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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from ___ to ___
Commission File No.
1-800-FLOWERS.COM, Inc.
(Exact name of registrant as specified in its charter)
| | |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
| | ( |
| (Address of principal executive offices) (Zip code) | (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| | | The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☐ Large accelerated filer | ☑ | |
| ☐ Non-accelerated filer | | |
| |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares outstanding of each of the Registrant’s classes of common stock as of November 4, 2022:
| Class A common stock: |
| Class B common stock: |
FORM 10-Q
For the quarterly period ended October 2, 2022
TABLE OF CONTENTS
| Page |
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| Part I. |
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| Item 1. |
1 |
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| Condensed Consolidated Balance Sheets – October 2, 2022 (Unaudited) and July 3, 2022 |
1 |
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| 2 |
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| 3 |
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| 4 |
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| Notes to Condensed Consolidated Financial Statements (Unaudited) |
5 |
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| Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
18 |
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| Item 3. |
33 |
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| Item 4. |
33 |
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| Part II. |
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| Item 1. |
34 |
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| Item 1A. |
34 |
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| Item 2. |
35 |
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| Item 3. |
35 |
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| Item 4. |
35 |
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| Item 5. |
35 |
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| Item 6. |
35 |
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| 36 |
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PART I. – FINANCIAL INFORMATION
ITEM 1. – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1-800-FLOWERS.COM, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except for share data)
| October 2, 2022 | July 3, 2022 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Trade receivables, net | ||||||||
| Inventories | ||||||||
| Prepaid and other | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Goodwill | ||||||||
| Other intangibles, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current maturities of long-term debt | ||||||||
| Current portion of long-term operating lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term debt, net | ||||||||
| Long-term operating lease liabilities | ||||||||
| Deferred tax liabilities, net | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders' equity: | ||||||||
| Preferred stock, $ par value, shares authorized, issued | ||||||||
| Class A common stock, $ par value, shares authorized, shares issued at October 2, 2022 and July 3, 2022 | ||||||||
| Class B common stock, $ par value, shares authorized, shares issued at October 2, 2022 and July 3, 2022 | ||||||||
| Additional paid-in capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Treasury stock, at cost, Class A shares at October 2, 2022 and July 3, 2022, and Class B shares at October 2, 2022 and July 3, 2022 | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
1-800-FLOWERS.COM, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except for per share data)
(unaudited)
| Three Months Ended |
||||||||
| October 2, 2022 |
September 26, 2021 |
|||||||
| Net revenues |
$ | $ | ||||||
| Cost of revenues |
||||||||
| Gross profit |
||||||||
| Operating expenses: |
||||||||
| Marketing and sales |
||||||||
| Technology and development |
||||||||
| General and administrative |
||||||||
| Depreciation and amortization |
||||||||
| Total operating expenses |
||||||||
| Operating loss |
( |
) |
( |
) |
||||
| Interest expense, net |
||||||||
| Other expense (income), net |
( |
) |
||||||
| Loss before income taxes |
( |
) |
( |
) |
||||
| Income tax benefit |
( |
) |
( |
) |
||||
| Net loss and comprehensive net loss |
( |
) |
$ | ( |
) |
|||
| Basic and diluted net loss per common share |
$ | ( |
) |
$ | ( |
) |
||
| Basic and diluted weighted average shares used in the calculation of net loss per common share |
||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
1-800-FLOWERS.COM, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
(unaudited)
| Three Months Ended October 2, 2022 and September 26, 2021 |
||||||||||||||||||||||||||||||||||||||||
| Common Stock |
Additional |
Retained |
Accumulated Other |
Total |
||||||||||||||||||||||||||||||||||||
| Class A |
Class B |
Paid-in |
Earnings |
Comprehensive |
Treasury Stock |
Stockholders’ |
||||||||||||||||||||||||||||||||||
| Shares |
Amount |
Shares |
Amount |
Capital |
(Deficit) |
Loss |
Shares |
Amount |
Equity |
|||||||||||||||||||||||||||||||
| Balance at July 3, 2022 |
$ | $ | $ | $ | $ | ( |
) |
$ | ( |
) |
$ | |||||||||||||||||||||||||||||
| Net loss |
- | - | ( |
) |
- | ( |
) |
|||||||||||||||||||||||||||||||||
| Stock-based compensation |
||||||||||||||||||||||||||||||||||||||||
| Balance at October 2, 2022 |
$ | $ | $ | $ | $ | ( |
) |
$ | ( |
) |
$ | |||||||||||||||||||||||||||||
| Balance at June 27, 2021 |
$ | $ | $ | $ | $ | ( |
) |
$ | ( |
) |
$ | |||||||||||||||||||||||||||||
| Net loss |
- | - | ( |
) |
- | ( |
) |
|||||||||||||||||||||||||||||||||
| Stock-based compensation |
||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options |
||||||||||||||||||||||||||||||||||||||||
| Acquisition of Class A treasury stock |
( |
) |
( |
) |
||||||||||||||||||||||||||||||||||||
| Balance at September 26, 2021 |
$ | $ | $ | $ | $ | ( |
) |
$ | ( |
) | $ | |||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
1-800-FLOWERS.COM, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Three months ended | ||||||||
| October 2, 2022 | September 26, 2021 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of deferred financing costs | ||||||||
| Deferred income taxes | ( | ) | ( | ) | ||||
| Bad debt expense | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Other non-cash items | ||||||||
| Changes in operating items: | ||||||||
| Trade receivables | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid and other | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| Other assets and liabilities | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities: | ||||||||
| Capital expenditures, net of non-cash expenditures | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Acquisition of treasury stock | ( | ) | ||||||
| Proceeds from exercise of employee stock options | ||||||||
| Proceeds from bank borrowings | ||||||||
| Repayment of notes payable and bank borrowings | ( | ) | ||||||
| Debt issuance cost | ||||||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net change in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents: | ||||||||
| Beginning of period | ||||||||
| End of period | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
1-800-FLOWERS.COM, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by 1-800-FLOWERS.COM, Inc. and Subsidiaries (the “Company”) in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the
The Company’s quarterly results may experience seasonal fluctuations. Due to the seasonal nature of the Company’s business, and its continued expansion into non-floral products, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, is expected to generate over 40% of the Company’s annual revenues, and all of its earnings. Due to the number of major floral gifting occasions, including Valentine’s Day, Easter, Administrative Professionals Week, and Mother's Day, revenues also have historically risen during the Company’s fiscal third and fourth quarters in comparison to its fiscal first quarter.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Net revenue is measured based on the amount of consideration that we expect to receive, reduced by discounts and estimates for credits and returns (calculated based upon previous experience and management’s evaluation). Service and outbound shipping charged to customers are recognized at the time the related merchandise revenues are recognized and are included in net revenues. Inbound and outbound shipping and delivery costs are included in cost of revenues. Net revenues exclude sales and other similar taxes collected from customers.
A description of our principal revenue generating activities is as follows:
| ● | E-commerce revenues - consumer products sold through our online and telephonic channels. Revenue is recognized when control of the merchandise is transferred to the customer, which generally occurs upon shipment. Payment is typically due prior to the date of shipment. |
| ● | Retail revenues - consumer products sold through our retail stores. Revenue is recognized when control of the goods is transferred to the customer, at the point of sale, at which time payment is received. |
| ● | Wholesale revenues - products sold to our wholesale customers for subsequent resale. Revenue is recognized when control of the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms are typically 30 days from the date control over the product is transferred to the customer. |
| ● | BloomNet Services - membership fees as well as other service offerings to florists. Membership and other subscription-based fees are recognized monthly as earned. Services revenues related to orders sent through the floral network are variable, based on either the number of orders or the value of orders, and are recognized in the period in which the orders are delivered. The contracts within BloomNet Services are typically month-to-month and as a result no consideration allocation is necessary across multiple reporting periods. Payment is typically due less than 30 days from the date the services were performed. |
|
Deferred Revenues
Deferred revenues are recorded when the Company has received consideration (i.e. advance payment) before satisfying its performance obligations. As such, customer orders are recorded as deferred revenue prior to shipment or rendering of product or services. Deferred revenues primarily relate to e-commerce orders placed, but not shipped, prior to the end of the fiscal period, as well as for subscription programs, including our various food, wine, and plant-of-the-month clubs and our Celebrations Passport program.
Our total deferred revenue as of July 3, 2022 was $
Recently Issued Accounting Pronouncements
The Company does not expect that any recently issued accounting pronouncements will have a material effect on its consolidated financial statements.
Note 2 – Net Income (Loss) Per Common Share
Basic net loss per common share is computed by dividing the net loss during the period by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed using the weighted-average number of common shares outstanding during the period and excludes the dilutive potential common shares (consisting of unvested restricted stock awards), as their inclusion would be antidilutive. As a result of the net loss for the three months ended October 2, 2022 and September 26, 2021, there is no dilutive impact to the net loss per share calculation for the respective periods.
Note 3 – Stock-Based Compensation
The Company has a Long Term Incentive and Share Award Plan, which is more fully described in Note 12 and Note 13 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2022, that provides for the grant to eligible employees, consultants and directors of stock options, restricted shares, and other stock-based awards.
The amounts of stock-based compensation expense recognized in the periods presented are as follows:
| Three Months Ended | ||||||||
| October 2, 2022 | September 26, 2021 | |||||||
| (in thousands) | ||||||||
| Stock options | $ | $ | ||||||
| Restricted stock | ||||||||
| Total | ||||||||
| Deferred income tax benefit | ||||||||
| Stock-based compensation expense, net | $ | $ | ||||||
Stock-based compensation is recorded within the following line items of operating expenses:
| Three Months Ended | ||||||||
| October 2, 2022 | September 26, 2021 | |||||||
| (in thousands) | ||||||||
| Marketing and sales | $ | $ | ||||||
| Technology and development | ||||||||
| General and administrative | ||||||||
| Total | $ | $ | ||||||
Stock-based compensation expense has not been allocated between business segments, but is reflected as part of Corporate overhead (see Note 12 - Business Segments).
Stock Options
As of October 2, 2022, the Company does have any options outstanding.
Restricted Stock
The Company grants shares of Common Stock to its employees that are subject to restrictions on transfer and risk of forfeiture until fulfillment of applicable service and performance conditions and, in certain cases, holding periods (Restricted Stock). The following table summarizes the activity of non-vested restricted stock awards during the three months ended October 2, 2022:
| Shares | Weighted Average Grant Date Fair Value | |||||||
| Non-vested at July 3, 2022 | $ | |||||||
| Granted | $ | |||||||
| Vested | $ | |||||||
| Forfeited | ( | ) | $ | |||||
| Non-vested at October 2, 2022 | $ | |||||||
The fair value of non-vested shares is determined based on the closing stock price on the grant date. As of October 2, 2022, there was $
Acquisition of Vital Choice
On October 27, 2021, the Company completed its acquisition of all of the membership interests in Vital Choice Seafood LLC (“Vital Choice”), a provider of wild-caught seafood and sustainably farmed shellfish, pastured proteins, organic foods, and marine-sourced nutritional supplements. The Company utilized its existing credit facility to fund the $
After working capital and related adjustments, total consideration was approximately $
The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed at the date of the acquisition:
| Vital Choice | Measurement | Vital Choice | ||||||||||
| October 27, | October 2, | |||||||||||
| 2021 | 2022 | |||||||||||
| (in thousands) | ||||||||||||
| Inventory | $ | $ | - | $ | ||||||||
| Other current assets | ( | ) | ||||||||||
| Property, plant and equipment | ( | ) | ||||||||||
| Intangible assets | - | |||||||||||
| Goodwill | ||||||||||||
| Total assets acquired | ( | ) | ||||||||||
| Current liabilities | ( | ) | ||||||||||
| Net assets acquired | $ | $ | ( | ) | $ | |||||||
The estimated fair value of the acquired work in process and finished goods inventory was determined utilizing the income approach. The income approach estimates the fair value of the inventory based on the net retail value of the inventory, less operating expenses and a reasonable profit allowance. Raw materials inventory was valued at book value, as there have not been any significant price fluctuations or other events that would materially change the cost to replace the raw materials.
Of the acquired intangible assets, $
The estimated fair value of the acquired tradenames was determined using the relief from royalty method, which is a risk-adjusted discounted cash flow approach. The relief from royalty method values an intangible asset by estimating the royalties saved through ownership of the asset. The relief from royalty method requires identifying the future revenue that would be generated by the trademark, multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. The royalty rate used in the valuation was based on a consideration of market rates for similar categories of assets. The discount rate used in the valuation was based on the Company’s weighted average cost of capital, the riskiness of the earnings stream associated with the trademarks and the overall composition of the acquired assets.
The estimated fair value of the acquired customer lists was determined using the excess earnings method under the income approach. This method requires identifying the future revenue that would be generated by existing customers at the time of the acquisition, considering an appropriate attrition rate based on the historical experience of the Company. Appropriate expenses are then deducted from the revenues and economic rents are charged for the return on contributory assets. The after-tax cash flows attributable to the asset are discounted back to their net present value at an appropriate intangible asset rate of return and summed to calculate the value of the customer lists.
Operating results of the Vital Choice business are reflected in the Company’s consolidated financial statements from the date of acquisition within the Gourmet Foods & Gift Baskets segment. Pro forma results of operations have not been presented, as the impact on the Company’s consolidated financial results was not material.
Acquisition of Alice’s Table
On December 31, 2021, the Company completed its acquisition of Alice’s Table, Inc. (“Alice’s Table”), a lifestyle business offering fully digital livestreaming floral, culinary and other experiences. The Company utilized existing cash of $
The resulting total consideration of $
Note 5 – Inventory, Net
The Company’s inventory, stated at cost, which is not in excess of market, includes purchased and manufactured finished goods for sale, packaging supplies, crops, raw material ingredients for manufactured products and associated manufacturing labor, and is classified as follows:
| October 2, 2022 | July 3, 2022 | |||||||
| (in thousands) | ||||||||
| Finished goods | $ | $ | ||||||
| Work-in-process | ||||||||
| Raw materials | ||||||||
| Total inventory | $ | $ | ||||||
Note 6 – Goodwill and Intangible Assets, Net
The following table presents goodwill by segment and the related change in the net carrying amount:
| Consumer Floral & Gifts | BloomNet | Gourmet Foods & Gift Baskets | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
| Balance at July 3, 2022 | $ | $ | $ | $ | ||||||||||||
| Balance at October 2, 2022 | $ | $ | $ | $ | ||||||||||||
The Company’s other intangible assets consist of the following:
| October 2, 2022 | July 3, 2022 | ||||||||||||||||||||||||||||
| Amortization Period | Gross Carrying Amount | Accumulated | Net | Gross Carrying Amount | Accumulated | Net | |||||||||||||||||||||||
| (in years) | (in thousands) | ||||||||||||||||||||||||||||
| Intangible assets with determinable lives | |||||||||||||||||||||||||||||
| Investment in licenses | - | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Customer lists | - | ||||||||||||||||||||||||||||
| Other | - | ||||||||||||||||||||||||||||
| Total intangible assets with determinable lives | |||||||||||||||||||||||||||||
| Trademarks with indefinite lives | - | - | |||||||||||||||||||||||||||
| Total identifiable intangible assets | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Future estimated amortization expense is as follows: remainder of fiscal 2023 - $
Note 7 – Investments
Equity investments without a readily determinable fair value
Investments in non-marketable equity instruments of private companies, where the Company does not possess the ability to exercise significant influence, are accounted for at cost, less impairment (assessed qualitatively at each reporting period), adjusted for observable price changes from orderly transactions for identical or similar investments of the same issuer. These investments are included within “Other assets” in the Company’s consolidated balance sheets. The aggregate carrying amount of the Company’s cost method investments was $
Equity investments with a readily determinable fair value
The Company also holds certain trading securities associated with its Non-Qualified Deferred Compensation Plan (“NQDC Plan”). These investments are measured using quoted market prices at the reporting date and are included within the “Other assets” line item in the consolidated balance sheets (see Note 10 - Fair Value Measurements).
The Company’s current and long-term debt consists of the following:
| October 2, 2022 | July 3, 2022 | |||||||
| (in thousands) | ||||||||
| Revolver | $ | $ | ||||||
| Term Loans | ||||||||
| Deferred financing costs | ( | ) | ( | ) | ||||
| Total debt | ||||||||
| Less: current debt | ||||||||
| Long-term debt | $ | $ | ||||||
On May 31, 2019, the Company and certain of its U.S. subsidiaries entered into a Second Amended and Restated Credit Agreement (the “2019 Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent, and a group of lenders. The 2019 Credit Agreement amended and restated the Company’s existing amended and restated credit agreement dated as of December 23, 2016 to, among other modifications: (i) increase the amount of the outstanding term loan (“Term Loan”) from approximately $
On August 20, 2020, the Company, the Subsidiary Guarantors, JPMorgan Chase Bank, N.A. as administrative agent, and a group of lenders entered into a First Amendment (the “First Amendment”) to the 2019 Credit Agreement. The First Amendment amends the 2019 Credit Agreement to, among other modifications, (i) increase the aggregate principal amount of the existing Revolver commitments from $
The 2020 Term Loan will mature on May 31, 2024. Proceeds of the borrowing under the 2020 Term Loan may be used for working capital and general corporate purposes of the Company and its subsidiaries, subject to certain restrictions. The 2020 Term Loan is payable in
On November 8, 2021, the Company, certain of its U.S. subsidiaries, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, entered into a Second Amendment (the “Second Amendment”) to the 2019 Credit Agreement. The Second Amendment amended the 2019 Credit Agreement to, among other modifications, decrease the interest margins and LIBOR floor applicable to the 2020 Term Loan.
On August 29, 2022, the Company, certain of its U.S. subsidiaries, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, entered into a Third Amendment (the “Third Amendment”) to the 2019 Credit Agreement. The Third Amendment amends the 2019 Credit Agreement (the 2019 Credit Agreement, as amended by the First Amendment, the Second Amendment, and the Third Amendment, the “Existing Credit Agreement”) to, among other modifications, (A) alter the financial maintenance covenants set forth therein by (1) increasing the required maximum consolidated leverage ratio, for the reference period ending October 2, 2022, from
The Existing Credit Agreement requires that while any borrowings or commitments are outstanding the Company comply with certain financial covenants and affirmative covenants as well as certain negative covenants that, subject to certain exceptions, limit the Company’s ability to, among other things, incur additional indebtedness, make certain investments and make certain restricted payments. The Company was in compliance with these covenants as of October 2, 2022. The Existing Credit Agreement is secured by substantially all of the assets of the Company.
Future principal payments under the Term Loan and 2020 Term Loan are as follows: $
Note 9 - Property, Plant and Equipment
The Company’s property, plant and equipment consists of the following:
| October 2, 2022 | July 3, 2022 | |||||||
| (in thousands) | ||||||||
| Land | $ | $ | ||||||
| Orchards in production and land improvements | ||||||||
| Building and building improvements | ||||||||
| Leasehold improvements | ||||||||
| Production equipment | ||||||||
| Furniture and fixtures | ||||||||
| Computer and telecommunication equipment | ||||||||
| Software | ||||||||
| Capital projects in progress | ||||||||
| Property, plant and equipment, gross | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
Note 10 - Fair Value Measurements
Cash and cash equivalents, trade and other receivables, prepaids, accounts payable and accrued expenses are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments. Although no trading market exists, the Company believes that the carrying amount of its debt approximates fair value due to its variable nature. The Company’s investments in non-marketable equity instruments of private companies are carried at cost and are periodically assessed for other-than-temporary impairment when an event or circumstances indicate that an other-than-temporary decline in value may have occurred. The Company’s remaining financial assets and liabilities are measured and recorded at fair value (see table below). The Company’s non-financial assets, such as definite lived intangible assets and property, plant and equipment, are recorded at cost and are assessed for impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. Goodwill and indefinite lived intangibles are tested for impairment annually, or more frequently, if events occur or circumstances change such that it is more likely than not that an impairment may exist, as required under the accounting standards.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the guidance are described below:
| Level 1 | Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access. |
| Level 2 | Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. |
| Level 3 | Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following table presents by level, within the fair value hierarchy, financial assets and liabilities measured at fair value on a recurring basis:
| Carrying Value | Fair Value Measurements Assets (Liabilities) | |||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||
| (in thousands) | ||||||||||||||||
| As of October 2, 2022: | ||||||||||||||||
| Trading securities held in a “rabbi trust” (1) | $ | $ | $ | $ | ||||||||||||
| Total assets (liabilities) at fair value | $ | $ | $ | $ | ||||||||||||
| As of July 3, 2022: | ||||||||||||||||
| Trading securities held in a “rabbi trust” (1) | $ | $ | $ | $ | ||||||||||||
| Total assets (liabilities) at fair value | $ | $ | $ | $ | ||||||||||||
| (1) | The Company has established a NQDC Plan for certain members of senior management. Deferred compensation plan assets are invested in mutual funds held in a “rabbi trust,” which is restricted for payment to participants of the NQDC Plan. Trading securities held in a rabbi trust are measured using quoted market prices at the reporting date and are included in the “Other assets” line item, with the corresponding liability included in the “Other liabilities” line item in the consolidated balance sheets. |
Note 11 – Income Taxes
At the end of each interim reporting period, the Company estimates its effective income tax rate expected to be applicable for the full year. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The Company’s effective tax rate for the three months ended October 2, 2022 was
The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various foreign countries. The Company completed its U.S. federal examination for fiscal 2018, however, fiscal years 2020 and 2021 remain subject to U.S. federal examination. Due to ongoing state examinations and nonconformity with the U.S. federal statute of limitations for assessment, certain states remain open from fiscal The Company's foreign income tax filings from fiscal 2017 are open for examination by its respective foreign tax authorities, mainly Canada, Brazil, and the United Kingdom.
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At October 2, 2022, the Company has an unrecognized tax benefit, including accrued interest and penalties, of approximately $
The Company’s management reviews the results of its operations by the following
| • | Consumer Floral & Gifts, |
| • | BloomNet, and |
| • | Gourmet Foods & Gift Baskets |
Segment performance is measured based on contribution margin, which includes only the direct controllable revenue and operating expenses of the segments. As such, management’s measure of profitability for these segments does not include the effect of corporate overhead (see (a) below), nor does it include depreciation and amortization, other (income) expense, net and income taxes, or stock-based compensation, which are included within corporate overhead. Assets and liabilities are reviewed at the consolidated level by management and not accounted for by segment.
| Three Months Ended | ||||||||
| October 2, 2022 | September 26, 2021 | |||||||
| (in thousands) | ||||||||
| Net Revenues: |
| |||||||
| Segment Net Revenues: | ||||||||
| Consumer Floral & Gifts | $ | $ | ||||||
| BloomNet | ||||||||
| Gourmet Foods & Gift Baskets | ||||||||
| Corporate | ||||||||
| Intercompany eliminations | ( | ) | ( | ) | ||||
| Total net revenues | $ | $ | ||||||
| Operating Income (Loss): | ||||||||
| Segment Contribution Margin: | ||||||||
| Consumer Floral & Gifts | $ | $ | ||||||
| BloomNet | ||||||||
| Gourmet Foods & Gift Baskets | ( | ) | ( | ) | ||||
| Segment Contribution Margin Subtotal | ||||||||
| Corporate (a) | ( | ) | ( | ) | ||||
| Depreciation and amortization | ( | ) | ( | ) | ||||
| Operating loss | $ | ( | ) | $ | ( | ) | ||
(a) Corporate expenses consist of the Company’s enterprise shared service cost centers, and include, among other items, Information Technology, Human Resources, Accounting and Finance, Legal, Executive and Customer Service Center functions, as well as Stock-Based Compensation. In order to leverage the Company’s infrastructure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions, other than those of the Customer Service Center, which are allocated directly to the above categories based upon usage, are included within corporate expenses as they are not directly allocable to a specific segment.
The following tables represent a disaggregation of revenue from contracts with customers, by channel:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||||
| Consumer Floral & | BloomNet | Gourmet Foods & Gift | Corporate and Eliminations | Consolidated | ||||||||||||||||||||||||||||||||||||
| October 2, 2022 | September 26, 2021 | October 2, 2022 | September 26, 2021 | October 2, 2022 | September 26, 2021 | October 2, 2022 | September 26, 2021 | October 2, 2022 | September 26, 2021 | |||||||||||||||||||||||||||||||
| Net revenues | ||||||||||||||||||||||||||||||||||||||||
| E-commerce | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Other | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Total net revenues | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||
| Other revenues detail | ||||||||||||||||||||||||||||||||||||||||
| Retail and other | ||||||||||||||||||||||||||||||||||||||||
| Wholesale | ||||||||||||||||||||||||||||||||||||||||
| BloomNet services | ||||||||||||||||||||||||||||||||||||||||
| Corporate | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
| Eliminations | - | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Total other revenues | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||
The Company currently leases plants, warehouses, offices, store facilities, and equipment under various leases through fiscal 2036. Most lease agreements are of a long-term nature (over a year), although the Company does also enter into short-term leases, primarily for seasonal needs. Lease agreements may contain renewal options and rent escalation clauses and require the Company to pay real estate taxes, insurance, common area maintenance and operating expenses applicable to the leased properties. The Company accounts for its leases in accordance with ASC 842.
At contract inception, we determine whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time, by assessing whether we have the right to obtain substantially all of the economic benefits from use of the identified asset and the right to direct the use of the identified asset.
At the lease commencement date, we determine if a lease should be classified as an operating or a finance lease (we currently have no finance leases) and recognize a corresponding lease liability and a right-of-use asset on our Balance Sheet. The lease liability is initially and subsequently measured as the present value of the remaining fixed minimum rental payments (including base rent and fixed common area maintenance) using discount rates as of the commencement date. Variable payments (including most utilities, real estate taxes, insurance and variable common area maintenance) are expensed as incurred. Further, we elected a short-term lease exception policy, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. The right-of-use asset is initially and subsequently measured at the carrying amount of the lease liability adjusted for any prepaid or accrued lease payments, remaining balance of lease incentives received, unamortized initial direct costs, or impairment charges relating to the right-of-use asset. Right-of-use assets are assessed for impairment using the long-lived assets impairment guidance. The discount rate used to determine the present value of lease payments is our estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as we generally cannot determine the interest rate implicit in the lease.
We recognize expense for our operating leases on a straight-line basis over the lease term. As these leases expire, it can be expected that in the normal course of business they will be renewed or replaced. Renewal option periods are included in the measurement of lease liability, where the exercise is reasonably certain to occur. Key estimates and judgments in accounting for leases include how we determine: (1) lease payments, (2) lease term, and (3) the discount rate used in calculating the lease liability.
Additional information related to our leases is as follows:
| Three Months Ended | ||||||||
| October 2, 2022 | September 26, 2021 | |||||||
| (in thousands) | ||||||||
| Lease costs: | ||||||||
| Operating lease costs | $ | |||||||
| Variable lease costs | ||||||||
| Short-term lease cost | ||||||||
| Sublease income | ( | ) | ( | ) | ||||
| Total lease costs | $ | $ | ||||||
| Cash paid for amounts included in measurement of operating lease liabilities | $ | |||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | |||||||
| October 2, 2022 | ||||
| (in thousands) | ||||
| Weighted-average remaining lease term - operating leases (in years) | ||||
| Weighted-discount rate - operating leases | % | |||
Maturities of lease liabilities in accordance with ASC 842 as of October 2, 2022 and reconciliation to balance sheet are as follows (in thousands):
| Remainder of 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total Future Minimum Lease Payments | ||||
| Less: Imputed Remaining Interest | ||||
| Total Operating Lease Liabilities | ||||
| Less: Current portion of long-term operating lease liabilities | ||||
| Long-term operating lease liabilities | $ |
Accrued expenses consisted of the following:
| October 2, 2022 | July 3, 2022 | |||||||
| (in thousands) | ||||||||
| Payroll and employee benefits | $ | $ | ||||||
| Deferred revenue | ||||||||
| Accrued marketing expenses | ||||||||
| Accrued florist payout | ||||||||
| Accrued purchases | ||||||||
| Other | ||||||||
| Accrued Expenses | $ | $ | ||||||
Note 15 – Commitments and Contingencies
Litigation
Call Center Worker Claim:
In March of 2018, a putative class action lawsuit was filed against a subsidiary of the Company (the “Subsidiary”) in the U.S. District Court for the District of Oregon, Medford Division (the “Court”), alleging violations of the federal Fair Labor Standards Act (FLSA) and Oregon state law. The complaint was brought on behalf of a putative class of call center workers and alleged that certain Subsidiary policies and practices resulted in class members’ performance of unpaid work. The plaintiff sought class certification, compensation for alleged unpaid and underpaid wages, civil penalties, prejudgment interest, liquidated damages, litigation costs, and attorneys’ fees. Following mediation, the parties reached an agreement in April 2022 to resolve all claims. The settlement agreement remains subject to certain judicial approvals. The Subsidiary’s payment liability under the settlement agreement is capped at a maximum amount of $
In addition, there are various claims, lawsuits, and pending actions against the Company and its subsidiaries incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the final resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” ("MD&A") is intended to provide an understanding of our financial condition, change in financial condition, cash flow, liquidity and results of operations. The following MD&A discussion should be read in conjunction with the consolidated financial statements and notes to those statements that appear elsewhere in this Form 10-Q and in the Company’s Annual Report on Form 10-K, for the year ended July 3, 2022. The following discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those discussed or referred to in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption “Forward-Looking Information and Factors That May Affect Future Results,” under Part I, Item 1A, of the Company’s Annual Report on Form 10-K, for the year ended July 3, 2022 under the heading “Risk Factors” and Part II-Other Information, Item 1A in this Form 10-Q.
Business Overview
1-800-FLOWERS.COM, Inc. and its subsidiaries (collectively, the “Company”) is a leading provider of gifts designed to help inspire customers to give more, connect more, and build more and better relationships. The Company’s e-commerce business platform features an all-star family of brands, including: 1-800-Flowers.com®, 1-800-Baskets.com®, Cheryl’s Cookies®, Harry & David®, PersonalizationMall.com®, Shari’s Berries®, FruitBouquets.com®, Moose Munch®, The Popcorn Factory®, Wolferman’s Bakery®, Vital Choice®, Stock Yards® and Simply Chocolate®. Through the Celebrations Passport® loyalty program, which provides members with free standard shipping and no service charge across our portfolio of brands, 1-800-FLOWERS.COM, Inc. strives to deepen relationships with customers. The Company also operates BloomNet®, an international floral and gift industry service provider offering a broad-range of products and services designed to help members grow their businesses profitably; Napco℠, a resource for floral gifts and seasonal décor; DesignPac Gifts, LLC, a manufacturer of gift baskets and towers; and Alice’s Table®, a lifestyle business offering fully digital livestreaming floral, culinary and other experiences to guests across the country.
For additional information, see Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” of our Annual Report on Form 10-K for the year ended July 3, 2022.
Acquisition of Vital Choice
On October 27, 2021, the Company completed its acquisition of Vital Choice Seafood LLC (“Vital Choice”), a provider of wild-caught seafood and sustainably farmed shellfish, pastured proteins, organic foods, and marine-sourced nutritional supplements. The Company utilized its existing credit facility to fund the $20.0 million purchase (subject to certain working capital and other adjustments), which included tradenames, customer lists, websites and operations. Vital Choice revenues were approximately $27.8 million during its most recent year ended December 31, 2020 - see Note 4 –Acquisitions in Item 1.
Acquisition of Alice’s Table
On December 31, 2021, the Company completed its acquisition of Alice’s Table LLC (“Alice’s Table”), a lifestyle business offering fully digital livestreaming floral, culinary and other experiences. The Company utilized existing cash of $0.8 million, converted the existing accounts receivable from Alice’s Table of $0.3 million and its previous $0.3 million cost method investment in Alice’s Table, in order to acquire 100% ownership in Alice’s Table, which included tradenames, customer lists, websites and operations. Alice’s Table revenues were approximately $3.8 million during the twelve-month period ended September 30, 2021 - see Note 4 –Acquisitions in Item 1.
Amended Credit Agreement
On August 29, 2022, the Company entered into a Third Amendment to the Company's 2019 Credit Agreement. The Third Amendment amends the 2019 Credit Agreement to, among other modifications, (A) alter the financial maintenance covenants set forth therein by (1) increasing the required maximum consolidated leverage ratio, for the reference period ending October 2, 2022, from 3.25 to 1.00 to 4.25 to 1.00 and (2) decreasing the required minimum consolidated fixed charge coverage ratio, for the reference periods ending October 2, 2022, January 1, 2023, and April 2, 2023, from 1.50 to 1.00 to 1.00 to 1.00 and (B) increase the amount of certain capital expenditures that may be disregarded for purposes of calculating the consolidated fixed charge coverage ratio from $25.0 million to $35.0 million (See Note 8 - Debt, in Item 1, for details).
COVID-19 and Other Macro-Economic Factors
The global COVID-19 pandemic, and its related impacts, have affected, and will continue to affect, our operations and financial results for the foreseeable future.
Overall, consumer behavior continues to reflect the significant geo-political and inflationary forces that are affecting both discretionary and nondiscretionary spending. Our total revenues for the quarter ended October 2, 2022 were down 1.9% in comparison to the prior year, mainly as a result of consumers purchasing fewer “Everyday” gifts, as they respond to these macro-economic pressures. However, as we look forward to the holiday season and the balance of our fiscal year, we are cautiously optimistic that consumers will continue to spend on the major gift giving holiday occasions, but we anticipate they will remain cautious in their spending otherwise.
Coming into fiscal 2023, we expected the challenging macro-economic and geo-political backdrop to affect our performance during the first quarter, as our year-ago results had not yet been affected by the global supply chain constraints, and the surge in in-bound and out-bound shipping, commodity costs, labor and fuel which began during the second quarter of fiscal 2022, and escalated throughout the balance of the year.
However, we expect to see a stabilization of our business during our second quarter and improvement during the second half of our fiscal year, as we cycle against the sharp inflationary period of a year ago. After growing revenues 77% since fiscal 2019, we anticipate revenues to decline slightly in fiscal 2023 as consumers adjust their discretionary purchases in response to the current inflationary environment. The impact of this revenue decline on our earnings is expected to be partially mitigated by our strategic cost reduction initiatives, coupled with the decline that we are seeing in ocean freight costs. We expect the reduction of these costs to begin to provide a margin benefit in the second half of this fiscal year, and even more so next year.
Company Guidance
The Company is providing the following guidance for fiscal 2023. While the highly unpredictable nature of the current macro economy makes it difficult to forecast in this environment, the Company anticipates that after growing revenues 77% over the past three fiscal years, revenues will decline slightly in fiscal 2023 on lower consumer confidence and cautious spending behavior. The Company anticipates that the combination of the investments it has made – and continues to make – in its business platform, along with strategic pricing programs and moderation of cost inputs, will enable it to gradually improve gross margins and bottom-line results during the latter half of the current fiscal year. Additionally, this guidance assumes the restoration of 100% bonus payout in fiscal 2023, compared with a limited bonus payout in fiscal 2022.
Full Year Fiscal 2023 Guidance
| ● |
Total revenues to decline in the mid-single digit range on a percentage basis as compared with the prior year; |
| ● |
Adjusted EBITDA to be in a range of $75 million to $80 million; and |
| ● |
Free Cash Flow to exceed $75 million. |
Definitions of non-GAAP Financial Measures:
We sometimes use financial measures derived from consolidated financial information, but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain of these are considered "non-GAAP financial measures" under the U.S. Securities and Exchange Commission rules. See below for definitions and the reasons why we use these non-GAAP financial measures. Where applicable, see the Segment Information and Results of Operations sections below for reconciliations of these non-GAAP measures to their most directly comparable GAAP financial measures. We do not provide a reconciliation of adjusted EBITDA guidance to net income guidance or a reconciliation of free cash flow guidance to net cash provided by operating activities because doing so would require unreasonable efforts at this time, because of the uncertainty and variability of the nature and amount of certain components of various necessary GAAP components, including for example those related to compensation, tax items, amortization or others that may arise during the year, and the Company's management believes such reconciliations would imply a degree of precision that would be confusing or misleading to investors. For the same reasons, the Company is unable to address the probable significance of the unavailable information. The lack of such reconciling information should be considered when assessing the impact of such disclosures.
EBITDA and adjusted EBITDA
We define EBITDA as net income (loss) before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for the impact of stock-based compensation, NQDC Plan investment appreciation/depreciation, and for certain items affecting period-to-period comparability. See Segment Information for details on how EBITDA and adjusted EBITDA were calculated for each period presented.
The Company presents EBITDA and adjusted EBITDA because it considers such information meaningful supplemental measures of its performance and believes such information is frequently used by the investment community in the evaluation of similarly situated companies. The Company uses EBITDA and adjusted EBITDA as factors to determine the total amount of incentive compensation available to be awarded to executive officers and other employees. The Company's credit agreement uses EBITDA and adjusted EBITDA to measure compliance with covenants such as interest coverage and debt incurrence. EBITDA and adjusted EBITDA are also used by the Company to evaluate and price potential acquisition candidates.
EBITDA and adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP. Some of the limitations are: (a) EBITDA and adjusted EBITDA do not reflect changes in, or cash requirements for, the Company's working capital needs; (b) EBITDA and adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company's debts; and (c) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and EBITDA does not reflect any cash requirements for such capital expenditures. EBITDA should only be used on a supplemental basis combined with GAAP results when evaluating the Company's performance.
Segment contribution margin and adjusted segment contribution margin
We define segment contribution margin as earnings before interest, taxes, depreciation and amortization, before the allocation of corporate overhead expenses. Adjusted segment contribution margin is defined as contribution margin adjusted for certain items affecting period-to-period comparability. See Segment Information for details on how segment contribution margin was calculated for each period presented.
When viewed together with our GAAP results, we believe segment contribution margin and adjusted segment contribution margin provide management and users of the financial statements meaningful information about the performance of our business segments.
Segment contribution margin and adjusted segment contribution margin are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. The material limitation associated with the use of segment contribution margin and adjusted segment contribution margin is that they are an incomplete measure of profitability as they do not include all operating expenses or non-operating income and expenses. Management compensates for these limitations when using this measure by looking at other GAAP measures, such as operating income and net income.
Adjusted net income (loss) and adjusted or comparable net income (loss) per common share
We define adjusted net income (loss) and adjusted or comparable net income (loss) per common share as net income (loss) and net income (loss) per common share adjusted for certain items affecting period-to-period comparability. See Segment Information below for details on how adjusted net income (loss) and adjusted or comparable net income (loss) per common share were calculated for each period presented.
We believe that adjusted net income (loss) and adjusted or comparable net income (loss) per common share are meaningful measures because they increase the comparability of period-to-period results.
Since these are not measures of performance calculated in accordance with GAAP, they should not be considered in isolation of, or as a substitute for, GAAP net income (loss) and net income (loss) per common share, as indicators of operating performance and they may not be comparable to similarly titled measures employed by other companies.
Free Cash Flow
We define free cash flow as net cash provided by operating activities, less capital expenditures. The Company considers free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases of fixed assets, which can then be used to, among other things, invest in the Company’s business, make strategic acquisitions, strengthen the balance sheet, and repurchase stock or retire debt. Free cash flow is a liquidity measure that is frequently used by the investment community in the evaluation of similarly situated companies.
Since free cash flow is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP. A limitation of the utility of free cash flow as a measure of financial performance is that it does not represent the total increase or decrease in the company's cash balance for the period.
The following table presents the net revenues, gross profit and segment contribution margin from each of the Company’s business segments, as well as consolidated EBITDA, and adjusted EBITDA.
| Three Months Ended |
||||||||||||||||||||
| October 2, |
September 26, |
Vital |
As Adjusted |
% |
||||||||||||||||
| Net revenues: |
||||||||||||||||||||
| Consumer Floral & Gifts |
$ | 162,180 | $ | 181,229 | $ | - | $ | 181,229 | -10.5 | % | ||||||||||
| BloomNet |
33,367 | 30,834 | 30,834 | 8.2 | % | |||||||||||||||
| Gourmet Foods & Gift Baskets |
108,228 | 97,482 | 97,482 | 11.0 | % | |||||||||||||||
| Corporate |
44 | 45 | 45 | -2.2 | % | |||||||||||||||
| Intercompany eliminations |
(215 | ) | (217 | ) | (217 | ) | 0.9 | % | ||||||||||||
| Total net revenues |
$ | 303,604 | $ | 309,373 | $ | - | $ | 309,373 | -1.9 | % | ||||||||||
| Gross profit: |
||||||||||||||||||||
| Consumer Floral & Gifts |
$ | 61,919 | $ | 76,003 | $ | 76,003 | -18.5 | % | ||||||||||||
| 38.2 | % | 41.9 | % | 41.9 | % | |||||||||||||||
| BloomNet |
14,487 | 15,409 | 15,409 | -6.0 | % | |||||||||||||||
| 43.4 | % | 50.0 | % | 50.0 | % | |||||||||||||||
| Gourmet Foods & Gift Baskets |
25,113 | 34,163 | 34,163 | -26.5 | % | |||||||||||||||
| 23.2 | % | 35.0 | % | 35.0 | % | |||||||||||||||
| Corporate |
(61 | ) | (61 | ) | (61 | ) | 0.0 | % | ||||||||||||
| -138.6 | % | -135.6 | % | -135.6 | % | |||||||||||||||
| Total gross profit |
$ | 101,458 | $ | 125,514 | $ | - | $ | 125,514 | -19.2 | % | ||||||||||
| 33.4 | % | 40.6 | % | - | 40.6 | % | ||||||||||||||
| EBITDA (non-GAAP): |
||||||||||||||||||||
| Segment Contribution Margin (non-GAAP) (a): |
||||||||||||||||||||
| Consumer Floral & Gifts |
$ | 10,810 | $ | 19,190 | $ | - | $ | 19,190 | -43.7 | % | ||||||||||
| BloomNet |
9,517 | 10,860 | 10,860 | -12.4 | % | |||||||||||||||
| Gourmet Foods & Gift Baskets |
(18,710 | ) | (7,673 | ) | (7,673 | ) | -143.8 | % | ||||||||||||
| Segment Contribution Margin Subtotal |
1,617 | 22,377 | - | 22,377 | -92.8 | % | ||||||||||||||
| Corporate (b) |
(30,283 | ) | (31,731 | ) | 456 | (31,275 | ) | 3.2 | % | |||||||||||
| EBITDA (non-GAAP) |
(28,666 | ) | (9,354 | ) | 456 | (8,898 | ) | -222.2 | % | |||||||||||
| Add: Stock-based compensation |
1,555 | 3,005 | 3,005 | -48.3 | % | |||||||||||||||
| Add: Compensation charge related to NQ Plan Investment (Depreciation) Appreciation |
(906 | ) | 567 | 567 | -259.8 | % | ||||||||||||||
| Adjusted EBITDA (non-GAAP) |
$ | (28,017 | ) | $ | (5,782 | ) | $ | 456 | $ | (5,326 | ) | -426.0 | % | |||||||
| Reconciliation of net loss to adjusted net loss (non-GAAP): |
Three Months Ended |
|||||||
| October 2, 2022 |
September 26, 2021 |
|||||||
| Net loss |
$ | (33,692 | ) | $ | (13,199 | ) | ||
| Adjustments to reconcile net loss to adjusted net loss (non-GAAP) |
||||||||
| Add: Transaction costs |
- | 456 | ||||||
| Deduct: Income tax effect on adjustments (c) |
- | (173 | ) | |||||
| Adjusted net loss (non-GAAP) |
$ | (33,692 | ) | $ | (12,916 | ) | ||
| Basic and diluted net loss per common share |
$ | (0.52 | ) | $ | (0.20 | ) | ||
| Basic and diluted adjusted net loss per common share (non-GAAP) |
$ | (0.52 | ) | $ | (0.20 | ) | ||
| Weighted average shares used in the calculation of basic and diluted net loss and adjusted net loss per common share |
64,538 | 65,062 | ||||||
| Reconciliation of net loss to adjusted EBITDA (non-GAAP): |
Three Months Ended |
|||||||
| October 2, 2022 |
September 26, 2021 |
|||||||
| Net loss |
$ | (33,692 | ) | $ | (13,199 | ) | ||
| Add: Interest expense and other, net |
3,743 | 932 | ||||||
| Add: Depreciation and amortization |
12,694 | 10,970 | ||||||
| Deduct: Income tax benefit |
(11,411 | ) | (8,057 | ) | ||||
| EBITDA |
(28,666 | ) | (9,354 | ) | ||||
| Add: Stock-based compensation |
1,555 | 3,005 | ||||||
| Add: Compensation charge related to NQ plan investment (depreciation) appreciation |
(906 | ) | 567 | |||||
| Add: Transaction costs |
- | 456 | ||||||
| Adjusted EBITDA |
$ | (28,017 | ) | $ | (5,326 | ) | ||
(a) Segment performance is measured based on segment contribution margin or segment Adjusted EBITDA, reflecting only the direct controllable revenue and operating expenses of the segments, both of which are non-GAAP measurements. As such, management’s measure of profitability for these segments does not include the effect of corporate overhead, described above, depreciation and amortization, other income (net), and other items that we do not consider indicative of our core operating performance.
(b) Corporate expenses consist of the Company’s enterprise shared service cost centers, and include, among other items, Information Technology, Human Resources, Accounting and Finance, Legal, Executive and Customer Service Center functions, as well as Stock-Based Compensation. In order to leverage the Company’s infrastructure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions, other than those of the Customer Service Center, which are allocated directly to the above categories based upon usage, are included within corporate expenses as they are not directly allocable to a specific segment.
(c) Income tax effect on adjustments is calculated based upon the Company’s effective tax rate during the applicable period.
Net revenues
| Three Months Ended |
||||||||||||
| October 2, |
September 26, |
% Change |
||||||||||
| (dollars in thousands) | ||||||||||||
| Net revenues: |
|
|||||||||||
| E-Commerce |
$ | 238,922 | $ | 263,371 | -9.3 | % |
||||||
| Other |
64,682 | 46,002 | 40.6 | % |
||||||||
| Total net revenues |
$ | 303,604 | $ | 309,373 | -1.9 | % |
||||||
Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits.
Net revenues decreased 1.9% during the three months ended October 2, 2022, compared to the same period of the prior year due to lower volume within the Consumer Floral & Gifts segment, partially offset by increased volume in the Gourmet Foods & Gift Baskets and BloomNet segments. Adjusted for the non-comparative impact of Alice’s Table and Vital Choice, which were acquired on December 31, 2021 and October 27, 2021, respectively, consolidated revenues decreased 3.6%, in comparison to the prior year period.
To provide perspective, our post-pandemic Q1 fiscal 2023 revenues exceeded our pre-pandemic Q1 fiscal 2019 revenues by 79.1% This revenue growth includes revenues attributable to Shari’s Berries, which was acquired in August 2019, PersonalizationMall, which was acquired on August 3, 2020, Vital Choice, which was acquired on October 27, 2021, and Alice's Table, which was acquired on December 31, 2021. Excluding revenues from these acquisitions, pro-forma revenue growth exceeded pre-pandemic Q1 fiscal 2019 revenues by 50.7%.
| Three Months Ended |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Consumer Floral & Gifts |
BloomNet |
Gourmet Foods & Gift Baskets |
Corporate and Eliminations |
Consolidated |
||||||||||||||||||||||||||||||||||||||||||||||||||||
| October 2, 2022 |
September 26, 2021 |
% Change |
October 2, 2022 |
September 26, 2021 |
% Change |
October 2, 2022 |
September 26, 2021 |
% Change |
October 2, 2022 |
September 26, 2021 |
October 2, 2022 |
September 26, 2021 |
% |
|||||||||||||||||||||||||||||||||||||||||||
| Net revenues |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| E-commerce |
$ | 160,382 | $ | 179,286 | -10.5 | % |
$ | - | $ | - | - | % |
$ | 78,540 | $ | 84,085 | -6.6 | % |
$ | - | $ | - | $ | 238,922 | $ | 263,371 | -9.3 | % |
||||||||||||||||||||||||||||
| Other |
1,798 | 1,943 | -7.5 | % |
33,367 | 30,834 | 8.2 | % |
29,688 | 13,397 | 121.6 | % |
(171 | ) |
(172 | ) |
64,682 | 46,002 | 40.6 | % |
||||||||||||||||||||||||||||||||||||
| Total net revenues |
$ | 162,180 | $ | 181,229 | -10.5 | % |
$ | 33,367 | $ | 30,834 | 8.2 | % |
$ | 108,228 | $ | 97,482 | 11.0 | % |
$ | (171 | ) |
$ | (172 | ) |
$ | 303,604 | $ | 309,373 | -1.9 | % |
||||||||||||||||||||||||||
| Other revenues detail |
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retail and other |
1,798 | 1,943 | -7.5 | % |
- | - | 1,907 | 1,837 | 3.8 | % |
- | - | 3,705 | 3,780 | -2.0 | % |
||||||||||||||||||||||||||||||||||||||||
| Wholesale |
- | - | 13,622 | 9,984 | 36.4 | % |
27,781 | 11,560 | 140.3 | % |
- | - | 41,403 | 21,544 | 92.2 | % |
||||||||||||||||||||||||||||||||||||||||
| BloomNet services |
- | - | 19,745 | 20,850 | -5.3 | % |
- | - | - | - | 19,745 | 20,850 | -5.3 | % |
||||||||||||||||||||||||||||||||||||||||||
| Corporate |
- | - | - | - | - | - | 44 | 45 | 44 | 45 | -2.2 | % |
||||||||||||||||||||||||||||||||||||||||||||
| Eliminations |
- | - | - | - | - | - | (215 | ) |
(217 | ) |
(215 | ) |
(217 | ) |
0.9 | % |
||||||||||||||||||||||||||||||||||||||||
| Total other revenues |
$ | 1,798 | 1,943 | -7.5 | % |
$ | 33,367 | $ | 30,834 | 8.2 | % |
$ | 29,688 | $ | 13,397 | 121.6 | % |
$ | (171 | ) |
$ | (172 | ) |
$ | 64,682 | 46,002 | 40.6 | % |
||||||||||||||||||||||||||||
Revenue by sales channel:
E-commerce revenues (combined online and telephonic) decreased 9.3% during the three months ended October 2, 2022 compared to the same period of the prior year as a result of lower consumer demand for “Everyday” gifts, across all segments, due to the macro-economic conditions noted above. The lower order volume (3.1 million, -15.1%) was partially offset by pricing initiatives and product mix, which drove a higher average sale ($75.78, +6.7%). Excluding the impact of the acquisitions of Vital Choice and Alice’s Table, pro-forma revenue declined 3.6% during the period. During the three months ended October 2, 2022, the Company added approximately 0.8 million new e-commerce customers, a decrease of 9.2% compared to the same period of the prior year, while existing customers contributed approximately 70% of our total e-commerce revenues during the quarter.
Other revenues are comprised of the Company’s BloomNet segment, as well as the wholesale and retail channels of its Consumer Floral & Gifts and Gourmet Foods & Gift Baskets segments. Other revenues increased by 40.6% during the three months ended October 2, 2022, compared to the same period of the prior year, due to increased wholesale product demand, attributable to the return of consumers to “brick-and-mortar” shopping, and the timing of certain DesignPac shipments due to improvements in the global supply chain, partially offset by a decrease in BloomNet services revenues.
Revenue by segment:
Consumer Floral & Gifts – this segment, which includes the operations of the 1-800-Flowers.com and PersonalizationMall brands, as well as Alice’s Table, subsequent to its acquisition on December 31, 2021, derives revenue from the sale of consumer floral products and gifts through its e-commerce sales channels (telephonic and online sales), retail stores, and royalties from its franchise operations.
Net revenues within this segment decreased 10.5% during the three months ended October 2, 2022, compared to the same period of the prior year, due to reduced “Everyday” product demand, as consumer discretionary spending continues to shrink in the current inflationary environment. Pro-forma segment revenues decreased 10.6% during the three months ended October 2, 2022, adjusting for the acquisition of Alice’s Table.
BloomNet - revenues in this segment are derived from membership fees, as well as other product and service offerings. Net revenues increased 8.2% during the three months ended October 2, 2022, compared to the same period of the prior year, due to strong wholesale product demand, and product availability, which had been constrained by supply chain issues in the prior year, partially offset by lower services revenue. The services revenue decline was attributable to membership/transaction fee revenues associated with a decline in order volume going through the network, as well as lower directory services ad revenues.
Gourmet Foods & Gift Baskets – this segment includes the operations of Harry & David, Wolferman’s, Stock Yards, Cheryl’s Cookies, The Popcorn Factory, 1-800-Baskets/DesignPac, Shari’s Berries, and Vital Choice, subsequent to its October 27, 2021 acquisition date. Revenue is derived from the sale of gourmet fruits, cookies, baked gifts, premium chocolates and confections, gourmet popcorn, gift baskets, dipped berries, prime steaks, chops, and fish, through the Company’s e-commerce sales channels (telephonic and online sales) and company-owned and operated retail stores under the Harry & David and Cheryl’s brand names, as well as wholesale operations.
Net revenues within this segment increased 11.0% during the three months ended October 2, 2022, compared to the same period of the prior year, as a result of favorable wholesale and retail revenues, due to improved demand as consumers return to traditional “brick-and-mortar” shopping, as well as timing of DesignPac revenues, which moved into the second quarter of the prior year as production was slowed by supply chain issues. E-commerce sales were lower than prior year as a result of the macro-economic issues noted above, partially offset by strategic price increases, and the incremental revenues attributable to Vital Choice, which was acquired on October 27, 2021, and subsequently integrated within the operations of Harry & David. This segment has also been impacted by the reductions in “EveryDay” volumes, due to the macro-economic conditions noted above, combined with the fact that the segment also experienced the highest growth rates during the Pandemic when food gifts/self-consumption peaked. Pro-forma segment revenues increased 5.6% during the three months ended October 2, 2022, adjusting for the acquisition of Vital Choice.
Gross profit
| Three Months Ended |
||||||||||||
| October 2, 2022 |
September 26, 2021 |
% Change |
||||||||||
| (dollars in thousands) |
||||||||||||
| Gross profit |
$ | 101,458 | $ | 125,514 | -19.2 | % |
||||||
| Gross profit % |
33.4 | % |
40.6 | % |
||||||||
Gross profit consists of net revenues less cost of revenues, which is comprised primarily of florist fulfillment costs (fees paid directly to florists), the cost of floral and non-floral merchandise sold from inventory or through third parties, and associated costs, including inbound and outbound shipping charges. Additionally, cost of revenues includes labor and facility costs related to direct-to-consumer and wholesale production operations, as well as payments made to sending florists related to order volume referred through the Company’s BloomNet network.
Gross profit decreased 19.2% during the three months ended October 2, 2022 compared to the same period of the prior year, primarily due to a significantly lower gross profit percentage, as well as the lower revenues noted above. Gross profit percentage decreased across all three segments, reflecting macro-economic headwinds which included higher commodity, labor, inbound and outbound shipping costs, including the impact of fuel surcharges, as well as the write-off of dated perishable product.
The Company has and will continue to implement strategies designed to mitigate the impact of these headwinds, including pricing initiatives across our product assortment, implementing logistics optimization programs to enhance our outbound shipping operations and manage rising third-party shipping costs and deploying automation to increase throughput and efficiency and address high cost of labor. In addition, ocean freight and certain commodity costs have come down significantly from their highs of last year.
Gross profit by segment follows:
Consumer Floral & Gifts segment - Gross profit decreased by 18.5% during the three months ended October 2, 2022, due to a decrease in gross profit percentage, as well as the lower revenues noted above. Gross profit percentage was negatively impacted by increased cost of merchandise, driven by higher ocean freight and product costs, as well as higher outbound freight, and labor rates, partially offset by pricing initiatives which are reflected in the higher average order value noted above.
BloomNet segment - Gross profit decreased by 6.0% during the three months ended October 2, 2022 compared to the same period of the prior year, due to the impact of sales mix, with a greater proportion of revenues derived from lower margin wholesale product sales, and higher rebates, partially offset by lower wholesale product costs due to easing of the supply chain issues experienced in the prior year.
Gourmet Foods & Gift Baskets segment - Gross profit decreased by 26.5% during the three months ended October 2, 2022 compared to the same period of the prior year, due to a significant decrease in gross profit percentage, partially offset by the increase in revenues noted above. The lower gross profit percentage was due to the impact of higher component costs due to inflationary pressure, higher labor rates, charges associated with the write-off of expiring inventories, product/channel mix with a larger proportion of wholesale product revenues, and outbound transportation costs increases, partially offset by pricing initiatives.
Marketing and sales expense
| Three Months Ended |
||||||||||||
| October 2, 2022 |
September 26, 2021 |
% Change |
||||||||||
| (dollars in thousands) |
||||||||||||
| Marketing and sales |
$ | 89,139 | $ | 94,379 | -5.6 | % |
||||||
| Percentage of net revenues |
29.4 | % |
30.5 | % |
||||||||
Marketing and sales expense consists primarily of advertising and promotional expenditures, catalog costs, online portal and search costs, retail store and fulfillment operations (other than costs included in cost of revenues) and customer service center expenses, as well as the operating expenses of the Company’s departments engaged in marketing, selling and merchandising activities.
Marketing and sales expense decreased 5.6% during the three months ended October 2, 2022, compared to the same period of the prior year, due to variable components associated with lower revenues, combined with reductions in advertising spend, partially offset by higher labor costs, due to increases in rate.
Technology and development expense
| Three Months Ended |
||||||||||||
| October 2, 2022 |
September 26, 2021 |
% Change |
||||||||||
| (dollars in thousands) |
||||||||||||
| Technology and development |
$ | 14,740 | $ | 13,423 | 9.8 | % |
||||||
| Percentage of net revenues |
4.9 | % |
4.3 | % |
||||||||
Technology and development expense consists primarily of payroll and operating expenses of the Company’s information technology group, costs associated with its websites, including hosting, design, content development and maintenance and support costs related to the Company’s order entry, customer service, fulfillment, and database systems.
Technology and development expense increased by 9.8% during the three months ended October 2, 2022 compared to the same period of the prior year, primarily due to higher maintenance and support for the Company’s technology platform enhancements, including higher labor and consulting costs.
General and administrative expense
| Three Months Ended |
||||||||||||
| October 2, 2022 |
September 26, 2021 |
% Change |
||||||||||
| (dollars in thousands) |
||||||||||||
| General and administrative |
$ | 26,245 | $ | 27,066 | -3.0 | % |
||||||
| Percentage of net revenues |
8.6 | % |
8.7 | % |
||||||||
General and administrative expense consists of payroll and other expenses in support of the Company’s executive, finance and accounting, legal, human resources and other administrative functions, as well as professional fees and other general corporate expenses.
General and administrative expenses decreased 3.0% during the three months ended October 2, 2022, compared to the same period of the prior year, due to lower labor and related costs, primarily resulting from a decrease in non-qualified deferred compensation plan investment income (refer to equal offset in “other income/expense, net”), partially offset by higher professional fees.
Depreciation and amortization expense
| Three Months Ended |
||||||||||||
| October 2, 2022 |
September 26, 2021 |
% Change |
||||||||||
| (dollars in thousands) |
||||||||||||
| Depreciation and amortization |
$ | 12,694 | $ | 10,970 | 15.7 | % |
||||||
| Percentage of net revenues |
4.2 | % |
3.5 | % |
||||||||
Depreciation and amortization expense increased 15.7% during the three months ended October 2, 2022, compared to the same period of the prior year, due to distribution facility automation projects and IT related ecommerce/platform enhancements, as well as incremental amortization associated with the Vital Choice and Alice’s Table acquisitions.
Interest expense, net
| Three Months Ended |
||||||||||||
| October 2, 2022 |
September 26, 2021 |
% Change |
||||||||||
| (dollars in thousands) |
||||||||||||
| Interest expense, net |
$ | 2,821 | $ | 1,528 | 84.6 | % |
||||||
Interest expense, net consists primarily of interest expense and amortization of deferred financing costs attributable to the Company’s credit facility (See Note 8 - Debt, in Item 1. for details), net of income earned on the Company’s available cash balances.
Interest expense, net increased 84.6% during the three months ended October 2, 2022 compared to the same period of the prior year, due to a higher level of borrowings against the Company’s line of credit, higher interest rates, and an increase in the amortization of deferred financing costs associated with Credit Facility amendments in November 2021 and August 2022.
Other expense (income), net
| Three Months Ended |
||||||||||||
| October 2, 2022 | September 26, 2021 |
% Change |
||||||||||
| (dollars in thousands) |
||||||||||||
| Other expense (income), net |
$ | 922 | $ | (596 | ) | -254.7 | % |
|||||
Other expense (income), net for the three months ended October 2, 2022, consists primarily of investment losses/(gains) on the Company’s NQDC Plan assets.
Income Taxes
The Company recorded income tax benefit of $11.4 million and $8.1 million, during the three months ended October 2, 2022 and September 26, 2021, respectively. The Company’s effective tax rate for the three months ended October 2, 2022 was 25.3% compared to 37.9% in the same period of the prior year. The effective tax rate differed from the U.S. federal statutory rate of 21% for the three months ended October 2, 2022, primarily due to state income taxes and nondeductible expenses for executive compensation, partially offset by various permanent differences and tax credits. The effective tax rate differed from the U.S. federal statutory rate of 21% for the three months ended September 26, 2021, primarily due to excess tax benefits from stock-based compensation, as well as state income taxes and nondeductible expenses for executive compensation.
Liquidity and Capital Resources
Liquidity and borrowings
The Company's principal sources of liquidity are cash on hand, cash flows generated from operations and borrowings available under the Company’s Credit Agreement (see Note 8 - Debt in Item 1 for details). At October 2, 2022, the Company had working capital of $46.4 million, including cash and cash equivalents of $9.4 million, compared to working capital of $82.5 million, including cash and cash equivalents of $31.5 million, at July 3, 2022.
Due to the seasonal nature of the Company’s business, and its continued expansion into non-floral products, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, is expected to generate over 40% of the Company’s annual revenues, and all of its earnings. Due to the number of major floral gifting occasions, including Valentine’s Day, Easter, Administrative Professionals Week, and Mother’s Day, revenues also have historically risen during the Company’s fiscal third and fourth quarters in comparison to its fiscal first quarter.
During the first quarter of fiscal 2023, the Company borrowed $140.0 million under its revolving credit agreement in order to fund pre-holiday manufacturing and inventory procurement requirements. Working capital borrowings typically peak in November after which time cash generated from operations during the Christmas holiday shopping season is expected to enable the Company to repay such borrowings.
While we believe that our sources of funding will be sufficient to meet our anticipated operating cash needs for at least the next twelve months, any projections of future cash needs and cash flows are subject to substantial uncertainty. We continually evaluate, and will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services, capital infrastructure, and technologies, which might affect our liquidity requirements or cause us to require additional financing.
Cash Flows
Net cash used in operating activities of $146.3 million, for the three months ended October 2, 2022, was primarily attributable to the Company’s net loss during the period, combined with seasonal changes in net working capital, including increases in inventory, trade receivables, prepaid and other, as well as accounts payable and accrued expenses, partially offset by non-cash charges for depreciation and amortization and stock-based compensation.
Net cash used in investing activities of $11.0 million, for the three months ended October 2, 2022, was primarily attributable to capital expenditures related to the Company's technology initiatives, as well as manufacturing, production, and warehousing equipment.
Net cash provided by financing activities of $135.3 million, for the three months ended October 2, 2022, related primarily to net proceeds from bank borrowings under the Company’s working capital line of credit.
Stock Repurchase Program
See Item 2 in Part II below for details.
Contractual Obligations
At October 2, 2022, the Company’s contractual obligations consist of:
| ● |
Long-term debt obligations - payments due under the Company's existing Credit Agreement (see Note 8 - Debt in Item 1 for details and payments due by period). |
| ● |
Operating lease obligations – payments due under the Company’s operating leases (see Note 13 - Leases in Item 1 for details and payments due by period for the long-term operating leases). |
| ● |
Purchase commitments - consisting primarily of inventory and IT related equipment purchase orders and license agreements made in the ordinary course of business – see below for the contractual payments due by period. |
| Payments due by period |
||||||||||||||||||||||||||||
| (in thousands) |
||||||||||||||||||||||||||||
| Remaining Fiscal 2023 |
Fiscal 2024 |
Fiscal 2025 |
Fiscal 2026 |
Fiscal 2027 |
Thereafter |
Total |
||||||||||||||||||||||
| Purchase commitments |
$ | 118,155 | $ | 21,484 | $ | 6,724 | $ | 2,472 | $ | 148 | $ | - | $ | 148,983 | ||||||||||||||
Critical Accounting Policies and Estimates
As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2022, the discussion and analysis of the Company’s financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances, and management evaluates its estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. The Company’s most critical accounting policies relate to goodwill, other intangible assets and income taxes. There have been no significant changes to the assumptions and estimates related to the Company’s critical accounting policies since July 3, 2022.
Recently Issued Accounting Pronouncements
See Note 1 - Accounting Policies in Item 1 for details regarding the impact of accounting standards that were recently issued on our consolidated financial statements.
Forward Looking Information and Factors that May Affect Future Results
Our disclosure and analysis in this report contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent the Company’s current expectations or beliefs concerning future events and can generally be identified by the use of statements that include words such as “estimate,” “project,” “believe,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will,” “goal,” “target” or similar words or phrases. These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of the Company’s control that could cause actual results to differ materially from the results expressed or implied in the forward-looking statements, including:
| ● |
the Company’s ability: |
| o |
to achieve revenue and profitability; |
|
| o |
to leverage its operating platform and reduce operating expenses; |
|
| o |
to manage the seasonality of its business; |
|
| o |
to cost effectively acquire and retain customers; |
|
| o |
to successfully integrate acquired businesses and assets; |
|
| o |
to reduce working capital requirements and capital expenditures; |
|
| o |
to mitigate the impact of supply chain cost and capacity constraints; |
|
| o |
to compete against existing and new competitors; |
|
| o |
to manage expenses associated with sales and marketing and necessary general and administrative and technology investments; and |
|
| o |
to cost effectively manage inventories; |
| ● |
the outcome of contingencies, including legal proceedings in the normal course of business; |
| ● |
general consumer sentiment and economic conditions that may affect among other things, the levels of discretionary customer purchases of the Company’s products and the costs of shipping and labor; and |
| ● |
the impact of the COVID-19 pandemic on our business and financial statements. |
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements.
We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission. Our Annual Report on Form 10-K for the fiscal year ended July 3, 2022 listed various important factors that could cause actual results to differ materially from expected and historic results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. Readers can find them in Part I, Item 1A, of that filing under the heading “Cautionary Statements Under the Private Securities Litigation Reform Act of 1995”. We incorporate that section of that Form 10-K in this filing and investors should refer to it. In addition, please refer to any additional risk factors in Part II, Item 1A in this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from the effect of interest rate changes.
Interest Rate Risk
The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment of available cash balances and its long-term debt. The Company generally invests its cash and cash equivalents in investment grade corporate and U.S. government securities. Due to the currently low rates of return the Company is receiving on its cash equivalents, the potential for a significant decrease in short-term interest rates is low and, therefore, a further decrease would not have a material impact on the Company’s interest income. Borrowings under the Company’s credit facility bear interest at a variable rate, plus an applicable margin, and therefore expose the Company to market risk for changes in interest rates. The effect of a 50 basis point increase in current interest rates on the Company’s interest expense would be approximately $0.3 million during the three months ended October 2, 2022.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of October 2, 2022. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have each concluded that the Company’s disclosure controls and procedures were not effective as of October 2, 2022, due to a material weakness in internal control over financial reporting related to logical access and segregation of duties, at the application control level, in certain information technology environments. The material weakness was first identified and reported in Management's Report on Internal Control over Financial Reporting in our Annual Report on Form 10-K for the period ending July 3, 2022.
Management has taken steps to remediate these deficiencies, including redesigning the logical access and placing enhanced segregation of duties, enhancing its internal documentation and monitoring approach to ensure that all procedures designed to restrict access to applications and data are operating in an optimal manner in order to provide management with comfort that access is properly limited to the appropriate internal personnel. Management began to implement these remedial steps during the first quarter of fiscal 2023. In accordance with our internal control compliance program, a material weakness is not considered remediated until the remediation processes have been operational for a sufficient period of time and successfully tested. In light of this material weakness, management performed additional procedures over our IT environment and personnel affected to determine if any unauthorized action had been taken and found no such instances.
Notwithstanding the material weakness described in Management's Report on logical access and segregation of duties in certain technology environments, our management has concluded that our consolidated financial statements for the periods covered by this form 10-Q are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and fairly present, in all material respects, our financial position, results of operations and cash flows for each of the periods presented herein.
Changes in Internal Control over Financial Reporting
Except for the remedial actions described above, there were no changes in our internal control over financial reporting identified in connection with the Company’s evaluation required by Rules 13a-15(d) or 15d-15(d) of the Securities Exchange Act of 1934 during the quarter ended October 2, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Litigation
Call Center Worker Claim:
In March of 2018, a putative class action lawsuit was filed against a subsidiary of the Company (the “Subsidiary”) in the U.S. District Court for the District of Oregon, Medford Division (the “Court”), alleging violations of the federal Fair Labor Standards Act (FLSA) and Oregon state law. The complaint was brought on behalf of a putative class of call center workers and alleged that certain Subsidiary policies and practices resulted in class members’ performance of unpaid work. The plaintiff sought class certification, compensation for alleged unpaid and underpaid wages, civil penalties, prejudgment interest, liquidated damages, litigation costs, and attorneys’ fees. Following mediation, the parties reached an agreement in April 2022 to resolve all claims. The settlement agreement remains subject to certain judicial approvals. The Subsidiary’s payment liability under the settlement agreement is capped at a maximum amount of $3.3 million, and the amount payable will depend on the number of claims filed by class members and the amounts of attorneys’ fees and litigation costs approved by the Court. In September 2022, the Court granted final approval of the settlement agreement. The parties are awaiting a final calculation from the settlement administrator. During the quarter ended March 27, 2022, the Company accrued $2.9 million, which is included in "Accrued expenses" in the consolidated balance sheets at July 3, 2022 and October 2, 2022, based upon the expected "opt-in" participation rate of the class members. In entering into the settlement agreement, the Subsidiary is making no admission of liability.
In addition, there are various claims, lawsuits, and pending actions against the Company and its subsidiaries incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the final resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.
There were no material changes to the Company’s risk factors as discussed in Part 1, Item 1A-Risk Factors in the Company’s Annual Report on Form 10-K for the year ended July 3, 2022.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company has a stock repurchase plan through which purchases can be made from time to time in the open market and through privately negotiated transactions, subject to general market conditions. The repurchase program is financed utilizing available cash. On April 22, 2021, the Company’s Board of Directors authorized an increase to its stock repurchase plan of up to $40.0 million. In addition, on February 3, 2022, the Company’s Board of Directors authorized an increase to its stock repurchase plan of up to $40.0 million. As of October 2, 2022, $33.2 million remained authorized under the plan.
The Company did not repurchase any common stock during the first three months of fiscal 2023, which included the period July 4, 2022 through October 2, 2022.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
| 10.1 | Third Amendment, dated as of August 29, 2022, among 1-800-FLOWERS.COM, INC., the subsidiary borrowers party thereto, the subsidiary guarantors party thereto, the lenders party thereto, and JPMorgan Chase Bank, N.A., as Administrative Agent, to that certain Second Amended and Restated Credit Agreement, dated as of May 31, 2019. | |
| 31.1 |
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| 31.2 |
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| 32.1 |
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| 101.INS |
Inline XBRL Instance Document |
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| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
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| 101.CAL |
Inline XBRL Taxonomy Calculation Linkbase Document |
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| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
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| 101.LAB |
Inline XBRL Taxonomy Extension Label Document |
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| 101.PRE |
Inline XBRL Taxonomy Definition Presentation Document |
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| 104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| 1-800-FLOWERS.COM, Inc. (Registrant) |
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| Date: November 14, 2022 |
/s/ Christopher G. McCann Christopher G. McCann |
| Date: November 14, 2022 |
/s/ William E. Shea |
