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 March 27, 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 ( )
The number of shares outstanding of each of the Registrant's classes of common
stock:
28,859,752
----------
(Number of shares of Class A common stock outstanding as of May 2, 2005)
36,864,465
----------
(Number of shares of Class B common stock outstanding as of May 2, 2005)
1-800-FLOWERS.COM, Inc.
TABLE OF CONTENTS
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - March 27, 2005
(Unaudited) and June 27, 2004 1
Consolidated Statements of Income (Unaudited) - Three
and Nine Months Ended March 27, 2005 and March 28, 2004 2
Consolidated Statements of Cash Flows (Unaudited) - Nine
Months Ended March 27, 2005 and March 28, 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)
March 27, June 27,
2005 2004
------------- --------------
(unaudited)
Assets
Current assets:
Cash and equivalents $71,601 $ 80,824
Short-term investments 20,279 22,550
Receivables, net 13,263 9,013
Inventories 28,658 19,625
Deferred income taxes 18,522 16,463
Prepaid and other 3,282 1,517
------------- ------------
Total current assets 155,605 149,992
Property, plant and equipment, net 40,904 42,460
Investments 5,865 8,260
Goodwill 42,553 34,529
Other intangibles, net 2,108 2,598
Deferred income taxes 10,693 13,548
Other assets 7,944 10,165
------------- ------------
Total assets $265,672 $261,552
============= ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $67,018 $ 63,266
Current maturities of long-term debt and obligations under capital leases 2,867 3,022
------------- ------------
Total current liabilities 69,885 66,288
Long-term debt and obligations under capital leases 3,913 6,062
Other liabilities 2,856 2,812
------------- ------------
Total liabilities 76,654 75,162
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, 29,739,486
and 29,428,143 shares issued at March 27, 2005 and June 27, 2004, respectively 297 295
Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,144,465
shares issued at March 27, 2005 and June 27, 2004 421 421
Additional paid-in capital 257,910 255,829
Retained deficit (63,099) (67,047)
Deferred Compensation (1,228) -
Treasury stock, at cost-326,023 and 52,800 Class A shares at March 27, 2005 and
June 27, 2004, respectively and 5,280,000 Class B shares (5,283) (3,108)
------------- ------------
Total stockholders' equity 189,018 186,390
------------- ------------
Total liabilities and stockholders' equity $265,672 $261,552
============= ============
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 Nine Months Ended
--------------------------------- ---------------------------------
March 27, March 28, March 27, March 28,
2005 2004 2005 2004
---------------- ---------------- --------------- ----------------
Net revenues $157,033 $134,069 $484,561 $442,411
Cost of revenues 97,947 79,429 283,291 253,072
---------------- ---------------- --------------- ----------------
Gross profit 59,086 54,640 201,270 189,339
Operating expenses:
Marketing and sales 45,813 37,693 148,546 133,301
Technology and development 4,160 3,576 10,556 10,510
General and administrative 9,864 7,872 25,420 23,228
Depreciation and amortization 3,350 3,572 11,016 11,332
---------------- ---------------- --------------- ----------------
Total operating expenses 63,187 52,713 195,538 178,371
---------------- ---------------- --------------- ----------------
Operating (loss) income (4,101) 1,927 5,732 10,968
Other income (expense):
Interest income 570 269 1,227 684
Interest expense (116) (182) (381) (601)
Other 55 (5) 80 (218)
---------------- ---------------- --------------- ----------------
Total other income (expense), net 509 82 926 (135)
---------------- ---------------- --------------- ----------------
(Loss) income before income taxes (3,592) 2,009 6,658 10,833
Income tax (benefit) (1,546) 66 2,710 358
---------------- ---------------- --------------- ----------------
Net (loss) income $(2,046) $1,943 $3,948 $10,475
================ ================ =============== ================
Net (loss) income per common share:
Basic $(0.03) $0.03 $0.06 $0.16
================ ================ =============== ================
Diluted $(0.03) $0.03 $0.06 $0.15
================ ================ =============== ================
Weighted average shares used in the calculation of
net (loss) income per common share:
Basic 66,102 66,016 66,124 65,891
================ ================ =============== ================
Diluted 66,102 68,984 67,565 68,876
================ ================ =============== ================
See accompanying notes.
2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
--------------------------------
March 27, March 28,
2005 2004
--------------- --------------
Operating activities:
Net income $3,948 $10,475
Reconciliation of net income to net cash provided by operations:
Depreciation and amortization 11,016 11,332
Deferred income taxes 2,710 -
Bad debt expense 249 401
Stock compensation expense 101 -
Other non-cash items - 170
Changes in operating items:
Receivables (3,785) (1,880)
Inventories (8,703) (2,761)
Prepaid and other (1,765) (1,106)
Accounts payable and accrued expenses 1,765 (5,756)
Other assets 1,840 2,207
Other liabilities 44 74
--------------- --------------
Net cash provided by operating activities 7,420 13,156
Investing activities:
Purchase of investments (84,593) (34,072)
Sale of investments 89,259 48,696
Acquisition of business (9,674) -
Capital expenditures, net of non-cash expenditures (8,106) (5,866)
Other 143 187
--------------- --------------
Net cash (used in) provided by investing activities (12,971) 8,945
Financing activities:
Acquisition of treasury stock (2,175) -
Proceeds from employee stock options/purchase plan 754 1,389
Repayment of notes payable and bank borrowings (967) (834)
Payment of capital lease obligations (1,284) (1,288)
--------------- --------------
Net cash used in financing activities (3,672) (733)
--------------- --------------
Net change in cash and equivalents (9,223) 21,368
Cash and equivalents:
Beginning of period 80,824 49,079
--------------- --------------
End of period $71,601 $70,447
=============== ==============
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 and nine months ended March 27, 2005 are not necessarily indicative of the
results that may be expected for the fiscal year ending July 3, 2005.
The balance sheet information at June 27, 2004 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 June 27, 2004.
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.
Employee Stock Incentive Plans
The Company accounts for its stock option plans under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, no stock-based compensation is reflected
in net income, 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 is fixed at that point in time. The following table
illustrates the effect on net income and net income per share as if the Company
had applied the fair value recognition provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure."
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
March 27, March 28, March 27, March 28,
2005 2004 2005 2004
-------------- -------------- -------------- ---------------
(in thousands, except per share data)
Net (loss) income - As reported $(2,046) $1,943 $3,948 $10,475
Less: Stock based compensation (a) 4,218 1,759 7,907 5,598
-------------- -------------- -------------- ---------------
Net (loss) income - Pro forma $(6,264) $ 184 $(3,959) $ 4,877
============== ============== ============== ===============
Net (loss) income per share:
Basic - As reported $(0.03) $0.03 $0.06 $0.16
Basic - Pro forma $(0.09) $0.00 $(0.06) $0.07
Diluted - As reported $(0.03) $0.03 $0.06 $0.15
Diluted - Pro forma $(0.09) $0.00 $(0.06) $0.07
(a) In March 2005, the Company accelerated the vesting of all unvested stock
options awarded to employees and officers which had an exercise price greater
than $10.00 per share. Options to purchase approximately 1.9 million shares
became exercisable immediately as a result of the vesting acceleration. Assuming
that the Company adopts SFAS 123R, "Share-Based Payment," as expected in the
first quarter of fiscal 2006, the decision to accelerate the vesting of the
identified stock options will result in the Company not being required to
recognize share-based compensation expense, of approximately $2.1 million in
fiscal 2006 and $0.9 million in fiscal 2007. The Company sought to balance the
4
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
benefit of eliminating the requirement to recognize compensation
expense in future periods with the need to continue to motivate
employee performance through previously issued, but currently unvested,
stock option grants. With those factors being considered, management
determined it to be appropriate to only accelerate those unvested stock
options where the strike price was reasonably in excess of the
Company's then current stock price.
The effect of accelerating the vesting for all unvested shares with
exercise prices greater than $10.00 per share was an increase to the
pro-forma stock based employee compensation expense for the three and
nine months ended March 27, 2005 of $3.8 million ($0.06 per basic and
diluted share).
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
-----------------------------
March 27, March 28,
2005 2004
------------- --------------
Weighted average fair value of options granted $4.10 $5.91
Risk-free interest rate 3.86% 3.95%
Expected life (in years) 5.0 5.0
Expected volatility 57.0% 70.0%
Expected dividend yield 0.0% 0.0%
Comprehensive Income
For the three and nine months ended March 27, 2005 and March 28, 2004, the
Company's comprehensive income was equal to the respective net income for each
of the periods presented.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123R, "Share-Based Payment" (SFAS 123R), which requires companies
to measure and recognize compensation expense for all stock-based payments at
fair value. SFAS 123R is effective for, and will be adopted by the Company
beginning with the first quarter of fiscal 2006. The Company currently uses the
Black-Scholes model to value its options and is currently assessing which model
will be used in the future, as well as the impact that SFAS 123R will have on
its results of operations and financial position. See Employee Stock Incentive
Plans, above for information related to the pro forma effect on reported net
income and net income per share of applying the fair value recognition
provisions of the previous Statement of Financial Accounting Standards (SFAS)
123, "Acounting for Stock Based Compensation," to stock-based employee
compensation.
5
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 2 - Net (Loss) Income Per Common Share
The following table sets forth the computation of basic and diluted net (loss)
income per common share:
Three Months Ended Nine Months Ended
---------------------------------- ----------------------------------
March 27, March 28, March 27, March 28,
2005 2004 2005 2004
----------------- --------------- ---------------- ----------------
(in thousands, except per share data)
Numerator:
Net (loss) income $(2,046) $1,943 $3,948 $10,475
================= =============== ================ ================
Denominator:
Weighted average shares outstanding 66,102 66,016 66,124 65,891
Effect of dilutive securities:
Employee stock options - 2,968 1,441 2,985
----------------- --------------- ---------------- ----------------
Adjusted weighted-average shares and assumed
conversions 66,102 68,984 67,565 68,876
================= =============== ================ ================
Net (loss) income per common share:
Basic $(0.03) $0.03 $0.06 $0.16
Diluted $(0.03) $0.03 $0.06 $0.15
Note 3 - Goodwill and Intangible Assets
The change in the net carrying amount of goodwill is as follows:
March 27, 2005
----------------
(in thousands)
Goodwill - beginning of year $34,529
Acquisition of Winetasting Network 7,499
Other 525
-----------
Goodwill - end of period $42,553
===========
6
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The Company's other intangible assets consist of the following:
March 27, 2005 June 27, 2004
---------------------------------------- ---------------------------------------
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 $3,357 $1,570 $4,927 $3,115 $1,812
Customer lists 3 years 910 885 25 910 657 253
Other 5 years 194 157 37 194 137 57
------------ --------------- ----------- ----------- --------------- -----------
6,031 4,399 1,632 6,031 3,909 2,122
Trademarks with - 476 - 476 476 - 476
indefinite lives ------------ --------------- ----------- ----------- --------------- -----------
Total identifiable
intangible assets $6,507 $4,399 $2,108 $6,507 $3,909 $2,598
============ =============== =========== =========== =============== ===========
Estimated amortization expense is as follows: remainder of fiscal 2005 - $0.1
million, fiscal 2006 - $0.3 million, fiscal 2007 - $0.3 million, fiscal 2008 -
$0.3 million, fiscal 2009 - $0.3 million, and thereafter - $0.3 million.
Note 4 - Long-Term Debt
The Company's long-term debt and obligations under capital leases consist of the
following:
March 27, June 27,
2005 2004
---------------- -----------
(in thousands)
Commercial notes and revolving credit lines $4,576 $5,504
Seller financed acquisition obligations 45 85
Obligations under capital leases 2,159 3,495
----------- -----------
6,780 9,084
Less current maturities of long-term debt and obligations under
capital leases 2,867 3,022
----------- -----------
$3,913 $6,062
=========== ===========
Note 5 - Income Taxes
At the end of each interim reporting period, the Company makes an estimate of
the 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. Income taxes have been included in the
accompanying financial statements on the basis of an estimated annual effective
rate of 40.7%. The primary reason that the tax rate differs from the 35%
statutory federal corporate income tax rate is due to state income tax expense.
Note 6 - Acquistion of The Winetasting Network
On November 15, 2004, the Company acquired The Winetasting Network, a Napa
Valley, California based distributor and direct-to-consumer wine marketer, for
$9.4 million, including acquisition costs and the retirement of $2.4 million of
7
long-term debt. The acquisition has been accounted for under the purchase method
of accounting in accordance with SFAS No. 141, "Business Combinations."
Accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values at the acquisition
date. The preliminary allocation of the
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
purchase price consists of the following (in thousands):
Net current assets $(870)
Other non-current assets 80
Plant and equipment 798
Deferred tax assets 1,914
Goodwill 7,499
-----------
Total purchase price $9,421
===========
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 - Acquisition of Cheryl & Co
On March 28, 2005, the Company completed its acquisition of Cheryl & Co., Inc.,
a Westerville, Ohio-based manufacturer and direct marketer of premium cookies
and related baked gift items, with annual revenues of approximately $33 million
during its most recent year ended January 29, 2005. The purchase price of
approximately $42.0 million, including acquisition costs, was funded utilizing
the Company's available cash and investment balance, and included $6.3 million
used to retire Cheryl & Co.'s outstanding debt.
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 across the nation 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 Fresh From Our Growers (sm). 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 wwwcherylandco.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).
Results of Operations
Net Revenues
Three Months Ended Nine Months Ended
----------------------------------------------- ---------------------------------------------
March 27, March 28, March 27, March 28,
2005 2004 % Change 2005 2004 % Change
--------------- ---------------- -------------- --------------- -------------- --------------
(in thousands)
Net revenues:
Telephonic $52,424 $50,851 3.1% $199,580 $204,596 (2.5)%
Online 91,638 74,521 23.0% 252,410 214,335 17.8%
Retail/fulfillment 12,971 8,697 49.1% 32,571 23,480 38.7%
-------------- ---------------- --------------- --------------
Total net revenues $157,033 $134,069 17.1% $484,561 $442,411 9.5%
============== ================ =============== ==============
Net revenues consist primarily of the selling price of the merchandise, service
or outbound shipping charges, less discounts, returns and credits. The Company
grew its combined telephonic and online revenue by 14.9% and 7.9%, respectively,
during the three and nine months ended March 27, 2005, 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
9
acquisition and accelerate top-line growth, (iv) the impact of Easter holiday,
which fell in the third quarter of fiscal 2005, compared to the fourth quarter
during fiscal 2004, and (v) the continued improvement in the sale of home decor
gift items which increased 7.4% during the three months ended March 27, 2005,
continuing the turnaround which began during the Company's fiscal second
quarter. During the three and nine months ended March 27, 2005, non-floral gift
products accounted for 35.0% and 50.6%, respectively, of total combined
telephonic and online net revenues, consistent with the same periods of the
prior year.
The Company fulfilled approximately 2,432,000 and 7,474,000 orders through its
combined telephonic and online sales channels during the three and nine months
ended March 27, 2005 an increase of 18.5% and 9.1%, respectively. Order volume
through the Company's online sales channel increased by 26.8% and 18.3% during
the three and nine months ended March 27, 2005, respectively, in comparison to
the prior year periods, as a result of improved conversion of qualified traffic
through the Company's websites, increased marketing efforts through search
engines and affiliates, and the continued migration of customers from the
Company's telephonic sales channel, as well as the aforementioned shift in the
timing of the Easter Holiday. The Company's telephonic sales channel experienced
a 4.9% increase in order volume during the three months ended March 27, 2005 as
a result of improvement in the sale of home decor gift items, as well as the
impact of the shift in the timing of the Easter Holiday on the Company's Popcorn
Factory products. During the nine months ended March 27, 2005, the revenue
through the Company's telephonic sales channel decreased by 2.5% due to the
migration of telephonic customers to the Company's websites. The Company's
combined telephonic and online average order values of $59.24 and $60.47 during
the three and nine months ended March 27, 2005, decreased 3.0% and 1.1% over the
respective prior year periods, primarily as a result of product mix and
increased promotional activity due to the highly competitive nature of the
Valentine's holiday period.
The online sales channel contributed 63.6% and 55.8% of total combined
telephonic and online revenues during the three and nine months ended March 27,
2005, respectively, compared to 59.4% and 51.2% for the respective periods of
the prior year. The Company intends to continue to drive revenue growth through
its online sales channel, and continue the migration of its customers from the
telephone to the Web for several important reasons: (i) online orders are less
expensive to process than telephonic orders, (ii) online customers can view the
Company's full range of gift offerings, including non-floral gifts, which in
many cases yield higher gross margin opportunities, (iii) online customers can
utilize all of the Company's services, such as the various gift search
functions, order status check and reminder service, thereby deepening the
relationship with its customers and leading to increased order rates, and (iv)
when customers visit the Company online, it provides an opportunity to interact
with them in an electronic dialog via cost efficient marketing programs.
Retail/fulfillment revenues for the three and nine months ended March 27, 2005
increased in comparison to the same periods of the prior year, primarily as a
result of increased membership and sales of product and service offerings to the
Company's BloomNet(TM) network, as well as the incremental winery services
revenue generated by the acquisition of The Winetasting Network in November
2004.
In order to extend the Company's leadership position in the floral and
thoughtful gift marketplace, the Company will continue to execute against its
previously announced plan to increase its marketing spending during the
remainder of fiscal 2005. In addition to increasing its presence in online
media, as well as broadcast advertising, the Company will expand its BloomNet
business-to-business floral operations, build out its technology platform, and
increase the depth of its marketing programs and personnel within its recently
acquired wine gift business in support of the Company's growing gourmet gift and
gift basket product lines, which now includes Cheryl & Co., which was acquired
on March 28, 2005. While the Company believes that these investments will impact
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 Nine Months Ended
--------------------------------------------- ----------------------------------------------
March 27, March 28, March 27, March 28,
2005 2004 % Change 2005 2004 % Change
-------------- --------------- ------------- --------------- --------------- -------------
(in thousands)
Gross profit $59,086 $54,640 8.1% $201,270 $189,339 6.3 %
Gross margin % 37.6% 40.8% 41.5% 42.8%
10
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 and nine months ended March 27, 2005, in comparison
to the same periods of the prior year, as a result of increased revenue on the
Company's online and retail fulfillment sales channels. Gross margin percentage
during the three and nine months ended March 27, 2005 decreased in comparison to
the prior year, by 320 and 130 basis points respectively, due to a combination
of product mix, increased promotional discounting related to the highly
competitive nature of the Valentine's holiday, as well as increased carrier fuel
surcharges and shipping costs associated with the Monday placement of the
Valentine's Holiday.
During the remainder of fiscal 2005 the Company expects that its gross margin
percentage will improve through a combination of operational efficiencies and
continued growth of its higher margin specialty brands gift categories,
including the recent acquisition of Cheryl & Co.
Marketing and Sales Expense
Three Months Ended Nine Months Ended
---------------------------------------------- --------------------------------------------
March 27, March 28, March 27, March 28,
2005 2004 % Change 2005 2004 % Change
--------------- --------------- ------------- -------------- --------------- ------------
(in thousands)
Marketing and sales $45,813 $37,693 21.5% $148,546 $133,301 11.4%
Percentage of net revenues 29.2% 28.1% 30.7% 30.1%
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. Marketing and sales expenses increased during the three and nine
months ended March 27, 2005, compared to the same periods of the prior year, as
a result of the Company's efforts to increase new customer acquisition and
accelerate top-line growth through increased spending in online and broadcast
advertising, as well as adding personnel to expand its Bloomnet
business-to-business floral operations. Partially funding the increased spending
during the highly competitive Valentine's Day holiday period were volume related
operating efficiencies, and a continued reduction of order processing costs. As
a result of the Company's cost-efficient customer retention programs, of the
1,878,000 and 4,817,000 customers who placed orders during the three and nine
months ended March 27, 2005, approximately 57.8% and 48.6% represented repeat
customers, compared to 56.6% and 47.7%, in the respective prior year periods. In
addition, as a result of the strength of the Company's brands, combined with its
cost-efficient marketing programs, the Company added approximately 792,000 and
2,476,000 new customers during the three and nine months ended March 27, 2005,
respectively.
During the remainder of fiscal 2005, 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 membership and support
the anticipated growth of its recently acquired wine business. As a result, over
the short term the Company expects that marketing and sales expense will
increase as a percentage of net revenues, enabling the Company to accelerate
revenue growth and thereby extend the Company's leadership in the floral and
thoughtful gift marketplace.
Technology and Development Expense
Three Months Ended Nine Months Ended
---------------------------------------------- --------------------------------------------
March 27, March 28, March 27, March 28,
2005 2004 % Change 2005 2004 % Change
--------------- --------------- ------------- -------------- --------------- ------------
(in thousands)
Technology and development $4,160 $3,576 16.3% $10,556 $10,510 0.4%
Percentage of net revenues 2.6% 2.7% 2.2% 2.4%
11
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 and nine months ended March
27, 2005, technology and development expense increased in comparison to the same
periods of the prior year, primarily as a result of the incremental expenses
associated with the acquisition of The Winetasting Network in November 2004.
During the three and nine months ended March 27, 2005, the Company expended $5.6
million and $15.6 million on technology and development, of which $1.4 million
and $5.0 million 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 2005, the Company intends to improve the technology infrastructure of its
wine business, as well as the recently acquired Cheryl & Co. cookies and baked
gifts business, and therefore expects that technology and development spending
as a percentage of net revenues will be consistent with, or slightly higher than
in the prior year.
General and Administrative Expense
Three Months Ended Nine Months Ended
---------------------------------------------- --------------------------------------------
March 27, March 28, March 27, March 28,
2005 2004 % Change 2005 2004 % Change
--------------- --------------- ------------- -------------- --------------- ------------
(in thousands)
General and administrative $9,864 $7,872 25.3% $25,420 $23,228 9.4%
Percentage of net revenues 6.3% 5.9% 5.2% 5.3%
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 and nine months ended March 27, 2005 in comparison to the same
periods of the prior year, primarily as a result of the incremental expenses
associated with the acquisition of The Winetasting Network and compliance with
the Sarbanes-Oxley Act.
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 Company's wine gift product line
and additional overhead added during a seasonally slow period for Cheryl & Co.,
during the remainder of fiscal 2005, the Company expects that its general and
administrative expenses as a percentage of net revenue will increase in
comparison to prior year.
Depreciation and Amortization Expense
Three Months Ended Nine Months Ended
---------------------------------------------- --------------------------------------------
March 27, March 28, March 27, March 28,
2005 2004 % Change 2005 2004 % Change
--------------- --------------- ------------- -------------- --------------- ------------
(in thousands)
Depreciation and amortization $3,350 $3,572 (6.2)% $11,016 $11,332 (2.8)%
Percentage of net revenues 2.1% 2.7% 2.3 % 2.6%
Depreciation and amortization expense during the three and nine months ended
March 27, 2005 decreased slightly in comparison to the same periods of the prior
year, 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
will continue to decrease as a percentage of net revenues.
12
Other Income (Expense)
Three Months Ended Nine Months Ended
-------------------------------------------- ---------------------------------------------
March 27, March 28, March 27, March 28,
2005 2004 % Change 2005 2004 % Change
-------------- --------------- ----------- --------------- --------------- -----------
(in thousands)
Interest income $570 $269 111.9% $1,227 $684 79.4%
Interest expense (116) (182) 36.3% (381) (601) 36.6%
Other 55 (5) 1200.0% 80 (218) 136.7%
-------------- --------------- ----------- --------------- ---------------
$509 $82 520.7% $926 ($135) 785.9%
============== =============== =============== ===============
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 increase in other income (expense) during the three and nine months ended
March 27, 2005 was primarily attributable to higher interest income, resulting
from an increase in average cash balances and interest rate returns, as well as
lower interest expense due to maturing capital lease obligations. Additionally,
during the nine months ended March 27, 2005, other income (expense) increased as
a result of a loss incurred upon the conversion/relocation of a retail store
into a local fulfillment center in the prior year period.
Income Taxes
During the three and nine months ended March 27, 2005, the Company recorded an
income tax (benefit) provision of ($1.5) million and $2.7 million, respectively,
based upon the Company's anticipated effective annualized income tax rate of
approximately 41%. During the three and nine months ended March 28, 2004 the
Company recorded a $0.1 million and $0.4 million income tax provision,
respectively, for federal alternative minimum tax (AMT) and various state taxes
resulting from state tax law changes that deferred the use of available net
operating losses. Until the fourth quarter of the prior fiscal year, the Company
had recorded a full valuation allowance on its deferred tax assets, consisting
primarily of net operating loss carryforwards. At June 27, 2004, management of
the Company reassessed the valuation allowance previously established against
its net deferred tax assets. Based upon the Company's earnings history and
projected future taxable income, management determined that it is more likely
than not that the deferred tax assets would be realized, and, accordingly, at
that time, the Company removed the valuation allowance.
Liquidity and Capital Resources
At March 27, 2005, the Company had working capital of $85.7 million, including
cash and equivalents and short-term investments of $91.9 million, compared to
working capital of $83.7 million, including cash and equivalents and short-term
investments of $103.4 million, at June 27, 2004. In addition to its cash and
short-term investments, at March 27, 2005 and June 27, 2004, the Company
maintained approximately $5.9 million and $8.3 million, respectively, of
long-term investments, consisting primarily of investment grade corporate and
U.S. government securities.
Net cash provided by operating activities of $7.4 million for the nine months
ended March 27, 2005 was primarily attributable to the Company's net income as
well as non-cash charges of depreciation and amortization and deferred income
taxes, offset in part by seasonal changes in working capital, including
receivables which increased in comparison to the prior year due to the timing of
the Easter Holiday in relation to the Company's quarter end, and inventory,
which increased in preparation for the upcoming selling season.
Net cash used in investing activities of $13.0 million for the nine months ended
March 27, 2005 was primarily attributable to acquisition of The Winetasting
Network as well as capital expenditures, primarily related to the Company's
technology infrastructure, offset in part by maturities of long-term
investments.
Net cash used in financing activities of $3.7 million for the nine months ended
March 27, 2005, resulted primarily from the acquisition of the Company's Class A
common stock, which was placed in treasury, as well as repayment of amounts
outstanding under the Company's credit facilities and long-term capital lease
obligations, offset in part by the net proceeds received from the exercise of
employee stock options and purchase plan.
13
At March 27, 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 $4,621 $1,268 $2,728 $625 -
Capital lease obligations 2,159 1,599 560 - -
Operating lease obligations 10,876 3,250 4,034 1,476 $2,116
Sublease obligations 9,236 2,453 3,688 1,994 1,101
Other cash obligations (*) 127 127 - - -
Purchase commitments (**) 10,807 10,807 - - -
----------- --------------- ------------ ------------- ----------------
Total $37,826 $19,504 $11,010 $4,095 $3,217
=========== =============== ============ ============= ================
(*) Other cash obligations include $0.1 million of franchise lease guarantees.
(**) Purchase commitments consist primarily of inventory and equipment purchase
orders made in the ordinary course of business
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.
Goodwill and Other Intangible Assets
14
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.
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
Statement No. 123R, "Share-Based Payment" (SFAS 123R), which requires companies
to measure and recognize compensation expense for all stock-based payments at
fair value. SFAS 123R is effective for years beginning after June 15, 2005, and
will be adopted by the Company beginning with the first quarter of fiscal 2006.
The Company currently uses the Black-Scholes model to value its options and is
currently assessing which model will be used in the future, as well as the
impact that SFAS 123R will have on its results of operations and financial
position. See Employee Stock Incentive Plans, above for information related to
the pro forma effect on reported net income and net income per share of applying
the fair value recognition provisions of the previous Statement of Financial
Accounting Standards (SFAS) 123, "Acounting for Stock Based Compensation," to
stock-based employee compensation.
15
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 these
disclosure controls and procedures are effective. There were no changes in our
internal control over financial reporting during the quarter ended March 27,
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
Not applicable.
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
Exhibits.
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: May 5, 2005 /s/ James F. McCann
- ------------------------- -----------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Date: May 5, 2005 /s/ William E. Shea
- ------------------------- -----------------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
18