1-800-FLOWERS.COM, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended October 2, 2016; comparisons are to the three months ended September 27, 2015. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise indicated. The company sells floral, gourmet food, and gift products and services. Its business is highly seasonal: management expects the Thanksgiving-to-Christmas quarter to generate nearly half of annual revenue and all annual earnings.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Revenue | $165.8 | $156.0 |
| Gross profit / gross margin | $71.4 / 43.0% | $67.5 / 43.3% |
| Operating loss | $(23.1) | $(22.3) |
| Net loss attributable to company | $(15.8) | $(4.5) |
| Basic and diluted loss per share | $(0.24) | $(0.07) |
| Net cash used in operating activities | $(134.8) | $(140.2) |
- Revenue rose 6.3%. E-commerce revenue increased 2.3%; orders were approximately 1.572 million versus 1.545 million, and average order value was $68.13 versus $67.76.
- Segment revenue: Consumer Floral $75.2 million (+3.1%); BloomNet $21.0 million (-2.7%); Gourmet Food & Gift Baskets $69.8 million (+13.3%). Gourmet growth included early holiday-basket shipments requested by some wholesale customers.
- Gross profit increased 5.7%, while margin declined 30 basis points. Management attributed the decline primarily to product mix from early wholesale gift-basket shipments. Consumer Floral margin improved to 40.5%; Gourmet margin declined to 41.2%.
- Operating expenses increased to $94.5 million from $89.8 million. Marketing and sales expense rose 4.9%, and general and administrative expense rose 9.8%; management cited holiday-preparation marketing, labor, and health-insurance costs.
- Interest expense, net, declined to $1.5 million from $1.9 million, primarily due to scheduled term-debt repayments. The prior-year comparison included a $19.6 million warehouse-fire insurance gain, partly offset by iFlorist and investment impairments. Excluding specified items, adjusted loss attributable to the company was $15.8 million versus $14.3 million; adjusted loss per share was $0.24 versus $0.22.
- Adjusted EBITDA excluding stock-based compensation was a loss of $13.3 million, compared with an adjusted loss of $12.0 million in the prior-year quarter. These are non-GAAP measures.
Cash, liquidity, and debt
- Cash was $6.8 million at October 2, 2016, down from $27.8 million at July 3, 2016. Working capital was $26.7 million, compared with $45.8 million at fiscal year-end.
- Operating cash outflow of $134.8 million reflected seasonal increases in inventory, receivables, and prepaid expenses and payment timing. Investing cash outflow was $4.7 million, principally for technology and production equipment.
- Financing provided $118.5 million, including $125.0 million of revolving-credit borrowings, partly offset by $3.6 million of debt repayments and $3.0 million of treasury-stock purchases.
- Total debt, net of deferred financing costs, was $235.8 million: $125.0 million drawn on the revolver and $114.0 million in term-loan principal. The balance sheet classified $146.4 million as current debt and $89.4 million as long-term debt. The company was in compliance with credit-facility covenants.
- Management said cash flows and available facility borrowings should provide sufficient liquidity and expected to repay all revolver borrowings by the end of fiscal Q2. A 50-basis-point interest-rate increase was estimated to add approximately $0.2 million of interest expense for the quarter.
Outlook, risks, and other material items
- No specific full-year revenue or earnings guidance is provided in the filing. Management expects holiday-season cash generation to repay seasonal working-capital borrowings; borrowings typically peak in November.
- Management highlighted risks involving profitability, expense and working-capital management, inventory, customer acquisition and retention, competition, seasonality, integration and growth of acquired businesses, consumer sentiment, and ordinary-course legal matters. The company noted that Easter falls in fiscal Q4 in 2017, shifting some revenue and EBITDA from Q3 to Q4 compared with the prior year.
- The Edible Arrangements litigation was settled in July 2016: the company paid $1.5 million, agreed to restrictions on certain marketing terms, and all claims were dismissed with prejudice. The payment was recorded in fiscal 2016, not as a Q1 FY2017 expense.
- The company repurchased approximately 318,600 shares during the quarter. On October 4, 2016, the board increased the remaining authorization to $25 million.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the quarter. No material changes to the risk factors in the prior Form 10-K were reported.
Investor verification priorities
- Track holiday-season revenue, margins, operating cash flow, and whether seasonal revolver borrowings are repaid by fiscal Q2 end.
- Assess whether the early wholesale shipments that boosted Q1 Gourmet revenue shifted sales from later periods, and monitor segment margins and BloomNet trends.
- Reconcile GAAP losses with management’s adjusted EBITDA and adjusted-loss measures, particularly the prior-year fire-insurance gain and other exclusions.
- Monitor debt levels, covenant compliance, variable-rate exposure, and liquidity as seasonal inventory and receivables fluctuate.
- Review the impact of the October 2016 buyback authorization and the continuing risks from seasonality, consumer demand, competition, and integration of acquired businesses.