(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 named in the Forbes 2021 Best Small Companies List.
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 year 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, through the first four weeks of our third quarter of fiscal year 2021, we continue to see strong e-commerce demand for gourmet foods and gift baskets and our floral and personalized products. With that said, there are also 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 of fiscal year 2020 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 and second quarter results within our Gourmet Foods and Gift Baskets segment, as many of our large wholesale customers took a cautious approach to the holiday season due to the uncertainty surrounding COVID-19 and its potential impact on brick and mortar retail store traffic.
? Increased operating costs - we have seen third-party carrier capacity constraints and an associated increase in transportation costs, increases in seasonal labor wage rates, as well as operating inefficiencies and 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.
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 third quarter:
o Based on the continued strong ecommerce growth momentum that has carried into January 2021, the Company expects to achieve total consolidated revenue growth for its third fiscal quarter, including contributions from PersonalizationMall, in a range of 45-to-50 percent, 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.
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.
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Three Months Ended Harry & David As Adjusted PersonalizationMall Store (non-GAAP) December Litigation and Closure December 27, December 27, 2020 Transaction Costs Costs 2020 29, 2019 % Change Net revenues: Consumer Floral & Gifts $ 305,357 $ - $ - $ 305,357 $ 115,716 163.9 % BloomNet 34,051 - - 34,051 25,722 32.4 % Gourmet Foods & Gift Baskets 538,265 - - 538,265 464,584 15.9 % Corporate 135 - - 135 165 -18.2 % Intercompany eliminations (552 ) - - (552 ) (545 ) -1.3 % Total net revenues $ 877,256 $ - $ - $ 877,256 $ 605,642 44.8 % Gross profit: Consumer Floral & Gifts $ 134,474 $ - $ - $ 134,474 $ 44,544 201.9 % 44.0 % 44.0 % 38.5 % BloomNet 16,820 - - 16,820 13,161 27.8 % 49.4 % 49.4 % 51.2 % Gourmet Foods & Gift Baskets 246,890 - - 246,890 211,362 16.8 % 45.9 % 45.9 % 45.5 % Corporate 62 - - 62 105 -41.0 % 45.9 % 45.9 % 63.6 % Total gross profit $ 398,246 $ - $ - $ 398,246 $ 269,172 48.0 % 45.4 % - - 45.4 % 44.4 % EBITDA (non-GAAP): Segment Contribution Margin (non-GAAP) (a): Consumer Floral & Gifts $ 45,657 $ - $ - $ 45,657 $ 10,890 319.3 % BloomNet 12,141 - - 12,141 9,134 32.9 % Gourmet Foods & Gift Baskets 135,621 - (78 ) 135,543 113,387 19.5 % Segment Contribution Margin Subtotal 193,419 - (78 ) 193,341 133,411 44.9 % Corporate (b) (34,757 ) 513 - (34,244 ) (26,010 ) -31.7 % EBITDA (non-GAAP) 158,662 513 (78 ) 159,097 $ 107,401 48.1 % Add: Stock-based compensation 2,965 2,965 2,280 30.0 % Add: Compensation charge related to NQDC Plan Investment Appreciation 2,227 - - 2,227 1,002 122.2 % Adjusted EBITDA (non-GAAP) $ 163,854 $ 513 $ (78 ) $ 164,289 $ 110,683 48.4 % Six Months Ended As Adjusted PersonalizationMall Harry & David (non-GAAP) December 27, Litigation and Transaction Store Closure December 27, December 2020 Costs Costs 2020 29, 2019 % Change Net revenues: Consumer Floral & Gifts $ 466,903 $ - $ - $ 466,903 $ 206,484 126.1 % BloomNet 66,789 - - 66,789 51,162 30.5 % Gourmet Foods & Gift Baskets 628,194 - - 628,194 535,799 17.2 % Corporate 241 - - 241 360 -33.1 % Intercompany eliminations (1,099 ) - - (1,099 ) (900 ) -22.1 % Total net revenues $ 1,161,028 $ - $ - $ 1,161,028 $ 792,905 46.4 % Gross profit: Consumer Floral & Gifts $ 200,060 $ - $ - $ 200,060 $ 80,594 148.2 % 42.8 % 42.8 % 39.0 % BloomNet 31,658 - - 31,658 26,119 21.2 % 47.4 % 47.4 % 51.1 % Gourmet Foods & Gift Baskets 281,897 - - 281,897 238,404 18.2 % 44.9 % 44.9 % 44.5 % Corporate 111 - - 111 201 -44.8 % 46.1 % 46.1 % 55.8 % Total gross profit $ 513,726 $ - $ - $ 513,726 $ 345,318 48.8 % 44.2 % - - 44.2 % 43.6 % EBITDA (non-GAAP): Segment Contribution Margin (non-GAAP) (a): Consumer Floral & Gifts $ 64,893 $ - $ - $ 64,893 $ 19,414 234.3 % BloomNet 22,562 - - 22,562 17,491 29.0 % Gourmet Foods & Gift Baskets 133,040 - (483 ) 132,557 106,787 24.1 % Segment Contribution Margin Subtotal 220,495 - (483 ) 220,012 143,692 53.1 % Corporate (b) (66,454 ) 5,403 - (61,051 ) (49,309 ) -23.8 % EBITDA (non-GAAP) 154,041 $ 5,403 $ (483 ) $ 158,961 94,383 68.4 % Add: Stock-based compensation 5,358 5,358 4,045 32.5 % Add: Compensation charge related to NQDC Plan Investment Appreciation 3,207 - - 3,207 958 234.8 % Adjusted EBITDA (non-GAAP) $ 162,606 $ 5,403 $ (483 ) $ 167,526 $ 99,386 68.6 %
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Reconciliation of net income to adjusted net income (non-GAAP): Three Months Ended Six Months Ended December 27, December December December 2020 29, 2019 27, 2020 29, 2019 Net income $ 113,677 $ 74,152 $ 103,915 $ 58,881 Adjustments to reconcile net income to adjusted net income (non-GAAP) Add: Personalization Mall litigation and transaction costs 513 - 5,403 - Deduct: Harry & David store closure cost adjustment (78 ) - (483 ) - Deduct: Income tax (benefit) on adjustments 125 - (1,117 ) - Adjusted net income (non-GAAP) $ 114,237 $ 74,152 $ 107,718 $ 58,881 Basic and diluted net income per common share Basic $ 1.76 $ 1.15 $ 1.61 $ 0.91 Diluted $ 1.71 $ 1.12 $ 1.56 $ 0.89 Basic and diluted adjusted net income per common share (non-GAAP) Basic $ 1.76 $ 1.15 $ 1.67 $ 0.91 Diluted $ 1.72 $ 1.12 $ 1.62 $ 0.89 Weighted average shares used in the calculation of net income and adjusted net income per common share Basic 64,728 64,687 64,524 64,595 Diluted 66,543 66,401 66,593 66,486 Reconciliation of net income to adjusted EBITDA (non-GAAP): Three Months Ended Six Months Ended December December December December 27, 2020 29, 2019 27, 2020 29, 2019 Net income $ 113,677 $ 74,152 $ 103,915 $ 58,881 Add: Interest expense, net (330 ) 10 (289 ) 689 Add: Depreciation and amortization 11,060 7,830 19,900 15,465 Add: Income tax expense 34,255 25,409 30,515 19,348 EBITDA 158,662 107,401 154,041 94,383 Add: Stock-based compensation 2,965 2,280 5,358 4,045 Add: Compensation charge related to NQDC plan investment appreciation 2,227 1,002 3,207 958 Add: Personalization Mall litigation and transaction costs 513 - 5,403 - Deduct: Harry & David store closure cost adjustment (78 ) - (483 ) - Adjusted EBITDA $ 164,289 $ 110,683 $ 167,526 $ 99,386
(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 . . .
Feb 05, 2021
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