Business context and reporting period
1-800-FLOWERS.COM, Inc. sells floral and gourmet gifts through its Consumer Floral, BloomNet Wire Service, and Gourmet Food & Gift Baskets businesses. This Form 10-Q covers the three and six months ended January 1, 2017; comparisons are with periods ended December 27, 2015. Amounts below are in millions except per-share data.
The second fiscal quarter includes the Thanksgiving-to-Christmas holiday season, which management expects to generate nearly 50% of annual revenue and all annual earnings. Results for the six-month period therefore should not be viewed as representative of a full year.
Financial performance and liquidity
| Metric | Three months ended Jan. 1, 2017 | Prior comparable period | Six months ended Jan. 1, 2017 | Prior comparable period |
|---|---|---|---|---|
| Revenue | $554.6 | $548.4 | $720.4 | $704.4 |
| Gross profit | $257.0 | $252.6 | $328.4 | $320.1 |
| Operating income | $96.6 | $94.4 | $73.4 | $72.1 |
| Net income attributable to 1-800-FLOWERS.COM | $62.9 | $61.5 | $47.2 | $57.1 |
| Diluted earnings per share | $0.93 | $0.92 | $0.70 | $0.85 |
- Quarterly revenue rose 1.1%; gross margin improved to 46.3% from 46.1%. Six-month revenue rose 2.3%, and gross margin was 45.6% versus 45.4%.
- Quarterly net income increased 2.3%. Six-month GAAP net income declined, principally because the prior-year period included a $19.6 million gain from insurance recovery for the Fannie May warehouse fire. Excluding disclosed unusual items, adjusted six-month income was $47.2 million versus $47.5 million, and adjusted diluted EPS was $0.70 versus $0.71.
- Six-month operating cash flow was $110.0 million, compared with $111.6 million. Investing cash outflow was $13.3 million, mainly for technology infrastructure and production equipment; financing cash outflow was $10.6 million. Cash increased to $114.0 million from $27.8 million at July 3, 2016.
- Working capital was $102.5 million. Debt was $111.0 million net of deferred financing costs, including $115.0 million gross term-loan principal; no revolver borrowings were outstanding at quarter-end.
- Gross term-loan principal payments during the six months were $2.6 million. The company repurchased $6.8 million of stock and had $21.1 million remaining under its repurchase authorization.
Material changes and management commentary
- Consumer Floral revenue increased 3.1% in both the quarter and six-month period, supported by holiday volume, improved assortments, and growth in everyday occasions. BloomNet quarterly revenue rose 4.2%, while six-month revenue increased 0.6%.
- Gourmet Food & Gift Baskets revenue grew 0.6% for the quarter and 2.2% year to date. Management cited e-commerce and wholesale growth, partly offset by fewer seasonal Harry & David stores, weaker store traffic, and order-timing effects. Slower Harry & David growth restrained overall results.
- Quarterly adjusted EBITDA excluding stock-based compensation was $107.4 million versus $104.8 million. For six months, it was $94.1 million versus $92.9 million on the company’s adjusted comparative basis.
- On December 23, 2016, the company amended and extended its credit agreement, extending term-loan and revolving-facility maturity to December 23, 2021. The revolver has a stated $200 million capacity, seasonally reduced to $100 million from January 1 through August 1. The company reported compliance with financial covenants at quarter-end.
- Management expects holiday-season cash to fund operating needs in the third and fourth quarters and expects to borrow on the revolver for pre-holiday manufacturing and inventory purchases ahead of fiscal 2018. It believes operating cash flow and available credit will provide sufficient liquidity. No specific revenue or earnings guidance is provided in the filing.
Outlook, risks, contingencies, and unusual items
- Management identifies risks including customer acquisition and retention, competition, discretionary consumer spending, seasonality, inventory and working-capital management, expense control, and integrating and growing acquired businesses. It notes Easter falls in the fourth quarter in fiscal 2017, shifting some revenue and EBITDA from the third quarter compared with fiscal 2016.
- The prior-year comparison includes the $19.6 million Fannie May fire-insurance gain, as well as iFlorist sale/impairment losses and a Flores Online investment impairment. These items make reported six-month GAAP earnings comparisons less representative of underlying operating trends.
- The company early adopted share-based payment accounting guidance, recognizing $0.8 million of excess tax benefits in income tax expense; management reported no EPS impact from the related share-count treatment.
- Management believes pending claims and lawsuits will not materially affect financial position, results, or liquidity. The filing reports approximately $0.6 million of unrecognized tax positions, including interest and penalties, and expects $0.3 million to be resolved within twelve months.
- Management concluded disclosure controls were effective as of January 1, 2017; no material changes in internal control over financial reporting were identified. The filing reports no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether modest revenue growth and improved gross margin persist outside the highly seasonal holiday quarter, particularly in Harry & David retail and e-commerce.
- How comparable earnings look after separating the prior-year fire recovery and other unusual items from recurring operations.
- Seasonal working-capital needs, revolver usage, term-loan amortization, variable interest-rate exposure, and continued compliance with credit covenants.
- Whether repurchases and planned investment can be sustained while funding inventory, capital expenditures, and debt obligations.
- The effect of the Easter timing shift and other seasonal factors on the remaining fiscal-year results; the filing provides no quantitative full-year guidance.