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1 800 FLOWERS COM INC - Quarter Report: 2023 January (Form 10-Q)

flws20230101_10q.htm
 

 

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 January 1, 2023

 

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

flws01.jpg

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 February 3, 2023:

 

Class A common stock: 37,698,868

Class B common stock: 27,068,221

 

 

 

1-800-FLOWERS.COM, Inc.

FORM 10-Q

For the quarterly period ended January 1, 2023

TABLE OF CONTENTS

 

   

Page

Part I.

Financial Information

 

Item 1.

Condensed Consolidated Financial Statements

1

 

Condensed Consolidated Balance Sheets  January 1, 2023 (Unaudited) and July 3, 2022

1

 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) (Unaudited)  Three and Six Months Ended January 1, 2023 and December 26, 2021

2

 

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)  Three and Six Months Ended January 1, 2023 and December 26, 2021

3

 

Condensed Consolidated Statements of Cash Flows (Unaudited)  Six Months Ended January 1, 2023 and December 26, 2021

4

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

5

Item 2.

Managements Discussion and Analysis of Financial Condition and Results of Operations

19

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4.

Controls and Procedures

36

     

Part II.

Other Information

 

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

38

Item 3.

Defaults upon Senior Securities

38

Item 4.

Mine Safety Disclosures

38

Item 5.

Other Information

38

Item 6.

Exhibits

38

     

Signatures

39

 

 
 

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)

 

  

January 1, 2023

  

July 3, 2022

 
  

(unaudited)

     

Assets

        

Current assets:

        

Cash and cash equivalents

 $189,718  $31,465 

Trade receivables, net

  53,027   23,812 

Inventories

  201,057   247,563 

Prepaid and other

  24,929   45,398 

Total current assets

  468,731   348,238 
         

Property, plant and equipment, net

  235,913   236,481 

Operating lease right-of-use assets

  131,722   129,390 

Goodwill

  213,999   213,287 

Other intangibles, net

  142,847   145,568 

Other assets

  23,787   21,927 

Total assets

 $1,216,999  $1,094,891 
         

Liabilities and Stockholders' Equity

        

Current liabilities:

        

Accounts payable

 $75,095  $57,386 

Accrued expenses

  233,926   175,392 

Current maturities of long-term debt

  20,000   20,000 

Current portion of long-term operating lease liabilities

  15,289   12,919 

Total current liabilities

  344,310   265,697 
         

Long-term debt, net

  132,786   142,497 

Long-term operating lease liabilities

  124,725   123,662 

Deferred tax liabilities, net

  34,895   35,742 

Other liabilities

  19,757   17,884 

Total liabilities

  656,473   585,482 
         

Commitments and contingencies (See Note 13 and Note 15)

          
         

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, 58,256,031 and 57,706,389 shares issued at January 1, 2023 and July 3, 2022

  583   577 

Class B common stock, $0.01 par value, 200,000,000 shares authorized, 32,348,221 and 32,529,614 shares issued at January 1, 2023 and July 3, 2022

  323   325 

Additional paid-in capital

  383,335   379,885 

Retained earnings

  364,623   315,785 

Accumulated other comprehensive loss

  (211

)

  (211

)

Treasury stock, at cost, 20,558,644 and 20,418,396 Class A shares at January 1, 2023 and July 3, 2022, and 5,280,000 Class B shares at January 1, 2023 and July 3, 2022

  (188,127

)

  (186,952

)

Total stockholders’ equity

  560,526   509,409 

Total liabilities and stockholders’ equity

 $1,216,999  $1,094,891 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

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

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(in thousands, except for per share data)

(unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

January 1,

2023

   

December

26, 2021

   

January 1,

2023

   

December

26, 2021

 
                                 

Net revenues

  $ 897,877     $ 943,044     $ 1,201,481     $ 1,252,417  

Cost of revenues

    530,111       564,594       732,257       748,453  

Gross profit

    367,766       378,450       469,224       503,964  

Operating expenses:

                               

Marketing and sales

    194,466       207,771       283,605       302,150  

Technology and development

    14,952       13,490       29,692       26,913  

General and administrative

    28,908       28,872       55,153       55,938  

Depreciation and amortization

    14,315       12,588       27,009       23,558  

Total operating expenses

    252,641       262,721       395,459       408,559  

Operating income

    115,125       115,729       73,765       95,405  

Interest expense, net

    4,143       1,723       6,964       3,251  

Other expense (income), net

    148       (2,457

)

    1,070       (3,053

)

Income before income taxes

    110,834       116,463       65,731       95,207  

Income tax expense

    28,304       27,995       16,893       19,938  

Net income and comprehensive net income

    82,530       88,468       48,838       75,269  
                                 

Basic net income per common share

  $ 1.28     $ 1.36     $ 0.76     $ 1.16  
                                 

Diluted net income per common share

  $ 1.27     $ 1.34     $ 0.75     $ 1.14  
                                 

Weighted average shares used in the calculation of net income per common share:

                               

Basic

    64,675       65,261       64,606       65,161  

Diluted

    64,835       65,969       64,820       65,954  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

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

Condensed Consolidated Statements of Stockholders' Equity

(in thousands, except share data)

(unaudited)

 

   

Three Months Ended January 1, 2023 and December 26, 2021

 
               

 

   

Accumulated

                       
    Common Stock     Additional           Other           Total  
   

Class A

   

Class B

   

Paid-in

    Retained     Comprehensive    

Treasury Stock

   

Stockholders

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

    Earnings    

Loss

   

Shares

   

Amount

   

Equity

 
                                                                                 

Balance at October 2, 2022

    57,706,389     $ 577       32,529,614     $ 325     $ 381,440     $ 282,093     $ (211

)

    25,698,396     $ (186,952

)

  $ 477,272  

Net income

    -       -       -       -       -       82,530       -       -       -       82,530  

Stock-based compensation

    368,249       4       -       -       1,895       -       -       -       -       1,899  

Conversion – Class B into Class A

    181,393       2       (181,393 )     (2 )     -       -       -       -       -       -  

Acquisition of Class A treasury stock

    -       -       -       -       -       -       -       140,248       (1,175

)

    (1,175

)

Balance at January 1, 2023

    58,256,031     $ 583       32,348,221     $ 323     $ 383,335     $ 364,623     $ (211

)

    25,838,644     $ (188,127

)

  $ 560,526  
                                                                                 

Balance at September 26, 2021

    56,098,061     $ 561       33,433,614     $ 334     $ 374,667     $ 272,976     $ (318

)

    24,393,867     $ (157,846

)

  $ 490,374  

Net income

    -       -       -       -       -       88,468       -       -       -       88,468  

Stock-based compensation

    530,821       6       -       -       2,285       -       -       -       -       2,291  

Exercise of stock options

    149,200       1       -       -       282       -       -       -       -       283  

Acquisition of Class A treasury stock

    -       -       -       -       -       -       -       539,281       (16,456

)

    (16,456

)

Balance at December 26, 2021

    56,778,082     $ 568       33,433,614     $ 334     $ 377,234     $ 361,444     $ (318

)

    24,933,148     $ (174,302

)

  $ 564,960  
 
   

Six Months Ended January 1, 2023 and December 26, 2021

 
                      Accumulated                        
   

Common Stock

   

Additional

   

 

    Other                    

Total

 
   

Class A

   

Class B

   

Paid-in

    Retained     Comprehensive    

Treasury Stock

   

Stockholders

 
   

Shares

   

Amount

   

Shares

   

Amount

   

Capital

    Earnings    

Loss

   

Shares

   

Amount

   

Equity

 
                                                                                 

Balance at July 3, 2022

    57,706,389     $ 577       32,529,614     $ 325     $ 379,885     $ 315,785     $ (211

)

    25,698,396     $ (186,952

)

  $ 509,409  

Net income

    -       -       -       -       -       48,838       -       -       -       48,838  

Stock-based compensation

    368,249       4       -       -       3,450       -       -       -       -       3,454  

Conversion – Class B into Class A

    181,393       2       (181,393 )     (2 )     -       -       -       -       -       -  

Acquisition of Class A treasury stock

    -       -       -       -       -       -       -       140,248       (1,175

)

    (1,175

)

Balance at January 1, 2023

    58,256,031     $ 583       32,348,221     $ 323     $ 383,335     $ 364,623     $ (211

)

    25,838,644     $ (188,127

)

  $ 560,526  
                                                                                 

Balance at June 27, 2021

    55,675,661     $ 557       33,433,614     $ 334     $ 371,103     $ 286,175     $ (318

)

    24,105,841     $ (148,781

)

  $ 509,070  

Net income

    -       -       -       -       -       75,269       -       -       -       75,269  

Stock-based compensation

    780,721       8       -       -       5,288       -       -       -       -       5,296  

Exercise of stock options

    321,700       3       -       -       843       -       -       -       -       846  

Acquisition of Class A treasury stock

    -       -       -       -       -       -       -       827,307       (25,521

)

    (25,521

)

Balance at December 26, 2021

    56,778,082     $ 568       33,433,614     $ 334     $ 377,234     $ 361,444     $ (318

)

    24,933,148     $ (174,302

)

  $ 564,960  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

 

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

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

   

Six months ended

 
   

January 1, 2023

   

December 26, 2021

 
                 

Operating activities:

               

Net income

  $ 48,838     $ 75,269  

Adjustments to reconcile net income to net cash provided by operating activities:

               

Depreciation and amortization

    27,009       23,558  

Amortization of deferred financing costs

    671       616  

Deferred income taxes

    (846

)

    (1,306

)

Bad debt expense

    2,407       (1,285

)

Stock-based compensation

    3,454       5,296  

Other non-cash items

    (470 )     (448

)

Changes in operating items:

               

Trade receivables

    (31,622

)

    (55,074

)

Inventories

    46,506       (28,534

)

Prepaid and other

    7,550       8,172  

Accounts payable and accrued expenses

    89,050       160,459  

Other assets and liabilities

    1,113       (875

)

Net cash provided by operating activities

    193,660       185,848  
                 

Investing activities:

               

Acquisitions, net of cash acquired

    -       (20,786

)

Capital expenditures, net of non-cash expenditures

    (23,849

)

    (32,608

)

Net cash used in investing activities

    (23,849

)

    (53,394

)

                 

Financing activities:

               

Acquisition of treasury stock

    (1,175 )     (25,521

)

Proceeds from exercise of employee stock options

    -       846  

Proceeds from bank borrowings

    195,900       125,000  

Repayment of notes payable and bank borrowings

    (205,900

)

    (135,000

)

Debt issuance cost

    (383 )     (284

)

Net cash used in financing activities

    (11,558 )     (34,959

)

                 

Net change in cash and cash equivalents

    158,253       97,495  

Cash and cash equivalents:

               

Beginning of period

    31,465       173,573  

End of period

  $ 189,718     $ 271,068  

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

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

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

 

 

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 six-month periods ended January 1, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending July 2, 2023. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended July 3, 2022, 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, is expected to generate over 40% of the Company’s annual revenues, and all of its earnings. Due to the number of major floral gifting occasions, including Valentine’s Day, Easter, Administrative Professionals Week, and Mother's Day, 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.

 

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. 

 

5

 

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 July 3, 2022 was $33.7 million (included in “Accrued expenses” on our consolidated balance sheets), of which $9.9 and $26.8 million was recognized as revenue during the three and six months ended January 1, 2023. The deferred revenue balance as of January 1, 2023 was $46.5 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.

 

 

Note 2 Net Income (Loss) Per Common Share

 

Basic net income per common share is computed by dividing the net income 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 potentially dilutive common shares (consisting of employee stock options and unvested restricted stock awards).

 

The following table sets forth the computation of basic and diluted net income per common share:

 

  

Three Months Ended

  

Six Months Ended

 
  

January 1,

2023

  

December

26, 2021

  

January 1,

2023

  

December

26, 2021

 
  

(in thousands, except per share data)

 

Numerator:

                

Net income

 $82,530  $88,468  $48,838  $75,269 
                 

Denominator:

                

Weighted average shares outstanding

  64,675   65,261   64,606   65,161 

Effect of dilutive securities:

                

Employee stock options

  -   14   -   98 

Employee restricted stock awards

  160   694   214   695 
   160   708   214   793 
                 

Adjusted weighted-average shares and assumed conversions

  64,835   65,969   64,820   65,954 
                 

Net income per common share

                

Basic

 $1.28  $1.36  $0.76  $1.16 

Diluted

 $1.27  $1.34  $0.75  $1.14 

 

6

 
 

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 Companys Annual Report on Form 10-K for the fiscal year ended July 3, 2022, 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

  

Six Months Ended

 
  

January 1,

2023

  

December

26, 2021

  

January 1,

2023

  

December

26, 2021

 
  

(in thousands)

 

Stock options

 $593  $9  $593  $18 

Restricted stock

  1,306   2,282   2,861   5,278 

Total

  1,899   2,291   3,454   5,296 

Deferred income tax benefit

  465   565   846   1,306 

Stock-based compensation expense, net

 $1,434  $1,726  $2,608  $3,990 

 

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

 

  

Three Months Ended

  

Six Months Ended

 
  

January 1,

2023

  

December

26, 2021

  

January 1,

2023

  

December

26, 2021

 
  

(in thousands)

 

Marketing and sales

 $874  $1,006  $1,574  $2,333 

Technology and development

  152   91   307   211 

General and administrative

  873   1,194   1,573   2,752 

Total

 $1,899  $2,291  $3,454  $5,296 

 

 

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 six months ended January 1, 2023:

 

  

Options

  

Weighted

Average

Exercise

Price

  

Weighted

Average

Remaining

Contractual

Term

  

Aggregate

Intrinsic

Value

 
          

(in years)

  

(in thousands)

 

Outstanding at July 3, 2022

  -  $-         

Granted

  2,346,416  $8.59         

Exercised

  -  $-         

Forfeited

  -   -         

Outstanding at January 1, 2023

  2,346,416  $8.59   9.9  $2,276 
                 

Exercisable at January 1, 2023

  -  $-   -  $- 

 

As of January 1, 2023, the total future compensation cost related to non-vested options, not yet recognized in the statement of income, was $11.4 million and the weighted average period over which these awards are expected to be recognized was 2.9 years.

 

7

 

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 six months ended January 1, 2023:

 

  

Shares

  

Weighted

Average Grant

Date Fair

Value

 

Non-vested at July 3, 2022

  929,709  $21.82 

Granted

  717,799  $8.38 

Vested

  (368,249) $17.68 

Forfeited

  (37,903

)

 $21.30 

Non-vested at January 1, 2023

  1,241,356  $15.29 

 

The fair value of non-vested shares is determined based on the closing stock price on the grant date. As of January 1, 2023, 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 2.9 years.  

 

 

Note 4 Acquisitions

 

Acquisition of Vital Choice

 

On October 27, 2021, the Company completed its acquisition of all of the membership interests in 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 $20.0 million, and was preliminarily allocated to the identifiable assets acquired and liabilities assumed based on our preliminary estimates of their fair values, as a result of information that was available as of the date of the acquisition. During the quarter ended January 1, 2023, the Company finalized its purchase price allocation, resulting in immaterial adjustments to the preliminary carrying value of the respective recorded assets and the residual amount that was allocated to goodwill. 

 

8

 

The following table summarizes the allocation of the purchase price to the fair values of assets acquired and liabilities assumed:

 

  

Vital Choice
Preliminary
Purchase Price
Allocation

  

Measurement
Period Interim
Adjustments

  

Vital Choice
Purchase Price
Allocation

 
  

October 27,

      

January 1,

 
  

2021

      

2023

 
  

(in thousands)

 
             

Inventory

 $8,653  $-  $8,653 

Other current assets

  929   (474

)

  455 

Property, plant and equipment

  205   (205

)

  - 

Intangible assets

  9,800   (600)  9,200 

Goodwill

  4,383   634   5,017 

Total assets acquired

  23,970   (645

)

  23,325 
             

Current liabilities

  3,621   (256

)

  3,365 

Net assets acquired

 $20,349  $(389

)

 $19,960 

 

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, $4.3 million was assigned to customer lists, which is being amortized over the estimated remaining life of 5 years, $4.9 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.

 

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.

 

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.

 

9

 

Acquisition of Alices 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 and on demand floral, culinary and other experiences to guests across the country. 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 for the fiscal year ended July 3, 2022. 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, as a result of information that was available as of the date of the acquisition. During the quarter ended January 1, 2023, the Company finalized its purchase price allocation, resulting in immaterial adjustments to the preliminary carrying value of the respective recorded assets and the residual amount that was allocated to goodwill. The consideration transferred was allocated to: goodwill of $0.8 million, trademarks of $0.5 million, customer lists of $0.2 million (4-year life), and liabilities of $0.2 million.   

 

 

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:

 

  

January 1, 2023

  

July 3, 2022

 
  

(in thousands)

 

Finished goods

 

$

109,404

  

$

128,760

 

Work-in-process

  

19,065

   

29,270

 

Raw materials

  

72,588

   

89,533

 

Total inventory

 

$

201,057

  

$

247,563

 

 

 

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

  

Total

 
  

(in thousands)

 

Balance at July 3, 2022

 $151,600  $-  $61,687  $213,287 

Measurement period adjustment for Vital Choice Acquisition

  -   -   600   600 

Measurement period adjustment for Alice's Table Acquisition

  112   -   -   112 

Balance at January 1, 2023

 $151,712  $-  $62,287  $213,999 

 

10

 

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

 

       

January 1, 2023

  

July 3, 2022

 
  

Amortization

Period

  

Gross

Carrying

Amount

  

Accumulated
Amortization

  

Net

  

Gross

Carrying

Amount

  

Accumulated
Amortization

  

Net

 
  

(in years)

  

(in thousands)

 

Intangible assets with determinable lives

                             

Investment in licenses

 14-16  $7,420  $6,516  $904  $7,420  $6,464  $956 

Customer lists

 3-10   28,309   19,512   8,797   28,509   17,473   11,036 

Other

 5-14   2,946   2,573   373   2,946   2,543   403 

Total intangible assets with determinable lives

       38,675   28,601   10,074   38,875   26,480   12,395 

Trademarks with indefinite lives

       132,773   -   132,773   133,173   -   133,173 

Total identifiable intangible assets

      $171,448  $28,601  $142,847  $172,048  $26,480  $145,568 

 

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 2023 - $2.0 million, fiscal 2024 - $4.2 million, fiscal 2025 - $1.7 million, fiscal 2026 - $1.1 million, fiscal 2027 - $0.5 million and thereafter - $0.6 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 $3.5 million as of January 1, 2023 and July 3, 2022, 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).

 

11

 
 

Note 8 Debt, Net

 

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

 

  

January 1, 2023

  

July 3, 2022

 
  

(in thousands)

 

Revolver

 $-  $- 

Term Loans

  155,000   165,000 

Deferred financing costs

  (2,214

)

  (2,503

)

Total debt

  152,786   162,497 

Less: current debt

  20,000   20,000 

Long-term debt

 $132,786  $142,497 

 

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 Existing Credit Agreement (as defined below), 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 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 “2020 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 2020 Term Loan will mature on May 31, 2024. Proceeds of the borrowing under the 2020 Term Loan may be used for working capital and general corporate purposes of the Company and its subsidiaries, subject to certain restrictions. The 2020 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 amended the 2019 Credit Agreement to, among other modifications, decrease the interest margins and LIBOR floor applicable to the 2020 Term Loan.

 

12

 

On August 29, 2022, the Company, certain of its U.S. subsidiaries, the lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent, entered into a Third Amendment (the “Third Amendment”) to the 2019 Credit Agreement. The Third Amendment amends the 2019 Credit Agreement (the 2019 Credit Agreement, as amended by the First Amendment, the Second Amendment, and the Third Amendment, the “Existing Credit Agreement”) to, among other modifications, (A) alter the financial maintenance covenants set forth therein by (1) increasing the required maximum consolidated leverage ratio, for the reference period ending October 2, 2022, from 3.25 to 1.00 to 4.25 to 1.00 and (2) decreasing the required minimum consolidated fixed charge coverage ratio, for the reference periods ending October 2, 2022, January 1, 2023, and April 2, 2023, from 1.50 to 1.00 to 1.00 to 1.00 and (B) increase the amount of certain capital expenditures that may be disregarded for purposes of calculating the consolidated fixed charge coverage ratio from $25.0 million to $35.0 million.

 

The Existing 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 January 1, 2023. The Existing Credit Agreement is secured by substantially all of the assets of the Company. 

 

Future principal payments under the Term Loan and 2020 Term Loan are as follows: $10.0 million – remainder of 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:

 

  

January 1, 2023

  

July 3, 2022

 
  

(in thousands)

 

Land

 $33,866  $33,862 

Orchards in production and land improvements

  20,134   19,773 

Building and building improvements

  66,631   65,909 

Leasehold improvements

  29,039   26,266 

Production equipment

  120,179   106,244 

Furniture and fixtures

  8,895   8,985 

Computer and telecommunication equipment

  40,590   38,934 

Software

  180,187   165,289 

Capital projects in progress

  3,980   14,525 

Property, plant and equipment, gross

  503,501   479,787 

Accumulated depreciation and amortization

  (267,588

)

  (243,306

)

Property, plant and equipment, net

 $235,913  $236,481 

 

 

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.

 

13

 

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:

 

  

Carrying

Value

  

Fair Value Measurements

Assets (Liabilities)

 
      

Level 1

  

Level 2

  

Level 3

 
  

(in thousands)

 

As of January 1, 2023:

                

Trading securities held in a “rabbi trust” (1)

 $19,621  $19,621  $-  $- 

Total assets (liabilities) at fair value

 $19,621  $19,621  $-  $- 
                 

As of July 3, 2022:

                

Trading securities held in a “rabbi trust” (1)

 $17,760  $17,760  $-  $- 

Total assets (liabilities) at fair value

 $17,760  $17,760  $-  $- 

 

 

(1)

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 six months ended January 1, 2023 was 25.5% and 25.7% respectively, compared to 24.0% and 20.9% in the same periods of the prior year. The effective rates for fiscal 2023 differed from the U.S. federal statutory rate of 21.0% due to state income taxes, nondeductible expenses for executive compensation and tax shortfalls related to stock-based compensation, partially offset by various permanent differences and tax credits. The effective tax rates for fiscal 2022 differed from the U.S. federal statutory rate of 21.0% due to state income taxes and nondeductible expenses for executive compensation, partially offset by various permanent differences and tax credits, including tax windfalls 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 completed its U.S. federal examination for fiscal 2018, however, fiscal years 2019, 2020 and 2021 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 January 1, 2023, the Company has an unrecognized tax benefit, including accrued interest and penalties, of approximately $1.4 million. The Company believes that $0.1 million of unrecognized tax positions will be resolved over the next twelve months. 

 

14

 
 

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, which are included within corporate overhead. Assets and liabilities are reviewed at the consolidated level by management and not accounted for by segment.

 

  

Three Months Ended

  

Six Months Ended

 
  

January 1,

2023

  

December 26,

2021

  

January 1,

2023

  

December 26,

2021

 

Net Revenues:

 

(in thousands)

 

Segment Net Revenues:

                

Consumer Floral & Gifts

 $277,049  $315,083  $439,229  $496,312 

BloomNet

  32,852   37,930   66,219   68,764 

Gourmet Foods & Gift Baskets

  588,431   590,946   696,659   688,428 

Corporate

  72   69   116   114 

Intercompany eliminations

  (527

)

  (984

)

  (742

)

  (1,201

)

Total net revenues

 $897,877  $943,044  $1,201,481  $1,252,417 
                 

Operating Income:

                

Segment Contribution Margin:

                

Consumer Floral & Gifts

 $27,886  $38,156  $38,696  $57,346 

BloomNet

  9,348   11,887   18,865   22,747 

Gourmet Foods & Gift Baskets

  123,503   110,502   104,793   102,829 

Segment Contribution Margin Subtotal

  160,737   160,545   162,354   182,922 

Corporate (a)

  (31,297

)

  (32,228

)

  (61,580

)

  (63,959

)

Depreciation and amortization

  (14,315

)

  (12,588

)

  (27,009

)

  (23,558

)

Operating income

 $115,125  $115,729  $73,765  $95,405 

 

(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.

 

15

 

The following tables represent a disaggregation of revenue from contracts with customers, by channel: 

 

  

Three Months Ended

 
  

Consumer Floral &
Gifts

  

BloomNet

  

Gourmet Foods &

Gift
Baskets

  

Corporate and

Eliminations

  

Consolidated

 
  

January

1, 2023

  

December

26, 2021

  

January

1, 2023

  

December

26, 2021

  

January

1, 2023

  

December

26, 2021

  

January

1, 2023

  

December

26, 2021

  

January

1, 2023

  

December 26, 2021

 

Net revenues

                                        

E-commerce

 $275,081  $312,820  $-  $-  $515,329  $514,702  $-  $-  $790,410  $827,522 

Other

  1,968   2,263   32,852   37,930   73,102   76,244   (455

)

  (915

)

  107,467   115,522 

Total net revenues

 $277,049  $315,083  $32,852  $37,930  $588,431  $590,946  $(455

)

 $(915

)

 $897,877  $943,044 
                                         

Other revenues detail

                                     

Retail and other

  1,968   2,263   -   -   4,313   4,591   -   -   6,281   6,854 

Wholesale

  -   -   12,054   14,584   68,789   71,653   -   -   80,843   86,237 

BloomNet services

  -   -   20,798   23,346   -   -   -   -   20,798   23,346 

Corporate

  -   -   -   -   -   -   72   69   72   69 

Eliminations

  -   -   -   -   -   -   (527

)

  (984

)

  (527

)

  (984

)

Total other revenues

 $1,968   2,263  $32,852  $37,930  $73,102  $76,244  $(455

)

 $(915

)

 $107,467   115,522 

 

  

Six Months Ended

 
  

Consumer Floral &
Gifts

  

BloomNet

  

Gourmet Foods &

Gift
Baskets

  

Corporate and

Eliminations

  

Consolidated

 
  

January

1, 2023

  

December

26, 2021

  

January

1, 2023

  

December

26, 2021

  

January

1, 2023

  

December

26, 2021

  

January

1, 2023

  

December

26, 2021

  

January

1, 2023

  

December

26, 2021

 

Net revenues

                                        

E-commerce

 $435,463  $492,106  $-  $-  $593,869  $598,787  $-  $-  $1,029,332  $1,090,893 

Other

  3,766   4,206   66,219   68,764   102,790   89,641   (626

)

  (1,087

)

  172,149   161,524 

Total net revenues

 $439,229  $496,312  $66,219  $68,764  $696,659  $688,428  $(626

)

 $(1,087

)

 $1,201,481  $1,252,417 
                                         

Other revenues detail

                                     

Retail and other

  3,766   4,206   -   -   6,221   6,428   -   -   9,987   10,634 

Wholesale

  -   -   25,675   24,568   96,569   83,213   -   -   122,244   107,781 

BloomNet services

  -   -   40,544   44,196   -   -   -   -   40,544   44,196 

Corporate

  -   -   -   -   -   -   116   114   116   114 

Eliminations

  -   -   -   -   -   -   (742

)

  (1,201

)

  (742)  (1,201

)

Total other revenues

 $3,766   4,206  $66,219  $68,764  $102,790  $89,641  $(626

)

 $(1,087

)

 $172,149   161,524 

 

 

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.

 

16

 

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:

 

  

Three Months Ended

  

Six Months Ended

 
  

January

1, 2023

  

December

26, 2021

  

January

1, 2023

  

December

26, 2021

 
  

(in thousands)

             

Lease costs:

                

Operating lease costs

 $5,606  $5,101  $10,953  $9,064 

Variable lease costs

  6,603   5,745   12,454   10,875 

Short-term lease cost

  2,889   2,916   4,454   4,497 

Sublease income

  (241

)

  (175

)

  (484)  (357

)

Total lease costs

 $14,857  $13,587  $27,377  $24,079 
                 

Cash paid for amounts included in measurement of operating lease liabilities

  $9,851  $7,309 

Right-of-use assets obtained in exchange for new operating lease liabilities

  $10,521  $55,433 

 

  

January 1,

2023

 
  

(in thousands)

 

Weighted-average remaining lease term - operating leases (in years)

  9.1 

Weighted-discount rate - operating leases

  3.9

%

 

Maturities of lease liabilities in accordance with ASC 842 as of January 1, 2023 and reconciliation to balance sheet are as follows (in thousands):

 

Remainder of 2023

 $9,358 

2024

  22,235 

2025

  19,946 

2026

  18,006 

2027

  16,376 

Thereafter

  82,497 

Total Future Minimum Lease Payments

  168,418 

Less: Imputed Remaining Interest

  28,404 

Total Operating Lease Liabilities

  140,014 

Less: Current portion of long-term operating lease liabilities

  15,289 

Long-term operating lease liabilities

 $124,725 

 

17

 
 

Note 14 - Accrued Expenses

 

Accrued expenses consisted of the following:

 

  

January 1, 2023

  

July 3, 2022

 
  

(in thousands)

 

Payroll and employee benefits

 

$

33,543

  

$

37,617

 

Deferred revenue

  

46,537

   

33,746

 

Accrued marketing expenses

  

22,138

   

19,506

 

Accrued florist payout

  

22,210

   

18,938

 

Accrued purchases

  

46,464

   

32,141

 

Other

  

63,034

   

33,444

 

Accrued Expenses

 

$

233,926

  

$

175,392

 

 

 

Note 15 Commitments and Contingencies

 

Litigation

 

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 2022 to resolve all claims. In September 2022, the Court granted final approval of the settlement agreement, and in November 2022, the Company remitted payment of approximately $2.9 million, which was previously accrued during the quarter ended March 27, 2022, and was included in "Accrued expenses" in the consolidated balance sheets at  July 3, 2022. In entering into the settlement agreement, the Subsidiary made 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 16. Subsequent Events

 

Acquisition of Things Remembered

 

On January 10, 2023, the Company completed its acquisition of the Things Remembered brand, a provider of personalized gifts, which will maintain it's well-known brand and whose operations will be integrated within the PersonalizationMall brand, in the Consumer Floral & Gifts segment.

 

The Company used cash on its balance sheet to fund the $5.0 million purchase, which included the intellectual property, customer list, as well as certain residual inventory and equipment. The acquisition did not include Things Remembered retail stores. Things Remembered’s annual revenues from its ecommerce operations, based on its most recently available financial information was $30.4 million for the twelve months ended November 30, 2022.

 

18

 
 

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

This Managements 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 Companys Annual Report on Form 10-K, for the year ended July 3, 2022. The following discussion contains forward-looking statements that reflect the Companys plans, estimates and beliefs. The Companys 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 Companys Annual Report on Form 10-K, for the year ended July 3, 2022 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 inspire customers to give more, connect more, and build more and better relationships. The Company’s e-commerce business platform features an 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®, Things Remembered®, 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; DesignPac Gifts, LLC, a manufacturer of gift baskets and towers; and Alice’s Table®, a lifestyle business offering fully digital livestreaming and on demand 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 July 3, 2022. 

 

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 - see Note 4 Acquisitions in Item 1

 

Acquisition of Alices Table

 

On December 31, 2021, the Company completed its acquisition of Alice’s Table LLC (“Alice’s Table”), a lifestyle business offering fully digital livestreaming and on demand 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.

 

Acquisition of Things Remembered

 

On January 10, 2023, the Company completed its acquisition of the Things Remembered brand, a provider of personalized gifts, which will maintain it's well-known brand and whose operations will be integrated within the PersonalizationMall brand, in the Consumer Floral & Gifts segment.

 

The Company used cash on its balance sheet to fund the $5.0 million purchase, which included the intellectual property, customer list, and tradenames, as well as certain residual inventory and equipment. The acquisition did not include Things Remembered retail stores. Things Remembered’s annual revenues from its ecommerce operations, based on its most recently available financial information was $30.4 million for the twelve months ended November 30, 2022 - see Note 16. Subsequent Events in Item 1.

 

Amended Credit Agreement

 

On August 29, 2022, the Company entered into a Third Amendment to the Company's 2019 Credit Agreement. The Third Amendment amends the 2019 Credit Agreement to, among other modifications, (A) alter the financial maintenance covenants set forth therein by (1) increasing the required maximum consolidated leverage ratio, for the reference period ending October 2, 2022, from 3.25 to 1.00 to 4.25 to 1.00 and (2) decreasing the required minimum consolidated fixed charge coverage ratio, for the reference periods ending October 2, 2022, January 1, 2023, and April 2, 2023, from 1.50 to 1.00 to 1.00 to 1.00 and (B) increase the amount of certain capital expenditures that may be disregarded for purposes of calculating the consolidated fixed charge coverage ratio from $25.0 million to $35.0 million (See Note 8 - Debt, in Item 1, for details).

 

 

Macro-Economic Factors

 

Overall, consumer behavior continues to reflect the significant geo-political, inflationary forces and interest rate hikes that are affecting both their discretionary and nondiscretionary spending. Throughout the current fiscal year, we have seen that customer spending on “Everyday” gifting occasions has slowed, whereas spending for the major holidays has held up better, even while customers reverted to their historical shopping patterns, shopping much later in the holiday period. We also noticed that our customers shifted from our floral gifts towards our gourmet food products, consistent with trends we’ve seen in previous challenging macroeconomic environments. COVID still remains an impact on corporate gifting, which we attribute to macro-economic pressures and hybrid work environments.

 

For the balance of the fiscal year, we expect that customers will continue to moderate their spending on everyday gifting occasions, and while we also expect that our customers will continue to shop for the important people in their lives during the major upcoming holidays, including Valentine’s Day and Mother’s Day, the second half of our fiscal year is more heavily weighted towards everyday gifting occasions.

 

The challenging macro-economic conditions that have affected our customers have also impacted our operating costs. During the second quarter of fiscal 2022, in-bound and out-bound shipping, commodity, labor and fuel costs began to surge, and escalated throughout the balance of the year into our first quarter of fiscal 2023. During our second quarter of the current fiscal year, while certain commodity prices remain near historical highs, we began to see a more stable labor market, and year-over-year reductions in ocean freight costs. As a result of these trends, combined with our strategic pricing initiatives, and automation efforts, we expect to continue to see margin improvement during the second half of our fiscal year, as we cycle against the sharp inflationary period of a year ago.

 

Company Guidance

The Company is updating its fiscal 2023 guidance based on its second quarter performance and the current economic environment. While the highly unpredictable nature of the current macro economy makes it difficult to forecast in this environment, the Company continues to expect that after growing revenues 77% over the past three fiscal years, revenues will decline in fiscal 2023 on cautious consumer behavior. The Company also anticipates that as a result of the investments it has made, and continues to make, in its business platform, along with strategic pricing programs and a moderation of certain cost inputs, gross margins and bottom-line results will gradually improve during the latter half of the current fiscal year.

 

Full Year Fiscal 2023 Guidance

 

Total revenues to decline in the mid-single digit range on a percentage basis as compared with the prior year;

 

Adjusted EBITDA is now expected to be in a range of $80 million to $85 million; and

 

Free Cash Flow to exceed $75 million.

 

Refer to "Definitions of non-GAAP Financial Measures" for reconciliation of non-GAAP results to applicable GAAP results.

 

 

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. For the same reasons, the Company is unable to address the probable significance of the unavailable information. The lack of such reconciling information should be considered when assessing the impact of such disclosures.

 

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 determine its interest rate and to measure compliance with certain covenants. 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.

 

   

Three Months Ended

 
   

January

1, 2023

   

Things

Remembered Transaction

Costs

   

As

Adjusted

(non-

GAAP)

January

1, 2023

   

December

26, 2021

   

Vital Choice

and Alice's

Table

Transaction

Costs

   

As

Adjusted

(non-

GAAP)

December

26, 2021

   

%

Change

 

Net revenues:

                                                       

Consumer Floral & Gifts

  $ 277,049             $ 277,049     $ 315,083     $ -     $ 315,083       -12.1 %

BloomNet

    32,852               32,852       37,930               37,930       -13.4 %

Gourmet Foods & Gift Baskets

    588,431               588,431       590,946               590,946       -0.4 %

Corporate

    72               72       69               69       4.3 %

Intercompany eliminations

    (527 )             (527 )     (984 )             (984 )     46.4 %

Total net revenues

  $ 897,877     $ -     $ 897,877     $ 943,044     $ -     $ 943,044       -4.8 %
                                                         

Gross profit:

                                                       

Consumer Floral & Gifts

  $ 112,274             $ 112,274     $ 130,025             $ 130,025       -13.7 %
      40.5 %             40.5 %     41.3 %             41.3 %        
                                                         

BloomNet

    13,879               13,879       16,021               16,021       -13.4 %
      42.2 %             42.2 %     42.2 %             42.2 %        
                                                         

Gourmet Foods & Gift Baskets

    241,418               241,418       232,239               232,239       4.0 %
      41.0 %             41.0 %     39.3 %             39.3 %        
                                                         

Corporate

    195               195       165               165       18.2 %
      270.8 %             270.8 %     239.1 %             239.1 %        
                                                         

Total gross profit

  $ 367,766     $ -     $ 367,766     $ 378,450     $ -     $ 378,450       -2.8 %
      41.0 %     -       41.0 %     40.1 %     -       40.1 %        
                                                         

EBITDA (non-GAAP):

                                                       

Segment Contribution Margin (non-GAAP) (a):

                                                       

Consumer Floral & Gifts

  $ 27,886     $ -     $ 27,886     $ 38,156     $ -     $ 38,156       -26.9 %

BloomNet

    9,348               9,348       11,887               11,887       -21.4 %

Gourmet Foods & Gift Baskets

    123,503               123,503       110,502               110,502       11.8 %

Segment Contribution Margin Subtotal

    160,737       -       160,737       160,545       -       160,545       0.1 %

Corporate (b)

    (31,297 )     243       (31,054 )     (32,228 )     59       (32,169 )     3.5 %

EBITDA (non-GAAP)

    129,440       243       129,683       128,317       59       128,376       1.0 %

Add: Stock-based compensation

    1,899               1,899       2,291               2,291       -17.1 %

Add: Compensation charge related to NQDC Plan Investment (Depreciation) Appreciation

    (196 )             (196 )     2,425               2,425       -108.1 %

Adjusted EBITDA (non-GAAP)

  $ 131,143     $ 243     $ 131,386     $ 133,033     $ 59     $ 133,092       -1.3 %

 

 

   

Six Months Ended

 
   

January 1,

2023

   

Things

Remembered Transaction

Costs

   

As

Adjusted

(non-

GAAP)

January 1,

2023

   

December

26, 2021

   

Vital

Choice and

Alice's

Table

Transaction

Costs

   

As

Adjusted

(non-

GAAP)

December

26, 2021

   

%

Change

 

Net revenues:

                                                       

Consumer Floral & Gifts

  $ 439,229     $ -     $ 439,229     $ 496,312     $ -     $ 496,312       -11.5 %

BloomNet

    66,219               66,219       68,764               68,764       -3.7 %

Gourmet Foods & Gift Baskets

    696,659               696,659       688,428               688,428       1.2 %

Corporate

    116               116       114               114       1.8 %

Intercompany eliminations

    (742 )             (742 )     (1,201 )             (1,201 )     38.2 %

Total net revenues

  $ 1,201,481     $ -     $ 1,201,481     $ 1,252,417     $ -     $ 1,252,417       -4.1 %
                                                         

Gross profit:

                                                       

Consumer Floral & Gifts

  $ 174,193     $ -     $ 174,193     $ 206,028     $ -     $ 206,028       -15.5 %
      39.7 %             39.7 %     41.5 %             41.5 %        
                                                         

BloomNet

    28,366               28,366       31,430               31,430       -9.7 %
      42.8 %             42.8 %     45.7 %             45.7 %        
                                                         

Gourmet Foods & Gift Baskets

    266,531               266,531       266,402               266,402       0.0 %
      38.3 %             38.3 %     38.7 %             38.7 %        
                                                         

Corporate

    134               134       104               104       28.8 %
      115.5 %             115.5 %     91.2 %             91.2 %        
                                                         

Total gross profit

  $ 469,224     $ -     $ 469,224     $ 503,964     $ -     $ 503,964       -6.9 %
      39.1 %     -       39.1 %     40.2 %     -       40.2 %        
                                                         

EBITDA (non-GAAP):

                                                       

Segment Contribution Margin (non-GAAP) (a):

                                                       

Consumer Floral & Gifts

  $ 38,696     $ -     $ 38,696     $ 57,346     $ -     $ 57,346       -32.5 %

BloomNet

    18,865               18,865       22,747               22,747       -17.1 %

Gourmet Foods & Gift Baskets

    104,793               104,793       102,829               102,829       1.9 %

Segment Contribution Margin Subtotal

    162,354       -       162,354       182,922       -       182,922       -11.2 %

Corporate (b)

    (61,580 )     243       (61,337 )     (63,959 )     515       (63,444 )     3.3 %

EBITDA (non-GAAP)

    100,774       243       101,017       118,963       515       119,478       -15.5 %

Add: Stock-based compensation

    3,454               3,454       5,296               5,296       -34.8 %

Add: Compensation charge related to NQDC Plan Investment (Depreciation) Appreciation

    (1,102 )             (1,102 )     2,992               2,992       -136.8 %

Adjusted EBITDA (non-GAAP)

  $ 103,126     $ 243     $ 103,369     $ 127,251     $ 515     $ 127,766       -19.1 %

 

 

Reconciliation of net income to adjusted net income (non-GAAP):

 

Three Months Ended

   

Six Months Ended

 
   

January 1,

2023

   

December 26,

2021

   

January 1,

2023

   

December 26,

2021

 
                                 

Net income

  $ 82,530     $ 88,468     $ 48,838     $ 75,269  

Adjustments to reconcile net income to adjusted net income (non-GAAP)

                               

Add: Transaction costs

    243       59       243       515  

Deduct: Income tax effect on adjustments

    (63 )     65       (63 )     (108 )

Adjusted net income (non-GAAP)

  $ 82,710     $ 88,592     $ 49,018     $ 75,676  
                                 

Basic and diluted net income per common share

                               

Basic

  $ 1.28     $ 1.36     $ 0.76     $ 1.16  

Diluted

  $ 1.27     $ 1.34     $ 0.75     $ 1.14  
                                 
                                 

Basic and diluted adjusted net income per common share (non-GAAP)

                               

Basic

  $ 1.28     $ 1.36     $ 0.76     $ 1.16  

Diluted

  $ 1.28     $ 1.34     $ 0.76     $ 1.15  
                                 

Weighted average shares used in the calculation of basic and diluted net income and adjusted net income per common share

                               

Basic

    64,675       65,261       64,606       65,161  

Diluted

    64,835       65,969       64,820       65,954  

 

 

Reconciliation of net income to adjusted EBITDA (non-GAAP):

 

Three Months Ended

   

Six Months Ended

 
   

January 1,

2023

   

December

26, 2021

   

January 1,

2023

   

December

26, 2021

 
                                 

Net income

  $ 82,530     $ 88,468     $ 48,838     $ 75,269  

Add: Interest expense and other, net

    4,291       (734 )     8,034       198  

Add: Depreciation and amortization

    14,315       12,588       27,009       23,558  

Add: Income tax expense

    28,304       27,995       16,893       19,938  

EBITDA

    129,440       128,317       100,774       118,963  

Add: Stock-based compensation

    1,899       2,291       3,454       5,296  

Add: Compensation charge related to NQDC plan investment (depreciation) appreciation

    (196 )     2,425       (1,102 )     2,992  

Add: Transaction costs

    243       59       243       515  

Adjusted EBITDA

  $ 131,386     $ 133,092     $ 103,369     $ 127,766  

 

(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.

 

(c) Income tax effect on adjustments is calculated based upon the Company’s effective tax rate during the applicable period.

 

 

Results of Operations

 

Net revenues

 

   

Three Months Ended

   

Six Months Ended

 
   

January 1,

2023

   

December

26, 2021

   

% Change

   

January 1,

2023

   

December

26, 2021

   

% Change

 
   

(dollars in thousands)

         

Net revenues:

                                               

E-Commerce

  $ 790,410     $ 827,522       -4.5

%

  $ 1,029,332     $ 1,090,893       -5.6

%

Other

    107,467       115,522       -7.0

%

    172,149       161,524       6.6

%

Total net revenues

  $ 897,877     $ 943,044       -4.8

%

  $ 1,201,481     $ 1,252,417       -4.1

%

 

 

Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits.

 

Net revenues decreased 4.8% and 4.1% during the three and six months ended January 1, 2023, respectively, compared to the same periods of the prior year due to lower volume across all segments, as consumers reacted to the significant macro-economic pressures as core food and energy inflation continues to reduce consumer discretionary spending. The downward trend in “Everyday” e-commerce demand, which began in the latter half of fiscal 2022, persisted into the current quarter. However, as we had anticipated, consumers continued to spend for the major holidays and they reverted to their historical shopping patterns, shopping much later in the holiday period. We also noticed demand soften in corporate gifting, which we attribute to macro-economic pressures and hybrid work environments, whereas a year ago there were fewer in-person holiday get-togethers. 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 5.0% and 4.7%, in comparison to the prior year periods.

 

To provide perspective, our post-pandemic fiscal 2023 (three and six months ended January 1, 2023) revenues exceeded our pre-pandemic fiscal 2019 (three and six months ended December 30, 2018) revenues by 57.2% and 62.2%, respectively. This revenue growth includes revenues attributable to Shari’s Berries, which was acquired in August 2019, PersonalizationMall, which was acquired on August 3, 2020, Vital Choice, which was acquired on October 27, 2021, and Alice's Table, which was acquired on December 31, 2021. Excluding revenues from these acquisitions, pro-forma, post-pandemic revenues for the three and six months ended January 1, 2023, exceeded pre-pandemic (three and six months ended December 30, 2018) revenues by 31.8% and 36.1%, respectively.

 

 

   

Three Months Ended

 
   

Consumer Floral & Gifts

   

BloomNet

   

Gourmet Foods & Gift Baskets

   

Corporate and Eliminations

   

Consolidated

 
   

January 1, 2023

   

December 26, 2021

   

% Change

   

January 1, 2023

   

December 26, 2021

   

% Change

   

January 1, 2023

   

December 26, 2021

   

% Change

   

January 1, 2023

   

December 26, 2021

   

January 1, 2023

   

December 26, 2021

   

% Change

 

Net revenues

                                                                                                         

E-commerce

  $ 275,081     $ 312,820       -12.1

%

  $ -     $ -       -

%

  $ 515,329     $ 514,702       0.1

%

  $ -     $ -     $ 790,410     $ 827,522       -4.5

%

Other

    1,968       2,263       -13.0

%

    32,852       37,930       -13.4

%

    73,102       76,244       -4.1

%

    (455

)

    (915

)

    107,467       115,522       -7.0

%

Total net revenues

  $ 277,049     $ 315,083       -12.1

%

  $ 32,852     $ 37,930       -13.4

%

  $ 588,431     $ 590,946       -0.4

%

  $ (455

)

  $ (915

)

  $ 897,877     $ 943,044       -4.8

%

                                                                                                                 

Other revenues detail

                                                                                                         

Retail and other

    1,968       2,263       -13.0

%

    -       -               4,313       4,591       -6.1

%

    -       -       6,281       6,854       -8.4

%

Wholesale

    -       -               12,054       14,584       -17.3

%

    68,789       71,653       -4.0

%

    -       -       80,843       86,237       -6.3

%

BloomNet services

    -       -               20,798       23,346       -10.9

%

    -       -               -       -       20,798       23,346       -10.9

%

Corporate

    -       -               -       -               -       -               72       69       72       69       4.3

%

Eliminations

    -       -               -       -               -       -               (527

)

    (984

)

    (527

)

    (984

)

    46.4

%

Total other revenues

  $ 1,968       2,263       -13.0

%

  $ 32,852     $ 37,930       -13.4

%

  $ 73,102     $ 76,244       -4.1

%

  $ (455

)

  $ (915

)

  $ 107,467       115,522       -7.0

%

 

   

Six Months Ended

 
   

Consumer Floral & Gifts

   

BloomNet

   

Gourmet Foods & Gift Baskets

   

Corporate and Eliminations

   

Consolidated

 
   

January 1, 2023

   

December 26, 2021

   

% Change

   

January 1, 2023

   

December 26, 2021

   

% Change

   

January 1, 2023

   

December 26, 2021

   

% Change

   

January 1, 2023

   

December

26, 2021

   

January 1, 2023

   

December 26, 2021

   

% Change

 

Net revenues

                                                                                                         

E-commerce

  $ 435,463     $ 492,106       -11.5

%

  $ -     $ -       -

%

  $ 593,869     $ 598,787       -0.8

%

  $ -     $ -     $ 1,029,332     $ 1,090,893       -5.6

%

Other

    3,766       4,206       -10.5

%

    66,219       68,764       -3.7

%

    102,790       89,641       14.7

%

    (626

)

    (1,087

)

    172,149       161,524       6.6

%

Total net revenues

  $ 439,229     $ 496,312       -11.5

%

  $ 66,219     $ 68,764       -3.7

%

  $ 696,659     $ 688,428       1.2

%

  $ (626

)

  $ (1,087

)

  $ 1,201,481     $ 1,252,417       -4.1

%

                                                                                                                 

Other revenues detail

                                                                                                         

Retail and other

    3,766       4,206       -10.5

%

    -       -               6,221       6,428       -3.2

%

    -       -       9,987       10,634       -6.1

%

Wholesale

    -       -               25,675       24,568       4.5

%

    96,569       83,213       16.1

%

    -       -       122,244       107,781       13.4

%

BloomNet services

    -       -               40,544       44,196       -8.3

%

    -       -               -       -       40,544       44,196       -8.3

%

Corporate

    -       -               -       -               -       -               116       114       116       114       1.8

%

Eliminations

    -       -               -       -               -       -               (742

)

    (1,201

)

    (742

)

    (1,201

)

    38.2

%

Total other revenues

  $ 3,766       4,206       -10.5

%

  $ 66,219     $ 68,764       -3.7

%

  $ 102,790     $ 89,641       14.7

%

  $ (626

)

  $ (1,087

)

  $ 172,149       161,524       6.6

%

 

 

Revenue by sales channel:

 

E-commerce revenues (combined online and telephonic) decreased 4.5% and 5.6% during the three and six months ended January 1, 2023, respectively, compared to the same periods of the prior year, primarily as a result of a decline in demand for “Everyday” gifts within the Consumer Floral & Gifts segment, attributable to the macro-economic conditions noted above, which have negatively impacted consumer discretionary spending. E-commerce revenues within the Gourmet Foods & Gift Baskets segment were flat during the three months ended January 1, 2023, and down slightly during the six months ended January 1, 2023, in comparison to the same periods of the prior year, as our customers tend to gravitate towards food products during more challenging economic times. During the three and six months ended January 1, 2023, the Company fulfilled approximately 8.7 million and 11.8 million orders through its e-commerce sales channel (online and telephonic sales), a decrease of 10.3% and 11.7%, respectively, compared to the same periods of the prior year. During the three and six months ended January 1, 2023, average order value increased 6.4% and 6.7%, to $90.66 and $87.11, respectively, as a result of strategic price increases, and product mix into higher price point items. Excluding the impact of the acquisitions of Vital Choice and Alice’s Table, pro-forma e-commerce revenues declined 4.8% and 6.4%, during the three and six months ended January 1, 2023, respectively, compared to the same periods of the prior year.

 

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 decreased by 7.0% during the three months ended January 1, 2023, compared to the same period of the prior year, primarily due to unfavorable wholesale product and services revenues within the BloomNet segment, and timing of wholesale shipments within the Gourmet Foods & Gift Baskets segment as a result of several customers who requested product delivery in the first quarter of the fiscal year, in order to avoid supply chain congestion issues experienced in the prior year. Other revenues increased 6.6% during the six months ended January 1, 2023, compared to the same period of the prior year, due to increased wholesale product demand within the Gourmet Foods & Gift Baskets segment, as consumers returned to in person “brick-and-mortar” shopping, partially offset by the decline of wholesale product demand within the BloomNet segment.

 

 

Revenue by segment:

 

Consumer Floral & Gifts – this segment, which includes the operations of the 1-800-Flowers.com and PersonalizationMall brands, as well as Alice’s Table, subsequent to its acquisition on December 31, 2021, 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 decreased 12.1% and 11.5% during the three and six months ended January 1, 2023, respectively, compared to the same periods of the prior year, due to reduced “Everyday” product demand, as consumer discretionary spending continues to shrink in the current inflationary environment. Pro-forma segment revenues decreased 12.3% and 11.7% during the three and six months ended January 1, 2023, respectively, adjusting for the acquisition of Alice’s Table.

 

BloomNet - revenues in this segment are derived from membership fees, as well as product and service offerings. Net revenues decreased 13.4% and 3.7% during the three and six months ended January 1, 2023, respectively, compared to the same periods of the prior year, due a decline in services revenues, which was attributable to membership/transaction fee revenues associated with a decline in order volume going through the network, as well as lower directory services ad revenues. Wholesale revenues were unfavorable during the three months ended January 1, 2023, due to the slowing macro-economic environment. Wholesale revenues were favorable during the six months ended January 1, 2023 due to strong wholesale product demand in the first quarter of the fiscal year, driven by product availability, which had been constrained by supply chain issues in the prior year.

 

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 0.4% during the three months ended January 1, 2023 compared to the same period of the prior year, primarily due to unfavorable wholesale volume, due to the timing of DesignPac shipments which, at customer request, moved into the first quarter of the current year to avoid the supply chain delays experienced in the prior year. E-commerce revenues within the segment during the quarter were relatively flat in comparison to prior year as the direct-to-consumer food gifting business held up better during the holiday period, mitigating the softness in our corporate gifting business. Net revenues increased 1.2% during the six months ended January 1, 2023 compared to the same period of the prior year due to favorable wholesale volumes from improved demand as consumers return to traditional “brick-and-mortar” shopping. E-commerce revenues declined by 0.8% during the six months ended January 1, 2023 due to reductions in “EveryDay” volumes, due to macro-economic conditions, combined with the fact that the segment also experienced the highest growth rates during the Pandemic when food gifts/self-consumption peaked. Pro-forma segment revenues decreased 0.7%, and increased 0.2% during the three and six months ended January 1, 2023, respectively, adjusting for the acquisition of Vital Choice.

 

 

Gross profit

 

   

Three Months Ended

   

Six Months Ended

 
   

January 1,

2023

   

December

26, 2021

   

% Change

   

January 1,

2023

   

December

26, 2021

   

% Change

 
   

(dollars in thousands)

 
                                                 

Gross profit

  $ 367,766     $ 378,450       -2.8

%

  $ 469,224     $ 503,964       -6.9

%

Gross profit %

    41.0

%

    40.1

%

            39.1

%

    40.2

%

       

 

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 2.8% and 6.9% during the three and six months ended January 1, 2023, respectively, compared to the same periods of the prior year, primarily due to lower revenues noted above. Gross profit percentage increased 90 basis points during the three months ended January 1, 2023, compared to the prior year, driven by the Gourmet Foods & Gift Baskets segment, as a result of strategic pricing initiatives, lower in-bound freight costs, logistics optimization efforts, as well as an improvement in labor availability and automation. Gross profit percentage decreased by 110 basis points during the six months ended January 1, 2023 compared to the prior year, reflecting the annualization of macro-economic headwinds in the first quarter of fiscal 2023, attributable to higher commodity, labor, inbound and outbound shipping costs, including the impact of fuel surcharges, as well as the write-off of dated perishable product, partially offset by the previously noted improvements during the second quarter.

 

The Company has and will continue to implement strategies designed to mitigate the impact of these headwinds, including pricing initiatives across our product assortment, implementing logistics optimization programs to enhance our outbound shipping operations and manage rising third-party shipping costs and deploying automation to increase throughput and efficiency and address the high cost of labor. In addition, ocean freight costs have come down significantly from their highs of last year.

 

Gross profit by segment follows:

 

Consumer Floral & Gifts segment - Gross profit decreased by 13.7% and 15.5% during the three and six months ended January 1, 2023, respectively, due to the lower revenues noted above, as well as a decrease in gross profit percentage. Gross profit percentage was negatively impacted by increased cost of merchandise, driven by higher ocean freight (carried on earlier inventory buys), as well as higher outbound freight, and labor rates, partially offset by pricing initiatives which are reflected in the higher average order value noted above.

 

BloomNet segment - Gross profit decreased by 13.4% and 9.7% during the three and six months ended January 1, 2023, respectively, compared to the same periods of the prior year, due to the lower revenues noted above, as well as the impact of a lower gross margin percentage during the six months ended January 1, 2023, due to the impact of sales mix, with a greater proportion of revenues derived from lower margin wholesale product sales, and higher rebates.

 

Gourmet Foods & Gift Baskets segment - Gross profit increased by 4.0% during the three months ended January 1, 2023, compared to the same period of the prior year, primarily due to an increase in gross profit percentage driven by strategic pricing initiatives, lower inbound transportation costs, and fulfillment automation. Gross profit during the six months ended January 1, 2023 was consistent with the same period of the prior year. The higher revenues noted above were partially offset by lower gross margins reflecting the annualization of macro-economic headwinds in the first quarter of fiscal 2023, partially offset by the previously noted improvements during the second quarter.

 

 

Marketing and sales expense

 

   

Three Months Ended

   

Six Months Ended

 
   

January 1,

2023

   

December

26, 2021

   

% Change

   

January 1,

2023

   

December

26, 2021

   

% Change

 
   

(dollars in thousands)

 
                                                 

Marketing and sales

  $ 194,466     $ 207,771       -6.4

%

  $ 283,605     $ 302,150       -6.1

%

Percentage of net revenues

    21.7

%

    22.0

%

            23.6

%

    24.1

%

       

 

 

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 decreased 6.4% and 6.1% during the three and six months ended January 1, 2023, respectively, compared to the same period of the prior year, due to variable components associated with lower revenues, combined with reduced, but more efficient advertising spend.

 

Technology and development expense

 

   

Three Months Ended

   

Six Months Ended

 
   

January 1,

2023

   

December

26, 2021

   

% Change

   

January 1,

2023

   

December

26, 2021

   

% Change

 
   

(dollars in thousands)

 
                                                 

Technology and development

  $ 14,952     $ 13,490       10.8

%

  $ 29,692     $ 26,913       10.3

%

Percentage of net revenues

    1.7

%

    1.4

%

            2.5

%

    2.1

%

       

 

 

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 10.8% and 10.3% during the three and six months ended January 1, 2023, respectively, compared to the same periods of the prior year, primarily due to higher maintenance and support for the Company’s technology platform enhancements, including higher labor and consulting costs.

 

General and administrative expense

 

   

Three Months Ended

   

Six Months Ended

 
   

January 1,

2023

   

December

26, 2021

   

% Change

   

January 1,

2023

   

December

26, 2021

   

% Change

 
   

(dollars in thousands)

 
                                                 

General and administrative

  $ 28,908     $ 28,872       0.1

%

  $ 55,153     $ 55,938       -1.4

%

Percentage of net revenues

    3.2

%

    3.1

%

            4.6

%

    4.5

%

       

 

 

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 during the three months ended January 1, 2023, were consistent with the same period of the prior year, as the lower labor and related costs, primarily resulting from a decrease in non-qualified deferred compensation plan investment income (see equal offset in “other income/expense, net”), were offset by higher bad debt expense.

 

 

General and administrative expenses decreased 1.4% during the six months ended January 1, 2023, compared to the same period of the prior year, due to lower labor and related costs, primarily resulting from a decrease in non-qualified deferred compensation plan investment income (see equal offset in “other income/expense, net”) and performance-based stock-based compensation, offset in part by professional fees and higher bad debt expense.

 

Depreciation and amortization expense

 

   

Three Months Ended

   

Six Months Ended

 
   

January 1,

2023

   

December

26, 2021

   

% Change

   

January 1,

2023

   

December

26, 2021

   

% Change

 
   

(dollars in thousands)

 
                                                 

Depreciation and amortization

  $ 14,315     $ 12,588       13.7

%

  $ 27,009     $ 23,558       14.6

%

Percentage of net revenues

    1.6

%

    1.3

%

            2.2

%

    1.9

%

       

 

 

Depreciation and amortization expense increased 13.7% and 14.6% during the three and six months ended January 1, 2023, respectively, compared to the same periods of the prior year, due to distribution facility automation projects and IT related ecommerce/platform enhancements, as well as incremental amortization associated with the Vital Choice and Alice’s Table acquisitions.

 

Interest expense, net

 

   

Three Months Ended

   

Six Months Ended

 
   

January 1,

2023

   

December

26, 2021

   

% Change

   

January 1,

2023

   

December

26, 2021

   

% Change

 
   

(dollars in thousands)

 
                                                 

Interest expense, net

  $ 4,143     $ 1,723       140.5

%

  $ 6,964     $ 3,251       114.2

%

 

 

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 increased 140.5% and 114.2% during the three and six months ended January 1, 2023, respectively, compared to the same periods of the prior year, primarily due to a higher level of borrowings against the Company’s line of credit and higher interest rates, partially offset by favorable interest earned on available cash balances at quarter end.

 

Other expense (income), net

 

   

Three Months Ended

   

Six Months Ended

 
   

January 1,

2023

   

December

26, 2021

   

% Change

   

January 1,

2023

   

December

26, 2021

   

% Change

 
   

(dollars in thousands)

 
                                                 

Other expense (income), net

  $ 148     $ (2,457

)

    -106.0

%

  $ 1,070     $ (3,053

)

    -135.0

%

 

Other expense (income) consists primarily of investment losses/(gains) on the Company’s NQDC Plan assets. 

 

 

Income Taxes

 

The Company recorded income tax expense of $28.3 million and $16.9 million, during the three and six months ended January 1, 2023, respectively, and $28.0 million and $19.9 million, during the three and six months ended December 26, 2021, respectively. The Company’s effective tax rate for the three and six months ended January 1, 2023 was 25.5% and 25.7%, respectively, compared to 24.0% and 20.9% in the same periods of the prior year. The effective rates for fiscal 2023 differed from the U.S. federal statutory rate of 21.0% due to state income taxes, nondeductible expenses for executive compensation and tax shortfalls related to stock-based compensation, partially offset by various permanent differences and tax credits. The effective tax rates for fiscal 2022 differed from the U.S. federal statutory rate of 21.0% due to state income taxes and nondeductible expenses for executive compensation, partially offset by various permanent differences and tax credits, including tax windfalls 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 Company’s Credit Agreement (see Note 8 - Debt in Item 1 for details). At January 1, 2023, the Company had working capital of $124.4 million, including cash and cash equivalents of $189.7 million, compared to working capital of $82.5 million, including cash and cash equivalents of $31.5 million, at July 3, 2022. 

 

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, is expected to generate over 40% of the Company’s annual revenues, and all of its earnings. Due to the number of major floral gifting occasions, including Valentine’s Day, Easter, Administrative Professionals Week, and Mother’s Day, revenues also have historically risen during the Company’s fiscal third and fourth quarters in comparison to its fiscal first quarter.

 

During the first two quarters of fiscal 2023, the Company borrowed under its revolving credit agreement in order to fund pre-holiday manufacturing and inventory procurement requirements, with borrowings peaking at $195.9 million in November 2022. Cash generated from operations during the Christmas holiday shopping season enabled the Company to repay the borrowings under the Revolver in December 2022. Based on current projected cash flows, the Company believes that available cash balances will be sufficient to provide for the Company’s operating needs through the remainder of fiscal 2023, at which time the Company would again expect to borrow against its Revolver to fund pre-holiday manufacturing and inventory purchases. The Company had no amounts outstanding under its Revolver as of January 1, 2023.

 

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. 

 

Cash Flows

 

Net cash provided by operating activities of $193.7 million, for the six months ended January 1, 2023, was primarily attributable to the Company’s net income during the period, adjusted by non-cash charges for depreciation and amortization, bad debt expense and stock-based compensation, combined with seasonal changes in working capital, including holiday related increases in accounts payable and accrued expenses, inventory and trade receivables.

 

Net cash used in investing activities of $23.8 million, for the six months ended January 1, 2023, was attributable to capital expenditures primarily related to the Company's technology and automation initiatives.

 

Net cash used in financing activities of $11.6 million, for the six months ended January 1, 2023, related primarily to net repayments of bank borrowings under the Company’s working capital line of credit, and acquisition of treasury stock.

 

Stock Repurchase Program

 

See Item 2 in Part II below for details.

 

 

Contractual Obligations

 

At January 1, 2023, the Company’s contractual obligations consist of:

 

Long-term debt obligations - payments due under the Company's Existing 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

 
   

(in thousands)

 
   

Remaining

Fiscal

2023

   

Fiscal

2024

   

Fiscal

2025

   

Fiscal

2026

   

Fiscal

2027

   

Thereafter

   

Total

 

Purchase commitments

  $ 79,430     $ 29,676     $ 10,247     $ 2,052     $ 148     $ -     $ 121,553  

 

Critical Accounting Policies and Estimates

 

As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended July 3, 2022, 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 July 3, 2022.

 

Recently Issued Accounting Pronouncements 

 

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;

 

o

to leverage its operating platform and reduce operating expenses;

 

o

to manage the seasonality of its business;

 

o

to cost effectively acquire and retain customers;

 

to successfully integrate acquired businesses and assets;

 

to reduce working capital requirements and capital expenditures;

 

to mitigate the impact of supply chain cost and capacity constraints;

 

o

to compete against existing and new competitors;

 

o

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; and

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.

 

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 July 3, 2022 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. Borrowings under the Company’s credit facility 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 $0.4 and $0.7 million during the three and six months ended January 1, 2023.

 

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 January 1, 2023. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have each concluded that the Company’s disclosure controls and procedures were not effective as of January 1, 2023, due to a material weakness in internal control over financial reporting related to logical access and segregation of duties, at the application control level, in certain information technology environments. The material weakness was first identified and reported in Management's Report on Internal Control over Financial Reporting in our Annual Report on Form 10-K for the period ending July 3, 2022.

 

Management has taken steps to remediate these deficiencies, including redesigning the logical access and placing enhanced segregation of duties, enhancing its internal documentation and monitoring approach to ensure that all procedures designed to restrict access to applications and data are operating in an optimal manner in order to provide management with comfort that access is properly limited to the appropriate internal personnel. Management began to implement these remedial steps during the first quarter of fiscal 2023. In accordance with our internal control compliance program, a material weakness is not considered remediated until the remediation processes have been operational for a sufficient period of time and successfully tested. In light of this material weakness, management performed additional procedures over our IT environment and personnel affected to determine if any unauthorized action had been taken and found no such instances.

 

Notwithstanding the material weakness described in Management's Report on logical access and segregation of duties in certain technology environments, our management has concluded that our consolidated financial statements for the periods covered by this form 10-Q are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and fairly present, in all material respects, our financial position, results of operations and cash flows for each of the periods presented herein.

 

Changes in Internal Control over Financial Reporting

 

Except for the remedial actions described above, 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 January 1, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Litigation

 

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 2022 to resolve all claims. In September 2022, the Court granted final approval of the settlement agreement, and in November 2022, the Company remitted payment of approximately $2.9 million, which was previously accrued during the quarter ended March 27, 2022, and was included in "Accrued expenses" in the consolidated balance sheets at July 3, 2022. In entering into the settlement agreement, the Subsidiary made 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. 

 

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 July 3, 2022.

 

 

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 January 1, 2023, $32.0 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 six months of fiscal 2023, which includes the period July 4, 2022 through January 1, 2023:

 

Period

 

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)

         
                                 

07/04/22 - 07/31/22

    -     $ -       -     $ 33,203  

08/01/22 - 08/28/22

    -     $ -       -     $ 33,203  

08/29/22 - 10/02/22

    -     $ -       -     $ 33,203  

10/03/22 - 10/30/22

    -     $ -       -     $ 33,203  

10/31/22 - 11/27/22

    140,248     $ 8.38       140,248     $ 32,029  

11/28/22 – 01/01/23

    -     $ -       -     $ 32,029  

Total

    140,248     $ 8.38       140,248          

 

(1)

Average price per share excludes commissions and other transaction fees.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable. 

 

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.

 

 

1-800-FLOWERS.COM, Inc. 

(Registrant)
 

Date: February 10, 2023     

/s/ Christopher G. McCann      

Christopher G. McCann
Chief Executive Officer and 
Director
(Principal Executive Officer)  

   

Date: February 10, 2023     

/s/ William E. Shea      
William E. Shea
Senior Vice President, Treasurer and
Chief Financial Officer (Principal
Financial and Accounting Officer)

 

39