1-800-FLOWERS.COM, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended June 30, 2013 (52 weeks), compared with fiscal 2012 ended July 1, 2012. The filing is an annual report, not a standalone “2012 Q4” filing; fourth-quarter figures are unaudited quarterly data included in the 10-K. Amounts below are in U.S. dollars.
Business context and reporting period
The company sells flowers, plants, gourmet foods, gift baskets and related products through e-commerce, retail, wholesale and florist-wire-service operations. Its three continuing segments are Consumer Floral, Gourmet Food and Gift Baskets, and BloomNet Wire Service. In May 2013, it acquired online invitation and event-planning business Pingg for approximately $1.7 million. The company classified Winetasting Network’s remaining e-commerce and procurement businesses as discontinued operations and planned to divest them.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $735.5 million | $707.5 million |
| Gross profit / gross margin | $305.2 million / 41.5% | $292.6 million / 41.4% |
| Operating income | $25.8 million | $23.7 million |
| Income from continuing operations | $15.7 million | $13.3 million |
| Net income | $12.3 million | $17.6 million |
| Adjusted EBITDA from continuing operations, excluding stock compensation | $48.9 million | $44.3 million |
| Cash provided by operating activities | $34.6 million | $39.8 million |
Revenue grew 4.0%; gross profit increased 4.3%, and gross margin expanded 10 basis points. Net income fell 30.2%, mainly reflecting discontinued operations: FY2013 included a $3.4 million discontinued-operations loss, including a $1.5 million after-tax loss on the planned Winetasting Network disposition; FY2012 included a $4.5 million after-tax gain on a prior wine-business asset sale. Cash used in investing activities was $24.5 million, including $20.0 million of capital expenditures; cash used in financing was $38.8 million.
At June 30, 2013, cash was $0.2 million (versus $28.9 million a year earlier), working capital was $16.9 million (versus $29.7 million), and total debt was zero after repayment of the term loan. A new secured revolving facility, maturing in April 2018, provides seasonally adjusted capacity of $150 million to $200 million; none was drawn at year-end. The company reported total assets of $250.1 million, liabilities of $80.8 million and stockholders’ equity of $169.3 million.
Material changes and fourth-quarter comparison
- FY2013 revenue rose in Consumer Floral (+3.4%) and Gourmet Food and Gift Baskets (+6.7%); BloomNet revenue declined 0.9%. Consumer Floral and BloomNet segment contribution margins improved, while Gourmet Food and Gift Baskets contribution margin fell 32.6% to $20.3 million.
- Fannie May production and distribution difficulties pressured Gourmet Food and Gift Baskets margins. Segment gross margin declined 250 basis points; the company cited production issues and sales mix, including increased lower-margin DesignPac wholesale baskets.
- Fourth-quarter revenue was $173.0 million versus $177.3 million in the comparable prior-year quarter. Operating income was $0.4 million versus $2.6 million; income from continuing operations was $0.5 million versus $1.7 million. The company recorded a fourth-quarter net loss of $1.7 million versus net income of $1.8 million, including discontinued-operation losses and the $1.5 million after-tax disposition loss. Easter fell in Q3 in FY2013 but Q4 in FY2012, affecting quarterly comparability.
- Cash declined substantially as the company repaid its remaining term loan and repurchased $9.6 million of stock (2.49 million shares) during FY2013. The board authorized an additional $20 million for repurchases in March 2013; $18.9 million remained authorized at year-end.
Outlook, risks and unusual items
For FY2014, management forecast mid-single-digit consolidated revenue growth, growth across all three segments, and EBITDA and EPS growth exceeding revenue growth. It expected gross-margin improvement and approximately $20 million of free cash flow. Management said ongoing economic uncertainty tempered its outlook and expected cash from operations plus available revolver capacity to fund liquidity needs. It planned approximately $5 million of capital spending to expand Cheryl’s manufacturing capacity.
Management identified continued Fannie May operational remediation as important; failure to achieve planned improvements could materially harm results. Other material risks include sensitivity to consumer spending, seasonality and peak-period execution, competition and marketing costs, dependence on independent florists and vendors, flower supply and shipping costs, inventory forecasting, and e-commerce system or security disruptions. The company anticipated completing the Winetasting Network divestiture in FY2014 at an estimated $2.3 million pre-tax loss ($1.5 million after tax).
Purported class actions concerning former post-transaction marketing practices remained pending. Plaintiffs sought damages in excess of $5 million in each of two actions; the company said a possible loss or range could not be reasonably estimated. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported disclosure controls and internal controls were effective at June 30, 2013.
Important facts for investors to verify
- Whether FY2014 revenue, margin, EBITDA, EPS and free-cash-flow guidance was achieved, and how the company defines free cash flow.
- Progress and costs of Fannie May remediation and the Cheryl’s capacity expansion.
- Closing terms and final proceeds or loss on the Winetasting Network divestiture.
- Seasonal liquidity needs, revolver availability and covenant compliance, given low year-end cash and secured borrowing capacity.
- Developments in the post-transaction marketing litigation and any change in the company’s loss estimate.
- Whether segment growth and margins persist, particularly in Gourmet Food and Gift Baskets and BloomNet, and the impact of discontinued operations on comparisons.