Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 2022
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 incorporation)
(I.R.S. Employer Identification No.)
Two Jericho Plaza, Suite 200, Jericho, NY 11753
(516) 237-6000
(Address of principal executive offices) (Zip code)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading symbol(s)
Name of each exchange on which registered
Class A common stock
FLWS
The Nasdaq Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
☐ Large accelerated filer
☑ Accelerated filer
☐ Non-accelerated filer
☐ Smaller reporting company
☐ Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
The number of shares outstanding of each of the Registrant’s classes of common stock as of April 29, 2022:
Class A common stock: 37,292,237
Class B common stock: 27,263,754
TABLE OF CONTENTS
Page
Part I.
Financial Information
Item 1.
Condensed Consolidated Financial Statements
1
Condensed Consolidated Balance Sheets – March 27, 2022 (Unaudited) and June 27, 2021
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited) – Three and Nine Months Ended March 27, 2022 and March 28, 2021
2
Condensed Consolidated Statements of Stockholders' Equity (Unaudited) – Three and Nine Months Ended March 27, 2022 and March 28, 2021
3
Condensed Consolidated Statements of Cash Flows (Unaudited) – Nine Months Ended March 27, 2022 and March 28, 2021
4
Notes to Condensed Consolidated Financial Statements (Unaudited)
5
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
22
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
36
Item 4.
Controls and Procedures
Part II.
Other Information
Legal Proceedings
37
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
38
Defaults upon Senior Securities
Mine Safety Disclosures
Item 5.
Item 6.
Exhibits
39
Signatures
40
PART I. – FINANCIAL INFORMATION
ITEM 1. – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1-800-FLOWERS.COM, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except for share data)
March 27, 2022
June 27, 2021
(unaudited)
Assets
Current assets:
Cash and cash equivalents
Trade receivables, net
Inventories, net
Prepaid and other
Total current assets
Property, plant and equipment, net
Operating lease right-of-use assets
Goodwill
Other intangibles, net
Other assets
Total assets
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Accrued expenses
Current maturities of long-term debt
Current portion of long-term operating lease liabilities
Total current liabilities
Long-term debt, net
Long-term operating lease liabilities
Deferred tax liabilities, net
Other liabilities
Total liabilities
Commitments and contingencies (See Note 13 and Note 14)
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued
Class A common stock, $0.01 par value, 200,000,000 shares authorized, 57,687,608 and 55,675,661 shares issued at March 27, 2022 and June 27, 2021, respectively
Class B common stock, $0.01 par value, 200,000,000 shares authorized, 32,543,754 and 33,433,614 shares issued at March 27, 2022 and June 27, 2021, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
)
Treasury stock, at cost, 20,155,931 and 18,825,841 Class A shares at March 27, 2022 and June 27, 2021, respectively, and 5,280,000 Class B shares at March 27, 2022 and June 27, 2021
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying Notes to Condensed Consolidated Financial Statements.
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(in thousands, except for per share data)
Three Months Ended
Nine Months Ended
March 28, 2021
Net revenues
Cost of revenues
Gross profit
Operating expenses:
Marketing and sales
Technology and development
General and administrative
Depreciation and amortization
Total operating expenses
Operating income (loss)
Interest expense, net
Other (income) expense, net
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Other comprehensive loss (currency translation & other miscellaneous items)
Comprehensive income (loss)
Basic net income (loss) per common share
Diluted net income (loss) per common share
Weighted average shares used in the calculation of net income (loss) per common share:
Basic
Diluted
Condensed Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
Three Months Ended March 27, 2022 and March 28, 2021
Common Stock
Additional
Accumulated
Total
Class A
Class B
Paid-in
Treasury Stock
Stockholders’
Shares
Amount
Capital
Loss
Equity
Balance at December 26, 2021
Net loss
Stock-based compensation
Exercise of stock options
Conversion – Class B into Class A
Acquisition of Class A treasury stock
Balance at March 27, 2022
Balance at December 28, 2020
Net income
Balance at March 28, 2021
Nine Months Ended March 27, 2022 and March 28, 2021
Accumulated Other
Balance at June 27, 2021
Balance at June 28, 2020
Translation adjustment
Condensed Consolidated Statements of Cash Flows
(in thousands)
Nine months ended
Operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs
Deferred income taxes
Bad debt expense
Other non-cash items
Changes in operating items:
Trade receivables
Inventories
Accounts payable and accrued expenses
Other assets and liabilities
Net cash provided by operating activities
Investing activities:
Acquisitions, net of cash acquired
Capital expenditures, net of non-cash expenditures
Purchase of equity investments
Net cash used in investing activities
Financing activities:
Acquisition of treasury stock
Proceeds from exercise of employee stock options
Proceeds from bank borrowings
Repayment of notes payable and bank borrowings
Debt issuance cost
Net cash (used in) provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents:
Beginning of period
End of period
Notes to Condensed Consolidated Financial Statements
Note 1 – Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by 1-800-FLOWERS.COM, Inc. and Subsidiaries (the “Company”) in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three and nine-month periods ended March 27, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending July 3, 2022. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended June 27, 2021, which provides a more complete understanding of our accounting policies, financial position, operating results and other matters.
The Company’s quarterly results may experience seasonal fluctuations. Due to the seasonal nature of the Company’s business, and its continued expansion into non-floral products, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, generates over 40% of the Company’s annual revenues. Since the onset of the pandemic of the novel strain of coronavirus (“COVID-19”), our customers have turned to our brands and our expanded product offerings to help them connect and express themselves. While the continuing impacts of COVID-19 are difficult to predict, the Company expects that its fiscal second quarter will continue to be its largest in terms of revenues, and the Company will likely generate all of its earnings within this quarter. Due to the number of major floral gifting occasions, including Mother's Day, Valentine’s Day, Easter and Administrative Professionals Week, revenues also have historically risen during the Company’s fiscal third and fourth quarters in comparison to its fiscal first quarter.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
COVID-19
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of COVID-19, including tax relief and government loans, grants and investments. The CARES Act did not have a material impact on the Company’s consolidated financial statements during the quarters ended March 27, 2022 and March 28, 2021.
The Company is closely monitoring the impact of COVID-19 on its business, including how it affects its customers, workforce, suppliers, vendors, franchisees, florists, and production and distribution channels, as well as its financial statements. The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors, including, but not limited to: the magnitude and duration of COVID-19, the extent to which it continues to impact macroeconomic conditions, including interest rates, employment rates and consumer confidence, product and delivery supply chain capacity and rates, and governmental, business and individual consumer reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of March 27, 2022 and through the date of this report. The accounting matters assessed included, but were not limited to, the Company’s allowance for doubtful accounts and credit losses, inventory and related reserves and the carrying value of goodwill and other long-lived assets. While there was not a material impact to the Company’s consolidated financial statements as of and for the quarters ended March 27, 2022 and March 28, 2021, the Company’s future assessment of these factors and the evolving factors described above, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.
Revenue Recognition
Net revenue is measured based on the amount of consideration that we expect to receive, reduced by discounts and estimates for credits and returns (calculated based upon previous experience and management’s evaluation). Service and outbound shipping charged to customers are recognized at the time the related merchandise revenues are recognized and are included in net revenues. Inbound and outbound shipping and delivery costs are included in cost of revenues. Net revenues exclude sales and other similar taxes collected from customers.
A description of our principal revenue generating activities is as follows:
●
E-commerce revenues - consumer products sold through our online and telephonic channels. Revenue is recognized when control of the merchandise is transferred to the customer, which generally occurs upon shipment. Payment is typically due prior to the date of shipment.
Retail revenues - consumer products sold through our retail stores. Revenue is recognized when control of the goods is transferred to the customer, at the point of sale, at which time payment is received.
Wholesale revenues - products sold to our wholesale customers for subsequent resale. Revenue is recognized when control of the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms are typically 30 days from the date control over the product is transferred to the customer.
BloomNet Services - membership fees as well as other service offerings to florists. Membership and other subscription-based fees are recognized monthly as earned. Services revenues related to orders sent through the floral network are variable, based on either the number of orders or the value of orders, and are recognized in the period in which the orders are delivered. The contracts within BloomNet Services are typically month-to-month and as a result no consideration allocation is necessary across multiple reporting periods. Payment is typically due less than 30 days from the date the services were performed.
Deferred Revenues
Deferred revenues are recorded when the Company has received consideration (i.e. advance payment) before satisfying its performance obligations. As such, customer orders are recorded as deferred revenue prior to shipment or rendering of product or services. Deferred revenues primarily relate to e-commerce orders placed, but not shipped, prior to the end of the fiscal period, as well as for subscription programs, including our various food, wine, and plant-of-the-month clubs and our Celebrations Passport program.
Our total deferred revenue as of June 27, 2021 was $33.4 million (included in “Accrued expenses” on our consolidated balance sheets), of which $3.0 million and $32.3 million was recognized as revenue during the three and nine months ended March 27, 2022, respectively. The deferred revenue balance as of March 27, 2022 was $42.6 million.
Recently Issued Accounting Pronouncements
The Company does not expect that any recently issued accounting pronouncements will have a material effect on its consolidated financial statements. Any recently adopted accounting pronouncements did not have a material impact on the Company’s consolidated financial statements.
Note 2 – Net Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing the net income (loss) during the period by the weighted average number of common shares outstanding during the period. Diluted net income per common share is computed by dividing the net income during the period by the sum of the weighted-average number of common shares outstanding during the period and the potential dilutive common shares (consisting of employee stock options and unvested restricted stock awards). During periods of net loss, the potentially dilutive common shares are not included in the calculation as their inclusion would be antidilutive.
The following table sets forth the computation of basic and diluted net income (loss) per common share:
March 27,
2022
March 28,
2021
(in thousands, except per share data)
Numerator:
Denominator:
Weighted average shares outstanding
Effect of dilutive securities:
Employee stock options
Employee restricted stock awards
Adjusted weighted-average shares and assumed conversions
Net income (loss) per common share
Note 3 – Stock-Based Compensation
The Company has a Long Term Incentive and Share Award Plan, which is more fully described in Note 12 and Note 13 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2021, that provides for the grant to eligible employees, consultants and directors of stock options, restricted shares, and other stock-based awards.
The amounts of stock-based compensation expense recognized in the periods presented are as follows:
Stock options
Restricted stock
Deferred income tax benefit
Stock-based compensation expense, net
Stock-based compensation is recorded within the following line items of operating expenses:
Stock based compensation expense has not been allocated between business segments, but is reflected as part of Corporate overhead (see Note 12 - Business Segments).
Stock Options
The following table summarizes stock option activity during the nine months ended March 27, 2022:
Options
Weighted
Average
Exercise
Price
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
(in years)
Outstanding at June 27, 2021
Granted
Exercised
Forfeited
Outstanding at March 27, 2022
Exercisable at March 27, 2022
Restricted Stock
The Company grants shares of Common Stock to its employees that are subject to restrictions on transfer and risk of forfeiture until fulfillment of applicable service and performance conditions and, in certain cases, holding periods (Restricted Stock). The following table summarizes the activity of non-vested restricted stock awards during the nine months ended March 27, 2022:
Average Grant
Date Fair
Non-vested at June 27, 2021
Vested
Non-vested at March 27, 2022
The fair value of non-vested shares is determined based on the closing stock price on the grant date. As of March 27, 2022, there was $13.7 million of total unrecognized compensation cost related to non-vested, restricted, stock-based compensation to be recognized over the weighted-average remaining period of 2.6 years.
Note 4 – Acquisitions
Acquisition of PersonalizationMall
On February 14, 2020, 1-800-Flowers.com, Inc., 800-Flowers, Inc., a wholly-owned subsidiary of 1-800-Flowers.com, Inc. (the “Purchaser”), PersonalizationMall.com, LLC ("PersonalizationMall"), and Bed Bath & Beyond Inc. (“Seller”), entered into an Equity Purchase Agreement (the “Purchase Agreement”) pursuant to which Seller agreed to sell to the Purchaser, and the Purchaser agreed to purchase from Seller, all of the issued and outstanding membership interests of PersonalizationMall for $252.0 million in cash (subject to certain working capital and other adjustments). On July 20, 2020, Purchaser, PersonalizationMall, and Seller entered into an amendment (the “Amendment”) to the Purchase Agreement to, among other things, amend the purchase price to $245.0 million (subject to certain working capital and other adjustments). On August 3, 2020, the Company completed its acquisition of PersonalizationMall, including its newly renovated, leased 360,000 square foot, state-of-the-art production and distribution facility, as well as its customer database, tradenames and website. After working capital and related adjustments, total consideration paid was approximately $250.9 million.
The total purchase price was allocated to the identifiable assets acquired and liabilities assumed based on our preliminary estimates of their fair values on the acquisition date. The fair values assigned to PersonalizationMall’s tangible and intangible assets and liabilities assumed were considered preliminary and were based on the information that was available as of the date of the acquisition. As of June 27, 2021, the Company had finalized its allocation and this resulted in immaterial adjustments to the carrying value of the respective recorded assets and the determination of the residual amount that was allocated to goodwill.
The following table summarizes the allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed:
PersonalizationMall’s
Preliminary
Purchase Price
Allocation
Measurement
Period Adjustments (1)
Final Purchase Price
August 3, 2020
Assets Acquired:
Total assets acquired
Liabilities assumed:
Operating lease liabilities
Total liabilities assumed
Net assets acquired
(1) The measurement period adjustments did not have a significant impact on the Company’s condensed consolidated statements of income for the year ended June 27, 2021.
The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. The estimates and assumptions include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows.
Acquired inventory, consisting of raw materials and supplies, was valued at book value, as there have not been any significant price fluctuations or other events that would materially change the cost to replace the raw materials.
Property, plant and equipment was valued at book value (cost less accumulated depreciation and amortization), due to the nature of the assets, which included recently acquired production equipment and leasehold improvements for PersonalizationMall's production facility, which became operational in September 2019.
Based on the valuation as of August 3, 2020, of the acquired intangible assets, $11.0 million was assigned to customer lists (4 years life), $65.0 million was assigned to tradenames (indefinite life), and the residual amount of $133.4 million was allocated to goodwill (indefinite life and deductible for tax purposes). The goodwill recognized in conjunction with the Purchaser’s acquisition of PersonalizationMall is primarily related to synergistic value created in terms of both operating costs and revenue growth opportunities, enhanced financial and operational scale, and other strategic benefits. It also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce.
The estimated fair value of the acquired trade names was determined using the relief from royalty method, which is a risk-adjusted discounted cash flow approach. The relief from royalty method values an intangible asset by estimating the royalties saved through ownership of the asset. The relief from royalty method requires identifying the future revenue that would be generated by the trademark, multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. The royalty rate used in the valuation was based on a consideration of market rates for similar categories of assets. The discount rate used in the valuation was based on PersonalizationMall's weighted average cost of capital, the riskiness of the earnings stream association with the trademarks and the overall composition of the acquired assets.
The estimated fair value of the acquired customer lists was determined using the excess earnings method under the income approach. This method requires identifying the future revenue that would be generated by existing customers at the time of the acquisition, considering an appropriate attrition rate based on the historical experience of the Company. Appropriate expenses are then deducted from the revenues and economic rents are charged for the return on contributory assets. The after-tax cash flows attributable to the asset are discounted back to their net present value at an appropriate intangible asset rate of return and summed to calculate the value of the customer lists.
As required by ASC 805, “Business Combinations,” the following unaudited pro forma financial information for the three and nine months ended March 28, 2021, give effect to the PersonalizationMall acquisition as if it had been completed on July 1, 2019. The unaudited pro forma financial information is prepared by management for informational purposes only in accordance with ASC 805 and is not necessarily indicative of or intended to represent the results that would have been achieved had the acquisition been consummated as of the dates presented, and should not be taken as representative of future consolidated results of operations. The unaudited pro forma financial information does not reflect any operating efficiencies and/or cost savings that the Company may achieve with respect to the combined companies. The pro forma information has been adjusted to give effect to nonrecurring items that are directly attributable to the acquisition.
Three months ended
Net Revenues
Net Income
The unaudited pro forma amounts above include the following adjustments:
-
A decrease of operating expenses by $0 and $5.4 million during the three and nine months ended March 28, 2021, to eliminate transaction and litigation costs directly related to the transaction that do not have a continuing impact on operating results.
An increase of operating expenses by $0.2 million during the nine months ended March 28, 2021 to reflect the additional amortization expense related to the increase in definite lived intangible assets.
An increase in interest expense of $0.6 million during the nine months ended March 28, 2021, which is comprised of incremental interest and amortization of deferred financing costs associated with the New Term Loan (as defined below). The interest rate used for the purposes of these pro forma statements, of 3.5%, was the rate in effect at loan inception.
The combined pro forma results were tax effected using the Company's effective tax rate for the respective periods.
Acquisition of Vital Choice
On October 27, 2021, the Company completed its acquisition of Vital Choice Seafood LLC (“Vital Choice”), a provider of wild-caught seafood and sustainably farmed shellfish, pastured proteins, organic foods, and marine-sourced nutritional supplements. The Company utilized its existing credit facility to fund the $20.0 million purchase (subject to certain working capital and other adjustments), which included tradenames, customer lists, websites and operations. Vital Choice revenues were approximately $27.8 million during its most recent year ended December 31, 2020.
After working capital and related adjustments, total consideration was approximately $20.3 million, and was preliminarily allocated to the identifiable assets acquired and liabilities assumed based on our preliminary estimates of their fair values on the acquisition date. The Company is in the process of finalizing its allocation and has booked certain immaterial adjustments during the current quarter. The final allocation may result in additional adjustments to the carrying value of the respective recorded assets and liabilities, establishment of certain additional intangible assets, revisions of useful lives of intangible assets, and the determination of any residual amount that will be allocated to goodwill.
The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed at the date of the acquisition:
Vital Choice Preliminary Purchase Price Allocation
Measurement Period Interim Adjustments
Inventory
Other current assets
Property, plant and equipment
Intangible assets
Current liabilities
The estimated fair value of the acquired work in process and finished goods inventory was determined utilizing the income approach. The income approach estimates the fair value of the inventory based on the net retail value of the inventory, less operating expenses and a reasonable profit allowance. Raw materials inventory was valued at book value, as there have not been any significant price fluctuations or other events that would materially change the cost to replace the raw materials.
Of the acquired intangible assets, $4.5 million was assigned to customer lists, which is being amortized over the estimated remaining life of 5 years, $5.3 million was assigned to tradenames (indefinite life), and $5.0 million was assigned to goodwill (indefinite life), which is expected to be deductible for tax purposes. The goodwill recognized is primarily related to synergistic value created in terms of both operating costs and revenue growth opportunities, enhanced financial and operational scale, and other strategic benefits.
The estimated fair value of the acquired tradenames was determined using the relief from royalty method, which is a risk-adjusted discounted cash flow approach. The relief from royalty method values an intangible asset by estimating the royalties saved through ownership of the asset. The relief from royalty method requires identifying the future revenue that would be generated by the trademark, multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. The royalty rate used in the valuation was based on a consideration of market rates for similar categories of assets. The discount rate used in the valuation was based on the Company’s weighted average cost of capital, the riskiness of the earnings stream associated with the trademarks and the overall composition of the acquired assets.
Operating results of the Vital Choice business are reflected in the Company’s consolidated financial statements from the date of acquisition within the Gourmet Foods & Gift Baskets segment. Pro forma results of operations have not been presented, as the impact on the Company’s consolidated financial results was not material.
Acquisition of Alice’s Table
On December 31, 2021, the Company completed its acquisition of Alice’s Table, Inc. (“Alice’s Table”), a lifestyle business offering fully digital livestreaming floral, culinary and other experiences. The Company utilized existing cash of $0.8 million, contributed accounts receivable due from Alice’s Table of $0.3 million, and converted its cost method investment in Alice’s Table of $0.3 million, in order to acquire 100% ownership in Alice’s Table, which included tradenames, customer lists, websites and operations. Immediately prior to completing the acquisition, the Company wrote down its previous cost method investment in Alice’s Table to its $0.3 million fair value, on the date of the acquisition, resulting in an impairment of $0.7 million, which is recorded in the “Other (income) expense, net” line item on the Statement of Operations. Alice’s Table revenues were approximately $3.8 million during its most recent fiscal year ended September 30, 2021.
The resulting total consideration of $1.3 million was preliminarily allocated to the identifiable assets acquired and liabilities assumed based on our preliminary estimates of their fair values on the acquisition date, including: goodwill of $0.7 million, trademarks of $0.5 million, customer lists of $0.2 million (4 year life) and deferred revenue of $0.1 million. The Company is in the process of finalizing its allocation and this may result in potential adjustments to the carrying value of the respective recorded assets and liabilities, establishment of certain additional intangible assets, revisions of useful lives of intangible assets, and the determination of any residual amount that will be allocated to goodwill.
Note 5 – Inventory, Net
The Company’s inventory, stated at cost, which is not in excess of market, includes purchased and manufactured finished goods for sale, packaging supplies, crops, raw material ingredients for manufactured products and associated manufacturing labor, and is classified as follows:
Finished goods
Work-in-process
Raw materials
Total inventory
Note 6 – Goodwill and Intangible Assets, Net
The following table presents goodwill by segment and the related change in the net carrying amount:
Consumer
Floral &
Gifts
BloomNet
Gourmet
Foods &
Gift Baskets
The Company’s other intangible assets consist of the following:
Amortization
Period
Gross
Carrying
Accumulated Amortization
Net
Intangible assets with determinable lives
Investment in licenses
Customer lists
Other
Total intangible assets with determinable lives
Trademarks with indefinite lives
Total identifiable intangible assets
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Future estimated amortization expense is as follows: remainder of fiscal 2022 - $1.3 million, fiscal 2023 - $4.2 million, fiscal 2024 - $4.2 million, fiscal 2025 - $1.7 million, fiscal 2026 - $1.2 million and thereafter - $0.9 million.
Note 7 – Investments
Equity investments without a readily determinable fair value
Investments in non-marketable equity instruments of private companies, where the Company does not possess the ability to exercise significant influence, are accounted for at cost, less impairment (assessed qualitatively at each reporting period), adjusted for observable price changes from orderly transactions for identical or similar investments of the same issuer. These investments are included within “Other assets” in the Company’s consolidated balance sheets. The aggregate carrying amount of the Company’s cost method investments was $3.1 million and $4.6 million as of March 27, 2022 and June 27, 2021, respectively.
Equity investments with a readily determinable fair value
The Company also holds certain trading securities associated with its Non-Qualified Deferred Compensation Plan (“NQDC Plan”). These investments are measured using quoted market prices at the reporting date and are included within the “Other assets” line item in the consolidated balance sheets (see Note 10 - Fair Value Measurements).
Note 8 –Debt, Net
The Company’s current and long-term debt consists of the following:
Revolver (1)
Term Loans (1)
Deferred financing costs
Total debt
Less: current debt
Long-term debt
(1)
On May 31, 2019, the Company and certain of its U.S. subsidiaries entered into a Second Amended and Restated Credit Agreement (the “2019 Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent, and a group of lenders. The 2019 Credit Agreement amended and restated the Company’s existing amended and restated credit agreement dated as of December 23, 2016 to, among other modifications: (i) increase the amount of the outstanding term loan (“Term Loan”) from approximately $97 million to $100 million, (ii) extend the maturity date of the outstanding Term Loan and the revolving credit facility (“Revolver”) by approximately 29 months to May 31, 2024, and (iii) decrease the applicable interest rate margins for LIBOR and base rate loans by 25 basis points. The Term Loan is payable in 19 quarterly installments of principal and interest beginning on September 29, 2019, with escalating principal payments, at the rate of 5.0% per annum for the first eight payments, and 10.0% per annum for the remaining 11 payments, with the remaining balance of $62.5 million due upon maturity. The Revolver, in the aggregate amount of $200 million, subject to seasonal reduction to an aggregate amount of $100 million for the period from January 1 through August 1, may be used for working capital and general corporate purposes, subject to certain restrictions. For each borrowing under the 2019 Credit Agreement, the Company may elect that such borrowing bear interest at an annual rate equal to either: (1) a base rate plus an applicable margin varying based on the Company’s consolidated leverage ratio, where the base rate is the highest of (a) the prime rate, (b) the New York fed bank rate plus 0.5%, and (c) a LIBOR rate plus 1%, or (2) an adjusted LIBOR rate plus an applicable margin varying based on the Company’s consolidated leverage ratio.
On August 20, 2020, the Company, the Subsidiary Guarantors, JPMorgan Chase Bank, N.A. as administrative agent, and a group of lenders entered into a First Amendment (the “First Amendment”) to the 2019 Credit Agreement. The First Amendment amends the 2019 Credit Agreement (together the "2020 Credit Agreement”) to, among other modifications, (i) increase the aggregate principal amount of the existing Revolver commitments from $200.0 million to $250.0 million, (ii) establish a new tranche of term A-1 loans in an aggregate principal amount of $100.0 million (the “New Term Loan”), (iii) increase the working capital sublimit with respect to the Revolver from $175.0 million to $200.0 million, and (iv) increase the seasonally-reduced Revolver commitments from $100.0 million to $125.0 million for the period from January 1 through August 1 for each fiscal year of the Company. The New Term Loan will mature on May 31, 2024. Proceeds of the borrowing under the New Term Loan may be used for working capital and general corporate purposes of the Company and its subsidiaries, subject to certain restrictions. For each borrowing under the 2020 Credit Agreement, the Company may elect that such borrowing bear interest at an annual rate equal to either (1) a base rate plus the applicable margin for the relevant class of borrowing, which margins vary based on the Company’s consolidated leverage ratio, where the base rate is the highest of (a) the prime rate, (b) the New York fed bank rate plus 0.5%, and (c) a LIBOR rate plus 1%, or (2) an adjusted LIBOR rate plus an applicable margin varying based on the Company’s consolidated leverage ratio. The New Term Loan is payable in 15 quarterly installments of principal and interest beginning on September 27, 2020, with escalating principal payments, at the rate of 5.0% per annum for the first four payments, and 10.0% per annum for the remaining 11 payments, with the remaining balance of $67.5 million due upon maturity.
On November 8, 2021, the Company, certain of its U.S. subsidiaries, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, entered into a Second Amendment (the “Second Amendment”) to the 2019 Credit Agreement. The Second Amendment amends the 2020 Credit Agreement (together the “2021 Credit Agreement”) to, among other modifications, decrease the interest margins and LIBOR floor applicable to the existing tranche of term A-1 loans.
The 2021 Credit Agreement requires that while any borrowings or commitments are outstanding the Company comply with certain financial covenants and affirmative covenants as well as certain negative covenants that, subject to certain exceptions, limit the Company’s ability to, among other things, incur additional indebtedness, make certain investments and make certain restricted payments. The Company was in compliance with these covenants as of March 27, 2022. The 2021 Credit Agreement is secured by substantially all of the assets of the Company.
Future principal payments under the Term Loan and New Term Loan are as follows: $5.0 million – remainder of fiscal 2022, $20.0 million – fiscal 2023 and $145.0 million – fiscal 2024.
Note 9 - Property, Plant and Equipment
The Company’s property, plant and equipment consists of the following:
Land
Orchards in production and land improvements
Building and building improvements
Leasehold improvements
Production equipment
Furniture and fixtures
Computer and telecommunication equipment
Software
Capital projects in progress - orchards
Property, plant and equipment, gross
Accumulated depreciation and amortization
Note 10 - Fair Value Measurements
Cash and cash equivalents, trade and other receivables, prepaids, accounts payable and accrued expenses are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments. Although no trading market exists, the Company believes that the carrying amount of its debt approximates fair value due to its variable nature. The Company’s investments in non-marketable equity instruments of private companies are carried at cost and are periodically assessed for other-than-temporary impairment, when an event or circumstances indicate that an other-than-temporary decline in value may have occurred. The Company’s remaining financial assets and liabilities are measured and recorded at fair value (see table below). The Company’s non-financial assets, such as definite lived intangible assets and property, plant and equipment, are recorded at cost and are assessed for impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. Goodwill and indefinite lived intangibles are tested for impairment annually, or more frequently, if events occur or circumstances change such that it is more likely than not that an impairment may exist, as required under the accounting standards.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the guidance are described below:
Level 1
Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Level 2
Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.
Level 3
Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The following table presents by level, within the fair value hierarchy, financial assets and liabilities measured at fair value on a recurring basis:
Fair Value Measurements
Assets (Liabilities)
As of March 27, 2022:
Trading securities held in a “rabbi trust” (1)
Total assets (liabilities) at fair value
As of June 27, 2021:
The Company has established a NQDC Plan for certain members of senior management. Deferred compensation plan assets are invested in mutual funds held in a “rabbi trust,” which is restricted for payment to participants of the NQDC Plan. Trading securities held in a rabbi trust are measured using quoted market prices at the reporting date and are included in the “Other assets” line item, with the corresponding liability included in the “Other liabilities” line item in the consolidated balance sheets.
Note 11 – 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 and nine months ended March 27, 2022 was 25.7% and 18.6%, respectively, compared to 255.6% and 21.1% in the same periods of the prior year. The effective tax rate differed from the U.S. federal statutory rate of 21% for the three months ended March 27, 2022 primarily due to state income taxes and nondeductible expenses for executive compensation, partially offset by various permanent differences and tax credits, and for the nine months ended March 27, 2022 primarily due to excess tax benefits from stock based compensation, partially offset by state income taxes. The effective tax rate differed from the U.S. federal statutory rate of 21% for the three months ended March 28, 2021 primarily due to excess tax benefits from stock based compensation and state income taxes, and for the nine months ended March 28, 2021 primarily due to state income taxes and nondeductible expenses for executive compensation, which were partially offset by various permanent differences, tax credits, and excess tax benefits from stock-based compensation.
The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various foreign countries. The Company recently completed its U.S. federal examination for fiscal 2018, however, fiscal years 2019 and 2020 remain subject to U.S. federal examination. Due to ongoing state examinations and nonconformity with the U.S. federal statute of limitations for assessment, certain states remain open from fiscal 2016. The Company's foreign income tax filings from fiscal 2017 are open for examination by its respective foreign tax authorities, mainly Canada, Brazil, and the United Kingdom.
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At March 27, 2022, the Company has an unrecognized tax benefit, including accrued interest and penalties, of approximately $1.1 million. The Company believes that $0.1 million of unrecognized tax positions will be resolved over the next twelve months.
Note 12 – Business Segments
The Company’s management reviews the results of its operations by the following three business segments:
•
Consumer Floral & Gifts,
BloomNet, and
Gourmet Foods & Gift Baskets
Segment performance is measured based on contribution margin, which includes only the direct controllable revenue and operating expenses of the segments. As such, management’s measure of profitability for these segments does not include the effect of corporate overhead (see (a) below), nor does it include depreciation and amortization, other (income) expense, net and income taxes, or stock-based compensation. Assets and liabilities are reviewed at the consolidated level by management and not accounted for by segment.
Net Revenues:
Segment Net Revenues:
Consumer Floral & Gifts
Corporate
Intercompany eliminations
Total net revenues
Operating Income:
Segment Contribution Margin:
Segment Contribution Margin Subtotal
Corporate (a)
Operating income
(a) Corporate expenses consist of the Company’s enterprise shared service cost centers, and include, among other items, Information Technology, Human Resources, Accounting and Finance, Legal, Executive and Customer Service Center functions, as well as Stock-Based Compensation. In order to leverage the Company’s infrastructure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions, other than those of the Customer Service Center, which are allocated directly to the above categories based upon usage, are included within corporate expenses as they are not directly allocable to a specific segment.
The following tables represent a disaggregation of revenue from contracts with customers, by channel:
Corporate and
Eliminations
Consolidated
E-commerce
Retail and other
Wholesale
BloomNet services
Total other revenues
Corporate and Eliminations
Other revenues detail
Note 13 – Leases
The Company currently leases plants, warehouses, offices, store facilities, and equipment under various leases through fiscal 2036. Most lease agreements are of a long-term nature (over a year), although the Company does also enter into short-term leases, primarily for seasonal needs. Lease agreements may contain renewal options and rent escalation clauses and require the Company to pay real estate taxes, insurance, common area maintenance and operating expenses applicable to the leased properties. The Company accounts for its leases in accordance with ASC 842.
At contract inception, we determine whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time, by assessing whether we have the right to obtain substantially all of the economic benefits from use of the identified asset and the right to direct the use of the identified asset.
At the lease commencement date, we determine if a lease should be classified as an operating or a finance lease (we currently have no finance leases) and recognize a corresponding lease liability and a right-of-use asset on our Balance Sheet. The lease liability is initially and subsequently measured as the present value of the remaining fixed minimum rental payments (including base rent and fixed common area maintenance) using discount rates as of the commencement date. Variable payments (including most utilities, real estate taxes, insurance and variable common area maintenance) are expensed as incurred. Further, we elected a short-term lease exception policy, permitting us to not apply the recognition requirements of this standard to short-term leases (i.e. leases with terms of 12 months or less) and an accounting policy to account for lease and non-lease components as a single component for certain classes of assets. The right-of-use asset is initially and subsequently measured at the carrying amount of the lease liability adjusted for any prepaid or accrued lease payments, remaining balance of lease incentives received, unamortized initial direct costs, or impairment charges relating to the right-of-use asset. Right-of-use assets are assessed for impairment using the long-lived assets impairment guidance. The discount rate used to determine the present value of lease payments is our estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as we generally cannot determine the interest rate implicit in the lease.
We recognize expense for our operating leases on a straight-line basis over the lease term. As these leases expire, it can be expected that in the normal course of business they will be renewed or replaced. Renewal option periods are included in the measurement of lease liability, where the exercise is reasonably certain to occur. Key estimates and judgments in accounting for leases include how we determine: (1) lease payments, (2) lease term, and (3) the discount rate used in calculating the lease liability.
Additional information related to our leases is as follows:
Lease costs:
Operating lease costs
Variable lease costs
Short-term lease cost
Sublease income
Total lease costs
Nine Months
Ended
Cash paid for amounts included in measurement of operating lease liabilities
Right-of-use assets obtained in exchange for new operating lease liabilities
Weighted-average remaining lease term - operating leases (in years)
Weighted-discount rate - operating leases
%
Maturities of lease liabilities in accordance with ASC 842 as of March 27, 2022 are as follows (in thousands):
Remainder of 2022
2023
2024
2025
2026
Thereafter
Total Future Minimum Lease Payments
Less Imputed Remaining Interest
Note 14 – Commitments and Contingencies
Litigation
Bed Bath & Beyond:
On April 1, 2020, the Seller commenced an action against the Company in the Court of Chancery for the State of Delaware, which is captioned Bed Bath & Beyond Inc. v. 1-800-Flowers.com, et ano., C.A. (the “Complaint”), alleging a breach of the Equity Purchase Agreement (the “Purchase Agreement”), dated February 14, 2020, between Seller, PersonalizationMall, the Company and the Purchaser, pursuant to which the Seller agreed to sell to Purchaser, and the Purchaser agreed to purchase from Seller, all of the issued and outstanding membership interests of PersonalizationMall. The action was initiated after the Company requested a reasonable delay in the closing under the Purchase Agreement due to the unprecedented circumstances created by COVID-19. The Complaint requested an order of specific performance to consummate the transaction under the Purchase Agreement plus attorney’s fees and costs in connection with the action. The Company filed its answer to the Complaint on April 17, 2020 and an order governing expedited proceedings was approved on April 9, 2020 that set a trial date for late September 2020. On July 21, 2020, the Company and Seller entered into a settlement agreement, pursuant to which the Company agreed to move forward with its purchase of PersonalizationMall for $245.0 million, subject to certain working capital and other adjustments. The transaction closed on August 3, 2020. In connection with the settlement agreement, the parties executed a Stipulation and Proposed Order of Dismissal, resulting in the voluntary dismissal with prejudice of the litigation relating to the transaction.
Call Center Worker Claim:
In March of 2018, a putative class action lawsuit was filed against a subsidiary of the Company (the “Subsidiary”) in the U.S. District Court for the District of Oregon, Medford Division (the “Court”), alleging violations of the federal Fair Labor Standards Act (FLSA) and Oregon state law. The complaint was brought on behalf of a putative class of call center workers and alleged that certain Subsidiary policies and practices resulted in class members’ performance of unpaid work. The plaintiff sought class certification, compensation for alleged unpaid and underpaid wages, civil penalties, prejudgment interest, liquidated damages, litigation costs, and attorneys’ fees. Following mediation, the parties reached an agreement in April of 2022 to resolve all claims. The settlement agreement remains subject to certain judicial approvals. The Subsidiary’s payment liability under the settlement agreement is capped at a maximum amount of $3.3 million, and the amount payable will depend on the number of claims filed by class members and the amounts of attorneys’ fees and litigation costs that are approved by the Court. We anticipate that final Court approval, and determination and payment of the final settlement amount, may occur during the third quarter of fiscal 2023. In entering into the settlement agreement, the Subsidiary is making no admission of liability.
In addition, there are various claims, lawsuits, and pending actions against the Company and its subsidiaries incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the final resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.
Note 15 - Accrued Expenses
Accrued expenses consisted of the following:
Payroll and employee benefits
Deferred revenue
Accrued marketing expenses
Accrued florist payout
Accrued purchases
Accrued Expenses
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” ("MD&A") is intended to provide an understanding of our financial condition, change in financial condition, cash flow, liquidity and results of operations. The following MD&A discussion should be read in conjunction with the consolidated financial statements and notes to those statements that appear elsewhere in this Form 10-Q and in the Company’s Annual Report on Form 10-K, for the year ended June 27, 2021. The following discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those discussed or referred to in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption “Forward-Looking Information and Factors That May Affect Future Results,” under Part I, Item 1A, of the Company’s Annual Report on Form 10-K, for the year ended June 27, 2021 under the heading “Risk Factors” and Part II-Other Information, Item 1A in this Form 10-Q.
Business Overview
1-800-FLOWERS.COM, Inc. and its subsidiaries (collectively, the “Company”) is a leading provider of gifts designed to help customers express, connect and celebrate. The Company’s business platform features our all-star family of brands, including: 1-800-Flowers.com®, 1-800-Baskets.com®, Cheryl’s Cookies®, Harry & David®, PersonalizationMall.com®, Shari’s Berries®, FruitBouquets.com®, Moose Munch®, The Popcorn Factory®, Wolferman’s Bakery®, Vital Choice®, Stock Yards® and Simply Chocolate®. Through the Celebrations Passport® loyalty program, which provides members with free standard shipping and no service charge across our portfolio of brands, 1-800-FLOWERS.COM, Inc. strives to deepen relationships with customers. The Company also operates BloomNet®, an international floral and gift industry service provider offering a broad-range of products and services designed to help members grow their businesses profitably; Napco℠, a resource for floral gifts and seasonal décor; and DesignPac Gifts, LLC, a manufacturer of gift baskets and towers; and Alice’s Table®, a lifestyle business offering fully digital livestreaming floral, culinary and other experiences to guests across the country.
For additional information, see Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” of our Annual Report on Form 10-K for the year ended June 27, 2021.
On August 3, 2020, the Company completed its acquisition of PersonalizationMall.com LLC ("PersonalizationMall"), a leading ecommerce provider of personalized products. The extensive offerings of PersonalizationMall include a wide variety of personalization processes such as sublimation, embroidery, digital printing, engraving and sandblasting, while providing an industry-leading customer experience based on a fully integrated business platform that includes a highly automated personalization process and rapid order fulfillment.
The Company used a combination of cash on its balance sheet and its existing credit facility to fund the $245.0 million purchase (subject to certain working capital and other adjustments), which included its newly renovated, leased 360,000 square foot state-of-the-art production and distribution facility, as well as customer database, tradenames and website. PersonalizationMall’s revenues were approximately $171.2 million during its fiscal year ended February 29, 2020 - see Note 4 – Acquisitions in Item 1.
On October 27, 2021, the Company completed its acquisition of Vital Choice Seafood LLC (“Vital Choice”), a provider of wild-caught seafood and sustainably farmed shellfish, pastured proteins, organic foods, and marine-sourced nutritional supplements. The Company utilized its existing credit facility to fund the $20.0 million purchase (subject to certain working capital and other adjustments), which included tradenames, customer lists, websites and operations. Vital Choice revenues were approximately $27.8 million during its most recent year ended December 31, 2020 - see Note 4 – Acquisitions in Item 1.
On December 31, 2021, the Company completed its acquisition of Alice’s Table LLC (“Alice’s Table”), a lifestyle business offering fully digital livestreaming floral, culinary and other experiences to guests across the country. The Company utilized existing cash of $0.8 million, converted the existing accounts receivable from Alice’s Table of $0.3 million and its previous $0.3 million cost method investment in Alice’s Table, in order to acquire 100% ownership in Alice’s Table, which included tradenames, customer lists, websites and operations. Alice’s Table revenues were approximately $3.8 million during the twelve-month period ended September 30, 2021 - see Note 4 – Acquisitions in Item 1.
Amended Credit Agreement
Subsequent to, but in contemplation of the acquisition of PersonalizationMall, on August 20, 2020, the Company entered into a First Amendment to its 2019 Credit Agreement to: (i) increase the aggregate principal amount of the existing Revolver commitments from $200.0 million to $250.0 million, (ii) establish a new tranche of term A-1 loans in an aggregate principal amount of $100.0 million (the “New Term Loan”), (iii) increase the working capital sublimit with respect to the Revolver from $175.0 million to $200.0 million, and (iv) increase the seasonally-reduced Revolver commitments from $100.0 million to $125.0 million for the period from January 1 through August 1 for each fiscal year of the Company. The $100.0 million proceeds of the New Term Loan were used to repay the $95.0 million borrowing that had been drawn on its existing Revolver to finance the acquisition of PersonalizationMall, as well as financing fees of approximately $2.0 million.
On November 8, 2021, the Company, entered into a Second Amendment to the Company’s existing credit agreement, to, among other modifications, decrease the interest margins and LIBOR floor applicable to the existing tranche of term A-1 loans (See Note 8 - Debt, in Item 1. for details).
COVID-19 and Other Macro-Economic Factors
The global COVID-19 pandemic, and its related impacts, have affected, and will continue to affect, our operations and financial results for the foreseeable future. In response to the pandemic, the Company has taken actions to promote employee safety and business continuity, informed by the guidelines set forth by local, state and federal government and health officials. These initiatives are governed by our “Pandemic Preparedness and Response Plan,” which established an internal “nerve center” to assist efforts surrounding: communication and coordination throughout the business, workforce protection and supply chain management, and support for the Company’s customers, vendors, franchisees, and our BloomNet member florists.
Our results for the fiscal third quarter were below our expectations. A solid Valentine’s Day holiday for our 1-800-Flowers brand was offset by overall slower consumer demand for everyday gifting occasions throughout the period. These results reflected a continuation, and in some areas an escalation, of the macro-economic cost headwinds that we saw in the prior quarter, including disruptions in the global supply chain, rising costs for inbound and outbound shipping, higher year-over-year labor costs, and growing consumer concerns with rapidly rising inflation and geopolitical unrest.
While total revenues for the quarter ended March 27, 2022 were down by 1% in comparison to the prior year, the investments we have made in our brand have enabled us to maintain the significant revenue base generated by the accelerated shift to online shopping during the pandemic, as evidenced by the growth of 68.4%, and 60.7% when revenues are compared with the three and nine months ended March 29, 2020. While we expect that the easing of pandemic restrictions, along with the impact of new variants, and the aforementioned inflation and geopolitical concerns, will result in irregular buying patterns, as each of these issues are closely related to the overall financial health and outlook of our customers, we anticipate revenue growth for the full year, as we continue to leverage our large customer file, the strong growth we continue to see in our Celebrations Passport loyalty program, and innovative product introductions and partnerships.
From a cost perspective, in the near term, the Company anticipates facing continued labor and supply chain headwinds, which are expected to put further pressure on earnings. While supply chain issues associated with ocean container capacity and cost escalation are expected to moderate, in the short-to-mid-term, these costs are expected to continue to be well above pre-pandemic rates, and current COVID variants, which are causing renewed lockdowns in China, may negatively impact the modest supply chain recovery we have seen over recent months. In order to mitigate these headwinds, the Company intends to continue to invest in its operating platform to automate warehouse and distribution facilities, optimize its outbound shipping operations and build and bring in inventory early. Over the longer term, we anticipate these initiatives will enable us to improve gross margins and drive enhanced bottom-line performance.
Company Guidance
The Company is updating its guidance for fiscal year 2022, reflecting results for the first three quarters of the year, as well as its outlook for the remainder of the year. The updated guidance includes:
Total revenue growth of 3.0 percent to 5.0 percent, compared with the prior year;
Adjusted EBITDA in a range of $110.0 million to $115.0 million;
EPS in a range of $0.55 to $0.60 per diluted share, and;
The Company anticipates that Free Cash Flow for the year will be down significantly compared with the prior year based on its updated guidance and its plans to invest in inventory to support its growth plans and address the headwinds it sees in the macro economy.
The Company’s guidance for the year is based on several factors, including:
The continuing headwinds associated with the ongoing pandemic, increased costs for labor, inbound and outbound shipping and marketing, as well as consumer concerns regarding rising price inflation and geopolitical issues, somewhat offset by:
the Company’s ability to continue to attract new customers and add new members to its Celebrations Passport® Loyalty program, which is helping drive increased frequency, retention, and cross-category/cross-brand purchases.
Definitions of non-GAAP Financial Measures:
We sometimes use financial measures derived from consolidated financial information, but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain of these are considered "non-GAAP financial measures" under the U.S. Securities and Exchange Commission rules. See below for definitions and the reasons why we use these non-GAAP financial measures. Where applicable, see the Segment Information and Results of Operations sections below for reconciliations of these non-GAAP measures to their most directly comparable GAAP financial measures. We do not provide a reconciliation of adjusted EBITDA guidance to net income guidance or a reconciliation of free cash flow guidance to net cash provided by operating activities because doing so would require unreasonable efforts at this time, because of the uncertainty and variability of the nature and amount of certain components of various necessary GAAP components, including for example those related to compensation, tax items, amortization or others that may arise during the year, and the Company's management believes such reconciliations would imply a degree of precision that would be confusing or misleading to investors. These non-GAAP financial measures are referred to as “adjusted" or “on a comparable basis” below.
EBITDA and adjusted EBITDA
We define EBITDA as net income (loss) before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for the impact of stock-based compensation, NQDC Plan investment appreciation/depreciation, and for certain items affecting period-to-period comparability. See Segment Information for details on how EBITDA and adjusted EBITDA were calculated for each period presented.
The Company presents EBITDA and adjusted EBITDA because it considers such information meaningful supplemental measures of its performance and believes such information is frequently used by the investment community in the evaluation of similarly situated companies. The Company uses EBITDA and adjusted EBITDA as factors to determine the total amount of incentive compensation available to be awarded to executive officers and other employees. The Company's credit agreement uses EBITDA and adjusted EBITDA to measure compliance with covenants such as interest coverage and debt incurrence. EBITDA and adjusted EBITDA are also used by the Company to evaluate and price potential acquisition candidates.
EBITDA and adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP. Some of the limitations are: (a) EBITDA and adjusted EBITDA do not reflect changes in, or cash requirements for, the Company's working capital needs; (b) EBITDA and adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company's debts; and (c) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and EBITDA does not reflect any cash requirements for such capital expenditures. EBITDA should only be used on a supplemental basis combined with GAAP results when evaluating the Company's performance.
Segment contribution margin and adjusted segment contribution margin
We define segment contribution margin as earnings before interest, taxes, depreciation and amortization, before the allocation of corporate overhead expenses. Adjusted segment contribution margin is defined as contribution margin adjusted for certain items affecting period-to-period comparability. See Segment Information for details on how segment contribution margin was calculated for each period presented.
When viewed together with our GAAP results, we believe segment contribution margin and adjusted segment contribution margin provide management and users of the financial statements meaningful information about the performance of our business segments.
Segment contribution margin and adjusted segment contribution margin are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. The material limitation associated with the use of segment contribution margin and adjusted segment contribution margin is that they are an incomplete measure of profitability as they do not include all operating expenses or non-operating income and expenses. Management compensates for these limitations when using this measure by looking at other GAAP measures, such as operating income and net income.
Adjusted net income (loss) and adjusted or comparable net income (loss) per common share
We define adjusted net income (loss) and adjusted or comparable net income (loss) per common share as net income (loss) and net income (loss) per common share adjusted for certain items affecting period-to-period comparability. See Segment Information below for details on how adjusted net income (loss) and adjusted or comparable net income (loss) per common share were calculated for each period presented.
We believe that adjusted net income (loss) and adjusted or comparable net income (loss) per common share are meaningful measures because they increase the comparability of period-to-period results.
Since these are not measures of performance calculated in accordance with GAAP, they should not be considered in isolation of, or as a substitute for, GAAP net income (loss) and net income (loss) per common share, as indicators of operating performance and they may not be comparable to similarly titled measures employed by other companies.
Free Cash Flow
We define free cash flow as net cash provided by operating activities, less capital expenditures. The Company considers free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases of fixed assets, which can then be used to, among other things, invest in the Company’s business, make strategic acquisitions, strengthen the balance sheet, and repurchase stock or retire debt. Free cash flow is a liquidity measure that is frequently used by the investment community in the evaluation of similarly situated companies.
Since free cash flow is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP. A limitation of the utility of free cash flow as a measure of financial performance is that it does not represent the total increase or decrease in the company's cash balance for the period.
Segment Information
The following table presents the net revenues, gross profit and segment contribution margin from each of the Company’s business segments, as well as consolidated EBITDA, and adjusted EBITDA.
Vital Choice and Alice's Table Transaction Costs
Litigation Settlement
As Adjusted
(non-GAAP)
Change
Net revenues:
Gross profit:
Total gross profit
EBITDA (non-GAAP):
Corporate (b)
EBITDA (non-GAAP)
Add: Stock-based compensation
Add: Compensation charge related to NQ Plan investment (depreciation) appreciation
Adjusted EBITDA (non-GAAP)
As Adjusted (non-GAAP) March 27, 2022
Personalization
Mall
Litigation & Transaction Costs
Harry & David Store Closure Costs
As Adjusted (non-GAAP) March 28, 2021
Segment Contribution Margin (non-GAAP) (a)
Add: Compensation charge related to NQ Plan investment appreciation
Reconciliation of net income to adjusted net income (loss) (non-GAAP):
Adjustments to reconcile net income (loss) to adjusted net income (loss) (non-GAAP)
Add: Transaction costs
Add: Litigation settlement
Deduct: Harry & David store closure cost adjustment
Deduct: Income tax effect on adjustments
Adjusted net income (loss) (non-GAAP)
Basic and diluted net income (loss) per common share
Basic and diluted adjusted net income (loss) per common share (non-GAAP)
Weighted average shares used in the calculation of net income (loss) and adjusted net income (loss) per common share
Reconciliation of net income (loss) to adjusted EBITDA (non-GAAP):
Add: Interest expense, net
Add: Depreciation and amortization
Add: Income tax expense (benefit)
EBITDA
Adjusted EBITDA
(a) Segment performance is measured based on segment contribution margin or segment Adjusted EBITDA, reflecting only the direct controllable revenue and operating expenses of the segments, both of which are non-GAAP measurements. As such, management’s measure of profitability for these segments does not include the effect of corporate overhead, described above, depreciation and amortization, other income (net), and other items that we do not consider indicative of our core operating performance.
(b) Corporate expenses consist of the Company’s enterprise shared service cost centers, and include, among other items, Information Technology, Human Resources, Accounting and Finance, Legal, Executive and Customer Service Center functions, as well as Stock-Based Compensation. In order to leverage the Company’s infrastructure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions, other than those of the Customer Service Center, which are allocated directly to the above categories based upon usage, are included within corporate expenses as they are not directly allocable to a specific segment.
Results of Operations
% Change
Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits.
Net revenues decreased 1.0% during the three months ended March 27, 2022, compared to the same period of the prior year due to lower revenues in the Gourmet Foods & Gift Baskets and BloomNet segments, partially offset by slightly higher revenues in the Consumer Floral & Gifts segment. Adjusted for the non-comparative impact of Alice’s Table and Vital Choice, which were acquired on December 31, 2021 and October 27, 2021, respectively, consolidated revenues decreased 2.5%, in comparison to the prior year period. The decrease in revenues was due to the Easter shift (the Easter holiday was on April 17th, 2022, compared to April 4th in 2021, resulting in the shift of some Easter-related revenue and associated EBITDA, into the Company’s fiscal fourth quarter), lower deferred revenues coming into the quarter, compared with the prior year when customers – particularly in our Harry & David brand – were willing to accept delivery of holiday season gifts well into January, and slower ecommerce demand for everyday occasions, throughout the quarter, reflecting growing consumer concerns with rising inflation and geopolitical unrest. This was partially offset by solid growth of approximately 5% for the Valentine’s Day holiday in our consumer floral business, strong demand in our wholesale business and contributions from Vital Choice and Alice’s Table. Compared with the Company’s fiscal 2020 third quarter, prior to the pandemic, revenues increased 68.4%.
Net revenues increased 5.3% during the nine months ended March 27, 2022 compared to the same period of the prior year, due to higher revenues across our three segments. Adjusted for the non-comparative impact of PersonalizationMall, Alice’s Table and Vital Choice, which were acquired on August 3, 2020, December 31, 2021 and October 27, 2021, respectively, consolidated revenues increased 3.7%, in comparison to the prior year period. This revenue growth followed the 52.6% revenue growth we reported for the nine months ended March 28, 2021, which was accelerated by the growth of e-commerce shopping during the pandemic, illustrating the strong growth momentum that we had generated over the past several years, as a result of increased recognition and relevance for our family of brands for everyday gifting and connective occasions, which was complemented by an expanded product assortment, including PersonalizationMall and Vital Choice. We also continued to see growth in our customer file and Celebrations Passport loyalty program, which helps drive increased cross-brand purchasing, purchase frequency, retention, and customer life-time value. However, in the current year, the macro economy has changed dramatically once again and we were and will be faced with significant headwinds which have slowed consumer demand and increased our costs, including: limited availability of production and distribution labor, escalating global supply-chain disruptions that caused shortages of key components for some products, geopolitical turmoil, an unprecedented, rapid rise in price inflation, and increased digital marketing costs.
Revenue by sales channel:
E-commerce revenues (combined online and telephonic) decreased 3.5% during the three months ended March 27, 2022 compared to the same period of the prior year as a result of lower sales of 11.2% within the Gourmet Foods & Gift Baskets segment, which includes revenues of Vital Choice, acquired on October 27, 2021, partially offset by growth of 1.4% within the Consumer Floral & Gifts segment.
E-commerce revenues increased 4.1% during the nine months ended March 27, 2022, compared to the same period of the prior year as a result of growth within the Gourmet Foods & Gift Baskets segment of 3.7%, which includes revenues of Vital Choice since its date of acquisition, and the Consumer Floral & Gifts segment of 4.5%, which includes the revenues of PersonalizationMall and Alice’s Table since their dates of acquisition on August 3, 2020 and December 31, 2021, respectively.
During the three and nine months ended March 27, 2022, respectively, the Company fulfilled approximately 5.4 and 18.7 million orders through its e-commerce sales channels (online and telephonic sales), a decrease of 14.6% and 5.6%, respectively, compared to the same periods of the prior year, while average order value increased 12.7% and 10.2%, to $80.29 and $72.84, respectively.
Other revenues are comprised of the Company’s BloomNet segment, as well as the wholesale and retail channels of its Consumer Floral & Gifts and Gourmet Foods & Gift Baskets segments. Other revenues increased by 20.9% and 14.2% during the three and nine months ended March 27, 2022, respectively, compared to the same periods of the prior year, due to increased Gourmet Foods & Gift Baskets and BloomNet wholesale demand, partially offset by a decrease in BloomNet services revenues.
Revenue by segment:
Consumer Floral & Gifts – this segment, which historically has consisted primarily of the operations of the 1-800-Flowers.com brand, but now includes revenues attributable to PersonalizationMall and Alice’s Table, derives revenue from the sale of consumer floral products and gifts through its e-commerce sales channels (telephonic and online sales), retail stores, and royalties from its franchise operations.
Net revenues within this segment increased 1.5% and 4.6% during the three and nine months ended March 27, 2022, respectively, compared to the same periods of the prior year, reflecting the marketing and merchandising investments made in our flagship brand, which are continuing to drive growth and market share gains, solid growth for the Valentine’s Day holiday, partly offset by softer everyday gifting sales in the third quarter. Pro-forma segment revenue growth was 1.3% and 2.7% during the three and nine months ended March 27, 2022, adjusting for the acquisitions of PersonalizationMall and Alice’s Table.
BloomNet - revenues in this segment are derived from membership fees, as well as other product and service offerings to florists. Net revenues decreased 1.0% during the three months ended March 27, 2022 compared to the same period of the prior year, due to lower membership/transaction fee revenues as a result of reduced florist-to-florist and 1-800-Flowers.com order volume attributable to overall macro-economic conditions, partially offset by an increase in directory services and growth in wholesale product volume. Net revenues increased 1.5% during the nine months ended March 27, 2022, compared to the same period of the prior year, due to growth in directory services and wholesale product volume, partially offset by lower membership/transaction fee revenues due to reduced florist-to-florist and 1-800-Flowers.com order volume attributable to overall macro-economic conditions.
Gourmet Foods & Gift Baskets – this segment includes the operations of Harry & David, Wolferman’s, Stock Yards, Cheryl’s Cookies, The Popcorn Factory, 1-800-Baskets/DesignPac, Shari’s Berries, and Vital Choice, subsequent to its October 27, 2021 acquisition date. Revenue is derived from the sale of gourmet fruits, cookies, baked gifts, premium chocolates and confections, gourmet popcorn, gift baskets, dipped berries, prime steaks, chops, and fish, through the Company’s e-commerce sales channels (telephonic and online sales) and company-owned and operated retail stores under the Harry & David and Cheryl’s brand names, as well as wholesale operations.
Net revenues within this segment decreased 4.5% during the three months ended March 27, 2022 compared to the same period of the prior year, primarily reflecting softer consumer demand due to macro-economic issues, the shift of the Easter holiday later into the Company’s fiscal fourth quarter, as well as lower deferred revenue entering the quarter, compared with the prior year period, partly offset by higher year-over-year wholesale revenues and revenues associated with Vital Choice®, which the Company acquired in October, 2021. Net revenues increased 6.5% during the nine months ended March 27, 2022 compared to the same period of the prior year, due to: (i) favorable e-commerce revenues of 3.7%, resulting from increased penetration of both “everyday” and specific volume driven by Harry & David and Shari’s Berries initiatives, as well as (ii) wholesale and retail revenue growth of 31.2% due to improving demand as COVID-19 restrictions were lifted and foot-traffic in customer locations continued to return to more normalized levels. Pro-forma segment revenue decreased 8.2%, and increased 5.1%, during the three and nine months ended March 27, 2022, respectively, adjusting for the October 27, 2021 acquisition of Vital Choice.
(dollars in thousands)
Gross profit %
Gross profit consists of net revenues less cost of revenues, which is comprised primarily of florist fulfillment costs (fees paid directly to florists), the cost of floral and non-floral merchandise sold from inventory or through third parties, and associated costs, including inbound and outbound shipping charges. Additionally, cost of revenues includes labor and facility costs related to direct-to-consumer and wholesale production operations, as well as payments made to sending florists related to order volume referred through the Company’s BloomNet network.
Gross profit decreased 16.6% and 5.8% during the three and nine months ended March 27, 2022, respectively, compared to the same periods of the prior year. The decrease during the three months ended March 27, 2022 was attributable to the aforementioned decrease in revenues combined with a lower gross margin percentage, while the decrease during the nine months ended, March 27, 2022 was attributable entirely to a lower gross margin percentage, which was partially offset by the higher revenues noted above.
Gross profit percentage decreased 610 and 450 basis points, during the three and nine months ended March 27, 2022, respectively, compared to the same periods of the prior year, primarily due to lower margins across all three segments reflecting macro-economic headwinds including: continued disruptions in the global supply chain, the escalation of increased commodity costs, increased year-over-year labor rates across the Company, as well as widespread delays and increased costs for inbound and outbound shipping, including an acceleration in fuel surcharges related to rising oil prices, and the write-off of certain inventories of expired perishable products, reflecting softer than anticipated demand levels. The Company has and will continue to implement strategic initiatives designed to mitigate the impact of these issues, including pricing initiatives across our product assortment, as well as pre-building inventory to offset supply chain delays, implementing logistics optimizing programs to enhance our outbound shipping operations and manage rising third-party shipping costs and deploying automation to increase throughput and address labor shortages.
On a pro-forma basis, adjusting for the impact of PersonalizationMall, Alice’s Table and Vital Choice, gross margin percentage was 32.9% and 38.2% during the three and nine months ended March 27, 2022.
Gross profit by segment follows:
Consumer Floral & Gifts segment - Gross profit decreased by 1.5% during the three months ended March 27, 2022, due to a reduction in gross margin percentage of 110 basis points to 36.7%, partially offset by the increase in revenue noted above. Gross profit increased by 1.5% during the nine months ended March 27, 2022, compared to the same period of the prior year, as a result of the revenue increase noted above, partially offset by decline in the gross margin percentage of 120 basis points to 39.8%. Gross margin percentage was negatively impacted for both the three and nine month periods ending March 27, 2022 as a result of significantly increased costs for inbound and outbound shipping and labor, and higher raw material component input costs, partially offset by pricing initiatives, reflected in the higher average order value. On a pro-forma basis, adjusting for the impact of PersonalizationMall and Alice’s Table, gross margin percentage was 36.7% and 39.6% during the three and nine months ended March 27, 2022.
BloomNet segment - Gross profit decreased by 13.4% and 5.2% during the three and nine months ended March 27, 2022, respectively, compared to the same periods of the prior year, due to a decrease in gross margin percentage of 560 basis points to 38.7%, and 310 basis points, to 43.2% during the respective three and nine months ended March 27, 2022. The decrease in gross margin percentage was due to revenue mix resulting from growth in lower margin wholesale revenues, combined with increased costs for inbound shipping, and higher raw material component input costs, partially offset by lower florist-to-florist volumes, which are monetized at lower margins.
Gourmet Foods & Gift Baskets segment - Gross profit decreased by 38.7% during the three months ended March 27, 2022, compared to the same period of the prior year, due to the decrease in revenues noted above, combined with a decrease in gross margin percentage of 1,410 basis points, to 25.3%. Gross profit decreased by 12.0% during the nine months ended March 27, 2022 due to a decline in gross margin percentage of 760 basis points, to 36.1%, partially offset by the aforementioned increase in revenues. The decline in gross margin percentage reflects the macro-economic headwinds including: continued disruptions in the global supply chain, the escalation of increased commodity costs, increased year-over-year labor rates across the Company, as well as widespread delays and increased costs for inbound and outbound shipping, including an acceleration in fuel surcharges related to rising oil prices, and the write-off of certain inventories of expired perishable products, reflecting softer than anticipated demand levels. On a pro-forma basis, adjusting for the impact of Vital Choice, gross margin percentage was 25.1% and 36.2% during the three and nine months ended March 27, 2022.
Marketing and sales expense
Percentage of net revenues
Marketing and sales expense consists primarily of advertising and promotional expenditures, catalog costs, online portal and search costs, retail store and fulfillment operations (other than costs included in cost of revenues) and customer service center expenses, as well as the operating expenses of the Company’s departments engaged in marketing, selling and merchandising activities.
Marketing and sales expense increased 2.1% and 7.4% during the three and nine months ended March 27, 2022, respectively, compared to the same periods of the prior year, due to: (i) higher advertising costs to support revenue generation and market share gains, combined with advertising rates which have increased above historical averages, (ii) higher labor costs, primarily as a result of a class-action litigation settlement during the current quarter, labor rates and annual merit increases, all of which were almost entirely offset by lower performance related bonuses, and (iii) the impact of the acquisition of Vital Choice, and for the nine-month period, the annualization of the impact of the acquisition of PersonalizationMall, which carries both higher product gross margins, as well as higher advertising ratios.
During the three and nine months ended March 27, 2022, the Company added approximately 1.5 and 4.0 million new e-commerce customers, a decrease of 17.4% and 13.0% compared to the same periods of the prior year, while purchase activity from existing customers decreased 1.4% for the three months ended March 27, 2022 and increased 5.0% for the nine months ended March 27, 2022, in comparison to the same periods of the prior year.
Technology and development expense
Technology and development expense consists primarily of payroll and operating expenses of the Company’s information technology group, costs associated with its websites, including hosting, design, content development and maintenance and support costs related to the Company’s order entry, customer service, fulfillment, and database systems.
Technology and development expense increased by 1.2% and 3.6% during the three and nine month periods ended March 27, 2022 compared to the same periods of the prior year, primarily due to higher maintenance and support for the Company’s technology platform enhancements, which was partially offset by lower labor costs resulting from reductions in performance related bonuses, and non-recurring costs related to PersonalizationMall in the prior periods.
General and administrative expense
General and administrative expense consists of payroll and other expenses in support of the Company’s executive, finance and accounting, legal, human resources and other administrative functions, as well as professional fees and other general corporate expenses.
General and administrative expenses decreased 27.0% and 12.7% during the three and nine months ended March 27, 2022, respectively, compared to the same periods of the prior year, due to: (i) lower labor and related costs, primarily resulting from lower performance bonuses, and year-over-year decreases in non-qualified deferred compensation plan investment income (refer to equal offset in “other income/expense, net”) and (ii) lower transaction and litigation costs, and lower insurance costs.
Depreciation and amortization expense
Depreciation and amortization expense increased 6.7% and 14.0% during the three and nine months ended March 27, 2022, respectively, compared to the same periods of the prior year, due to distribution facility automation projects and IT related ecommerce/platform enhancements, and incremental depreciation associated with the Vital Choice acquisition, while depreciation and amortization expense for the nine months ended March 27, 2022 was also impacted by the incremental depreciation and customer list amortization associated with PersonalizationMall.
Interest expense, net consists primarily of interest expense and amortization of deferred financing costs attributable to the Company’s credit facility (See Note 8 - Debt, in Item 1. for details), net of income earned on the Company’s available cash balances.
Interest expense, net decreased 21.1% and 1.0% during the three and nine months ended March 27, 2022, respectively, compared to the same periods of the prior year, due to lower interest rates attributable to the Second Amendment to the Company’s credit facility. Interest expense for the nine months ended March 27, 2022 was also impacted by the interest expense associated with the incremental debt that was used to partially finance the acquisition of PersonalizationMall.
Other income, net for the three and nine months ended March 27, 2022, consists primarily of investment (gains)/losses on the Company’s NQDC Plan assets.
Income Taxes
The Company recorded income tax benefit of $8.1 million, and income tax expense of $11.9 million, during the three and nine months ended March 27, 2022, respectively, and income tax benefit of $2.3 million and income tax expense of $28.2 million, during the three and nine months ended March 28, 2021, respectively. The Company’s effective tax rate for the three and nine months ended March 27, 2022 was 25.7% and 18.6%, respectively, compared to 255.6% and 21.1% in the same periods of the prior year. The effective tax rate differed from the U.S. federal statutory rate of 21% for the three months ended March 27, 2022 primarily due to state income taxes and nondeductible expenses for executive compensation, partially offset by various permanent differences and tax credits, and for the nine months ended March 27, 2022 primarily due to excess tax benefits from stock based compensation, partially offset by state income taxes. The effective tax rate differed from the U.S. federal statutory rate of 21% for the three months ended March 28, 2021 primarily due to excess tax benefits from stock based compensation and state income taxes, and for the nine months ended March 28, 2021 primarily due to state income taxes and nondeductible expenses for executive compensation, which were partially offset by various permanent differences, tax credits, and excess tax benefits from stock-based compensation.
Liquidity and Capital Resources
Liquidity and borrowings
The Company's principal sources of liquidity are cash on hand, cash flows generated from operations and borrowings available under the 2021 Credit Agreement (see Note 8 - Debt in Item 1 for details). At March 27, 2022, the Company had working capital of $114.3 million, including cash and cash equivalents of $93.0 million, compared to working capital of $134.1 million, including cash and cash equivalents of $173.6 million, at June 27, 2021.
Due to the seasonal nature of the Company’s business, and its continued expansion into non-floral products, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, generates over 40% of the Company’s annual revenues. Since the onset of the pandemic of the novel strain of coronavirus (“COVID-19”), our customers have turned to our brands and our expanded product offerings to help them connect and express themselves. While the continuing impacts of COVID-19 are difficult to predict, the Company expects that its fiscal second quarter will continue to be its largest in terms of revenues, and the Company will likely generate all of its earnings within this quarter. Due to the number of major floral gifting occasions, including Mother's Day, Valentine’s Day, Easter and Administrative Professionals Week, revenues also have historically risen during the Company’s fiscal third and fourth quarters in comparison to its fiscal first quarter.
The Company utilized cash on hand to fund its operations through the first quarter of fiscal 2022. In the beginning of the second quarter, the Company borrowed under its Revolver to fund short-term working capital needs, and the acquisition of Vital Choice, with borrowings peaking at $125.0 million in November 2021. Cash generated from operations during the Christmas holiday shopping season enabled the Company to repay the borrowings under the Revolver in December 2021. Based on current projected cash flows, the Company believes that available cash balances are expected to be sufficient to provide for the Company’s operating needs through the remainder of Fiscal 2022, when the Company expects to borrow against its Revolver to fund pre-holiday manufacturing and inventory purchases. The Company had no outstanding amount under its Revolver as of March 27, 2022.
While we believe that our sources of funding will be sufficient to meet our anticipated operating cash needs for at least the next twelve months, any projections of future cash needs and cash flows are subject to substantial uncertainty. We continually evaluate, and will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services, capital infrastructure, and technologies, which might affect our liquidity requirements or cause us to require additional financing.
To date, we have not identified any material liquidity deficiencies as a result of the COVID-19 pandemic. Based on the information currently available to us, we do not expect the impact of COVID-19 to have a negative impact on our liquidity. We will continue to monitor and assess the impact COVID-19 may have on our business and financial results. See Part II. Item 1A. “Risk Factors” and Part I. Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information.
Cash Flows
Net cash provided by operating activities of $38.7 million, for the nine months ended March 27, 2022, was primarily attributable to the Company’s net income during the period, adjusted by non-cash charges for depreciation and amortization and stock-based compensation, combined with changes in working capital, including increases in inventory and trade receivables. The Company intends to continue to carry higher than historical inventory balances to mitigate the expectation of continued supply chain constraints.
Net cash used in investing activities of $70.1 million, for the nine months ended March 27, 2022, was primarily attributable to the acquisitions of Vital Choice and Alice’s Table for a combined $22.1 million, and capital expenditures of $48.0 million related to the Company's technology initiatives, as well as manufacturing, production, and warehousing equipment.
Net cash used in financing activities of $49.2 million, for the nine months ended March 27, 2022, related primarily to net repayment of debt of $15.0 million and the acquisition of $34.8 million of treasury stock.
Stock Repurchase Program
See Item 2 in Part II below for details.
Contractual Obligations
At March 27, 2022, the Company’s contractual obligations consist of:
Long-term debt obligations - payments due under the Company's 2021 Credit Agreement (see Note 8 - Debt in Item 1 for details and payments due by period).
Operating lease obligations – payments due under the Company’s operating leases (see Note 13 - Leases in Item 1 for details and payments due by period for the long-term operating leases).
Purchase commitments - consisting primarily of inventory and IT related equipment purchase orders and license agreements made in the ordinary course of business – see below for the contractual payments due by period.
Payments due by period
Fiscal
Purchase commitments
Critical Accounting Policies and Estimates
As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2021, the discussion and analysis of the Company’s financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances, and management evaluates its estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. The Company’s most critical accounting policies relate to goodwill, other intangible assets and income taxes. There have been no significant changes to the assumptions and estimates related to the Company’s critical accounting policies since June 27, 2021.
See Note 1 - Accounting Policies in Item 1 for details regarding the impact of accounting standards that were recently issued on our consolidated financial statements.
Forward Looking Information and Factors that May Affect Future Results
Our disclosure and analysis in this report contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent the Company’s current expectations or beliefs concerning future events and can generally be identified by the use of statements that include words such as “estimate,” “project,” “believe,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will,” “goal,” “target” or similar words or phrases. These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of the Company’s control that could cause actual results to differ materially from the results expressed or implied in the forward-looking statements, including:
the Company’s ability:
o
to achieve revenue and profitability;
to leverage its operating platform and reduce operating expenses;
to manage the seasonality of its business;
to cost effectively acquire and retain customers;
to successfully integrate acquired businesses and assets;
to mitigate the impact of supply chain cost and capacity constraints;
to compete against existing and new competitors;
to manage expenses associated with sales and marketing and necessary general and administrative and technology investments; and
to cost effectively manage inventories;
the outcome of contingencies, including legal proceedings in the normal course of business;
general consumer sentiment and economic conditions that may affect among other things, the levels of discretionary customer purchases of the Company’s products and the costs of shipping and labor; and
the impact of the COVID-19 pandemic on our business and financial statements.
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements.
We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission. Our Annual Report on Form 10-K for the fiscal year ended June 27, 2021, listed various important factors that could cause actual results to differ materially from expected and historic results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. Readers can find them in Part I, Item 1A, of that filing under the heading “Cautionary Statements Under the Private Securities Litigation Reform Act of 1995”. We incorporate that section of that Form 10-K in this filing and investors should refer to it. In addition, please refer to any additional risk factors in Part II, Item 1A in this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from the effect of interest rate changes.
Interest Rate Risk
The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment of available cash balances and its long-term debt. The Company generally invests its cash and cash equivalents in investment grade corporate and U.S. government securities. Due to the currently low rates of return the Company is receiving on its cash equivalents, the potential for a significant decrease in short-term interest rates is low and, therefore, a further decrease would not have a material impact on the Company’s interest income. Borrowings under the Company’s 2021 Credit Agreement bear interest at a variable rate, plus an applicable margin, and therefore expose the Company to market risk for changes in interest rates. The effect of a 50 basis point increase in current interest rates on the Company’s interest expense would be approximately $0.2 million and $0.8 million during the three and nine months ended March 27, 2022, respectively.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of March 27, 2022. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of March 27, 2022.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the Company’s evaluation required by Rules 13a-15(d) or 15d-15(d) of the Securities Exchange Act of 1934 during the quarter ended March 27, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. To the extent our normal procedures and controls related to our financial close or other reporting processes were adversely impacted by the COVID-19 outbreak, we took appropriate actions and safeguards to reasonably ensure the fair presentation of the financial statements in accordance with GAAP.
PART II. – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 1A. RISK FACTORS.
There were no material changes to the Company’s risk factors as discussed in Part 1, Item 1A-Risk Factors in the Company’s Annual Report on Form 10-K for the year ended June 27, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company has a stock repurchase plan through which purchases can be made from time to time in the open market and through privately negotiated transactions, subject to general market conditions. The repurchase program is financed utilizing available cash. On April 22, 2021, the Company’s Board of Directors authorized an increase to its stock repurchase plan of up to $40.0 million. In addition, on February 3, 2022, the Company’s Board of Directors authorized an increase to its stock repurchase plan of up to $40.0 million. As of March 27, 2022, $36.6 million remained authorized under the plan.
The following table sets forth, for the months indicated, the Company’s purchase of common stock during the first nine months of fiscal 2022, which includes the period June 28, 2021 through March 27, 2022:
Total Number of
Shares Purchased
Average Price
Paid Per Share (1)
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
Dollar Value of Shares
that May Yet Be Purchased
Under the Plans or Programs
(in thousands, except average price paid per share)
06/28/21 - 07/25/21
07/26/21 - 08/22/21
08/23/21 - 09/26/21
09/27/21 - 10/24/21
10/25/21 - 11/21/21
11/22/21 - 12/26/21
12/27/21 - 01/23/22
01/24/22 - 02/20/22
02/21/22 - 03/27/22
Average price per share excludes commissions and other transaction fees.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1
Certification of the principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2
Certification of the principal financial officer 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. *
101.INS
Inline XBRL Instance Document
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Calculation Linkbase Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
Inline XBRL Taxonomy Extension Label Document
101.PRE
Inline XBRL Taxonomy Definition Presentation Document
104
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
* Filed herewith.
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.
(Registrant)
Date: May 6, 2022
/s/ Christopher G. McCann
Christopher G. McCann Chief Executive Officer and Director (Principal Executive Officer)
/s/ William E. Shea William E. Shea Senior Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)