1-800-FLOWERS.COM, Inc. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2019 (52 weeks). Although the request references 2018 Q4, this filing is the FY2019 annual report; it also reports quarterly results, including the quarter ended June 30, 2019. Dollar figures below are in millions unless noted.
Business context
The company sells flowers, plants, gourmet foods, gift baskets and related products through e-commerce, telephone, retail and wholesale channels. It operates Consumer Floral, Gourmet Foods & Gift Baskets, and BloomNet Wire Service segments. Nearly 50% of annual revenue and historically all earnings occur in the Thanksgiving-to-Christmas second fiscal quarter. The company sold Fannie May in May 2017, so comparisons with FY2017 are affected by that divestiture.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $1,248.6 | $1,151.9 |
| Gross profit / margin | $526.1 / 42.1% | $489.0 / 42.5% |
| Operating income / margin | $45.1 / 3.6% | $41.0 / 3.6% |
| Net income | $34.8 | $40.8 |
| Diluted EPS | $0.52 | $0.61 |
| Adjusted EBITDA (non-GAAP) | $82.1 | $78.9 |
| Operating cash flow | $78.1 | $58.3 |
| Capital expenditures | $32.6 | $33.3 |
Free cash flow, defined by the company as operating cash flow less capital expenditures, was approximately $45.5 million in FY2019. Revenue increased 8.4%; e-commerce revenue rose 8.3%. The company fulfilled approximately 13.2 million e-commerce orders, up 6.4%, at a $75.44 average order value, up 1.8%.
Net income declined despite higher revenue and adjusted EBITDA, in part because FY2018 included a $12.2 million tax benefit from revaluing deferred tax liabilities after U.S. tax reform. FY2019 effective tax rate was 19.1%, versus a tax benefit and negative effective rate in FY2018. Adjusted EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
At June 30, 2019, cash and cash equivalents were $172.9 million, working capital was $175.7 million, and total assets were $606.4 million. Term-loan principal was $100 million; the company had no Revolver borrowings. The May 2019 credit agreement extended the term loan and revolving facility maturity to May 31, 2024 and reduced interest-rate margins by 25 basis points. The Revolver provides up to $200 million, seasonally reduced to $100 million from January 1 through August 1. The company reported covenant compliance.
FY2019 cash used in financing was $19.9 million, including $14.8 million of share repurchases and net bank repayments. Cash used in investing was $32.6 million, primarily capital expenditures. The company repurchased 1.23 million shares during the year; $30 million remained authorized under its repurchase plan at year-end.
Material changes versus the prior comparable period
- Revenue grew 8.4%, following FY2018 comparable growth of 3.7% after excluding divested Fannie May revenue.
- Adjusted EBITDA increased to $82.1 million from $78.9 million; GAAP operating income rose to $45.1 million from $41.0 million, while net income fell to $34.8 million from $40.8 million.
- Gross margin declined 40 basis points to 42.1%, reflecting BloomNet mix and margin pressure, seasonal labor, transportation costs and the free-shipping Passport program; Gourmet Foods & Gift Baskets margin improved.
- Consumer Floral revenue rose 8.8%, BloomNet revenue rose 14.9%, and Gourmet Foods & Gift Baskets revenue rose 7.1%. Gourmet Foods segment contribution margin increased to $82.3 million from $70.9 million; Consumer Floral contribution margin declined to $49.7 million from $50.8 million.
- Operating cash flow increased to $78.1 million from $58.3 million. Year-end cash increased to $172.9 million from $147.2 million.
Quarter ended June 30, 2019
Revenue was $259.4 million, compared with $229.9 million in the quarter ended July 1, 2018. The company reported a net loss of $8.3 million, versus a net loss of $8.2 million. These unaudited quarterly results are seasonal and are not necessarily indicative of future periods.
Outlook, management commentary and risks
For FY2020, management guided to consolidated revenue growth of 8%–9%, including organic growth of approximately 6%–7% and contribution from Shari’s Berries, acquired in August 2019. It expected adjusted EBITDA and EPS growth of 8%–10% and free cash flow of approximately $45 million. Management expected gross margins to remain broadly consistent with FY2019, with productivity and logistics improvements largely offsetting labor and tariff increases.
Management attributed growth to marketing and merchandising investment, everyday gifting, multi-brand customer initiatives and stronger digital and wholesale activity. It also cited ongoing investments in technology, manufacturing, distribution and orchard operations. The company adopted ASC 606 using the modified retrospective method; it reported no material impact on FY2019 net income, though catalog-cost accounting affected quarterly timing.
Key risks include pronounced seasonality and working-capital needs; changes in consumer demand and intense competition; shipping, labor and marketing costs; reliance on independent florists and other vendors; weather, disease, water availability and international sourcing for flowers and fruit; tariffs and trade restrictions; cyber, privacy and system disruptions; and potential sales-tax compliance obligations. The company has $106.6 million of operating lease commitments and $105.9 million of purchase commitments. Management said pending claims and lawsuits were not expected to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether FY2020 revenue, adjusted EBITDA, EPS and free-cash-flow guidance was achieved, and the contribution and integration costs associated with Shari’s Berries.
- Whether revenue growth translated into durable profit and margin improvement, particularly given the FY2019 gross-margin decline and rising labor and tariff costs.
- Whether seasonal operating cash generation and the $172.9 million year-end cash balance can support inventory builds, debt service, capital investment and repurchases.
- Term-loan repayment requirements, variable-rate exposure, Revolver availability and compliance with credit-agreement covenants.
- Whether investments in customer acquisition are improving repeat purchasing: repeat customers represented approximately 57% of FY2019 e-commerce purchasers, versus 59% in FY2018.
- The sensitivity of goodwill and intangible-asset valuations to changes in forecasts and discount-rate assumptions; no impairment was recorded in FY2019.