1-800-FLOWERS.COM, Inc. — FY2017 Form 10-K
Period clarification: The filing covers the fiscal year ended July 2, 2017, not a fiscal 2016 fourth quarter. It also reports the quarter ended July 2, 2017; selected fourth-quarter figures are included below.
Business context
The company sells flowers, gourmet foods, gift baskets and related products through e-commerce, telephone, retail and wholesale channels. It reports three segments: Consumer Floral, Gourmet Food & Gift Baskets, and BloomNet Wire Service. Fiscal 2017 comprised 52 weeks; fiscal 2016 comprised 53 weeks, affecting year-over-year comparisons. The company sold Fannie May on May 30, 2017.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $1,193.6 million | $1,173.0 million |
| Gross profit / margin | $520.3 million / 43.6% | $517.5 million / 44.1% |
| Operating income | $46.4 million | $43.3 million |
| Net income attributable to 1-800-FLOWERS.COM | $44.0 million; diluted EPS $0.65 | $36.9 million; diluted EPS $0.55 |
| Adjusted net income / diluted EPS (non-GAAP) | $29.2 million / $0.43 | $28.5 million / $0.43 |
| Adjusted EBITDA excluding stock-based compensation (non-GAAP) | $87.2 million | $85.7 million |
| Operating cash flow | $61.0 million | $57.7 million |
| Capital expenditures | $33.7 million | $33.9 million |
Revenue grew 1.8% as reported and 3.1% on management’s comparable basis, which adjusts for the extra fiscal 2016 week, Fannie May’s prior-year June revenue and a shifted Harry & David cherry shipment. Consumer Floral revenue rose 4.5% and BloomNet rose 2.6%; Gourmet Food & Gift Baskets revenue was broadly flat. The company fulfilled about 12.3 million e-commerce orders at a $73.12 average order value.
Net income included a $14.6 million pretax gain on the Fannie May sale. The company reported a 21.4% effective tax rate, versus 30.3% in FY2016; the filing attributes the difference principally to the sale-related tax effect and other tax items. Adjusted measures exclude specified unusual or nonrecurring items and should be considered alongside GAAP results.
At July 2, 2017, cash was $149.7 million and working capital was $132.2 million, compared with $27.8 million and $45.8 million a year earlier. Gross term-loan principal was $112.1 million; reported debt net of deferred financing costs was $108.6 million. No revolver borrowings were outstanding. The $200 million revolving facility matures December 23, 2021, subject to seasonal capacity reductions and covenants. The company was in covenant compliance. Cash increased primarily due to the Fannie May sale; investing cash flow was $78.3 million, including $112.0 million of sale proceeds.
For the quarter ended July 2, 2017, revenue was $239.5 million, operating loss was $10.8 million and net income was $8.0 million. The quarter’s results included approximately $14.9 million of other income, primarily the Fannie May sale gain.
Material changes, outlook and risks
- Fannie May was sold for stated consideration of $115.0 million, subject to working-capital adjustment. The finalized adjustment reduced consideration by $11.4 million; an $8.5 million payable was recorded at year-end. The company recorded a $14.6 million gain and will provide transition services for approximately 18 months, as well as distribute certain products under a commercial agreement.
- Management said Consumer Floral and BloomNet improved, while Gourmet Food & Gift Baskets was affected by Harry & David’s weaker Christmas-season demand and store closures. Gross margin fell 0.5 percentage point, citing shipping-rate increases, product mix and promotions.
- FY2018 guidance: revenue of $1.14–$1.16 billion, EPS of $0.46–$0.48 and EBITDA of $90–$93 million. Management expects growth across all three segments, renewed focus on Harry & David, and improved gross profit from sales growth and manufacturing and supply-chain initiatives. The EPS outlook assumes a normalized 35% tax rate.
- The business is highly seasonal: the Thanksgiving-to-Christmas period is expected to generate nearly half of annual revenue and all annual earnings. Key risks include consumer-spending changes, intense competition and promotional pressure, shipping and labor costs, dependence on third-party florists and vendors, inventory and harvest/weather variability, and cyber or systems disruptions.
- Management and the auditor reported effective internal controls; the auditor issued an unqualified opinion on the financial statements. Management said pending claims are not expected to materially affect financial position, results or liquidity.
Most important facts for investors to verify
- How much of FY2017 GAAP earnings and cash growth reflects the Fannie May sale and related tax effects, versus recurring operating performance.
- Whether the forecast recovery at Harry & David and growth across all segments materialize, especially after the holiday-season demand decline.
- Comparable-revenue calculations and the impact of FY2016’s extra week and the shifted cherry shipment on reported growth.
- Debt amortization, variable-rate exposure and seasonal revolver needs; the filing estimates a 50-basis-point rate increase would add about $0.8 million of annual interest expense.
- Execution of the FY2018 revenue, EPS and EBITDA guidance, including the assumed 35% tax rate and planned margin improvements.