1-800-FLOWERS.COM, Inc. — Form 10-Q Summary
Business context and period: The company sells flowers, gourmet foods, gift baskets and related services through its Consumer Floral, BloomNet Wire Service, and Gourmet Food & Gift Baskets segments. This unaudited report covers the three months ended September 29, 2013, the first quarter of fiscal 2014, compared with the three months ended September 30, 2012. Results are seasonal and the company says this quarter is not necessarily indicative of full-year performance.
Key financial results
| Metric | Q1 FY2014 | Prior-year quarter |
|---|---|---|
| Net revenue | $123.0 million | $119.6 million |
| Gross profit / gross margin | $51.3 million / 41.7% | $49.4 million / 41.3% |
| Operating loss | $7.1 million | $6.2 million |
| Continuing-operations loss | $4.6 million | $4.4 million |
| Net loss | $4.6 million | $4.6 million |
| Net loss per share, basic and diluted | $0.07 | $0.07 |
| Net cash used in operating activities | $61.7 million | $49.6 million |
| Capital expenditures | $4.1 million | $4.4 million |
Liquidity and debt: At September 29, 2013, cash was $3.6 million and working capital was $12.6 million, versus $0.2 million and $16.9 million, respectively, at June 30, 2013. The company had $71.0 million outstanding on its revolving credit facility, compared with no borrowings at June 30; the balance was classified as current. The facility has a seasonally adjusted limit of $150–$200 million and matures April 10, 2018. The company was in compliance with its covenants and expected to repay all facility borrowings by the end of fiscal Q2. Operating cash use reflected seasonal inventory and receivables build and payment timing; financing cash flow was positive $69.3 million, primarily from borrowings.
Changes and operating drivers
- Revenue rose 2.9%. Gourmet Food & Gift Baskets increased 15.1% to $31.2 million, and BloomNet rose 2.9% to $20.3 million; Consumer Floral declined 1.7% to $71.5 million.
- Gross margin improved 40 basis points, primarily from BloomNet margin expansion. Gourmet Food & Gift Baskets gross margin fell 130 basis points due to a greater mix of mass-market gift baskets.
- Operating loss widened as marketing and sales expense rose 5.4% and general and administrative expense rose 5.7%. Marketing and sales increased to 28.0% of revenue from 27.4%.
- E-commerce orders increased 2.7% to approximately 1.265 million, while average order value decreased 3.3% to $63.70. Approximately 63% of e-commerce customers were repeat customers.
- Cash used in operations increased year over year, mainly reflecting larger seasonal working-capital needs, including inventory and receivables.
Outlook, risks and unusual items
- Management expected fiscal 2014 revenue growth across all segments and consolidated growth in the mid-single-digit range. It also expected gross margin improvement versus fiscal 2013, citing sourcing, supply-chain and manufacturing efficiencies.
- The company planned to divest The Winetasting Network’s e-commerce and procurement businesses during fiscal 2014. A $2.3 million expected loss ($1.5 million after tax) had been provided for in fiscal 2013; the quarter’s discontinued operations recorded a net loss of $82,000.
- Management highlighted risks involving seasonality and working-capital requirements, customer acquisition and retention, competition, expense management, inventory efficiency, economic conditions, and the ability to achieve growth and profitability.
- Purported class actions concerning former third-party post-transaction marketing practices remained unresolved. Plaintiffs sought class certification and damages; the company said the possible loss or range of loss was not reasonably estimable and stated it would defend the actions.
- Variable-rate debt exposed the company to interest-rate risk; management estimated a 50-basis-point rate increase would add approximately $0.4 million of annual interest expense at the quarter-end debt level. The company repurchased $1.7 million of Class A shares during the quarter, with $17.3 million remaining authorized.
Important facts for investors to verify
- Whether holiday-season sales and cash generation support the mid-single-digit fiscal 2014 revenue outlook and planned repayment of the revolver.
- Whether the improvement in consolidated gross margin continues, particularly given the Gourmet segment’s product-mix pressure.
- Progress and final proceeds or losses from the planned Winetasting Network divestiture.
- Developments in the unresolved marketing-practices litigation and any change in the company’s ability to estimate exposure.
- The filing’s cash-flow statement heading says “Year Ended,” although the statements and comparisons are for the three months ended September 29, 2013 and September 30, 2012; confirm the intended quarterly presentation.