1-800-FLOWERS.COM, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Three and six months ended January 1, 2012; comparisons are with periods ended December 26, 2010. Unaudited results are seasonal and are not necessarily indicative of full-year performance. Amounts below are in millions except per-share data.
Business context
The company sells flowers, gifts, gourmet foods and related services through e-commerce, retail, wholesale and florist-wire-service channels. Its reported segments are Consumer Floral, BloomNet Wire Service, and Gourmet Food & Gift Baskets. Wine fulfillment services were sold in September 2011 and reported as discontinued operations.
Financial performance
| Metric | Q2 FY2012 | Q2 prior year | Six months FY2012 | Six months prior year |
|---|---|---|---|---|
| Revenue | $239.8 | $228.9 | $357.0 | $330.6 |
| Gross profit | $100.3 | $97.1 | $146.9 | $140.1 |
| Gross margin | 41.8% | 42.4% | 41.1% | 42.4% |
| Operating income | $28.4 | $24.3 | $20.6 | $16.4 |
| Income from continuing operations | $16.6 | $13.1 | $11.4 | $8.1 |
| Net income | $16.6 | $13.5 | $15.9 | $8.4 |
| Diluted EPS | $0.25 | $0.21 | $0.24 | $0.13 |
Q2 revenue rose 4.8% and six-month revenue rose 8.0%. E-commerce revenue increased 6.8% and 8.0%, respectively, while order counts fell 3.4% in Q2 and 0.9% for the six-month period; higher average order value helped offset lower order volume. Q2 operating income includes a $3.8 million gain on the sale of 17 Fannie May stores. Six-month net income also includes a $4.5 million after-tax gain on the sale of the wine fulfillment business. Management’s adjusted EBITDA, excluding stock compensation and the store-sale gain, was $30.7 million for Q2, up 0.6%, and $29.1 million for six months, up 2.6%.
Cash flow, debt and liquidity
- Six-month operating cash flow was $19.8 million, versus $4.5 million a year earlier. Investing cash use was $1.6 million and financing cash use was $9.6 million; cash increased $8.6 million to $30.1 million.
- At January 1, 2012, working capital was $36.9 million, compared with $17.8 million at July 3, 2011. Current assets were $134.8 million and current liabilities $97.9 million.
- Total debt and capital lease obligations were $37.3 million, including $15.5 million current and $21.8 million long-term; the revolving credit facility was fully repaid by quarter-end. The term loan matures in March 2014. The company said operating cash flow and available credit should provide sufficient liquidity.
- Six-month capital expenditures were $8.7 million. Contractual obligations totaled $130.5 million, including operating leases of $62.5 million and purchase commitments of $22.9 million.
Material changes, outlook and risks
- Consumer Floral revenue grew 10.3% in Q2 and 11.0% for six months; BloomNet grew 12.7% and 18.0%; Gourmet Food & Gift Baskets grew 0.7% and 3.5%. Growth reflected higher average order value, acquisitions and licensed brands. Management said revenue growth excluding acquisitions, licensing and the net Fannie May transaction effects was 1.0% in Q2 and 4.5% for six months.
- Gross margin declined year over year, attributed to product mix, lower-margin BloomNet and wholesale basket activity, and higher commodity and shipping costs. Management expected full-year revenue growth in the mid-to-upper single digits and gross margin improvement versus fiscal 2011, citing lower promotions and sourcing, supply-chain and manufacturing efficiencies.
- Fannie May sold 17 stores for $5.6 million and recognized a $3.8 million gain. A franchise development agreement provides for at least 45 new stores by December 2014; related fees are generally recognized as stores open or when the agreement ends.
- The wine fulfillment asset sale generated $12.0 million at closing, with up to $1.5 million additional consideration tied to revenue targets. The company also acquired Flowerama for approximately $4.3 million and made smaller acquisitions and investments.
- A purported class action concerning former third-party post-transaction marketing practices seeks damages exceeding $5 million. The company intends to defend the case but said a possible loss or range could not be reasonably estimated. The filing also flags seasonality, consumer spending and economic conditions, competition, acquisition integration, inventory management and cost control as risks.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the period. Its interest-rate swap fixing LIBOR at 1.92% on a $45 million notional amount matures July 25, 2012.
Important facts for investors to verify
- Whether revenue growth and order trends continue, particularly as average order value rises while e-commerce order volume declines.
- Whether margin improvement materializes, and how reported earnings compare after excluding the Fannie May store-sale and discontinued-operation gains.
- Progress on the Fannie May franchise development commitment and the timing of related fees and product sales.
- Cash generation and seasonal working-capital needs, remaining credit availability, and scheduled debt repayments.
- Developments in the marketing-practices class action, whose potential loss remains unestimable.