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FLWS > SEC Filings for FLWS > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for 1 800 FLOWERS COM INC


10-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward Looking Statements

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. 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" and under Part I, Item 1A, of the Company's Annual Report on Form 10-K under the heading "Risk Factors."

Overview

1-800-FLOWERS.COM, Inc. is the world's leading florist and gift shop. For more than 30 years, 1-800-FLOWERS® (1-800-356-9377 or www.1800flowers.com) has been helping deliver smiles for our customers with gifts for every occasion, including fresh flowers and the finest selection of plants, gift baskets, gourmet foods, confections, candles, balloons and plush stuffed animals. As always, our 100% Smile Guarantee backs every gift. 1-800-FLOWERS.COM's Mobile Flower & Gift Center was named winner of the Mobile Shopping Summit's "Best Mobile Site of 2011." 1-800-FLOWERS.COM was also rated number one vs. competitors for customer satisfaction by STELLAService and named by the E-Tailing Group as one of only nine online retailers out of 100 benchmarked to meet the criteria for Excellence in Online Customer Service. 1-800-FLOWERS.COM has been honored in Internet Retailer's "Hot 100: America's Best Retail Web Sites" for 2011. The Company's BloomNet® international floral wire service (www.mybloomnet.net) provides a broad range of quality products and value-added services designed to help professional florists grow their businesses profitably.

The 1-800-FLOWERS.COM "Gift Shop" also includes gourmet gifts such as popcorn and specialty treats from The Popcorn Factory® (1-800-541-2676 or www.thepopcornfactory.com); cookies and baked gifts from Cheryl's® (1-800-443-8124 or www.cheryls.com); premium chocolates and confections from Fannie May® confections brands (www.fanniemay.com and www.harrylondon.com); gift baskets and towers from 1-800-Baskets.com® (www.1800baskets.com); delicious cut-fruit arrangements from FruitBouquets.com (www.fruitbouquets.com); wine gifts from Winetasting.com® (www.winetasting.com); ultra- premium meats from Stockyards.com (www.stockyards.com); as well as exquisite, customizable invitations and personal stationery from FineStationery.com (www.finestationery.com). The Company's Celebrations® brand (www.celebrations.com) is a new premier online destination for fabulous party ideas and planning tips. 1-800-FLOWERS.COM, Inc. is involved in a broad range of corporate social responsibility initiatives including continuous expansion and enhancement of its environmentally-friendly "green" programs as well as various philanthropic and charitable efforts.

On September 6, 2011, the Company, through its Winetasting Network subsidiary, completed the sale of certain assets of its non-strategic wine fulfillment services business in order to focus on its core Direct-to-Consumer wine business. The Company has classified the results of operations of its wine fulfillment services business, which had previously been included within its Gourmet Foods & Gift Baskets segment, as discontinued operations for all periods presented.

Shares in 1-800-FLOWERS.COM, Inc. are traded on the NASDAQ Global Select Market, ticker symbol: FLWS.


Segment Information

The following table presents the contribution of net revenues, gross profit and segment contribution margin from each of the Company's business segments, as well as consolidated "EBITDA" (earnings before interest, taxes, depreciation and amortization). Additionally, the table adjusts Segment Contribution Margin to EBITDA, EBITDA excluding stock-based compensation, and Adjusted EBITDA, and reconciles Net Income to EBITDA, EBITDA excluding stock-based compensation, Adjusted EBITDA, and Adjusted Net Income. As noted previously, the Company's wine fulfillment services business, which had previously been included within its Gourmet Foods & Gift Baskets segment has been classified as discontinued operations and therefore excluded from segment information below.

                                    Three Months Ended                        Nine Months Ended
                             March 31,      April 1,                 March 31,     January 1,
                               2013           2012      % Change       2013           2012       % Change
                             (dollars in thousands)                   (dollars in thousands)
Net revenues from
continuing operations:
Consumer Floral            $     121,005    $ 112,987        7.1 %  $   285,608   $    274,168        4.2 %
BloomNet Wire Service             22,819       24,060       (5.2 )%      61,320         60,837        0.8 %
Gourmet Food & Gift
Baskets                           49,341       43,104       14.5 %      220,483        202,829        8.7 %
Corporate (*)                        200          199        0.5 %          594            575        3.3 %
Intercompany
eliminations                        (741 )       (691 )     (7.2 )%      (1,497 )       (1,707 )     12.3 %
Total net revenues from
continuing operations      $     192,624    $ 179,659        7.2 %  $   566,508   $    536,702        5.6 %




                                    Three Months Ended                       Nine Months Ended
                             March 31,      April 1,                 March 31,       April 1,
                                2013          2012      % Change       2013            2012      % Change
                             (dollars in thousands)                  (dollars in thousands)
Gross profit from
continuing operations:
Consumer Floral            $       48,455   $  44,045       10.0 % $     112,701    $  106,258        6.1 %
                                     40.0 %      39.0 %                     39.5 %        38.8 %
BloomNet Wire Service              11,382      10,733        6.0 %        30,974        28,254        9.6 %
                                     49.9 %      44.6 %                     50.5 %        46.4 %
Gourmet Food & Gift
Baskets                            20,418      18,116       12.7 %        90,200        84,981        6.1 %
                                     41.4 %      42.0 %                     40.9 %        41.9 %
Corporate (*)                         148         145        2.1 %           650           434       49.8 %
                                     74.0 %      72.9 %                    109.4 %        75.6 %
Total gross profit from
continuing operations      $       80,403   $  73,039       10.1 % $     234,525    $  219,927        6.6 %
                                     41.7 %      40.7 %                     41.4 %        41.0 %




                                  Three Months Ended                        Nine Months Ended
                           March 31,      April 1,                  March 31,      April 1,
                              2013          2012      % Change         2013          2012      % Change
                           (dollars in thousands)                   (dollars in thousands)
Adjusted EBITDA from
continuing operations:
Segment Contribution
Margin (**)
Consumer Floral          $       13,902   $  10,948       27.0 %  $       31,074   $  26,899       15.5 %
BloomNet Wire Service             6,952       6,258       11.1 %          18,797      15,925       18.0 %
Gourmet Food & Gift
Baskets (***)                       970         948        2.3 %          25,351      29,188      (13.1 )%
Segment Contribution
Margin Subtotal                  21,824      18,154       20.2 %          75,222      72,012        4.5 %
Corporate (*)                   (12,879 )   (13,125 )      1.9 %         (37,737 )   (36,505 )     (3.4 )%
EBITDA from continuing
operations                        8,945       5,029       77.9 %          37,485      35,507        5.6 %
Add: Stock-based
compensation                      1,093       1,356      (19.4 )%          3,397       3,736       (9.1 )%
EBITDA from continuing
operations, excluding
stock-based
compensation                     10,038       6,385       57.2 %          40,882      39,243        4.2 %
Less: Gain on sale of
stores (***)                          -           -          -                 -       3,789          -
Adjusted EBITDA from
continuing operations    $       10,038   $   6,385       57.2 %  $       40,882   $  35,454       15.3 %


                                 Three Months Ended                  Nine Months Ended
                           March 31,   April 1,              March 31,    April 1,
                             2013        2012     % Change     2013         2012      % Change
                              (in thousands)                     (in thousands)
Discontinued Operations:
Net revenues                       -          -          -           -   $    2,003          -
Gross profit                       -          -          -           -   $      405          -
Contribution margin                -          -          -           -   $     (190 )        -
Gain (loss) on sale of
discontinued operations,
net of tax                         -       (136 )        -           -   $    4,342          -
Income from discontinued
operations                         -       (136 )        -           -   $    4,320          -




                                              Three Months Ended           Nine Months Ended
                                            March 31,      April 1,     March 31,     April 1,
                                              2013           2012          2013         2012
                                                              (in thousands)
Reconciliation of Net Income from
continuing operations to Adjusted
EBITDA from continuing operations (**):
Net income from continuing operations      $     2,638    $       51    $   14,043    $  11,494
Add:
Interest expense, net                              227           319         1,088        1,990
Depreciation and amortization                    4,849         4,874        13,838       14,705
Income tax expense                               1,231             -         8,516        7,318
Less:
Income tax benefit                                   -           215             -            -
EBITDA                                           8,945         5,029        37,485       35,507
Add: Stock-based compensation                    1,093         1,356         3,397        3,736
EBITDA, excluding stock-based
compensation                                    10,038         6,385        40,882       39,243
Less: Gain on sale of stores                         -             -             -        3,789
Adjusted EBITDA from continuing
operations                                 $    10,038    $    6,385    $   40,882    $  35,454




                                              Three Months Ended           Nine Months Ended
                                            March 31,      April 1,     March 31,     April 1,
                                              2013           2012          2013         2012
                                                  (in thousands, except per share data)
Reconciliation of Net Income and EPS
from continuing operations to Adjusted
Net Income and EPS from continuing
operations:
Net income from continuing operations      $     2,638    $       51    $   14,043    $  11,494
Less: Gain on sale of stores, net of
tax (***)                                            -             -             -        2,315
Adjusted Net Income from continuing
operations                                 $     2,638    $       51    $   14,043    $   9,179

Net Income per common share from
continuing operations
Basic                                      $      0.04    $     0.00    $     0.22    $    0.18
Diluted                                    $      0.04    $     0.00    $     0.21    $    0.17

Adjusted Net Income per common share
from continuing operations
Basic                                      $      0.04    $     0.00    $     0.22    $    0.14
Diluted                                    $      0.04    $     0.00    $     0.21    $    0.14

Weighted average shares used in the
calculation of net income per common
share from continuing operations
Basic                                           64,256        64,988        64,528       64,683
Diluted                                         66,111        66,299        66,647       66,257


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(*) Corporate expenses consist of the Company's enterprise shared service cost centers including, 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 segments based upon usage, are included within corporate expenses, which include stock-based compensation, as they are not directly allocable to a specific 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. 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), nor does it include one-time charges. Management utilizes EBITDA, and adjusted financial information, as a performance measurement tool because it considers such information a meaningful supplemental measure of its performance and believes it is frequently used by the investment community in the evaluation of companies with comparable market capitalization. The Company also uses EBITDA and adjusted financial information as one of the factors used to determine the total amount of bonuses available to be awarded to executive officers and other employees. The Company's credit agreement uses EBITDA and adjusted financial information to measure compliance with covenants such as interest coverage and debt incurrence. EBITDA and adjusted financial information is also used by the Company to evaluate and price potential acquisition candidates. EBITDA and adjusted financial information have limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP. Some of these limitations are:
(a) EBITDA does not reflect changes in, or cash requirements for, the Company's working capital needs; (b) EBITDA does 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. Because of these limitations, EBITDA should only be used on a supplemental basis combined with GAAP results when evaluating the Company's performance.

(***) GFGB segment contribution margin during the nine months ended April 1, 2012 includes a $3.8 million gain on the sale ($2.3 million, net of tax) of 17 Fannie May stores, which are being operated as franchised locations post-sale.

Results of Operations



Net Revenues



                            Three Months Ended                   Nine Months Ended
                     March 31,    April 1,               March 31,    April 1,
                        2013        2012      % Change      2013        2012      % Change
                                            (dollars in thousands)
Net revenues:
E-Commerce           $  144,888   $ 132,190        9.6 % $  398,978   $ 376,110        6.1 %
Other                    47,736      47,469        0.6 %    167,530     160,592        4.3 %
Total net revenues   $  192,624   $ 179,659        7.2 % $  566,508   $ 536,702        5.6 %

Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits.

During the three months ended March 31, 2013, revenues increased by 7.2% in comparison to the prior year period as a result of: (i) growth within the Consumer Floral segment, driven by a strong Valentine's Day holiday by the 1-800-Flowers.com brand, as well as the shift of the Easter holiday into the third quarter, compared with the prior year when Easter fell in the fourth quarter, and (ii) growth within the Gourmet Food & Gift Baskets category driven primarily by the shift of the Easter holiday, as well as the launch of the Fannie May Berries line of chocolate covered strawberries. This growth was partially offset by lower revenues with the BloomNet Wire Service segment, which is discussed in more detail below. During the nine months ended March 31, 2013, revenues increased by 5.6% in comparison to the prior year period as a result of growth across all segments. As noted above, the Consumer Floral segment growth is largely attributable to a strong Valentine's Day holiday, aided by the shift of the Easter holiday, while the Gourmet Food and Gift Baskets segment, was primarily attributable to a rebound in the wholesale gift basket business during the second quarter holiday season, after several years of declines, as well as strong e-commerce growth from the Cheryl's, Fannie May Chocolates and The Popcorn Factory brands, and the shift of the Easter holiday, offset in part


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by lower revenue from the Fannie May retail and wholesale channel, which is partially the result of the 17 store franchise conversion completed in the second quarter of the prior year. Excluding the impact of the shift in the timing of the Easter holiday, revenues increased by 3.6% and 4.3% during the three and nine months ended March 31, 2013, respectively.

E-Commerce revenues increased 9.6% and 6.1% during the three and nine months ended March 31, 2013, respectively, in comparison to the prior year periods, due to increased order volume, as the Company fulfilled approximately 2,318,000 and 6,561,000 orders through its e-commerce sales channels (online and telephonic sales) during the three and nine months ended March 31, 2013, representing an increase of 13.7% and 8.1% over the same periods of the prior year. These increases were primarily attributable to: (i) continued improved performance of the 1-800-Flowers brand, especially during the Valentine's Day holiday,
(ii) increased order volume within the Gourmet Food & Gift Baskets segment during the Christmas Holiday season, as well as from the launch of the Fannie May Berries line of chocolate dipped strawberries, and (iii) the aforementioned shift of the Easter holiday. Average order value decreased slightly to $62.50 and $60.81 during the three and nine months ended March 31, 2013, representing reductions of 3.6% and 1.9% over the respective prior year periods as a result of product and segment mix due to the shift of the Easter holiday, as well as an increase in lower price point gifts within the Gourmet Food & Gift Baskets category as a result of the Company's strategy to increase customer purchase frequency through "social gifting" programs.

Other revenues, comprised of the Company's BloomNet Wire Service segment, as well as the wholesale and retail channels of its Consumer Floral and Gourmet Food and Gift Baskets segments, increased 0.6% during the three months ended March 31, 2013 in comparison to the prior year period, as a result of the growth within the Gourmet Food and Gift Baskets' wholesale business, partially offset by a decline in BloomNet wholesale product revenues. Other revenues increased 4.3% during the nine months ended March 31, 2013, in comparison to the prior year period, primarily as a result of growth within the Gourmet Food and Gift Baskets' wholesale gift basket business during the second quarter, as well as membership services growth within the BloomNet WireService segment, partially offset by a decrease in Fannie May retail store sales, resulting from the aforementioned conversion of 17 stores into franchise operations in the second quarter of the prior year

The Consumer Floral segment includes the operations of the 1-800-Flowers brand which derives revenue from the sale of consumer floral products through its e-commerce sales channels (telephonic and online sales), royalties from its franchise operations, as well as the operations of Fine Stationery, an e-commerce retailer of personalized stationery, invitations and announcements. Net revenues during the three and nine months ended March 31, 2013 increased by 7.1% and 4.2% over the respective prior year periods, as a result of the continued improvement within the flagship 1-800-Flowers brand, especially during the Valentine's Day holiday, due in part to the favorable Thursday day placement, compared to the prior year when Valentine's Day fell on Tuesday, as well as the shift of the Easter holiday. Excluding the impact of the shift in the timing of the Easter holiday, Consumer Floral revenues increased by 5.2% and 3.4% during the three and nine months ended March 31, 2013, respectively.

The BloomNet Wire Service segment includes revenues from membership fees as well as other product and service offerings to florists. Net revenues during the three months ended March 31, 2013 decreased by 5.2% over the prior year period reflecting changes in the mix of products, services and order volumes, as well as lower revenue of wholesale products to florists. Net revenues during the nine months ended March 31, 2013 increased by 0.8% over the prior year period, due to increases in technology and other service offerings, offset in part by lower order volumes and wholesale product sales to florists.

The Gourmet Food & Gift Baskets segment includes the operations of 1-800-Baskets, Cheryl's (which includes Mrs. Beasley's), Fannie May Confections, The Popcorn Factory, Winetasting.com, Stockyards.com and DesignPac. Revenue is derived from the sale of gift baskets, cookies, baked gifts, premium chocolates and confections, gourmet popcorn, wine gifts and prime steaks and chops through its e-commerce sales channels (telephonic and online sales) and company-owned and operated retail stores under the Cheryl's and Fannie May brand names, royalties from Fannie May franchise operations, as well as wholesale operations. Net revenue during the three and nine months ended March 31, 2013 increased by 14.5% and 8.7% over the respective prior year periods, primarily as a result of aforementioned contributions from the shift in the Easter holiday, the launch of Fannie May Berries, and strong e-commerce growth from Cheryl's, Fannie May and The Popcorn Factory. Further contributing to the growth for the nine month period ending March 31, 2013 was the increased wholesale gift basket business during the second quarter holiday season,


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offset in part by lower revenue from Fannie May's wholesale and retail channel, which is partially the result of store count reductions due to the 17 store franchise conversion completed in second quarter of the prior year. Excluding the impact of the shift in the timing of the Easter holiday, Gourmet Food & Gift Basket revenues increased by 4.4% and 6.6% during the three and nine months ended March 31, 2013, respectively.

The Company expects to achieve annual revenue growth in Fiscal 2013 across all of its business segments, with consolidated revenue growth in the mid-single-digit range.

Gross Profit



                         Three Months Ended                   Nine Months Ended
                  March 31,    April 1,               March 31,    April 1,
                    2013         2012      % Change      2013        2012      % Change
                                   (dollars in thousands)

Gross profit     $    80,403   $  73,039       10.1 % $  234,525   $ 219,927        6.6 %
Gross margin %          41.7 %      40.7 %                  41.4 %      41.0 %

Gross profit consists of net revenues less cost of revenues, which is comprised primarily of florist fulfillment costs (primarily 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 include labor and facility costs related to direct-to-consumer and wholesale production operations.

Gross profit during the three and nine months ended March 31, 2013 increased by 10.1% and 6.6% in comparison to the respective prior year periods, as a result of the aforementioned revenue growth within the Consumer Floral and Gourmet Food & Gift Baskets segments, combined with higher gross margin percentages within the Consumer Floral and BloomNet WireService segments. As a result, overall gross margin percentage increased by 100 basis points, to 41.7%, during the three months ended March 31, 2013, and 40 basis points, to 41.4%, during the nine months ended March 31, 2013, in comparison to the respective periods of the prior year.

Consumer Floral segment gross profit increased by 10.0% and 6.1%, respectively, during the three and nine months ended March 31, 2013, in comparison to the prior year periods, due to the revenue growth described above, especially during the Valentine's Day holiday, combined with higher gross margin percentages achieved through improved product sourcing and logistics initiatives.

BloomNet Wire Service segment gross profit increased by 6.0% and 9.6%, respectively, during the three and nine months ended March 31, 2013 in comparison to the prior year periods, primarily due to increased gross margin percentages attributable to the mix of products, consisting of a greater proportion of higher margin offerings, including increased technology and other service revenue, combined with reduced sales of lower margin wholesale products to florists.

The Gourmet Food & Gift Baskets segment gross profit increased by 12.7% and 6.1%, respectively, during the three and nine months ended March 31, 2013 in comparison to the prior year periods, due to the aforementioned revenue growth, including contributions from the shift in the Easter holiday into the Company's third quarter, compared with the same periods of the prior year. The impact of the revenue growth was partially offset by operational issues associated with the relocation of a warehouse and distribution facility, which impacted the Company's second quarter, and to a lesser extent, third quarter margins, as well as the mix of sales, which, during the nine months ended March 31, 2013, were influenced by the significant increase in the wholesale gift baskets business, which is comprised of lower margin products.

. . .

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