Business context and reporting period
1-800-FLOWERS.COM, Inc. filed this unaudited Form 10-Q for the quarter ended December 30, 2018, the second quarter of fiscal 2019. The quarter includes the Thanksgiving-to-Christmas holiday season, which management says generates nearly half of annual revenue and all annual earnings. Results are therefore highly seasonal and are not necessarily indicative of full-year performance.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
- Quarter: Revenue was $571.3, up 8.6% year over year. Gross profit was $254.8, up 8.3%; gross margin was 44.6% versus 44.7%. Operating income rose 12.1% to $94.7. Net income was $68.6, down 3.0%, and diluted EPS was $1.04 versus $1.06.
- Six months: Revenue was $740.8, up 8.4%; gross profit was $323.4, up 6.9%, with gross margin of 43.7% versus 44.3%. Operating income was $71.7 versus $64.9. Net income was $51.3 versus $57.5, and diluted EPS was $0.77 versus $0.86.
- Non-GAAP measures: Adjusted EBITDA was $103.1 for the quarter, up 9.1%, and $89.2 for six months, up 5.8%. Adjusted net income was $68.6 for the quarter versus $58.5 a year earlier, and $51.3 for six months versus $45.3. Prior-year adjusted net income excludes a $12.2 tax-reform benefit.
- Cash flow and investment: Six-month operating cash flow was $139.6, versus $114.2. Capital expenditures were $11.8, compared with $8.9. Cash increased to $257.7 from $147.2 at fiscal year-end; cash flow reflected seasonal increases in payables and accrued expenses and lower inventory, partly offset by higher receivables.
- Liquidity and debt: Working capital was $186.7, versus $148.2 at July 1, 2018. The company reported $100.6 of term-loan principal, $98.5 of debt net of deferred financing costs, and no revolver borrowings at December 30. It repaid the revolver after seasonal borrowings peaked at $30.0 in November. The credit facility matures December 2021; the company reported compliance with its covenants.
Changes versus the prior comparable periods
- Quarter revenue grew across all three segments: Consumer Floral +8.0%, BloomNet +15.0%, and Gourmet Food and Gift Baskets +8.4%. BloomNet’s higher mix of lower-margin florist-to-florist orders reduced its gross margin; consolidated gross margin was nearly flat for the quarter.
- For six months, BloomNet revenue grew 18.2%, Consumer Floral 9.3%, and Gourmet Food and Gift Baskets 7.2%. Consolidated gross margin declined 60 basis points, reflecting promotions, seasonal labor costs, Passport free shipping, and segment mix, partly offset by logistics and manufacturing efficiencies.
- Quarterly net income declined despite higher operating income, primarily amid a higher effective tax rate and a shift from prior-year investment gains to current-period investment losses. The prior-year tax benefit also depresses the six-month year-over-year net income comparison: the effective tax rate was 25.4% for the quarter and 24.9% for six months, versus 15.2% and 8.7% a year earlier.
- E-commerce revenue rose 8.2% in both the quarter and six-month period. In the quarter, orders increased 6.3% and average order value rose 1.8% to $83.47.
Outlook, commentary and risks
- Management expects available cash to meet operating needs until the second quarter of fiscal 2020, when it expects to borrow under its revolver for pre-holiday manufacturing and inventory purchases. It believes funding sources are sufficient for anticipated operating cash needs for at least 12 months, while cautioning that projections are uncertain.
- No numerical full-year revenue or earnings guidance is provided in the filing. Management notes that Easter falls on April 21 in 2019, shifting most related revenue and EBITDA from fiscal Q3 to Q4.
- Management attributed growth to holiday and everyday gifting demand, marketing and merchandising initiatives, BloomNet service growth, and improved Cheryl’s Cookies operations after prior-year fulfillment issues. Higher technology costs, labor, promotional activity, and shipping-program penetration remain pressures.
- Key disclosed risks include customer demand and economic conditions, competition, customer acquisition and retention, seasonality, inventory and working-capital management, marketing and technology costs, acquisitions, and ordinary-course legal contingencies. Management says pending claims are not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
- ASC 606 was adopted July 2, 2018 using the modified retrospective method, increasing opening retained earnings by $0.3. Management expects no material ongoing annual net-income impact, but expects some quarterly fluctuations. The company also expects the forthcoming lease standard to materially affect its balance sheet and disclosures.
Important facts for investors to verify
- Reconcile the EBITDA disclosure: the quarter’s income statement reports net interest expense of $1.4, while the EBITDA reconciliation uses $2.7; for six months the corresponding figures are $2.4 and $3.4. The reconciliation amounts appear to include the separately reported other expense, so confirm the presentation in the original filing.
- Assess the quality and seasonality of operating cash flow, particularly the contribution from accrued expenses and payables, and the expected timing and scale of fiscal 2020 revolver borrowing.
- Track gross-margin trends, especially BloomNet’s lower-margin order mix, labor and shipping costs, promotions, and Passport program economics.
- Separate recurring earnings from the prior-year $12.2 tax-reform benefit and monitor the effective tax rate and open tax examinations.
- Review the timing shift of Easter-related sales and earnings, and the expected balance-sheet effects of lease accounting.