1-800-FLOWERS.COM, Inc. — Q2 FY2022 Form 10-Q
Reporting period: The quarter and six-month period ended December 26, 2021; comparable periods ended December 27, 2020. Amounts below are in millions of dollars unless stated otherwise. The company sells floral, personalized and gourmet gifts through e-commerce, retail and wholesale channels, and operates BloomNet florist services. Its holiday quarter is highly seasonal, generating over 40% of annual revenue.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Revenue | $943.0 (+7.5%) | $877.3 | $1,252.4 (+7.9%) | $1,161.0 |
| Gross profit / margin | $378.5 / 40.1% | $398.2 / 45.4% | $504.0 / 40.2% | $513.7 / 44.2% |
| Operating income | $115.7 | $147.6 | $95.4 | $134.1 |
| Net income | $88.5 | $113.7 | $75.3 | $103.9 |
| Diluted EPS | $1.34 | $1.71 | $1.14 | $1.56 |
| Adjusted EBITDA (non-GAAP) | $133.1 | $164.3 | $127.8 | $167.5 |
Revenue growth was broad-based, but higher costs more than offset sales gains. Q2 e-commerce revenue grew 6.4%; average order value rose 10.7% to $85.22 while orders declined 3.9%. Gourmet Foods & Gift Baskets generated $590.9 million of Q2 revenue, up 9.8%; Consumer Floral & Gifts rose 3.2% to $315.1 million, and BloomNet rose 11.4% to $37.9 million.
For the six months, operating cash flow was $185.8 million, versus $316.6 million a year earlier. Investing used $53.4 million, including $32.6 million of capital expenditures and $20.8 million for Vital Choice. Financing used $35.0 million, including $25.5 million of share repurchases and $10.0 million of net debt repayment. Free cash flow, calculated as operating cash flow less capital expenditures, was approximately $153.2 million.
At December 26, 2021, cash was $271.1 million and working capital was $151.9 million. Debt consisted of $175.0 million of term loans before deferred financing costs, with $20.0 million current; reported debt net of financing costs was $171.8 million. The $250 million revolving facility had no balance outstanding at quarter-end. Cash had been $173.6 million at June 27, 2021. The company reported compliance with credit covenants.
Changes versus prior period
- Despite revenue growth, Q2 gross profit fell 5.0%, operating income fell 21.6%, net income fell 22.2%, and diluted EPS declined from $1.71 to $1.34. Six-month net income declined 27.6%.
- Gross margin contracted 530 basis points in Q2 and 400 basis points for the six-month period. The company cited higher labor, inbound and outbound shipping, raw-material and marketing costs, as well as supply-chain disruption.
- Revenue comparisons followed unusually strong pandemic-era growth in the prior year: 44.8% for the prior-year quarter and 46.4% for the prior-year six months. Excluding acquisition effects, current-period revenue growth was 6.9% for Q2 and 6.3% for six months.
- Vital Choice, acquired October 27, 2021 for approximately $20.3 million after adjustments, was included in Gourmet Foods & Gift Baskets from the acquisition date. Its purchase-price allocation remained preliminary. The company also repurchased 827,307 shares for $25.5 million during the six months.
Outlook, risks and other items
- Updated FY2022 guidance: revenue growth of 7%–9%, adjusted EBITDA of $140–$150 million, and diluted EPS of $0.90–$1.00. Management expected full-year free cash flow to be significantly lower than the prior year, partly because of inventory investment. The filing does not provide reconciliations for adjusted EBITDA or free-cash-flow guidance.
- Management expects the second fiscal quarter to remain the largest revenue quarter and likely to account for all of the year’s earnings, while everyday gifting is moderating seasonality. The full-year EPS outlook is below reported first-half diluted EPS of $1.14; investors should examine management’s assumptions for the second half.
- Management cited pandemic uncertainty, labor shortages and wage inflation, constrained carrier and ocean-freight capacity, higher transport and storage costs, marketing inflation, and consumer sensitivity to rising prices. It described strong demand, but noted that cost pressures exceeded expectations and reduced margins.
- Management expected cash and operating cash flow to cover needs for at least the next 12 months, while noting forecast uncertainty and expected seasonal revolver borrowing for pre-holiday inventory and manufacturing. The company intended to maintain higher inventory to mitigate supply constraints.
- The PersonalizationMall litigation was settled and dismissed with prejudice after the acquisition closed. Management said other ordinary-course claims were not expected to materially affect financial position, results or liquidity. No material changes to previously disclosed risk factors were reported; disclosure controls were deemed effective.
Most important facts for investors to verify
- Whether gross-margin pressure from labor, freight, materials and marketing costs persists, and how much pricing, automation and inventory actions offset it.
- Whether demand, order volumes and customer acquisition support the revenue-growth guidance, particularly after exceptional prior-year comparisons.
- Whether the full-year EPS and adjusted EBITDA outlook remains achievable given first-half results and management’s expectation that most earnings occur in Q2.
- Cash conversion, inventory levels, capital spending and the expected seasonal use of the revolving credit facility; confirm debt balances, maturities and covenant headroom.
- Integration and performance of Vital Choice, including final purchase accounting and its contribution to segment results.