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| FLWS > SEC Filings for FLWS > Form 10-K on 11-Sep-2009 | All Recent SEC Filings |
11-Sep-2009
Annual Report
This "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A) is intended to provide an understanding of our financial condition, change in financial condition, cash flow, liquidity and results of operations. The following MD&A discussion should be read in conjunction with the consolidated financial statements and notes to those statements that appear elsewhere in this Form 10-K. The following discussion contains forward-looking statements that reflect the Company's plans, estimates and beliefs. The Company's actual results could differ materially from those discussed 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 under Item 1A -- "Risk Factors."
Description of Business
For more than 30 years, 1-800-FLOWERS.COM, Inc. has been providing customers with fresh flowers and the finest selection of plants, gift baskets, gourmet foods, confections, balloons and plush stuffed animals perfect for every occasion. 1-800-FLOWERS.COM(R) offers the best of both worlds: exquisite arrangements individually created by some of the nation's top floral artists and hand-delivered the same day, and spectacular flowers shipped overnight under our Fresh From Our Growers(R) program. As always, 100 percent satisfaction and freshness are guaranteed. The Company's BloomNet(R) (www.mybloomnet.net) international floral wire service provides a broad range of quality products and value-added services designed to help professional florists to grow their businesses profitably. The 1-800-FLOWERS.COM, Inc. "Gift Shop" also includes gourmet gifts such as popcorn and specialty treats from The Popcorn Factory(R) (1-800-541-2676 or www.thepopcornfactory.com); exceptional cookies and baked gifts from Cheryl&Co.(R) (1-800-443-8124 or www.cherylandco.com); premium chocolates and confections from Fannie May Confections Brands (www.fanniemay.com and www.harrylondon.com); gourmet foods from Greatfood.com(R) (www.greatfood.com); wine gifts from Ambrosia(R) (www.ambrosia.com or www.winetasting.com or www.Geerwade.com); and gift baskets from 1-800-BASKETS.COM(R) (www.1800baskets.com) and DesignPac Giftssm (www.designpac.com).
During the fourth quarter of fiscal 2009, the Company made the strategic
decision to divest its Home & Children's Gifts business segment to focus on its
core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets
categories. The Company has classified the results of operations of its Home &
Children's Gifts segment, which includes Home Decor and Children's Gifts from
Plow & Hearth(R) (1-800-627-1712 or www.plowandhearth.com), Wind & Weather(R)
(www.windandweather.com), HearthSong(R) (www.hearthsong.com) and Magic Cabin(R)
(www.magiccabin.com), as discontinued operations for all periods presented.
1-800-FLOWERS.COM, Inc. stock is traded on the NASDAQ Global Select Market under ticker symbol FLWS.
As a provider of gifts to consumers and wholesalers for resale to consumers, the Company is subject to changes in consumer confidence and the economic conditions that impact our customers. The demand for the Company's products is affected by the financial health of our customers, which is influenced by macro economic issues such as unemployment, fuel and energy costs, weakness in the housing market and unavailability of consumer credit. During the recent economic downturn, the demand for our products has been adversely affected by the reduction in consumer spending, and the Company's results for the fiscal year ended June 28, 2009 reflect the impact of the global economic downturn.
However, during fiscal 2009, the Company took significant steps to reduce its operating cost structure to improve its results in the near-term, including:
o During the fourth quarter the Company made the strategic decision to
divest its Home & Children's Gifts segment in order to focus its
efforts and investments on its key Consumer Floral, BloomNet
Wire Service and Gourmet Foods & Gift Baskets categories which better
leverage the Company's business platform and offer the greatest
opportunity for revenue and earnings growth.
o The Company implemented enterprise-wide cost reduction programs
including a 15% reduction in its salaried, full-time labor force, as
well as reductions in variable labor commensurate with lower order
volumes.
o The IT infrastructure was reduced through consolidation of hosting
sites, reducing footprints and rationalizing maintenance and support
applications.
o Marketing programs across the enterprise were evaluated and spending
on such programs has been scaled to levels appropriate to current
consumer demand in order to achieve desired returns on these
investments.
o Brick-and-mortar customer service centers were closed, reducing fixed
costs, as the Company further virtualized its customer service
platform, utilizing technology to expand its home agent network.
o Product assortments have been evaluated and reformulated to meet
reduced price points, providing for better product margins and
alleviating the reliance on discounting and markdowns in order to
improve demand.
We continue to evaluate further cost-reduction activities as well as the need to adjust our operations in the event that economic conditions deteriorate further. The Company believes that its cost reduction initiatives, combined with its ability to be innovative and execute quickly, will enable it to strengthen its relative competitive position in this difficult economic environment and to take advantage of long-term growth opportunities when favorable business conditions return.
The following tables set forth some of the Company's key financial information:
Category Information
The Company has segmented its organization to improve execution and customer focus and to align its resources to meet the demands of the markets it serves. The following table presents the contribution of net revenues, gross profit and category contribution margin or category "Adjusted EBITDA" (earnings before interest (including write-off of deferred financing costs, taxes, depreciation and amortization, goodwill and intangible impairment and severance and other restructuring costs) from each of the Company's business categories. (As noted previously, the Company's Home & Children's Gifts segment has been classified as discontinued operations and therefore excluded from category information below).
Years Ended
----------------------------------------------------------------------
June 28, June 29, July 1,
Net revenues 2009 % Change 2008 % Change 2007
------------ --------------- ------------- ------------- -------------
(in thousands)
Net revenues:
1-800-Flowers.com Consumer Floral $414,897 (15.6%) $491,696 0.1% $491,404
BloomNet Wire Service 63,933 19.5% 53,488 20.5% 44,379
Gourmet Food & Gift Baskets 240,200 22.4% 196,298 1.9% 192,698
Corporate (*) 1,119 (54.0%) 2,431 47.2% 1,652
Intercompany eliminations (6,199) (31.8%) (4,702) (4.9%) (4,483)
------------ ------------- -------------
Total net revenues from continuing
operations $713,950 (3.4%) $739,211 1.9% $725,650
============ ============= =============
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Years Ended
----------------------------------------------------------------------
June 28, June 29, July 1,
Gross Profit from Continuing Operations: 2009 % Change 2008 % Change 2007
------------ --------------- ------------- ------------- -------------
(in thousands)
Gross profit:
1-800-Flowers.com Consumer Floral $152,045 (20.1%) $190,259 (1.4%) $192,921
36.6% 38.7% 39.3%
BloomNet Wire Service 35,374 17.6% 30,080 21.1% 24,844
55.3% 56.2% 56.0%
Gourmet Food & Gift Baskets 94,021 2.5% 91,713 4.0% 88,207
39.1% 46.7% 45.8%
Corporate (*) 289 (70.2%) 970 27.0% 764
25.8% 39.9% 46.2%
Intercompany eliminations (524) (727) (169)
------------ ------------- -------------
Total gross profit from continuing
operations $281,206 (10.0%) $312,295 1.9% $306,567
============ ============= =============
39.4% 42.2% 42.2%
============ ============= =============
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Years Ended
----------------------------------------------------------------------
Adjusted EBITDA(**) from June 28, June 29, July 1,
Continuing Operations 2009 % Change 2008 % Change 2007
------------ --------------- ------------- ------------- -------------
(in thousands)
1-800-Flowers.com Consumer Floral $40,882 (35.1%) $62,967 (3.4%) $65,166
BloomNet Wire Service 19,093 3.2% 18,509 30.7% 14,162
Gourmet Food & Gift Baskets 23,433 (4.7%) 24,593 (6.8%) 26,377
------------ ------------- -------------
Category Contribution Margin Subtotal 83,408 (21.4%) 106,069 0.3% 105,705
Corporate (*) (49,492) (1.2%) (48,922) (0.9%) (48,483)
Severance and other restructuring costs 2,543 100.0% - - -
------------ ------------- -------------
Adjusted EBITDA from continuing
operations $36,459 (36.2%) $57,147 0.1% $57,222
============ ============= =============
Years Ended
----------------------------------------------------------------------
Discontinued operations: June 28, June 29, July 1,
2009 % Change 2008 % Change 2007
------------ --------------- ------------- ------------- -------------
(in thousands)
Net revenues from discontinued
operations $143,746 (20.2%) $180,181 (3.6%) $186,948
Gross profit from discontinued
operations 67,439 (17.2%) 81,459 (5.2%) 85,899
Adjusted EBITDA from discontinued
operations (2,569) (539.9%) 584 113.3% (4,392)
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(*) 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 category.
(**) Performance is measured based on category contribution margin or category Adjusted EBITDA, reflecting only the direct controllable revenue and operating expenses of the categories. As such, management's measure of profitability for these categories does not include the effect of corporate overhead, described above, depreciation and amortization, other income (net), including deferred financing write-offs, income taxes, goodwill and intangible impairment, and severance and other restructuring costs. Management utilizes EBITDA, and adjusted financial information, as a performance measurement tool because it considers such information a meaningful supplemental measure of its performance and believes it is frequently used by the investment community in the evaluation of companies with comparable market capitalization. The Company also uses EBITDA and adjusted financial information as one of the factors used to determine the total amount of bonuses available to be awarded to executive officers and other employees. The Company's credit agreement uses EBITDA and adjusted financial information to measure compliance with covenants such as interest coverage and debt incurrence. EBITDA and adjusted financial information is also used by the Company to evaluate and price potential acquisition candidates. EBITDA and adjusted financial information have limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP. Some of these limitations are: (a) EBITDA does not reflect changes in, or cash requirements for, the Company's working capital needs; (b) EBITDA does 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. Because of these limitations, EBITDA should only be used on a supplemental basis combined with GAAP results when evaluating the Company's performance.
Due to the Company's strategic decision to divest its Home & Children's Gifts segment and classify such as Discontinued Operations as well as other non-recurring charges incurred during fiscal 2009 (Goodwill and intangible impairment; Deferred financing costs write-off; and Severance and other restructuring costs), the following Non-GAAP reconciliation table have been included within MD&A.
Reconciliation of Net Income (Loss) from Continuing Operations to Adjusted
EBITDA from Continuing Operations:
Years Ended
------------ ------------------------
June 28, June 29, July 1,
2009 2008 2007
------------ ----------- ------------
Net income (loss) from continuing operations ($66,501) $22,029 $20,981
Add:
Interest expense 6,269 5,039 7,212
Depreciation and amortization 21,010 17,822 15,353
Income tax expense - 13,126 14,755
Goodwill and intangible impairment 85,438 - -
Deferred financing cost write-off 3,245 - -
Severance and other restructuring costs 2,543 - -
Less:
Income tax benefit 15,326 - -
Interest income 314 826 1,077
Other income (expense) (95) 43 2
------------ ----------- ------------
Adjusted EBITDA from continuing operations $36,459 $57,147 $57,222
============ =========== ============
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Results of Operations
The Company's fiscal year is a 52- or 53-week period ending on the Sunday nearest to June 30. Fiscal years 2009, 2008 and 2007 which ended on June 28, 2009, June 29, 2008 and July 1, 2007 respectively, consisted of 52 weeks.
Net Revenues
Years Ended
--------------------------------------------------------------------
June 28, June 29, July 1,
2009 % Change 2008 % Change 2007
------------ ------------- ------------- ------------- -------------
(in thousands)
Net revenues:
E-Commerce $498,519 (14.7%) $584,174 1.3% $576,627
Other 215,431 39.0% 155,037 4.0% 149,023
------- ------- -------
$713,950 (3.4%) $739,211 1.9% $725,650
======== ======== ========
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Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits.
During the fiscal year ended June 28, 2009, revenues declined by 3.4% over the prior year period, resulting from continued weakness in the retail economy causing a decline in both customer orders as well as overall average order values as consumers "traded down" to lower price point products. The decline was partially offset by revenue growth in the Company's BloomNet Wire Service category, which increased during the year ended June 28, 2009 by 19.5% over the prior year due to the acquisition of Napco, a wholesaler of floral hardgoods, in July 2008, as well as growth from the Gourmet Food & Gift Baskets category by 22.4%, due to the incremental revenue associated with the acquisition of DesignPac in May 2008 and Geerlings & Wade in March 2009. Organic revenue, excluding the revenue associated with the acquisitions of DesignPac, Napco,
and Geerlings & Wade, declined approximately 13.1% during the fiscal year ended June 28, 2009. The Company's revenue growth of 1.9% during the fiscal year ended June 29, 2008 was primarily attributable to the continued expansion of the Company's BloomNet Wire Service business, which increased 20.5% over the prior fiscal year, as well as growth from the Gourmet Food & Gift Basket business, which increased 1.9% over the same period of the prior year.
The Company fulfilled approximately 8.6 million, 9.8 million and 9.8 million orders through its e-commerce (combined online and telephonic) sales channel during fiscal 2009, 2008 and 2007, respectively. The Company's e-commerce (combined online and telephonic) sales channel average order value decreased 3.5% to $57.69 during fiscal 2009, as a result of increased promotional pricing and markdowns and consumers trading down to lower price point products, whereas the average order value increased by 1.4% to $59.79 during fiscal 2008, primarily as a result of increased service and shipping charges (in line with industry norms) to partially offset the impact of increased fuel costs passed on from freight carriers.
Other revenues increased during fiscal 2009 as a result of the Company's recent acquisitions of Napco and DesignPac, and during fiscal 2008 due to growth within the Company's BloomNet Wire Service category.
The 1-800-Flowers.com Consumer Floral category includes the operations of the 1-800-Flowers brand which derives revenue from the sale of consumer floral products through its E-Commerce sales channels (telephonic and online sales) and company-owned and operated retail floral stores, as well as royalties from its franchise operations. Net revenues during the fiscal year ended June 28, 2009 decreased 15.6% over the prior year period due to lower order volume as a result of continued decline in demand throughout the consumer sector, caused by the weak economy. Net revenues during the fiscal year ended June 29, 2008 increased by 0.1% over the prior year period, primarily from an increased average order value from its e-commerce sales channel, offset in part by lower retail sales from its company-owned floral stores due to the planned transition of Company stores to franchise ownership.
The BloomNet Wire Service category includes revenues from membership fees as well as other product and service offerings to florists. Net revenues during the fiscal year ended June 28, 2009 increased by 19.5% over the prior year, resulting entirely from the incremental revenue generated by the acquisition of Napco in July 2008, as lower wholesale product sales due to florists scaling back purchases due to the recession offset gains in monthly service fees. Net revenues during the fiscal year ended June 29, 2008 increased by 20.5% over the prior year period primarily as a result of increased florists' membership fees, expanded product and service offerings, and pricing initiatives.
The Gourmet Food & Gift Baskets category includes the revenues of Cheryl & Co., Fannie May (including Harry London), Popcorn Factory, The Winetasting Network (including Geerlings & Wade) and DesignPac brands. Revenue is derived from the sale of cookies, baked gifts, premium chocolates and confections, gourmet popcorn, wine gifts and gift baskets through its E-commerce sales channels (telephonic and online sales) and company-owned and operated retail stores under the Cheryl & Co. and Fannie May brands, as well as wholesale operations. Net revenues during the fiscal year ended June 28, 2009 increased by 22.4% over the prior year period as a result of incremental wholesale revenues generated by DesignPac, acquired in April 2008. Net revenues decreased 7.8%, excluding the revenues of DesignPac, as a result of reduced consumer spending caused by the economic down-turn. Net revenues for the fiscal year ended June 29, 2008 increased 1.9% compared to the prior fiscal year as a result of increased direct-to-consumer order volume from Cheryl & Co. and Fannie May Confections brands.
The Company expects economic conditions for consumers will continue to be very challenging. Based on this outlook, the Company anticipates that revenues for the full fiscal year 2010 will be consistent to down approximately 5 percent compared with the prior year.
Gross Profit
Years Ended
-----------------------------------------------------------------------
June 28, June 29, July 1,
2009 % Change 2008 % Change 2007
------------- ------------ --------------- --------------- ------------
(in thousands)
Gross profit $281,206 (10.0%) $312,295 1.9% $306,567
Gross margin % 39.4% 42.2% 42.2%
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Gross profit consists of net revenues less cost of revenues, which is comprised primarily of florist fulfillment costs (primarily 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 include labor and facility costs related to direct-to-consumer and wholesale production operations.
Gross profit decreased during the fiscal year ended June 28, 2009, through a combination of the decline in revenues described above, offset in part by the incremental gross profit generated by the DesignPac and Napco acquisitions and the reduction in gross margin percentage. Gross margin percentage during the fiscal year ended June 28, 2009, decreased by 280 basis points, primarily reflecting a combination of product mix associated with revenues from the Company's most recent acquisitions, which are primarily wholesale businesses, as well as increased promotional and markdown activity designed to improve sales. Gross profit increased during the fiscal year ended June 29, 2008 in comparison to the same period of the prior year, primarily as a result of the revenue growth described above. Gross margin percentage during the fiscal year ended June 29, 2008 was consistent with the prior year period.
The 1-800-Flowers.com Consumer Floral category gross profit and gross profit margin percentage decreased during the fiscal years ended June 28, 2009 and June . . .
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