1-800-FLOWERS.COM, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended April 2, 2017, the company’s fiscal 2017 third quarter. The request metadata says “2016 Q3,” but the filing itself is for 2017 Q3. Income and cash-flow comparisons are to the periods ended March 27, 2016; balance-sheet comparisons are to July 3, 2016. Dollar amounts below are in millions unless noted.
Business context and results
The company sells floral and gourmet food gifts through its Consumer Floral, BloomNet Wire Service, and Gourmet Food & Gift Baskets segments. Results are seasonal: management expects the Thanksgiving-to-Christmas quarter to produce nearly half of annual revenue and all annual earnings. Easter fell in fiscal Q4 in 2017, versus Q3 in 2016.
- Quarter: Revenue was $233.7, down 0.2%. Gross profit was $93.6, down 3.2%, and gross margin fell to 40.0% from 41.3%. Operating loss was $16.3 versus $13.2; net loss was $11.1, or $0.17 per diluted share, compared with a $9.1 loss, or $0.14 per share.
- Nine months: Revenue was $954.1, up 1.6%. Gross profit was $422.0, up 1.2%, while gross margin edged down to 44.2% from 44.4%. Operating income was $57.2 versus $58.9; net income was $36.0, or $0.53 per diluted share, versus $46.9, or $0.71. Prior-year results included a $19.6 insurance-recovery gain related to a warehouse fire; excluding specified prior-year items, adjusted net income was $38.3.
- Segment trends: Q3 Consumer Floral revenue rose 10.2% and BloomNet rose 7.0%; Gourmet Food & Gift Baskets revenue fell 13.6%. The latter segment’s contribution margin was a $10.8 loss versus a $6.8 loss. For nine months, Consumer Floral and BloomNet revenue rose 6.0% and 2.9%, respectively, while Gourmet Food & Gift Baskets declined 0.5%.
- Non-GAAP measures: Nine-month adjusted EBITDA excluding stock-based compensation was $87.6 versus $88.8. Q3 EBITDA excluding stock-based compensation was a $6.5 loss versus a $4.0 loss. The company cautions that EBITDA is supplemental and does not capture working-capital needs, debt service, or capital expenditure requirements.
Cash flow, debt and liquidity
- For nine months, operating cash flow was $61.2, down from $77.0. Investing cash outflow was $18.8, primarily capital spending on technology infrastructure and production equipment. Financing cash outflow was $13.5, including $8.3 of treasury-stock purchases, $4.0 of net term-loan repayments, and $1.5 of debt issuance costs. Cash increased $28.9 to $56.8.
- At April 2, 2017, working capital was $133.0, including $87.4 of net assets held for sale. The company reported $56.8 of cash. The working-capital comparison was $45.8 at July 3, 2016.
- Debt carrying value was $109.8, comprising a $113.6 term-loan balance less deferred financing costs; no revolver borrowings were outstanding. The amended credit agreement provides a $200.0 revolving facility, seasonally reduced to $100.0 from January 1 through August 1. The term loan and revolver mature December 23, 2021. The company reported covenant compliance at quarter-end.
- Management said operating cash flows and available credit were expected to provide sufficient liquidity. It expects seasonal revolver borrowing to support pre-holiday manufacturing and inventory purchases, with holiday cash generation typically enabling repayment by December.
Material changes, outlook and risks
- The company agreed to sell Fannie May to Ferrero for $115.0 in cash, subject to seasonal working-capital adjustment. Closing was expected May 30, 2017, subject to customary conditions, including regulatory approval. Fannie May was classified as held for sale, not as a discontinued operation; its assets were $91.8 and liabilities $4.4. Credit-facility terms allow sale proceeds to be reinvested within 24 months; until then, management expected proceeds to help fund working capital and reduce expected fiscal 2018 revolver borrowing.
- Management attributed approximately $13.0 of year-over-year revenue impact to Easter’s shift into fiscal Q4, including approximately $10.5 in Gourmet Food & Gift Baskets and $2.5 in Consumer Floral. It also cited fewer Harry & David seasonal kiosks and pop-up locations and the closure of underperforming stores. Management expected Easter-related revenue and EBITDA to shift into Q4; the filing provides no specific full-year earnings or revenue guidance.
- Risks highlighted include achieving revenue and profitability, managing seasonality and inventory, customer acquisition and retention, competition, integrating and growing acquired businesses, working-capital and capital-spending needs, consumer sentiment, and litigation. Management said there were no material changes to the annual-report risk factors. It believed pending legal matters would not materially harm financial position, results, or liquidity.
- The company early adopted share-based-payment accounting guidance, recognizing $0.9 of excess tax benefits against income-tax expense for the nine months. Management reported disclosure controls were effective and no material changes in internal control during the quarter.
Important facts for investors to verify
- Whether the Fannie May transaction closed as expected, final proceeds after working-capital adjustments, and the permitted use of proceeds.
- Whether the Easter-related sales and earnings shift materialized in fiscal Q4, and how seasonal performance affected full-year results.
- Whether Gourmet Food & Gift Baskets margins and contribution results improved after the quarter, given lower sales, product/channel mix, and manufacturing productivity pressures.
- Cash generation, seasonal revolver usage, and compliance with credit-facility covenants as holiday inventory and production needs rise.
- The distinction between GAAP results and management’s adjusted measures, including the effect of unusual prior-year fire-insurance proceeds on comparisons.