(EDGAR Online via COMTEX) -- 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 28, 2020 . 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 28, 2020 under the heading "Risk Factors" and Part II-Other Information, Item 1A in this Form 10-Q.
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(R), 1-800-Baskets.com(R), Cheryl's Cookies(R), Harry & David(R), PersonalizationMall.com(R), Shari's Berries(R), FruitBouquets.com(R), Moose Munch(R), The Popcorn Factory(R), Wolferman's Bakery(R) and Simply Chocolate(R). We also offer top-quality steaks and chops from Stock Yards(R). Through the Celebrations Passport(R) 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(R), an international floral service provider offering a broad-range of products and services designed to help professional florists grow their businesses profitably; Napco?, a resource for floral gifts and seasonal decor; and DesignPac Gifts, LLC, a manufacturer of gift baskets and towers.
1-800-FLOWERS.COM, Inc. was recognized as the 2019 Mid-Market Company of the Year by CEO Connection.
Shares in 1-800-FLOWERS.COM, Inc. are traded on the NASDAQ Global Select Market, ticker symbol: FLWS.
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 28, 2020.
Acquisition of PersonalizationMall
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 in its fiscal 2020.
Amended Credit Agreement
Subsequent to, but in contemplation of the acquisition, 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"),
In response to the global 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 include developing a "Pandemic Preparedness and Response Plan," establishing an internal "nerve center" to allow for communication and coordination throughout the business, designing workstream teams to promote workforce protection and supply chain management, and dedicating resources to support customers, vendors, franchisees, and our BloomNet member florists.
The COVID-19 pandemic has affected, and will continue to affect, our operations and financial results for the foreseeable future. While there is significant uncertainty in the overall consumer environment due to the COVID-19 crisis, we continue to see strong e-commerce demand for gourmet foods and gift baskets and our floral and personalized products and anticipate that this trend will continue. With that said, there are headwinds (and resulting increased costs) that have been, and will continue to impact our operations during the foreseeable future, including the following:
? Retail store closures - on March 20, 2020, in response to government actions, and for the safety of its employees, the Company temporarily closed its Cheryl's and Harry & David retail stores. Affected employees were provided with Company-paid special COVID leave pay through April 3rd, as the nation and the Company worked to understand the extent and potential length of the crisis. On April 14th, the difficult decision was made to permanently close 38 of our 39 Harry & David retail stores. As a result, the Company incurred a charge of approximately $5.2 million in our fourth quarter for lease obligations, employee costs and other store closure costs. Annual revenues attributable to the closed locations was approximately $33.0 million.
? Wholesale volume reductions - we have seen a reduction in our wholesale business as a result of COVID-19, which impacted our first quarter results within our Gourmet Foods and Gift Baskets segment as many of our large wholesale customers are taking a cautious approach to the upcoming holidays due to the uncertainty surrounding the future impact of COVID-19 on their brick and mortar retail stores.
? Increased operating costs - we are seeing some increased costs associated with the changes we have made, and continue to make, to our manufacturing, warehouse and distribution facilities to provide for the safety and wellbeing of our associates, including: required social distancing, enhanced facility cleaning and sanitizing schedules, and staggered production shifts.
? Fulfillment capacity constraints - the nationwide increase in e-commerce volume is expected to result in third-party carrier capacity constraints in addition to increased delivery costs.
The scale and overall economic impact of the COVID-19 crisis is still very difficult to assess. However, the Company believes that the operating platform it has built over the years, combined with its diversified product line, and ability to engage with its customers will allow it to successfully navigate this challenging environment. We remain focused on three key elements of our business strategy:
? Taking care of the health and safety of our associates, our BloomNet florists, our vendors and our customers,
? Maintaining our financial strength and flexibility, and
? Continuing to invest in areas of our business that can help drive future growth.
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Due to the significant uncertainty in the overall economy related to the ongoing COVID-19 pandemic, the Company is not providing guidance for its full fiscal 2021 year at this time.
Regarding the fiscal second quarter:
o Based on the continued strong ecommerce growth momentum that has carried into October, the Company expects to achieve total consolidated revenue growth for its second fiscal quarter in a range of 22-to-26 percent, compared with the prior year period.
o The anticipated strong revenue growth in the quarter reflects expected e-commerce revenue growth of more than 40 percent, including contributions from PersonalizationMall, somewhat offset by lower wholesale orders and reduced retail revenues (reflecting the closing of the Harry & David retail stores in fiscal 2020).
o The Company anticipates that the aforementioned revenue growth combined with contributions from PersonalizationMall will help offset certain headwinds, including increased costs from third-party shipping vendors, higher labor expenses and higher operating costs due to the COVID-19 pandemic,
o As a result, the Company anticipates achieving Adjusted EBITDA and EPS growth in a range of 18.0-to-23.0 percent for the quarter, compared with the prior year period.
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. 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 the 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
We believe that adjusted net income (loss) and adjusted or comparable net income
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.
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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. Three Months Ended As Adjusted PersonalizationMall Harry & David (non-GAAP) September Litigation and Transaction Store Closure September 27, September 27, 2020 Costs Costs 2020 29, 2019 % Change (dollars in thousands) Net revenues: Consumer Floral & Gifts $ 161,546 $ 161,546 $ 90,768 78.0 % BloomNet 32,738 32,738 25,440 28.7 % Gourmet Foods & Gift Baskets 89,929 89,929 71,215 26.3 % Corporate 106 106 195 -45.6 % Intercompany eliminations (547 ) (547 ) (355 ) -54.1 % Total net revenues $ 283,772 $ - $ - $ 283,772 $ 187,263 51.5 % Gross profit: Consumer Floral & Gifts $ 65,586 $ 65,586 $ 36,050 81.9 % 40.6 % 40.6 % 39.7 % BloomNet 14,838 14,838 12,958 14.5 % 45.3 % 45.3 % 50.9 % Gourmet Foods & Gift Baskets 35,007 35,007 27,042 29.5 % 38.9 % 38.9 % 38.0 % Corporate 49 49 96 -49.0 % 46.2 % 46.2 % 49.2 % Total gross profit $ 115,480 $ - $ - $ 115,480 $ 76,146 51.7 % 40.7 % - - 40.7 % 40.7 % EBITDA (non-GAAP): Segment Contribution Margin (non-GAAP) (a): Consumer Floral & Gifts $ 19,236 $ 19,236 $ 8,524 125.7 % BloomNet 10,421 10,421 8,357 24.7 % Gourmet Foods & Gift Baskets (2,581 ) (405 ) (2,986 ) (6,600 ) 54.8 % Segment Contribution Margin Subtotal 27,076 - (405 ) 26,671 10,281 159.4 % Corporate (b) (31,697 ) 4,890 (26,807 ) (23,299 ) -15.1 % EBITDA (non-GAAP) (4,621 ) 4,890 (405 ) (136 ) $ (13,018 ) 99.0 % Add: Stock-based compensation 2,393 2,393 1,765 35.6 % Add: Compensation charge related to NQDC Plan Investment Appreciation 980 980 (44 ) 2327.3 % Adjusted EBITDA (non-GAAP) $ (1,248 ) $ 4,890 $ (405 ) $ 3,237 $ (11,297 ) 128.7 %
Reconciliation of net loss to adjusted net loss (non-GAAP): Three Months Ended September 29, September 27, 2020 2019 (in thousands, except per share data) Net loss $ (9,762 ) $ (15,271 ) Adjustments to reconcile net loss to adjusted net loss (non-GAAP) Add: Personalization Mall litigation and transaction costs 4,890 Deduct: Harry & David store closure cost adjustment (405 ) Deduct: Income tax (benefit) on adjustments (1,242 ) Adjusted net loss (non-GAAP) $ (6,519 ) $ (15,271 ) Basic and diluted net loss per common share Basic $ (0.15 ) $ (0.24 ) Diluted $ (0.15 ) $ (0.24 ) Basic and diluted adjusted net loss per common share (non-GAAP) Basic $ (0.10 ) $ (0.24 ) Diluted $ (0.10 ) $ (0.24 ) Weighted average shares used in the calculation of net loss and adjusted net loss per common share Basic 64,320 64,503 Diluted 64,320 64,503
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Reconciliation of net loss to adjusted EBITDA
(non-GAAP): Three Months Ended September September 27, 2020 29, 2019 (in thousands) Net loss $ (9,762 ) $ (15,271 ) Add: Interest expense, net 41 679 Depreciation and amortization 8,840 7,635 Less: Income tax benefit 3,740 6,061 EBITDA (4,621 ) (13,018 ) Add: Stock-based compensation 2,393 1,765 Add: Compensation charge related to NQDC plan investment appreciation/(depreciation) 980 (44 ) Add: Personalization Mall litigation and transaction costs 4,890 Deduct: Harry & David store closure cost adjustment (405 ) Adjusted EBITDA $ 3,237 $ (11,297 )
(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
(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 Net revenues Three Months Ended September 27, 2020 September 29, 2019 % Change (dollars in thousands) Net revenues: E-Commerce $ 238,863 $ 129,050 85.1 % Other 44,909 58,213 -22.9 % Total net revenues $ 283,772 $ 187,263 51.5 %
Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits.
Net revenues increased 51.5% during the three months ended September 27, 2020, respectively, compared to the same period of the prior year, due to higher revenues across our three segments (+40.6% vs prior year on a pro-forma basis, excluding the impact of PersonalizationMall, acquired on August 3, 2020, which is included in our Consumer Floral & Gifts segment, and contributed incremental revenue of $20.4 million during the quarter), as the Company was able to leverage its unique business platform, advanced technology stack, and manufacturing, distribution and logistics capabilities, reflecting the strategic marketing and merchandising investments that the Company has made across its brands. The positive trends we have been seeing in everyday gifting occasions during non-holiday periods, accelerated by the growth of e-commerce shopping during the pandemic, has resulted in significant increases in customer demand and customer file growth.
Disaggregated revenue by channel follows:
Nov 06, 2020
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