1-800-FLOWERS.COM, Inc. — Q2 FY2016 Form 10-Q
Business context and period. The quarter ended December 27, 2015; comparisons are with the quarter ended December 28, 2014. The company sells floral and gourmet gifts through e-commerce, retail, wholesale and florist services. Its fiscal second quarter includes the Thanksgiving–Christmas season, which management expects to generate nearly half of annual revenue and all annual earnings. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance and liquidity
| Metric | Three months ended Dec. 27, 2015 | Six months ended Dec. 27, 2015 |
|---|---|---|
| Revenue | $548.4 million, +2.6% year over year | $704.4 million, +6.6% |
| Gross profit / margin | $252.6 million / 46.1%, versus 45.0% | $320.1 million / 45.4%, versus 44.4% |
| Operating income / margin | $94.4 million / 17.2%, versus $74.8 million / 14.0% | $72.1 million / 10.2%, versus $68.2 million / 10.3% |
| Net income attributable to company | $61.5 million; diluted EPS $0.92, versus $45.8 million and $0.68 | $57.1 million; diluted EPS $0.85, versus $41.5 million and $0.62 |
| Operating cash flow | Not separately reported for the quarter | $111.6 million, versus $178.2 million |
Second-quarter net income attributable to the company increased about 34.5%. Six-month results include a $19.6 million gain from the Fannie May warehouse-fire insurance settlement, partly offset by iFlorist and Flores Online impairments and the iFlorist sale loss. The prior-year comparison also includes fire-related disruption and Harry & David acquisition accounting effects. Management’s adjusted non-GAAP measures exclude or adjust for selected items: adjusted diluted EPS was $0.92 for the quarter versus $0.83, and $0.71 for six months versus $0.60. These measures are not substitutes for GAAP results.
Cash and cash equivalents were $108.4 million at December 27, 2015, versus $27.9 million at June 28, 2015. Working capital was $76.4 million. Total debt was $124.7 million, all under the term loan; there were no revolver borrowings at period end. Debt less cash was approximately $16.2 million. The company reported $111.6 million of operating cash flow, $13.1 million of capital expenditures and $18.1 million of cash used in financing activities for the six-month period; financing included $7.1 million of term-debt repayments and $11.2 million of share repurchases.
Changes, outlook and notable items
- Reported revenue growth reflected, among other factors, recovery from the prior-year Fannie May warehouse fire and the inclusion of Harry & David, acquired in September 2014. On management’s comparable basis, adjusting for the fire, acquisition-related accounting and business dispositions, revenue growth was about 0.8% for both the quarter and six-month period.
- For the quarter, Gourmet Food & Gift Baskets revenue rose 4.7%, while Consumer Floral revenue declined 4.8% and BloomNet revenue declined 2.2%. The company cited timing of BloomNet wholesale orders and the sale of iFlorist and Fine Stationery as factors affecting comparisons. E-commerce orders fell to about 5.205 million from 5.302 million in the quarter, while average order value rose to $79.20 from $77.16.
- Management said operating cash flow and available credit were expected to provide sufficient liquidity. It expects seasonal cash needs for pre-holiday manufacturing and inventory purchases to require revolver borrowing in fiscal 2017’s first quarter, with holiday cash generation typically allowing repayment by the end of the second quarter. No specific earnings or revenue guidance was provided in the supplied filing text.
- The $55.0 million fire-insurance settlement was finalized; the resulting $19.6 million gain was recorded in the six-month period. Management anticipated moving back into the repaired leased facility before the end of fiscal Q3 2016.
- The company sold substantially all iFlorist assets in October 2015, receiving a Euroflorist investment valued at about $1.5 million. It recorded a $1.9 million impairment before sale and a further $0.2 million sale loss. It also recorded a $1.7 million impairment of its Flores Online investment.
- Edible Arrangements alleges trademark and related claims and sought damages of $101.4 million. The company disputes the claims and is defending the case; it stated that a possible loss or range could not be reasonably estimated. The court denied a motion to dismiss the company’s antitrust counterclaims.
- Term-loan borrowings bear variable interest rates, and substantially all company and subsidiary-guarantor assets secure the facility. The company reported covenant compliance at quarter end. A 50-basis-point rate increase was estimated to raise interest expense by about $0.3 million for the quarter and $0.5 million for six months.
Important facts for investors to verify
- Separate recurring operating performance from the one-time fire-insurance gain and other unusual charges; review both GAAP and the company’s adjusted measures and reconciliations.
- Assess whether modest comparable revenue growth and segment trends persist after the holiday season, including order volume, average order value and the effects of divestitures.
- Monitor seasonal working-capital needs, revolver usage, debt amortization and the company’s ability to sustain cash generation outside the holiday quarter.
- Track Harry & David integration and synergy progress, along with higher technology, depreciation and amortization costs.
- Follow the Edible Arrangements litigation, for which the filing states potential loss is not reasonably estimable, and any developments in the repair and return to the fire-damaged facility.