1 800 FLOWERS COM INC quarterly report, Q1 FY2016

Business context and reporting period

1-800-FLOWERS.COM, Inc. filed this unaudited Form 10-Q for its fiscal first quarter, the three months ended September 27, 2015, with comparison to the three months ended September 28, 2014. The company sells floral, gourmet food and gifting products through e-commerce, retail, wholesale and florist wire-service operations. Harry & David, acquired September 30, 2014, was included in the current-period results but not the reported prior-period results.

Financial performance and liquidity

• Reported revenue grew 23.2%, but management said revenue was essentially flat on a comparable basis including Harry & David in both periods. E-commerce revenue increased 24.6%, including acquisition-related growth.
• Gross margin improved 120 basis points year over year. Operating expenses rose substantially, including marketing and sales (+47.7%), technology and development (+66.3%), and general and administrative (+46.1%).
• Reported results included a $19.6 million gain from the Fannie May warehouse fire insurance settlement, partly offset by $1.9 million of iFlorist impairment and $1.7 million of Flores Online investment impairment. Excluding specified items, adjusted net loss attributable to the company was $14.3 million, versus $15.5 million on a pro forma prior-period basis; adjusted EBITDA excluding stock compensation was a loss of $12.0 million versus $14.4 million.
• Cash and cash equivalents were $2.0 million at quarter-end, down from $27.9 million at June 28, 2015. Working capital was $30.1 million, compared with $36.4 million. Operating cash outflow chiefly reflected seasonal inventory and receivables growth, payment timing, and the fire-insurance gain recognized before collection.
• Total debt was $257.3 million, versus $132.1 million at June 28, 2015, including $128.9 million outstanding on the revolver and a $128.3 million term loan. Revolver borrowings funded seasonal working capital. The company was in compliance with credit-facility covenants at quarter-end; the facility is secured by substantially all company and subsidiary-guarantor assets.

Material changes, outlook and risks

• Gourmet Food & Gift Baskets revenue increased 90.3% as reported, primarily due to Harry & David; comparable pro forma revenue declined 0.3%, partly reflecting wholesale-order timing. Consumer Floral revenue fell 1.9%, while BloomNet revenue rose 7.7%.
• Management expects the Thanksgiving-to-Christmas season, in the fiscal second quarter, to generate nearly half of annual revenue and all annual earnings. The company expects significant second-quarter operating cash generation and stated that revolver borrowings should be repaid by the end of that quarter; seasonal revolver usage typically peaks in November.
• The $55.0 million insurance settlement for the November 2014 warehouse fire resulted in a $19.6 million gain after $35.4 million of fire-related costs. The company had received $30.0 million by quarter-end and collected the remaining $25.0 million in October 2015. The fire had disrupted confection availability and affected prior-period revenue and earnings.
• The company committed to sell iFlorist and completed the sale of substantially all its assets on October 28, 2015, receiving an investment in Euroflorist valued at approximately $1.5 million. The quarter included a $1.9 million impairment charge on the disposal group.
• Management cited risks involving integration of Harry & David, seasonality and working-capital needs, customer acquisition and retention, competition, inventory management, discretionary consumer spending and legal proceedings. In the Edible Arrangements case, plaintiffs claimed damages of $101.4 million; the company disputed the claims and stated that a possible loss or range could not be reasonably estimated. The company reported no material change to its previously disclosed risk factors.
• Disclosure controls and procedures were assessed as effective as of September 27, 2015, with no reported material change in internal control over financial reporting during the quarter.

Important facts for investors to verify

1. Whether holiday-season sales and cash generation meet management’s expectations and reduce the seasonal revolver balance as forecast.
2. Whether the business achieves sustainable profitability after separating the one-time fire-insurance gain and other impairment and integration items from reported results.
3. How Harry & David integration, comparable segment trends, and marketing and overhead costs affect margins and cash flow.
4. The timing and terms of debt repayment, available revolver capacity, covenant compliance and the impact of variable interest rates.
5. Developments in the Edible Arrangements litigation and the completed iFlorist asset sale and Euroflorist investment.