1-800-FLOWERS.COM, Inc. — Q1 FY2012 Form 10-Q
Reporting period: Three months ended October 2, 2011, compared with the three months ended September 26, 2010. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial performance
| Metric | Q1 FY2012 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue from continuing operations | $117.2 million | $101.7 million | +15.2% |
| Gross profit / gross margin | $46.6 million / 39.7% | $43.0 million / 42.3% | Gross profit +8.3%; margin down 2.6 percentage points |
| Operating loss | $(7.7) million | $(7.9) million | Improved by $0.2 million |
| Continuing-operations net loss | $(5.1) million | $(4.9) million | Loss increased by $0.2 million |
| Net loss | $(0.7) million | $(5.1) million | Improved, principally due to sale gain |
| Net cash used in operating activities | $(52.5) million | $(42.9) million | Use increased by $9.6 million |
Revenue growth was reported across all continuing categories: Consumer Floral $70.1 million (+12.0%), BloomNet $18.5 million (+23.7%), and Gourmet Food & Gift Baskets $28.6 million (+18.6%). Management said growth excluding acquisitions was approximately 12.3%. E-commerce revenue grew 10.6%; orders increased 5.3% to approximately 1.212 million, while average order value rose 5.1% to $64.99.
Cost of revenue and operating expenses totaled $124.9 million. Marketing and sales expense was $32.3 million (27.5% of revenue, versus 29.1%); technology and development was $4.8 million; general and administrative expense was $12.4 million; and depreciation and amortization was $4.9 million. Net interest expense declined to $0.8 million from $1.2 million. The continuing-operations income tax benefit was $3.4 million; the effective tax rate was 40.0% versus 45.3%.
Management’s non-GAAP EBITDA from continuing operations was a loss of $2.8 million, compared with a loss of $2.9 million; excluding stock-based compensation, the loss was $1.7 million versus $2.2 million. These measures are supplemental and do not replace GAAP results.
Liquidity, debt, and cash flow
Cash and equivalents were $5.7 million at October 2, 2011, down from $21.4 million at fiscal year-end. Working capital was $15.0 million versus $17.8 million. Operating cash use primarily reflected seasonal increases in inventory, receivables, and prepaid expenses ahead of the holiday season.
Total debt and capital lease obligations were $79.5 million, including $40.5 million of term loans and $38.0 million drawn on the revolving credit facility; $54.0 million was classified as current. The company borrowed $40.0 million under its bank facilities during the quarter. It expected the $38.0 million revolver balance to be repaid by the end of fiscal Q2, using seasonal cash flows. The credit facility matures in 2014; a $45.0 million interest-rate swap fixes LIBOR at 1.92% on its notional amount through July 2012.
Investing activities provided $3.0 million, including $12.0 million of proceeds from the wine fulfillment business sale, offset by acquisitions and capital expenditures. Financing activities provided $33.8 million. The filing states management believes operating cash flows and available credit-facility borrowings will be sufficient liquidity sources.
Material changes and unusual items
- On September 6, 2011, the company sold certain assets of its wine fulfillment services business for $12.0 million cash, with up to an additional $1.5 million contingent on revenue targets. The business was classified as discontinued operations. The quarter included a $4.5 million after-tax gain on sale; discontinued operations also reported an $85,000 loss, producing $4.4 million of total discontinued-operations income.
- The company acquired Flowerama on August 1, 2011 for approximately $4.3 million, funded with cash. The quarter also reflects the earlier acquisitions of Fine Stationery and Mrs. Beasley’s. Purchase-price allocations remained preliminary.
- Gross margin declined due to a greater wholesale sales mix, particularly in BloomNet and Gourmet Food & Gift Baskets, and higher commodity and shipping costs. Management said it expected gross margin to improve during the remainder of FY2012, citing reduced promotions and sourcing, supply-chain, and manufacturing efficiencies.
- BloomNet’s higher shop-to-shop order volume increased revenue but carried lower-than-normal margins. Management said it expected to monetize the volume through membership, technology, service, and product fees.
- Operating cash use reflected seasonal working-capital needs. The filing lists $190.0 million of contractual obligations, including $36.1 million in purchase commitments due within one year.
Outlook, risks, and contingencies
The filing gives no specific revenue or earnings guidance. Management cautioned that quarterly results are not necessarily indicative of full-year results and identified risks including seasonality, consumer demand and economic conditions, customer acquisition and retention costs, competition, inventory management, execution and integration of acquisitions, working-capital needs, and the ability to achieve revenue and profitability.
A purported class action concerning former third-party post-transaction marketing practices seeks class certification and damages or restitution exceeding $5 million. The company said it intends to defend the case vigorously and cannot predict the outcome or rule out further actions. In a separate state investigation involving the same general practices, the company paid $325,000 in January 2011 under an Assurance of Discontinuance.
Important facts for investors to verify
- Whether the seasonal revolver balance was repaid by the end of fiscal Q2, as management expected.
- Whether gross-margin improvement materialized despite wholesale mix and commodity and shipping-cost pressures.
- Final purchase-price allocations and performance of Flowerama, Fine Stationery, and Mrs. Beasley’s.
- Any developments in the post-transaction marketing class action and potential related claims.
- Whether the contingent sale proceeds of up to $1.5 million were earned and collected.