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FLWS > SEC Filings for FLWS > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for 1 800 FLOWERS COM INC

Form 10-Q for 1 800 FLOWERS COM INC


8-Nov-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 35 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 has been honored in Internet Retailer's "Hot 500 Guide" for 2013. 1-800-FLOWERS.COM was recognized for our mobile site with a Gold Award in the Ecommerce/Shopping category of the 2012 Horizon Interactive Awards. 1-800-FLOWERS.COM was also rated number one vs. competitors for customer service 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.

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 (www.fanniemay.com and www.harrylondon.com); gift baskets and towers from 1-800-Baskets.com® (www.1800baskets.com); incredible, carved fresh fruit arrangements from FruitBouquets.comsm (www.fruitbouquets.com); top quality steaks and chops from Stock Yards® (www.stockyards.com); as well as premium branded customizable invitations and personal stationery from FineStationery.com® (www.finestationery.com). The Company's Celebrations® brand (www.celebrations.com) is a source for creative party ideas, must-read articles, online invitations and e-cards, all created to help people celebrate holidays and the everyday. 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.

During the fourth quarter of fiscal 2013, the Company made the strategic decision to divest the e-commerce and procurement businesses of The Winetasting Network in order to focus on growth opportunities in its Gourmet Foods and Gift Baskets business segment. The Company anticipates completing the sale of the Winetasting Network business in fiscal 2014, at an anticipated loss of $2.3 million ($1.5 million, net of tax), which was provided for in the Company's fourth quarter of fiscal 2013. Consequently, the Company has classified the results of its wine e-commerce and procurement business of Winetasting Network as a discontinued operation for all periods presented.

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


Table of Contents

Segment Information

The following table presents the contribution of net revenues, gross profit and contribution margin from each of the Company's business segments, as well as consolidated EBITDA and Adjusted EBITDA. As noted previously, the Company's e-commerce and procurement businesses of The Winetasting Network, which had previously been included within its Gourmet Foods & Gift Baskets category, have been classified as discontinued operations and therefore excluded from segment information below.

                                                         Three Months Ended
                                           September 29,      September 30,
                                               2013               2012           % Change

Net revenues from continuing
operations:
1-800-Flowers.com Consumer Floral         $        71,549    $        72,777           -1.7 %
BloomNet Wire Service                              20,346             19,767            2.9 %
Gourmet Food & Gift Baskets                        31,239             27,130           15.1 %
Corporate (*)                                         195                194            0.5 %
Intercompany eliminations                            (281 )             (276 )         -1.8 %
Total net revenues from continuing
operations                                $       123,048    $       119,592            2.9 %




                                                         Three Months Ended
                                           September 29,      September 30,
                                               2013               2012           % Change

Gross profit from continuing
operations:
1-800-Flowers.com Consumer Floral         $        27,958    $        28,292           -1.2 %
                                                     39.1 %             38.9 %

BloomNet Wire Service                              10,783              9,800           10.0 %
                                                     53.0 %             49.6 %

Gourmet Food & Gift Baskets                        12,239             10,992           11.3 %
                                                     39.2 %             40.5 %

Corporate (*)                                         317                340           -6.8 %
                                                    162.6 %            175.3 %

Total gross profit from continuing
operations                                $        51,297    $        49,424            3.8 %
                                                     41.7 %             41.3 %




                                                         Three Months Ended
                                           September 29,      September 30,
                                               2013               2012           % Change

EBITDA from continuing operations,
excluding stock-based compensation:
Segment Contribution Margin from
continuing operations (**)
1-800-Flowers.com Consumer Floral         $         6,429    $         6,886           -6.6 %
BloomNet Wire Service                               6,439              5,796           11.1 %
Gourmet Food & Gift Baskets                        (2,046 )           (2,279 )         10.2 %
Segment Contribution Margin Subtotal               10,822             10,403            4.0 %
Corporate (*)                                     (13,214 )          (12,158 )         -8.7 %
EBITDA from continuing operations         $        (2,392 )  $        (1,755 )         36.3 %
Add: Stock-based compensation                       1,066                989            7.8 %
EBITDA from continuing operations,
excluding stock-based compensation        $        (1,326 )  $          (766 )         73.1 %


Table of Contents

                                                                 Three Months Ended
                                                          September 29,      September 30,
                                                              2013               2012

Reconciliation of loss from continuing operations to
EBITDA from continuing operations, excluding
stock-based compensation (**):
Loss from continuing operations                          $        (4,557 )  $        (4,443 )
Add:
Interest expense, net                                                292                286
Depreciation and amortization                                      4,689              4,447
Less:
Income tax benefit                                                 2,816              2,045
EBITDA from continuing operations                                 (2,392 )           (1,755 )
Add: Stock-based compensation                                      1,066                989
EBITDA from continuing operation, excluding stock
based compensation                                       $        (1,326 )  $          (766 )


(*) 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 segments based upon usage, are included within corporate expenses 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.

Results of Operations



Net Revenues



                                  Three Months Ended
                      September 29,     September 30,
                          2013              2012         % Change
                                (dollars in thousands)
Net revenues:
E-Commerce           $        80,880   $        81,112       (0.3 )%
Other                         42,168            38,480        9.6 %
Total net revenues   $       123,048   $       119,592        2.9 %

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 September 29, 2013, revenues increased by 2.9% in comparison to the same period of the prior year as a result of: (i) growth within the Gourmet Food & Gift Baskets segment driven primarily by increased shipments of gift baskets for mass market customers and continued solid e-commerce growth in the Company's Fannie May, Cheryl's and The Popcorn Factory brands, (ii) increased service offerings and pricing initiatives within the BloomNet Wire Service segment, (iii) partially offset by a slight decline in the 1-800-Flowers Consumer Floral segment.


Table of Contents

E-Commerce revenues decreased 0.3% during the three months ended September 29, 2013, in comparison to the same period of the prior year, as a result of a decline of 1-800-Flowers brand revenue, which is the primary driver of the Consumer Floral segment, offset by the aforementioned increases of Fannie May, Cheryl's and The Popcorn Factory. The Company fulfilled approximately 1,265,000 orders through its e-commerce sales channels (online and telephonic sales) during the three months ended September 29, 2013, representing an increase of 2.7% over the same period of the prior year. However, the average order value declined 3.3% to $63.70 during the three months ended September 29, 2013, as a result of the change in brand volume mix.

Other revenues are 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. Other revenues increased 9.6% during the three months ended September 29, 2013 in comparison to the same period of the prior year, primarily as a result of the aforementioned growth within the Gourmet Food and Gift Baskets' mass market gift basket business, coupled with increased revenue within the BloomNet Wire Service segment.

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 months ended September 29, 2013 decreased 1.7% over the same period of the prior year as a result of both reduced order volume and a lower average order value.

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 September 29, 2013 increased by 2.9% over the same period of the prior year as a result of an increase in service offerings and pricing initiatives.

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, Stockyards.com and DesignPac. Revenue is derived from the sale of gift baskets, cookies, baked gifts, premium chocolates and confections, gourmet popcorn, 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 months ended September 29, 2013 increased by 15.1% over the same period of the prior year, primarily as a result of increased sales of gift baskets for mass market customers and continued e-commerce growth in the Company's Fannie May, Cheryl's and The Popcorn Factory brands.

The Company expects to achieve annual revenue growth in Fiscal 2014 across all of its business segments, with consolidated revenue growth in the mid-single-digit range.

Gross Profit



                              Three Months Ended
                  September 29,     September 30,
                      2013              2012         % Change
                      (dollars in thousands)

Gross profit     $        51,297   $        49,425        3.8 %
Gross margin %              41.7 %            41.3 %

Gross profit consists of net revenues less cost of revenues, which is comprised primarily of florist fulfillment costs (mainly 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.


Table of Contents

Gross profit during the three months ended September 29, 2013 increased by 3.8%, in comparison to the same period of the prior year, due to a combination of revenue growth within the Gourmet Food & Gift Baskets and BloomNet Wire Service segments, and an improvement in gross margin percentage, primarily attributable to margin expansion within the BloomNet Wire Service segment, partially offset by a reduction in gross margin percentage within the Gourmet Food & Gift Baskets segment due to a shift in product mix. As a result, overall gross margin percentage increased 40 basis points, to 41.7%, during the three months ended September 29, 2013 in comparison to the same period of the prior year.

The Consumer Floral segment gross profit decreased by 1.2% during the three months ended September 29, 2013, in comparison to the same period of the prior year, due to the aforementioned decline in revenue, partially offset by improved gross margins percentages, achieved through improved product sourcing and logistics initiatives.

The BloomNet Wire Service segment gross profit increased by 10.0%, during the three months ended September 29, 2013, in comparison to the same period of the prior year, primarily due to increased service offerings and pricing initiatives.

The Gourmet Food & Gift Baskets segment gross profit increased by 11.3% during the three months ended September 29, 2013, in comparison to the same period of the prior year, due to the aforementioned revenue growth across all brands, partially offset by a gross margin percentage decrease of 130 basis points. The decrease in gross margin percentage was due to product mix, as a greater weighting of revenues came from sales of gift baskets to mass market customers.

The Company expects its gross margin percentage will improve in comparison to fiscal 2013 as a result of continued improvements in product sourcing, supply chain and manufacturing efficiencies.

Marketing and Sales Expense



                                          Three Months Ended
                              September 29,     September 30,
                                  2013              2012         % Change
                                        (dollars in thousands)

Marketing and sales          $        34,479   $        32,723        5.4 %
Percentage of net revenues              28.0 %            27.4 %

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 increased by 5.4% during the three months ended September 29, 2013 in comparison to the same period of the prior year, primarily as a result of an increase in advertising costs, consistent with the Company's efforts to grow cost effectively during this recessionary period, and increased labor and infrastructure required to support anticipated growth, as well as for improvements to Fannie May's production and distribution operations. As a result, and due to the seasonal nature of the Company's business, marketing and sales expense, as a percentage of revenues, increased 60 basis points, from 27.4% at September 30, 2012 to 28.0% at September 29, 2013.

During the three months ended September 29, 2013 the Company added approximately 375,000 new e-commerce customers. Of the 1,002,000 total customers who placed e-commerce orders during the three months ended September 29, 2013, approximately 63% represented repeat customers, reflecting the Company's successful efforts to engage with its customers and deepen its relationships as their trusted Florist and Gift shop for all of their celebratory occasions.


Table of Contents

Technology and Development Expense



                                          Three Months Ended
                              September 29,     September 30,
                                  2013              2012         % Change
                                  (dollars in thousands)

Technology and development   $         5,398   $         5,396        0.0 %
Percentage of net revenues               4.4 %             4.5 %

Technology and development expense consists primarily of payroll and operating expenses of the Company's information technology group, costs associated with its web sites, including hosting, design, content development and maintenance and support costs related to the Company's order entry, customer service, fulfillment and database systems. During the three months ended September 29, 2013, technology and development expense was consistent with the same period of the prior year, as a result of the Company's efforts to leverage its existing IT infrastructure.

During the three months ended September 29, 2013, the Company expended $8.4 million on technology and development, of which $3.0 million has been capitalized.

General and Administrative Expense



                                          Three Months Ended
                              September 29,     September 30,
                                  2013              2012         % Change
                                  (dollars in thousands)

General and administrative   $        13,812   $        13,061        5.7 %
Percentage of net revenues              11.2 %            10.9 %

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 expense increased by 5.7% during the three months ended September 29, 2013, compared to the same period of the prior year, as a result of annual wage increases, hiring additional personnel to support the Company's growth objectives, and increases in health insurance costs.

Depreciation and Amortization Expense



                                             Three Months Ended
                                 September 29,     September 30,
                                     2013              2012         % Change
                                     (dollars in thousands)

Depreciation and amortization   $         4,689   $         4,447        5.4 %
Percentage of net revenues                  3.8 %             3.7 %

Depreciation and amortization expense increased by 5.4%, during the three months ended September 29, 2013 in comparison to the same period of the prior year, as a result of capital expenditures, primarily related to website design/technology upgrades.

Interest Expense, net



                                     Three Months Ended
                         September 29,     September 30,
                             2013              2012         % Change
                             (dollars in thousands)

Interest expense, net   $           292   $           286        2.1 %

Interest expense, net consists primarily of interest expense and amortization of deferred financing costs attributable to the Company's credit facility, net of income earned on the Company's available cash balances and earnings/losses from the Company's non-controlling interest in a foreign subsidiary and investments in the NQDC Plan. Net interest expense during the three months ended September 29, 2013, was consistent with the same period of the prior year, as lower interest expense and amortization of deferred financing costs were offset by lower earnings on the NQDC Plan investments and lower earnings on the non-controlling interest investment.


Table of Contents

Income Taxes

The Company recorded income tax benefit from continuing operations of $2.8 million during the three months ended September 29, 2013, compared to an income tax benefit of $2.0 million in the prior year period. The Company's effective tax rate from continuing operations for the three months ended September 29, 2013 was 38.2%, compared to 31.8% in the prior year period. The effective tax rate for fiscal 2014 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes, and other permanent differences, offset by tax credits and incentives. The effective tax rate for fiscal 2013 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes, and other permanent differences, including the impact of expiring non-qualified stock options, offset by tax credits and incentives.

Discontinued Operations

During the fourth quarter of fiscal 2013, the Company made the strategic decision to divest the e-commerce and procurement businesses of The Winetasting Network in order to focus on growth opportunities in its Gourmet Foods and Gift Baskets business segment. The Company anticipates completing the sale of the Winetasting Network business in fiscal 2014, at an anticipated loss of $2.3 million ($1.5 million, net of tax), which was provided for in the Company's fourth quarter of fiscal 2013. Consequently, the Company has classified the results of its e-commerce and procurement business of Winetasting Network as a discontinued operation for all periods presented.

Results for discontinued operations are as follows:

                                                        Three Months Ended
                                                 September 29,      September 30,
                                                     2013               2012

Net revenues from discontinued operations       $           906    $         1,276
. . .
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