Business context and reporting period
1-800-FLOWERS.COM, Inc. filed this unaudited Form 10-Q for its first quarter of fiscal 2015, the three months ended September 28, 2014; comparisons are with the three months ended September 29, 2013. The company sells flowers, gifts, gourmet foods and related services through consumer brands and florist networks. Results are highly seasonal: management expects the Thanksgiving–Christmas quarter to generate nearly 50% of annual revenue and all annual earnings.
Financial results and liquidity
Unless otherwise stated, amounts are in millions of dollars. The quarter remained loss-making, although revenue, gross margin and adjusted EBITDA improved year over year.
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Revenue | $126.7 | $123.0 |
| Gross profit / margin | $53.3 / 42.1% | $51.3 / 41.7% |
| Operating loss | $(6.6) | $(7.1) |
| Loss from continuing operations | $(4.6) | $(4.6) |
| Net loss attributable to 1-800-FLOWERS.COM | $(4.3) | $(4.6) |
| Basic and diluted loss per share | $(0.07) | $(0.07) |
| Adjusted EBITDA, excluding stock compensation | $0.5 | $(1.3) |
- Revenue rose 3.0%; e-commerce revenue increased 3.9%. The company reported approximately 1.315 million e-commerce orders versus 1.265 million, with average order value of $63.92 versus $63.70.
- Gross margin increased 40 basis points. Consumer Floral revenue grew 4.0%, BloomNet revenue declined 1.6%, and Gourmet Food & Gift Baskets revenue grew 3.6%.
- Operating expenses were $59.9 million versus $58.4 million. Interest expense and other, net increased to $0.8 million from $0.3 million, primarily reflecting iFlorist foreign-currency losses and lower returns on deferred-compensation investments.
- Operating cash use was $59.5 million, compared with $61.7 million. Investing cash use was $4.3 million, mainly for capital spending; financing provided $60.8 million, principally from revolving borrowings.
- At quarter end, cash was $2.2 million, working capital was $13.4 million, total assets were $314.4 million and current debt was $62.3 million. The company had no long-term debt then and reported compliance with its credit-facility covenants. Working-capital cash use reflected seasonal inventory and receivables buildup and payment timing.
Material changes, outlook and risks
- On September 30, 2014, after quarter end, the company completed its $142.5 million acquisition of Harry & David. Its fiscal 2014 revenue was approximately $386 million and adjusted EBITDA approximately $28 million. The acquired business was not included in the quarter’s results.
- To finance the acquisition, the company entered a new facility with a $142.5 million five-year term loan and a seasonal revolving facility of $100–$200 million. At closing, it drew $136.7 million under the revolver to repay prior credit agreements and fund transaction costs. The new facility is secured by substantially all company and guarantor assets and includes financial and non-financial covenants.
- Management projected fiscal 2015 revenue above $1.1 billion and adjusted EBITDA of approximately $90 million, excluding stock compensation, Harry & David transaction costs and purchase-accounting adjustments. The projection includes Harry & David only from the acquisition date and excludes its typically weakest first quarter. The company expected seasonal revolver borrowings to be repaid by the end of fiscal Q2.
- Management attributed revenue growth to consumer floral initiatives, iFlorist, Fannie May and Cheryl’s; BloomNet and some wholesale sales were affected by West Coast dock-strike delays. The company expected to recapture some delayed revenue in Q2 and the remainder of the fiscal year.
- Segment contribution margin improved overall, but Gourmet Food & Gift Baskets remained negative at $(2.4) million, compared with $(2.0) million. Harry & David integration, seasonality, customer acquisition and retention, inventory management, competition, consumer spending and the ability to realize projected synergies are significant execution risks.
- A class-action matter concerning former third-party post-transaction marketing practices remained pending. The company said the possible loss or range of loss was not reasonably estimable; plaintiffs sought damages exceeding $5 million in each of certain actions. No material changes to previously disclosed risk factors were reported.
- The company disclosed no material change in internal control over financial reporting and concluded disclosure controls were effective. New accounting guidance on discontinued operations and revenue recognition was under evaluation.
Important facts for investors to verify
- Whether the Harry & David acquisition delivers the projected revenue and adjusted EBITDA, and how purchase accounting and integration affect reported results.
- Actual post-acquisition debt, revolver utilization, interest expense, covenant headroom and repayment progress; quarter-end debt figures predate the new facility.
- Whether seasonal inventory converts to sales and cash as expected, and whether the company repays seasonal borrowing by the end of fiscal Q2.
- Whether dock-strike-related delayed sales were recovered and whether Gourmet Food & Gift Baskets improves from its negative segment contribution.
- Developments in the unresolved class-action litigation and any change in the company’s ability to estimate potential exposure.