Business context and reporting period
1-800-FLOWERS.COM, Inc. filed this unaudited Form 10-Q for the quarter ended December 29, 2013, the second quarter of fiscal 2014. The business operates across Consumer Floral, BloomNet Wire Service, and Gourmet Food & Gift Baskets. The holiday quarter is seasonally important; management also notes higher revenue around major floral holidays in later quarters.
Financial performance
Amounts below are in millions except per-share data. Quarterly and six-month results are compared with the corresponding prior-year periods.
| Metric | Quarter ended Dec. 29, 2013 | Prior-year quarter | Six months ended Dec. 29, 2013 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $266.3 | $251.4 | $389.4 | $371.0 |
| Gross profit | $111.0 | $104.5 | $162.3 | $153.9 |
| Gross margin | 41.7% | 41.6% | 41.7% | 41.5% |
| Operating income | $28.7 | $26.8 | $21.6 | $20.6 |
| Income from continuing operations | $17.5 | $16.5 | $13.0 | $12.1 |
| Net income | $18.0 | $16.0 | $13.4 | $11.4 |
| Diluted EPS | $0.27 | $0.24 | $0.20 | $0.17 |
| Operating cash flow | Not presented separately | Not presented separately | $17.8 | $21.1 |
- Quarterly revenue rose 6.0%; six-month revenue rose 5.0%. All three segments grew. Quarterly segment revenue growth was 5.8% in Consumer Floral, 6.3% in BloomNet, and 6.1% in Gourmet Food & Gift Baskets.
- Quarterly segment contribution margin increased 5.3% to $46.2 million. Consumer Floral contribution margin declined 15.6% to $8.7 million, while BloomNet rose 7.9% to $6.5 million and Gourmet Food & Gift Baskets rose 12.5% to $31.0 million.
- Continuing-operations EBITDA excluding stock-based compensation, a company-presented non-GAAP measure, was $34.9 million for the quarter, up 7.0%, and $33.6 million for six months, up 5.4%.
- Quarterly marketing and sales expense was $57.7 million, general and administrative expense $14.3 million, and depreciation and amortization $5.0 million. For six months, these were $92.1 million, $28.1 million, and $9.7 million, respectively.
Liquidity, debt and cash flow
At December 29, 2013, cash was $3.3 million, working capital was $24.5 million, and total debt was $3.4 million, comprising $3.0 million under the revolving facility and a $0.4 million acquired bank loan. Cash was $0.2 million and working capital $16.9 million at June 30, 2013. The company reported compliance with credit-facility covenants.
- Six-month operating cash flow was $17.8 million, down from $21.1 million, reflecting seasonal working-capital movements, including receivables associated with holiday sales.
- Investing cash outflow was $11.2 million, including $9.8 million of capital expenditures and acquisition spending. Financing cash outflow was $3.5 million, including $6.5 million of treasury-stock purchases.
- The revolving facility has a seasonally adjusted limit of $150 million to $200 million, with a $25 million to $75 million working-capital sublimit, and matures April 10, 2018. Management said operating cash flow and available facility borrowings should provide sufficient liquidity.
- The company repurchased $6.5 million of Class A shares during the six months; $12.4 million remained authorized under the plan at quarter-end.
Material changes, outlook and risks
- On December 3, 2013, the company acquired a controlling 56.2% interest in UK-based iFlorist. The purchase price was $8.8 million, including converted debt and the fair value of the previously held stake and noncontrolling interest. The acquisition added $3.5 million of revenue in the quarter; purchase-price allocation remained preliminary.
- The Winetasting Network e-commerce and procurement business was sold on December 31, 2013. The sale loss estimate was reduced from $2.3 million to $1.0 million, and the company recorded a $0.9 million after-tax reversal of the previously accrued loss. Discontinued operations reported income of $0.5 million for the quarter and $0.4 million for six months, including this adjustment.
- Management expected fiscal 2014 consolidated revenue growth in the mid-single-digit range and revenue growth across all segments. It also expected gross margin to improve versus fiscal 2013, citing sourcing, supply-chain, and manufacturing efficiencies.
- Management attributed growth to product initiatives, holiday and everyday marketing, recovery in DesignPac wholesale gift baskets, Cheryl’s e-commerce growth, BloomNet penetration, and iFlorist. It cited difficult economic conditions, the October government shutdown, and six fewer shopping days between Thanksgiving and Christmas as headwinds; November comparisons also benefited from prior-year Hurricane Sandy disruption.
- Risks include seasonality, customer acquisition and retention, competition, inventory and working-capital management, capital needs, integration and growth of acquisitions, discretionary consumer spending, and legal contingencies. A purported class action concerning former post-transaction marketing practices remained unresolved; the company said potential loss was not reasonably estimable. No material change to the prior 10-K risk factors was reported.
- The effective tax rate from continuing operations was 38.2% for the quarter and 38.1% for six months. The company disclosed approximately $0.8 million of unrecognized tax positions, including interest and penalties, and expected $0.4 million to be resolved within twelve months.
Important facts for investors to verify
- Whether mid-single-digit fiscal 2014 revenue growth and the projected gross-margin improvement are achieved, particularly after seasonal holiday sales.
- Whether Consumer Floral contribution-margin weakness persists and how iFlorist affects segment growth, margins, and the final acquisition accounting.
- Cash conversion and working-capital needs, given lower six-month operating cash flow and low quarter-end cash; also verify subsequent revolver usage and liquidity.
- Whether the Winetasting Network sale closed on the disclosed terms and whether any additional discontinued-operation adjustments arise.
- Developments in the unresolved marketing-practices litigation, for which the company could not estimate a loss range.