1-800-FLOWERS.COM, Inc. — Q1 FY2013 Form 10-Q
Reporting period: Three months ended September 30, 2012; comparative quarter ended October 2, 2011. The company sells floral, gourmet food and gift products and operates BloomNet, a florist wire service. Results are seasonal, with the holiday season typically generating the largest share of annual revenue.
Financial performance and position
| Metric | Q1 FY2013 | Prior-year quarter |
|---|---|---|
| Revenue | $120.9 million | $117.2 million |
| Gross profit / margin | $49.6 million / 41.1% | $46.6 million / 39.7% |
| Operating loss | $(6.4) million | $(7.7) million |
| Continuing-operations loss | $(4.6) million; $(0.07) per share | $(5.1) million; $(0.08) per share |
| Net loss | $(4.6) million | $(0.7) million |
| Cash used in operating activities | $(49.6) million | $(52.5) million |
| Cash and equivalents at period end | $5.8 million | $5.7 million |
Revenue grew 3.1%; gross profit rose 6.6%, lifting gross margin 140 basis points. E-commerce revenue increased 3.4%; the company reported about 1.234 million online and telephone orders, up 1.8%, and average order value of $66.01, up 1.6%. Consumer Floral revenue increased 3.8%, BloomNet 6.8%, while Gourmet Food & Gift Baskets declined 0.8%.
Segment contribution margin was $6.9 million for Consumer Floral, $5.8 million for BloomNet and negative $2.5 million for Gourmet Food & Gift Baskets. Consolidated EBITDA, a non-GAAP measure, was negative $2.0 million, or negative $1.0 million excluding stock-based compensation.
The prior-year net loss included $4.5 million of after-tax gain from selling the wine fulfillment services business; that business is presented as discontinued operations. Accordingly, the larger reported net loss in the current quarter does not reflect deterioration in continuing-operations loss, which narrowed year over year.
Cash used in operations reflected seasonal working-capital needs, including higher inventory and receivables ahead of the holiday season. Investing activities used $5.7 million, including $4.5 million of capital expenditures and purchases of minority investments. Financing provided $32.3 million, including $37.0 million of revolving-credit borrowings; the company also repurchased approximately $1.0 million of stock.
At September 30, 2012, working capital was $19.3 million, down from $29.7 million at July 1. Total debt and capital leases were $62.5 million, comprising $25.5 million of term debt, $37.0 million drawn on the revolver and $3,000 of capital leases. The credit facility's seasonal revolving capacity ranged from $40 million to $75 million; the term loan matures in March 2014 and the facility in April 2014.
Changes, outlook and risks
- Management attributed revenue growth to higher Consumer Floral order volume and average order value and expanded BloomNet services. Gross-margin gains were attributed to sourcing and logistics improvements, service mix, and product mix.
- Marketing and sales expense rose 2.2%, technology and development expense rose 14.0%, and general and administrative expense rose 7.0%. Net interest expense declined 63.3% to $0.3 million, primarily reflecting lower borrowings and borrowing costs.
- Management expected fiscal 2013 annual revenue growth in the mid-single digits and gross-margin improvement over fiscal 2012. It expected the $37.0 million revolver balance to be repaid by the end of fiscal Q2 and stated that operating cash flow plus available credit would provide sufficient liquidity.
- Liquidity depends in part on seasonal working-capital management and access to the credit facility. The filing identifies risks including consumer demand and economic conditions, competition, customer acquisition and retention costs, inventory management, operating expenses, acquisitions, and seasonality.
- Purported class actions concerning former post-transaction marketing practices seek damages in excess of $5 million in each case. The company intends to defend the actions but said a possible loss or range of loss could not be reasonably estimated.
- The company reported an IRS examination for fiscal 2011; fiscal 2010 remained subject to examination. Unrecognized tax positions, including interest and penalties, were approximately $0.5 million. Management said it did not expect material changes in those positions over the next 12 months.
- A material weakness in controls over deferred tax liabilities related to historical acquisitions was reported as remediated after new procedures were designed and implemented. Management concluded disclosure controls were effective as of September 30, 2012.
Most important facts for investors to verify
- Whether holiday-season sales and cash generation support the stated mid-single-digit revenue outlook and planned revolver repayment.
- Whether gross-margin gains continue while technology, marketing and administrative costs rise.
- Inventory, receivables and other seasonal working-capital trends, given the quarter's substantial operating cash outflow and low ending cash balance.
- Remaining borrowing availability and compliance with credit-facility covenants; the filing does not state the precise unused availability at period end.
- Developments in the class-action proceedings and any change in the company's ability to estimate potential losses.
- Whether the deferred-tax control remediation remains effective and whether tax examinations or uncertain tax positions change materially.