1-800-FLOWERS.COM, Inc. — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended December 30, 2012; comparable periods ended January 1, 2012. The company sells floral, gourmet food and gift products through e-commerce, retail, wholesale and florist services. Its second fiscal quarter includes the Thanksgiving–Christmas holiday season, its peak revenue period. Financial amounts below are USD millions unless stated otherwise.
Financial performance
| Metric | Q2 FY2013 | Q2 FY2012 | Six months FY2013 | Six months FY2012 |
|---|---|---|---|---|
| Revenue | $253.0 | $239.8 | $373.9 | $357.0 |
| Gross profit / margin | $104.5 / 41.3% | $100.3 / 41.8% | $154.1 / 41.2% | $146.9 / 41.1% |
| Operating income | $26.0 | $28.4 | $19.6 | $20.6 |
| Continuing-operations net income | $16.0 | $16.6 | $11.4 | $11.4 |
| Diluted EPS, continuing operations | $0.24 | $0.25 | $0.17 | $0.17 |
| Adjusted EBITDA, continuing operations | $31.8 | $30.7 | $30.8 | $29.1 |
Q2 revenue rose 5.5%; six-month revenue rose 4.7%. Gourmet Food & Gift Baskets led growth, supported by wholesale gift baskets and e-commerce brands. Q2 gross margin declined mainly due to sales mix, particularly wholesale gift baskets. Operating income comparisons were affected by a $3.8 million prior-year gain on the sale of Fannie May stores; the company’s adjusted EBITDA excludes that gain. Six-month reported net income was $11.4 million versus $15.9 million in the prior year, which included a $4.5 million after-tax gain on the sale of the wine fulfillment business.
Cash, liquidity and debt
- Six-month operating cash flow was $21.1 million; investing cash outflow was $10.4 million and financing cash outflow was $12.6 million. Capital expenditures were $9.1 million; operating cash flow less capital expenditures was approximately $12.0 million.
- Cash and equivalents were $27.0 million at December 30, 2012, down from $28.9 million at July 1, 2012. Working capital was $28.1 million, versus $29.7 million.
- Total debt and capital lease obligations were $21.8 million, including $17.3 million current, compared with $29.3 million at fiscal year-end. The company repaid term debt and had repaid seasonal revolver borrowings by quarter-end.
- The credit facility’s seasonal revolver availability ranges from $40 million to $75 million and expires in April 2014. Management said operating cash flow and available facility borrowings should provide sufficient liquidity.
- Contractual obligations totaled $110.9 million, including operating leases of $56.1 million and purchase commitments of $28.7 million.
Outlook, commentary and risks
- Management expected FY2013 revenue growth in the mid-single-digit range, with growth across all business segments, and expected gross margin to improve during the remainder of the fiscal year versus FY2012.
- Management cited Superstorm Sandy, weaker consumer confidence and economic uncertainty as headwinds. It also reported warehouse-relocation operational issues that pressured Gourmet Food & Gift Baskets margins.
- Key stated risks include customer acquisition and retention costs, seasonality and inventory management, competition, execution of growth and integration plans, economic conditions and legal contingencies. The filing reported no material changes to the risk factors in the prior 10-K.
- Purported class actions concerning former third-party post-transaction marketing practices remained pending. Plaintiffs sought damages in excess of $5 million in each of two earlier actions; the company said any possible loss was not reasonably estimable and intended to defend the cases. An additional similar action was filed in December 2012.
- The IRS was examining fiscal 2011; fiscal 2010 also remained subject to federal examination. Unrecognized tax positions, including interest and penalties, totaled approximately $0.9 million.
- The company repurchased 1.474 million shares for approximately $5.1 million during the six months; $3.4 million remained authorized under the repurchase plan.
Important facts for investors to verify
- Whether the mid-single-digit FY2013 revenue outlook and expected gross-margin improvement were achieved, given the holiday-season concentration and reported distribution disruption.
- Whether revenue growth translates into improved operating income and cash generation, especially as Q2 gross margin narrowed and operating expenses rose.
- The timing and funding of the $17.3 million current debt maturities, and continued access to the seasonal revolving facility through its 2014 expiration.
- Developments in the marketing-practices litigation, including class certification, dismissal motions and any change in the currently unestimable loss exposure.
- Seasonal working-capital movements, inventory realization, and the return on technology spending and share repurchases.