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 October 2, 2005
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)
DELAWARE 11-3117311
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Stewart Avenue, Westbury, New York 11590
---------------------------------------------
(Address of principal executive offices)(Zip code)
(516) 237-6000
-------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year, if changed
since last report)
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 (X) No ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
The number of shares outstanding of each of the Registrant's classes of common
stock:
28,194,056
----------
(Number of shares of Class A common stock outstanding as of November 2, 2005)
36,864,465
----------
(Number of shares of Class B common stock outstanding as of November 2, 2005)
1-800-FLOWERS.COM, Inc.
TABLE OF CONTENTS
INDEX
-----
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - October 2, 2005
(Unaudited) and July 3, 2005 1
Consolidated Statements of Income (Unaudited) - Three
Months Ended October 2, 2005 and September 26, 2004 2
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended October 2, 2005 and September 26,
2004 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
Item 4. Controls and Procedures 16
Part II. Other Information
Item 1. Legal Proceedings 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 17
Signatures 18
PART I. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
October 2, July 3,
2005 2005
------------- -------------
(Unaudited)
Assets
Current assets:
Cash and equivalents $ 10,557 $ 39,961
Short-term investments - 6,647
Receivables, net 12,926 10,619
Inventories 46,312 28,675
Deferred income taxes 14,584 10,219
Prepaid and other 7,710 5,289
------------- -------------
Total current assets 92,089 101,410
Property, plant and equipment, net 54,323 50,474
Goodwill 63,251 63,219
Other intangibles, net 14,040 14,215
Deferred income taxes 17,161 17,161
Other assets 18,058 5,473
------------- -------------
Total assets $258,922 $251,952
============= =============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $70,792 $ 57,121
Current maturities of long-term debt and obligations under capital leases 2,363 2,597
------------- -------------
Total current liabilities 73,155 59,718
Long-term debt and obligations under capital leases 2,938 3,347
Other liabilities 3,387 2,553
------------- -------------
Total liabilities 79,480 65,618
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued - -
Class A common stock, $.01 par value, 200,000,000 shares authorized, 29,756,966
and 29,888,603 shares issued at October 2, 2005 and July 3, 2005, respectively 298 300
Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,144,465
shares issued at October 2, 2005 and July 3, 2005 421 421
Additional paid-in capital 258,792 258,848
Retained deficit (65,824) (59,198)
Deferred compensation - (1,116)
Treasury stock, at cost-1,562,850 and 1,380,850 Class A shares at October 2,
2005 and July 3, 2005, respectively and 5,280,000 Class B shares (14,245) (12,921)
------------- -------------
Total stockholders' equity 179,442 186,334
------------- -------------
Total liabilities and stockholders' equity $258,922 $251,952
============= =============
See accompanying notes.
1
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
Three Months Ended
---------------------------------
October 2, September 26,
2005 2004
---------------- ----------------
Net revenues $112,765 $97,514
Cost of revenues 66,739 57,942
---------------- ----------------
Gross profit 46,026 39,572
Operating expenses:
Marketing and sales 38,224 29,892
Technology and development 4,769 3,104
General and administrative 10,636 7,602
Depreciation and amortization 3,524 3,896
---------------- ----------------
Total operating expenses 57,153 44,494
---------------- ----------------
Operating loss (11,127) (4,922)
Other income (expense):
Interest income 215 382
Interest expense (84) (141)
Other 6 4
---------------- ----------------
Total other income, net 137 245
---------------- ----------------
Loss before income taxes (10,990) (4,677)
Income tax benefit (4,364) (1,967)
---------------- ----------------
Net loss ($6,626) ($2,710)
================ ================
Basic and diluted net loss per common share ($0.10) ($0.04)
================ ================
Weighted average shares used in the calculation
of basic and diluted net loss per common share 65,088 66,210
================ ================
See accompanying notes.
2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended
--------------------------------
October 2, September 26,
2005 2004
--------------- ---------------
Operating activities:
Net loss ($6,626) ($2,710)
Reconciliation of net loss to net cash used in operations:
Depreciation and amortization 3,524 3,896
Deferred income taxes (4,365) (1,967)
Share based compensation expense 937 -
Bad debt expense 75 46
Changes in operating items:
Receivables (2,382) (794)
Inventories (17,637) (13,733)
Prepaid and other (2,419) (2,164)
Accounts payable and accrued expenses 13,671 (5,685)
Other assets (12,668) (2,404)
Other liabilities 834 405
--------------- ---------------
Net cash used in operating activities (27,056) (25,110)
Investing activities:
Purchase of investments - (26,090)
Sale of investments 6,647 25,828
Capital expenditures (7,196) (2,945)
Other 38 58
--------------- ---------------
Net cash used in investing activities (511) (3,149)
Financing activities:
Acquisition of treasury stock (1,324) (1,173)
Proceeds from employee stock options 122 146
Repayment of notes payable and bank borrowings (237) (337)
Payment of capital lease obligations (398) (411)
--------------- ---------------
Net cash used in financing activities (1,837) (1,775)
--------------- ---------------
Net change in cash and equivalents (29,404) (30,034)
Cash and equivalents:
Beginning of period 39,961 80,824
--------------- ---------------
End of period $10,557 $50,790
=============== ===============
See accompanying notes.
3
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by 1-800-FLOWERS.COM, Inc. and subsidiaries (the "Company") in accordance with
accounting principles generally accepted in the United States for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for the
three months ended October 2, 2005 are not necessarily indicative of the results
that may be expected for the fiscal year ending July 2, 2006.
The balance sheet information at July 3, 2005 has been derived from the audited
financial statements at that date.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended July 3, 2005.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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.
Comprehensive Income
For the three months ended October 2, 2005 and September 26, 2004, the Company's
comprehensive income was equal to the respective net income for each of the
periods presented.
Note 2 - Net (Loss) Income Per Common Share
Basic net loss per common share is computed using the weighted average number of
common shares outstanding during the period. Diluted net loss per common share
is computed using the weighted average number of common shares outstanding
during the period, and excludes the effect of 1,314,000 and 1,404,000 dilutive
potential common shares (primarily employee stock options) for the three months
ended October 2, 2005 and September 26, 2004, respectively, as their inclusion
would be antidilutive.
Note 3 - Stock-Based Compensation
The Company has a Long Term Incentive and Share Award Plan, which is more fully
described in Note 9 of the Company's 2005 Annual Report on Form 10-K, that
provides for the grant to eligible employees, consultants and directors of stock
options, share appreciation rights (SARs), restricted shares, restricted share
units, performance shares, performance units, dividend equivalents, and other
share-based awards.
Prior to July 4, 2005, as permitted under SFAS No. 123, the Company accounted
for its stock option plans following the recognition and measurement principles
of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, no stock-based
compensation had been reflected in net income for stock options, as all options
granted had an exercise price equal to the market value of the underlying common
stock on the date of grant and the related number of shares granted was fixed at
that point in time.
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123 (R), "Share-Based Payment." This Statement revised SFAS No. 123 by
eliminating the option to account for employee stock options under APB No. 25
and requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards (the "fair-value-based" method).
4
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Effective July 4, 2005, the Company adopted the fair value recognition
provisions of SFAS No. 123(R) using the modified prospective application method.
Under this transition method, compensation cost recognized in the three months
ended October 2, 2005, includes amounts of: (a) compensation cost of all
stock-based payments granted prior to, but not yet vested as of, July 4, 2005
(based on grant-date fair value estimated in accordance with the original
provisions of SFAS No. 123, and previously presented in the pro-forma footnote
disclosures), and (b) compensation cost for all stock-based payments granted
subsequent to July 3, 2005 (based on the grant-date fair value estimated in
accordance with the new provision of SFAS No. 123(R)). In accordance with the
modified prospective method, results for prior periods have not been restated.
The following table summarizes the effect of adopting SFAS No. 123(R) as of July
4, 2005:
Three months
ended
October 2, 2005
--------------------------------------
Stock-option compensation expense recognized (*): (in thousands, except per share data)
Marketing and sales $298
Technology and development 127
General and administrative 425
----------
Total 850
Related deferred income tax benefit 175
----------
Increase in net loss $675
==========
Impact on basic and diluted net loss per common
share ($0.01)
==========
(*) excludes the impact of amortization of restricted stock
awards in the amount of $87, ($52, net of tax)
Compensation expense related to the amortization of restricted stock awards was
recognized prior to the implementation of SFAS No. 123(R). Total stock based
compensation expense, which includes both expense from stock options and
restricted stock awards, totaled $937 thousand ($727 thousand, net of tax)
during the three months ended October 2, 2005.
Under the modified prospective application method, results for prior periods
have not been restated to reflect the effects of implementing SFAS No. 123(R).
The following pro-forma information, as required by SFAS No. 148, "Accounting
for Stock-Based Compensation-Transition and Disclosure, an amendment of FASB
Statement No. 123," is presented for comparative purposes and illustrates the
effect on net loss and net loss per common share for the period presented as if
the Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation prior to July 4, 2005:
Three months ended
September 26, 2004
--------------------------------------
(in thousands, except per share data)
Net loss - As reported ($2,710)
Less: Stock-option compensation expense (*) 1,711
-----------
Net loss - Pro forma ($4,421)
===========
Net loss per share:
Basic and diluted - As reported ($0.04)
Basic and diluted - Pro forma ($0.07)
===========
(*) no restricted stock awards had been awarded prior to
January 2005
5
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The weighted average fair value of stock options on the date of grant, and the
assumptions used to estimate the fair value of the stock options using the
Black-Scholes option valuation model were as follows:
Three months ended
-----------------------------
October 2, September 26,
2005 2004
------------- --------------
Weighted average fair value of options granted $3.38 $4.67
Expected volatility 46.0% 70.0%
Expected life 5.2 years 5.0 years
Risk-free interest rate 4.17% 3.25%
Expected dividend yield 0.00% 0.00%
The expected volatility of the option is determined using historical
volatilities based on historical stock prices. The expected life of options
granted in fiscal 2005 was based on the Company's historical share option
exercise experience. Due to minimal exercising of stock options, in fiscal 2006,
the Company estimated the expected life of options granted to be the average of
the Company's historical expected term from vest date and the midpoint between
the average vesting term and the contractual term. The risk-free interest rate
is determined using the yield available for zero-coupon U.S. government issues
with a remaining term equal to the expected life of the option. The Company has
never paid a dividend, and as such the dividend yield is 0.0%.
The following table summarizes stock option activity during the three months
ended October 2, 2005:
Weighted
Average
Weighted Remaining Aggregate
Average Contractual Intrinsic
Options Exercise Price Term Value (000's)
-----------------------------------------------------------
Outstanding at July 3, 2005 9,477,461 $8.35
Granted 55,000 $7.28
Exercised (23,895) $5.10
Forfeited (118,892) $10.41
Outstanding at October 2, 2005 9,389,674 $8.32 6.1 years $10,102
===========
Options vested or expected to vest at October 2, 2005 8,938,970 $8.32 6.1 years $9,617
Exercisable at October 2, 2005 6,343,349 $9.03 5.5 years $8,404
As of October 2, 2005, the total future compensation cost related to nonvested
options not yet recognized in the statement of income was $5.2 million and the
weighted average period over which these awards are expected to be recognized
was 2.1 years.
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 conditions and, in certain cases, holding periods (Restricted Stock). In
fiscal 2005, the Company recorded the grant date fair value of unvested shares
of Restricted Stock as unearned stock-based compensation ("Deferred
Compensation"). In accordance with SFAS No. 123(R), in fiscal 2006, the Company
reclassified the balance of Deferred Compensation against additionalpaid-in
capital, and reduced its shares of Class A Common Stock issued accordingly.
6
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The following table summarizes the activity of non-vested restricted stock
during the three months ended October 2, 2005:
Weighted
Average Grant
Date Fair
Shares Value
------------- ---------------
Non-vested at July 3, 2005 155,919 $8.39
Granted 28,924 $6.67
Vested (-) -
Forfeited (5,000) $8.45
-------------
Non-vested at October 2, 2005 179,843 $8.11
=============
The fair value of nonvested shares is determined based on the closing stock
price on the grant date. As of October 2, 2005, there was $1.2 million of total
unrecognized compensation cost related to non-vested restricted stock-based
compensation to be recognized over a weighted-average period of 2.8 years.
Note 4 - Goodwill and Intangible Assets
The change in the net carrying amount of goodwill is as follows:
October 2,
2005
---------------
(in thousands)
Goodwill - beginning of year $63,219
Other - acquisition costs 32
------------
Goodwill - end of period $63,251
============
The Company's other intangible assets consist of the following:
October 2, 2005 July 3, 2005
------------------------------------- --------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount Amortization Net Amount Amortization Net
-------------- ----------- -------------- ---------- ----------- --------------- ----------
(in thousands)
Intangible assets with
determinable lives
Investment in licenses 14 - 16 years $4,927 $3,519 $1,408 $4,927 $3,438 $1,489
Customer lists 3 - 6 years 4,640 1,227 3,413 4,640 1,145 3,495
Other 5 - 8 years 555 182 373 555 170 385
----------- -------------- ---------- ----------- --------------------------
10,122 4,928 5,194 10,122 4,753 5,369
Trademarks with
indefinite lives - 8,846 - 8,846 8,846 - 8,846
----------- -------------- ---------- ----------- -------------- -----------
Total identifiable
intangible assets $18,968 $4,928 $14,040 $18,968 $4,753 $14,215
=========== ============== ========== =========== ==========================
Estimated amortization expense is as follows: remainder of fiscal 2006 - $0.8
million, fiscal 2007 - $1.0 million, fiscal 2008 - $1.0 million, fiscal 2009 -
$0.9 million, fiscal 2010 - $0.9 million, fiscal 2011 - $0.5 million and
thereafter - $0.1 million.
7
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 5 - Long-Term Debt
The Company's long-term debt and obligations under capital leases consist of the
following:
October 2, July 3,
2005 2005
-------------- -----------
(in thousands)
Commercial notes and revolving credit lines (*) $3,937 $4,152
Seller financed acquisition obligations 23 46
Obligations under capital leases 1,341 1,746
------------- -----------
5,301 5,944
Less current maturities of long-term debt and obligations under
capital leases 2,363 2,597
------------- -----------
$2,938 $3,347
============= ===========
(*) refer to Note 8 - Subsequent Event-Revolving Credit Line for additional
information
Note 6 - Income Taxes
At the end of each interim reporting period, the Company estimates its effective
income tax rate expected to be applicable for the full year. This estimate is
used in providing for income taxes on a year-to-date basis and may change in
subsequent interim periods. The Company's effective tax rate for the three
months ending October 2, 2005 and September 26, 2004 was 39.7% and 42.1%,
respectively. The effective tax rate for the three months ended October 2, 2005
included a benefit relating to the income tax impact associated with accounting
for stock-based compensation as required by SFAS No. 123(R), which was adopted
by the Company on July 4, 2005. The effect of this benefit was to decrease the
effective tax rate by approximately 1.6%.
Note 7 - Commitments and Contingencies
Legal Proceedings
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its consolidated financial position,
results of operations or liquidity.
Note 8 - Subsequent Event-Revolving Credit Line
In order to fund working capital requirements for its upcoming holiday selling
season and to support letters of credit, in addition to its existing credit line
of $5.0 million, on October 27, 2005, the Company established a second line of
credit in the amount of $20.0 million, bringing its total available credit
facilities to $25.0 million. Both lines, which are collateralized by the
Company's working capital, bear interest equal to the applicable LIBOR Index
plus 1.50% per annum.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Forward Looking Statements
Certain of the matters and subject areas discussed in this Quarterly Report on
Form 10-Q contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements other than statements
of historical information provided herein are forward-looking statements and may
contain information about financial results, economic conditions, trends and
known uncertainties based on the Company's current expectations, assumptions,
estimates and projections about its business and the Company's industry. These
forward-looking statements involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of several factors, including those more fully described
under the caption "Risk Factors that May Affect Future Results" within the
Company's Annual Report on Form 10-K. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis, judgment, belief or expectation only as of the date hereof. The
forward-looking statements made in this Quarterly Report on Form 10-Q relate
only to events as of the date on which the statements are made. The Company
undertakes no obligation to publicly update any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
Overview
For more than 25 years, 1-800-FLOWERS.COM Inc. - "Your Florist of Choice (sm)" -
has been providing customers around the world with the freshest flowers and
finest selection of plants, gift baskets, gourmet foods and confections, and
plush stuffed animals perfect for every occasion. 1-800-FLOWERS.COM(R) offers
the best of both worlds: exquisite, florist-designed arrangements individually
created by some of the nation's top floral artists and hand-delivered the same
day, and spectacular flowers shipped from our growers to your door fresh.
Customers can shop 1-800-FLOWERS.COM 24 hours a day, 7 days a week via the phone
or Internet (1-800-356-9377 or www.1800flowers.com) or by visiting a
Company-operated or franchised store. Gift advisors are available 24/7, and fast
and reliable delivery is offered same day, any day. As always, 100 percent
satisfaction and freshness is guaranteed. The 1-800-FLOWERS.COM collection of
brands also includes home decor and garden merchandise from Plow & Hearth(R)
(1-800-627-1712 or www.plowandhearth.com); premium popcorn and specialty treats
from The Popcorn Factory(R) (1-800-541-2676 or www.thepopcornfactory.com);
exceptional cookies and baked gifts from Cheryl&Co.(R) (1-800-443-8124 or
www.cherylandco.com); gourmet foods from GreatFood.com(R) (www.greatfood.com);
children's gifts from HearthSong(R) (www.hearthsong.com) and Magic Cabin(R)
(www.magiccabin.com) and wine gifts from the WineTasting Network(R)
(www.ambrosiawine.com and www.winetasting.com). 1-800-FLOWERS.COM, Inc. stock is
traded on the NASDAQ market under ticker symbol FLWS.
Results of Operations
Net Revenues
Three Months Ended
-----------------------------------------------
October 2, September 26,
2005 2004 % Change
---------------- --------------- --------------
(in thousands)
Net revenues:
Online $62,273 $53,086 17.3%
Telephonic 38,382 37,586 2.1%
Retail/fulfillment 12,110 6,842 77.0%
---------------- ---------------
Total net revenues $112,765 $97,514 15.6%
================ ===============
Net revenues consist primarily of the selling price of the merchandise, service
or outbound shipping charges, less discounts, returns and credits. The Company's
combined online and telephonic revenue growth of 11% during the three months
ended October 2, 2005 was due to an increase in order volume resulting from: (i)
the Company's strong brand name recognition, (ii) continued leveraging of its
existing customer base, (iii) increased spending on its marketing and selling
programs, designed to improve customer acquisition and accelerate top-line
growth, and (iv) the continued improvement in the sale of home decor gift items,
following the turnaround which began during the Company's second quarter of
fiscal 2005. In addition, revenues during the three months ended October 2, 2005
were favorably impacted by the incremental sales generated from Cheryl & Co., a
manufacturer of cookies and baked gifts, which was acquired in March 2005.
During the three months ended October 2, 2005, non-floral gift products
9
accounted for 37.9% of total combined telephonic and online net revenues, which
was slightly higher than the 37.4% during the same period of the prior year.
The Company fulfilled approximately 1,596,000 orders through its combined
telephonic and online sales channels during the three months ended October 2,
2005, an increase of 13.5% over the prior year period. Order volume through the
Company's online sales channel, which contributed 61.9% of total combined
telephonic and online revenues during the three months ended October 2, 2005,
compared to 58.5% in the prior year period, increased by 18.4% as a result of
additional marketing efforts through search engines and affiliates, and the
continued migration of customers from the Company's telephonic sales channel.
During the three months ended October 2, 2005, revenue generated through the
Company's telephonic sales channel increased by 2.1%, driven primarily by the
sales of Cheryl & Co., which was acquired in March 2005. The Company's combined
telephonic and online average order value of $63.08 decreased by 2.1% in
comparison to the prior year period, due primarily to the addition of the Cheryl
& Co. product line which has a lower average sale.
Retail/fulfillment revenues for the three months ended October 2, 2005 increased
in comparison to the same period of the prior year, primarily as a result of:
(i) increased membership and sales of product and service offerings to the
Company's BloomNet(TM) network, (ii) winery services revenue generated by The
Winetasting Network, acquired in November 2004, and (iii) retail and wholesale
bakery product revenue from Cheryl & Co.
During the second half of fiscal 2005, the Company implemented plans designed to
extend the Company's leadership position in the floral and thoughtful gift
marketplace, through increased marketing spend intended to drive customer
acquisition, particularly in the floral gift category, and to further extend its
popular gourmet and sweetshop offerings through internal growth and acquisition
of complementary product lines. The Company has made significant progress in
integrating both The Winetasting Network and Cheryl & Co., acquisitions, and
combined with The Popcorn Factory and the Company's other offerings in candy,
gourmet foods, and gift baskets, expects that its Food, Wine and Gift Basket
collection positions the Company for continued strong growth during the upcoming
holiday season. The Company intends to continue to increase its media presence
and the depth of its marketing programs, and to further expand its BloomNet
business-to-business floral operations and build out its supporting technology
platform. While the Company believes that these investments have impacted the
Company's earnings growth over the short term, over the longer term, the Company
believes that this strategy will enable it to achieve sustainable double digit
revenue growth and provide further leverage within its business model and
therefore improved profitability.
Gross Profit
Three Months Ended
---------------------------------------------
October 2, September 26,
2005 2004 % Change
-------------- --------------- -------------
(in thousands)
Gross profit $46,026 $39,572 16.3%
Gross margin % 40.8% 40.6%
Gross profit consists of net revenues less cost of revenues, which is comprised
primarily of florist fulfillment costs (primarily fees paid directly to
florists), the cost of floral and non-floral merchandise sold from inventory or
through third parties, and associated costs including inbound and outbound
shipping charges. Additionally, cost of revenues include labor and facility
costs related to direct-to-consumer merchandise operations, as well as facility
costs on properties that are sublet to the Company's franchisees. Gross profit
increased during the three months ended October 2, 2005, in comparison to the
same period of the prior year, as a result of increased revenues across all
sales channels, as well as improved gross margin percentage, up 20 basis points
over the prior year, despite increases in carrier fuel surcharges, due to:
(i)improved product margins on the Company's home and garden product lines,
(ii)pricing initiatives, and (iii) product mix, which was favorably impacted by
the addition of the Cheryl & Co. product line, which has higher gross margins.
During fiscal 2006, although varying by quarter due to seasonal changes in
product mix, the Company expects that its gross margin percentage will continue
to improve, primarily through the growth of its higher margin specialty brand
gift categories, including the recent acquisition of Cheryl & Co., and through
improved sourcing, pricing initiatives and customer service and fulfillment
enhancements which are expected to mitigate continued pressure on shipping
costs.
10
Marketing and Sales Expense
Three Months Ended
---------------------------------------------
October 2, September 26,
2005 2004 % Change
--------------- ---------------- ------------
(in thousands)
Marketing and sales $38,224 $29,892 27.9%
Percentage of net revenues 33.9% 30.7%
Marketing and sales expense consists primarily of advertising and promotional
expenditures, catalog costs, online portal agreements, retail store and
fulfillment operations (other than costs included in cost of revenues) and
customer service center expenses, as well as the operating expenses of the
Company's departments engaged in marketing, selling and merchandising
activities. During the three months ended October 2, 2005, traditionally the
Company's smallest in terms of revenues due to the lack of gifting occasions
during the summer months, marketing and sales expenses increased over the prior
year, as a result of: (i) the Company's efforts to increase new customer
acquisition and accelerate top-line growth through increased spending in online
and broadcast advertising, (ii) personnel required to expand its BloomNet(TM)
business-to-business floral operations, (iii) carrying costs associated with the
acquisitions made during fiscal 2005, which generate the majority of their
revenues and profitability during the second quarter, and (iv) the impact of
adopting SFAS No. 123(R), "Share-Based Payment" - refer below to Recent
Accounting Pronouncements for further details. As a result of the Company's
cost-efficient customer retention programs, of the 1,306,000 customers who
placed orders during the three months ended October 2, 2005, approximately 61.1%
represented repeat customers, compared to 60.5% in the prior year period. In
addition, as a result of the strength of the Company's brands, combined with its
cost-efficient marketing programs, the Company added approximately 508,000 new
customers during the three months ended October 2, 2005.
During the remainder of fiscal 2006, the Company expects to increase its
marketing and sales spending in order to accelerate its rate of new customer
acquisition, while also leveraging its already significant customer base through
cost effective, customer retention initiatives. Such spending will include an
increasing presence in online search and affiliate relationships, as well as in
direct marketing and broadcast advertising programs. In addition, the Company
plans to continue to add personnel to grow its BloomNet(TM) membership and
support the anticipated growth of its recently acquired wine business and
gourmet cookie businesses. As a result, over the short term the Company expects
that marketing and sales expense, as a percentage of revenue, will be consistent
with the prior year.
Technology and Development Expense
Three Months Ended
----------------------------------------------
October 2, September 26,
2005 2004 % Change
--------------- ---------------- -------------
(in thousands)
Technology and development $4,769 $3,104 53.6%
Percentage of net revenues 4.2% 3.2%
Technology and development expense consists primarily of payroll and operating
expenses of the Company's information technology group, costs associated with
its Web sites, including hosting, design, content development and maintenance
and support costs related to the Company's order entry, customer service,
fulfillment and database systems. During the three months ended October 2, 2005,
technology and development expense increased as a result of the incremental
expenses associated with the acquisition of The Winetasting Network in November
2004 and Cheryl & Co. in March 2005, as well as for increases in the cost of
maintenance and license agreements required to support the Company's technology
platform, and the impact of adopting SFAS No. 123(R), "Share-Based Payment" -
refer below to Recent Accounting Pronouncements for further details. During the
three months ended October 2, 2005 and September 26, 2004, the Company expended
$9.3 million and $5.1 million, respectively, on technology and development, of
which $4.5 million and $2.0 million, respectively, has been capitalized.
Although over the longer term, the Company believes that it will continue to
demonstrate its ability to leverage its IT platforms, during the remainder of
fiscal 2006, the Company intends to improve the technology infrastructure of its
wine gift business, and cookies and baked gifts business, and therefore expects
that technology and development spending as a percentage of net revenues will be
consistent with the prior year.
11
General and Administrative Expense
Three Months Ended
----------------------------------------------
October 2, September 26,
2005 2004 % Change
--------------- ---------------- -------------
(in thousands)
General and administrative $10,636 $7,602 39.9%
Percentage of net revenues 9.4% 7.8%
General and administrative expense consists of payroll and other expenses in
support of the Company's executive, finance and accounting, legal, human
resources and other administrative functions, as well as professional fees and
other general corporate expenses. General and administrative expense increased
during the three months ended October 2, 2005 in comparison to the prior year,
primarily as a result of the following: (i) incremental expenses associated with
the Company's wine gift and baked cookies and related product lines, (ii)
expenses associated with the Company's corporate headquarters relocation, which
is scheduled to be completed in the second quarter of fiscal 2006, (iii)
increased costs associated with the Company's BloomNet business-to-business
expansion, and (iv) the impact of adopting SFAS No. 123(R), "Share-Based
Payment" - refer below to Recent Accounting Pronouncements for further details.
Although the Company believes that its current general and administrative
infrastructure is sufficient to support existing requirements, as a result of
the incremental expenses associated with the acquisitions of The Winetasting
Network and Cheryl & Co., the Company expects that its general and
administrative expenses as a percentage of net revenue during fiscal 2006 will
be consistent with, or increase slightly, in comparison to fiscal 2005.
Depreciation and Amortization Expense
Three Months Ended
----------------------------------------------
October 2, September 26,
2005 2004 % Change
--------------- ---------------- -------------
Depreciation and amortization $3,524 $3,896 (9.5%)
Percentage of net revenues 3.1% 4.0%
Depreciation and amortization expense during the three months ended October 2,
2005 decreased in comparison to the prior year period, reflecting the impact of
the Company's declining rate of capital additions, and the leverage of the
Company's existing infrastructure.
Although the Company believes that continued investment in its infrastructure,
primarily in the areas of technology and development, including the improvement
of the technology platform of the Company's wine business, but also for the
anticipated expansion of Cheryl & Co.'s operations, is critical to attaining its
strategic objectives, the Company expects that depreciation and amortization in
fiscal 2006 will continue to decrease as a percentage of net revenues in
comparison to prior years.
Other Income (Expense)
Three Months Ended
----------------------------------------------
October 2, September 26,
2005 2004 % Change
--------------- ---------------- -------------
(in thousands)
Interest income $215 $382 (43.7%)
Interest expense (84) (141) 40.4%
Other 6 4 50.0%
--------------- ----------------
$137 $245 (44.1%)
=============== ================
12
Other income (expense) consists primarily of interest income earned on the
Company's investments and available cash balances, offset by interest expense,
primarily attributable to the Company's capital leases and other long-term debt.
The decrease in other income (expense) during the three months ended October 2,
2005 was primarily attributable to lower interest income, resulting from a
decrease in average cash balances, due to the acquisitions of the Winetasting
Network in November 2004 and Cheryl & Co. in March 2005 as well as the Company's
stock buy-back programs, offset in part by lower interest expense due to
maturing debt and capital lease obligations.
Income Taxes
During the three months ended October 2, 2005 and September 26, 2004, the
Company recorded an income tax benefit of $4.4 million and $2.0 million,
respectively. The Company's effective tax rate for the three months ending
October 2, 2005 and September 26, 2004 was 39.7% and 42.1%, respectively. The
effective tax rate for the three months ended October 2, 2005 included a benefit
relating to the income tax impact associated with accounting for stock-based
compensation as required by SFAS No. 123(R), which was adopted by the Company on
July 4, 2005. The effect of this benefit was to decrease the effective tax rate
by approximately 1.6%.
Liquidity and Capital Resources
At October 2, 2005, the Company had working capital of $18.9 million, including
cash and equivalents of $10.6 million, compared to working capital of $41.7
million, including cash and equivalents and short-term investments of $46.6
million, at July 3, 2005.
Net cash used in operating activities of $27.1 million for the three months
ended October 2, 2005 was primarily attributable to the Company's net loss,
non-cash charges for deferred income taxes, and changes in working capital,
including increases in inventory, receivables and prepaids, as well as other
assets, consisting primarily of prepaid catalog production costs (included in
other assets), partially offset by higher accounts payable and accrued expenses,
all of which increased in preparation for the upcoming holiday selling season.
Net cash used in investing activities of $0.5 million for the three months ended
October 2, 2005 was primarily attributable to capital expenditure related to the
Company's technology infrastructure, offset in part by net proceeds from the
sale of the Company's short-term investments.
Net cash used in financing activities of $1.8 million for the three months ended
October 2, 2005, resulted primarily from cash used to repurchase 182,000 shares
of the Company's Class A common stock, which were placed in treasury, for
approximately $1.3 million, as well as the repayment of amounts outstanding
under the Company's credit facilities and long-term capital lease obligations,
offset in part by the net proceeds received upon the exercise of employee stock
options.
The Company has historically utilized cash generated from operations to meet its
cash requirements, including all operating, investing and debt repayment
activities. During fiscal 2005, the Company utilized available cash balances to
fund its acquisitions of The Winetasting Network and Cheryl & Co., as well as
its share repurchase program, which in aggregate amounted to $60.8 million. In
order to fund working capital requirements for its upcoming holiday selling
season and to support letters of credit, in addition to its existing credit line
of $5.0 million, on October 27, 2005, the Company established a second line of
credit in the amount of $20.0 million, bringing its total available credit
facilities to $25.0 million. Both lines, which are collateralized by the
Company's working capital, bear interest equal to the applicable LIBOR Index
plus 1.50% per annum.
13
At October 2, 2005, the Company's contractual obligations consist of:
Payments due by period
-----------------------------------------------------------------------------------
(in thousands)
Less than 1 1 - 3 3 - 5 More than 5
Total year years years years
----------- --------------- ------------ ------------- ----------------
Long-term debt $4,300 $1,517 $2,783 $- $-
Capital lease obligations 1,411 1,187 224 - -
Operating lease obligations 60,349 8,665 15,367 9,007 27,310
Sublease obligations 8,174 2,331 3,343 1,624 876
Purchase commitments (*) 38,646 38,646 - - -
----------- --------------- ------------ ------------- ----------------
Total $112,880 $52,346 $21,717 $10,631 $28,186
=========== =============== ============ ============= ================
(*) Purchase commitments consist primarily of inventory and equipment purchase
orders and online marketing agreements made in the ordinary course of business.
On May 12, 2005, the Company's Board of Directors increased the Company's
authorization to repurchase the Company's Class A common stock up to $20
million, from the previous authorized limit of $10 million. Any such purchases
could be made from time to time in the open market and through privately
negotiated transactions, subject to general market conditions. The repurchase
program will be financed utilizing available cash. As of October 2, 2005, the
Company had repurchased 1.5 million shares of common stock for $11.1 million, of
which 182,000 shares of common stock for $1.3 million was repurchased during the
three months ending October 2, 2005.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial statements and results of
operations are based upon the consolidated financial statements of
1-800-FLOWERS.COM, Inc., which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amount of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
management evaluates its estimates, including those related to revenue
recognition, inventory and long-lived assets, including goodwill and other
intangible assets related to acquisitions. Management bases its estimates and
judgments on historical experience and on various other factors that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions. Management believes the following critical accounting policies,
among others, affects the Company's more significant judgments and estimates
used in preparation of its consolidated financial statements.
Revenue Recognition
Net revenues are generated by online, telephonic and retail fulfillment
operations and primarily consist of the selling price of merchandise, service or
outbound shipping charges, less discounts, returns and credits. Net revenues are
recognized upon product shipment.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers were to deteriorate, resulting in
an impairment of their ability to make payments, additional allowances may be
required.
Inventory
The Company states inventory at the lower of cost or market. In assessing the
realization of inventories, we are required to make judgments as to future
demand requirements and compare that with inventory levels. It is possible that
changes in consumer demand could cause a reduction in the net realizable value
of inventory.
14
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired and is evaluated annually for impairment. The cost of
intangible assets with determinable lives is amortized to reflect the pattern of
economic benefits consumed, on a straight-line basis, over the estimated periods
benefited, ranging from 3 to 16 years.
The Company periodically evaluates acquired businesses for potential impairment
indicators. Judgment regarding the existence of impairment indicators is based
on market conditions and operational performance of the Company. Future events
could cause the Company to conclude that impairment indicators exist and that
goodwill and other intangible assets associated with our acquired businesses are
impaired.
Capitalized Software
The carrying value of capitalized software, both purchased and internally
developed, is periodically reviewed for potential impairment indicators. Future
events could cause the Company to conclude that impairment indicators exist and
that capitalized software is impaired.
Stock-based Compensation
With the implementation of SFAS No. 123(R) effective July 4, 2005, stock-based
compensation changes our financial statements as detailed in Note 3 to the
financial statements. Determining the amount and distribution of expense for
stock-based compensation, as well as the associated impact to the balance sheet
and statement of cash flows, requires the Company to develop estimates of the
fair value of stock-based compensation expenses. The most significant factors of
that expense require estimates or projections including the expected volatility,
expected lives and estimate forfeiture rates of employee stock options, and are
determined based on historical measurements and expected outcomes, and the
Company's interpretation of regulatory guidance.
Income Taxes
The Company has established deferred income tax assets and liabilities for
temporary differences between the financial reporting bases and the income tax
bases of its assets and liabilities at enacted tax rates expected to be in
effect when such assets or liabilities are realized or settled. The Company has
recognized as a deferred tax asset the tax benefits associated with losses
related to operations, which are expected to result in a future tax benefit.
Realization of this deferred tax asset assumes that the Company will be able to
generate sufficient taxable income so that these assets will be realized. The
factors that the Company considers in assessing the likelihood of realization
include the forecast of future taxable income and available tax planning
strategies that could be implemented to realize the deferred tax assets.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123 (R), "Share-Based Payment." This Statement revised SFAS No. 123 by
eliminating the option to account for employee stock options under APB No. 25
and requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments based on the grant-date fair value of
those awards (the "fair-value-based" method).
Effective July 4, 2005, the Company adopted the fair value recognition
provisions of SFAS No. 123(R) using the modified prospective application method.
Under this transition method, compensation cost recognized in the three months
ended October 2, 2005, includes amounts of: (a) compensation cost of all
stock-based payments granted prior to, but not yet vested as of, July 4, 2005
(based on grant-date fair value estimated in accordance with the original
provisions of SFAS No. 123, and previously presented in the pro-forma footnote
disclosures), and (b) compensation cost for all stock-based payments granted
subsequent to July 3, 2005 (based on the grant-date fair value estimated in
accordance with the new provision of SFAS No. 123(R)). In accordance with the
modified prospective method, results for prior periods have not been restated.
15
The following table summarizes the effect of adopting SFAS No. 123(R) as of
July 4, 2005:
Three months
ended
October 2, 2005
------------------------------------
Stock-option compensation expense recognized (*): (in thousands, except per share data)
Marketing and sales $298
Technology and develment 127
General and administtive 425
----------
Total 850
Related deferred income tax benefit 175
----------
Increase in net loss $675
==========
Impact on basic and diluted net loss per common
share ($0.01)
==========
(*) exludes the impact of amortization of restricted stock
awards in the amount of $87, ($52, net of tax)
Compensation expense related to the amortization of restricted stock awards was
recognized prior to the implementation of SFAS No. 123(R). Total stock based
compensation expense, which includes both expense from stock options and
restricted stock awards, totaled $937 thousand ($727 thousand, net of tax)
during the three months ended October 2, 2005.
Refer to Note 3 - Stock-Based Compensation for further information regarding
disclosure required in accordance with SFAS No. 123(R).
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
investment grade corporate and U.S. government securities. Under its current
policies, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
the Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end
of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of the period covered by this report, these disclosure controls and procedures
are effective. There were no changes in our internal control over financial
reporting (as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f)during the three months ended October 2, 2005 that have materially
affected, or are reasonably likely to materially affect, our internal controls
over financial reporting.
16
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, consolidated financial
position, results of operations or liquidity.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth, for the months indicated, the Company's purchase
of common stock during the first quarter of fiscal 2006 which includes the
period July 4, 2005 through October 2, 2005.
Total Number of Dollar Value of
Shares Purchased as Shares that May Yet
Part of Publicly Be Purchased Under
Total Number of Average Price Announced Plans or the Plans or
Period Shares Purchased Paid Per Share Programs Programs
- ----------------------------------------------------------------------------------------------------------------
(in thousands, except average price paid per share)
7/4/05 - 7/31/05 120.5 $7.19 120.5 $9,315
8/1/05 - 8/28/05 61.5 $7.31 61.5 $8,863
8/29/05 - 10/2/05 - $- - $8,863
-------------------- ----------------- ------------------
Total 182.0 $7.23 182.0
On May 12, 2005, the Company's Board of Directors increased the Company's
authorization to repurchase the Company's Class A common stock up to $20
million, from the previous authorized limit of $10 million. All share purchases
were made in open-market transactions. The average price paid per share is
calculated on a settlement basis and excludes commission
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
10.27 Promissory Note dated October 24, 2005 entered into by
800-FLOWERS.COM, INC., a New York corporation, 800-FLOWERS, INC.,
a New York corporation, THE CHILDREN'S GROUP, INC., a Delaware
corporation, and THE PLOW & HEARTH, INC., a Virginia corporation
with JPMORGAN CHASE BANK, N.A.
10.28 Promissory Note dated October 27, 2005 entered into by
800-FLOWERS.COM, INC., a New York corporation, 800-FLOWERS, INC.,
a New York corporation, THE CHILDREN'S GROUP, INC., a Delaware
corporation, and THE PLOW & HEARTH, INC., a Virginia corporation
with Wachovia Bank, National Association.
31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
17
SIGNATURES
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: November 10, 2005 /s/ James F. McCann
- --------------------------- ----------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Date: November 10, 2005 /s/ William E. Shea
- --------------------------- ----------------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
18