UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2017 27, 2020
or
___☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File No. 0-26841
1-800-FLOWERS.COM, Inc.
(Exact name of registrant as specified in its charter)
| 11-3117311 |
(State of incorporation) | (I.R.S. Employer Identification No.) |
One Old Country Road, Carle Place, New York, 11514 | (516) 237-6000 |
(Address of principal executive offices) | ( |
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered |
Class A common stock | FLWS | The Nasdaq Stock Market |
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. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
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 | ☑ Accelerated filer | |||
☐ Non-accelerated filer |
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| ☐ Emerging growth company |
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 ☐ No ☑
The number of shares outstanding of each of the Registrant’sRegistrant’s classes of common stock as of February 2, 2018:January 29, 2021:
Class A common stock: | 36,693,449 |
Class B common stock: | 28,153,614 |
1-800-FLOWERS.COM, Inc.
FORM 10-Q
For the quarterly period ended December 27, 2020
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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)
December 31, 2017 | July 2, 2017 | December 27, 2020 | June 28, 2020 | |||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
Assets | ||||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 232,589 | $ | 149,732 | $ | 370,586 | $ | 240,506 | ||||||||
Trade receivables, net | 44,424 | 14,073 | 72,590 | 15,178 | ||||||||||||
Inventories | 60,567 | 75,862 | 89,389 | 97,760 | ||||||||||||
Prepaid and other | 22,007 | 17,735 | 30,879 | 25,186 | ||||||||||||
Total current assets | 359,587 | 257,402 | 563,444 | 378,630 | ||||||||||||
Property, plant and equipment, net | 154,606 | 161,381 | 197,598 | 169,075 | ||||||||||||
Operating lease right-of-use assets | 88,096 | 66,760 | ||||||||||||||
Goodwill | 62,590 | 62,590 | 208,048 | 74,711 | ||||||||||||
Other intangibles, net | 60,460 | 61,090 | 140,672 | 66,273 | ||||||||||||
Other assets | 11,520 | 10,007 | 24,402 | 18,986 | ||||||||||||
Total assets | $ | 648,763 | $ | 552,470 | $ | 1,222,260 | $ | 774,435 | ||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 55,252 | $ | 27,781 | $ | 104,965 | $ | 25,306 | ||||||||
Accrued expenses | 123,504 | 90,206 | 285,822 | 141,741 | ||||||||||||
Current maturities of long-term debt | 8,625 | 7,188 | 15,000 | 5,000 | ||||||||||||
Current portion of long-term operating lease liabilities | 10,953 | 8,285 | ||||||||||||||
Total current liabilities | 187,381 | 125,175 | 416,740 | 180,332 | ||||||||||||
Long-term debt | 97,545 | 101,377 | 170,912 | 87,559 | ||||||||||||
Long-term operating lease liabilities | 81,308 | 61,964 | ||||||||||||||
Deferred tax liabilities | 21,530 | 33,868 | 27,244 | 28,632 | ||||||||||||
Other liabilities | 11,565 | 9,811 | 28,448 | 16,174 | ||||||||||||
Total liabilities | 318,021 | 270,231 | 724,652 | 374,661 | ||||||||||||
Commitments and contingencies (Note 13) | ||||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued | - | - | ||||||||||||||
Class A common stock, $0.01 par value, 200,000,000 shares authorized, 51,879,967 and 51,227,779 shares issued at December 31, 2017 and July 2, 2017, respectively | 519 | 513 | ||||||||||||||
Class B common stock, $0.01 par value, 200,000,000 shares authorized, 33,847,063 and 33,901,603 shares issued at December 31, 2017 and July 2, 2017, respectively | 338 | 339 | ||||||||||||||
Stockholders’ equity: | ||||||||||||||||
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued | 0 | 0 | ||||||||||||||
Class A common stock, $0.01 par value, 200,000,000 shares authorized, 55,166,476 and 53,704,477 shares issued at December 27, 2020 and June 28, 2020, respectively | 551 | 537 | ||||||||||||||
Class B common stock, $0.01 par value, 200,000,000 shares authorized, 33,433,614 and 33,822,823 shares issued at December 27, 2020 and June 28, 2020, respectively | 334 | 338 | ||||||||||||||
Additional paid-in-capital | 339,805 | 337,726 | 364,411 | 358,031 | ||||||||||||
Retained earnings | 90,115 | 32,638 | 271,438 | 167,523 | ||||||||||||
Accumulated other comprehensive loss | (160 | ) | (187 | ) | (244 | ) | (243 | ) | ||||||||
Treasury stock, at cost, 15,877,054 and 14,709,731 Class A shares at December 31, 2017 and July 2, 2017, respectively, and 5,280,000 Class B shares at December 31, 2017 and July 2, 2017 | (99,875 | ) | (88,790 | ) | ||||||||||||
Total stockholders’ equity | 330,742 | 282,239 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 648,763 | $ | 552,470 | ||||||||||||
Treasury stock, at cost, 18,509,689 and 17,963,551 Class A shares at December 27, 2020 and June 28, 2020, respectively, and 5,280,000 Class B shares at December 27, 2020 and June 28, 2020, respectively | (138,882 |
) | (126,412 |
) | ||||||||||||
Total stockholders’ equity | 497,608 | 399,774 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 1,222,260 | $ | 774,435 |
See accompanying Notes to Condensed Consolidated Financial StatementsStatements..
1-800-FLOWERS.COM, Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Income
(in thousands, except for per share data)
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
Three Months Ended | Six Months Ended | December 27, 2020 | December 29, 2019 | December 27, 2020 | December 29, 2019 | |||||||||||||||||||||||||||
December 31, 2017 | January 1, 2017 | December 31, 2017 | January 1, 2017 | |||||||||||||||||||||||||||||
Net revenues | $ | 526,093 | $ | 554,553 | $ | 683,442 | $ | 720,382 | $ | 877,256 | $ | 605,642 | $ | 1,161,028 | $ | 792,905 | ||||||||||||||||
Cost of revenues | 290,834 | 297,559 | 380,905 | 392,001 | 479,010 | 336,470 | 647,302 | 447,587 | ||||||||||||||||||||||||
Gross profit | 235,259 | 256,994 | 302,537 | 328,381 | 398,246 | 269,172 | 513,726 | 345,318 | ||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||
Marketing and sales | 113,771 | 119,876 | 163,493 | 174,954 | 194,696 | 127,404 | 274,981 | 184,243 | ||||||||||||||||||||||||
Technology and development | 9,175 | 9,849 | 18,845 | 19,337 | 14,053 | 11,733 | 25,656 | 22,536 | ||||||||||||||||||||||||
General and administrative | 19,170 | 21,551 | 38,575 | 43,484 | 30,835 | 22,634 | 59,048 | 44,156 | ||||||||||||||||||||||||
Depreciation and amortization | 8,677 | 9,167 | 16,761 | 17,164 | 11,060 | 7,830 | 19,900 | 15,465 | ||||||||||||||||||||||||
Total operating expenses | 150,793 | 160,443 | 237,674 | 254,939 | 250,644 | 169,601 | 379,585 | 266,400 | ||||||||||||||||||||||||
Operating income | 84,466 | 96,551 | 64,863 | 73,442 | 147,602 | 99,571 | 134,141 | 78,918 | ||||||||||||||||||||||||
Interest expense, net | 1,226 | 2,154 | 2,257 | 3,605 | 1,927 | 985 | 2,967 | 1,580 | ||||||||||||||||||||||||
Other (income) expense, net | (86 | ) | 1 | (346 | ) | (149 | ) | (2,257 | ) | (975 | ) | (3,256 | ) | (891 | ) | |||||||||||||||||
Income before income taxes | 83,326 | 94,396 | 62,952 | 69,986 | 147,932 | 99,561 | 134,430 | 78,229 | ||||||||||||||||||||||||
Income tax expense | 12,627 | 31,467 | 5,475 | 22,828 | 34,255 | 25,409 | 30,515 | 19,348 | ||||||||||||||||||||||||
Net income | $ | 70,699 | $ | 62,929 | $ | 57,477 | $ | 47,158 | 113,677 | 74,152 | 103,915 | 58,881 | ||||||||||||||||||||
Other comprehensive income (loss) (currency translation & other miscellaneous items) | (1 | ) | 16 | (1 | ) | 16 | ||||||||||||||||||||||||||
Comprehensive income | $ | 113,676 | $ | 74,168 | $ | 103,914 | $ | 58,897 | ||||||||||||||||||||||||
Basic net income per common share | $ | 1.09 | $ | 0.97 | $ | 0.89 | $ | 0.72 | $ | 1.76 | $ | 1.15 | $ | 1.61 | $ | 0.91 | ||||||||||||||||
Diluted net income per common share | $ | 1.06 | $ | 0.93 | $ | 0.86 | $ | 0.70 | ||||||||||||||||||||||||
Diluted net income per common share | $ | 1.71 | $ | 1.12 | $ | 1.56 | $ | 0.89 | ||||||||||||||||||||||||
Weighted average shares used in the calculation of net income per common share: | ||||||||||||||||||||||||||||||||
Basic | 64,601 | 65,172 | 64,778 | 65,112 | 64,728 | 64,687 | 64,524 | 64,595 | ||||||||||||||||||||||||
Diluted | 66,782 | 67,754 | 67,037 | 67,778 | 66,543 | 66,401 | 66,593 | 66,486 |
See accompanying Notes to Condensed Consolidated Financial StatementsStatements..
1-800-FLOWERS.COM, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Stockholders' EquityIncome
(in thousands)thousands, except share data)
(unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
December 31, 2017 | January 1, 2017 | December 31, 2017 | January 1, 2017 | |||||||||||||
Net income | $ | 70,699 | $ | 62,929 | $ | 57,477 | $ | 47,158 | ||||||||
Other comprehensive income/(loss) (currency translation & other miscellaneous items) | 26 | (14 | ) | 27 | 81 | |||||||||||
Comprehensive income | $ | 70,725 | $ | 62,915 | $ | 57,504 | $ | 47,239 |
Three Months Ended December 27, 2020 and December 29, 2019 | ||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional | Retained | Accumulated | Total | ||||||||||||||||||||||||||||||||||||
Class A | Class B | Paid-in | Earnings | Other | Treasury Stock | Stockholders’ | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Comprehensive Loss | Shares | Amount | Equity | ||||||||||||||||||||||||||||||||
Balance at September 27, 2020 | 54,053,730 | $ | 541 | 33,638,614 | $ | 336 | $ | 360,643 | $ | 157,761 | $ | (243 | ) | 23,279,906 | $ | (127,500 | ) | $ | 391,538 | |||||||||||||||||||||
Net income | - | 0 | - | 0 | 0 | 113,677 | 0 | - | 0 | 113,677 | ||||||||||||||||||||||||||||||
Translation adjustment | - | 0 | - | 0 | 0 | 0 | (1 | ) | - | 0 | (1 | ) | ||||||||||||||||||||||||||||
Stock-based compensation | 554,924 | 5 | 0 | 0 | 2,960 | 0 | 0 | 0 | 0 | 2,965 | ||||||||||||||||||||||||||||||
Exercise of stock options | 352,822 | 3 | 0 | 0 | 808 | 0 | 0 | 0 | 0 | 811 | ||||||||||||||||||||||||||||||
Conversion – Class B into Class A | 205,000 | 2 | (205,000 | ) | (2 | ) | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||
Acquisition of Class A treasury stock | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 509,783 | (11,382 | ) | (11,382 | ) | ||||||||||||||||||||||||||||
Balance at December 27, 2020 | 55,166,476 | $ | 551 | 33,433,614 | $ | 334 | $ | 364,411 | $ | 271,438 | $ | (244 | ) | 23,789,689 | $ | (138,882 | ) | $ | 497,608 | |||||||||||||||||||||
Balance at September 29, 2019 | 53,216,294 | $ | 532 | 33,822,823 | $ | 338 | $ | 351,304 | $ | 93,254 | $ | (269 | ) | 22,491,206 | $ | (115,763 | ) | $ | 329,396 | |||||||||||||||||||||
Net income | - | 0 | - | 0 | 0 | 74,152 | 0 | - | 0 | 74,152 | ||||||||||||||||||||||||||||||
Translation adjustment | - | 0 | - | 0 | 0 | 0 | 16 | - | 0 | 16 | ||||||||||||||||||||||||||||||
Stock-based compensation | 437,625 | 4 | - | 0 | 2,276 | 0 | 0 | 0 | 0 | 2,280 | ||||||||||||||||||||||||||||||
Exercise of stock options | 25,000 | 0 | 0 | 0 | 63 | 0 | 0 | 0 | 0 | 63 | ||||||||||||||||||||||||||||||
Acquisition of Class A treasury stock | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 368,750 | (4,999 | ) | (4,999 | ) | ||||||||||||||||||||||||||||
Balance at December 29, 2019 | 53,678,919 | $ | 536 | 33,822,823 | $ | 338 | $ | 353,643 | $ | 167,406 | $ | (253 | ) | 22,859,956 | $ | (120,762 | ) | $ | 400,908 |
Six Months Ended December 27, 2020 and December 29, 2019 | ||||||||||||||||||||||||||||||||||||||||
Common Stock | Additional | Retained | Accumulated | Total | ||||||||||||||||||||||||||||||||||||
Class A | Class B | Paid-in | Earnings | Other | Treasury Stock | Stockholders’ | ||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Comprehensive Loss | Shares | Amount | Equity | ||||||||||||||||||||||||||||||||
Balance at June 28, 2020 | 53,704,477 | $ | 537 | 33,822,823 | $ | 338 | $ | 358,031 | $ | 167,523 | $ | (243 | ) | 23,243,551 | $ | (126,412 | ) | $ | 399,774 | |||||||||||||||||||||
Net income | 0 | 0 | 0 | 103,915 | 0 | 0 | 103,915 | |||||||||||||||||||||||||||||||||
Translation adjustment | - | 0 | - | 0 | 0 | 0 | (1 | ) | - | 0 | (1 | ) | ||||||||||||||||||||||||||||
Stock-based compensation | 643,590 | 6 | 0 | 0 | 5,352 | 0 | 0 | 0 | 0 | 5,358 | ||||||||||||||||||||||||||||||
Exercise of stock options | 429,200 | 4 | 0 | 0 | 1,028 | 0 | 0 | 0 | 0 | 1,032 | ||||||||||||||||||||||||||||||
Conversion – Class B into Class A | 389,209 | 4 | (389,209 | ) | (4 | ) | 0 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||||||||||
Acquisition of Class A treasury stock | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 546,138 | (12,470 | ) | (12,470 | ) | ||||||||||||||||||||||||||||
Balance at December 27, 2020 | 55,166,476 | $ | 551 | 33,433,614 | $ | 334 | $ | 364,411 | $ | 271,438 | $ | (244 | ) | 23,789,689 | $ | (138,882 | ) | $ | 497,608 | |||||||||||||||||||||
Balance at June 30, 2019 | 53,084,127 | $ | 530 | 33,822,823 | $ | 338 | $ | 349,319 | $ | 108,525 | $ | (269 | ) | 22,489,093 | $ | (115,732 | ) | $ | 342,711 | |||||||||||||||||||||
Net income | - | 0 | - | 0 | 0 | 58,881 | 0 | - | 0 | 58,881 | ||||||||||||||||||||||||||||||
Translation adjustment | - | 0 | - | 0 | 0 | 0 | 16 | - | 0 | 16 | ||||||||||||||||||||||||||||||
Stock-based compensation | 444,792 | 4 | 0 | 0 | 4,041 | 0 | 0 | 0 | 0 | 4,045 | ||||||||||||||||||||||||||||||
Exercise of stock options | 150,000 | 2 | 0 | 0 | 283 | 0 | 0 | �� | 0 | 0 | 285 | |||||||||||||||||||||||||||||
Acquisition of Class A treasury stock | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 370,863 | (5,030 | ) | (5,030 | ) | ||||||||||||||||||||||||||||
Balance at December 29, 2019 | 53,678,919 | $ | 536 | 33,822,823 | $ | 338 | $ | 353,643 | $ | 167,406 | $ | (253 | ) | 22,859,956 | $ | (120,762 | ) | $ | 400,908 |
See accompanying Notes to Condensed Consolidated Financial StatementsStatements..
1-800-FLOWERS.COM, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six months ended | Six months ended | |||||||||||||||
December 31, 2017 | January 1, 2017 | December 27, 2020 | December 29, 2019 | |||||||||||||
Operating activities: | ||||||||||||||||
Net income | $ | 57,477 | $ | 47,158 | $ | 103,915 | $ | 58,881 | ||||||||
Reconciliation of net income to net cash provided by operating activities: | ||||||||||||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Depreciation and amortization | 16,761 | 17,164 | 19,900 | 15,465 | ||||||||||||
Amortization of deferred financing costs | 480 | 1,050 | 545 | 325 | ||||||||||||
Deferred income taxes | (12,338 | ) | (1,380 | ) | (1,388 | ) | (1,003 | ) | ||||||||
Bad debt expense | 418 | 656 | 341 | 731 | ||||||||||||
Stock-based compensation | 2,069 | 3,498 | 5,358 | 4,045 | ||||||||||||
Other non-cash items | (103 | ) | (400 | ) | (321 | ) | (187 | ) | ||||||||
Changes in operating items: | ||||||||||||||||
Trade receivables | (30,769 | ) | (39,399 | ) | (56,372 | ) | (32,918 | ) | ||||||||
Inventories | 15,295 | 9,916 | 25,369 | 25,358 | ||||||||||||
Prepaid and other | (4,272 | ) | (3,215 | ) | (1,937 | ) | 1,021 | |||||||||
Accounts payable and accrued expenses | 69,269 | 75,304 | 212,340 | 90,166 | ||||||||||||
Other assets | (97 | ) | (35 | ) | ||||||||||||
Other liabilities | (24 | ) | (324 | ) | ||||||||||||
Other assets and liabilities | 8,897 | 272 | ||||||||||||||
Net cash provided by operating activities | 114,166 | 109,993 | 316,647 | 162,156 | ||||||||||||
Investing activities: | ||||||||||||||||
Working capital adjustment related to sale of business | (8,500 | ) | - | |||||||||||||
Acquisitions, net of cash acquired | (250,943 | ) | (20,500 | ) | ||||||||||||
Capital expenditures, net of non-cash expenditures | (8,864 | ) | (13,253 | ) | (15,708 | ) | (10,712 | ) | ||||||||
Purchase of equity investments | (1,285 | ) | (1,001 | ) | ||||||||||||
Net cash used in investing activities | (17,364 | ) | (13,253 | ) | (267,936 | ) | (32,213 | ) | ||||||||
Financing activities: | ||||||||||||||||
Acquisition of treasury stock | (11,085 | ) | (6,822 | ) | (12,470 | ) | (5,030 | ) | ||||||||
Proceeds from exercise of employee stock options | 15 | 267 | 1,032 | 285 | ||||||||||||
Proceeds from bank borrowings | 30,000 | 181,000 | 265,000 | 20,000 | ||||||||||||
Repayment of bank borrowings | (32,875 | ) | (183,563 | ) | ||||||||||||
Debt issuance costs | - | (1,456 | ) | |||||||||||||
Net cash used in financing activities | (13,945 | ) | (10,574 | ) | ||||||||||||
Repayment of notes payable and bank borrowings | (170,000 | ) | (22,500 | ) | ||||||||||||
Debt issuance cost | (2,193 | ) | (60 | ) | ||||||||||||
Net cash provided by (used in) financing activities | 81,369 | (7,305 | ) | |||||||||||||
Net change in cash and cash equivalents | 82,857 | 86,166 | 130,080 | 122,638 | ||||||||||||
Cash and cash equivalents: | ||||||||||||||||
Beginning of period | 149,732 | 27,826 | 240,506 | 172,923 | ||||||||||||
End of period | $ | 232,589 | $ | 113,992 | $ | 370,586 | $ | 295,561 |
See accompanying Notes to Condensed Consolidated Financial StatementsStatements..
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 subsidiariesSubsidiaries (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. TheyAccordingly, they do not include all of the information and notes required by generally accepted accounting principlesGAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals)adjustments) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended December 31, 201727, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending July 1, 2018.June 27, 2021. For further information, refer to the consolidatedThese financial statements and footnotes thereto includedshould be read in the Company’s annual reportconjunction with our Annual Report on Form 10-K for the fiscal year ended July 2, 2017.June 28, 2020, which provides a more complete understanding of our accounting policies, financial position, operating results and other matters.
The Company’sCompany’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 generatehistorically generated nearly 50% of the Company’s annual revenues, and all of its earnings. Additionally, dueHowever, with the onset of the pandemic of the novel strain of coronavirus (“COVID-19”), the Company experienced a significant increase in its revenues and earnings during its fourth quarter of fiscal 2020. These trends have continued through the firstfour weeks of its fiscal 2021third quarter. Our customers have increasingly turned to our brands and our expanded product offerings to help them connect and express themselves during the recent COVID-19 pandemic and our “everyday” gifting product line has seen increased volume. While the continuing impacts of COVID-19 are difficult to predict, the Company expects that its fiscal second quarter will continue to be its largest in terms of revenues and earnings, although increases in the Company’s “everyday” business have and are expected to continue to lessen the seasonality of our business. Due to the number of major floral gifting occasions, including Mother's Day, Valentine’s Day, Easter and Administrative Professionals Week, revenues also rise during the Company’s fiscal third and fourth quarters in comparison to its fiscal first quarter. In fiscal 2017, Easter was on April 16th, which resulted in the shift of some revenue and EBITDA from the Company’s third quarter of fiscal 2016. In fiscal 2018, Easter falls on April 1st, which will result in the shift of all Easter-related revenue and EBITDA into the Company’s third quarter of fiscal 2018.
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.
Recent Accounting Pronouncements
COVID-19
In
On May 2014,March 27, 2020, the FASB issued ASU No.2014-09, “Revenue from Contracts with Customers.” This amended guidance will enhance the comparability of revenue recognition practicesCoronavirus Aid, Relief, and will be appliedEconomic Security (“CARES”) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to all contracts with customers. Expanded disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. As we continue to evaluateaddress the impact of this ASU, we have determined that the new standard will impact the following areas: the costs of producingCOVID-19, including tax relief and distributing the Company’s catalogs will be expensed upon mailing, instead of being capitalizedgovernment loans, grants and amortized in direct proportion to the actual sales; gift card breakage will be estimated based on the historical pattern of gift card redemption, rather than when redemption is considered remote; the Company will defer revenue at the time the Celebrations Reward loyalty points are earned using a relative fair value approach, rather than accruing a liability equal to the incremental cost of fulfilling its obligations. We have further identified the timing of revenue recognition for e-commerce orders (shipping point versus destination) as a potential issue in our analysis, which is not expected to change the total amount of revenue recognized, but could accelerate the timing of when revenue is recognized. We plan to adopt this guidance beginning with the first quarter in the fiscal year ending June 30, 2019, on a retrospective basis, with a cumulative adjustment to retained earnings. We are continuing to evaluate the impact that this ASU, and related amendments and interpretive guidance, will have on our consolidated financial statements, including the related disclosures.
In July 2015, the FASB issued ASU No.2015-11, “Inventory (Topic 330).”investments. The pronouncement was issued to simplify the measurement of inventory and changes the measurement from lower of cost or market to lower of cost and net realizable value. The Company adopted this standard effective July 3, 2017. The adoption of ASU 2015-11CARES Act did not have a significant impact on the Company’s consolidated financial position or results of operations.
In January 2016, the FASB issued ASU No.2016-01, "Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." The pronouncement requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. This guidance will become effective for the Company's fiscal year ending June 30, 2019. The adoption is not expected to have a significantmaterial impact on the Company’s consolidated financial statements.statements during the three and six months ended December 27, 2020.
In February 2016, The Company is closely monitoring the FASB issued ASU impact of COVID-No.192016-02, “Leases (Topic 842).” Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheetbusiness, including how it will affect its customers, workforce, suppliers, vendors, franchisees, florists, and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessorproduction and saledistribution channels, as well as its financial statements. The extent to which COVID-19 impacts the Company’s business and leaseback transactions. Lesseesfinancial results will depend on numerous evolving factors, including, but not limited to: the magnitude and lessors are requiredduration of COVID-19, the extent to disclose qualitativewhich it will impact macroeconomic conditions, including interest rates, employment rates and quantitative information about leasing arrangements to enable a userconsumer confidence, the speed of the anticipated recovery, and governmental, business and individual consumer reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial statementsinformation in context with the information reasonably available to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for the Company’s fiscal year ending June 28, 2020. We are currently evaluating and the impact unknown future impacts of COVID-19 as of December 27, 2020 and expectthrough the ASU will havedate of this report. The accounting matters assessed included, but were not limited to, the Company’s allowance for doubtful accounts and credit losses, inventory and related reserves and the carrying value of goodwill and other long-lived assets. While there was not a material impact to the Company’s consolidated financial statements as of and for the three and six months ended December 27, 2020, the Company’s future assessment of these factors and the evolving factors described above, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.
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 monthly subscription programs, including our Fruit of the Month Club and Celebrations Passport program.
Our total deferred revenue as of June 28, 2020 was $25.9 million (included in “Accrued expenses” on our consolidated financial statements, primarily tobalance sheets), of which, $8.7 million and $23.7 million was recognized as revenue during the consolidatedthree and six months ended December 27, 2020. The deferred revenue balance sheets and related disclosures.as of December 27, 2020 was $61.8 million.
In
Recently Issued Accounting Pronouncements - Adopted
Financial Instruments – Measurement of Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces a new forward-looking “expected loss” approach, to estimate credit losses on most financial assets and certain other instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’sentity’s assumptions, models and methods for estimating expected credit losses. We adopted ASU 2016-13 is effective for the Company’s fiscal year2021 (quarter ending July 4, 2021,September 27, 2020), and the guidance is to be applied using the modified-retrospective approach. The Company is currently evaluating the potentialThere was no material impact of adopting this guidance on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force.” ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The ASU is effective for the Company’s fiscal year ending June 30, 2019, and interim periods within those fiscal years. Early adoption is permitted, including interim periods within those fiscal years. An entity that elects early adoption must adopt all of the amendments in the same period. The guidance requires application using a retrospective transition method. The adoption is not expected to have a significant impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No.2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01)," which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. ASU 2017-01 is effective for the Company's fiscal year ending June 30, 2019, with early adoption permitted, and should be applied prospectively. We do not expect the standard to have a material impact on our consolidated financial statements.
Goodwill – Impairment Test. In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. ThisWe adopted this guidance is effective for the Company’s fiscal year ending July 4, 2021, with early adoption permitted, and should be applied prospectively. We do not expect the standard to have a material impact on our consolidated financial statements.
In February 2017, the FASB issued ASU No.2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets.” This update clarifies the scope of accounting for the derecognition or partial sale of nonfinancial assets to exclude all businesses and nonprofit activities. ASU 2017-05 also provides a definition for in-substance nonfinancial assets and additional guidance on partial sales of nonfinancial assets. This guidance will be effective for the Company’s fiscal year2021 (quarter ending June 30, 2019September 27, 2020), andon a prospective basis. There was may nobe applied retrospectively. The Company is currently evaluating the potential material impact of adopting this guidance on our consolidated financial statements.
In May 2017, the FASB issued ASU No2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. An entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. ASU 2017-09 is effective for the Company's fiscal year ending June 30, 2019, with early adoption permitted, and should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
On December 22, 2017, the U.S. government enacted significant changes to the U.S. tax law following the passage and signing of the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act revises the future ongoing U.S. corporate income tax by, among other things, lowering U. S. corporate income tax rates from 35% to 21%. As the Company’s fiscal year ends on July 1, 2018, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of approximately 28% for the current fiscal year and 21% for subsequent fiscal years. The Tax Act also eliminates the domestic production activities deduction and introduces limitations on certain business expenses and executive compensation deductions. See Note 11 – Income taxes for the impact of the Tax Act on the Company’s financial statements.
On December 22, 2017, the SEC issued guidance under Staff Accounting Bulletin No.118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) directing taxpayers to consider the impact of the Tax Act as “provisional” when it does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete its accounting for the change in tax law. The changes in the Tax Act are broad and complex. The final impacts of the Tax Act may differ from the Company’s estimates due to, among other things, changes in interpretations of the Tax Act, further legislation related to the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates to estimates the Company has utilized to calculate the impacts of the Tax Act. The Securities Exchange Commission has issued rules that would allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the related tax impacts.
Note 2 – Net Income Per Common Share
The following table sets forth the computation of basic and diluted net income per common share:
Three Months Ended | Six Months Ended | |||||||||||||||
December 31, 2017 | January 1, 2017 | December 31, 2017 | January 1, 2017 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 70,699 | $ | 62,929 | $ | 57,477 | $ | 47,158 | ||||||||
Denominator: | ||||||||||||||||
Weighted average shares outstanding | 64,601 | 65,172 | 64,778 | 65,112 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Employee stock options | 1,549 | 1,526 | 1,528 | 1,503 | ||||||||||||
Employee restricted stock awards | 632 | 1,056 | 731 | 1,163 | ||||||||||||
2,181 | 2,582 | 2,259 | 2,666 | |||||||||||||
Adjusted weighted-average shares and assumed conversions | 66,782 | 67,754 | 67,037 | 67,778 | ||||||||||||
Net income per common share | ||||||||||||||||
Basic | $ | 1.09 | $ | 0.97 | $ | 0.89 | $ | 0.72 | ||||||||
Diluted | $ | 1.06 | $ | 0.93 | $ | 0.86 | $ | 0.70 |
Three Months Ended | Six Months Ended | |||||||||||||||
December 27, 2020 | December 29, 2019 | December 27, 2020 | December 29, 2019 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 113,677 | $ | 74,152 | $ | 103,915 | $ | 58,881 | ||||||||
Denominator: | ||||||||||||||||
Weighted average shares outstanding | 64,728 | 64,687 | 64,524 | 64,595 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Employee stock options | 824 | 997 | 951 | 1,046 | ||||||||||||
Employee restricted stock awards | 991 | 717 | 1,118 | 845 | ||||||||||||
1,815 | 1,714 | 2,069 | 1,891 | |||||||||||||
Adjusted weighted-average shares and assumed conversions | 66,543 | 66,401 | 66,593 | 66,486 | ||||||||||||
Net income per common share | ||||||||||||||||
Basic | $ | 1.76 | $ | 1.15 | $ | 1.61 | $ | 0.91 | ||||||||
Diluted | $ | 1.71 | $ | 1.12 | $ | 1.56 | $ | 0.89 |
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 2, 2017, June 28, 2020, 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 | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||
December 31, 2017 | January 1, 2017 | December 31, 2017 | January 1, 2017 | December 27, 2020 | December 29, 2019 | December 27, 2020 | December 29, 2019 | |||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Stock options | $ | 107 | $ | 113 | $ | 215 | $ | 227 | $ | 9 | $ | 28 | $ | 18 | $ | 93 | ||||||||||||||||
Restricted stock | 861 | 1,611 | 1,854 | 3.271 | 2,956 | 2,252 | 5,340 | 3,952 | ||||||||||||||||||||||||
Total | 968 | 1,724 | 2,069 | 3,498 | 2,965 | 2,280 | 5,358 | 4,045 | ||||||||||||||||||||||||
Deferred income tax (expense) benefit | 206 | 438 | 592 | 1,141 | ||||||||||||||||||||||||||||
Deferred income tax benefit | 785 | 300 | 1,388 | 1,003 | ||||||||||||||||||||||||||||
Stock-based compensation expense, net | $ | 762 | $ | 1,286 | $ | 1,477 | $ | 2,357 | $ | 2,180 | $ | 1,980 | $ | 3,970 | $ | 3,042 |
Stock-based compensation is recorded within the following line items of operating expenses:
Three Months Ended | Six Months Ended | |||||||||||||||
December 31, 2017 | January 1, 2017 | December 31, 2017 | January 1, 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Marketing and sales | $ | 258 | $ | 495 | $ | 556 | $ | 1,042 | ||||||||
Technology and development | 51 | 96 | 111 | 196 | ||||||||||||
General and administrative | 659 | 1,133 | 1,402 | 2,260 | ||||||||||||
Total | $ | 968 | $ | 1,724 | $ | 2,069 | $ | 3,498 |
Three Months Ended | Six Months Ended | |||||||||||||||
December 27, 2020 | December 29, 2019 | December 27, 2020 | December 29, 2019 | |||||||||||||
(in thousands) | ||||||||||||||||
Marketing and sales | $ | 1,367 | $ | 1,047 | $ | 2,511 | $ | 1,863 | ||||||||
Technology and development | 226 | 173 | 417 | 292 | ||||||||||||
General and administrative | 1,372 | 1,060 | 2,430 | 1,890 | ||||||||||||
Total | $ | 2,965 | $ | 2,280 | $ | 5,358 | $ | 4,045 |
Stock based compensation expense has not been allocated between business segments, but is reflected as part of Corporate overhead.overhead (see Note 12 - Business Segments).)
Stock Options
The following table summarizes stock option activity during the six months ended December 31, 2017:27, 2020:
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value (000s) | |||||||||||||
Outstanding at July 2, 2017 | 2,127,734 | $ | 2.42 | |||||||||||||
Granted | - | $ | - | |||||||||||||
Exercised | (4,000 | ) | $ | 3.71 | ||||||||||||
Forfeited | (17,500 | ) | $ | 9.83 | ||||||||||||
Outstanding at December 31, 2017 | 2,106,234 | $ | 2.36 | 3.4 | $ | 17,573 | ||||||||||
Options vested or expected to vest at December 31, 2017 | 2,106,234 | $ | 2.36 | 3.4 | $ | 17,573 | ||||||||||
Exercisable at December 31, 2017 | 1,707,234 | $ | 2.27 | 3.3 | $ | 14,389 |
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
(in years) | (in thousands) | |||||||||||||||
Outstanding at June 28, 2020 | 1,230,000 | $ | 2.77 | |||||||||||||
Granted | 0 | $ | 0 | |||||||||||||
Exercised | (429,200 | ) | $ | 2.41 | ||||||||||||
Forfeited | ||||||||||||||||
Outstanding at December 27, 2020 | 800,800 | $ | 2.97 | 1.0 | $ | 18,475 | ||||||||||
Exercisable at December 27, 2020 | 785,800 | $ | 2.63 | 0.9 | $ | 18,396 |
As of December 31, 2017,27, 2020, the total future compensation cost related to non-vested options, not yet recognized in the statement of income, was $0.6$0.1 million and the weighted average period over which these awards are expected to be recognized was 1.53.9 years.
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 six months ended December 31, 2017:27, 2020:
Shares | Weighted Average Grant Date Fair Value |
Shares | Weighted Average Grant Date Fair Value | |||||||||||||
Non-vested at July 2, 2017 | 1,352,873 | $ | 7.44 | |||||||||||||
Non-vested at June 28, 2020 | 1,608,468 | $ | 12.01 | |||||||||||||
Granted | 881,473 | $ | 9.47 | 701,311 | $ | 21.83 | ||||||||||
Vested | (593,648 | ) | $ | 7.76 | (643,590 | ) | $ | 11.05 | ||||||||
Forfeited | (628,946 | ) | $ | 9.50 | (29,949 | ) | $ | 19.80 | ||||||||
Non-vested at December 31, 2017 | 1,011,752 | $ | 7.74 | |||||||||||||
Non-vested at December 27, 2020 | 1,636,240 | $ | 16.46 |
The fair value of non-vested shares is determined based on the closing stock price on the grant date. As of December 31, 201727, 2020, , there was $5.8$19.4 million of total unrecognized compensation cost related to non-vested restricted stock-based compensation to be recognized over the weighted-average remaining period of 2.21.9 years.
Note 4 – DispositionAcquisition
Acquisition of PersonalizationMall
On March 15, 2017,February 14, 2020, the Company and Ferrero International S.A.1-800-Flowers.com, Inc., 800-Flowers, Inc., a Luxembourg corporationwholly-owned subsidiary of 1-800-Flowers.com, Inc. (the “Purchaser”), PersonalizationMall.com, LLC ("PersonalizationMall"), and Bed Bath & Beyond Inc. (“Ferrero”Seller”), entered into a Stockan Equity Purchase Agreement (the “Purchase Agreement”) pursuant to which FerreroSeller agreed to sell to the Purchaser, and the Purchaser agreed to purchase from the CompanySeller, all of the issued and outstanding equitymembership interests of Fannie May Confections Brands, Inc., including its subsidiaries, Fannie May Confections, Inc. and Harry London Candies, Inc. (“Fannie May”) PersonalizationMall for a total consideration of $115.0$252.0 million in cash subject(subject to adjustment for seasonal working capital. Thecertain working capital adjustment was finalized inand other adjustments). On August 2017,July 20, 2020, resulting inPurchaser, PersonalizationMall, and Seller entered into an $11.4 million reductionamendment (the “Amendment”) to the Purchase Agreement to, among other things, amend the purchase price. The resulting gain on saleprice to $245.0 million (subject to certain working capital and other adjustments). On August 3, 2020, the Company completed its acquisition of $14.6 million, is included within “Other (income) expense, net” in the Company’s consolidated statements of income in the fourth quarter of fiscal year 2017.PersonalizationMall, including its newly renovated, leased 360,000 square foot, state-of-the-art production and distribution facility, as well as customer database, tradenames and website. After working capital and related adjustments, total consideration paid was approximately $250.9 million.
The total purchase price was allocated to the identifiable assets acquired and liabilities assumed based on our preliminary estimates of their fair values on the acquisition date. The fair values assigned to PersonalizationMall’s tangible and intangible assets and liabilities assumed are considered preliminary and are based on the information that was available as of the date of the acquisition. The Company is in the process of finalizing its allocation and Ferrerothis may result in potential adjustments to the carrying value of the respective recorded assets and liabilities, establishment of certain additional intangible assets, revisions of useful lives of intangible assets, establishment of potential acquisition contingencies, and the determination of any residual amount that will be allocated to goodwill. As additional information becomes available, the preliminary purchase price allocation may be revised during the remainder of the measurement period, which will not exceed 12 months from the acquisition date. Any such revisions or changes may be material.
The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed:
PersonalizationMall’s Preliminary Purchase Price Allocation | ||||
(in thousands) | ||||
Assets Acquired: | ||||
Inventories | $ | 16,998 | ||
Other assets | 5,216 | |||
Property, plant and equipment | 30,792 | |||
Operating lease right-of-use assets | 21,438 | |||
Goodwill | 133,337 | |||
Other intangibles | 76,000 | |||
Total assets acquired | $ | 283,781 | ||
Liabilities assumed: | ||||
Accounts payable and accrued expenses | $ | 11,400 | ||
Operating lease liabilities | 21,438 | |||
Total liabilities assumed | 32,838 | |||
Net assets acquired | $ | 250,943 |
The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. The estimates and assumptions include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows.
Acquired inventory, consisting of raw materials and supplies, 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.
Property, plant and equipment was valued at book value (cost less accumulated depreciation and amortization), due to the nature of the assets, which included recently acquired production equipment and leasehold improvements for PersonalizationMall's production facility, which became operational in September 2019.
Based on the valuation as of August 3, 2020, of the acquired intangible assets, $11.0 million was assigned to customer lists (4 years life), $65.0 million was assigned to tradenames (indefinite life), and the residual amount of $133.3 million was allocated to Goodwill (indefinite life and deductible for tax purposes). The goodwill recognized in conjunction with the Purchaser’s acquisition of PersonalizationMall is primarily related to synergistic value created in terms of both operating costs and revenue growth opportunities, enhanced financial and operational scale, and other strategic benefits. It also entered intoincludes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce.
The estimated fair value of the acquired trade names was determined using the relief from royalty method, which is a transition services agreement wherebyrisk-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 PersonalizationMall's weighted average cost of capital, the riskiness of the earnings stream association 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.
As required by ASC 805, “Business Combinations,” the following unaudited pro forma financial information for the three and six months ended December 27, 2020 and December 29, 2019, give effect to the PersonalizationMall acquisition as if it had been completed on July 1, 2019. The unaudited pro forma financial information is prepared by management for informational purposes only in accordance with ASC 805 and is not necessarily indicative of or intended to represent the results that would have been achieved had the acquisition been consummated as of the dates presented, and should not be taken as representative of future consolidated results of operations. The unaudited pro forma financial information does not reflect any operating efficiencies and/or cost savings that the Company will provide certain post-closing services to Ferrero and Fannie Maymay for a period of approximately 18 months, related to the business of Fannie May, and a commercial agreementachieve with respect to the distributioncombined companies. The pro forma information has been adjusted to give effect to nonrecurring items that are directly attributable to the acquisition.
Three months ended December 27, 2020 | Three months ended December 29, 2019 | Six months ended December 27, 2020 | Six months ended December 29, 2019 | |||||||||||||
(in thousands) | ||||||||||||||||
Net Revenues | $ | 877,256 | $ | 687,596 | $ | 1,177,021 | $ | 896,297 | ||||||||
Net Income | 114,071 | 83,084 | 110,289 | 66,443 |
The unaudited pro forma amounts above include the following adjustments:
- | A decrease of operating expenses by $0.5 and $5.4 million during the three and six months ended December 27, 2020, to eliminate transaction and litigation costs directly related to the transaction that do not have a continuing impact on operating results. | |
- | An increase of operating expenses by $0.2 million during the six months ended December 27, 2020 and $0.7 million and $1.4 million during the three and six months ended December 29, 2019, respectively, to reflect the additional amortization expense related to the increase in definite lived intangible assets. | |
- | An increase in interest expense of $0.6 million during the six months ended December 27, 2020 and $1.0 and $2.1 million during the three and six months ended December 29, 2019, respectively, which is comprised of incremental interest and amortization of deferred financing costs associated with the New Term Loan (as defined below). The interest rate used for the purposes of these pro forma statements, of 3.5%, was the rate in effect at loan inception. | |
- | The combined pro forma results were tax effected using the Company's effective tax rate for the respective periods |
Net revenue attributable to PersonalizationMall, included within the three and six month periods ended December 27, 2020, was $122.2 million and $142.6 million, and corresponding operating income during the periods, excluding litigation and transaction costs, was $24.3 million and $25.4 million.
Acquisition of Shari’s Berries
On August 14, 2019, the Company completed its acquisition of the Shari’s Berries business ("Shari's Berries"), a leading provider of dipped berries and other specialty treats, through a bankruptcy proceeding of certain Ferreroassets of the gourmet food business of the FTD Companies, Inc. The transaction, for a purchase price of $20.5 million, included the Shari’s Berries domain names, copyrights, trademarks, customer data, phone numbers and Fannieother intellectual property, as well as certain raw material inventory and the assumption of specified liabilities.
During the quarter ended MayJune 28, 2020, products.the Company finalized the allocation of the purchase price to the identifiable assets acquired and liabilities assumed based on its estimates of their fair values on the acquisition date. Of the acquired intangible assets, $0.6 million was assigned to customer lists, which is being amortized over the estimated remaining life of 2 years, $6.9 million was assigned to tradenames, and $12.1 million was assigned to goodwill, which is expected to be deductible for tax purposes. The goodwill recognized in conjunction with our acquisition of Shari’s Berries is primarily related to synergistic value created in terms of both operating costs and revenue growth opportunities, enhanced financial and operational scale, and other strategic benefits.
The following table summarizes the allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed at the date of the acquisition:
Shari’s Berries Purchase Price Allocation | ||||
(in thousands) | ||||
Current assets | $ | 1,029 | ||
Intangible assets | 7,540 | |||
Goodwill | 12,121 | |||
Total assets acquired | 20,690 | |||
Current liabilities | 190 | |||
Net assets acquired | $ | 20,500 |
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 Fannie May the Shari’s Berries brand are reflected in the Company’sCompany’s consolidated financial statements through May 30, 2017, from the date of its disposition,acquisition, within itsthe Gourmet FoodFoods & Gift Baskets segment. During fiscal 2017, Fannie May contributed net revenuesPro forma results of $85.6 million. Operating and pre-tax income during such period wereoperations have not been presented, as the impact on the Company’s consolidated financial results would not have been material.
The Company’sCompany’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:
December 31, 2017 | July 2, 2017 | December 27, 2020 | June 28, 2020 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Finished goods | $ | 26,853 | $ | 34,476 | $ | 37,030 | $ | 35,779 | ||||||||
Work-in-process | 4,559 | 11,933 | 10,864 | 16,536 | ||||||||||||
Raw materials | 29,155 | 29,453 | 41,495 | 45,445 | ||||||||||||
Total inventory | $ | 60,567 | $ | 75,862 | $ | 89,389 | $ | 97,760 |
Note 6 – Goodwill and Intangible Assets
The following table presents goodwill by segment and the related change in the net carrying amount:
1-800-Flowers.com Consumer Floral | BloomNet Wire Service | Gourmet Food & Gift Baskets | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Balance at December 31, 2017 and July 2, 2017 | $ | 17,441 | $ | - | $ | 45,149 | $ | 62,590 |
Consumer Floral & Gifts | BloomNet | Gourmet Foods & Gift Baskets | Total | |||||||||||||
(in thousands) | ||||||||||||||||
Balance at June 28, 2020 | $ | 17,441 | $ | 0 | $ | 57,270 | $ | 74,711 | ||||||||
Acquisition of PersonalizationMall | 133,337 | 0 | 0 | 133,337 | ||||||||||||
Balance at December 27, 2020 | $ | 150,778 | $ | 0 | $ | 57,270 | $ | 208,048 |
The Company’sCompany’s other intangible assets consist of the following:
December 31, 2017 | July 2, 2017 | December 27, 2020 | June 28, 2020 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | |||||||||||||||||||||||||||||||||||||||||||
(in years) | (in thousands) | (in years) | (in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Intangible assets with determinable lives: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Intangible assets with determinable lives | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investment in licenses | 14-16 | $ | 7,420 | $ | 5,990 | $ | 1,430 | $ | 7,420 | $ | 5,937 | $ | 1,483 | 14-16 | $ | 7,420 | $ | 6,306 | $ | 1,114 | $ | 7,420 | $ | 6,253 | $ | 1,167 | ||||||||||||||||||||||||||||||
Customer lists | 3-10 | 12,184 | 8,840 | 3,344 | 12,184 | 8,227 | 3,957 | 2-10 | 23,825 | 11,972 | 11,853 | 12,825 | 10,474 | 2,351 | ||||||||||||||||||||||||||||||||||||||||||
Other | 5-14 | 2,946 | 2,102 | 844 | 2,946 | 2,045 | 901 | 5-14 | 2,946 | 2,432 | 514 | 2,946 | 2,382 | 564 | ||||||||||||||||||||||||||||||||||||||||||
Total intangible assets with determinable lives | 22,550 | 16,932 | 5,618 | 22,550 | 16,209 | 6,341 | 34,191 | 20,710 | 13,481 | 23,191 | 19,109 | 4,082 | ||||||||||||||||||||||||||||||||||||||||||||
Trademarks with indefinite lives | 54,842 | - | 54,842 | 54,749 | - | 54,749 | 127191 | - | 127,191 | 62,191 | - | 62,191 | ||||||||||||||||||||||||||||||||||||||||||||
Total identifiable intangible assets | $ | 77,392 | $ | 16,932 | $ | 60,460 | $ | 77,299 | $ | 16,209 | $ | 61,090 | $ | 161,382 | $ | 20,710 | $ | 140,672 | $ | 85,382 | $ | 19,109 | $ | 66,273 |
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: remainderremainder of fiscal 2018 - $0.6 million, fiscal 2019 - $0.7 million, fiscal 2020 - $0.6 million, fiscal 2021 - $0.6$1.8 million, fiscal 2022 - $3.3 million, fiscal $0.52023 - $3.3 million, fiscal 2024 - $3.3 million, fiscal 2025 - $0.8 million and thereafter - $1.0 million.
The Company has certainEquity investments in non-marketable equity instruments of private companies. The Company accounts for these investments using the equity method if they provide the Company the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method is appropriate. The Company records equity method investments initially at cost, and adjusts the carrying amount to reflect the Company’s share of the earnings or losses of the investee.
The Company’s equity method investment is comprised of an interest in Flores Online,without a Sao Paulo, Brazil based internet floral and gift retailer, that the Company originally acquired on May 31, 2012. The Company currently holds 24.9% of the outstanding shares of Flores Online. The book value of this investment was $0.6 million as of December 31, 2017 and $1.0 million as of July 2, 2017, and is included in the “Other assets” line item within the Company’s consolidated balance sheets. The Company’s equity in the net loss of Flores Online for the three and six months ended December 31, 2017 and January 1, 2017 was less than $0.1 million. During the quarter ended December 31, 2017, Flores Online entered into a share exchange agreement with Isabella Flores, whereby among other changes, the Company exchanged 5% of its interest in Flores Online for a 5% interest in Isabella Flores. This new investment of approximately $0.1 million is currently being accounted as a cost method investment and is immaterial to the financial statements. In conjunction with this share exchange, the Company determined that thereadily determinable fair value of its investment in Flores Online was below its carrying value and that this decline was other-than-temporary. As a result, the Company recorded an impairment charge of $0.2 million, which is included within the “Other (income) expense, net” line item in the Company’s consolidated statement of income during the quarter ended December 31, 2017.
Investments in non-marketable equity instruments of private companies, where the Company does not possess the ability to exercise significant influence, are accounted for under the cost method. Cost method investments are originally recorded at cost, andless 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’sCompany’s consolidated balance sheets. The aggregate carrying amount of the Company’s cost method investments was $1.8$4.1 million as of December 31, 201727, 2020 and $1.7$2.8 million as of July 2, 2017.June 28, 2020.
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’sCompany’s current and long-term debt consists of the following:
December 27, 2020 | June 28, 2020 | |||||||
(in thousands) | ||||||||
Revolver (1) | $ | 0 | $ | 0 | ||||
Term Loans (1) | 190,000 | 95,000 | ||||||
Deferred financing costs | (4,088 | ) | (2,441 | ) | ||||
Total debt | 185,912 | 92,559 | ||||||
Less: current debt | 15,000 | 5,000 | ||||||
Long-term debt | $ | 170,912 | $ | 87,559 |
December 31, 2017 | July 2, 2017 | |||||||
(in thousands) | ||||||||
Revolver (1) | $ | - | $ | - | ||||
Term Loan (1) | 109,250 | 112,125 | ||||||
Deferred financing costs | (3,080 | ) | (3,560 | ) | ||||
Total debt | 106,170 | 108,565 | ||||||
Less: current debt | 8,625 | 7,188 | ||||||
Long-term debt | $ | 97,545 | $ | 101,377 |
(1)
| 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 (the “2016 Credit Agreement”) to, among other modifications: (i) increase the amount of the outstanding term loan (“Term Loan”) from approximately $97 million to $100 million, (ii) extend the maturity date of the outstanding Term Loan and the revolving credit facility (“Revolver”) by approximately 29 months to May 31, 2024, and (iii) decrease the applicable interest rate margins for LIBOR and base rate loans by 25 basis points. The Term Loan is payable in 19 quarterly installments of principal and interest beginning on December 29, 2019, with escalating principal payments, at the rate of 5.0% per annum for the firsteight payments, and 10.0% per annum for the remaining 11 payments, with the remaining balance of $62.5 million due upon maturity. The Revolver, in the aggregate amount of $200 million, subject to seasonal reduction to an aggregate amount of $100 million for the period from January 1 through August 1, may be used for working capital and general corporate purposes, subject to certain restrictions. For each borrowing under the 2019 Credit Agreement, the Company may elect that such borrowing bear interest at an annual rate equal to either: (1) a base rate plus an applicable margin varying based on the Company’s consolidated leverage ratio, where the base rate is the highest of (a) the prime rate, (b) the New York fed bank rate plus 0.5%, and (c) a LIBOR rate plus 1%, or (2) an adjusted LIBOR rate plus an applicable margin varying based on the Company’s consolidated leverage ratio. 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 (together the "2020 Credit Agreement”) to, among other modifications, (i) increase the aggregate principal amount of the existing Revolver commitments from $200.0 million to $250.0 million, (ii) establish a new tranche of term A-1 loans in an aggregate principal amount of $100.0 million (the “New Term Loan”), (iii) increase the working capital sublimit with respect to the Revolver from $175.0 million to $200.0 million, and (iv) increase the seasonally-reduced Revolver commitments from $100.0 million to $125.0 million for the period from January 1 through August 1 for each fiscal year of the Company. The New Term Loan will mature on May 31, 2024. Proceeds of the borrowing under the New Term Loan may be used for working capital and general corporate purposes of the Company and its subsidiaries, subject to certain restrictions. For each borrowing under the 2020 Credit Agreement, the Company may elect that such borrowing bear interest at an annual rate equal to either (1) a base rate plus the applicable margin for the relevant class of borrowing, which such margins vary based on the Company’s consolidated leverage ratio, where the base rate is the highest of (a) the prime rate, (b) the New York fed bank rate plus 0.5%, and (c) a LIBOR rate plus 1%, or (2) an adjusted LIBOR rate plus an applicable margin varying based on the Company’s consolidated leverage ratio. The New Term Loan is payable in 15 quarterly installments of principal and interest beginning on September 27, 2020, with escalating principal payments, at the rate of 5.0% per annum for the firstfour payments, and 10.0% per annum for the remaining 11 payments, with the remaining balance of $67.5 million due upon maturity. The 2020 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 December 27, 2020. The 2020 Credit Agreement is secured by substantially all of the assets of the Company. |
Future principal payments under the term loanthe Term Loan and New Term Loan are as follows: $4.4$5.0 million – remainder of fiscal 2018,2021, $20.0 million - fiscal $10.12022, $20.0 million – fiscal 2019,2023 $12.9and $145.0 million – fiscal 2020,2024.$15.8 million - fiscal 2021, and $66.1 – fiscal 2022.
Note 9 - Property, Plant and Equipment
The Company’sCompany’s property, plant and equipment consists of the following:
December 27, 2020 | June 28, 2020 | |||||||
(in thousands) | ||||||||
Land | $ | 30,789 | $ | 30,789 | ||||
Orchards in production and land improvements | 18,548 | 17,139 | ||||||
Building and building improvements | 61,679 | 61,159 | ||||||
Leasehold improvements | 25,669 | 13,675 | ||||||
Production equipment | 78,040 | 57,904 | ||||||
Furniture and fixtures | 7,995 | 7,444 | ||||||
Computer and telecommunication equipment | 57,005 | 55,381 | ||||||
Software | 162,304 | 151,264 | ||||||
Capital projects in progress - orchards | 7,291 | 8,130 | ||||||
Property, plant and equipment, gross | 449,320 | 402,885 | ||||||
Accumulated depreciation and amortization | (251,722 | ) | (233,810 | ) | ||||
Property, plant and equipment, net | $ | 197,598 | $ | 169,075 |
December 31, 2017 | July 2, 2017 | |||||||
(in thousands) | ||||||||
Land | $ | 30,789 | $ | 30,789 | ||||
Orchards in production and land improvements | 10,773 | 9,703 | ||||||
Building and building improvements | 57,803 | 56,791 | ||||||
Leasehold improvements | 12,305 | 11,950 | ||||||
Production equipment and furniture and fixtures | 48,889 | 47,293 | ||||||
Computer and telecommunication equipment | 46,890 | 45,026 | ||||||
Software | 123,001 | 119,177 | ||||||
Capital projects in progress - orchards | 9,114 | 9,971 | ||||||
Property, plant and equipment, gross | 339,564 | 330,700 | ||||||
Accumulated depreciation and amortization | (184,958 | ) | (169,319 | ) | ||||
Property, plant and equipment, net | $ | 154,606 | $ | 161,381 |
NoteNote 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 |
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) |
Carrying Value | Fair Value Measurements Assets (Liabilities) | |||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Assets (liabilities) as of December 31, 2017: | ||||||||||||||||||||||||||||||||
As of December 27, 2020: | ||||||||||||||||||||||||||||||||
Trading securities held in a “rabbi trust” (1) | $ | 8,693 | $ | 8,693 | $ | - | $ | - | $ | 18,617 | $ | 18,617 | $ | 0 | $ | 0 | ||||||||||||||||
Total assets (liabilities) at fair value | $ | 18,617 | $ | 18,617 | $ | 0 | $ | 0 | ||||||||||||||||||||||||
$ | 8,693 | $ | 8,693 | $ | - | $ | - | |||||||||||||||||||||||||
Assets (liabilities) as of July 2, 2017: | ||||||||||||||||||||||||||||||||
As of June 28, 2020: | ||||||||||||||||||||||||||||||||
Trading securities held in a “rabbi trust” (1) | $ | 6,916 | $ | 6,916 | $ | - | $ | - | $ | 13,442 | $ | 13,442 | $ | 0 | $ | 0 | ||||||||||||||||
$ | 6,916 | $ | 6,916 | $ | - | $ | - | |||||||||||||||||||||||||
Total assets (liabilities) at fair value | $ | 13,442 | $ | 13,442 | $ | 0 | $ | 0 |
| (1) | The Company has established a |
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’sCompany’s effective tax rate from operations for the three and six months ended December 31, 201727, 2020 was 15.2%23.2% and 8.7%22.7%, respectively, compared to 33.3%25.5% and 32.6%24.7% in the same periods of the prior year. The effective rates for fiscal 2018 were impacted by changes associated with the Tax Act (see Note 1 -Accounting Policies above). During the quarter ended December 31, 2017, the Company recognized a benefit of $15.9 million, or $0.24 per diluted share related to the impact of the Tax Act, consisting of a discrete tax benefit of $12.2 million, or $0.18 per diluted share, reflecting a revaluation of deferred tax liabilities at the lower U.S. federal statutory rate of 21%,2021 and a benefit of $3.7 million, or $0.06 per diluted share, reflecting the Company’s lower transitional federal tax rate in fiscal 2018 of 28.0 percent. In addition, fiscal 2018 effective rates were impacted by state income taxes, which were partially offset by various permanent differences and tax credits. The effective rates for fiscal 20172020 differed from the U.S. federal statutory rate of 21% due to state income taxes and nondeductible expenses for executive compensation, which were more thanpartially offset by various permanent differences and tax credits, including excess tax benefits on stock based compensation as a result of the Company’s adoption of ASU 2016-09.from stock-based compensation.
The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various foreign countries. The Company completedis currently undergoing its audit by the Internal Revenue ServiceU.S. federal examination for fiscal year 2014,2018, however, fiscal yearsyear 20152019 and 2016 remainremains subject to U.S. federal examination. Due to ongoing state examinations and non-conformitynonconformity with the U.S. federal statute of limitations for assessment, certain states remain open from fiscal 2012. The Company commenced operations in foreign jurisdictions in 2012.2016. The Company's foreign income tax filings from fiscal 2015 are open for examination by its respective foreign tax authorities.authorities, mainly Canada, Brazil, and the United Kingdom.
The Company���sCompany’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At December 31, 2017,27, 2020, the Company has an unrecognized tax benefit, including an immaterial amount of accrued interest and penalties, of approximately $0.4$1.2 million. The Company believes that no significant$0.8 million of unrecognized tax positions will be resolved over the next twelve months.
The Company’sCompany’s management reviews the results of the Company’sits operations by the following three business segments:
•1-800-Flowers.com Consumer Floral & Gifts,
• BloomNet, Wire Service, and
• Gourmet Food andFoods & 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’smanagement’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, both of which are included within corporate overhead.compensation. Assets and liabilities are reviewed at the consolidated level by management and not accounted for by segment.
Three Months Ended | Six Months Ended | |||||||||||||||
December 27, 2020 | December 29, 2019 | December 27, 2020 | December 29, 2019 | |||||||||||||
Net Revenues: | (in thousands) | |||||||||||||||
Segment Net Revenues: | ||||||||||||||||
Consumer Floral & Gifts | $ | 305,357 | $ | 115,716 | $ | 466,903 | $ | 206,484 | ||||||||
BloomNet | 34,051 | 25,722 | 66,789 | 51,162 | ||||||||||||
Gourmet Foods & Gift Baskets | 538,265 | 464,584 | 628,194 | 535,799 | ||||||||||||
Corporate | 135 | 165 | 241 | 360 | ||||||||||||
Intercompany eliminations | (552 | ) | (545 | ) | (1,099 | ) | (900 | ) | ||||||||
Total net revenues | $ | 877,256 | $ | 605,642 | $ | 1,161,028 | $ | 792,905 | ||||||||
Operating Income: | ||||||||||||||||
Segment Contribution Margin: | ||||||||||||||||
Consumer Floral & Gifts | $ | 45,657 | $ | 10,890 | $ | 64,893 | $ | 19,414 | ||||||||
BloomNet | 12,141 | 9,134 | 22,562 | 17,491 | ||||||||||||
Gourmet Foods & Gift Baskets | 135,621 | 113,387 | 133,040 | 106,787 | ||||||||||||
Segment Contribution Margin Subtotal | 193,419 | 133,411 | 220,495 | 143,692 | ||||||||||||
Corporate (a) | (34,757 | ) | (26,010 | ) | (66,454 | ) | (49,309 | ) | ||||||||
Depreciation and amortization | (11,060 | ) | (7,830 | ) | (19,900 | ) | (15,465 | ) | ||||||||
Operating income | $ | 147,602 | $ | 99,571 | $ | 134,141 | $ | 78,918 |
(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 | Three Months Ended | |||||||||||||||||||||||||||||||
December 27, 2020 | December 29, 2019 | |||||||||||||||||||||||||||||||
Consumer Floral & Gifts | BloomNet | Gourmet Foods & Gift Baskets | Consolidated | Consumer Floral & Gifts | BloomNet | Gourmet Foods & Gift Baskets | Consolidated | |||||||||||||||||||||||||
Net revenues | (in thousands) | |||||||||||||||||||||||||||||||
E-commerce | $ | 303,275 | $ | 0 | $ | 474,535 | $ | 777,810 | $ | 113,858 | $ | 0 | $ | 373,226 | $ | 487,084 | ||||||||||||||||
Retail | 1,210 | 0 | 4,088 | 5,298 | 1,082 | 0 | 23,120 | 24,202 | ||||||||||||||||||||||||
Wholesale | 0 | 9,150 | 59,642 | 68,792 | 0 | 7,270 | 68,238 | 75,508 | ||||||||||||||||||||||||
BloomNet services | 0 | 24,901 | 0 | 24,901 | 0 | 18,452 | 0 | 18,452 | ||||||||||||||||||||||||
Other | 872 | 0 | 0 | 872 | 776 | 0 | 0 | 776 | ||||||||||||||||||||||||
Corporate | 0 | 0 | 0 | 135 | 0 | 0 | 0 | 165 | ||||||||||||||||||||||||
Eliminations | 0 | 0 | 0 | (552 | ) | 0 | 0 | 0 | (545 | ) | ||||||||||||||||||||||
Net revenues | $ | 305,357 | $ | 34,051 | $ | 538,265 | $ | 877,256 | $ | 115,716 | $ | 25,722 | $ | 464,584 | $ | 605,642 |
Six months ended | Six months ended | |||||||||||||||||||||||||||||||
December 27, 2020 | December 29, 2019 | |||||||||||||||||||||||||||||||
Consumer Floral & Gifts | BloomNet | Gourmet Foods & Gift Baskets | Consolidated | Consumer Floral & Gifts | BloomNet | Gourmet Foods & Gift Baskets | Consolidated | |||||||||||||||||||||||||
Net revenues | (in thousands) | |||||||||||||||||||||||||||||||
E-commerce | $ | 463,067 | $ | 0 | $ | 553,606 | $ | 1,016,673 | $ | 202,946 | $ | 0 | $ | 413,188 | $ | 616,134 | ||||||||||||||||
Retail | 2,157 | 0 | 5,661 | 7,818 | 2,021 | 0 | 30,610 | 32,631 | ||||||||||||||||||||||||
Wholesale | 0 | 20,443 | 68,927 | 89,370 | 0 | 16,018 | 92,001 | 108,019 | ||||||||||||||||||||||||
BloomNet services | 0 | 46,346 | 0 | 46,346 | 0 | 35,144 | 0 | 35,144 | ||||||||||||||||||||||||
Other | 1,679 | 0 | 0 | 1,679 | 1,517 | 0 | 0 | 1,517 | ||||||||||||||||||||||||
Corporate | 0 | 0 | 0 | 241 | 0 | 0 | 0 | 360 | ||||||||||||||||||||||||
Eliminations | 0 | 0 | 0 | (1,099 | ) | 0 | 0 | 0 | (900 | ) | ||||||||||||||||||||||
Net revenues | $ | 466,903 | $ | 66,789 | $ | 628,194 | $ | 1,161,028 | $ | 206,484 | $ | 51,162 | $ | 535,799 | $ | 792,905 |
Three Months Ended | Six Months Ended | |||||||||||||||
Net Revenues: | December 31, 2017 | January 1, 2017 | December 31, 2017 | January 1, 2017 | ||||||||||||
(in thousands) | ||||||||||||||||
Segment Net Revenues: | ||||||||||||||||
1-800-Flowers.com Consumer Floral | $ | 100,064 | $ | 97,808 | $ | 176,674 | $ | 173,023 | ||||||||
BloomNet Wire Service | 20,375 | 20,502 | 40,139 | 41,466 | ||||||||||||
Gourmet Food & Gift Baskets | 405,964 | 436,870 | 466,950 | 506,684 | ||||||||||||
Corporate | 317 | 316 | 587 | 579 | ||||||||||||
Intercompany eliminations | (627 | ) | (943 | ) | (908 | ) | (1,370 | ) | ||||||||
Total net revenues | $ | 526,093 | $ | 554,553 | $ | 683,442 | $ | 720,382 |
Three Months Ended | Six Months Ended | |||||||||||||||
Operating Income: | December 31, 2017 | January 1, 2017 | December 31, 2017 | January 1, 2017 | ||||||||||||
(in thousands) | ||||||||||||||||
Segment Contribution Margin: | ||||||||||||||||
1-800-Flowers.com Consumer Floral | $ | 10,791 | $ | 13,128 | $ | 17,762 | $ | 21,309 | ||||||||
BloomNet Wire Service | 7,692 | 8,189 | 14,393 | 15,468 | ||||||||||||
Gourmet Food & Gift Baskets | 93,496 | 104,624 | 88,509 | 95,320 | ||||||||||||
Segment Contribution Margin Subtotal | 111,979 | 125,941 | 120,664 | 132,097 | ||||||||||||
Corporate (a) | (18,836 | ) | (20,223 | ) | (39,040 | ) | (41,491 | ) | ||||||||
Depreciation and amortization | (8,677 | ) | (9,167 | ) | (16,761 | ) | (17,164 | ) | ||||||||
Operating income | $ | 84,466 | $ | 96,551 | $ | 64,863 | $ | 73,442 |
|
The Company currently leases plants, warehouses, offices, store facilities, and equipment under various leases through fiscal 2034. 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 | Six Months Ended | |||||||
December 27, 2020 | December 27, 2020 | |||||||
(in thousands) | ||||||||
Lease costs: | ||||||||
Operating lease costs | $ | 3,679 | $ | 7,026 | ||||
Variable lease costs | 5,451 | 9,650 | ||||||
Short-term lease cost | 3,420 | 5,227 | ||||||
Sublease income | (201 | ) | (406 | ) | ||||
Total lease costs | $ | 12,349 | $ | 21,497 |
Six Months Ended | ||||
December 27, 2020 | ||||
(in thousands) | ||||
Cash paid for amounts included in measurement of operating lease liabilities | $ | 6,507 | ||
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 26,919 |
December 27, 2020 | ||||
(in thousands) | ||||
Weighted-average remaining lease term - operating leases | 9.1 years | |||
Weighted-discount rate - operating leases | 3.8 | % |
Maturities of lease liabilities in accordance with ASC 842 as of December 27, 2020 are as follows (in thousands):
Remainder of 2021 | $ | 7,191 | ||
2022 | 13,916 | |||
2023 | 13,593 | |||
2024 | 13,047 | |||
2025 | 10,665 | |||
Thereafter | 52,105 | |||
Total Future Minimum Lease Payments | 110,517 | |||
Less Imputed Remaining Interest | 18,256 | |||
Total | $ | 92,261 |
Note 14 – Commitments and Contingencies
Litigation
ThereBed Bath & Beyond:
On April 1, 2020, the Seller commenced an action against the Company in the Court of Chancery for the State of Delaware, which is captioned Bed Bath & Beyond Inc. v. 1-800-Flowers.com, et ano., C.A. (the “Complaint”), alleging a breach of the Equity Purchase Agreement (the “Agreement”), dated February 14, 2020, between Seller, PersonalizationMall, the Company and the Purchaser, pursuant to which the Seller agreed to sell to Purchaser, and the Purchaser agreed to purchase from Seller, all of the issued and outstanding membership interests of PersonalizationMall. The action was initiated after the Company requested a reasonable delay in the closing under the Purchase Agreement due to the unprecedented circumstances created by COVID-19. The Complaint requested an order of specific performance to consummate the transaction under the Purchase Agreement plus attorney’s fees and costs in connection with the action. The Company filed its answer to the Complaint on April 17, 2020 and an order governing expedited proceedings was approved on April 9, 2020 that set a trial date for late September 2020. On July 21, 2020, the Company and Seller entered into a settlement agreement, pursuant to which the Company agreed to move forward with its purchase of PersonalizationMall for $245.0 million, subject to certain working capital and other adjustments. The transaction closed on August 3, 2020. In connection with the settlement agreement, the parties executed a Stipulation and Proposed Order of Dismissal, resulting in the voluntary dismissal with prejudice of the litigation relating to the transaction.
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 ultimatefinal 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 liquidityliquidity.
ITEM 2. MANAGEMENT’S2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward Looking Statements
This “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A)("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.10-K, for the year ended June 28, 2020. 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” andResults,” under Part I, Item 1A, of the Company’s Annual Report on Form 10-K, for the year ended June 28, 2020under the heading “Risk Factors.”Factors” and Part II-Other Information, Item 1A in this Form 10-Q.
Overview
1-800-FLOWERS.COM, Inc. and its subsidiariessubsidiaries (collectively, the “Company”) is a leading provider of gifts for all celebratory occasions. Fordesigned to help customers express, connect and celebrate. The Company’s business platform features our 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® and Simply Chocolate®. We also offer top-quality steaks and chops from Stock Yards®. Through the past 40 years, 1-800-Flowers.com® has been helping deliver smilesCelebrations 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 customersdeepen relationships with a 100% Smile Guarantee® backing every gift. In addition to the 1-800-Flowers.com brand, which offers fresh flowers, plants, fruit and gift baskets, as well as balloons, plush and keepsake gifts, the Company’scustomers. The Company also operates BloomNet®, an international floral wire service (www.mybloomnet.net) and Napco brands provideprovider offering a broad rangebroad-range of quality products and value-added services designed to help professional florists grow their businesses profitably. The 1-800-FLOWERS.COM, Inc. familyprofitably; Napco℠, a resource for floral gifts and seasonal décor; and DesignPac Gifts, LLC, a manufacturer of brands also offers everyday gifting and entertaining products such as premium, gift-quality fruits and other gourmet items from Harry & David® (1-877-322-1200 or www.harryanddavid.com), 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); gift baskets and towers from 1-800-Baskets.com® (www.1800baskets.com) and DesignPac; premium English muffins and other breakfast treats from Wolferman’s (1-800-999-1910 or www.wolfermans.com); artisanal and specialty chocolates from Simply ChocolateSM (www.simplychocolate.com), carved fresh fruit arrangements from FruitBouquets.com (www.fruitbouquets.com); top quality steaks and chops from Stock Yards® (www.stockyards.com), and personalized gifts from Personalization Universe�� (www.personalizationuniverse.com).towers.
Service offerings such as Celebrations Passport®, Celebrations Rewards® and Celebrations Reminders® are designed to deepen relationships with customers across all brands. 1-800-FLOWERS.COM, Inc. was named to the Stores® 2017 Hot 100 Retailers List by the National Retail Federation and received the Gold award in the “Best Artificial Intelligence” category at the Data & Marketing Association’s 2017 International ECHO Awards for the Company’s groundbreaking implementation of an artificial intelligence-powered online gift concierge, GWYN.Forbes 2021 Best Small Companies List.
Shares in 1-800-FLOWERS.COM, Inc. are traded on the NASDAQ Global Select Market, ticker symbol: FLWS.
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 June 28, 2020.
Acquisition of PersonalizationMall
On May 30, 2017,August 3, 2020, the Company completed its acquisition of PersonalizationMall.com LLC ("PersonalizationMall"), a leading ecommerce provider of personalized products. The extensive offerings of PersonalizationMall include a wide variety of personalization processes such as sublimation, embroidery, digital printing, engraving and sandblasting, while providing an industry-leading customer experience based on a fully integrated business platform that includes a highly automated personalization process and rapid order fulfillment.
The Company used a combination of cash on its balance sheet and its existing credit facility to fund the sale$245.0 million purchase (subject to certain working capital and other adjustments), which included its newly renovated, leased 360,000 square foot, state-of-the-art production and distribution facility, as well as customer database, tradenames and website. PersonalizationMall’s revenues were approximately $171.2 million in its fiscal year 2020.
Amended Credit Agreement
Subsequent to, but in contemplation of the outstanding equityacquisition, on August 20, 2020, the Company entered into a First Amendment to its 2019 Credit Agreement to: (i) increase the aggregate principal amount of Fannie May Confections Brands, Inc., including its subsidiaries, Fannie May Confections, Inc. and Harry London Candies, Inc. (“Fannie May”)the existing Revolver commitments from $200.0 million to Ferrero International S.A.,$250.0 million, (ii) establish a Luxembourg corporation (“Ferrero”new tranche of term A-1 loans in an aggregate principal amount of $100.0 million (the “New Term Loan”), for a total consideration of $115.0 million in cash, subject to adjustment for seasonal working capital. The(iii) increase the working capital adjustment was finalized in August 2017, resulting in an $11.4 million reductionsublimit with respect to the purchase price.Revolver from $175.0 million to $200.0 million, and (iv) increase the seasonally-reduced Revolver commitments from $100.0 million to $125.0 million for the period from January 1 through August 1 for each fiscal year of the Company. The resulting gain$100.0 million proceeds of the New Term Loan were used to repay the $95.0 million borrowing that had been drawn on saleits existing Revolver to finance the acquisition, as well as financing fees of $14.6approximately $2.0 million (See Note 8 - Debt, in Item 1. for details).
COVID-19 Impact
In response to the global pandemic, the Company has taken actions to promote employee safety and business continuity, informed by the guidelines set forth by local, state and federal government and health officials. These initiatives include developing a “Pandemic Preparedness and Response Plan,” establishing an internal “nerve center” to allow for communication and coordination throughout the business, designing workstream teams to promote workforce protection and supply chain management, and dedicating resources to support customers, vendors, franchisees, and our BloomNet member florists.
The COVID-19 pandemic has affected, and will continue to affect, our operations and financial results for the foreseeable future. While there is included within “Other (income) expense, net”significant uncertainty in the Company’s consolidated statementsoverall consumer environment due to the COVID-19 crisis, through the first four weeks of income in the fourthour third quarter of fiscal year 2017.2021, we continue to see strong e-commerce demand for gourmet foods and gift baskets and our floral and personalized products. With that said, there are also headwinds (and resulting increased costs) that have been, and will continue to impact our operations during the foreseeable future, including the following:
● | Retail store closures – on March 20, 2020, in response to government actions, and for the safety of its employees, the Company temporarily closed its Cheryl’s and Harry & David retail stores. Affected employees were provided with Company-paid special COVID leave pay through April 3rd, as the nation and the Company worked to understand the extent and potential length of the crisis. On April 14th, the difficult decision was made to permanently close 38 of our 39 Harry & David retail stores. As a result, the Company incurred a charge of approximately $5.2 million in our fourth quarter of fiscal year 2020 for lease obligations, employee costs and other store closure costs. Annual revenues attributable to the closed locations was approximately $33.0 million. |
● | Wholesale volume reductions - we have seen a reduction in our wholesale business as a result of COVID-19, which impacted our first and second quarter results within our Gourmet Foods and Gift Baskets segment, as many of our large wholesale customers took a cautious approach to the holiday season due to the uncertainty surrounding COVID-19 and its potential impact on brick and mortar retail store traffic. |
● | Increased operating costs - we have seen third-party carrier capacity constraints and an associated increase in transportation costs, increases in seasonal labor wage rates, as well as operating inefficiencies and costs associated with the changes we have made, and continue to make, to our manufacturing, warehouse and distribution facilities to provide for the safety and wellbeing of our associates, including: required social distancing, enhanced facility cleaning and sanitizing schedules, and staggered production shifts. |
The Companyscale and Ferrero also entered into a transition services agreement wherebyoverall economic impact of the COVID-19 crisis is still very difficult to assess. However, the Company believes that the operating platform it has built over the years, combined with its diversified product line, and ability to engage with its customers will provide certain post-closing servicesallow it to Ferrero and Fannie May for a periodsuccessfully navigate this challenging environment. We remain focused on three key elements of approximately 18 months, related to theour business of Fannie May, and a commercial agreement with respect to the distribution of certain Ferrero and Fannie May products.strategy:
Operating results of Fannie May are reflected in the Company’s consolidated financial statements through May 30, 2017, the date of its disposition, within its Gourmet Food & Gift Baskets segment. See Segment Information and Results of Operations below for a comparison of fiscal 2018 results to fiscal 2017, adjusted to exclude the operations of Fannie May.
| ● | Taking care of the health and safety of our associates, our BloomNet florists, our vendors and our customers, |
● | Maintaining our financial strength and flexibility, and |
● | Continuing to invest in areas of our business that can help drive future growth. |
Company Guidance
Due to the significant uncertainty in the overall economy related to the ongoing COVID-19 pandemic, the Company is not providing guidance for its full fiscal 2021 year at this time.
Regarding the fiscal third quarter:
o | Based on the continued strong ecommerce growth momentum that has carried into January 2021, the Company expects to achieve total consolidated revenue growth for its third fiscal quarter, including contributions from PersonalizationMall, in a range of 45-to-50 percent, compared with the prior year period. | |
o | The Company anticipates that the strong revenue growth will help offset certain headwinds, including the Sunday placement of the key Valentine’s Day holiday, increased year-over-year labor and transportation costs and operating inefficiencies related to the COVID-19 pandemic. | |
o | As a result, the Company anticipates achieving Adjusted EBITDA of between $4.0-and-$5.0 million, compared with an Adjusted EBITDA loss of $2.4 million in the prior year period, and | |
o | an EPS loss of between $0.09-and-$0.11, compared with an EPS loss of $0.15 in the prior year period. |
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 Operationssections below for reconciliations of these non-GAAP measures to their most directly comparable GAAP financial measures. These non-GAAP financial measures are referred to as “adjusted" or “on a comparable basis” below, as these terms are used interchangeably.below.
Adjusted revenues
Adjusted revenues measure GAAP revenues adjusted for the effects of acquisitions, dispositions, and other items affecting period to period comparability. See Segment Information for details on how adjusted revenues were calculated for each period presented.
We believe that this measure provides management and investors with a more complete understanding of underlying revenue trends of established, ongoing operations by excluding the effect of activities which are subject to volatility and can obscure underlying trends.
Management recognizes that the term "adjusted revenues" may be interpreted differently by other companies and under different circumstances. Although this may influence comparability of absolute percentage growth from company to company, we believe that these measures are useful in assessing trends of the Company and its segments, and may therefore be a useful tool in assessing period-to-period performance trends.
Adjusted gross profit and adjusted gross profit percentage
Adjusted gross profit measures GAAP revenues less cost of revenues, adjusted for the effects of acquisitions, dispositions, and other items affecting period to period comparability. Adjusted gross profit percentage measures adjusted gross profit divided by adjusted revenues. See Segment Information for details on how adjusted gross profit and adjusted gross profit percentage were calculated for each period presented.
We believe that this measure provides management and investors with a more complete understanding of underlying gross profit trends of established, ongoing operations by excluding the effect of activities which are subject to volatility and can obscure underlying trends.
Management recognizes that the term "adjusted gross profit" or “adjusted gross profit percentage” may be interpreted differently by other companies and under different circumstances. Although this interpretation may vary from company to company, we believe that these consistently applied measures are useful in assessing trends of the Company and its segments, and may therefore be a useful tool in assessing period-to-period performance trends.
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 basedstock-based compensation, Non-QualifiedNQDC Plan Investment appreciation/investment appreciation/depreciation, and for certain items affecting period to period comparability. See Segment Information orfor 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 used 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 segment contribution margin adjusted for certain items affecting period to periodperiod-to-period comparability. See Segment Information for details on how segment contribution margin and comparable segment contribution margin werewas calculated for each period presented.
When viewed together with our GAAPGAAP results, we believe segment contribution margin and comparableadjusted segment contribution margin provide management and users of the financial statements meaningful information about the performance of our business segments.
Segment contribution margin and comparableadjusted 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 the segment contribution margin and adjusted segment contribution margin is that it isthey are an incomplete measure of profitability as it doesthey 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 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.
Segment Information Information
The following table presents the net revenues,revenues, gross profit and segment contribution margin from each of the Company’s business segments, as well as consolidated EBITDA, Adjusted EBITDA and adjusted net income.
Three Months Ended | |||||||||||||||||||||||||
December 31, 2017 | January 1, 2017 | Exclude Operating Results of Fannie May | Severance Costs | Adjusted (non-GAAP) December 31, 2017 | Adjusted (non-GAAP) % Change | ||||||||||||||||||||
(dollars in thousands) | |||||||||||||||||||||||||
Net revenues: | |||||||||||||||||||||||||
1-800-Flowers.com Consumer Floral | $ | 100,064 | $ | 97,808 | $ | - | $ | - | $ | 97,808 | 2.3 | % | |||||||||||||
BloomNet Wire Service | 20,375 | 20,502 | 20,502 | -0.6 | % | ||||||||||||||||||||
Gourmet Food & Gift Baskets | 405,964 | 436,870 | (41,199 | ) | - | 395,671 | 2.6 | % | |||||||||||||||||
Corporate | 317 | 316 | 316 | 0.3 | % | ||||||||||||||||||||
Intercompany eliminations | (627 | ) | (943 | ) | 344 | - | (599 | ) | -4.7 | % | |||||||||||||||
Total net revenues | $ | 526,093 | $ | 554,553 | $ | (40,855 | ) | $ | - | $ | 513,698 | 2.4 | % | ||||||||||||
Gross profit: | |||||||||||||||||||||||||
1-800-Flowers.com Consumer Floral | $ | 38,844 | $ | 40,300 | - | - | $ | 40,300 | -3.6 | % | |||||||||||||||
38.8 | % | 41.2 | % | 41.2 | % | ||||||||||||||||||||
- | - | ||||||||||||||||||||||||
BloomNet Wire Service | 11,693 | 12,310 | 12,310 | -5.0 | % | ||||||||||||||||||||
57.4 | % | 60.0 | % | - | - | 60.0 | % | ||||||||||||||||||
Gourmet Food & Gift Baskets | 184,468 | 204,185 | (15,939 | ) | - | 188,246 | -2.0 | % | |||||||||||||||||
45.4 | % | 46.7 | % | 47.6 | % | ||||||||||||||||||||
Corporate (a) | 254 | 199 | - | - | 199 | 27.6 | % | ||||||||||||||||||
80.1 | % | 63.0 | % | 63.0 | % | ||||||||||||||||||||
Total gross profit | $ | 235,259 | $ | 256,994 | $ | (15,939 | ) | $ | - | $ | 241,055 | -2.4 | % | ||||||||||||
44.7 | % | 46.3 | % | 46.9 | % | ||||||||||||||||||||
EBITDA (non-GAAP): | |||||||||||||||||||||||||
Segment Contribution Margin (non-GAAP): | |||||||||||||||||||||||||
1-800-Flowers.com Consumer Floral | $ | 10,791 | $ | 13,128 | $ | - | $ | - | $ | 13,128 | -17.8 | % | |||||||||||||
BloomNet Wire Service | 7,692 | 8,189 | - | - | 8,189 | -6.1 | % | ||||||||||||||||||
Gourmet Food & Gift Baskets | 93,496 | 104,624 | (6,219 | ) | 79 | 98,484 | -5.1 | % | |||||||||||||||||
Segment Contribution Margin Subtotal | 111,979 | 125,941 | (6,219 | ) | 79 | 119,801 | -6.5 | % | |||||||||||||||||
Corporate (a) | (18,836 | ) | (20,223 | ) | 356 | - | (19,867 | ) | 5.2 | % | |||||||||||||||
EBITDA (non-GAAP) | 93,143 | 105,718 | (5,863 | ) | 79 | 99,934 | -6.8 | % | |||||||||||||||||
Add: Stock-based compensation | 968 | 1,724 | - | - | 1,724 | -43.9 | % | ||||||||||||||||||
Add: Comp charge related to NQ Plan Investment Appreciation | 364 | 20 | - | - | 20 | 1720.0 | % | ||||||||||||||||||
Adjusted EBITDA (non-GAAP) | $ | 94,475 | $ | 107,462 | $ | (5,863 | ) | $ | 79 | $ | 101,678 | -7.1 | % |
Six Months Ended | ||||||||||||||||||||||||
December 31, 2017 | January 1, 2017 | Exclude Operating Results of Fannie May | Severance Costs | Adjusted (non-GAAP) December 31, 2017 | Adjusted (non-GAAP) % Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||
1-800-Flowers.com Consumer Floral | $ | 176,674 | $ | 173,023 | $ | - | $ | - | $ | 173,023 | 2.1 | % | ||||||||||||
BloomNet Wire Service | 40,139 | 41,466 | - | - | 41,466 | -3.2 | % | |||||||||||||||||
Gourmet Food & Gift Baskets | 466,950 | 506,684 | (52,573 | ) | - | 454,111 | 2.8 | % | ||||||||||||||||
Corporate | 587 | 579 | - | - | 579 | 1.4 | % | |||||||||||||||||
Intercompany eliminations | (908 | ) | (1,370 | ) | 514 | - | (856 | ) | -6.0 | % | ||||||||||||||
Total net revenues | $ | 683,442 | $ | 720,382 | $ | (52,059 | ) | $ | - | $ | 668,323 | 2.3 | % | |||||||||||
Gross profit: | ||||||||||||||||||||||||
1-800-Flowers.com Consumer Floral | $ | 69,578 | $ | 70,799 | $ | - | $ | - | $ | 70,799 | -1.7 | % | ||||||||||||
39.4 | % | 40.9 | % | 40.9 | % | |||||||||||||||||||
BloomNet Wire Service | 22,751 | 24,104 | - | - | 24,104 | -5.6 | % | |||||||||||||||||
56.7 | % | 58.1 | % | 58.1 | % | |||||||||||||||||||
Gourmet Food & Gift Baskets | 209,620 | 232,936 | (20,425 | ) | - | 212,511 | -1.4 | % | ||||||||||||||||
44.9 | % | 46.0 | % | 46.8 | % | |||||||||||||||||||
Corporate (a) | 588 | 542 | - | - | 542 | 8.5 | % | |||||||||||||||||
100.2 | % | 93.6 | % | 93.6 | % | |||||||||||||||||||
Total gross profit | $ | 302,537 | $ | 328,381 | $ | (20,425 | ) | $ | - | $ | 307,956 | -1.8 | % | |||||||||||
44.3 | % | 45.6 | % | 46.1 | % | |||||||||||||||||||
EBITDA (non-GAAP): | ||||||||||||||||||||||||
Segment Contribution Margin (non-GAAP): | ||||||||||||||||||||||||
1-800-Flowers.com Consumer Floral | $ | 17,762 | $ | 21,309 | $ | - | $ | - | $ | 21,309 | -16.6 | % | ||||||||||||
BloomNet Wire Service | 14,393 | 15,468 | - | - | 15,468 | -6.9 | % | |||||||||||||||||
Gourmet Food & Gift Baskets | 88,509 | 95,320 | (3,018 | ) | 103 | 92,405 | -4.2 | % | ||||||||||||||||
Segment Contribution Margin Subtotal | 120,664 | 132,097 | (3,018 | ) | 103 | 129,182 | -6.6 | % | ||||||||||||||||
Corporate (a) | (39,040 | ) | (41,491 | ) | 763 | - | (40,728 | ) | 4.1 | % | ||||||||||||||
EBITDA (non-GAAP) | 81,624 | 90,606 | (2,255 | ) | 103 | 88,454 | -7.7 | % | ||||||||||||||||
Add: Stock-based compensation | 2,069 | 3,498 | - | - | 3,498 | -40.9 | % | |||||||||||||||||
Add: Comp charge related to NQ Plan Investment Appreciation | 639 | 282 | - | - | 282 | -126.6 | % | |||||||||||||||||
Adjusted EBITDA (non-GAAP) | $ | 84,332 | $ | 94,386 | $ | (2,255 | ) | $ | 103 | $ | 92,234 | -8.6 | % |
EBITDA.
Three Months Ended | ||||||||||||||||||||||||
December 27, 2020 | PersonalizationMall Litigation and Transaction Costs | Harry & David Store Closure Costs | As Adjusted (non-GAAP) December 27, 2020 | December 29, 2019 | % Change | |||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||
Consumer Floral & Gifts | $ | 305,357 | $ | - | $ | - | $ | 305,357 | $ | 115,716 | 163.9 | % | ||||||||||||
BloomNet | 34,051 | - | - | 34,051 | 25,722 | 32.4 | % | |||||||||||||||||
Gourmet Foods & Gift Baskets | 538,265 | - | - | 538,265 | 464,584 | 15.9 | % | |||||||||||||||||
Corporate | 135 | - | - | 135 | 165 | -18.2 | % | |||||||||||||||||
Intercompany eliminations | (552 | ) | - | - | (552 | ) | (545 | ) | -1.3 | % | ||||||||||||||
Total net revenues | $ | 877,256 | $ | - | $ | - | $ | 877,256 | $ | 605,642 | 44.8 | % | ||||||||||||
Gross profit: | ||||||||||||||||||||||||
Consumer Floral & Gifts | $ | 134,474 | $ | - | $ | - | $ | 134,474 | $ | 44,544 | 201.9 | % | ||||||||||||
44.0 | % | 44.0 | % | 38.5 | % | |||||||||||||||||||
BloomNet | 16,820 | - | - | 16,820 | 13,161 | 27.8 | % | |||||||||||||||||
49.4 | % | 49.4 | % | 51.2 | % | |||||||||||||||||||
Gourmet Foods & Gift Baskets | 246,890 | - | - | 246,890 | 211,362 | 16.8 | % | |||||||||||||||||
45.9 | % | 45.9 | % | 45.5 | % | |||||||||||||||||||
Corporate | 62 | - | - | 62 | 105 | -41.0 | % | |||||||||||||||||
45.9 | % | 45.9 | % | 63.6 | % | |||||||||||||||||||
Total gross profit | $ | 398,246 | $ | - | $ | - | $ | 398,246 | $ | 269,172 | 48.0 | % | ||||||||||||
45.4 | % | - | - | 45.4 | % | 44.4 | % | |||||||||||||||||
EBITDA (non-GAAP): | ||||||||||||||||||||||||
Segment Contribution Margin (non-GAAP) (a): | ||||||||||||||||||||||||
Consumer Floral & Gifts | $ | 45,657 | $ | - | $ | - | $ | 45,657 | $ | 10,890 | 319.3 | % | ||||||||||||
BloomNet | 12,141 | - | - | 12,141 | 9,134 | 32.9 | % | |||||||||||||||||
Gourmet Foods & Gift Baskets | 135,621 | - | (78 | ) | 135,543 | 113,387 | 19.5 | % | ||||||||||||||||
Segment Contribution Margin Subtotal | 193,419 | - | (78 | ) | 193,341 | 133,411 | 44.9 | % | ||||||||||||||||
Corporate (b) | (34,757 | ) | 513 | - | (34,244 | ) | (26,010 | ) | -31.7 | % | ||||||||||||||
EBITDA (non-GAAP) | 158,662 | 513 | (78 | ) | 159,097 | $ | 107,401 | 48.1 | % | |||||||||||||||
Add: Stock-based compensation | 2,965 | 2,965 | 2,280 | 30.0 | % | |||||||||||||||||||
Add: Compensation charge related to NQDC Plan Investment Appreciation | 2,227 | - | - | 2,227 | 1,002 | 122.2 | % | |||||||||||||||||
Adjusted EBITDA (non-GAAP) | $ | 163,854 | $ | 513 | $ | (78 | ) | $ | 164,289 | $ | 110,683 | 48.4 | % |
Reconciliation of net income to adjusted net income (non-GAAP):
Three Months Ended | Years Ended | |||||||||||||||
December 31, 2017 | January 1, 2017 | December 31, 2017 | January 1, 2017 | |||||||||||||
(in thousands, except per share data) | ||||||||||||||||
Net income | $ | 70,699 | $ | 62,929 | $ | 57,477 | $ | 47,158 | ||||||||
Adjustments to reconcile net income to adjusted net income (non-GAAP) | ||||||||||||||||
Deduct: Fannie May operating results | - | 5,047 | - | 629 | ||||||||||||
Deduct: U.S. tax reform impact on deferred taxes (b) | 12,158 | - | 12,158 | - | ||||||||||||
Add back: Severance costs | - | 79 | - | 103 | ||||||||||||
Add back: Income tax expense impact on Fannie May operating results and severance adjustments | - | 1,656 | - | 171 | ||||||||||||
Adjusted net income (non-GAAP) | $ | 58,541 | $ | 59,617 | $ | 45,319 | $ | 46,803 | ||||||||
Basic and diluted net income per common share | ||||||||||||||||
Basic | $ | 1.09 | $ | 0.97 | $ | 0.89 | $ | 0.72 | ||||||||
Diluted | $ | 1.06 | $ | 0.93 | $ | 0.86 | $ | 0.70 | ||||||||
Basic and diluted adjusted net income per common share (non-GAAP) | ||||||||||||||||
Basic | $ | 0.91 | $ | 0.91 | $ | 0.70 | $ | 0.72 | ||||||||
Diluted | $ | 0.88 | $ | 0.88 | $ | 0.68 | $ | 0.69 | ||||||||
Weighted average shares used in the calculation of net income and adjusted net income (non-GAAP) per common share | ||||||||||||||||
Basic | 64,601 | 65,172 | 64,778 | 65,112 | ||||||||||||
Diluted | 66,782 | 67,754 | 67,037 | 67,778 |
Reconciliation of net income to adjusted EBITDA (non-GAAP) (c):
Three Months Ended | Years Ended | |||||||||||||||
December 31, 2017 | January 1, 2017 | December 31, 2017 | January 1, 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Net income | $ | 70,699 | $ | 62,929 | $ | 57,477 | $ | 47,158 | ||||||||
Add: | ||||||||||||||||
Interest expense, net | 1,140 | 2,155 | 1,911 | 3,456 | ||||||||||||
Depreciation and amortization | 8,677 | 9,167 | 16,761 | 17,164 | ||||||||||||
Income tax expense | 12,627 | 31,467 | 5,475 | 22,828 | ||||||||||||
EBITDA (non-GAAP) | 93,143 | 105,718 | 81,624 | 90,606 | ||||||||||||
Add: | ||||||||||||||||
Severance costs | - | 79 | - | 103 | ||||||||||||
Compensation charge related to NQ plan investment appreciation | 364 | 20 | 639 | 282 | ||||||||||||
Stock-based compensation | 968 | 1,724 | 2,069 | 3,498 | ||||||||||||
Less: | ||||||||||||||||
Fannie May EBITDA | - | 5,863 | - | 2,255 | ||||||||||||
Adjusted EBITDA (non-GAAP) | $ | 94,475 | $ | 101,678 | $ | 84,332 | $ | 92,234 |
|
|
|
|
|
|
Six Months Ended | ||||||||||||||||||||||||
December 27, 2020 | PersonalizationMall Litigation and Transaction Costs | Harry & David Store Closure Costs | As Adjusted (non-GAAP) December 27, 2020 | December 29, 2019 | % Change | |||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||
Consumer Floral & Gifts | $ | 466,903 | $ | - | $ | - | $ | 466,903 | $ | 206,484 | 126.1 | % | ||||||||||||
BloomNet | 66,789 | - | - | 66,789 | 51,162 | 30.5 | % | |||||||||||||||||
Gourmet Foods & Gift Baskets | 628,194 | - | - | 628,194 | 535,799 | 17.2 | % | |||||||||||||||||
Corporate | 241 | - | - | 241 | 360 | -33.1 | % | |||||||||||||||||
Intercompany eliminations | (1,099 | ) | - | - | (1,099 | ) | (900 | ) | -22.1 | % | ||||||||||||||
Total net revenues | $ | 1,161,028 | $ | - | $ | - | $ | 1,161,028 | $ | 792,905 | 46.4 | % | ||||||||||||
Gross profit: | ||||||||||||||||||||||||
Consumer Floral & Gifts | $ | 200,060 | $ | - | $ | - | $ | 200,060 | $ | 80,594 | 148.2 | % | ||||||||||||
42.8 | % | 42.8 | % | 39.0 | % | |||||||||||||||||||
BloomNet | 31,658 | - | - | 31,658 | 26,119 | 21.2 | % | |||||||||||||||||
47.4 | % | 47.4 | % | 51.1 | % | |||||||||||||||||||
Gourmet Foods & Gift Baskets | 281,897 | - | - | 281,897 | 238,404 | 18.2 | % | |||||||||||||||||
44.9 | % | 44.9 | % | 44.5 | % | |||||||||||||||||||
Corporate | 111 | - | - | 111 | 201 | -44.8 | % | |||||||||||||||||
46.1 | % | 46.1 | % | 55.8 | % | |||||||||||||||||||
Total gross profit | $ | 513,726 | $ | - | $ | - | $ | 513,726 | $ | 345,318 | 48.8 | % | ||||||||||||
44.2 | % | - | - | 44.2 | % | 43.6 | % | |||||||||||||||||
EBITDA (non-GAAP): | ||||||||||||||||||||||||
Segment Contribution Margin (non-GAAP) (a): | ||||||||||||||||||||||||
Consumer Floral & Gifts | $ | 64,893 | $ | - | $ | - | $ | 64,893 | $ | 19,414 | 234.3 | % | ||||||||||||
BloomNet | 22,562 | - | - | 22,562 | 17,491 | 29.0 | % | |||||||||||||||||
Gourmet Foods & Gift Baskets | 133,040 | - | (483 | ) | 132,557 | 106,787 | 24.1 | % | ||||||||||||||||
Segment Contribution Margin Subtotal | 220,495 | - | (483 | ) | 220,012 | 143,692 | 53.1 | % | ||||||||||||||||
Corporate (b) | (66,454 | ) | 5,403 | - | (61,051 | ) | (49,309 | ) | -23.8 | % | ||||||||||||||
EBITDA (non-GAAP) | 154,041 | $ | 5,403 | $ | (483 | ) | $ | 158,961 | 94,383 | 68.4 | % | |||||||||||||
Add: Stock-based compensation | 5,358 | 5,358 | 4,045 | 32.5 | % | |||||||||||||||||||
Add: Compensation charge related to NQDC Plan Investment Appreciation | 3,207 | - | - | 3,207 | 958 | 234.8 | % | |||||||||||||||||
Adjusted EBITDA (non-GAAP) | $ | 162,606 | $ | 5,403 | $ | (483 | ) | $ | 167,526 | $ | 99,386 | 68.6 | % |
Reconciliation of net income to adjusted net income (non-GAAP): |
Three Months Ended |
Six Months Ended | ||||||||||||||
December 27, 2020 | December 29, 2019 | December 27, 2020 | December 29, 2019 | |||||||||||||
Net income | $ | 113,677 | $ | 74,152 | $ | 103,915 | $ | 58,881 | ||||||||
Adjustments to reconcile net income to adjusted net income (non-GAAP) | ||||||||||||||||
Add: Personalization Mall litigation and transaction costs | 513 | - | 5,403 | - | ||||||||||||
Deduct: Harry & David store closure cost adjustment | (78 | ) | - | (483 | ) | - | ||||||||||
Deduct: Income tax (benefit) on adjustments | 125 | - | (1,117 | ) | - | |||||||||||
Adjusted net income (non-GAAP) | $ | 114,237 | $ | 74,152 | $ | 107,718 | $ | 58,881 | ||||||||
Basic and diluted net income per common share | ||||||||||||||||
Basic | $ | 1.76 | $ | 1.15 | $ | 1.61 | $ | 0.91 | ||||||||
Diluted | $ | 1.71 | $ | 1.12 | $ | 1.56 | $ | 0.89 | ||||||||
Basic and diluted adjusted net income per common share (non-GAAP) | ||||||||||||||||
Basic | $ | 1.76 | $ | 1.15 | $ | 1.67 | $ | 0.91 | ||||||||
Diluted | $ | 1.72 | $ | 1.12 | $ | 1.62 | $ | 0.89 | ||||||||
Weighted average shares used in the calculation of net income and adjusted net income per common share | ||||||||||||||||
Basic | 64,728 | 64,687 | 64,524 | 64,595 | ||||||||||||
Diluted | 66,543 | 66,401 | 66,593 | 66,486 |
Reconciliation of net income to adjusted EBITDA (non-GAAP): |
Three Months Ended |
Six Months Ended | ||||||||||||||
December 27, 2020 | December 29, 2019 | December 27, 2020 | December 29, 2019 | |||||||||||||
Net income | $ | 113,677 | $ | 74,152 | $ | 103,915 | $ | 58,881 | ||||||||
Add: Interest expense, net | (330 | ) | 10 | (289 | ) | 689 | ||||||||||
Add: Depreciation and amortization | 11,060 | 7,830 | 19,900 | 15,465 | ||||||||||||
Add: Income tax expense | 34,255 | 25,409 | 30,515 | 19,348 | ||||||||||||
EBITDA | 158,662 | 107,401 | 154,041 | 94,383 | ||||||||||||
Add: Stock-based compensation | 2,965 | 2,280 | 5,358 | 4,045 | ||||||||||||
Add: Compensation charge related to NQDC plan investment appreciation | 2,227 | 1,002 | 3,207 | 958 | ||||||||||||
Add: Personalization Mall litigation and transaction costs | 513 | - | 5,403 | - | ||||||||||||
Deduct: Harry & David store closure cost adjustment | (78 | ) | - | (483 | ) | - | ||||||||||
Adjusted EBITDA | $ | 164,289 | $ | 110,683 | $ | 167,526 | $ | 99,386 | ||||||||
(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. |
Results of OperationsOperations
Net Revenuesrevenues
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | January 1, 2017 | % Change | December 31, 2017 | January 1, 2017 | % Change | December 27, 2020 | December 29, 2019 | % Change | December 27, 2020 | December 29, 2019 | % Change | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Net revenues: | ||||||||||||||||||||||||||||||||||||||||||||||||
E-Commerce | $ | 424,132 | $ | 420,594 | 0.8 | % | $ | 532,903 | $ | 527,678 | 1.0 | % | $ | 777,810 | $ | 487,084 | 59.7 | % | $ | 1,016,673 | $ | 616,134 | 65.0 | % | ||||||||||||||||||||||||
Other | 101,961 | 133,959 | -23.9 | % | 150,539 | 192,704 | -21.9 | % | 99,446 | 118,558 | -16.1 | % | 144,355 | 176,771 | -18.3 | % | ||||||||||||||||||||||||||||||||
Total net revenues | $ | 526,093 | $ | 554,553 | -5.1 | % | $ | 683,442 | $ | 720,382 | -5.1 | % | $ | 877,256 | $ | 605,642 | 44.8 | % | $ | 1,161,028 | $ | 792,905 | 46.4 | % |
Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits.
Net revenues decreased 5.1%increased 44.8% and 46.4% duringboth the three and six months ended December 31, 2017,27, 2020, respectively, compared to the same periods of the prior year, due to higher revenues across our three business segments (+24.7% and +28.4% on a pro-forma basis for the dispositionthree and six months ended December 27, 2020,compared to the respective prior year periods, excluding the impact of Fannie MayPersonalizationMall, which was acquired on May 30, 2017. On a comparable basis, adjusting fiscal 2017 netAugust 3, 2020,and is included in our Consumer Floral & Gifts segment)as the positive trends we had been seeing in everyday gifting occasions during the previous two quarters continued throughout the 2020 holiday gifting season. The marketing and merchandising investments that the Company has made across its brands, including product offerings and messaging that have resonated with our customers, coupled with the strategic acquisitions of Shari’s Berries® in August of 2019 and PersonalizationMall.com in August of 2020, have enabled the Company to capitalize on the consumer behavioral shift to e-commerce shopping caused by the pandemic.
Disaggregated revenue by channel follows:
Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||
December 27, 2020 | December 29, 2019 | |||||||||||||||||||||||||||||||
Consumer Floral & Gifts | BloomNet | Gourmet Foods & Gift Baskets | Consolidated | Consumer Floral & Gifts | BloomNet | Gourmet Foods & Gift Baskets | Consolidated | |||||||||||||||||||||||||
Net revenues |
| |||||||||||||||||||||||||||||||
E-commerce | $ | 303,275 | $ | - | $ | 474,535 | $ | 777,810 | $ | 113,858 | $ | - | $ | 373,226 | $ | 487,084 | ||||||||||||||||
Retail | 1,210 | - | 4,088 | 5,298 | 1,082 | - | 23,120 | 24,202 | ||||||||||||||||||||||||
Wholesale | 9,150 | 59,642 | 68,792 | - | 7,270 | 68,238 | 75,508 | |||||||||||||||||||||||||
BloomNet services | 24,901 | - | 24,901 | - | 18,452 | - | 18,452 | |||||||||||||||||||||||||
Other | 872 | - | - | 872 | 776 | - | - | 776 | ||||||||||||||||||||||||
Corporate | - | - | 135 | - | - | - | 165 | |||||||||||||||||||||||||
Eliminations | - | - | (552 | ) | - | - | - | (545 | ) | |||||||||||||||||||||||
Net revenues | $ | 305,357 | $ | 34,051 | $ | 538,265 | $ | 877,256 | $ | 115,716 | $ | 25,722 | $ | 464,584 | $ | 605,642 |
Six months ended | Six months ended | |||||||||||||||||||||||||||||||
December 27, 2020 | December 29, 2019 | |||||||||||||||||||||||||||||||
Consumer Floral & Gifts | BloomNet | Gourmet Foods & Gift Baskets | Consolidated | Consumer Floral & Gifts | BloomNet | Gourmet Foods & Gift Baskets | Consolidated | |||||||||||||||||||||||||
Net revenues | (in thousands) | |||||||||||||||||||||||||||||||
E-commerce | $ | 463,067 | $ | - | $ | 553,606 | $ | 1,016,673 | $ | 202,946 | $ | - | $ | 413,188 | $ | 616,134 | ||||||||||||||||
Retail | 2,157 | - | 5,661 | 7,818 | 2,021 | - | 30,610 | 32,631 | ||||||||||||||||||||||||
Wholesale | - | 20,443 | 68,927 | 89,370 | - | 16,018 | 92,001 | 108,019 | ||||||||||||||||||||||||
BloomNet services | - | 46,346 | - | 46,346 | - | 35,144 | - | 35,144 | ||||||||||||||||||||||||
Other | 1,679 | - | - | 1,679 | 1,517 | - | - | 1,517 | ||||||||||||||||||||||||
Corporate | - | - | - | 241 | - | - | - | 360 | ||||||||||||||||||||||||
Eliminations | - | - | - | (1,099 | ) | - | - | - | (900 | ) | ||||||||||||||||||||||
Net revenues | $ | 466,903 | $ | 66,789 | $ | 628,194 | $ | 1,161,028 | $ | 206,484 | $ | 51,162 | $ | 535,799 | $ | 792,905 |
Revenue by sales channel:
E-commerce revenues to exclude the revenues of Fannie May, net revenues(combined online and telephonic) increased 2.4%by 59.7% and 2.3%65.0% during the three and six months ended December 31, 2017, respectively, compared to the same periods of the prior year. This increase was due to growth within the Consumer Floral and Gourmet Foods & Gift Baskets segment, attributable to the Harry & David and 1-800-Baskets/DesignPac brands, partially offset by slightly lower revenues in the Company’s BloomNet segment. Comparable revenue growth was negatively impacted by a temporary disruption in operations at our Cheryl’s brand, related to the recent implementation of a new production and warehouse management system, which, in turn, led to the brand’s decision to stop taking orders eight days prior to the Christmas holiday. As a result, the Company estimates that it had to forego approximately $4.0 million in holiday revenues during the three and six months ended December 31, 2017. In addition, revenues during the six months ended December 31, 2017 were negatively impacted, by approximately $1.1 million, due to hurricanes Harvey and Irma.
E-commerce revenues (combined online and telephonic) increased by 0.8% and 1.0% during the three and six months ended December 31, 2017, 27, 2020, respectively, compared to the same periods of the prior year, as a result of growth withinwithin: (i) the Consumer Floral and Gourmet Foods & Gift Baskets segments. On a comparable basis, adjusting fiscal 2017 e-commerce revenues to excludesegment of 27.1% and 34.0%, and (ii) the Consumer Floral & Gifts segment of 166.4% and 128.2%, which includes the revenues of Fannie May, e-commerce revenues increased 3.1% and 2.9% duringPersonalizationMall, since its date of acquisition on August 3, 2020. During the three and six months ended December 31, 2017,27, 2020, respectively, compared to the same periods of the prior year. During the three months ended December 31, 2017, the Company fulfilled approximately 5.205,0009.9 and 13.2 million orders through its e-commerce sales channels (online and telephonic sales), an increase of 70.7% and 75.5% compared to approximately 5,263,000 (5,020,000 adjusted to exclude Fannie May orders in fiscal 2017) during the same period of the prior year, while average order value increaseddecreased 6.5% and 6.0%, to $81.44 during the three months ended December 31, 2017, from $79.92 ($81.92 adjusted to exclude Fannie May$78.89 and $76.83, respectively. The decrease in average order value in fiscal 2017) duringwas attributable to the same periodimpact of the prior year. During the six months ended December 31, 2017, the Company fulfilled approximately 6,725,000 orders through its e-commerce sales channels (online and telephonic sales), compared to approximately 6,780,000 (6,526,000 adjusted to exclude Fannie May orders in fiscal 2017) during the same periodmix of the prior year, while averagePersonalizationMall order value increased to $79.20 during the six months ended December 31, 2017, from $77.83 ($79.36 adjusted to exclude Fannie May average order value in fiscal 2017) during the same period of the prior year.volumes.
Other revenues are comprised of the Company’sCompany’s BloomNet Wire Service segment, as well as the wholesale and retail channels of its 1-800-Flowers.com Consumer Floral & Gifts and Gourmet Food andFoods & Gift Baskets segments. Other revenues decreased by 23.9%16.1% and 21.9%18.3% during the three and six months ended December 31, 2017, respectively,27, 2020, compared to the same periods of the prior year, primarilydue to: (i) wholesale/retail sales channel declines within the Gourmet Foods & Gift Baskets segment, as a result ofbig-box retail store customers reduced order volumes for the Fannie May disposition during May 2017. On a comparable basis, adjusting fiscal 2017 other revenues to exclude the revenues of Fannie May, other revenues decreased 0.5% during the three months ended December 31, 2017, and increased 0.1% during the six months ended December 31, 2017, comparedholiday season due to the respective prior year periods.pandemic, and (ii) the closure of Harry and David retail store operations in the fourth quarter of fiscal 2020, partially offset by an increase in BloomNet segment revenues.
The 1-800-Flowers.com Revenue by segment:
Consumer Floral & Gifts – this segment, includeswhich historically has consisted primarily of the operations of the 1-800-Flowers.com brand, whichbut now includes revenues attributable to PersonalizationMall subsequent to its August 3, 2020 acquisition date, 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 increased 2.3%163.9% and 2.1%,126.1% during the three and six months ended December 31, 2017, in comparison27, 2020, compared to the same periods of the prior year, due to increased demandreflecting: (i) the marketing and merchandising investments made in our flagship brand, which have driven by merchandisingour growth and marketing efforts,market share gains that began in the second half of Fiscal 2018, continued through Fiscal 2020, and accelerated with the start of the pandemic, as well as an increase in promotional activity in order to expand market share. Revenues(ii) the incremental revenues of PersonalizationMall. Excluding the revenues derived from PersonalizationMall, segment pro-forma revenue growth was 58.3% and 57.1% during the three and six months ended December 31, 2017 were negatively impacted, by approximately $0.8 million, due to hurricanes Harvey and Irma.27, 2020, respectively.
The BloomNet Wire Service- revenues in this segment includes revenuesare derived from membership fees, as well as other product and service offerings to florists. Net revenues decreased 0.6%increased 32.4% and 3.2%30.5% during the three and six months ended December 31, 2017,27, 2020, respectively, compared to thethe same periods of the prior year, primarily due to lowerincreased: (i) settlement processing revenues, due to the higher florist-to-florist order volume, (ii)transaction, reciprocity and membership transaction fees, driven primarily by increased order volume sent through the network, and ancillary revenues resulting from a decline in network shop count, partially offset by higher(iii) favorable wholesale product revenues. During the six months ended December 31, 2017, these decreases were exacerbated by the impact of hurricanes Harvey and Irma, as BloomNet provided financial aid to florists in the affected areas, and waived approximately $0.2 million of membership fees.demand.
The Gourmet FoodFoods & Gift Baskets – this segment includes the operations of Harry & David, Wolferman’s, Stockyards,Wolferman’s, Stock Yards, Cheryl’s Fannie May (through the date of its disposition on May 30, 2017),Cookies, The Popcorn Factory, 1-800-Baskets/DesignPac, and 1-800-Baskets/DesignPac.Shari’s Berries (acquired on August 14, 2019). Revenue is derived from the sale of gourmet fruits, cookies, baked gifts, premium chocolates and confections, gourmet popcorn, gift baskets, dipped berries, and prime steaks and chops through the Company’s e-commerce sales channels (telephonic and online sales) and company-owned and operated retail stores under the Harry & David Cheryl’s and Fannie May (through the date of its disposition)Cheryl’s brand names, as well as wholesale operations. Net revenues decreased 7.1%increased 15.9% and 7.8%17.2% during the three and six months ended December 31, 2017,27, 2020, respectively, compared to the same periods of the prior year, due to favorable e-commerce revenues across the dispositionsegment, partially offset by reduced wholesale and retail volumes. E-commerce revenue growth of Fannie May on May 30, 2017. On a comparable basis, adjusting fiscal year 2017 revenues to exclude Fannie May, net revenues increased 2.6%27.1% and 2.8%34.0% during the three and six months ended December 31, 2017,27, 2020, respectively, compared towas the same periodsresult of increased demand during the Christmas holiday period, as well as increased penetration of “everyday” volume within the segment, which benefitted from the impact of the prior year due to growth by the Harry & DavidCOVID-19 pandemic as product offerings, convenience, and 1-800-Baskets.com consumerbrand sentiment resonated with customers. Wholesale/retail channel revenues declined 30.2% and wholesale channel brands. Comparable segment growth was attributable to several initiatives implemented during the second half of fiscal 2017, including: (i) the Company’s successful efforts to grow the “everyday” volume of its Gourmet Foods & Gift Baskets brands through expanded birthday and sympathy merchandise, (ii) the modernization of the Harry & David brand, which focused on developing merchandising assortments and digital marketing programs that helped to broaden the demographic reach of the brand, and, (ii) the launch of the Simply Chocolates product line, which is managed by 1-800-Baskets. As noted above, Cheryl’s revenue decrease, in comparison to the prior year, was due to the Company’s decision to suspend order taking as a result of operational issues experienced during the weeks leading up to the Christmas holiday. As a result, the Company estimates that it had to forego approximately $4.0 million in holiday revenues39.2%, during the three and six months ended December 31, 2017. In addition, revenues during the six months ended December 31, 2017 were negatively impacted, by approximately $0.2 million,27, 2020, respectively, as big-box retail store customers reduced order volumes due to hurricanes Harveythe pandemic and Irma. The operational issues at Cheryl’s have been addressed,as a result of the closure of the Harry and business has returned to its normal pace.
David retail store operations in the fourth quarter of fiscal 2020.
Gross Profitprofit
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December 31, 2017 | January 1, 2017 | % Change | December 31, 2017 | January 1, 2017 | % Change | December 27, 2020 | December 29, 2019 | % Change | December 27, 2020 | December 29, 2019 | % Change | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Gross profit | $ | 235,259 | $ | 256,994 | -8.5 | % | $ | 302,537 | $ | 328,381 | -7.9 | % | $ | 398,246 | $ | 269,172 | 48.0 | % | $ | 513,726 | $ | 345,318 | 48.8 | % | ||||||||||||||||||||||||
Gross profit % | 44.7 | % | 46.3 | % | 44.3 | % | 45.6 | % | 45.4 | % | 44.4 | % | 44.2 | % | 43.6 | % |
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 includeincludes labor and facility costs related to direct-to-consumer and wholesale production operations.operations, as well as payments made to sending florists related to order volume sent through the Company’s BloomNet network.
Gross profit decreased 8.5%increased 48.0% and 7.9%48.8% during the three and six months ended December 31, 2017,27, 2020, respectively, in comparisoncompared to the same periods of the prior year, while grossas a result of the increase in revenues noted above. Gross profit percentage decreased 160increased 100 basis points and 13060 basis points, during the three and six months ended December 31, 2017,27, 2020, respectively, in comparisoncompared to the same periods of the prior year.year, as higher margins in the Consumer Floral & Gifts (primarily due to the acquisition of PersonalizationMall, which carries higher margins) and Gourmet Foods & Gift Basket segments were offset by lower margins in the BloomNet segment. On a comparablepro-forma basis, adjusting prior yearexcluding the impact of PersonalizationMall, gross profit to exclude Fannie May, whichmargin percentage was disposed of on May 30, 2017, gross profit decreased 2.4%44.4% and 1.8%43.2% during the three and six months ended December 31, 2017,27, 2020, respectively.
Consumer Floral & Gifts segment - Gross profit increased by 201.9% and 148.2% during the three and six months ended December 27, 2020, respectively, in comparisoncompared to the same periods of the prior year, whileas a result of the revenue increases noted above and increases in gross profitmargin percentage decreased 220 and 180of 550 basis points, to 44.0% and 380 basis points, to 42.8%, during the same periods.respective three and six months periods ended December 27, 2020. The lower comparableincrease in gross profit,margin percentage was primarily attributable to the acquisition of PersonalizationMall, which carries higher margins, as well as pricing initiatives and gross profit percentage, primarily reflectsreductions in promotional activity after the onset of COVID-19, partially offset by higher product and delivery costs associated with the pandemic. On a pro-forma basis, excluding the impact of the operational issue at the Company’s Cheryl’s Cookies brand, as well as increased transportation costs in the Gourmet FoodPersonalizationMall, acquired on August 3, 2020, gross margin percentage was 39.2% and Gift Baskets segment, and increased promotional activity within the Consumer Floral segment in order to increase market share.
The 1-800-Flowers.com Consumer Floral segment gross profit decreased by 3.6% and 1.7%39.1% during the three and six months ended December 31, 2017, respectively, in comparison to the same period of the prior year, due to a decrease in gross profit percentage of 240 and 150 basis points to 38.8% and 39.4%, respectively, partially offset by the aforementioned revenue growth. The lower gross profit percentages reflect an increase in promotional activity initiated to extend the market share of the 1-800-Flowers brand, as well as an increase in Passport free shipping participation, which has improved customer loyalty and purchase frequency.27, 2020, respectively.
BloomNet Wire Service segment’s gross - Gross profit decreasedincreased by 5.0%27.8% and 5.6%21.2% during the three and six months ended December 31, 2017,27, 2020, respectively, in comparisoncompared to the same periodperiods of the prior year, due to the decreaseincrease in revenuesrevenue noted above, as well as decreasespartially offset by a decline in gross profitmargin percentage of 260 and 140180 basis points, to 57.4%49.4%, and 56.7%, respectively, The lower gross profit percentages are370 basis points, to 47.4% during the respective three months ended and six months ended December 27, 2020, due to sales mix, with a decline in higher margin membershiprebates (higher florist-to-florist volume) and related services, offset by an increase in lower marginunfavorable wholesale product sales.margins due to mix, and higher shipping and product costs.
The Gourmet FoodFoods & Gift Baskets segment gross - Gross profit decreasedincreased by 9.7%16.8% and 10.0%18.2% during the three and six months ended December 31, 2017,27, 2020, respectively, in comparisoncompared to the same periods of the prior year, whiledue to the revenue increase noted above, as well as an increase in gross profit percentage decreased 130 and 110of 40 basis points, to 45.4%45.9%, and 44.9%, over the same respective periods. On a comparable40 basis adjusting prior year gross profitpoints, to exclude Fannie May, which was disposed of on May 30, 2017, gross profit decreased 2.0% and 1.4%44.9% during the three and six months ended December 31, 2017, respectively,27, 2020, respectively. The improvement in comparisongross margin percentage was primarily attributable to the same periods of the prior year, while gross profit percentage decreased 220lower promotions, merchandise assortment, and 190 basis points to 45.4% and 44.9%, over the same respective periods. The lower comparable gross profit and gross profit percentage primarily reflects the impact of the operational issue at the Company’s Cheryl’s Cookies brand, which negatively impacted gross profitchannel mix, partially offset by approximately $4.0 million as a result of increased labor, expedited shipping, expiring product and higher customer credits. In addition, although revenue growth provided for improved gross profit at Harry & David, higher transportation costs at Harry & Daviddue to holiday surcharges and our wholesale baskets brands negatively impacted gross profit percentage.
expedited ship methods, as well as increased labor costs.
Marketing and Sales Expensesales expense
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December 31, 2017 | January 1, 2017 | % Change | December 31, 2017 | January 1, 2017 | % Change | December 27, 2020 | December 29, 2019 | % Change | December 27, 2020 | December 29, 2019 | % Change | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Marketing and sales | $ | 113,771 | $ | 119,876 | -5.1 | % | $ | 163,493 | $ | 174,954 | -6.6 | % | $ | 194,696 | $ | 127,404 | 52.8 | % | $ | 274,981 | $ | 184,243 | 49.2 | % | ||||||||||||||||||||||||
Percentage of net revenues | 21.6 | % | 21.6 | % | 23.9 | % | 24.3 | % | 22.2 | % | 21.0 | % | 23.7 | % | 23.2 | % |
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’sCompany’s departments engaged in marketing, selling and merchandising activities.
Marketing and sales expense decreased 5.1%increased 52.8% and 6.6%49.2% during the three and six months ended December 31, 2017,27, 2020, respectively, compared to the same periods of the prior year,, due as a result of marketing initiatives designed to accelerate revenue growth and capture market share within both the dispositionGourmet Foods & Gift Baskets segment, and the Consumer Floral & Gifts segment, which includes the incremental marketing costs of Fannie MayPersonalizationMall, which was acquired on May 30, 2017.August 3, 2020. On a comparablepro-forma basis, adjusting prior yearexcluding the impact of PersonalizationMall, marketing and sales expense to exclude Fannie May’s expenditures, marketingas a percentage of net revenues, was 21.4% and sales expense increased 1.8%23.1% during both the three and six months ended December 31, 2017,27,2020, respectively, compared to 21.0% and 23.2% in comparison to the same periods of the prior year, duereflecting the operational efficiencies and platform leverage attributable to increased marketing spend within the Consumer Floral and Gourmet Foods & Gift Baskets segments, commensurate with revenue growth, including the Company’s efforts to test digital marketing strategies during the holiday season for applications throughout the remainder of the fiscal year. These increases were partially offset by a reduction in performance based bonuses.growth.
Technology and Development Expensedevelopment expense
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | January 1, 2017 | % Change | January 1, 2017 | January 1, 2017 | % Change | December 27, 2020 | December 29, 2019 | % Change | December 27, 2020 | December 29, 2019 | % Change | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Technology and development | $ | 9,175 | $ | 9,849 | -6.8 | % | $ | 18,845 | $ | 19,337 | -2.5 | % | $ | 14,053 | $ | 11,733 | 19.8 | % | $ | 25,656 | $ | 22,536 | 13.8 | % | ||||||||||||||||||||||||
Percentage of net revenues | 1.7 | % | 1.8 | % | 2.8 | % | 2.7 | % | 1.6 | % | 1.9 | % | 2.2 | % | 2.8 | % |
Technology and development expense consists primarily of payroll and operating expenses of the Company’sCompany’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 expenses decreased 6.8%expense increased 19.8% and 2.5%13.8% during the three and six months ended December 31, 2017,27, 2020, respectively, compared to the same periodperiods of the prior year, primarily due to favorableincreased labor, hosting costs and labor expenses resulting from a reduction in performance based bonuses, partially offset by increased license and maintenance costs relatedincurred to security and order processing platforms.support the Company’s technology platform, in addition to the incremental technology costs associated with PersonalizationMall, which was acquired on August 3, 2020.
General and Administrative Expenseadministrative expense
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | January 1, 2017 | % Change | December 31, 2017 | January 1, 2017 | % Change | December 27, 2020 | December 29, 2019 | % Change | December 27, 2020 | December 29, 2019 | % Change | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
General and administrative | $ | 19,170 | $ | 21,551 | -11.0 | % | $ | 38,575 | $ | 43,484 | -11.3 | % | $ | 30,835 | $ | 22,634 | 36.2 | % | $ | 59,048 | $ | 44,156 | 33.7 | % | ||||||||||||||||||||||||
Percentage of net revenues | 3.6 | % | 3.9 | % | 5.6 | % | 6.0 | % | 3.5 | % | 3.7 | % | 5.1 | % | 5.6 | % |
General and administrative expense consists of payroll and other expenses in support of the Company’sCompany’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 decreased 11.0%expenses increased 36.2% and 11.3%33.7% during the three and six months ended December 31, 2017,27, 2020, respectively, compared to the same period of the prior year, primarily due to the disposition of Fannie May on May 30, 2017. On a comparable basis, adjusting prior year general and administrative expense to exclude Fannie May’s expenditures, general and administrative expense decreased 3.9% and 3.7% during the respective three and six months ended December 31, 2017, in comparison to the same periods of the prior year, due to reductions in travel,incremental costs related to: (i) PersonalizationMall (including transaction and litigation related costs), (ii) higher labor resulting from a reduction incosts due to annual merit increases and performance basedrelated bonuses partially offset by an increase inas well as investment earnings on the value of Non-Qualified Deferred CompensationCompany’s NQDC Plan investments (increase offset in assets (offset within Other (income) expense net line item on the financials statement – see below),expenses noted below, and higher(iii) incremental health insurance costs.and safety-related COVID-19 related expenses.
Depreciation and amortization expense and Amortization Expense
Three Months Ended | Six Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
December 31, 2017 | January 1, 2017 | % Change | December 31, 2017 | January 1, 2017 | % Change | December 27, 2020 | December 29, 2019 | % Change | December 27, 2020 | December 29, 2019 | % Change | |||||||||||||||||||||||||||||||||||||
(dollars in thousands) | (dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | $ | 8,677 | $ | 9,167 | -5.3 | % | $ | 16,761 | $ | 17,164 | -2.3 | % | $ | 11,060 | $ | 7,830 | 41.3 | % | $ | 19,900 | $ | 15,465 | 28.7 | % | ||||||||||||||||||||||||
Percentage of net revenues | 1.6 | % | 1.7 | % | 2.5 | % | 2.4 | % | 1.3 | % | 1.3 | % | 1.7 | % | 2.0 | % |
Depreciation and amortization expense for the three months ended December 31, 2017 decreased 5.3% expenses increased 41.3% and 2.3%, in comparison to the same period of the prior year, due to the disposition of Fannie May. On a comparable basis, adjusting prior year depreciation and amortization expense to exclude Fannie May, depreciation and amortization expense increased 3.9% and 7.9%28.7% during the respective three and six months ended December 31, 2017, in comparison27, 2020, respectively, compared to the same periods of the prior year, primarily due to the incremental depreciation and customer list amortization associated with PersonalizationMall, as a result ofwell as recent shorter-livedshort-lived IT capital expenditures.
related ecommerce/platform enhancements.
Interest Expense,(income) expense, net
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
December 31, 2017 | January 1, 2017 | % Change | December 31, 2017 | January 1, 2017 | % Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest expense, net | $ | 1,226 | $ | 2,154 | -43.1 | % | $ | 2,257 | $ | 3,605 | -37.4 | % |
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
December 27, 2020 | December 29, 2019 | % Change | December 27, 2020 | December 29, 2019 | % Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Interest expense, net | $ | 1,927 | $ | 985 | 95.6 | % | $ | 2,967 | $ | 1,580 | 87.8 | % |
Interest expense, net consists primarily of interest expense and amortization of deferred financing costs attributable to the Company’sCompany’s credit facility (See Note 8 - Debt,, in Item 1.1. for details regarding the 2016 Amended Credit Facility)details), net of income earned on the Company’s available cash balances.
Interest expense, net decreased 43.1%increased 95.6% and 37.4%87.8% during the three and six months ended December 31, 2017 in comparison27, 2020, respectively, compared to the same periods of the prior year, as a result due to the incremental interest expense associated with the New Term Loan, which was used to partially finance the acquisition of scheduled repayment of term loan borrowingsPersonalizationMall, and funding fiscal 2018 working capital requirements primarily throughlower interest income on the use ofCompany’s outstanding cash on hand from the sale of Fannie May, in comparisonbalances due to fiscal 2017, when the Company funded working capital requirements through its revolving credit facility.
lower interest rates.
Other (income) expense, net
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
December 31, 2017 | January 1, 2017 | % Change | December 31, 2017 | January 1, 2017 | % Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Other (income) expense, net | $ | (86 | ) | $ | 1 | 8,700 | % | $ | (346 | ) | $ | (149 | ) | 132.2 | % |
Three Months Ended | Six Months Ended | |||||||||||||||||||||||
December 27, 2020 | December 29, 2019 | % Change | December 27, 2020 | December 29, 2019 | % Change | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Other (income) expense, net | $ | (2,257 | ) | $ | (975 | ) | 131.5 | % | $ | (3,256 | ) | $ | (891 | ) | 265.4 | % |
Other income,expense, net for the three and six months ended December 31, 201727, 2020, respectively, consists primarily of investment earnings ofgain on the Company’s Non-Qualified Deferred CompensationNQDC Plan assets, partially offset by a $0.2 million impairment related to the Company’s equity method investment in Flores Online (see Note 7 - Investmentsabove).
Other (income) expense, net for the three and six months ended January 1, 2017 primarily consists of investment earnings of the Company’s Non-Qualified Deferred Compensation Plan assets for both the three and six months ended January 1, 2017, partially offset by a decrease in the Company’s equity interest in Flores Online of $0.1 million for both the three and six months ended January 1, 2017.assets.
Income Taxes
The Company recorded an income tax expense of $12.6$34.3 million and $5.5$30.5 million respectively, during the three and six months ended December 31, 201727, 2020, respectively, and income tax expense of $31.5$25.4 million and $22.8$19.3 million respectively, during the three and six months ended January 1, 2017.December 29, 2019, respectively. The Company’s effective tax rate for the three and six months ended December 31, 201727, 2020 was 15.2%23.2% and 8.7%22.7%, respectively, compared to 33.3%25.5% and 32.6%24.7% in the same periods of the prior year. The effective rates for fiscal 2018 were impacted by changes associated with the Tax Act (see Note 1 -Accounting Policies in Item 1. above). During the quarter ended December 31, 2017, the Company recognized a benefit of $15.9 million, or $0.24 per diluted share related to the impact of the Tax Act, consisting of a discrete tax benefit of $12.2 million, or $0.18 per diluted share, reflecting a revaluation of deferred tax liabilities at the lower U.S. federal statutory rate of 21%,year 2021 and a benefit of $3.7 million, or $0.06 per diluted share, reflecting the Company’s lower transitional federal tax rate in fiscal 2018 of 28.0 percent. In addition, fiscal 2018 effective rates were impacted by state income taxes, which were partially offset by various permanent differences and tax credits. The effective rates for fiscal 2017year 2020 differed from the U.S. federal statutory rate of 21% due to state income taxes and nondeductible expenses for executive compensation, which were more thanpartially offset by various permanent differences and tax credits, including excess tax benefits on stock based compensation as a resultfrom stock-based 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 the borrowings available under the 20162020 Credit FacilityAgreement (see Note 8 - Debt in Item 1 for details). At December 31, 2017,27, 2020, the Company had working capital of $172.2$146.7 million, including cash and cash equivalents of $232.6$370.6 million, compared to working capital of $132.2$198.3 million, including cash and cash equivalents of $149.7$240.5 million, at July 2, 2017. Borrowings under the Revolver (working capital needs), which were significantly lower than prior year as a result of cash generated from the sale of Fannie May, peaked in November, when cash generated from operations during the Christmas holiday shopping season enabled the Company to repay the Revolver prior to the end of December 2017. June 28, 2020.
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 generatehistorically generated nearly 50% of the Company’s annual revenues, and all of its earnings. As a result,However, with the onset of the COVID-19 pandemic, the Company generatedexperienced a significant increase in its revenues and earnings during its fourth quarter of fiscal year 2020. These trends have continued through the first four weeks of its fiscal year 2021 third quarter. Our customers have increasingly turned to our brands and our expanded product offerings to help them connect and express themselves during the recent COVID-19 pandemic and our “everyday” gifting product line has seen increased volume. While the continuing impacts of COVID-19 are difficult to predict, the Company expects that its fiscal second quarter will continue to be its largest in terms of revenues and earnings, although increases in the Company’s “everyday” business have and are expected to continue to lessen the seasonality of our business.
The Company utilized cash on hand to fund its operations through August 2020. In September 2020, the Company borrowed under its Revolver to fund short-term working capital needs, with borrowings peaking at $70.0 million in November 2020. Cash generated from operations during its second quarter, which, after re-paying all borrowings outstanding under itsthe Christmas holiday shopping season enabled the Company to repay the Revolver isin December 2020. Based on current projected cash flows, the Company believes that available cash balances are expected to be sufficient to provide for the Company’s operating needs until the second quarter of fiscal 2019,year 2022, when the Company expects to borrow against its Revolver to fund pre-holiday manufacturing and inventory purchases. The Company has no outstanding amount under its Revolver as of December 27, 2020.
WeWhile we believe that our sources of funding will be sufficient to meet our anticipated operating cash needs for at leastleast the next 12 months. However,twelve months, any projections of future cash needs and cash flows are subject to substantial uncertainty. We continually evaluate, opportunities to repurchase common stock and we 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.
To date, we have not identified any material liquidity deficiencies as a result of Contentsthe COVID-19 pandemic. Based on the information currently available to us, we do not expect the impact of COVID-19 to have a negative impact on our liquidity. We will continue to monitor and assess the impact COVID-19 may have on our business and financial results. See Part II. Item 1A. “Risk Factors”
Cash Flows
Net cash provided by operating activities of $114.2$316.6 million, for the six months ended December 31, 2017,27, 2020, was primarily attributable to the Company’s net income during the period, adjusted by non-cash charges for depreciation/depreciation and amortization deferred income taxes (including the impact of the Tax Act – see Note 1 -Accounting Policiesand Note 11 – Income taxes in Item 1 above) and stock basedstock-based compensation, as well ascombined with seasonal changes in working capital, including holiday related increases in accounts payable and accrued expenses, and reductions in inventory, partially offset by increases in receivables related to holiday season sales.
Net cash used in investing activities of $17.4$267.9 million, for the six months ended December 31, 2017,27, 2020, was primarily attributable to the workingacquisition of PersonalizationMall for $250.9 million, capital adjustment related to the saleexpenditures of Fannie May, of which $8.5$15.7 million was still due to Ferrero at July 2, 2017 and to capital expenditures related to the Company's technology initiatives, and Gourmet Foods & Gift Basket segmentas well as manufacturing production and orchard plantingwarehousing equipment.
Net cash used inprovided by financing activities of $13.9$81.4 million, for the six months ended December 31, 2017 was primarily due27, 2020, related to proceeds from bank borrowings of $265.0 million (including the Company’s New Term Loan repaymentsin the amount of $2.9$100.0 million, which was used to repay borrowing then outstanding under the Company’s Revolver in the amount of $97.5 million), repayment of notes payable and bank borrowings of $170.0 million (including the $97.5 million repayment of the Revolver upon closing of the $100.0 million New Term Loan), and the acquisition of $11.1$12.5 million of treasury stock. All borrowings under the Company's revolving credit facility were repaid by the end
Table of the fiscal second quarter. Contents
Stock Repurchase Program
The Company has a stock repurchase plan through which purchases can be made from time to timeSee Item 2 in the open market and through privately negotiated transactions, subject to general market conditions. The repurchase program is financed utilizing available cash. On August 30, 2017, the Company’s Board of Directors authorized an increase to its stock repurchase plan of up to $30.0 million. As of December 31, 2017, $21.1 million remained authorized under the plan.Part II below for details.
Contractual Obligations
There have been no material changes outsideAt December 27, 2020, the ordinary course of business related to the Company’sCompany’s contractual obligations as discussed in the Annual Report on Form 10-K for the year ended July 2, 2017.consist of:
● | Long-term debt obligations - payments due under the Company's 2020 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 2021 | Fiscal 2022 | Fiscal 2023 | Fiscal 2024 | Fiscal 2025 | Thereafter | Total | ||||||||||||||||||||||
Purchase commitments | $ | 92,805 | $ | 4,986 | $ | 5,694 | $ | 4,539 | $ | 3,750 | $ | 2,000 | $ | 113,774 |
Critical Accounting Policies and Estimates
As disclosed in the Company’s Company’s Annual Report on Form 10-K for the fiscal year ended July 2, 2017,June 28, 2020, the discussion and analysis of the Company’s financial condition and results of operations are based upon the consolidated financial statements, of 1-800-FLOWERS.COM, Inc., 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 revenue recognition, accounts receivable, inventory, goodwill, other intangible assets and long-lived 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 2, 2017, except for the enactment of the Tax Act (seeJune 28, 2020.
Recently Issued Accounting Pronouncements
See Note 1 -Accounting Policies and Note 11 – Income taxes in Item 1 above for details).
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This amended guidance will enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Expanded disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. As we continue to evaluatedetails regarding the impact of this ASU, we have determinedaccounting standards that the new standard will impact the following areas: the costs of producing and distributing the Company’s catalogs will be expensed upon shipment, instead of being capitalized and amortized in direct proportion to the actual sales; gift card breakage will be estimated based on the historical pattern of gift card redemption, rather than when redemption is considered remote; the Company will defer revenue at the time the Celebrations Reward loyalty points are earned using a relative fair value approach, rather than accruing a liability equal to the incremental cost of fulfilling its obligations. We have further identified the timing of revenue recognition for e-commerce orders (shipping point versus destination) as a potential issue in our analysis, which is not expected to change the total amount of revenue recognized, but could accelerate the timing of when revenue is recognized. We plan to adopt this guidance beginning with the first quarter in the fiscal year ending June 30, 2019 on a retrospective basis with a cumulative adjustment to retained earnings. We are continuing to evaluate the impact that this ASU, and related amendments and interpretive guidance, will have on our consolidated financial statements, including the related disclosures.
In July 2015, the FASBwere recently issued ASU No. 2015-11, “Inventory (Topic 330).” The pronouncement was issued to simplify the measurement of inventory and changes the measurement from lower of cost or market to lower of cost and net realizable value. The Company adopted this standard effective July 3, 2017. The adoption of ASU 2015-11 did not have a significant impact on the Company’s consolidated financial position or results of operations.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities." The pronouncement requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. This guidance will become effective for the Company's fiscal year ending June 30, 2019. The adoption is not expected to have a significant impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for the Company’s fiscal year ending June 28, 2020. We are currently evaluating the impact and expect the ASU will have a material impact on our consolidated financial statements, primarily to the consolidated balance sheets and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” ASU No. 2016-09 affects all entities that issue share-based payment awards to their employees. ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company elected to early adopt the amendments in ASU 2016-09, in fiscal 2017. As a result, stock-based compensation excess tax benefits are reflected in the Consolidated Statements of Income as a component of the provision for income taxes, whereas they were previously recognized in equity. This change resulted in the recognition of excess tax benefits against income tax expenses, rather than additional paid-in capital, of $1.0 million for the year ended July 2, 2017. There was no impact on earnings per share since approximately 700,000 tax benefit shares for the year ended July 2, 2017, previously associated with the APIC pool calculation, are no longer considered in the diluted share computation. Additionally, our Consolidated Statements of Cash Flows now present excess tax benefits as an operating activity. This change has been applied prospectively in accordance with the ASU and prior periods have not been adjusted. Further, the Company has elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The cumulative effect of this change, which was recorded as compensation expense in fiscal 2017, was not material to the financial statements. In addition, this ASU allows entities to withhold an amount up to an employees’ maximum individual statutory tax rate in the relevant jurisdiction, up from the minimum statutory requirement, without resulting in liability classification of the award. We adopted this change on a modified retrospective basis, with no impact to our consolidated financial statements. Finally, this ASU clarified that the cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. This change does not have an impact on the Company’s consolidated financials as it conforms with its current practice.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces a new forward-looking “expected loss” approach, to estimate credit losses on most financial assets and certain other instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. ASU 2016-13 is effective for the Company’s fiscal year ending July 4, 2021, and the guidance is to be applied using the modified-retrospective approach. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230), a consensus of the FASB’s Emerging Issues Task Force.” ASU 2016-15 is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The ASU is effective for the Company’s fiscal year ending June 30, 2019, and interim periods within those fiscal years. Early adoption is permitted, including interim periods within those fiscal years. An entity that elects early adoption must adopt all of the amendments in the same period. The guidance requires application using a retrospective transition method. The adoption is not expected to have a significant impact on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01)," which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. ASU 2017-01 is effective for the Company's fiscal year ending June 30, 2019, with early adoption permitted, and should be applied prospectively. We do not expect the standard to have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. This guidance is effective for the Company’s fiscal year ending July 4, 2021, with early adoption permitted, and should be applied prospectively. We do not expect the standard to have a material impact on our consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets.” This update clarifies the scope of accounting for the derecognition or partial sale of nonfinancial assets to exclude all businesses and nonprofit activities. ASU 2017-05 also provides a definition for in-substance nonfinancial assets and additional guidance on partial sales of nonfinancial assets. This guidance will be effective for the Company’s fiscal year ending June 30, 2019 and may be applied retrospectively. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.
In May 2017, the FASB issued ASU No 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. An entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. ASU 2017-09 is effective for the Company's fiscal year ending June 30, 2019, with early adoption permitted, and should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the potential impact of adopting this guidance 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’sCompany’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 |
| o | to achieve revenue and profitability; |
| o | to leverage its operating platform and reduce operating expenses; |
| o | to manage the increased seasonality of its business; |
| o | to cost effectively acquire and retain customers; |
| o | to effectively integrate and grow acquired companies; |
| o | to reduce working capital requirements and capital expenditures; |
| 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 |
● | the outcome of contingencies, including legal proceedings in the normal course of |
● | general consumer sentiment and economic conditions that may affect levels of discretionary customer purchases of the | |
● | the impact of COVID-19 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 filing for the fiscal year ended July 2, 2017June 28, 2020 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 this Form 10-Q.
ITEM 3.3. 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’sCompany’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 facility2020 Credit Agreement 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 $0.2$0.3 million and $0.3$0.5 million during the three and six months ended December 31, 2017,27, 2020, respectively.
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ITEM 4.4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’sCompany’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 December 31, 2017.27, 2020. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2017.27, 2020.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the Company’sCompany’s evaluation required by Rules 13a-15(d) or 15d-15(d) of the Securities Exchange Act of 1934 during the quarter ended December 31, 2017,27, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
the financial statements in accordance with GAAP.
PART II. II. – OTHER INFORMATION
Litigation
ThereBed Bath & Beyond:
On April 1, 2020, the Seller commenced an action against the Company in the Court of Chancery for the State of Delaware, which is captioned Bed Bath & Beyond Inc. v. 1-800-Flowers.com, et ano., C.A. (the “Complaint”), alleging a breach of the Equity Purchase Agreement (the “Agreement”), dated February 14, 2020, between Seller, PersonalizationMall, the Company and the Purchaser, pursuant to which the Seller agreed to sell to Purchaser, and the Purchaser agreed to purchase from Seller, all of the issued and outstanding membership interests of PersonalizationMall. The action was initiated after the Company requested a reasonable delay in the closing under the Purchase Agreement due to the unprecedented circumstances created by COVID-19. The Complaint requested an order of specific performance to consummate the transaction under the Purchase Agreement plus attorney’s fees and costs in connection with the action. The Company filed its answer to the Complaint on April 17, 2020 and an order governing expedited proceedings was approved on April 9, 2020 that set a trial date for late September 2020. On July 21, 2020, the Company and Seller entered into a settlement agreement, pursuant to which the Company agreed to move forward with its purchase of PersonalizationMall for $245.0 million, subject to certain working capital and other adjustments. The transaction closed on August 3, 2020. In connection with the settlement agreement, the parties executed a Stipulation and Proposed Order of Dismissal, resulting in the voluntary dismissal with prejudice of the litigation relating to the transaction.
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 ultimatefinal 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’sCompany’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 2, 2017.
.
ITEM 2.2. 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 August 30, 2017,June 27, 2019, the Company’sCompany’s Board of Directors authorized an increase to its stock repurchase plan of up to $30.0 million. As of December 31, 2017, $21.127, 2020, $6.9 million remained authorized under the plan.
The following table sets forth, for the months indicated, the Company’sCompany’s purchase of common stock during the first six months of fiscal 2018,2021, which includes the period July 3, 20171, 2020 through December 31, 2017:27, 2020:
Period | Total Number of Shares Purchased | Average Price Paid Per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
(in thousands, except average price paid per share) | ||||||||||||||||
07/03/17 - 07/30/17 | 89.3 | $ | 9.66 | 89.3 | $ | 16,363 | ||||||||||
07/31/16 - 08/27/17 | 99.6 | $ | 9.08 | 99.6 | $ | 15,456 | ||||||||||
08/28/17 - 10/01/17 | 268.7 | $ | 9.43 | 268.7 | $ | 27,859 | ||||||||||
10/02/17 - 10/29/17 | 233.5 | $ | 9.62 | 233.5 | $ | 25,606 | ||||||||||
10/30/17 - 12/03/17 | 414.3 | $ | 9.36 | 414.3 | $ | 21,719 | ||||||||||
12/04/17 - 12/31/17 | 61.9 | $ | 10.16 | 61.9 | $ | 21,089 | ||||||||||
Total | 1,167.3 | $ | 9.47 | 1,167.3 |
Period | Total Number of Shares Purchased | Average Price Paid Per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
(in thousands, except average price paid per share) | ||||||||||||||||
06/29/20 - 07/26/20 | - | $ | - | - | $ | 19,320 | ||||||||||
07/27/20 - 08/23/20 | - | $ | - | - | $ | 19,320 | ||||||||||
08/24/20 - 09/27/20 | 36,355 | $ | 29.94 | 36,355 | $ | 18,231 | ||||||||||
09/28/20 - 10/25/20 | - | $ | - | - | $ | 18,231 | ||||||||||
10/26/20 - 11/22/20 | 305,941 | $ | 21.23 | 305,941 | $ | 11,735 | ||||||||||
11/23/20 - 12/27/20 | 203,842 | $ | 23.93 | 203,842 | $ | 6,850 | ||||||||||
Total | 546,138 | $ | 22.82 | 546,138 |
(1) Average price per share excludes commissions and other transaction fees.
ITEM 3.3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
31.1 |
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31.2 |
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32.1 |
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101.INS | Inline XBRL Instance Document | ||
101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||
101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document | ||
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||
101.LAB | Inline XBRL Taxonomy Extension Label Document | ||
101.PRE | Inline XBRL Taxonomy Definition Presentation Document | ||
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) |
Date: February | /s/ Christopher G. McCann Christopher G. McCann |
|
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Date: February | /s/ William E. Shea |
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