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 September 30, 2007
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 of (I.R.S. Employer
incorporation) Identification No.)
One Old Country Road, Carle Place, New York 11514
-------------------------------------------------
(Address of principal executive offices)(Zip code)
(516) 237-6000
--------------
(Registrant's telephone number, including area code)
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ( ) Accelerated filer(X) Non-accelerated filer ( )
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:
26,137,840
----------
(Number of shares of Class A common stock outstanding as of November 2, 2007)
36,858,465
----------
(Number of shares of Class B common stock outstanding as of November 2, 2007)
1-800-FLOWERS.COM, Inc.
TABLE OF CONTENTS
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - September 30, 2007 (Unaudited)
(Unaudited) and July 1, 2007 1
Consolidated Statements of Income (Unaudited) - Three
Months Ended September 30, 2007 and October 1, 2006 2
Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended September 30, 2007 and October 1, 2006 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Item 4. Controls and Procedures 21
Part II. Other Information
Item 1. Legal Proceedings 22
Item 1A. Risk Factors 22
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits 22
Signatures 24
PART I. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
September 30, July 1,
2007 2007
-------------- -----------
(unaudited)
Assets
Current assets:
Cash and equivalents $3,821 $16,087
Receivables, net 20,915 17,010
Inventories 83,163 62,051
Deferred income taxes 23,040 19,260
Prepaid and other 18,342 9,576
-------------- -----------
Total current assets 149,281 123,984
Property, plant and equipment, net 62,666 62,561
Goodwill 112,131 112,131
Other intangibles, net 52,082 52,750
Other assets 677 1,081
-------------- -----------
Total assets $376,837 $352,507
============== ===========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $52,795 $62,433
Current maturities of long-term debt and obligations under capital leases 50,829 10,132
-------------- -----------
Total current liabilities 103,624 72,565
Long-term debt and obligations under capital leases 64,813 68,000
Deferred income taxes 8,230 8,230
Other liabilities 2,614 2,681
-------------- -----------
Total liabilities 179,281 151,476
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 30,446,524
and 30,298,019 shares issued at September 30, 2007 and July 1, 2007,
respectively 304 303
Class B common stock, $.01 par value, 200,000,000 shares authorized 42,138,465
shares issued at September 30, 2007 and July 1, 2007 421 421
Additional paid-in capital 271,584 269,270
Retained deficit (44,683) (38,893)
Treasury stock, at cost - 4,594,326 and 4,590,717 Class A Shares at September
30, 2007 and July 1, 2007, respectively and 5,280,000 Class B shares (30,070) (30,070)
-------------- -----------
Total stockholders' equity $197,556 $201,031
-------------- -----------
Total liabilities and stockholders' equity $376,837 $352,507
============== ===========
See accompanying Notes to Consolidated Financial Statements.
1
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
Three Months Ended
---------------------------------
September 30, October 1,
2007 2006
---------------- ----------------
Net revenues $145,810 $137,132
Cost of revenues 85,929 82,318
---------------- ----------------
Gross profit 59,881 54,814
Operating expenses:
Marketing and sales 42,779 42,370
Technology and development 5,235 5,161
General and administrative 15,218 13,343
Depreciation and amortization 4,870 4,744
---------------- ----------------
Total operating expenses 68,102 65,618
---------------- ----------------
Operating loss (8,221) (10,804)
Other income (expense):
Interest income 178 337
Interest expense (1,545) (1,828)
Other 18 11
---------------- ----------------
Total other income (expense), net (1,349) (1,480)
---------------- ----------------
Loss before income taxes (9,570) (12,284)
Income tax benefit 3,780 4,865
---------------- ----------------
Net loss ($5,790) ($7,419)
================ ================
Basic and diluted net loss per common share ($0.09) ($0.11)
================ ================
Weighted average shares used in the calculation
of basic and diluted net loss per common share 62,638 65,195
================ ================
See accompanying Notes to Consolidated Financial Statements.
2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Three Months Ended
---------------------------------
September 30, October 1,
2007 2006
---------------- ----------------
Operating activities:
Net loss ($5,790) ($7,419)
Reconciliation of net loss to net cash used in operations:
Depreciation and amortization 4,870 4,744
Deferred income taxes (3,780) (4,865)
Stock-based compensation 1,469 1,020
Bad debt expense 584 238
Other non-cash items 97 56
Changes in operating items:
Receivables (4,489) (7,078)
Inventories (21,179) (21,581)
Prepaid and other (8,766) (16,776)
Accounts payable and accrued expenses (5,272) 6,391
Other assets 351 (387)
Other liabilities (67) 562
---------------- ----------------
Net cash used in operating activities (41,972) (45,095)
Investing activities:
Acquisitions, net of cash acquired (4,366) -
Capital expenditures (4,332) (6,146)
Other 48 (262)
---------------- ----------------
Net cash used in investing activities (8,650) (6,408)
Financing activities:
Proceeds from employee stock options 846 138
Proceeds from bank borrowings 50,000 37,000
Repayment of notes payable and bank borrowings (12,481) (363)
Repayment of capital lease obligations (9) (173)
---------------- ----------------
Net cash provided by financing activities 38,356 36,602
---------------- ----------------
Net change in cash and equivalents (12,266) (14,901)
Cash and equivalents:
Beginning of period 16,087 24,599
---------------- ----------------
End of period $3,821 $9,698
================ ================
See accompanying Notes to Consolidated Financial Statements.
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 September 30, 2007 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 29, 2008.
The balance sheet information at July 1, 2007 has been derived from the audited
financial statements at that date.
The information in this Quarterly Report on Form 10-Q should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
July 1, 2007.
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 September 30, 2007 and October 1, 2006, the Company's
comprehensive net losses were equal to the respective net losses for each of the
periods presented.
Recent Accounting Pronouncements
On July 2, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48). FIN 48 prescribes a
"more-likely-than-not" threshold for the recognition and derecognition of tax
positions, providing guidance on the accounting for interest and penalties
relating to tax positions and requires that the cumulative effect of applying
the provisions of FIN 48 shall be reported as an adjustment to the opening
balance sheet of retained earnings or other appropriate components of equity or
net assets in the statement of financial position. The Company did not have any
significant unrecognized tax benefits and there was no material effect on our
financial condition or results of operations as a result of implementing FIN 48.
See Note 8, "Income Taxes," for additional information relating to the Company's
implementation of FIN 48.
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements"
("Statement No. 157") which defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements.
Statement No. 157 applies to other accounting pronouncements that require or
permit fair value measurements and, accordingly, does not require any new fair
value measurements. Statement No. 157 is effective for fiscal years beginning
after November 15, 2007. The transition adjustment of the difference between the
carrying amounts and the fair values of those financial instruments should be
recognized as a cumulative-effect adjustment to retained earnings as of the
beginning of the year of adoption. The company is currently evaluating the
impact of adopting the provisions of Statement No. 157.
Reclassifications
Certain balances in the prior fiscal periods have been reclassified to conform
with the presentation in the current fiscal year.
4
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 2 - Net Loss 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 dilutive potential common shares
(consisting of employee stock options and unvested restricted stock awards) for
the three months ended September 30, 2007 and October 1, 2006, 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 11 of the Company's 2007 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
stock-based awards.
The amounts of stock-based compensation expense recognized in the periods
presented are as follows:
Three Months Ended
-----------------------------
September 30, October 1,
2007 2006
-------------- --------------
(in thousands, except
per share data)
Stock options $502 $856
Restricted stock awards 967 164
-------------- --------------
Total 1,469 1,020
Deferred income tax benefit 487 281
-------------- --------------
Stock-based compensation expense, net $982 $739
============== ==============
Impact on basic and diluted net loss per
common share $0.02 $0.01
============== ==============
Stock-based compensation is recorded within the following line items of
operating expenses:
Three Months Ended
-----------------------------
September 30, October 1,
2007 2006
-------------- --------------
(in thousands, except
per share data)
Marketing and sales $514 $358
Technology and development 220 153
General and administrative 735 509
-------------- --------------
Total $1,469 $1,020
============== ==============
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 granted during the respective periods were
as follows:
Three Months Ended
-------------------------------
September 30, October 1,
2007 2006(*)
--------------- ---------------
Weighted average fair value of
options granted $4.74 -
Expected volatility 46.5% -
Expected life 5.3 yrs -
Risk-free interest rate 4.43% -
Expected dividend yield 0.0% -
(*) The Company did not grant stock options during the three months ended
October 1, 2006.
The expected volatility of the option is determined using historical
volatilities based on historical stock prices. 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 September 30, 2007:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price Term Value (000s)
-----------------------------------------------------------
Outstanding at July 1, 2007 9,152,665 $8.10
Granted 127,500 $9.95
Exercised (135,622) $5.22
Forfeited (83,781) $10.78
--------------
Outstanding at September 30, 2007 9,060,762 $8.14 4.7 years $37,796
==============
Options vested or expected to vest at September
30,2007 8,794,680 $8.17 4.6 years $36,654
Exercisable at September 30, 2007 7,248,508 $8.35 3.9 years $30,008
As of September 30, 2007, the total future compensation cost related to
nonvested options, not yet recognized in the statement of income, was $4.8
million and the weighted average period over which these awards are expected to
be recognized was 2.9 years.
6
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
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
Awards). The following table summarizes the activity of non-vested restricted
stock awards during the three months ended September 30, 2007:
Weighted
Average Grant
Date Fair
Shares Value
------------- ---------------
Non-vested at July 1, 2007 1,101,982 $5.70
Granted 510,044 $12.87
Vested (11,177) $5.89
Forfeited (17,476) $9.70
-------------
Non-vested at September 30, 2007 1,583,373 $8.01
=============
The fair value of nonvested shares is determined based on the closing stock
price on the grant date. As of September 30, 2007, there was $9.0 million of
total unrecognized compensation cost related to non-vested restricted
stock-based compensation to be recognized over the weighted-average remaining
period of 2.4 years.
Note 4 - Acquisitions
The Company accounts for its business combinations in accordance with SFAS No.
141, "Business Combinations," which addresses financial accounting and reporting
for business combinations and requires that all such transactions be accounted
for using the purchase method. Under the purchase method of accounting for
business combinations, the aggregate purchase price for the acquired business is
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the acquisition date. Operating results of the acquired
entities are reflected in the Company's consolidated financial statements from
date of acquisition.
Acquisition of Fannie May Confections Brands, Inc.
On May 1, 2006, the Company acquired all of the outstanding common stock of
Fannie May Confections Brands, Inc. ("Fannie May Confections"), a manufacturer
and multi-channel retailer and wholesaler of premium chocolate and other
confections under the Fannie May, Harry London and Fanny Farmer brands. The
acquisition, for a purchase price of approximately $96.6 million in cash,
including estimated working capital adjustments and transaction costs, includes
a 200,000-square foot manufacturing facility in North Canton, Ohio and 52 Fannie
May retail stores in the Chicago area, where the chocolate brand has been a
tradition since 1920. The purchase price is subject to "earn-out" incentives
which amount to a maximum of $4.5 million during the year ended July 1, 2007
(of which $4.4 million was achieved) and $1.5 million during the year ending
June 29, 2008, upon achievement of specified earnings targets. Fannie May
Confections generated revenues of approximately $75.0 million in its fiscal year
ended April 30, 2006.
As described further under "Long-Term Debt," in order to finance the
acquisition, on May 1, 2006, the Company entered into a secured credit facility
with JPMorgan Chase Bank, N.A., as administrative agent, and a group of lenders
(the "2006 Credit Facility"). The 2006 Credit Facility includes an $85.0 million
term loan and a $50.0 million revolving facility (which was subsequently
increased to $75.0 million effective October 23, 2007), which bear interest at
LIBOR plus 0.625% to 1.125%, with pricing based upon the Company's leverage
ratio. At closing, the Company borrowed $85.0 million of the term facility to
acquire all of the outstanding capital stock of Fannie May Confections.
7
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 5 - Inventory
The Company's inventory, stated at cost, which is not in excess of market,
includes purchased and manufactured finished goods for resale, packaging
supplies, raw material ingredients for manufactured products and associated
manufacturing labor, and is classified as follows:
September 30, July 1,
2007 2007
---------------- -----------
(in thousands)
Finished goods $59,528 $43,113
Work-in-Process 5,016 3,911
Raw materials 18,619 15,027
----------- -----------
$83,163 $62,051
=========== ===========
Note 6 - Goodwill and Intangible Assets
There were no changes in the carrying amount of the Company's goodwill during
the three month period ended September 30, 2007. Goodwill by segment is as
follows:
1-800- Gourmet
Flowers.com BloomNet Food and Home and
Consumer Wire Gift Children's
Floral Service Baskets Gifts Total
----------------------------------------------------------------------------------
Balance at July 1, 2007 $6,352 $- $87,279 $18,500 $ 112,131
Change - - - - -
-------------- ------------- --------------- -------------- ----------------
Balance at September 30, 2007 $6,352 $- $87,279 $18,500 $ 112,131
============== ============= =============== ============== ================
The Company's other intangible assets consist of the following:
September 30, 2007 July 1, 2007
---------------------------------------- ----------------------------------------
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 $4,166 $761 $4,927 $4,085 $842
Customer lists 3 - 10 years 14,260 4,403 9,857 14,260 3,919 10,341
Other 5 - 8 years 2,639 851 1,788 2,639 748 1,891
------------ --------------- ----------- ----------- --------------- ------------
21,826 9,420 12,406 21,826 8,752 13,074
Trademarks with
indefinite lives - 39,676 - 39,676 39,676 - 39,676
------------ --------------- ----------- ----------- --------------- ------------
Total identifiable
intangible assets $61,502 $9,420 $52,082 $61,502 $8,752 $52,750
============ =============== =========== =========== =============== ============
Estimated future amortization expense is as follows: remainder of fiscal 2008 -
$2.0 million, fiscal 2009 - $2.6 million, fiscal 2010 - $2.5 million, fiscal
2011 - $2.0 million, fiscal 2012 - $0.9 and thereafter - $2.4 million.
8
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 7 - Long-Term Debt
The Company's long-term debt and obligations under capital leases consist of the
following:
September 30, July 1,
2007 2007
---------------- -----------
(in thousands)
Term loan $74,375 $76,500
Revolving line of credit 40,000 -
Commercial note 1,193 1,553
Obligations under capital leases 74 79
---------------- -----------
115,642 78,132
Less current maturities of long-term debt and obligations under
capital leases 50,829 10,132
---------------- -----------
$64,813 $68,000
================ ===========
In order to finance the acquisition of Fannie May Confections, on May 1, 2006,
the Company entered into a secured credit facility with JPMorgan Chase Bank,
N.A., as administrative agent, and a group of lenders (the "2006 Credit
Facility"). The 2006 Credit Facility includes an $85.0 million term loan and a
$50.0 million revolving facility, (which was subsequently increased to $75.0
million effective October 23, 2007), which bear interest at LIBOR plus 0.625% to
1.125%, with pricing based upon the Company's leverage ratio. At closing, the
Company borrowed $85.0 million of the term facility to acquire all of the
outstanding capital stock of Fannie May Confections. The Company is required to
pay the outstanding term loan in escalating quarterly installments, with the
final installment payment due on May 1, 2012. As of September 30, 2007, the
Company had $40.0 million outstanding under its revolving credit facility,
bearing interest at a rate of 5.5%.
Note 8 - 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 ended September 30, 2007 was 39.5%, compared to 39.6% during the
comparative three months ended October 1, 2006. The Company's effective tax rate
for the three months ended September 30, 2007 and October 1, 2006 differed from
the U.S. federal statutory rate of 35% primarily due to state income taxes,
partially offset by various tax credits.
The Company adopted the provisions of FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109, or
FIN 48, on July 2, 2007. The Company did not have any significant unrecognized
tax benefits and there was no material effect on its financial condition or
results of operations as a result of implementing FIN 48.
The Company files income tax returns in the U.S. federal jurisdiction and
various state jurisdictions. The tax years that remain subject to examination
are fiscal 2003 through fiscal 2006. The Company does not believe there will be
any material changes in its unrecognized tax positions over the next twelve
months.
The Company's policy is to recognize interest and penalties accrued on any
unrecognized tax benefits as a component of income tax expense. As of the date
of adoption of FIN 48, the Company did not have any accrued interest or
penalties associated with any unrecognized tax benefits, nor was any interest
expense recognized during the quarter.
9
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 9 - Business Segments
The Company's management reviews the results of the Company's operations by the
following four business categories:
o 1-800-Flowers.com Consumer Floral;
o BloomNet Wire Service;
o Gourmet Food and Gift Baskets; and
o Home and Children's Gifts.
Category performance is measured based on contribution margin, which includes
only the direct controllable revenue and operating expenses of the categories.
As such, management's measure of profitability for these categories does not
include the effect of corporate overhead (see (*) below), which are operated
under a centralized management platform, providing services throughout the
organization, nor does it include stock-based compensation, depreciation and
amortization, other income (net), and income taxes. Assets and liabilities are
reviewed at the consolidated level by management and not accounted for by
category.
Three Months Ended
------------------------------
September 30, October 1,
Net revenues 2007 2006
--------------- --------------
In thousands
Net revenues:
1-800-Flowers.com Consumer Floral $87,599 $82,668
BloomNet Wire Service 9,891 7,166
Gourmet Food & Gift Baskets 23,162 22,224
Home & Children's Gifts 24,735 24,867
Corporate (*) 1,125 915
Intercompany eliminations (702) (708)
--------------- --------------
Total net revenues $145,810 $137,132
=============== ==============
Three Months Ended
------------------------------
September 30, October 1,
Operating Loss 2007 2006
--------------- --------------
In thousands
Category Contribution Margin:
1-800-Flowers.com Consumer Floral $11,945 $7,870
BloomNet Wire Service 2,564 1,702
Gourmet Food & Gift Baskets (1,855) (1,574)
Home & Children's Gifts (2,296) (1,878)
--------------- --------------
Category Contribution Margin Subtotal 10,358 6,120
Corporate (*) (13,709) (12,180)
Depreciation and amortization (4,870) (4,744)
--------------- --------------
Operating loss (8,221) (10,804)
=============== ==============
(*) Corporate expenses consist of the Company's enterprise shared service cost
centers, and include, among others, Information Technology, Human
Resources, Accounting and Finance, Legal, Executive and Customer Service
Center functions, as well as Stock-Based Compensation. In order to leverage
the Company's infrastructure, these functions are operated under a
centralized management platform, providing support services throughout the
organization. The costs of these functions, other than those of the
Customer Service Center which are allocated directly to the above
categories based upon usage, are included within corporate expenses, as
they are not directly allocable to a specific category.
Note 10 - 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.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
The section entitled "Forward Looking Information and Factors that May Affect
Future Results," provides a description of the risks and uncertainties that
could cause actual results to differ materially from those discussed in
forward-looking statements set forth in this report relating to the financial
results, operations and business prospects of the Company. Such forward-looking
statements are based on management's current expectations about future events,
which are inherently susceptible to uncertainty and changes in circumstances.
Overview
For more than 30 years, 1-800-FLOWERS.COM Inc. - "Your Florist of Choice(R)" -
has been providing customers around the world with the freshest flowers and
finest selection of plants, gift baskets, gourmet foods, 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 overnight "Fresh From Our Growers(sm)."
Customers can "call, click or come in" to shop 1-800-FLOWERS.COM 24/7 at
1-800-356-9377 or www.1800flowers.com. As always, 100 percent satisfaction and
freshness are guaranteed. The 1-800-FLOWERS.COM collection of brands also
includes home decor and children's gifts from Plow & Hearth(R) (1-800-627-1712
or www.plowandhearth.com), Wind & Weather(R) (www.windandweather.com),
HearthSong(R) (www.hearthsong.com) and Magic Cabin(R) (www.magiccabin.com);
gourmet gifts including 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); premium
chocolates and confections from Fannie May Confections Brands(R)
(www.fanniemay.com and www.harrylondon.com); gourmet foods from GreatFood.com(R)
(www.greatfood.com); wine gifts from Ambrosia(R) (www.ambrosia.com); gift
baskets from 1-800-BASKETS.COM(R) (www.1800baskets.com) and the BloomNet(R)
international floral wire service, which provides quality products and diverse
services to a select network of florists.
1-800-FLOWERS.COM, Inc. stock is traded on the NASDAQ Global Select Market under
ticker symbol FLWS.
11
Category Information
During the first quarter of fiscal 2007, the Company segmented its organization
to improve execution and customer focus and to align its resources to meet the
demands of the markets it serves. The following table presents the contribution
of net revenues, gross profit and category contribution margin or category
"EBITDA" (earnings before interest, taxes, depreciation and amortization) from
each of the Company's business categories.
Three Months Ended
------------------------------------------------
Net Revenues September 30, October 1,
2007 2006 % Change
---------------- ---------------- --------------
(in thousands)
Net revenues:
1-800-Flowers.com Consumer Floral $87,599 $82,668 6.0%
BloomNet Wire Service 9,891 7,166 38.0%
Gourmet Food & Gift Baskets 23,162 22,224 4.2%
Home & Children's Gifts 24,735 24,867 (0.5%)
Corporate (*) 1,125 915 23.0%
Intercompany eliminations (702) (708) 0.8%
---------------- ----------------
Total net revenues $145,810 $137,132 6.3%
================ ================
Three Months Ended
------------------------------------------------
Gross Profit September 30, October 1,
2007 2006 % Change
---------------- ---------------- --------------
(in thousands)
Gross Profit:
1-800-Flowers.com Consumer Floral $34,096 $31,451 8.4%
38.9% 38.0%
BloomNet Wire Service 5,609 4,100 36.8%
56.7% 57.2%
Gourmet Food & Gift Baskets 9,483 8,519 11.3%
40.9% 38.3%
Home & Children's Gifts 10,206 10,342 (1.3%)
41.3% 41.6%
Corporate (*) 507 446 13.7%
45.1% 48.7%
Intercompany eliminations (20) (44) 54.5%
---------------- ----------------
Total gross profit $59,881 $54,814 9.2%
================ ================
41.1% 40.0%
================ ================
Three Months Ended
------------------------------------------------
EBITDA** September 30, October 1,
2007 2006 % Change
---------------- ---------------- --------------
(in thousands)
Category Contribution Margin:
1-800-Flowers.com Consumer Floral $11,945 $7,870 51.8%
BloomNet Wire Service 2,564 1,702 50.6%
Gourmet Food & Gift Baskets (1,855) (1,574) (17.9%)
Home & Children's Gifts (2,296) (1,878) (22.3%)
---------------- ----------------
Category Contribution Margin Subtotal 10,358 6,120 69.2%
Corporate (*) (13,709) (12,180) (12.6%)
---------------- ----------------
EBITDA ($3,351) ($6,060) 44.7%
================ ================
12
(*) Corporate expenses consist of the Company's enterprise shared service cost
centers, and include, among other items, Information Technology, Human
Resources, Accounting and Finance, Legal, Executive and Customer Service
Center functions, as well as Stock-Based Compensation. In order to leverage
the Company's infrastructure, these functions are operated under a
centralized management platform, providing support services throughout the
organization. The costs of these functions, other than those of the
Customer Service Center, which are allocated directly to the above
categories based upon usage, are included within corporate expenses as they
are not directly allocable to a specific category.
(**) Performance is measured based on category contribution margin or category
EBITDA, reflecting only the direct controllable revenue and operating
expenses of the categories. As such, management's measure of profitability
for these categories does not include the effect of corporate overhead,
described above, nor does it include depreciation and amortization, other
income (net), and income taxes. Management utilizes EBITDA as a performance
measurement tool because it considers such information a meaningful
supplemental measure of its performance and believes it is frequently used
by the investment community in the evaluation of companies with comparable
market capitalization. The Company also uses EBITDA as one of the factors
used to determine the total amount of bonuses available to be awarded to
executive officers and other employees. The Company's credit agreement uses
EBITDA (with additional adjustments) to measure compliance with covenants
such as interest coverage and debt incurrence. EBITDA is also used by the
Company to evaluate and price potential acquisition candidates. EBITDA has
limitations as an analytical tool, and should not be considered in
isolation or as a substitute for analysis of the Company's results as
reported under GAAP. Some of these limitations are: (a) EBITDA does not
reflect changes in, or cash requirements for, the Company's working capital
needs; (b) EBITDA does not reflect the significant interest expense, or the
cash requirements necessary to service interest or principal payments, on
the Company's debts; and (c) although depreciation and amortization are
non-cash charges, the assets being depreciated and amortized may have to be
replaced in the future, and EBITDA does not reflect any cash requirements
for such capital expenditures. Because of these limitations, EBITDA should
only be used on a supplemental basis combined with GAAP results when
evaluating the Company's performance.
Reconciliation of Net Loss to EBITDA:
Three Months Ended
------------------------------
September 30, October 1,
2007 2006
-------------- ---------------
Net loss ($5,790) ($7,419)
Add:
Interest expense 1,545 1,828
Depreciation and amortization 4,870 4,744
Less:
Interest income 178 337
Other income 18 11
Income tax benefit 3,780 4,865
-------------- ---------------
EBITDA ($3,351) ($6,060)
============== ===============
Results of Operations
Net Revenues
Three Months Ended
-------------------------------------------
September 30, October 1,
2007 2006 % Change
-------------- -------------- -------------
(in thousands)
Net revenues:
E-commerce $114,503 $109,259 4.8%
Other 31,307 27,873 12.3%
-------------- --------------
Total net revenues $145,810 $137,132 6.3%
============== ==============
The Company's revenue growth of 6.3% during the three months ended September 30,
2007 resulted primarily from growth within the Company's 1-800-Flowers.com
Consumer Floral and BloomNet Wire Service businesses, which increased 6.0% and
13
38.0%, respectively. Excluding the Home and Children's Gift category, total
revenue growth during the three months ended September 30, 2007 was 8.0%,
reflecting: (i) the Company's strong brand name recognition, (ii) continued
leveraging of its existing customer base, and (iii) cost effective spending on
its marketing and selling programs.
The Company fulfilled approximately 1,654,200 orders through its E-commerce
sales channels (online and telephonic sales) during the three months ended
September 30, 2007, an increase of 1.1% over the prior year period. The
Company's E-commerce average order value of $67.84 during the three months ended
September 30, 2007, increased 2.8% over the prior year period, primarily from a
combination of product mix and pricing initiatives. Other revenues, for the
three months ended September 30, 2007, increased in comparison to the same
period of the prior year, primarily as a result of the continued membership
growth and expanded product and service offerings from the Company's BloomNet
Wire Service category as well as increased retail/wholesale revenues from Fannie
May Confections Brands, Inc.
The 1-800-Flowers.com Consumer Floral category includes the 1-800-Flowers brand
operations which derives revenue from the sale of consumer floral products
through its E-Commerce sales channels (telephonic and online sales) and
company-owned and operated retail floral stores, as well as royalties from its
franchise operations. Net revenues during the three months ended September 30,
2007 increased by 6.0% over the prior year period, primarily from a combination
of increased average order value and order volumes from its E-commerce sales
channel (which grew at a rate of 7.2%), offset in part by lower retail sales
from its company-owned floral stores due to the continued transition of Company
stores to franchise ownership.
The BloomNet Wire Service category includes revenues from membership fees as
well as other product and service offerings to florists. Net revenues during the
three months ended September 30, 2007 increased by 38.0% over the prior year
period, primarily as a result of increased florist membership, expanded product
and service offerings, pricing initiatives and a growing volume of orders sent
between florists.
The Gourmet Food & Gift Basket category includes the operations of the Cheryl &
Co., Fannie May Confections, The Popcorn Factory and The Winetasting Network
brands. Revenue is derived from the sale of cookies, baked gifts, premium
chocolates and confections, gourmet popcorn and wine gifts through its
E-commerce sales channels (telephonic and online sales) and company-owned and
operated retail stores under the Cheryl & Co. and Fannie May brands, as well as
wholesale operations. Net revenue during the three months ended September 30,
2007 increased by 4.2% over the prior year period, reflecting the Company's
seasonally slower summer months.
The Home & Children's Gifts category includes revenues from Plow & Hearth, Wind
& Weather, HearthSong and Magic Cabin brands. Revenue is derived from the sale
of home decor and children's gifts through its E-commerce sales channels
(telephonic and online sales) or company-owned and operated retail stores under
the Plow & Hearth brand. Net revenue during the three months ended September 30,
2007 was consistent with the prior year period, and is expected to remain flat
for the balance of the fiscal year. As a result of the poor results during the
second quarter of fiscal 2007, the Company announced a planned reduction in
investment spending in this category, and as a result, beginning with the third
quarter of fiscal 2007, management implemented several changes to improve the
performance within this category: (i) discontinued such as Madison Place and
Problem Solvers, (ii) strengthened the management team, (iii) improved the
creative look and feel of the catalogs and (iv) reduced the circulation plans
for all titles to place more focus on the category's existing customer base.
Over the past several years, through a combination of organic efforts and
strategic acquisitions, the Company has rapidly grown its revenues, achieving a
solid base of business which is approaching $1 billion. The Company anticipates
that its revenue growth for fiscal 2008 will be in the range of 7-9 percent, as
strong revenue growth in the Company's key business categories of 1-800-Flowers
Consumer Floral, BloomNet Wire Service and Gourmet Food & Gift Baskets offsets
the lower revenue contribution expected from its Home and Children's Gifts
category.
Gross Profit
Three Months Ended
---------------------------------------------
September 30, October 1,
2007 2006 % Change
-------------- --------------- -------------
(In thousands)
Gross profit $59,881 $54,814 9.2%
Gross margin % 41.1% 40.0%
Gross profit increased during the three months ended September 30, 2007, in
comparison to the same period of the prior year, primarily as a result of the
revenue growth described above, as well as an increase in gross margin
percentage. Gross margin percentage increased 110 basis points to 41.1% during
the three months ended September 30, 2007, as a result of product mix and
pricing initiatives, as well as continued improvements in customer service,
fulfillment, including improved outbound shipping rates, and merchandising
programs.
14
The 1-800-Flowers.com Consumer Floral category gross profit for the three months
ended September 30, 2007 increased by 8.4% over the prior year period as a
result of the aforementioned increase in net revenues, as well as improvements
in sourcing, fulfillment logistics, including reduced outbound shipping rates,
and pricing initiatives, which resulted in an increase in gross margin
percentage of 90 basis points to 38.9%, during the three months ended September
30, 2007.
The BloomNet Wire Service category gross profit for the three months ended
September 30, 2007 increased by 36.8% over the prior year period as a result of
increases in florist membership, product and service offerings and pricing
initiatives. Gross margin percentage decreased 50 basis points to 56.7% during
the three months ended September 30, 2007, primarily as a result of sales mix,
impacted by increased revenue related to a growing volume of orders sent between
florists which bear lower margins, but support membership growth.
The Gourmet Food & Gift Basket category gross profit for the three months ended
September 30, 2007 increased by 11.3% over the prior year period as a result of
the aforementioned increased revenue as well as an improved gross margin
percentage. The gross margin percentage increased by 260 basis points to 40.9%
during the three months ended September 30, 2007, driven primarily by reduced
manufacturing costs and improved product sourcing, as well as sales mix.
The Home & Children's Gift category gross profit for the three months ended
September 30, 2007 decreased by 1.3% over the prior year period as a result of
the lower gross margin percentage, which declined 30 basis points to 41.3%, due
to sales mix.
During the remainder of fiscal 2008, the Company expects that its gross margin
percentage will improve, although varying by quarter due to seasonal changes in
product mix, primarily through: (i) growth of its higher margin business
categories including Gourmet Food and Gift Baskets and BloomNet Wire Service,
(ii) improved product sourcing, new product development and process improvement
initiatives implemented during the second half of fiscal 2007, and (iii) the
continued improved performance of the Consumer Floral category.
Marketing and Sales Expense
Three Months Ended
---------------------------------------------
September 30, October 1,
2007 2006 % Change
------------------ --------------- ----------
(In thousands)
Marketing and sales $42,779 $42,370 1.0%
Percentage of net revenues 29.3% 30.9%
During the three months ended September 30, 2007, marketing and sales expenses
decreased from 30.9% of net revenues to 29.3% of net revenues, reflecting
improved operating leverage from a number of cost-saving initiatives, such as
catalog printing and e-mail pricing improvements, as well as the impact of the
growth of the Company's BloomNet category. Marketing and sales expense increased
slightly over the prior year period, by 1.0%, as a result of incremental
variable costs to accommodate higher sales volumes. During the three months
ended September 30, 2007, the Company added approximately 506,000 new e-commerce
customers. As a result of the Company's effective customer retention efforts,
approximately 822,000 existing customers placed e-commerce orders during the
three months ended September 30, 2007, representing an increase of 3.1% over the
same period of the prior year. Of the 1,328,000 total customers who placed
e-commerce orders during the three months ended September 30, 2007,
approximately 61.9% were repeat customers, compared to 59.3% during the prior
year, reflecting the Company's ongoing focus on deepening the relationship with
its existing customers as their trusted source for gifts and services for all of
their celebratory occasions.
During fiscal 2008, the Company is focused on continuing to improve its
operating expense ratio through a number of cost saving initiatives, including
catalog printing and e-mail pricing improvements, as well as a review of the
type, quantity and effectiveness of its marketing programs. In addition to the
improved operating results expected now that the Company has completed the
investment phase of its BloomNet florist business, the Company expects that
marketing and sales expense, as a percentage of revenue, will continue to
decrease in comparison to the prior year.
15
Technology and Development Expense
Three Months Ended
---------------------------------------------
September 30, October 1,
2007 2006 % Change
-------------- --------------- --------------
(In thousands)
Technology and development $5,235 $5,161 1.4%
Percentage of net revenues 3.6% 3.8%
During the three months ended September 30, 2007, technology and development
expense decreased to 3.6% of net revenue, reflecting improved operating
leverage, but increased over the prior year period by 1.4% as a result of
increased cost of hosting, maintenance and license agreements required to
support the Company's technology platform. During the three months ended
September 30, 2007, the Company expended $8.4 million on technology and
development, of which $3.2 million has been capitalized.
While the Company believes that continued investment in technology and
development is critical to attaining its strategic objectives, the Company
expects that its spending for the remainder of fiscal 2008 will remain
consistent as a percentage of net revenues in comparison to the prior year.
General and Administrative Expense
Three Months Ended
---------------------------------------------
September 30, October 1,
2007 2006 % Change
-------------- --------------- --------------
(In thousands)
General and administrative $15,218 $13,343 14.1%
Percentage of net revenues 10.4% 9.7%
General and administrative expense increased 14.1% during the three months ended
September 30, 2007, and by 70 basis points of net revenues in comparison to the
prior year period, primarily as a result of increased professional fees and
corporate initiatives. The benefit of these increased costs are reflected in the
improvements in the Company's gross profit margin and marketing and selling
expense ratios, in comparison to the same period of the prior year.
The Company believes that its current general and administrative infrastructure
is sufficient to support existing requirements and drive operating leverage, and
as a result the Company expects that its general and administrative expenses as
a percentage of net revenue during the remainder of fiscal 2008 will be
consistent with the prior year period.
Depreciation and Amortization Expense
Three Months Ended
------------------------------------------
September 30, October 1,
2007 2006 % Change
-------------- --------------- -----------
(In thousands)
Depreciation and amortization $4,870 $4,744 2.7%
Percentage of net revenues 3.3% 3.5%
Depreciation and amortization expense, as a percentage of net revenue, decreased
by 20 basis points in comparison to the prior year period, as a result of the
Company's ability to leverage its existing technology infrastructure.
Depreciation and amortization expense increased 2.7% during the three months
ended September 30, 2007, as a result of the completion of technology projects
designed to provide improved order/warehouse management functionality across the
enterprise.
The Company believes that continued investment in its infrastructure, primarily
in the areas of technology and development, including the improvement of its
technology platforms are critical to attaining its strategic objectives. As a
result of these improvements, the Company expects that depreciation and
amortization for the remainder of fiscal 2008 will remain consistent as a
percentage of net revenues in comparison to the prior year.
16
Other Income (Expense)
Three Months Ended
------------------------------------------
September 30, October 1,
2007 2006 % Change
-------------- -------------- ------------
(In thousands)
Interest income $178 $337 (47.2%)
Interest expense (1,545) (1,828) 15.5%
Other 18 11 63.6%
-------------- --------------
($1,349) ($1,480) 8.9%
============== ==============
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 long-term debt, and revolving line of
credit. In order to finance the acquisition of Fannie May Confections Brands, on
May 1, 2006, the Company entered into a $135.0 million secured credit facility
with JPMorgan Chase Bank, N.A., as administrative agent, and a group of lenders
(the "2006 Credit Facility"). The 2006 Credit Facility, as amended on October
23, 2007, includes an $85.0 million term loan and a $75.0 million revolving
facility, which bear interest at LIBOR plus 0.625% to 1.125%, with pricing based
upon the Company's leverage ratio. At closing, the Company borrowed $85.0
million of the term facility to acquire all of the outstanding capital stock of
Fannie May Confections Brands, Inc. As of September 30, 2007, the outstanding
balances on the term loan and revolving credit line under the Company's 2006
Credit Facility was $74.4 million and $40.0 million, respectively. The
outstanding balance on the Company's credit line was used to fund working
capital needs in preparation for the upcoming holiday season.
The increase in other income (expense) during the three months ended September
30, 2007, in comparison to the prior year period was primarily the result of
lower interest expense on the Company's 2006 Credit Facility due to a reduced
outstanding balance on the Company's term loan as a result of the scheduled
repayments, and a reduction in rates, offset in part by lower interest income,
resulting from a decrease in average cash balances and rates.
Income Taxes
On July 2, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48). FIN 48 prescribes a
"more-likely-than-not" threshold for the recognition and derecognition of tax
positions, providing guidance on the accounting for interest and penalties
relating to tax positions and requires that the cumulative effect of applying
the provisions of FIN 48 shall be reported as an adjustment to the opening
balance sheet of retained earnings or other appropriate components of equity or
net assets in the statement of financial position. The Company did not have any
significant unrecognized tax benefits and there was no material effect on our
financial condition or results of operations as a result of implementing FIN 48.
See Note 7, "Income Taxes," for additional information relating to the Company's
implementation of FIN 48.
During the three months ended September 30, 2007 and October 1, 2006, the
Company recorded an income tax benefit of $3.8 million and $4.9 million,
respectively. The Company's effective tax rate for the three months ended
September 30, 2007 and October 1, 2006 was 39.5% and 39.6%, respectively. The
Company's effective tax rate for the three months ended September 30, 2007 and
October 1, 2006 differed from the U.S. federal statutory rate of 35% primarily
due to state income taxes, partially offset by various tax credits.
Liquidity and Capital Resources
At September 30, 2007, the Company had working capital of $45.7 million,
including cash and equivalents of $3.8 million, compared to working capital of
$51.4 million, including cash and equivalents of $16.1 million, at July 1, 2007.
Net cash used in operating activities of $42.0 million for the three months
ended October 1, 2006 was primarily attributable to the Company's net loss and
seasonal changes in working capital, including increases in inventory,
receivables and prepaids, consisting primarily of prepaid catalog production
costs, as well as lower accounts payable and accrued expenses due to payments
related to the Company's fiscal 2007 performance-based bonuses.
Net cash used in investing activities of $8.7 million for the three months ended
September 30, 2007 was primarily attributable to capital expenditures related to
the Company's technology and distribution infrastructure and to the payment of a
$4.4 million "earn-out" incentive, for financial targets achieved during fiscal
2007, related to the acquisition of Fannie May Confections Brands, Inc.
Net cash provided by financing activities of $38.4 million for the three months
ended September 30, 2007 was primarily from bank borrowings used to fund
17
seasonal operating losses and working capital requirements, net of the repayment
of bank borrowings on outstanding debt and long-term capital lease obligations.
On May 1, 2006, the Company entered into a $135.0 million secured credit
facility with JPMorgan Chase Bank, N.A., as administrative agent, and a group of
lenders (the "2006 Credit Facility"). The 2006 Credit Facility, as amended on
October 23, 2007, includes an $85.0 million term loan and a $75.0 million
revolving credit facility, which bear interest at LIBOR plus 0.625% to 1.125%,
with pricing based upon the Company's leverage ratio. At closing, the Company
borrowed $85.0 million of the term facility to acquire all of the outstanding
capital stock of Fannie May Confections Brands, Inc. The Company is required to
pay the outstanding term loan in quarterly installments, with the final
installment payment due on May 1, 2012. The 2006 Credit Facility contains
various conditions to borrowing, and affirmative and negative financial
covenants.
The Company has historically utilized cash generated from operations to meet its
cash requirements, including all operating, investing and debt repayment
activities. However, due to the Company's continued expansion into non-floral
products, including the acquisition of Fannie May Confections Brands, as of
September 30, 2007, the Company had borrowed $40.0 million against its line of
credit to fund working capital requirements, which have increased during this
time period as a result of increased inventory and pre-holiday manufacturing
requirements. The Company expects to increase its level of borrowing during its
fiscal second quarter, but also expects that all such amounts will be repaid
prior to the end of the quarter.
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 September 30, 2007, the
Company had repurchased 1,538,286 shares of common stock for $11.3 million,
excluding the December 28, 2006 repurchase of 3,010,740 shares of common stock
from an affiliate. The purchase price was $15,689,000, or $5.21 per share. The
repurchase was approved by the disinterested members of the Company's Board of
Directors and is in addition to the Company's existing stock repurchase
authorization of $20.0 million, of which $8.7 million remains authorized but
unused.
At September 30, 2007, 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, including interest 128,934 55,390 32,861 40,683 -
Capital lease obligations 89 35 25 25 4
Operating lease obligations 65 947 8,182 16,436 13,182 28,147
Sublease obligations 5,656 1,755 2,720 927 254
Purchase commitments (*) 34,305 34,305 - - -
----------- --------------- ------------ ------------- ----------------
Total 234,931 99,667 52,042 54,817 28,405
=========== =============== ============ ============= ================
(*) Purchase commitments consist primarily of inventory, equipment purchase
orders and online marketing agreements made in the ordinary course of business.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial position and results of
operations are based upon the consolidated financial statements of
1-800-FLOWERS.COM, Inc., which have been prepared in accordance with U.S.
generally accepted accounting principles. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amount of assets, liabilities, revenue 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, affect its more significant judgments and estimates used in
preparation of its consolidated financial statements.
18
Revenue Recognition
Net revenues are generated by E-commerce operations from the Company's online
and telephonic sales channels as well as other operations (retail/fulfillment)
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. Shipping terms are FOB shipping point. Net
revenues generated by the Company's BloomNet Wire Service operations include
membership fees as well as other product and service offerings to florists.
Membership fees are recognized monthly in the period earned, and product sales
are recognized upon shipment with shipping terms of FOB shipping point.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers or franchisees to make required
payments. If the financial condition of the Company's customers or franchisees
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
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 performs an annual impairment test as of the first day of its fiscal
fourth quarter, or earlier if indicators of potential impairment exist, to
evaluate goodwill. Goodwill is considered impaired if the carrying amount of the
reporting unit exceeds its estimated fair value. In assessing the recoverability
of goodwill, the Company reviews both quantitative as well as qualitative
factors to support its assumptions with regard to fair value. 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 is 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
SFAS No. 123R requires the measurement of stock-based compensation expense based
on the fair value of the award on the date of grant. The Company determines the
fair value of stock options issued by using the Black-Scholes option-pricing
model. The Black-Scholes option-pricing model considers a range of assumptions
related to volatility, dividend yield, risk-free interest rate and employee
exercise behavior. Expected volatilities are based on historical volatility of
the Company's stock price. The dividend yield is based on historical experience
and future expectations. The risk-free interest rate is derived from the US
Treasury yield curve in effect at the time of grant. The Black-Scholes model
also incorporates expected forfeiture rates, based on historical behavior.
Determining these assumptions are subjective and complex, and therefore, a
change in the assumptions utilized could impact the calculation of the fair
value of the Company's stock options.
19
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 we will be able to generate
sufficient future taxable income so that these assets will be realized. The
factors that we consider 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
On July 2, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48). FIN 48 prescribes a
"more-likely-than-not" threshold for the recognition and derecognition of tax
positions, providing guidance on the accounting for interest and penalties
relating to tax positions and requires that the cumulative effect of applying
the provisions of FIN 48 shall be reported as an adjustment to the opening
balance sheet of retained earnings or other appropriate components of equity or
net assets in the statement of financial position. The Company did not have any
significant unrecognized tax benefits and there was no material effect on our
financial condition or results of operations as a result of implementing FIN 48.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
Statement defines fair value, establishes a framework for measuring fair value
and expands disclosure about fair value measurements, and is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company is currently
evaluating the effect that the adoption of this Statement will have on its
consolidated results of operations and financial condition.
Forward Looking Information and Factors that May Affect Future Results
Our disclosure and analysis in this report contain forward-looking information
about the Company's financial results and estimates, business prospects that
involve substantial risks and uncertainties. From time to time, we also may
provide oral or written forward-looking statements in other materials we release
to the public. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historic or current facts. They use words such as
"will," "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," "target," "forecast" and other words and terms of similar meaning in
connection with any discussion of future operating or financial performance. In
particular, these include statements relating to future actions, future
performance, new products and product categories, the outcome of contingencies,
such as legal proceedings, and financial results. Among the factors that could
cause actual results to differ materially are the following:
o the Company's ability:
o to achieve revenue and profitability;
o to reduce costs and enhance its profit margins;
o to manage the increased seasonality of its business;
o to effectively integrate and grow acquired companies;
o to cost effectively acquire and retain customers;
o to compete against existing and new competitors;
o to manage expenses associated with sales and marketing and necessary
general and administrative and technology investments;
o to cost efficiently manage inventories;
o to leverage its operating infrastructure;
o general consumer sentiment and economic conditions that may affect
levels of discretionary customer purchases of the Company's products;
and
o competition from existing and potential new competitors.
We cannot guarantee that any forward-looking statement will be realized,
although we believe we have been prudent in our plans and assumptions.
Achievement of future results is subject to risks, uncertainties and inaccurate
assumptions. Should known or unknown risks or uncertainties materialize, or
should underlying assumptions prove inaccurate, actual results could vary
materially from past results and those anticipated, estimated or projected.
Investors should bear this in mind as they consider forward-looking statements.
20
We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our Forms 10-Q, 8-K and 10-K reports to the Securities and Exchange
Commission. Our Annual Report on Form 10-K filing for the fiscal year ended July
1, 2007 listed various important factors that could cause actual results to
differ materially from expected and historic results. We note these factors for
investors as permitted by the Private Securities Litigation Reform Act of 1995.
Readers can find them in Part I, Item 1A, of that filing under the heading
"Cautionary Statements Under the Private Securities Litigation Reform Act of
1995". We incorporate that section of that Form 10-K in this filing and
investors should refer to it. You should understand that it is not possible to
predict or identify all such factors. Consequently, you should not consider any
such list to be a complete set of all potential risks or uncertainties.
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
money market funds. While the Company currently does not use interest rate
derivative instruments to manage exposure to interest rate changes, in order to
finance the acquisition of Fannie May Confections, on May 1, 2006, the Company
entered into a secured credit facility. The credit facility, as amended on
October 23, 2007, includes an $85.0 million term loan and a $75.0 million
revolving facility, which bear interest at LIBOR plus 0.625% to 1.125%, with
pricing based upon the Company's leverage ratio.
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 in alerting them in a timely manner to material information
required to be disclosed in the Company's periodic reports filed with the SEC.
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 September 30, 2007 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
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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 1A. RISK FACTORS.
There have been no material changes from the risk factors disclosed in Part 1,
Item 1, of the Company's Annual Report on Form 10-K for the fiscal year ended
July 1, 2007.
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 three months of fiscal 2008 which includes the period
July 2, 2007 through September 30, 2007.
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)
7/2/07-7/29/07 - $- - $8,711
7/30/07-8/26/07 - $- - $8,711
8/27/07-9/30/07 3.6 $11.55 3.6 $8,669
--------------- ---------------- ----------------
Total 3.6 $11.55 3.6
=============== ================ ================
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.
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
None.
ITEM 6. EXHIBITS
10.1 Revolving Credit Commitment Increase Dated October 23, 2007.
10.2 Offer letter dated November 25, 2003 between Monica L. Woo
and the Company.
10.3 Offer letter dated February 9, 2005 between the Company and
Timothy J. Hopkins.
10.4 Offer letter dated February 21, 2007 between the Company and
Stephen Bozzo.
31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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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 8, 2007 /s/ James F. McCann
--------------------------- -----------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Date: November 8, 2007 /s/ William E. Shea
--------------------------- -----------------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)
23