating cash flow less capital expenditures, was approximately $169.8 versus $153.2.
- Liquidity and debt: Cash was $189.7 at January 1, 2023, versus $31.5 at July 3, 2022; working capital was $124.4 versus $82.5. Debt, net of financing costs, was $152.8, including $20.0 current maturities; no revolver balance was outstanding at quarter-end. Cash rose during the period after seasonal revolver borrowings peaked at $195.9 in November and were repaid in December.
Changes, outlook and management commentary
- Management attributed weaker revenue principally to inflation and other macroeconomic pressures reducing discretionary spending, especially for “Everyday” gifting. Major holiday demand held up better, but customers shopped later; corporate gifting softened amid economic pressures and hybrid work.
- Customers shifted somewhat from floral gifts toward gourmet food. Order declines were partly offset by higher average order values from pricing and product mix.
- Management cited elevated commodity, labor, fuel and shipping costs, including a first-quarter inventory write-off of dated perishable product. In the second quarter, ocean freight costs fell year over year and labor availability improved. Pricing, logistics initiatives and automation supported quarterly gross-margin improvement; management expects further margin improvement in the second half.
- Fiscal 2023 guidance: Revenue decline in the mid-single-digit percentage range; adjusted EBITDA of $80–$85 million; free cash flow above $75 million. Management said forecasting is difficult given macroeconomic uncertainty. It did not provide reconciliations of adjusted EBITDA or free cash flow guidance to GAAP measures, citing uncertainty in reconciling items.
- Credit terms: An August 2022 amendment temporarily relaxed financial covenants, including reducing the minimum fixed-charge coverage ratio to 1.00 for specified test periods. The company reported compliance as of January 1, 2023. The credit facility is secured by substantially all company assets; $145 million of principal payments are scheduled in fiscal 2024.
- Subsequent event: On January 10, 2023, the company acquired the Things Remembered brand for $5.0 million in cash. The purchase included intellectual property, customer lists, certain inventory and equipment, but not retail stores.
Risks, contingencies and unusual items
- Internal controls: Management and the CEO and CFO concluded disclosure controls were not effective as of January 1, 2023 because of a previously reported material weakness involving logical access and segregation of duties in certain IT environments. Remediation had begun but was not yet considered complete; additional testing is required. Management reported no evidence of unauthorized actions and concluded the financial statements fairly present the company’s results.
- Interest-rate exposure: Debt bears variable interest. The filing estimates a 50-basis-point rate increase would add approximately $0.4 million and $0.7 million of interest expense for the three- and six-month periods, respectively.
- Litigation: A call-center worker class-action settlement received court approval; the company paid approximately $2.9 million in November 2022, previously accrued. Management said other pending claims are not expected to materially affect financial position, results or liquidity.
- Tax matters: Unrecognized tax benefits, including accrued interest and penalties, were approximately $1.4 million. Certain federal, state and foreign tax years remain open to examination.
- Other items: The company repurchased 140,248 shares for approximately $1.2 million during the six months; $32.0 million remained authorized. The company identified no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- Whether revenue declines and lower order volumes continue, particularly in Consumer Floral & Gifts and BloomNet, and whether holiday and everyday demand follow management’s expectations.
- Whether second-half gross-margin improvement materializes, given costs, pricing, freight, labor, automation and inventory risks.
- Progress against fiscal 2023 guidance, including the assumptions underlying adjusted EBITDA and free-cash-flow targets.
- Seasonal cash needs, revolver availability, fiscal 2024 debt maturities and continued compliance with amended credit covenants.
- Whether the IT access and segregation-of-duties material weakness is remediated and independently tested.
- Integration and performance of Things Remembered, and any material developments in litigation or tax examinations.