Business context and reporting period
1-800-FLOWERS.COM, Inc. filed this Form 10-Q for its fiscal third quarter ended April 1, 2018, and the nine months then ended; comparisons are with periods ended April 2, 2017. This is fiscal 2018 Q3, notwithstanding the request metadata identifying 2017 Q3. The company sells floral, gourmet food, gift basket and related products through its consumer brands and BloomNet wire service.
Fiscal results are highly seasonal: management expects the Thanksgiving-through-Christmas quarter to generate nearly half of annual revenue and all annual earnings. Easter fell in Q3 this year, versus Q4 last year, shifting revenue and EBITDA between quarters. The company sold Fannie May in May 2017, affecting year-over-year comparisons.
Financial performance and liquidity
Amounts below are in millions except per-share figures and percentages.
| Metric | Three months ended Apr. 1, 2018 | Three months ended Apr. 2, 2017 | Nine months ended Apr. 1, 2018 | Nine months ended Apr. 2, 2017 |
|---|---|---|---|---|
| Revenue | $238.5 | $233.7 | $922.0 | $954.1 |
| Gross profit / margin | $93.5 / 39.2% | $93.6 / 40.0% | $396.0 / 42.9% | $422.0 / 44.2% |
| Operating income (loss) | $(12.4) | $(16.3) | $52.4 | $57.2 |
| Net income (loss) | $(8.5) | $(11.1) | $49.0 | $36.0 |
| Diluted earnings (loss) per share | $(0.13) | $(0.17) | $0.73 | $0.53 |
| Adjusted EBITDA (non-GAAP) | $(3.6) | $(5.1), adjusted | $80.7 | $87.1, adjusted |
- Revenue: Reported revenue rose 2.1% in Q3 and declined 3.4% for nine months. Excluding Fannie May, management reported growth of 10.2% and 4.2%, respectively; excluding both Fannie May and the Easter timing shift, growth was approximately 6.1% and 3.3%.
- Margins and earnings: Reported gross margin fell 80 basis points in Q3 and 130 basis points for nine months. Nine-month net income included a $12.2 million discrete tax benefit from revaluing deferred tax liabilities after U.S. tax reform; management’s non-GAAP adjusted net income was $36.9 million versus $36.9 million in the prior-year comparison.
- Cash flow: Nine-month operating cash flow was $64.6 million, versus $61.2 million. Capital expenditures were $15.8 million; investing cash flow was $(24.3) million, including an $8.5 million Fannie May working-capital payment. Financing cash flow was $(16.9) million, including $5.0 million of term-loan repayments and $12.1 million of share repurchases.
- Liquidity and debt: At April 1, 2018, cash was $173.1 million and working capital was $162.0 million. Debt, net of deferred financing costs, was $104.3 million, including $9.3 million current; no revolver borrowings were outstanding. The $200 million revolver is seasonally reduced to $100 million during January 1–August 1. The company was in compliance with credit covenants.
- Balance sheet: Total assets were $570.4 million and total liabilities were $248.0 million. Cash increased from $149.7 million at July 2, 2017; debt declined from $108.6 million.
Material changes and management commentary
- Consumer Floral revenue increased 8.9% in Q3 and 5.0% for nine months. Gourmet Food & Gift Baskets revenue declined 8.4% and 7.9% as reported, but increased 15.5% and 4.5% excluding Fannie May. BloomNet revenue rose 1.7% in Q3 and fell 1.4% for nine months.
- Comparable gross margin pressure reflected free-shipping program growth, promotional activity, higher transportation and labor costs, and product mix. Adjusted EBITDA declined 7.3% for nine months, to $80.7 million.
- Cheryl’s experienced production and warehouse-system implementation problems during the Christmas period, requiring it to stop taking orders eight days before the holiday. Management estimated approximately $4.0 million of foregone holiday revenue, along with added labor and expedited-shipping costs. The filing says the issues were addressed and business had returned to its normal pace in the current quarter; excess inventory sales and customer win-back promotions continued to affect margins.
- Management believes available funding will meet anticipated operating cash needs for at least 12 months. It expects to draw on the revolver in fiscal 2019’s second quarter to fund pre-holiday manufacturing and inventory purchases. The company continues to consider share repurchases and potential acquisitions or investments.
Risks, contingencies and unusual items
- Key risks include achieving revenue and profitability, managing seasonality and inventory, acquiring and retaining customers, competition, costs and capital needs, consumer sentiment, and legal proceedings. The company reported no material changes to its previously disclosed risk factors.
- Management said pending claims and lawsuits are not expected to have a material adverse effect on financial position, results or liquidity. Unrecognized tax benefits were approximately $0.5 million; no significant resolution was expected in the next 12 months.
- U.S. tax reform reduced the federal corporate rate, with a transitional rate of approximately 28% for fiscal 2018 and 21% thereafter. The $12.2 million deferred-tax revaluation benefit is nonrecurring; future results should be assessed separately from it.
- The company expects the new lease standard, effective for its fiscal year ending June 28, 2020, to materially affect the balance sheet and disclosures. Variable-rate debt creates interest-rate exposure; a 50-basis-point rate increase was estimated to add about $0.1 million and $0.4 million of interest expense for the three- and nine-month periods, respectively.
Important facts for investors to verify
- Reconcile reported growth with management’s non-GAAP comparisons, including the Fannie May disposition and Easter timing effects.
- Assess whether Cheryl’s operational recovery is sustained and whether its lost holiday sales and margin effects persist.
- Separate recurring operating performance from the $12.2 million tax benefit and monitor the effective tax rate going forward.
- Track seasonal cash requirements, revolver usage, term-loan repayments, capital spending and remaining share-repurchase authorization of $20.1 million.
- Review margin trends, particularly transportation and labor costs, promotions, free shipping and BloomNet’s changing revenue mix.