1-800-FLOWERS.COM, Inc. — Q2 FY2018 Form 10-Q
Reporting period: Three and six months ended December 31, 2017; comparable periods ended January 1, 2017. Amounts below are in millions of dollars unless noted. The business is highly seasonal: management expects the Thanksgiving-to-Christmas quarter to generate nearly half of annual revenue and all annual earnings.
Financial results
| Metric | Q2 FY2018 | Q2 FY2017 | Six months FY2018 | Six months FY2017 |
|---|---|---|---|---|
| Revenue | $526.1 | $554.6 | $683.4 | $720.4 |
| Gross profit / margin | $235.3 / 44.7% | $257.0 / 46.3% | $302.5 / 44.3% | $328.4 / 45.6% |
| Operating income | $84.5 | $96.6 | $64.9 | $73.4 |
| Net income | $70.7 | $62.9 | $57.5 | $47.2 |
| Diluted EPS | $1.06 | $0.93 | $0.86 | $0.70 |
| Operating cash flow | Not separately reported for the quarter | $114.2 | $110.0 |
Q2 operating margin was approximately 16.1%, versus 17.4% a year earlier; six-month operating margin was approximately 9.5%, versus 10.2%. Reported Q2 net income included a $15.9 million tax benefit from the Tax Cuts and Jobs Act (Tax Act), including a $12.2 million deferred-tax remeasurement benefit and a $3.7 million benefit from the lower transitional rate. Excluding the tax-reform impact and other specified adjustments, adjusted diluted EPS was $0.88 for Q2 versus $0.88; for six months it was $0.68 versus $0.69.
Business trends and changes versus prior period
- Reported revenue fell 5.1% in both Q2 and the six-month period, principally because Fannie May was sold in May 2017. Excluding Fannie May from the prior-year comparison, revenue rose 2.4% in Q2 and 2.3% for six months.
- Comparable growth came from Consumer Floral and Gourmet Food & Gift Baskets, partly offset by BloomNet. Q2 segment revenue was $100.1 million for Consumer Floral, $20.4 million for BloomNet, and $406.0 million for Gourmet Food & Gift Baskets.
- Comparable gross profit and gross margin weakened: adjusted gross profit declined 2.4% in Q2 and 1.8% for six months; adjusted gross margin contracted 220 and 180 basis points, respectively. Management cited Cheryl’s operational disruption, higher transportation costs, and increased Consumer Floral promotions.
- Adjusted EBITDA was $101.7 million in Q2, down 7.1%, and $92.2 million for six months, down 8.6%. Segment contribution margin also declined on a comparable basis.
- E-commerce revenue increased 0.8% in Q2 and 1.0% for six months as reported; excluding Fannie May, growth was 3.1% and 2.9%. Q2 order volume was about 5.205 million and average order value was $81.44.
Liquidity, debt, cash flow, and capital allocation
- At December 31, cash and cash equivalents were $232.6 million, current assets $359.6 million, and current liabilities $187.4 million. Working capital was $172.2 million, compared with $132.2 million at July 2, 2017.
- Debt carrying value was $106.2 million: $109.3 million of term-loan principal less $3.1 million of deferred financing costs. There were no revolver borrowings at period end. The company reported compliance with credit covenants.
- The credit facility includes a $200 million revolver, seasonally reduced to $100 million from January 1 through August 1, and matures December 23, 2021. Management expects to borrow against it in Q2 FY2019 for pre-holiday manufacturing and inventory purchases.
- Six-month operating cash flow of $114.2 million reflected seasonal working-capital movements, including higher payables and accrued expenses and lower inventory, partly offset by higher receivables. Investing cash use was $17.4 million, including an $8.5 million Fannie May working-capital adjustment and capital expenditures of $8.9 million. Financing cash use was $13.9 million, including $11.1 million of share repurchases and $2.9 million of term-loan repayments.
- The company repurchased 1.167 million shares for $11.1 million during the six months. Of the $30 million repurchase authorization, $21.1 million remained at December 31.
Outlook, commentary, risks, and unusual items
- No specific earnings or revenue forecast is provided. Management said available funding should meet anticipated operating cash needs for at least 12 months, while cautioning that projections are uncertain.
- Cheryl’s production and warehouse-system implementation issues led the brand to stop taking orders eight days before Christmas. The company estimated approximately $4.0 million of foregone holiday revenue and cited approximately $4.0 million of gross-profit impact from related labor, expedited shipping, expiring product, and customer credits. Management said the issues were addressed and business returned to its normal pace.
- Hurricanes Harvey and Irma reduced six-month revenue by an estimated $1.1 million; BloomNet also waived about $0.2 million of membership fees and provided aid to affected florists.
- The Tax Act accounting was provisional under SEC guidance; final impacts could differ from estimates. The company also expects the new lease standard, effective for its fiscal year ending June 28, 2020, to materially affect its balance sheet and disclosures.
- There are ordinary-course claims and lawsuits; management, after consulting counsel, did not expect their resolution to materially affect financial position, results, or liquidity. The filing reported no material changes to previously disclosed risk factors.
- Management identified seasonality, customer acquisition and retention, competition, inventory and working-capital management, operating costs, consumer demand, and litigation outcomes among factors that could affect future results.
Important facts for investors to verify
- How much reported earnings growth reflects the $15.9 million Tax Act benefit, and whether the provisional tax accounting changes.
- Whether Cheryl’s operating recovery is sustained and its effects on sales, fulfillment costs, and margins.
- Whether comparable revenue growth can continue while gross margins and adjusted EBITDA remain under pressure.
- Whether seasonal cash generation is sufficient for planned inventory and manufacturing needs, and when revolver borrowing resumes.
- How Fannie May’s disposition and related working-capital adjustments affect comparability, cash, and segment trends.