Business context and reporting period
1-800-FLOWERS.COM, Inc. filed this unaudited Form 10-Q for its first fiscal quarter ended October 1, 2017, compared with the three months ended October 2, 2016. Its businesses include consumer floral, florist wire services, and gourmet food and gift baskets. Results are highly seasonal: management expects the Thanksgiving–Christmas quarter to generate nearly half of annual revenue and all annual earnings.
Fannie May was sold on May 30, 2017. The sale reduced reported year-over-year comparisons; the working-capital purchase-price adjustment finalized in August reduced consideration by $11.4 million from the original $115 million.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q1 FY2018 | Q1 FY2017 | Change / context |
|---|---|---|---|
| Net revenue | $157.3 | $165.8 | Down 5.1% reported; up 1.8% excluding prior-year Fannie May revenue |
| Gross profit / margin | $67.3 / 42.8% | $71.4 / 43.0% | Reported gross profit down 5.8%; margin down 20 basis points |
| Operating loss | $(19.6) | $(23.1) | Loss narrowed |
| Net loss / diluted loss per share | $(13.2) / $(0.20) | $(15.8) / $(0.24) | Loss narrowed |
| Adjusted EBITDA (non-GAAP) | $(10.1) | $(9.5), adjusted for Fannie May | 7.1% larger loss |
| Cash from operating activities | $(122.3) | $(134.8) | Seasonal working-capital outflow |
| Cash from investing activities | $(12.5) | $(4.7) | Includes $8.5 million Fannie May working-capital payment |
| Cash from financing activities | $(5.8) | $118.5 | Prior-year inflow included $125 million of bank borrowings |
Revenue growth excluding Fannie May reflected a 1.9% increase in Consumer Floral and 4.4% growth in Gourmet Food & Gift Baskets; BloomNet revenue fell 5.7%. Hurricanes Harvey and Irma were estimated to have reduced first-quarter revenue by approximately $1.1 million. E-commerce revenue increased 1.6%; order volume was approximately flat at 1.569 million, while average order value rose to $69.29 from $68.28.
At October 1, cash was $9.1 million, versus $149.7 million at July 2; working capital was $117.9 million, versus $132.2 million. Inventory rose to $148.4 million from $75.9 million, reflecting seasonal preparation. Total debt, net of deferred financing costs, was $107.4 million, including $7.9 million current and $99.5 million long-term. The company had no revolver balance and was in compliance with its debt covenants. The $200 million revolver is subject to a seasonal reduction to $100 million from January 1 through August 1.
Material changes and management outlook
- Reported revenue and expenses were affected by the Fannie May disposition. Management’s comparable-revenue measure excludes Fannie May from the prior-year period.
- Gross margin declined 20 basis points overall; comparable gross profit increased 0.6%, with margin pressure from mix, shipping costs, and higher Consumer Floral Passport participation.
- Marketing and sales expense fell 9.7%, and general and administrative expense fell 11.5%, partly reflecting the disposition. Technology and development expense rose 1.9%.
- Management expected to draw on the revolver during fiscal Q2, with borrowings peaking in November and repaid by the end of December using holiday-season cash flows. It expected cash on hand, operating cash flow, and available credit to provide sufficient fiscal 2018 liquidity.
- The company repurchased 457,600 shares during the quarter for approximately $4.3 million. Following an August increase to the authorization, approximately $27.9 million remained available at October 1.
Risks, contingencies, and unusual items
- Seasonality creates substantial inventory and working-capital needs ahead of the holiday quarter; actual results may differ from management’s expectations. The company also cited risks involving customer acquisition and retention, competition, expenses, inventory management, consumer demand, and legal contingencies.
- Management said pending claims and litigation were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- The company identified the new lease accounting standard as expected to have a material impact, primarily on the balance sheet and disclosures. It was still evaluating the effects of the new revenue recognition standard, including catalog-cost treatment, gift-card breakage, loyalty rewards, and potentially earlier e-commerce revenue timing.
- Management reported effective disclosure controls as of October 1, 2017, with no identified material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether holiday-season sales and cash generation meet management’s expectations and allow revolver borrowings to be repaid by year-end.
- Whether comparable revenue growth continues, particularly in Gourmet Food & Gift Baskets and Consumer Floral, and whether BloomNet stabilizes.
- Whether gross-margin pressure, seasonal inventory levels, and the sharp reduction in cash remain manageable.
- How revenue-recognition and lease-accounting adoption will affect reported results, retained earnings, assets, and liabilities.
- The final effects of the Fannie May sale adjustment and ongoing transition-services and distribution arrangements.