1-800-FLOWERS.COM, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended July 1, 2012 (52 weeks). The filing is an annual report, not a standalone “2011 Q4” report; it also compares against FY2011, a 53-week year ended July 3, 2011. Amounts below are in U.S. dollars.
Business context
The company sells flowers, plants, gourmet foods, gift baskets and related products through e-commerce, telephone, retail and wholesale channels. Its three segments are Consumer Floral, BloomNet Wire Service and Gourmet Food & Gift Baskets. It completed the sale of certain wine-fulfillment assets in September 2011 and continued to report that business, along with the previously sold Home & Children’s Gifts business, as discontinued operations.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $716.3 million | $671.6 million |
| Gross profit / margin | $294.0 million / 41.0% | $276.4 million / 41.2% |
| Operating income | $23.2 million | $13.1 million |
| Continuing-operations net income | $13.1 million | $5.5 million |
| Net income, including discontinued operations | $17.6 million | $5.7 million |
| Basic / diluted EPS | $0.27 / $0.27 | $0.09 / $0.09 |
| Operating cash flow | $40.2 million | $30.7 million |
- Revenue increased 6.6%; e-commerce revenue rose 6.1% to $515.2 million. Management estimated growth of approximately 5.2% after adjusting for acquisitions, the Fannie May store sale and FY2011’s extra week.
- Segment revenue growth was 7.9% for Consumer Floral, 12.7% for BloomNet and 3.2% for Gourmet Food & Gift Baskets. Average e-commerce order value increased to $62.45 from $59.58.
- Gross margin slipped 20 basis points, reflecting product mix and lower margins in BloomNet and wholesale baskets. Operating income improved, while net interest expense fell to $2.3 million from $4.1 million.
- Capital expenditures were $17.3 million; operating cash flow less capital expenditures was approximately $22.9 million. Net cash used in investing was $12.9 million and net cash used in financing was $19.9 million.
- At year-end, cash was $28.9 million, working capital $29.7 million and total debt and capital-lease obligations $29.3 million, including $15.8 million classified as current. No revolving-credit borrowings were outstanding. The company reported total assets of $264.8 million and equity of $161.7 million.
Material changes and unusual items
- FY2012 net income included a $4.5 million after-tax gain on the sale of discontinued wine-fulfillment assets. Continuing operations also included a $3.8 million gain on the sale of 17 Fannie May stores, which were converted to franchised locations.
- The company repurchased $3.3 million of shares during FY2012. It acquired Flowerama and had acquired Fine Stationery and Mrs. Beasley’s in 2011; it also invested in Brazilian floral retailer Flores Online.
- Management revised prior-period balance-sheet information for historical deferred-tax accounting errors. It reported the adjustments as immaterial to the affected prior periods, with no impact on FY2010–FY2012 statements of operations or cash flows.
Outlook, risks and contingencies
- For FY2013, management forecast mid-single-digit consolidated revenue growth and double-digit year-over-year increases in EBITDA and EPS, with expected gross-margin improvement. These are forward-looking expectations, not guarantees.
- Management cited continued economic uncertainty, unemployment, energy and commodity costs, consumer spending, competition, seasonality, and the execution of marketing, sourcing and growth initiatives as relevant factors.
- Three purported class actions concerning former post-transaction marketing practices seek restitution and other damages, each in excess of $5 million. The company intends to defend the cases; it said a possible loss or range could not be reasonably estimated.
- Controls: Management and Ernst & Young concluded internal control over financial reporting was ineffective at July 1, 2012 because of a material weakness in controls over deferred income taxes. The auditor issued an adverse opinion on internal controls but an unqualified opinion on the financial statements. Management described remediation work begun after year-end.
- Debt is secured and subject to financial covenants; scheduled debt maturities were $15.75 million in FY2013 and $13.5 million in FY2014. Operating leases and purchase commitments add to obligations.
Most important facts for investors to verify
- Track remediation and auditor testing of the deferred-tax control weakness, and review the effects of the historical tax-accounting corrections.
- Assess whether forecast FY2013 growth and margin improvement materialized, separating organic performance from acquisitions, franchise conversions and calendar effects.
- Review cash conversion, seasonal borrowing needs, near-term debt repayments, covenant headroom and the company’s ability to fund capital spending and commitments.
- Follow the class actions and any updates to the company’s assessment of potential loss.
- Reconcile the filing’s selected financial data, which lists FY2012 total assets as $268.8 million, with the audited balance sheet, which reports $264.8 million.