1-800-FLOWERS.COM, Inc. — Form 10-Q summary
Reporting period: Fiscal third quarter and nine months ended March 27, 2016; filed May 6, 2016. The request metadata says “2015 Q3,” but the filing covers fiscal 2016 Q3.
Business context and results
The company sells floral, gourmet food and gift products through e-commerce, retail, wholesale and florist wire-service channels. Results are highly seasonal: management expects the Thanksgiving-to-Christmas period, in fiscal Q2, to generate nearly half of annual revenue and all annual earnings. Easter fell in fiscal Q3 this year versus fiscal Q4 last year, shifting related revenue and EBITDA between quarters.
| Metric | Three months ended Mar. 27, 2016 | Prior-year quarter | Nine months ended Mar. 27, 2016 | Prior-year nine months |
|---|---|---|---|---|
| Net revenue | $234.2m | $232.2m | $938.6m | $893.2m |
| Gross profit / margin | $96.7m / 41.3% | $95.3m / 41.0% | $416.8m / 44.4% | $389.1m / 43.6% |
| Operating income (loss) | ($13.2m) | ($16.2m) | $58.9m | $52.0m |
| Net income (loss) attributable to company | ($9.1m) | ($10.5m) | $47.9m | $31.0m |
| Diluted EPS | ($0.14) | ($0.16) | $0.71 | $0.46 |
Financial position, cash flow and debt
- Cash and liquidity: Cash was $61.7m at March 27, 2016, versus $27.9m at June 28, 2015. Working capital was $63.5m, compared with $31.5m at fiscal year-end; the prior-period amount reflects a deferred-tax reclassification.
- Cash flow, nine months: Operating activities provided $77.0m, down from $137.0m. Investing used $20.0m, primarily for technology infrastructure and Gourmet Food & Gift Baskets improvements; financing used $23.2m, including $11.0m of term-debt repayments and $13.0m of treasury-stock purchases. Cash increased $33.8m.
- Debt: Total debt was $121.1m, all term-loan borrowings; no revolver borrowings were outstanding. The term loan matures September 2019, with a remaining $42.75m due at maturity. The company reported covenant compliance. Its $100m–$200m seasonal revolving facility is secured by substantially all company and subsidiary-guarantor assets.
- Capital returns: The company repurchased 1.43m shares for approximately $13.0m during the nine-month period. $14.3m remained authorized under its repurchase plan.
Changes versus prior comparable periods
- Quarterly revenue rose 0.8%; nine-month revenue rose 5.1%. Nine-month growth reflected Harry & David, recovery from the prior-year warehouse fire, Easter timing and organic growth, partly offset by the divestitures of iFlorist and Fine Stationery.
- Consumer Floral revenue declined 3.0% for the quarter and 3.4% year to date, with lower floral orders associated in part with Valentine’s Day falling on Sunday and the business divestitures. Gourmet Food & Gift Baskets revenue increased 6.6% for the quarter and 10.2% year to date.
- Quarterly e-commerce orders increased to approximately 2.86m from 2.72m, while average order value fell to $62.74 from $65.37. For nine months, orders rose to 9.51m from 9.24m and average order value increased to $73.24 from $72.60.
- Nine-month operating income and attributable net income improved. However, the period’s $19.6m insurance recovery gain materially affected reported results. Other notable nine-month items included a $2.1m iFlorist impairment/sale loss and a $1.7m impairment of the Flores Online investment.
- Reported nine-month cash from operations fell substantially, in part because prior-year working-capital movements differed; current-period cash generation also included collection of the fire-insurance settlement.
Management outlook, risks and unusual items
- Management said operating cash flow and available revolver capacity should provide sufficient liquidity. It expected to use the revolver for pre-holiday manufacturing and inventory purchases in fiscal Q1 2017, with holiday-season operating cash flow expected to repay those borrowings. No specific revenue or earnings guidance was provided.
- Management cited risks including achieving revenue and profitability, integrating Harry & David and realizing synergies, managing seasonality and working capital, controlling inventory and capital spending, customer acquisition and retention, competition, consumer sentiment, and discretionary spending.
- The 2014 Fannie May warehouse fire caused $35.4m of reported inventory and other costs; a $55.0m insurance recovery resulted in a $19.6m gain recognized in the nine-month period. Management said the fire had constrained prior-year product availability and affected revenue and earnings.
- Edible Arrangements litigation alleges trademark and related claims and seeks damages stated in the amended complaint at $101.4m, among other remedies. The company disputes the claims and intends to defend them; it said a possible loss or range of loss was not reasonably estimable.
- The company reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its prior Form 10-K.
Important facts for investors to verify
- How much of revenue and earnings growth reflects sustainable demand and integration synergies versus Easter timing, the fire recovery comparison, and acquisition-related effects.
- Whether cash conversion improves after the seasonal receivables and inventory build, given nine-month operating cash flow declined to $77.0m.
- The company’s capacity to service and reduce $121.1m of debt while funding seasonal inventory, capital expenditures and share repurchases.
- Whether Gourmet Food & Gift Baskets can address quarterly margin pressure from product mix, discounts and markdowns.
- Developments in the Edible Arrangements litigation and any change in the company’s ability to estimate potential exposure.
- Whether results and liquidity align with management’s seasonal outlook; actual interim results are not necessarily indicative of full-year performance.