Business context and reporting period
1-800-FLOWERS.COM, Inc. operates consumer floral, BloomNet florist wire-service, and gourmet food and gift-basket businesses. This unaudited Form 10-Q covers the three and nine months ended March 31, 2019, compared with the periods ended April 1, 2018. Although the request metadata says “2018 Q3,” the filing reports fiscal 2019 third-quarter results.
Amounts below are in millions of dollars, except per-share data. The business is highly seasonal: management says the Thanksgiving-to-Christmas quarter generates nearly half of annual revenue and all annual earnings. Easter fell in the fourth quarter in fiscal 2019, versus the third quarter in fiscal 2018.
Financial results and liquidity
| Metric | Three months | Nine months |
|---|---|---|
| Revenue | 248.4, up 4.1% | 989.2, up 7.3% |
| Gross profit / margin | 97.5 / 39.3% (prior 39.2%) | 420.9 / 42.5% (prior 42.9%) |
| Operating income (loss) | (14.6), versus (12.4) | 57.1, versus 52.4 |
| Net income (loss) | (8.2), versus (8.5); diluted EPS (0.13) in both periods | 43.1, versus 49.0; diluted EPS 0.65 versus 0.73 |
| Adjusted EBITDA (non-GAAP) | (4.4), versus (3.6) | 84.8, versus 80.7 |
| Operating cash flow | Not presented for the quarter | 97.0, versus 64.6 |
Quarterly revenue growth did not translate into improved operating results: operating expenses rose 5.9% to 112.1, including higher marketing, technology, and general and administrative costs. Nine-month net income declined despite higher operating income, principally because the prior-year period included a 12.2 tax benefit from U.S. tax reform. Prior-period comparisons were not restated for the adoption of ASC 606.
At March 31, 2019, cash was 206.4, working capital was 179.9, and total debt carrying value was 95.8, including 12.2 current and 83.6 long-term debt. The term loan principal was 97.8; no revolving-credit borrowings were outstanding. Cash was 147.2 and debt carrying value was 102.3 at July 1, 2018. The company reported 97.0 of operating cash flow, 16.8 of capital expenditures, and 21.0 of cash used in financing activities for the nine months. Financing uses included 7.2 of term-loan repayments and 14.8 of share repurchases.
Material changes and management commentary
- Third-quarter Consumer Floral revenue rose 6.7% and BloomNet revenue rose 15.0%; Gourmet Food & Gift Baskets revenue fell 3.8%, primarily because Easter shifted to the next quarter. Nine-month revenue increased across all three segments.
- For the quarter, e-commerce orders fell 0.9% to approximately 3.05 million, while average order value rose 4.7% to 67.07. For nine months, orders rose 4.6% and average order value rose 2.3% to 77.08.
- Management attributed quarterly gross-margin improvement to lower promotional activity and logistics savings. The nine-month gross margin declined 40 basis points, reflecting BloomNet mix, seasonal labor costs, and the Celebrations Passport free-shipping program, partly offset by logistics and manufacturing efficiencies.
- Quarterly adjusted EBITDA was negative and deteriorated year over year, partly reflecting higher corporate costs and a 1.3 compensation charge associated with appreciation in deferred-compensation plan investments. The related investment gains were recorded in other income.
- Management expects cash generated during the holiday quarter to cover operating needs until the second quarter of fiscal 2020, when it expects to borrow under the revolver for pre-holiday manufacturing and inventory purchases. It believes available funding will meet anticipated operating cash needs for at least 12 months, while cautioning that cash-flow projections are uncertain. No specific revenue or earnings guidance is provided.
Outlook, risks, contingencies, and unusual items
- Key risks identified include achieving revenue and profitability goals, customer acquisition and retention costs, competition, seasonality, inventory and working-capital management, expenses for marketing and technology, consumer sentiment, and the outcome of legal proceedings. The filing reports no material change to the risk factors in the prior Form 10-K.
- The credit agreement is secured by substantially all company and guarantor assets and includes financial and other covenants; the company reported compliance at March 31, 2019. Term-loan maturity is December 2021, with a stated remaining principal payment of 61.8 due at maturity.
- Management expects adoption of the new lease standard, effective for the fiscal year ending June 2020, to materially affect the balance sheet and related disclosures. Adoption of ASC 606 changed the timing of catalog expense, gift-card breakage, e-commerce revenue, and franchise-fee recognition; management does not expect a material ongoing annual net-income effect but expects quarterly fluctuations.
- Various claims and lawsuits are pending. Management, after consultation with counsel, believes their resolution will not materially adversely affect financial position, results, or liquidity. The company reported approximately 0.6 of unrecognized tax benefits and said it expected 0.1 of positions to be resolved over the next 12 months.
- Management concluded disclosure controls were effective as of March 31, 2019; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the Easter timing shift and holiday seasonality explain the quarterly Gourmet Food & Gift Baskets decline and how results develop in the following quarter.
- Whether revenue growth converts to operating-profit growth given rising corporate, technology, and marketing expenses and the weaker quarterly adjusted EBITDA.
- Cash generation, inventory and working-capital requirements, planned seasonal revolver use, and the company’s ability to maintain credit-agreement covenant compliance.
- The effects of ASC 606 on period-to-period comparability and the expected balance-sheet impact of lease-standard adoption.
- The impact of discretionary-spending conditions, customer-acquisition costs, logistics and labor costs, and unresolved legal or tax matters.