1-800-FLOWERS.COM, Inc. — Fiscal 2018 Form 10-K
Business context and reporting period. The company sells flowers, gifts, gourmet foods and gift baskets through its Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets segments. This is an annual report for the 52-week fiscal year ended July 1, 2018; it is not a standalone fiscal 2017 Q4 filing. The filing also reports the quarter ended July 1, 2018, which corresponds to fiscal 2018 Q4.
Financial performance and liquidity
| Metric | Fiscal 2018 | Prior comparable period |
|---|---|---|
| Revenue | $1,151.9 million | $1,193.6 million; down 3.5% reported. Excluding Fannie May, comparable revenue grew 3.7%. |
| Gross profit and margin | $489.0 million; 42.5% | $520.3 million; 43.6%. Comparable gross profit increased 0.3%, while margin declined 140 basis points. |
| Operating income | $41.0 million | $46.4 million |
| Net income and diluted EPS | $40.8 million; $0.61 | $44.0 million; $0.65 |
| Adjusted net income and diluted EPS (non-GAAP) | $29.3 million; $0.44 | $29.9 million; $0.44 |
| Adjusted EBITDA (non-GAAP) | $78.9 million | $85.9 million; down 8.2% |
| Operating cash flow | $58.3 million | $61.0 million |
| Cash and working capital | $147.2 million cash; $148.2 million working capital | $149.7 million cash; $132.2 million working capital |
| Debt and revolver | $104.9 million term-loan principal; no revolver borrowings | $112.1 million term-loan principal; no revolver borrowings at year-end |
Fiscal 2018 cash flow from investing was negative $41.8 million, including $33.3 million of capital expenditures and an $8.5 million Fannie May sale-related working-capital payment. Financing cash flow was negative $19.0 million, including $7.2 million of term-loan repayments and $12.2 million of share repurchases. The company reported $570.9 million in total assets and $314.9 million in stockholders’ equity at year-end.
In the July 1, 2018 quarter, revenue was $229.9 million versus $239.5 million a year earlier, and the company recorded a net loss of $8.2 million versus net income of $8.0 million. The filing emphasizes substantial seasonal swings: the holiday quarter generates nearly half of annual revenue and all annual earnings.
Material changes versus the prior period
- Reported annual revenue fell 3.5%, principally reflecting the May 2017 sale of Fannie May. On a comparable basis excluding Fannie May, revenue grew 3.7%; second-half comparable growth was 5.8%.
- Comparable e-commerce revenue grew 4.3%; order volume increased 5.2%, while average order value decreased 0.9%. The company fulfilled about 12.4 million e-commerce orders.
- Gross margin declined amid increased free-shipping participation, promotions, transportation and labor costs, and Cheryl’s operational disruption.
- Adjusted EBITDA declined from $85.9 million to $78.9 million despite comparable sales growth. The prior-year period included the Fannie May sale; reported net income in fiscal 2018 also benefited from a $12.2 million tax-reform-related deferred-tax benefit.
- Term-loan principal declined, cash remained substantial, and the company ended the year with no revolver borrowings. It repurchased $12.2 million of shares during fiscal 2018.
Outlook, management commentary and risks
For fiscal 2019, management forecast revenue growth of 5%–7%, diluted EPS of $0.38–$0.42, and adjusted EBITDA of $77–$80 million. The EPS outlook assumes a normalized 26% effective tax rate and restoration of full bonus payouts after minimal payouts in fiscal 2018. Management expects a return to double-digit EBITDA and EPS growth by fiscal 2020. These are forward-looking estimates, not guarantees.
Management attributed weaker fiscal 2018 earnings to deliberate marketing investment, higher health-insurance and transportation costs, and an operational problem at Cheryl’s during the Christmas season. A production and warehouse-management system implementation led Cheryl’s to stop taking orders eight days before Christmas; added labor and expedited shipping costs followed, and inventory liquidation and customer win-back promotions weighed on subsequent-period sales and margins. Management said the operational issues had been resolved.
Principal risks include pronounced holiday seasonality and associated inventory and cash needs; competition and promotional pressure; shipping and labor cost increases; dependence on independent florists and other vendors; flower supply and weather exposure; fruit-crop, water and environmental risks; cyberattacks, privacy breaches and system outages; and changes in online commerce, privacy and sales-tax regulation. The company cited the June 2018 Wayfair ruling as a potential source of broader sales-tax collection obligations. Management stated that pending claims and lawsuits were not expected to materially affect consolidated financial position, results or liquidity. The company was in compliance with its credit-facility covenants at year-end.
The Tax Act reduced the federal corporate rate to 21% for subsequent fiscal years; the fiscal 2018 rate was phased in at approximately 28%. The company recorded a $12.2 million discrete tax benefit from revaluing deferred tax liabilities. It also reported that adoption of the new lease standard was expected to materially affect its balance sheet and related disclosures.
Most important facts for investors to verify
- Whether comparable revenue growth continues to translate into improved operating income and adjusted EBITDA, given fiscal 2018 margin compression.
- Whether Cheryl’s system implementation issues are fully resolved and whether holiday fulfillment, customer retention and full-price sales recover.
- Progress against fiscal 2019 revenue, EPS and adjusted EBITDA guidance, including the impact of restored bonuses, marketing investment, labor and freight costs.
- Cash conversion and seasonal working-capital needs, capital spending, term-loan amortization and continued access to the revolving credit facility.
- The final effects of tax reform and new accounting standards, particularly lease accounting; also monitor sales-tax collection requirements following Wayfair.