1 800 FLOWERS COM INC - Quarter Report: 2013 September (Form 10-Q)

Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

x                QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 29, 2013

 

or

 

o                   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)

 

 

One Old Country Road, Carle Place, New York 11514

(Address of principal executive offices)(Zip code)

 

(516) 237-6000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x       No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  Yes x       No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 o       No x

 

The number of shares outstanding of each of the Registrant’s classes of common stock:

 

27,589,904

(Number of shares of Class A common stock outstanding as of November 1, 2013)

 

36,778,594

(Number of shares of Class B common stock outstanding as of November 1, 2013)

 

 

Table of Contents

 

1-800-FLOWERS.COM, Inc.

 

TABLE OF CONTENTS

 

INDEX

 

		Page
Part I.	Financial Information
Item 1.	Consolidated Financial Statements:
	Consolidated Balance Sheets — September 29, 2013 (Unaudited) and June 30, 2013	1
	Consolidated Statements of Operations (Unaudited) — Three Months Ended September 29, 2013 and September 30, 2012	2
	Consolidated Statements of Comprehensive Loss (Unaudited) — Three Months Ended September 29, 2013 and September 30, 2012	3
	Consolidated Statements of Cash Flows (Unaudited) —  Three Months Ended September 29, 2013 and September 30, 2012	4
	Notes to Consolidated Financial Statements (Unaudited)	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
Part II.	Other Information
Item 1.	Legal Proceedings	24
Item 1A.	Risk Factors	25
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3.	Defaults upon Senior Securities	25
Item 4.	Mine Safety Disclosures	25
Item 5.	Other Information	25
Item 6.	Exhibits	26
Signatures		27

 

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PART I. — FINANCIAL INFORMATION

ITEM 1. — CONSOLIDATED FINANCIAL STATEMENTS

 

1-800-FLOWERS.COM, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

 

		September 29, 2013			June 30, 2013
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	3,642		$	154
Receivables, net		30,072			14,957
Inventories		91,548			55,756
Deferred tax assets		6,166			5,746
Prepaid and other		8,530			9,941
Current assets of discontinued operations		4,863			6,095
Total current assets		144,821			92,649
Property, plant and equipment, net		52,749			52,943
Goodwill		47,943			47,943
Other intangibles, net		42,932			43,276
Deferred tax assets		2,126			2,127
Other assets		10,069			10,086
Non-current assets of discontinued operations		1,039			1,049
Total assets		$	301,679		$	250,073
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	17,101		$	26,235
Accrued expenses		40,257			45,044
Current maturities of long-term debt		71,000			—
Current liabilities of discontinued operations		3,828			4,484
Total current liabilities		132,186			75,763
Other liabilities		5,484			5,039
Total liabilities		137,670			80,802
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued		—			—
Class A common stock, $.01 par value, 200,000,000 shares authorized; 36,349,696 and 36,280,425 shares issued at September 29, 2013 and June 30, 2013, respectively		362			362
Class B common stock, $.01 par value, 200,000,000 shares authorized; 42,058,594 and 42,125,465 shares issued at September 29, 2013 and June 30, 2013, respectively		421			421
Additional paid-in capital		299,654			298,580
Retained deficit		(88,577		)	(83,937		)
Treasury stock, at cost — 9,569,179 and 9,257,231 Class A shares at September 29, 2013 and June 30, 2013, respectively, and 5,280,000 Class B shares at September 29, 2013 and June 30, 2013		(47,851		)	(46,155		)
Total stockholders’ equity		164,009			169,271
Total liabilities and stockholders’ equity		$	301,679		$	250,073

 

See accompanying Notes to Consolidated Financial Statements.

 

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1-800-FLOWERS.COM, Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

		Three Months Ended
		September 29, 2013			September 30, 2012
Net revenues		$	123,048		$	119,592
Cost of revenues		71,751			70,167
Gross profit		51,297			49,425
Operating expenses:
Marketing and sales		34,479			32,723
Technology and development		5,398			5,396
General and administrative		13,812			13,061
Depreciation and amortization		4,689			4,447
Total operating expenses		58,378			55,627
Operating loss		(7,081		)	(6,202		)
Interest expense, net		(292		)	(286		)
Loss from continuing operations before income taxes		(7,373		)	(6,488		)
Income tax benefit from continuing operations		(2,816		)	(2,045		)
Loss from continuing operations		(4,557		)	(4,443		)
Loss from discontinued operations, net of tax		(82		)	(163		)
Net loss		$	(4,639	)	$	(4,606	)
Basic and diluted net loss per common share:
From continuing operations		$	(0.07	)	$	(0.07	)
From discontinued operations		0.00			0.00
Net loss per common share		$	(0.07	)	(0.07		)
Weighted average shares used in the calculation of net loss per common share
Basic		63,799			64,505
Diluted		63,799			64,505

 

See accompanying Notes to Consolidated Financial Statements.

 

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1-800-FLOWERS.COM, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Loss

(in thousands)

(unaudited)

 

		Three Months Ended
		September 29, 2013			September 30, 2012
Net loss		$	(4,639	)	$	(4,606	)
Other comprehensive income		—			17
Comprehensive loss		$	(4,639	)	$	(4,589	)

 

See accompanying Notes to Consolidated Financial Statements.

 

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1-800-FLOWERS.COM, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

		Year Ended
		September 29, 2013			September 30, 2012
Operating activities
Net loss		$	(4,639	)	$	(4,606	)
Reconciliation of net loss to net cash used in operating activities:
Operating activities of discontinued operations		589			(676		)
Depreciation and amortization		4,689			4,447
Amortization of deferred financing costs		76			114
Deferred income taxes		(419		)	(2,166		)
Bad debt expense		340			264
Stock-based compensation		1,066			989
Other non-cash items		148			5
Changes in operating items:
Receivables		(15,455		)	(12,233		)
Inventories		(35,792		)	(28,910		)
Prepaid and other		1,411			(1,351		)
Accounts payable and accrued expenses		(13,921		)	(5,313		)
Other assets		(242		)	(525		)
Other liabilities		445			352
Net cash used in operating activities		(61,704		)	(49,609		)
Investing activities
Capital expenditures		(4,131		)	(4,427		)
Purchase of investments		—			(1,308		)
Other, net		8			39
Investing activities of discontinued operations		—			(26		)
Net cash used in investing activities		(4,123		)	(5,722		)
Financing activities
Acquisition of treasury stock		(1,696		)	(953		)
Proceeds from exercise of employee stock options		7			12
Proceeds from bank borrowings		74,000			37,000
Repayment of bank borrowings		(3,000		)	(3,750		)
Debt issuance costs		4			—
Repayment of capital leases		—			(3		)
Net cash provided by financing activities		69,315			32,306
Net change in cash and cash equivalents		3,488			(23,025		)
Cash and cash equivalents:
Beginning of period		154			28,854
End of period		$	3,642		$	5,829

 

See accompanying Notes to Consolidated Financial Statements.

 

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1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

Note 1 — Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared by 1-800-FLOWERS.COM, Inc. and subsidiaries (the “Company”) in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  They do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended September 29, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending June 29, 2014.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended June 30, 2013.

 

The Company’s quarterly results may experience seasonal fluctuations. Due to the Company’s expansion into non-floral products, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, generates the highest proportion of the Company’s annual revenues. Additionally, as the result of a number of major floral gifting occasions, including Mother’s Day, Valentine’s Day and Administrative Professionals Week, revenues also rise during the Company’s fiscal third and fourth quarter.  The Easter Holiday, which was in the Company’s third quarter during fiscal 2013, is in the fourth quarter of fiscal 2014.

 

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.

 

Recently Adopted Accounting Pronouncements

 

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” (“ASU No. 2012-02”), which allows entities to use a qualitative approach to test indefinite-lived intangible assets for impairment. ASU No. 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the currently prescribed quantitative impairment test. Otherwise, the quantitative impairment test is not required. This ASU became effective for annual and interim goodwill impairment tests performed for the Company’s fiscal year ending June 29, 2014. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

Reclassifications

 

Certain balances in the prior fiscal years have been reclassified to conform to the presentation in the current fiscal year.

 

Note 2 — Net Loss Per Common Share from Continuing Operations

 

Basic net loss per common share from continuing operations is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per common share from continuing operations is computed using the weighted-average number of common shares outstanding during the period, and excludes the dilutive potential common shares (consisting of employee stock options and unvested restricted stock awards) for the three months ended September 29, 2013 and September 30, 2012, respectively, as their inclusion would be antidilutive.

 

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1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Note 3 — Stock-Based Compensation

 

The Company has a Long Term Incentive and Share Award Plan, which is more fully described in Note 12 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2013, 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:

 

		Three Months Ended
		September 29, 2013			September 30, 2012
		(in thousands)
Stock options		$	98		$	106
Restricted stock		968			883
Total		1,066			989
Deferred income tax (benefit)/expense*		(420		)	10
Stock-based compensation expense, net		$	646		$	999

 

*     Tax expense during the three months ended September 30, 2012, reflects the net impact of the expiration of non-qualified stock options.

 

Stock-based compensation is recorded within the following line items of operating expenses:

 

		Three Months Ended
		September 29, 2013			September 30, 2012
		(in thousands)
Marketing and sales		$	373		$	346
Technology and development		107			99
General and administrative		586			544
Total		$	1,066		$	989

 

The weighted average fair value of stock options on the date of grant, and the assumptions used to estimate the fair value of the stock options using the Black-Scholes option valuation model granted during the respective periods were as follows:

 

		Three Months Ended
		September 29, 2013 (1)		September 30, 2012
Weighted average fair value of options granted		n/a		$	2.40
Expected volatility		n/a		72.1		%
Expected life		n/a		6.4 yrs
Risk-free interest rate		n/a		0.69		%
Expected dividend yield		n/a		0.0		%

 

(1)         no options were granted during the three months ended September 29, 2013.

 

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1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

The following table summarizes stock option activity during the three months ended September 29, 2013:

 

		Options		Weighted Average Exercise Price			Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (000s)
Outstanding at July 1, 2013		4,723,240		$	3.89
Granted		—		$	—
Exercised		(2,400	)	$	2.86
Forfeited		(120,900	)	$	4.04
Outstanding at September 29, 2013		4,599,940		$	3.89		4.9 years		$	8,951
Options vested or expected to vest at September 29, 2013		4,463,253		$	3.94		4.8 years		$	8,553
Exercisable at September 29, 2013		2,886		$	4.83		3.2 years		$	3,924

 

As of September 29, 2013, the total future compensation cost related to non-vested options, not yet recognized in the statement of income, was $2.1 million and the weighted average period over which these awards are expected to be recognized was 5.5 years.

 

The Company grants shares of Common Stock to its employees that are subject to restrictions on transfer and risk of forfeiture until fulfillment of applicable service conditions and, in certain cases, holding periods (Restricted Stock). The following table summarizes the activity of non-vested restricted stock awards during the three months ended September 29, 2013:

 

		Shares		Weighted Average Grant Date Fair Value
Non-vested at July 1, 2013		3,433,355		$	2.80
Granted		16,500		$	5.42
Vested		—		$	—
Forfeited		(87,425	)	$	3.24
Non-vested at September 29, 2013		3,362,430		$	2.80

 

The fair value of non-vested shares is determined based on the closing stock price on the grant date. As of September 29, 2013, there was $5.4 million of total unrecognized compensation cost related to non-vested restricted stock-based compensation to be recognized over the weighted-average remaining period of 2.1 years.

 

Note 4 — Acquisitions and Dispositions

 

Acquisition of Pingg

 

On May 31, 2013, the Company completed the acquisition of Pingg Corp., an online invitation and event planner. The purchase price, which included the acquisition of software, receivables and certain other assets and related liabilities, was approximately $1.7 million. Approximately $0.5 million of the purchase price was assigned to goodwill. The acquisition was financed utilizing available cash balances. Operating results of the acquired entity, which are not significant, are reflected in the Company’s consolidated financial statements from the date of acquisition, in the Consumer Floral segment.

 

Acquisition of 1-800-Flowers’ European trademarks

 

On March 11, 2013, the Company acquired the European rights to various derivations of the 1-800-Flowers’ tradename, trademark, URL’s and telephone numbers from Flowerscorp Pty Ltd. for a purchase price of $4.0 million, which is included within Other Intangibles, net. The purchase agreement required payment of $2.0 million on March 11, 2013, and $1.0 million on each of the first and second anniversary dates of the acquisition.

 

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1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Note 5 — Inventory

 

The Company’s inventory, stated at cost, which is not in excess of market, includes purchased and manufactured finish goods for resale, packaging supplies, raw material ingredients for manufactured products and associated manufacturing labor, and is classified as follows:

 

		September 29, 2013			June 30, 2013
		(in thousands)
Finished goods		$	55,635		$	30,906
Work-in-process		25,506			6,465
Raw materials		10,407			18,385
		$	91,548		$	55,756

 

Note 6 — Goodwill and Intangible Assets

 

The following table presents goodwill by segment and the related change in the net carrying amount:

 

		Consumer Floral			BloomNet Wire Service			Gourmet Food & Gift Baskets (1)			Total
		(in thousands)
Balance at September 29, 2013 and June 30, 2013		$	10,251		$	—		$	37,692		$	47,943

 

(1)         The total carrying amount of goodwill for all periods in the table above is reflected net of $71.1 million of accumulated impairment charges, which were recorded in the Gourmet Food & Gift Baskets segment during fiscal 2009.

 

The Company’s other intangible assets consist of the following:

 

				September 29, 2013									June 30, 2013
		Amortization Period		Gross Carrying Amount			Accumulated Amortization			Net			Gross Carrying Amount			Accumulated Amortization			Net
		(in thousands)
Intangible assets with determinable lives
Investment in licenses		14 - 16 years		$	7,420		$	5,542		$	1,878		$	7,420		$	5,516		$	1,904
Customer lists		3 - 10 years		15,989			11,639			4,350			15,989			11,334			4,655
Other		5 - 8 years		2,538			2,526			12			2,538			2,513			25
				25,947			19,707			6,240			25,947			19,363			6,584
Trademarks with indefinite lives				36,692			—			36,692			36,692			—			36,692
Total identifiable intangible assets				$	62,639		$	19,707		$	42,932		$	62,639		$	19,363		$	43,276

 

Future estimated amortization expense is as follows: remainder of fiscal 2014 - $1.0 million, fiscal 2015 - $1.3 million, fiscal 2016 - $1.2 million, fiscal 2017 - $0.7 million, fiscal 2018 - $0.7 million and thereafter - $1.3 million.

 

Note 7 — Investments

 

The Company has certain investments in non-marketable equity instruments of private companies. The Company accounts for these investments using the equity method if they provide the Company the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method is

 

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1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

appropriate. The Company records equity method investments initially at cost, and adjusts the carrying amount to reflect the Company’s share of the earnings or losses of the investee, including all adjustments similar to those made in preparing consolidated financial statements. The Company’s equity method investments are comprised of a 32% interest in Flores Online, a Sao Paulo, Brazil based internet floral and gift retailer, that the Company made on May 31, 2012. The book value of this investment was $3.7 million as of September 29, 2013 and $3.8 million as of June 30, 2013, and is included in Other assets within the consolidated balance sheets. The Company’s equity in the net loss of Flores Online for the quarter ended September 29, 2013 was less than $0.1 million.

 

Investments in non-marketable equity instruments of private companies, where the Company does not possess the ability to exercise significant influence, are accounted for under the cost method. Cost method investments are originally recorded at cost, and are included within Other assets in the Company’s consolidated balance sheets. The aggregate carrying amount of the Company’s cost method investments was $2.3 million as of September 29, 2013 and June 30, 2013. In addition, the Company had notes receivable from companies it maintains an investment in of $3.2 million as of September 29, 2013 and $2.3 million as of June 30, 2013.

 

The Company also holds certain trading securities in a “rabbi trust”, 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 in Other assets in the consolidated balance sheets (see Note 9).

 

Each reporting period, the Company uses available qualitative and quantitative information to evaluate its investments for impairment. When a decline in fair value, if any, is determined to be other-than-temporary, an impairment charge is recorded in the consolidated statement of operations.

 

Note 8 — Long-Term Debt

 

The Company’s long-term debt consists of the following:

 

		September 29, 2013			June 30, 2013
		(in thousands)
Revolving line of credit (1)		$	71,000		$	—
		$	71,000		$	—
Less current maturities of long-term debt		71,000			—
Long-term debt		$	—		$	—

 

(1)               On April 10, 2013, the Company repaid all amounts outstanding under its 2010 Credit Facility, and entered into a Third Amended and Restated Credit Agreement (the “2013 Credit Facility”). The 2013 Credit Facility consists of a revolving line of credit with a seasonally adjusted limit ranging from $150.0 to $200.0 million and a working capital sublimit ranging from $25.0 to $75.0 million. The 2013 Credit Facility also revised certain financial and non-financial covenants, including the maintenance of certain financial ratios. The Company was in compliance with these covenants as of September 29, 2013 and June 30, 2013. Outstanding amounts under the 2013 Credit Facility, which matures on April 10, 2018, bear interest at the Company’s option at either: (i) LIBOR, plus a spread of between 150 and 225 basis points, as determined by the Company’s leverage ratio, or (ii) the agent bank’s prime rate plus a margin. The obligations of the Company and its subsidiaries under the 2013 Credit Facility are secured by liens on all personal property of the Company and its domestic subsidiaries.

 

Note 9-Fair Value Measurements

 

Cash and cash equivalents, receivables, 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 goodwill, 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 also tested for impairment annually, as required under the accounting standards.

 

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1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

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 as of September 29, 2013:

 

					Fair Value Measurements Assets (Liabilities)
		Carrying Value			Level 1			Level 2			Level 3
					(in thousands)
Assets (liabilities):
Trading securities held in a “rabbi trust” (1)		$	1,976		$	1,976		$	—		$	—
Non-performance promissory note		205			—			—				205
		$	2,181		$	1,976		$	—		$	205

 

(1)         Trading securities held in a rabbi trust are measured using quoted market prices at the reporting date and are included in Other assets in the consolidated balance sheets.  The Company established a Non-qualified Deferred Compensation Plan for certain members of senior management in fiscal 2009. Deferred compensation is invested in mutual funds held in a “rabbi trust” which is restricted for payment to participants of the NQDC Plan.

 

The following table presents, by level, within the fair value hierarchy, financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2013:

 

					Fair Value Measurements Assets (Liabilities)
		Carrying Value			Level 1			Level 2			Level 3
					(in thousands)
Assets (liabilities):
Trading securities held in a “rabbi trust” (1)		$	1,708		$	1,708		$	—		$	—
Non-performance promissory note		205			—			—				205
		$	1,913		$	1,708		$	—		$	205

 

(1)         Trading securities held in a rabbi trust are measured using quoted market prices at the reporting date and are included in Other assets in the consolidated balance sheets.  The Company established a Non-qualified Deferred Compensation Plan for certain members of senior management in fiscal 2009. Deferred compensation is invested in mutual funds held in a “rabbi trust” which is restricted for payment to participants of the NQDC Plan.

 

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1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Note 10 — 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 from continuing operations for the three months ended September 29, 2013 was 38.2%, compared to 31.8% in the prior year period. The effective rate for fiscal 2014 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes, and other permanent differences, offset by tax credits and incentives. The effective rate for fiscal 2013 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes, and other permanent differences, including the impact of expiring non-qualified stock options, offset by tax credits and incentives.

 

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Company is currently under examination by the Internal Revenue Service for fiscal year 2011, while fiscal years 2010 and 2012 remain subject to federal examination. Due to non-conformity with the federal statute of limitations for assessment, certain states remain open from fiscal 2008.

 

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At September 29, 2013 and June 30, 2013, the Company has an unrecognized tax position of approximately $0.8 million, including accrued interest and penalties of $0.1 million. The Company believes that $0.4 million of its unrecognized tax positions will be resolved over the next twelve months.

 

Note 11 — Business Segments

 

The Company’s management reviews the results of the Company’s operations by the following three business segments:

 

·                  Consumer Floral,

·                  BloomNet Wire Service, and

·                  Gourmet Food and Gift Baskets

 

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1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

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 (1) below), nor does it include depreciation and amortization, other income, and income taxes, or stock-based compensation, which is included within corporate overhead. Assets and liabilities are reviewed at the consolidated level by management and not accounted for by segment.

 

		Three Months Ended
Net revenues		September 29, 2013			September 30, 2012
		(in thousands)
Segment Net Revenues:
Consumer Floral		$	71,549		$	72,777
BloomNet Wire Service		20,346			19,767
Gourmet Food & Gift Baskets		31,239			27,130
Corporate (1)		195			194
Intercompany eliminations		(281		)	(276		)
Total net revenues		$	123,048		$	119,592

 

		Three Months Ended
Operating Income		September 29, 2013			September 30, 2012
		(in thousands)
Segment Contribution Margin:
Consumer Floral		$	6,429		$	6,886
Bloomnet Wire Service		6,439			5,796
Gourmet Food & Gift Baskets		(2,046		)	(2,279		)
Segment Contribution Margin Subtotal		10,822			10,403
Corporate (1)		(13,214		)	(12,158		)
Depreciation and amortization		(4,689		)	(4,447		)
Operating loss		$	(7,081	)	$	(6,202	)

 

(1)         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 segments based upon usage, are included within corporate expenses, as they are not directly allocable to a specific segment.

 

Note 12-Discontinued Operations

 

During the fourth quarter of fiscal 2013, the Company made the strategic decision to divest the e-commerce and procurement businesses of The Winetasting Network in order to focus on growth opportunities in its Gourmet Foods and Gift Baskets business segment. The Company anticipates completing the sale of the Winetasting Network business in fiscal 2014, at an anticipated loss of $2.3 million ($1.5 million, net of tax), which was provided for in the Company’s fourth quarter of fiscal 2013. Consequently, the Company has classified the results of its e-commerce and procurement business of Winetasting Network as a discontinued operation for all periods presented.

 

Results for discontinued operations are as follows:

 

		Three Months Ended
		September 29, 2013			September 30, 2012
Net revenues from discontinued operations		$	906		$	1,276
Loss from discontinued operations, net of tax		$	(82	)	$	(163	)

 

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1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

 

Note 13 — Commitments and Contingencies

 

Legal Proceedings

 

From time to time, the Company is subject to legal proceedings and claims arising in the ordinary course of business.

 

On November 10, 2010, a purported class action complaint was filed in the United States District Court for the Eastern District of New York naming the Company (along with Trilegiant Corporation, Inc., Affinion, Inc. and Chase Bank USA, N.A.) as defendants in an action purporting to assert claims against the Company alleging violations arising under the Connecticut Unfair Trade Practices Act among other statutes, and for breach of contract and unjust enrichment in connection with certain post-transaction marketing practices in which certain of the Company’s subsidiaries previously engaged in with certain third-party vendors.  On December 23, 2011, plaintiff filed a notice of voluntary dismissal seeking to dismiss the entire action without prejudice.  The court entered an Order on November 28, 2012, dismissing the case in its entirety. This case was subsequently refiled in the United States District Court for the District of Connecticut.

 

On March 6, 2012 and March 15, 2012, two additional purported class action complaints were filed in the United States District Court for the District of Connecticut naming the Company and numerous other parties as defendants in actions purporting to assert claims substantially similar to those asserted in the lawsuit filed on November 10, 2010.  In each case, plaintiffs seek to have the respective case certified as a class action and seek restitution and other damages, each in an amount in excess of $5.0 million. On April 26, 2012, the two Connecticut cases were consolidated with a third case previously pending in the United States District Court for the District of Connecticut in which the Company is not a party (the “Consolidated Action”). A consolidated amended complaint was filed by plaintiffs on September 7, 2012, purporting to assert claims substantially similar to those originally asserted.  The Company moved to dismiss the consolidated amended complaint on December 7, 2012, which was subsequently refiled at the direction of the Court on January 16, 2013.

 

On December 5, 2012, the same plaintiff from the action voluntarily dismissed in the United States District Court for the Eastern District of New York filed a purported class action complaint in the United States District Court for the District of Connecticut naming the Company and numerous other parties as defendants, purporting to assert claims substantially similar to those asserted in the consolidated amended complaint (the “Frank Action”).  On January 23, 2013, plaintiffs in the Consolidated Action filed a motion to transfer and consolidate the action filed on December 5, 2012 with the Consolidated Action.  The Company intends to defend each of these actions vigorously.

 

On January 31, 2013, the court issued an order to show cause directing plaintiffs’ counsel in the Frank Action, also counsel for plaintiffs in the Consolidated Action, to show cause why the Frank Action is distinguishable from the Consolidated Action such that it may be maintained despite the prior-pending action doctrine. On June 13, 2013 the court issued an order in the Frank Action suspending deadlines to answer or to otherwise respond to the complaint until 21 days after the court decides whether the Frank Action should be consolidated with the Consolidated Action. On July 24, 2013 the Frank Action was reassigned to Judge Vanessa Bryant, before whom the Consolidated Action is currently pending, for all further proceedings. On August 14, 2013, other defendants filed a motion for clarification in the Frank Action requesting that Judge Bryant clarify the order suspending deadlines.

 

There has been no ruling on (1) plaintiff’s motion to consolidate, (2) the order to show cause, (3) the motion for clarification, or (4) the Company’s motion seeking to dismiss the plaintiffs’ amended consolidated complaint.  Oral argument thereon was held on September 25, 2013, but no ruling has yet been issued.

 

There are no assurances that additional legal actions will not be instituted in connection with the Company’s former post-transaction marketing practices involving third party vendors nor can we predict the outcome of any such legal action. At this time, we are unable to estimate a possible loss or range of possible loss for the aforementioned actions for various reasons, including, among others: (i) the damages sought are indeterminate, (ii) the proceedings are in the very early stages and the court has not yet ruled as to whether the classes will be certified, and (iii) there is uncertainty as to the outcome of pending motions.  As a result of the foregoing, we have determined that the amount of possible loss or range of loss is not reasonably estimable.  However, legal matters are inherently unpredictable and subject to significant uncertainties, some of which may be beyond our control.

 

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ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Forward Looking Statements

 

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. 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” and under Part I, Item 1A, of the Company’s Annual Report on Form 10-K under the heading “Risk Factors.”

 

Overview

 

1-800-FLOWERS.COM, Inc. is the world’s leading florist and gift shop. For more than 35 years, 1-800-FLOWERS® (1-800-356-9377 or www.1800flowers.com) has been helping deliver smiles for our customers with gifts for every occasion, including fresh flowers and the finest selection of plants, gift baskets, gourmet foods, confections, candles, balloons and plush stuffed animals. As always, our 100% Smile Guarantee backs every gift. 1-800-FLOWERS.COM has been honored in Internet Retailer’s “Hot 500 Guide” for 2013. 1-800-FLOWERS.COM was recognized for our mobile site with a Gold Award in the Ecommerce/Shopping category of the 2012 Horizon Interactive Awards. 1-800-FLOWERS.COM was also rated number one vs. competitors for customer service by STELLAService and named by the E-Tailing Group as one of only nine online retailers out of 100 benchmarked to meet the criteria for Excellence in Online Customer Service.

 

The Company’s BloomNet® international floral wire service (www.mybloomnet.net) provides a broad range of quality products and value-added services designed to help professional florists grow their businesses profitably. The 1-800-FLOWERS.COM “Gift Shop” also includes gourmet gifts such as popcorn and specialty treats from: The Popcorn Factory® (1-800-541-2676 or www.thepopcornfactory.com); cookies and baked gifts from Cheryl’s® (1-800-443-8124 or www.cheryls.com); premium chocolates and confections from Fannie May® confections (www.fanniemay.com and www.harrylondon.com); gift baskets and towers from 1-800-Baskets.com® (www.1800baskets.com); incredible, carved fresh fruit arrangements from FruitBouquets.comsm (www.fruitbouquets.com); top quality steaks and chops from Stock Yards® (www.stockyards.com); as well as premium branded customizable invitations and personal stationery from FineStationery.com® (www.finestationery.com). The Company’s Celebrations® brand (www.celebrations.com) is a source for creative party ideas, must-read articles, online invitations and e-cards, all created to help people celebrate holidays and the everyday. 1-800-FLOWERS.COM, Inc. is involved in a broad range of corporate social responsibility initiatives including continuous expansion and enhancement of its environmentally-friendly “green” programs as well as various philanthropic and charitable efforts.

 

During the fourth quarter of fiscal 2013, the Company made the strategic decision to divest the e-commerce and procurement businesses of The Winetasting Network in order to focus on growth opportunities in its Gourmet Foods and Gift Baskets business segment. The Company anticipates completing the sale of the Winetasting Network business in fiscal 2014, at an anticipated loss of $2.3 million ($1.5 million, net of tax), which was provided for in the Company’s fourth quarter of fiscal 2013. Consequently, the Company has classified the results of its wine e-commerce and procurement business of Winetasting Network as a discontinued operation for all periods presented.

 

Shares in 1-800-FLOWERS.COM, Inc. are traded on the NASDAQ Global Select Market, ticker symbol: FLWS.

 

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Segment Information

 

The following table presents the contribution of net revenues, gross profit and contribution margin from each of the Company’s business segments, as well as consolidated EBITDA and Adjusted EBITDA. As noted previously, the Company’s e-commerce and procurement businesses of The Winetasting Network, which had previously been included within its Gourmet Foods & Gift Baskets category, have been classified as discontinued operations and therefore excluded from segment information below.

 

		Three Months Ended
		September 29, 2013			September 30, 2012			% Change
Net revenues from continuing operations:
1-800-Flowers.com Consumer Floral		$	71,549		$	72,777		-1.7	%
BloomNet Wire Service		20,346			19,767			2.9	%
Gourmet Food & Gift Baskets		31,239			27,130			15.1	%
Corporate (*)		195			194			0.5	%
Intercompany eliminations		(281		)	(276		)	-1.8	%
Total net revenues from continuing operations		$	123,048		$	119,592		2.9	%

 

		Three Months Ended
		September 29, 2013			September 30, 2012			% Change
Gross profit from continuing operations:
1-800-Flowers.com Consumer Floral		$	27,958		$	28,292		-1.2	%
		39.1		%	38.9		%
BloomNet Wire Service		10,783			9,800			10.0	%
		53.0		%	49.6		%
Gourmet Food & Gift Baskets		12,239			10,992			11.3	%
		39.2		%	40.5		%
Corporate (*)		317			340			-6.8	%
		162.6		%	175.3		%
Total gross profit from continuing operations		$	51,297		$	49,424		3.8	%
		41.7		%	41.3		%

 

		Three Months Ended
		September 29, 2013			September 30, 2012			% Change
EBITDA from continuing operations, excluding stock-based compensation:
Segment Contribution Margin from continuing operations (**)
1-800-Flowers.com Consumer Floral		$	6,429		$	6,886		-6.6	%
BloomNet Wire Service		6,439			5,796			11.1	%
Gourmet Food & Gift Baskets		(2,046		)	(2,279		)	10.2	%
Segment Contribution Margin Subtotal		10,822			10,403			4.0	%
Corporate (*)		(13,214		)	(12,158		)	-8.7	%
EBITDA from continuing operations		$	(2,392	)	$	(1,755	)	36.3	%
Add: Stock-based compensation		1,066			989			7.8	%
EBITDA from continuing operations, excluding stock-based compensation		$	(1,326	)	$	(766	)	73.1	%

 

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