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 April 1, 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:
25,626,396
----------
(Number of shares of Class A common stock outstanding as of May 3, 2007)
36,858,465
----------
(Number of shares of Class B common stock outstanding as of May 3, 2007)
1-800-FLOWERS.COM, Inc.
TABLE OF CONTENTS
INDEX
Page
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - April 1, 2007 (Unaudited)
and July 2, 2006 1
Consolidated Statements of Income (Unaudited) - Three
and Nine Months Ended April 1, 2007 and April 2, 2006 2
Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended April 1, 2007 and April 2, 2006 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
Part II. Other Information
Item 1. Legal Proceedings 24
Item 1A. Risk Factors 24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 25
Signatures 26
PART I. - FINANCIAL INFORMATION
ITEM 1. - CONSOLIDATED FINANCIAL STATEMENTS
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share data)
April 1, July 2,
2007 2006
--------------- ------------
(unaudited)
Assets
Current assets:
Cash and equivalents $10,158 $24,599
Receivables, net 21,750 13,153
Inventories 66,343 52,954
Deferred income taxes 25,562 17,427
Prepaid and other 11,534 10,347
--------------- ------------
Total current assets 135,347 118,480
Property, plant and equipment, net 62,575 59,732
Goodwill 105,571 131,141
Other intangibles, net 53,414 29,822
Deferred income taxes - 6,224
Other assets 1,474 1,235
--------------- ------------
Total assets $358,381 $346,634
=============== ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $63,341 $63,870
Current maturities of long-term debt and obligations under capital leases 20,013 10,360
--------------- ------------
Total current liabilities 83,354 74,230
Long-term debt and obligations under capital leases 70,606 78,063
Deferred income taxes 9,735 -
Other liabilities 2,014 1,158
--------------- ------------
Total liabilities 165,709 153,451
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, 30,159,019
and 29,872,183 shares issued at April 1, 2007 and July 2, 2006, respectively 302 299
Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,138,465
shares issued at April 1, 2007 and July 2, 2006, respectively 421 421
Additional paid-in capital 267,319 262,667
Retained deficit (45,455) (56,011)
Treasury stock, at cost 4,577,492 and 1,555,350 Class A shares at April 1, 2007
and July 2,2006, respectively and 5,280,000 Class B shares (29,915) (14,193)
--------------- ------------
Total stockholders' equity 192,672 193,183
--------------- ------------
Total liabilities and stockholders' equity $358,381 $346,634
=============== ============
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 Nine Months Ended
--------------------------------- --------------------------------
April 1, April 2, April 1, April 2,
2007 2006 2007 2006
--------------- ---------------- --------------- ---------------
Net revenues $213,779 $180,017 $680,777 $570,611
Cost of revenues 127,092 109,743 387,299 329,319
--------------- ---------------- --------------- ---------------
Gross profit 86,687 70,274 293,478 241,292
Operating expenses:
Marketing and sales 59,023 53,188 200,430 179,286
Technology and development 5,469 5,170 15,831 14,736
General and administrative 14,198 11,181 41,472 32,174
Depreciation and amortization 4,447 3,877 13,025 11,210
--------------- ---------------- --------------- ---------------
Total operating expenses 83,137 73,416 270,758 237,406
--------------- ---------------- --------------- ---------------
Operating income (loss) 3,550 (3,142) 22,720 3,886
Other income (expense):
Interest income 203 474 794 830
Interest expense (1,551) (96) (5,804) (293)
Other 1 137 5 -
--------------- ---------------- --------------- ---------------
Total other income (expense), net (1,347) 515 (5,005) 537
--------------- ---------------- --------------- ---------------
Income (loss) before income taxes 2,203 (2,627) 17,715 4,423
Income tax expense (benefit) 1,150 (1,087) 7,159 2,253
--------------- ---------------- --------------- ---------------
Net income (loss) $1,053 ($1,540) $10,556 $2,170
================ ================ =============== ===============
Basic and diluted net income (loss ) per common
share: $0.02 ($0.02) $0.16 $0.03
================ ================ =============== ===============
Weighted average shares used in the calculation
of net income (loss) per common share:
Basic 62,358 65,092 64,216 65,082
================ ================ =============== ===============
Diluted 64,284 65,092 65,475 66,399
================ ================ =============== ===============
See accompanying Notes to Consolidated Financial Statements.
2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Nine Months Ended
--------------------------------
April 1, April 2,
2007 2006
--------------- --------------
Operating activities:
Net income $10,556 $2,170
Reconciliation of net income to net cash provided by (used in)
operations:
Depreciation and amortization 13,025 11,210
Deferred income taxes 7,824 1,983
Bad debt expense 1,111 361
Stock-based compensation 3,386 3,058
Other non-cash items 72 277
Changes in operating items:
Receivables (9,708) (2,216)
Inventories (13,881) (12,520)
Prepaid and other (1,187) (3,598)
Accounts payable and accrued expenses (529) (2,406)
Other assets (867) 3
Other liabilities 856 (93)
--------------- --------------
Net cash provided by (used in) operating activities 10,658 (1,771)
Investing activities:
Acquisitions, net of cash acquired (347) (4,959)
Dispositions 1,112 -
Capital expenditures (13,565) (17,045)
Proceeds from sale of investments - 6,647
Other (36) (63)
--------------- --------------
Net cash used in investing activities (12,836) (15,420)
Financing activities:
Acquisition of treasury stock (15,722) (1,324)
Proceeds from employee stock options 1,269 321
Proceeds from bank borrowings 95,000 20,000
Repayment of notes payable and bank borrowings (92,433) (22,147)
Repayment of capital lease obligations (377) (1,037)
--------------- --------------
Net cash used in financing activities (12,263) (4,187)
--------------- --------------
Net change in cash and equivalents (14,441) (21,378)
Cash and equivalents:
Beginning of period 24,599 39,961
--------------- --------------
End of period $10,158 $18,583
=============== ==============
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 and nine months ended April 1, 2007 are not necessarily indicative of the
results that may be expected for the fiscal year ending July 1, 2007.
The balance sheet information at July 2, 2006 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 2, 2006.
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 and nine months ended April 1, 2007 and April 2, 2006, the
Company's comprehensive net income (loss) was equal to the respective net income
(loss) for each of the periods presented.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 applies to all tax positions accounted for under SFAS No. 109,
"Accounting for Income Taxes" and defines the confidence level that a tax
position must meet in order to be recognized in the financial statements. The
interpretation requires that the tax effects of a position be recognized only if
it is "more-likely-than-not" to be sustained by the taxing authority as of the
reporting date. If a tax position is not considered "more-likely-than-not" to be
sustained then no benefits of the position are to be recognized. FIN 48 requires
additional disclosures and is effective as of the beginning of the first fiscal
year beginning after December 15, 2006. The Company is currently evaluating the
effect that the adoption of FIN 48 will have on its consolidated results of
operations and financial condition.
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.
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 Income (Loss) Per Common Share
The following table sets forth the computation of basic and diluted net income
(loss) per common share:
Three Months Ended Nine Months Ended
--------------------------------- --------------------------------
April 1, April 2, April 1, April 2,
2007 2006 2007 2006
---------------- --------------- --------------- ---------------
(in thousands, except per share data)
Numerator:
Net income (loss) $1,053 ($1,540) $10,556 $2,170
================ =============== =============== ===============
Denominator:
Weighted average shares outstanding (*) 62,358 65,092 64,216 65,082
Effect of dilutive securities:
Employee stock options 1,495 - 961 1,281
Employee restricted stock awards 431 - 298 36
---------------- --------------- --------------- ---------------
1,926 - 1,259 1,317
---------------- --------------- --------------- ---------------
Adjusted weighted-average shares and assumed
conversions 64,284 65,092 65,475 66,399
================ =============== =============== ===============
Basic and diluted net income (loss) per common
share: $0.02 ($0.02) $0.16 $0.03
================ =============== =============== ===============
(*) On December 28, 2006, the Company completed its repurchase of
3,010,740 shares of Class A Common Stock in a privately negotiated
transaction. 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 $8.8 million remains authorized but unused.
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 2006 Annual Report on Form 10-K, that
provides for the grant to eligible employees, consultants and directors of stock
options, share appreciation rights (SARs), restricted shares, restricted share
units, performance shares, performance units, dividend equivalents, and other
share-based awards.
The amounts of stock-based compensation expense recognized in the periods
presented are as follows:
Three Months Ended Nine Months Ended
--------------------------------- --------------------------------
April 1, April 2, April 1, April 2,
2007 2006 2007 2006
---------------- --------------- --------------- ---------------
(in thousands, except per share data)
Stock options $749 $857 $2,087 $2,654
Restricted stock awards 628 204 1,299 404
---------------- --------------- --------------- ---------------
Total 1,377 1,061 3,386 3,058
Deferred income tax benefit 412 342 1,011 793
---------------- --------------- --------------- ---------------
Stock-based compensation expense, net $965 $719 $2,375 $2,265
================= =============== =============== ===============
Impact on basic and diluted net income
per common share $.01 $.01 $.04 $.04
================= =============== =============== ===============
5
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Stock-based compensation is recorded within the following line items of
operating expenses:
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
April 1, April 2, April 1, April 2,
2007 2006 2007 2006
------------- -------------- -------------- -------------
(in thousands, except per share data)
Marketing and sales $484 $370 $1,189 $1,071
Technology and development 206 159 507 458
General and administrative 687 532 1,690 1,529
------------- -------------- -------------- -------------
Total $1,377 $1,061 $3,386 $3,058
============= ============== ============== =============
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 Nine Months Ended
---------------------------- ----------------------------
April 1, April 2, April 1, April 2,
2007 2006 2007 2006
------------- -------------- -------------- -------------
Weighted average fair value of
options granted $3.51 $3.05 $3.05 $3.10
Expected volatility 46% 46% 46% 46%
Expected life 5.3 years 5.3 years 5.3 years 5.3 years
Risk-free interest rate 4.7% 4.5% 4.6% 4.5%
Expected dividend yield 0.0% 0.0% 0.0% 0.0%
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 nine months
ended April 1, 2007:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price Term Value (000s)
----------------------------------------------------------
Outstanding at July 2, 2006 10,103,491 $8.09
Granted 120,000 $6.07
Exercised (256,419) $4.92
Forfeited (679,883) $9.22
-------------
Outstanding at April 1, 2007 9,287,189 $8.05 5.0 years $14,247
=============
Options vested or expected to vest at April 1, 2007 9,024,764 $8.07 4.9 years $14,024
Exercisable at April 1, 2007 7,483,698 $8.29 4.3 years $12,686
6
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
As of April 1, 2007, the total future compensation cost related to nonvested
options, not yet recognized in the statement of income, was $5.3 million and the
weighted average period over which these awards are expected to be recognized
was 3.2 years.
The Company grants shares of common stock to its employees that are subject to
restrictions on transfer and risk of forfeiture until fulfillment of applicable
service conditions and, in certain cases, holding periods (Restricted Stock
Awards). The following table summarizes the activity of non-vested restricted
stock during the nine months ended April 1, 2007:
Weighted
Average Grant
Date Fair
Shares Value
------------- ---------------
Non-vested at July 2, 2006 293,681 $7.44
Granted 904,442 $5.24
Vested (39,913) $6.48
Forfeited (52,983) $6.49
-------------
Non-vested at April 1, 2007 1,105,227 $5.73
=============
The fair value of nonvested shares is determined based on the closing stock
price on the grant date. As of April 1, 2007, there was $4.3million 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 $92.1 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 ending July 1, 2007
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 most recent 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 $60.0 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.
7
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
During fiscal 2007, the Company completed the allocation of the purchase price
to individual assets acquired and liabilities assumed, resulting in adjustments
to the carrying value of Fannie May Confections' recorded assets and
liabilities, including revisions to the value and expected lives of certain
intangible assets, subject to amortization, and the residual amount that was
allocated to goodwill.
Acquisition of Wind & Weather
On October 31, 2005, the Company acquired all of the outstanding common stock of
Wind & Weather, a Fort Bragg, California based direct marketer of weather-themed
gifts, with annual revenues of approximately $14.4 million during its then most
recently completed fiscal year ended March 31, 2005. The purchase price of
approximately $5.3 million, including acquisition costs, was funded utilizing
the Company's line of credit which was repaid during the Company's second
quarter utilizing cash generated from operations, and excludes the assumption of
Wind & Weather's $1.2 million balance on its seasonal working capital line. The
Company has since relocated the operations of Wind & Weather to its Madison,
Virginia facility, and terminated operations in California.
The following table summarizes the allocation of purchase price to the estimated
fair values of assets acquired and liabilities assumed at the date of
acquisitions of Fannie May Confections Brands and Wind & Weather:
Fannie May
Confections Wind & Weather
Purchase Price Purchase Price
Allocation Allocation
------------------ --------------------
(in thousands)
Current assets $21,979 $4,014
Property, plant and equipment 4,643 67
Intangible assets 37,879 2,560
Goodwill 37,266 2,703
Other 156 20
------------------ --------------------
Total assets acquired 101,923 9,364
------------------ --------------------
Current liabilities 4,929 3,810
Deferred tax liabilities 4,485 265
Other 399 39
------------------ --------------------
Total liabilities assumed $9,813 4,114
Net assets acquired $92,110 $5,250
================== ====================
Of the $40.4 million of acquired intangible assets related to the Fannie May
Confections and Wind & Weather acquisitions, $30.1 million was assigned to
trademarks that are not subject to amortization, while the remaining acquired
intangibles of $10.3 million were allocated primarily to customer related
intangibles which are being amortized over the assets' determinable useful life
of 3 - 10 years.
8
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Pro forma Results of Operation
The following unaudited pro forma consolidated financial information has been
prepared as if the acquisitions of Fannie May Confections and Wind & Weather had
taken place at the beginning of each fiscal year presented. The following
unaudited pro forma information is not necessarily indicative of the results of
operations in future periods or results that would have been achieved had the
acquisitions taken place at the beginning of the periods presented.
Three Months Ended Nine Months Ended
------------------------------- -----------------------------
April 1, April 2, April 1, April 2,
2007 2006 2007 2006
--------------- --------------- -------------- --------------
(in thousands, except per share data)
Net revenues $213,779 $196,164 $680,777 $635,520
Operating income (loss) $3,550 ($1,175) $22,720 $14,066
Net income (loss) $1,053 ($1,286) $10,556 $5,619
Basic and diluted net income (loss) per
common share $0.02 ($0.02) $0.16 $0.09
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:
April 1, July 2,
2007 2006
---------------- -----------
(in thousands)
Finished goods $46,682 $36,689
Work-in-Process 3,736 3,370
Raw materials 15,925 12,895
----------- -----------
$66,343 $52,954
=========== ===========
Note 6 - Goodwill and Intangible Assets
The change in the net carrying amount of goodwill is as follows:
April 1,
2007
----------------
(in thousands)
Goodwill - beginning of year $131,141
Acquisition of Fannie May Confections-reclassification of
indefinite lived, non-amortizable tradenames
Other (25,362)
(208)
-----------
Goodwill - end of period $105,571
===========
9
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The Company's other intangible assets consist of the following:
April 1, 2007 July 2, 2006
---------------------------------------- ----------------------------------------
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 $4,004 $923 $4,927 $3,762 $1,165
Customer lists 3 - 10 years 14,260 3,436 10,824 18,500 2,231 16,269
Other 5 - 8 years 2,567 576 1,991 1,754 252 1,502
------------ --------------- ----------- ----------- --------------- ------------
21,754 8,016 13,738 25,181 6,245 18,936
Trademarks with
indefinite lives 39,676 - 39,676 10,886 - 10,886
------------ --------------- ----------- ----------- --------------- ------------
Total identifiable
intangible assets $61,430 $8,016 $53,414 $36,067 $6,245 $29,822
============ =============== =========== =========== =============== ============
Estimated future amortization expense is as follows: remainder of fiscal 2007 -
$0.6 million, fiscal 2008 - $2.7 million, fiscal 2009 - $2.6 million, fiscal
2010 - $2.5 million, fiscal 2011 - $1.9 million, and thereafter - $3.4 million.
Note 7 - Long-Term Debt
The Company's long-term debt and obligations under capital leases consist of the
following:
April 1, July 2,
2007 2006
-------------- -----------
(in thousands)
Term loan $78,625 $85,000
Revolving line of credit 10,000 -
Commercial note 1,907 2,942
Seller financed acquisition obligations - 23
Obligations under capital leases 87 458
----------- -----------
90,619 88,423
Less current maturities of long-term debt and obligations under
capital leases 20,013 10,360
----------- -----------
70,606 $78,063
=========== ===========
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
$60.0 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. 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 April 1, 2007, the Company
had $10.0 million outstanding under its revolving credit facility, bearing
interest at a rate of 6.4%.
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
10
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
change in subsequent interim periods. The Company's effective tax rate for the
three and nine months ended April 1, 2007 was 52.2% and 40.4%, respectively,
compared to 41.4% and 50.9% during the comparative three and nine months ended
April 2, 2006. The effective tax rate includes the impact of stock-based
compensation recognized in accordance with SFAS No. 123(R) due to the associated
book/tax differences in accounting for incentive stock options.
Note 9 - Business Segments
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 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 such as Information Technology, Human
Resources and Finance, 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 Nine Months Ended
----------------------------- --------------------------------
April 1, April 2, April 1, April 2,
Net revenues 2007 2006 2007 2006
------------- -------------- -------------- ---------------
(in thousands)
Net revenues:
1-800-Flowers.com Consumer Floral $139,943 $128,562 $337,077 $308,137
BloomNet Wire Service 12,743 9,177 29,549 20,318
Gourmet Food & Gift Baskets 35,617 14,188 166,691 85,139
Home & Children's Gifts 26,338 28,354 148,908 157,199
Corporate (*) 439 658 2,235 2,557
Intercompany eliminations (1,301) (922) (3,683) (2,739)
------------- -------------- -------------- ---------------
Total net revenues $213,779 $180,017 $680,777 $570,611
============= ============== ============== ===============
Three Months Ended Nine Months Ended
----------------------------- --------------------------------
April 1, April 2, April 1, April 2,
Operating Income 2007 2006 2007 2006
------------- -------------- -------------- ---------------
(in thousands)
Category Contribution Margin:
1-800-Flowers.com Consumer Floral $19,093 $14,250 $40,194 $29,441
BloomNet Wire Service 3,835 2,253 8,793 4,449
Gourmet Food & Gift Baskets 1,827 (1,614) 25,547 7,548
Home & Children's Gifts (3,218) (2,667) (1,435) 6,622
------------- -------------- -------------- ---------------
Category Contribution Margin Subtotal 21,537 12,222 73,099 48,060
Corporate (*) (13,540) (11,487) (37,354) (32,964)
Depreciation and amortization (4,447) (3,877) (13,025) (11,210)
------------- -------------- -------------- ---------------
Operating income (loss) $3,550 ($3,142) $22,720 $3,886
============= ============== ============== ===============
11
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
(*) 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.
12
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" - 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 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 twenty four
hours a day, 7 days a week at 1-800-356-9377 or www.1800flowers.com. Sales and
Service Specialists are available 24/7, and fast and reliable delivery is
offered same day, any day. 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 (1-800-627-1712 or
www.plowandhearth.com), Problem Solvers (www.problemsolvers.com), Wind & Weather
(www.windandweather.com), Madison Place (www.madisonplace.com), HearthSong
(www.hearthsong.com) and Magic Cabin (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. (1-800-443-8124 or www.cherylandco.com); premium
chocolates and confections from Fannie May Confections Brands (www.fanniemay.com
and www.harrylondon.com); gourmet foods from GreatFood.com (www.greatfood.com);
wine gifts from Ambrosia.com (www.ambrosia.com); gift baskets from
1-800-BASKETS.COM (www.1800baskets.com) and the BloomNet 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 market under ticker symbol
FLWS.
13
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 "EBITDA" (earnings before interest, taxes,
depreciation and amortization) from each of the Company's business categories.
Prior year information has been restated for comparative purposes.
Three Months Ended Nine Months Ended
--------------------------------------------- ---------------------------------------------
April 1, April 2, April 1, April 2,
Net Revenues 2007 2006 % Change 2007 2006 % Change
-------------- --------------- -------------- -------------- --------------- --------------
(in thousands)
Net revenues:
1-800-Flowers.com Consumer Floral $139,943 $128,562 8.9% $337,077 $308,137 9.4%
BloomNet Wire Service 12,743 9,177 38.9% 29,549 20,318 45.4%
Gourmet Food & Gift Baskets 35,617 14,188 151.0% 166,691 85,139 95.8%
Home & Children's Gifts 26,338 28,354 (7.1%) 148,908 157,199 (5.3%)
Corporate (*) 439 658 (33.3%) 2,235 2,557 (12.6%)
Intercompany eliminations (1,301) (922) 41.1% (3,683) (2,739) 34.5%
-------------- --------------- -------------- ---------------
Total net revenues $213,779 $180,017 18.8% $680,777 $570,611 19.3%
============== =============== ============== ==============
Three Months Ended Nine Months Ended
--------------------------------------------- ---------------------------------------------
April 1, April 2, April 1, April 2,
Gross Profit 2007 2006 % Change 2007 2006 % Change
-------------- --------------- -------------- -------------- --------------- --------------
(in thousands)
Gross profit:
1-800-Flowers.com Consumer Floral $53,931 $47,982 12.4% $130,808 $116,532 12.3%
38.5% 37.3% 38.8% 37.8%
BloomNet Wire Service 6,612 4,589 44.1% 16,489 10,698 54.1%
51.9% 50.0% 55.8% 52.7%
Gourmet Food & Gift Baskets 15,392 6,028 155.3% 76,585 39,407 94.3%
43.2% 42.5% 45.9% 46.3%
Home & Children's Gifts 10,520 11,350 (7.3%) 68,527 73,407 (6.6%)
39.9% 40.0% 46.0% 46.7%
Corporate (*) 268 395 (32.2%) 1,208 1,434 (15.8%)
61.0% 60.0% 54.0% 56.1%
Intercompany eliminations (36) (70) (139) (186)
-------------- --------------- -------------- ---------------
Total gross profit $86,687 $70,274 23.4% $293,478 $241,292 21.6%
============== =============== ============== ==============
40.5% 39.0% 43.1% 42.3%
============== =============== ============== ==============
Three Months Ended Nine Months Ended
--------------------------------------------- ---------------------------------------------
April 1, April 2, April 1, April 2,
EBITDA(**) 2007 2006 % Change 2007 2006 % Change
-------------- --------------- -------------- -------------- --------------- --------------
(in thousands)
Category Contribution Margin:
1-800-Flowers.com Consumer Floral $19,093 $14,250 34.0% $40,194 $29,441 36.5%
BloomNet Wire Service 3,835 2,253 70.2% 8,793 4,449 97.6%
Gourmet Food & Gift Baskets 1,827 (1,614) 213.2% 25,547 7,548 238.5%
Home & Children's Gifts (3,218) (2,667) (20.7%) (1,435) 6,622 (121.7%)
-------------- --------------- -------------- ---------------
Category Contribution Margin Subtotal 21,537 12,222 76.2% 73,099 48,060 52.1%
Corporate (*) (13,540) (11,487) (17.9%) (37,354) (32,964) (13.3%)
-------------- --------------- -------------- ---------------
EBITDA $7,997 $735 988.0% $35,745 $15,096 136.8%
============== =============== ============== ==============
(*) 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.
14
(**) 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.
Results of Operations
Net Revenues
Three Months Ended Nine Months Ended
----------------------------------------------- ---------------------------------------------
April 1, April 2, April 1, April 2,
2007 2006 % Change 2007 2006 % Change
--------------- ---------------- -------------- --------------- -------------- ---------------
(in thousands)
Net revenues:
E-Commerce $175,592 $161,820 8.5% $555,010 $520,959 6.5%
Other 38,187 18,197 109.9% 125,767 49,652 153.3%
-------------- ---------------- -------------- --------------
Total net revenues $213,779 $180,017 18.8% $680,777 $570,611 19.3%
============== ================ ============== ==============
The Company's revenue growth of 18.8% and 19.3% during the three and nine months
ended April 1, 2007, respectively, was due to a combination of organic growth,
as well as the acquisitions of Wind & Weather, a direct marketer of
weather-themed gifts, acquired on October 31, 2005, and Fannie May Confections
Brands, Inc. ("Fannie May Confections"), a manufacturer and retailer of premium
chocolates and other confections, acquired on May 1, 2006. Excluding the impact
of acquisitions, total revenue growth during the three and nine months ended
April 1, 2007 was 9.1% and 6.4%, respectively, 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, designed to improve customer acquisition and accelerate top-line
growth. The Company fulfilled approximately 2,684,000 and 8,696,000 orders
through its E-commerce sales channels (online and telephonic sales) during the
three and nine months ended April 1, 2007, respectively, an increase of 5.3% and
3.1% over the respective prior year periods. The Company's E-commerce average
order value of $65.41 and $63.78 during the three and nine months ended April 1,
2007, respectively, increased 3.0% and 3.2%, over the respective prior year
periods, primarily from a combination of product mix and pricing initiatives.
Other revenues, for the three and nine months ended April 1, 2007, increased in
comparison to the same periods of the prior year, primarily as a result of the
retail/wholesale contributions of Fannie May Confections Brands, Inc., as well
as the continued membership growth and wholesale floral product and service
offerings from the Company's BloomNet Wire Service category.
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 and nine months ended April
1, 2007 increased by 8.9% and 9.4% over the respective prior year periods,
primarily from a combination of increased average order value and order volumes
from its E-commerce sales channel, offset in part by lower retail sales from its
company-owned floral stores due to the planned transition of Company stores to
franchise ownership.
The BloomNet Wire Service category includes revenues from membership fees as
well as other service offerings to florists. Net revenues during the three and
nine months ended April 1, 2007 increased by 38.9% and 45.4% over the respective
prior year periods, primarily as a result of increased florist membership,
expanded product and service offerings, pricing initiatives and an increase in
wholesale floral product sales.
15
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 and nine months ended April
1, 2007 increased by 151.0% and 95.8% over the respective prior year periods, as
a result of the contribution of Fannie May Confections ($17.3 million and $71.0
million during three and nine months ended April 1, 2007, respectively) and
strong organic growth within the Cheryl & Co. and The Popcorn Factory brands.
The Home & Children's Gifts category includes revenues from Plow & Hearth, Wind
& Weather, Problem Solvers, Madison Place, 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 and nine months ended April 1, 2007 decreased by 7.1% and 5.3% over the
respective prior year periods due to a lack of new "hit" products and an overall
macro decline in customer demand within this category. During the second quarter
of fiscal 2007, efforts to expand titles outside of the core Plow & Hearth brand
did not attract the level of customer demand to justify the increase in
marketing costs. In response to the previous quarter's results, during the three
months ended April 1, 2007, management implemented several changes to improve
the performance within this category: (i) strengthened the management team, (ii)
improved the creative look and feel of the catalogs and (iii) revised the
circulation plans for all titles to place more focus on the category's existing
customer base. To augment these efforts and help in the Company's analysis and
planning, the Company has hired a consulting firm with specific expertise in the
direct-to-consumer/catalog space. In addition, through their investment banking
capabilities, they will provide assistance in evaluating all strategic options
for this business.
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 2007 will be at the low end of its previous
guidance range of 17-20 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 (which includes the Fannie May Confections brand,
acquired May 1, 2006), is expected to more than offset the lower revenue
contribution expected from its Home and Children's Gifts category.
Gross Profit
Three Months Ended Nine Months Ended
--------------------------------------------- ------------------------------------------------
April 1, April 2, April 1, April 2,
2007 2006 % Change 2007 2006 % Change
-------------- --------------- ------------- --------------- --------------- -------------
(in thousands)
Gross profit $86,687 $70,274 23.4% $293,478 $241,292 21.6%
Gross margin % 40.5% 39.0% 43.1% 42.3%
Gross profit increased during the three and nine months ended April 1, 2007, in
comparison to the same period of the prior year, primarily as a result of the
revenue growth described above and an increase in gross margin percentage. Gross
margin percentage increased 150 basis points and 80 basis points, to 40.5% and
43.1% during the three and nine months ended April 1, 2007, respectively, 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.
The 1-800-Flowers.com Consumer Floral category gross profit for the three and
nine months ended April 1, 2007 increased by 12.4% and 12.3% over the respective
prior year periods 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 120 basis points and 100 basis points, to 38.5%
and 38.8%, during the three and nine months ended April 1, 2007, respectively.
These improvements more than offset increases in carrier fuel charges
experienced during the periods.
The BloomNet Wire Service category gross profit for the three and nine months
ended April 1, 2007 increased by 44.1% and 54.1% over the respective prior year
periods as a result of increases in florist membership, product and service
offerings, pricing initiatives and floral wholesale product sales. Gross margin
percentage increased 190 basis points and 310 basis points, to 51.9% and 55.8%
during the three and nine months ended April 1, 2007, respectively, primarily as
a result of sales mix.
16
The Gourmet Food & Gift Basket category gross profit for the three and nine
months ended April 1, 2007 increased by 155.3% and 94.3% over the respective
prior year periods as a result of the incremental revenue generated by Fannie
May Confections Brands and strong organic growth within the Cheryl & Co. and The
Popcorn Factory brands. Gross margin percentage increased by 70 basis points to
43.2% during the three months ended April 1, 2007, as a result of product mix
driven by the Fannie May Confections Brands, but decreased by 40 basis points to
45.9% during the nine months ended April 1, 2007, primarily as a result of the
seasonally lower margins of Fannie May Confections in first quarter of fiscal
2007.
The Home & Children's Gift category gross profit for the three and nine months
ended April 1, 2007 decreased by 7.3% and 6.6% over the respective prior year
periods as a result of the aforementioned decline in sales. Gross margin
percentage declined 10 basis points and 70 basis points, to 39.9% and 46.0%
during the three and nine months ended April 1, 2007, respectively, due to sales
mix and markdowns to move inventory.
During the remainder of fiscal 2007, the Company expects that its gross margin
percentage will improve in relation to its comparable prior year quarter,
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 first quarter, and (iii) the continued improved
performance of the Consumer Floral segment.
Marketing and Sales Expense
Three Months Ended Nine Months Ended
-------------------------------------------- ----------------------------------------------
April 1, April 2, April 1, April 2,
2007 2006 % Change 2007 2006 % Change
--------------- --------------- ------------ -------------- --------------- --------------
(in thousands)
Marketing and sales $59,023 $53,188 11.0% $200,430 $179,286 11.8%
Percentage of net revenues 27.6% 29.5% 29.4% 31.4%
During the three and nine months ended April 1, 2007, marketing and sales
expenses decreased from 29.5% and 31.4% of net revenue to 27.6% and 29.4% of net
revenues, reflecting improved operating leverage from a number of cost-saving
initiatives and the completion of the investment phase of the Company's BloomNet
Wire Service business, including the absorption of incremental personnel to
expand membership, increase product and service offerings, and increase BloomNet
Technologies penetration. This leverage was achieved through significant
improvement within the Company's 1-800-Flowers Consumer Floral, BloomNet Wire
Service and Gourmet Food & Gift Baskets categories, as efforts to grow the Home
and Children's Gifts businesses through the introduction of titles outside of
the core Plow & Hearth brand did not attract the necessary level of customer
demand to justify the costs.
Marketing and sales expense increased over the prior year period by 11.0% and
11.8% during the three and nine months ended April 1, 2007 as a result of
several factors, including: (i) incremental expenses associated with the recent
acquisition of Fannie May Confections, (ii) incremental variable costs to
accommodate higher sales volumes, and (iii) personnel associated with the
expansion of the BloomNet Wire Service business. During the three and nine
months ended April 1, 2007, the Company added approximately 834,000 and
2,610,000 new e-commerce customers, representing increases of 1.2% and 1.8% over
the same periods of the prior year. As a result of the Company's effective
customer retention efforts, 1,183,000 and 2,584,000 existing customers placed
e-commerce orders during the three and nine months ended April 1, 2007,
respectively, representing increases of 6.0% and 2.1% over the same periods of
the prior year. Of the 2,017,000 and 5,194,000 total customers who placed
e-commerce orders during the three and nine months ended April 1, 2007,
respectively, approximately 58.7% and 49.7% were repeat customers, compared to
57.5% and 49.2% during respective periods of 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 2007, the Company is focused on improving 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.
17
Technology and Development Expense
Three Months Ended Nine Months Ended
-------------------------------------------- ----------------------------------------------
April 1, April 2, April 1, April 2,
2007 2006 % Change 2007 2006 % Change
--------------- --------------- ------------ -------------- --------------- --------------
(in thousands)
Technology and development $5,469 $5,170 5.8% $15,831 $14,736 7.4%
Percentage of net revenues 2.6% 2.9% 2.3% 2.6%
During the three and nine months ended April 1, 2007, technology and development
expense decreased to 2.6% and 2.3% of net revenue, respectively, reflecting
improved operating leverage, but increased over the respective prior year
periods by 5.8% and 7.4%, as a result of the incremental expenses associated
with the acquisition of Fannie May Confections, as well as for increases in the
cost of maintenance and license agreements required to support the Company's
technology platform. During the three and nine months ended April 1, 2007, the
Company expended $6.7 million and $22.3 million on technology and development,
of which $1.2 million and $6.5 million has been capitalized.
The Company believes that continued investment in technology and development is
critical to attaining its strategic objectives. While many of its
acquisition-related integration projects are complete, as a result of
incremental expenses associated with Fannie May Confections Brands, the Company
expects that its spending for the remainder of fiscal 2007 will remain
consistent or decrease slightly as a percentage of net revenues in comparison to
the prior year.
General and Administrative Expense
Three Months Ended Nine Months Ended
-------------------------------------------- ----------------------------------------------
April 1, April 2, April 1, April 2,
2007 2006 % Change 2007 2006 % Change
--------------- --------------- ------------ -------------- --------------- --------------
(in thousands)
General and administrative $14,198 $11,181 27.0% $41,472 $32,174 28.9%
Percentage of net revenues 6.6% 6.2% 6.1% 5.6%
General and administrative expense increased 27.0% and 28.9% during the three
and nine months ended April 1, 2007, respectively, and by 40 basis points and 50
basis points of net revenues in comparison to the respective prior year periods,
primarily as a result of: (i) incremental expenses associated with Fannie May
Confections Brands, (ii) increased legal and professional fees, and (iii) the
achievement of certain performance related bonus targets which were not earned
in the prior year.
Although the Company believes that its current general and administrative
infrastructure is sufficient to support existing requirements and drive
operating leverage, as a result of the incremental expenses associated with
Fannie May Confections, including costs associated with Sarbanes-Oxley
compliance, the Company expects that its general and administrative expenses as
a percentage of net revenue during the remainder of fiscal 2007 will remain
consistent or increase slightly over the prior year period.
Depreciation and Amortization Expense
Three Months Ended Nine Months Ended
-------------------------------------------- ----------------------------------------------
April 1, April 2, April 1, April 2,
2007 2006 % Change 2007 2006 % Change
--------------- --------------- ------------ -------------- --------------- --------------
(in thousands)
Depreciation and amortization $4,447 $3,877 14.7% $13,025 $11,210 16.2%
Percentage of net revenues 2.1% 2.2% 1.9% 2.0%
Depreciation and amortization expense increased by 14.7% and 16.2% during the
three and nine months ended April 1, 2007, respectively, in comparison to the
prior year period as a result of the incremental amortization expense related to
the intangibles established as a result of the acquisitions of Wind & Weather
18
and Fannie May Confections, as well as depreciation associated with recently
completed 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 the
technology platforms are critical to attaining its strategic objectives. As a
result of these improvements, and the increase in amortization expense
associated with intangibles established as a result of recent acquisitions, the
Company expects that depreciation and amortization for the remainder of fiscal
2007 will remain consistent as a percentage of net revenues in comparison to the
prior year.
Other Income (Expense)
Three Months Ended Nine Months Ended
------------------------------ -----------------------------
April 1, April 2, April 1, April 2,
2007 2006 2007 2006
------------------------------ -----------------------------
(in thousands)
Interest income $203 $474 $794 $830
Interest expense (1,551) (96) (5,804) (293)
Other 1 137 5 -
-------------- ------------- --------------- -------------
($1,347) $515 ($5,005) $537
============== ============= =============== =============
The decrease in other income (expense) during the three and nine months ended
April 1, 2007, in comparison to prior year periods was primarily the result of
higher interest expense on the Company's 2006 Credit Facility. The Company
utilized an $85.0 million term loan to finance its acquisition of Fannie May
Confections in May 2006, and during the quarter, had borrowed under its line of
credit to fund working capital needs. As of April 1, 2007, the outstanding
balance on the Company's credit line was $10.0 million.
Income Taxes
During the three and nine months ended April 1, 2007, the Company recorded
income tax expense of $1.2 million and $7.2 million, respectively. The Company's
effective tax rate for the three and nine months ended April 1, 2007 was 52.2%
and 40.4%, respectively, compared to 41.4% and 50.9% during the comparative
three and nine months ended April 2, 2006. The effective tax rate includes the
impact of stock-based compensation recognized in accordance with SFAS No. 123(R)
due to the associated book/tax differences in accounting for incentive stock
options.
Liquidity and Capital Resources
At April 1, 2007, the Company had working capital of $52.0 million, including
cash and equivalents of $10.2 million, compared to working capital of $44.3
million, including cash and equivalents of $24.6 million, at July 2, 2006.
Net cash provided by operating activities of $10.7 million for the nine months
ended April 1, 2007 was primarily attributable to net income, non-cash charges
for depreciation and amortization, deferred income taxes and stock-based
compensation, offset in part by increases in inventory and receivables related
primarily to the Fannie May Confections wholesale business.
Net cash used in investing activities of $12.8 million for the nine months ended
April 1, 2007 was primarily attributable to capital expenditures related to the
Company's technology and distribution infrastructure, offset in part by the sale
of certain Company owned floral retail stores to franchise operators.
Net cash used in financing activities of $12.3 million for the nine months ended
April 1, 2007, was primarily due to the scheduled repayment of the Company's
debt and capital lease obligations of $7.8 million, and the repurchase of
3,010,740 shares of treasury stock in the amount of $15.7 million, offset in
part by $10.0 million of borrowings under the Company's line of credit to fund
working capital requirements as the Company approaches its Mother's Day holiday
selling season, and net proceeds received upon the exercise of employee stock
options.
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 $60.0 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
19
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 well as
its recent acquisition of $15.7 million of treasury stock, during the second
half of fiscal 2007, the Company expects to borrow against its line of credit to
fund working capital requirements. The Company expects that all such amounts
will be repaid prior to the end of its fiscal year. At April 1, 2007, the
Company had $10.0 million outstanding under its revolving credit facility.
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 April 1, 2007, the
Company had repurchased 1,521,452 shares of common stock for $11.1 million. As
noted above, on December 28, 2006, the Company completed its repurchase of
3,010,740 shares of Class A Common Stock in a privately negotiated transaction.
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 $8.8 million remains authorized but unused.
At April 1, 2007, the Company's contractual obligations consist of:
Payments due by period
-----------------------------------------------------------------------------------
(in thousands)
Less than 1 1 - 3 More than 5
Total year years 3 - 5 years years
----------- --------------- ------------ ------------- ----------------
Long-term debt, including interest $106,390 $24,490 $32,482 $42,950 $6,468
Capital lease obligations 116 46 32 25 13
Operating lease obligations 63,346 9,933 16,573 10,552 26,288
Sublease obligations 5,709 1,763 2,545 1,089 312
Purchase commitments (*) 18,464 18,464 - - -
----------- --------------- ------------ ------------- ----------------
Total $194,025 $54,696 $51,632 $54,616 $33,081
=========== =============== ============ ============= ================
(*) 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.
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.
20
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.
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
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 applies to all tax positions accounted for under SFAS No. 109,
"Accounting for Income Taxes" and defines the confidence level that a tax
position must meet in order to be recognized in the financial statements. The
interpretation requires that the tax effects of a position be recognized only if
21
it is "more-likely-than-not" to be sustained by the taxing authority as of the
reporting date. If a tax position is not considered "more-likely-than-not" to be
sustained then no benefits of the position are to be recognized. FIN 48 requires
additional disclosures and is effective as of the beginning of the first fiscal
year beginning after December 15, 2006. The Company is currently evaluating the
effect that the adoption of FIN 48 will have on its consolidated results of
operations and financial condition.
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 solid, sustainable revenue growth;
o to maintain and enhance its online shopping web sites to attract
customers;
o to successfully introduce new products and product categories;
o to successfully integrate acquisitions, including the acquisition of
Fannie May Confections Brands, Inc.;
o to cost effectively acquire and retain customers;
o to compete against existing and new competitors;
o to manage expenses associated with necessary general and
administrative and technology investments;
o to cost efficiently manage inventories; and
o to grow its revenues and leverage its operating infrastructure to
enhance profitability;
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.
We undertake no obligation to publicly update forward-looking statements,
whether as a result of new information, future events or otherwise. You are
advised, however, to consult any further disclosures we make on related subjects
in our Forms 10-Q, 8-K and 10-K reports to the Securities and Exchange
Commission. Our Annual Report on Form 10-K filing for the fiscal year ended July
2, 2006 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 1, of that filing under the heading "Risk
Factors that May Affect Future Results". 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.
22
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 includes an $85.0
million term loan and a $60.0 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 nine
months ended April 1, 2007 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
23
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 2, 2006.
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 nine months of fiscal 2007 which includes the period
July 3, 2006 through April 1, 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)
7/3/06 - 7/30/06 - $- - $8,863
7/31/06 - 8/27/06 - $- - $8,863
8/28/06 - 10/1/06 - $- - $8,863
10/2/06 - 10/29/06 - $- - $8,863
10/30/06 - 11/26/06 - $- - $8,863
11/27/06 - 12/31/06 3,010.7 $5.21 - $8,863
1/1/07 - 1/28/07 11.4 $2.89 11.4 $8,830
1/29/07 - 2/25/07 - $- - $8,830
2/26/07 - 4/1/07 - $- - $8,830
-------------------- ----------------- ---------------------
Total 3,022.1 $5.20 -
On May 12, 2005, the Company's Board of Directors increased the Company's
authorization to repurchase the Company's Class A common stock up to $20
million, from the previous authorized limit of $10 million. All share purchases
were made in open-market transactions. The average price paid per share is
calculated on a settlement basis and excludes commission.
On December 28, 2006, the Company completed its repurchase of 3,010,740 shares
of Class A Common Stock in a privately negotiated transaction. 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
$8.8 million remains authorized but unused.
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.
24
ITEM 6. EXHIBITS
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.
25
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 11, 2007 /s/ James F. McCann
----------------------- ----------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Date: May 11, 2007 /s/ William E. Shea
----------------------- -----------------------------------
William E. Shea
Senior Vice President of Finance
and Administration (Principal
Financial and Accounting Officer)