1-800-FLOWERS.COM, Inc. — FY2015 Form 10-K Summary
Reporting period: Fiscal year ended June 28, 2015 (52 weeks). The filing is an annual report, not a standalone fiscal fourth-quarter filing. Unless noted, financial amounts are in U.S. dollars.
Business context and reporting period
The company sells flowers, gifts, gourmet foods and gift baskets through e-commerce, telephone, retail, wholesale and florist-network channels. Its three segments are Consumer Floral, Gourmet Food and Gift Baskets, and BloomNet Wire Service. The September 30, 2014 acquisition of Harry & David expanded the gourmet segment; its results are included from the acquisition date, so FY2015 excludes Harry & David’s first fiscal quarter. Gourmet Food and Gift Baskets generated about 55% of reported FY2015 revenue.
Key financial results
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net revenue | $1,121.5 million | $756.3 million |
| Gross profit / gross margin | $487.2 million / 43.4% | $315.7 million / 41.7% |
| Operating income | $37.6 million | $23.7 million |
| Income from continuing operations | $19.4 million | $13.9 million |
| Net income attributable to 1-800-FLOWERS.COM | $20.3 million | $15.4 million |
| Diluted EPS from continuing operations | $0.30 | $0.22 |
| Cash from operating activities | $125.7 million | $42.5 million |
Revenue rose 48.3%, primarily reflecting the Harry & David acquisition. Excluding acquisitions and adjusting for estimated fire-related lost sales, management reported organic revenue growth of 2.8%. E-commerce revenue increased 54.8%; the company fulfilled approximately 12.0 million e-commerce orders, with a $70.87 average order value. Marketing and sales expense was $299.8 million, or 26.7% of revenue, compared with 25.8% the prior year. Interest expense and other, net increased to $7.3 million from $1.4 million, largely due to acquisition financing.
Management reported adjusted EBITDA of $95.3 million, excluding stock compensation and specified fire, purchase-accounting, acquisition, integration and severance items. This non-GAAP measure is not directly comparable to the company’s pro forma FY2015 adjusted EBITDA of $80.5 million used for guidance; that pro forma figure includes Harry & David’s seasonal first-quarter losses. GAAP operating cash flow was $125.7 million; the filing attributes it in part to working-capital movements and non-cash fire-related write-offs.
Liquidity, debt and capital resources
At June 28, 2015, cash and cash equivalents were $27.9 million and working capital was $36.4 million, compared with $5.2 million and $17.5 million, respectively, a year earlier. Total debt was $132.1 million, including $131.8 million under the term loan; no revolver borrowings were outstanding. The company reported $117.6 million of long-term debt and $14.5 million of current maturities. Net debt, calculated as total debt less cash, was approximately $104.2 million.
The acquisition was financed under a five-year credit facility that includes a $142.5 million term loan and a seasonally adjusted revolving facility with a $100 million to $200 million limit. The debt is secured by substantially all company and guarantor assets, carries variable-rate pricing and is subject to financial and other covenants; the company reported covenant compliance at year-end. Investing activities used $163.6 million, including $132.0 million net of cash acquired for Harry & David and capital expenditures of $32.6 million. Financing activities provided $60.6 million.
Material changes and unusual items
- Harry & David acquisition: Purchased for $142.5 million on September 30, 2014. The business contributed $359.7 million in revenue and approximately $24.6 million in operating income from acquisition through year-end. Reported growth and year-over-year comparisons therefore include a major acquisition effect.
- Warehouse fire: A November 27, 2014 fire destroyed Fannie May and Harry London inventory and disrupted holiday supply. Management estimated $17.3 million of lost sales and $6.6 million of lost pretax income. Separately, the company recorded $33.0 million of fire-related insurance recoveries against $33.0 million of incurred costs, including a $29.5 million inventory write-off; $30.0 million had been received and $3.0 million was recorded as an insurance receivable. Management expected insurance to cover lost sales, but had not recorded a recovery for those lost sales.
- Seasonality and calendar effects: The Thanksgiving-to-Christmas quarter is expected to generate nearly 56% of annual revenue and all annual earnings. Management cited the Saturday placement of Valentine’s Day in FY2015 as a demand and delivery challenge; Easter’s earlier date also shifted some revenue between quarters.
- Capital returns: The company repurchased $8.4 million of shares in FY2015 and authorized a $25 million increase to its buyback plan; $27.3 million remained authorized at year-end. It has not paid cash dividends.
Outlook, commentary and risks
For FY2016, management projected consolidated revenue growth of 5%–7%, EBITDA growth of approximately 10%, and EPS growth in excess of 20%, measured against pro forma FY2015 adjusted EBITDA of $80.5 million and adjusted diluted EPS of $0.33. The company also targeted $15 million of operating synergies over three years from Harry & David, alongside potential cross-brand, customer-database, multi-brand website and wholesale growth. These are forward-looking targets, not guarantees.
Key risks include consumer spending and economic conditions, intense competition and marketing costs, highly seasonal demand and inventory requirements, reliance on third-party florists and delivery carriers, supply and crop risks, cybersecurity and system interruptions, and the execution of acquisition integration and expected synergies. The company disclosed two material litigation matters: a class action concerning former third-party marketing practices and a trademark/related action by Edible Arrangements. Edible Arrangements alleged damages of $101.4 million; the company disputes the claims. Management said it could not reasonably estimate a possible loss or range for the disclosed matters.
Management and the auditor reported effective internal control over financial reporting, but Harry & David, representing approximately 32% of year-end assets and FY2015 revenue, was excluded from the internal-control assessment because of the timing of the acquisition.
Important facts for investors to verify
- Separate acquisition-driven growth from underlying performance, and compare reported results with the appropriate pro forma basis, including Harry & David’s omitted first quarter.
- Track whether the 5%–7% revenue, approximately 10% EBITDA and greater-than-20% EPS growth targets and the $15 million synergy plan are achieved; confirm the exact non-GAAP definitions used.
- Monitor term-loan amortization, variable interest-rate exposure, covenant headroom and seasonal revolver needs; the filing does not state a clear year-end revolver availability amount after applicable borrowing conditions.
- Verify the timing and amount of any additional insurance recovery for lost sales; the company had not recorded that recovery at year-end.
- Follow the Edible Arrangements and former marketing-practices litigation, for which potential losses were not reasonably estimable, and assess the integration and internal-control risks associated with Harry & David.