1-800-FLOWERS.COM, Inc. — Q2 FY2015 Form 10-Q
Reporting period: Three and six months ended December 28, 2014. The filing was signed February 6, 2015. Amounts below are in millions, except per-share data.
Business context and results
The company operates consumer floral, florist wire-service, and gourmet food and gift-basket businesses. Results include Harry & David from its September 30, 2014 acquisition; the holiday quarter is highly seasonal and management expects it to generate nearly half of annual revenue and all annual earnings.
| Metric | Q2 FY2015 | Q2 FY2014 | Six months FY2015 | Six months FY2014 |
|---|---|---|---|---|
| Revenue | $534.3 | $266.3 | $661.0 | $389.4 |
| Gross profit | $240.4 | $111.0 | $293.7 | $162.3 |
| Gross margin | 45.0% | 41.7% | 44.4% | 41.7% |
| Operating income | $74.8 | $28.7 | $68.2 | $21.6 |
| Net income attributable to 1-800-FLOWERS.COM | $45.8 | $18.0 | $41.5 | $13.4 |
| Diluted EPS | $0.68 | $0.27 | $0.62 | $0.20 |
Q2 revenue increased 100.6% and six-month revenue increased 69.7%, primarily reflecting Harry & David. Excluding acquisitions and adjusting for the warehouse fire, management reported organic revenue growth of 4.8% for Q2 and 3.9% for the six-month period. Harry & David contributed $268.5 million in revenue and approximately $54.4 million in operating income from acquisition through December 28; those results are not necessarily representative of standalone performance.
Reported gross-margin expansion chiefly reflected Harry & David’s vertically integrated business and higher margins. Q2 marketing and sales expense was 22.8% of revenue versus 21.6% a year earlier; general and administrative expense was 4.8% versus 5.4%. Interest expense and other, net rose to $2.6 million from $0.4 million in Q2, and to $3.4 million from $0.7 million for six months, mainly due to acquisition financing.
Cash flow, debt and liquidity
- Six-month operating cash flow was $178.2 million, compared with $17.8 million a year earlier. The filing attributes the increase to earnings, seasonal working-capital movements, and fire-related items, including a noncash $29.5 million inventory write-off and $15.0 million of insurance proceeds.
- Investing cash outflow was $147.4 million, including $133.1 million net of acquired cash for Harry & David and $14.9 million of capital expenditures. Financing cash inflow was $65.2 million. Cash increased to $101.2 million from $5.2 million at June 29, 2014.
- At December 28, working capital was $54.6 million. Total debt was $139.6 million, including $138.9 million under the term loan; cash less total debt was approximately negative $38.4 million. No revolving borrowings were outstanding at quarter-end.
- The September 2014 credit facility includes a $142.5 million term loan due September 2019 and a seasonal revolver with a $100–$200 million limit. It is secured by substantially all company and subsidiary-guarantor assets and includes financial covenants. Interest is variable-rate; management estimated a 50-basis-point rate increase would add about $0.2 million of interest expense over either reported period.
Material changes, outlook and risks
- Acquisition: Harry & David was acquired for $142.5 million, adding its brands, facilities, orchards and 48 retail stores. Purchase-price allocation was preliminary; $38.6 million was assigned to goodwill. Integration, acquisition costs and incremental debt affect comparability.
- Warehouse fire: A November 27 fire destroyed inventory and disabled the Maple Heights, Ohio facility during the holiday season. Management estimated lost sales of $13.8 million and a $5.6 million reduction in pretax continuing-operations income. Operations were restored, but management expected a lesser continuing revenue impact for the remainder of the fiscal year. The company recorded $29.9 million of recoveries for incurred fire costs, including an insurance receivable of $14.9 million; recovery of lost sales had not been recorded, though management expected insurance coverage.
- FY2015 outlook: Management anticipated annual revenue above $1.1 billion and adjusted EBITDA of approximately $90 million, excluding stock-based compensation, acquisition transaction costs, purchase-accounting adjustments and the warehouse-fire impact. The outlook excludes Harry & David’s first fiscal quarter, typically its lowest-revenue quarter and one with significant seasonal losses. These are company estimates, not guarantees.
- Seasonality: Management expects to use holiday-generated cash to fund later-quarter needs and to borrow on the revolver for pre-holiday manufacturing and inventory. Easter’s earlier timing in FY2015 was expected to shift some revenue and EBITDA into Q3 from Q4.
- Legal contingencies: Edible Arrangements alleged trademark and related violations and, in a January 2015 amended complaint, claimed $101.4 million in damages. The company disputes the claims; it said potential loss for this and the post-transaction marketing class-action matters was not reasonably estimable.
- Management identified acquisition integration, seasonality, customer acquisition and retention, inventory and working-capital management, competition, consumer demand, and legal proceedings among risks. It stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much reported growth and profitability are attributable to Harry & David versus sustainable organic performance, including the effects of acquisition accounting and integration costs.
- Whether insurance proceeds ultimately cover both fire-related incurred costs and estimated lost sales, and how much the fire continues to affect Fannie May and Harry London results.
- Whether seasonal operating cash generation is repeatable and sufficient to meet inventory, working-capital and term-loan obligations while maintaining covenant compliance.
- Progress toward the FY2015 revenue and adjusted EBITDA outlook, noting its exclusions and the company’s pronounced seasonal earnings pattern.
- Developments in the Edible Arrangements and post-transaction marketing litigation, for which the company disclosed no reasonably estimable loss range.