1-800-FLOWERS.COM, Inc. — Q1 FY2023 Form 10-Q
Reporting period: Three months ended October 2, 2022; comparative period ended September 26, 2021. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Business context
The company sells flowers, gifts, gourmet foods and related services through e-commerce, retail, wholesale and BloomNet. Its business is highly seasonal: management expects the Thanksgiving-to-Christmas quarter to generate over 40% of annual revenue and all annual earnings. The quarter included contributions from Vital Choice and Alice’s Table, acquired in October and December 2021, respectively.
Financial performance and liquidity
| Metric | Q1 FY2023 | Prior-year quarter |
|---|---|---|
| Revenue | $303.6 | $309.4 |
| Gross profit / margin | $101.5 / 33.4% | $125.5 / 40.6% |
| Operating loss | $(41.4) | $(20.3) |
| Net loss | $(33.7); $(0.52) per share | $(13.2); $(0.20) per share |
| Adjusted EBITDA (non-GAAP) | $(28.0) | $(5.3), adjusted for transaction costs |
| Cash used in operating activities | $(146.3) | $(150.2) |
| Capital expenditures | $11.0 | $11.1 |
Revenue declined 1.9% year over year, or 3.6% excluding the non-comparable impact of acquisitions. E-commerce revenue fell 9.3%, while other revenue rose 40.6%. Consumer Floral & Gifts revenue decreased 10.5%; BloomNet increased 8.2%; Gourmet Foods & Gift Baskets increased 11.0%. Gross margin contracted as higher commodity, labor, freight and fuel costs, product mix and write-offs of dated perishable inventory outweighed pricing actions. Order volume fell 15.1%, partly offset by a 6.7% increase in average sale to $75.78.
Operating cash outflow reflected the quarterly loss and seasonal working-capital investment, including a $95.0 million inventory increase and $25.4 million increase in receivables. Cash and equivalents were $9.4 million at quarter-end, down from $31.5 million at July 3, 2022. Working capital was $46.4 million, versus $82.5 million. Net cash used in operations less capital expenditures was approximately $157.4 million.
Debt totaled $300.0 million before $1.8 million of unamortized financing costs: $140.0 million drawn on the revolver and $160.0 million of term loans. The balance sheet classified $160.0 million as current and reported $138.2 million of long-term debt, net. The company borrowed $140.0 million on the revolver to fund pre-holiday manufacturing and inventory. Management said seasonal cash generation after the holiday period is expected to support repayment of working-capital borrowings.
Outlook, commentary and risks
For FY2023, management guided to a mid-single-digit percentage revenue decline, adjusted EBITDA of $75–$80 million and free cash flow above $75 million. It expects business stabilization in Q2 and improvement in the second half, supported by pricing, cost actions and lower ocean freight costs. The outlook assumes restoration of a 100% bonus payout, compared with limited payouts in FY2022. Management cautioned that macroeconomic uncertainty makes forecasting difficult and described its outlook as cautious.
Management attributed weaker demand to inflation, geopolitical pressures and lower consumer confidence, particularly for everyday discretionary gifts. It cited ongoing risks from consumer spending, supply-chain and input costs, labor and shipping, inventory management, seasonality, competition, acquisitions and COVID-19 effects. These are forward-looking expectations, not guarantees.
An August 2022 credit amendment relaxed certain financial covenants: the maximum leverage ratio for the period ended October 2, 2022 was raised from 3.25:1 to 4.25:1, and the minimum fixed-charge coverage ratio for specified periods through April 2, 2023 was lowered from 1.50:1 to 1.00:1. The company reported compliance as of October 2. The credit facility is secured by substantially all company assets; $160 million of term-loan principal is scheduled for payment during the remainder of FY2023 and FY2024.
Disclosure controls were deemed ineffective because of an unremediated material weakness involving logical access and segregation of duties in certain IT environments. Management reported beginning remediation and said additional procedures found no unauthorized activity; the weakness is not considered remediated until remediation has operated long enough and been successfully tested. Management nevertheless concluded the presented financial statements fairly state the company’s financial position and results in all material respects.
The call-center worker class settlement received final court approval in September 2022. The company had accrued $2.9 million; the subsidiary’s payment is capped at $3.3 million, with the final amount pending administrator calculation. The filing reports no other material risk-factor changes from the prior 10-K.
Important facts for investors to verify
- Whether revenue and margins stabilize as forecast, particularly given the sharp gross-margin decline and weaker everyday-gift demand.
- Whether holiday-season cash generation delivers the guided free cash flow and enables repayment of revolver borrowings.
- Inventory levels, aging and sell-through: inventory reached $342.6 million, up from $247.6 million at fiscal year-end.
- Debt repayment capacity, variable-rate interest exposure, and continued compliance with amended covenants.
- Progress and independent testing of remediation for the IT access and segregation-of-duties material weakness.
- The final payment amount for the approved call-center settlement and any developments in other claims.
- Performance against non-GAAP guidance; the filing does not reconcile adjusted EBITDA or free-cash-flow guidance to GAAP measures because management cites unreasonable effort.