flws20141228_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

   X   

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

 

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 28, 2014

 

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

 

1-800-FLOWERS.COM, Inc.

(Exact name of registrant as specified in its charter)

 

 

 DELAWARE    11-3117311

(State of  

 

  (I.R.S. Employer

 incorporation)

 

 Identification No.)

 

One Old Country Road, Carle Place, New York 11514

(Address of principal executive offices)(Zip code)

 

(516) 237-6000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.           

Yes        No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).           

Yes        No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

Accelerated filer

Non-accelerated filer     (Do not check if a smaller reporting company)

Smaller reporting company

 

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:

 

 27,928,475

(Number of shares of Class A common stock outstanding as of January 30, 2015)

 

36,778,594

(Number of shares of Class B common stock outstanding as of January 30, 2015) 

 

 
 

 

 

1-800-FLOWERS.COM, Inc.

 

TABLE OF CONTENTS

 

INDEX

 

    Page
     

Part I.

Financial Information

 
     
Item 1. Consolidated Financial Statements:  
     
 

Consolidated Balance Sheets – December 28, 2014 (Unaudited) and June 29, 2014

1
     
 

Consolidated Statements of Operations (Unaudited) – Three and Six Months Ended December 28, 2014 and December 29, 2013

2
     
 

Consolidated Statements of Comprehensive Income (Unaudited) – Three and Six Months Ended December 28, 2014 and December 29, 2013

     
 

Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended December 28, 2014 and December 29, 2013

4
     
  Notes to Consolidated Financial Statements (Unaudited)
     

    Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
     
Item 4. Controls and Procedures 35 
     

Part II.

Other Information

 
     
Item 1. Legal Proceedings 36 
     
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 39 
     
Signatures   40

  

 

 

 

PART I. – FINANCIAL INFORMATION

ITEM 1. – CONSOLIDATED FINANCIAL STATEMENTS

 

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

Consolidated Balance Sheets

(in thousands, except share data)

 

   

December 28,

2014

   

June 29,

2014

 
   

(unaudited)

         

Assets

               

Current assets:

               

Cash and cash equivalents

  $ 101,220     $ 5,203  

Receivables, net

    59,442       13,339  

Insurance receivable

    14,945       -  

Inventories

    70,808       58,520  

Deferred tax assets

    6,257       5,156  

Prepaid and other

    16,224       9,600  

Total current assets

    268,896       91,818  
                 

Property, plant and equipment, net

    153,370       60,147  

Goodwill

    99,690       60,166  

Other intangibles, net

    59,058       44,616  

Deferred tax assets

    -       2,002  

Other assets

    13,078       8,820  

Total assets

  $ 594,092     $ 267,569  
                 

Liabilities and Stockholders' Equity

               

Current liabilities:

               

Accounts payable

  $ 54,777     $ 24,447  

Accrued expenses

    144,528       49,517  

Current maturities of long-term debt

    14,944       343  

Total current liabilities

    214,249       74,307  
                 

Long-term debt

    124,688       -  

Deferred tax liabilities

    21,204       649  

Other liabilities

    7,664       6,495  

Total liabilities

    367,805       81,451  

Stockholders' equity:

               

Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued

    -       -  

Class A common stock, $.01 par value, 200,000,000 shares authorized; 39,528,826 and 38,119,398 shares issued at December 28, 2014 and June 29, 2014, respectively

    395       381  

Class B common stock, $.01 par value, 200,000,000 shares authorized; 42,058,594 shares issued at December 28, 2014 and June 29, 2014

    420       420  

Additional paid-in capital

    310,066       305,510  

Retained deficit

    (27,044 )     (68,565 )

Accumulated other comprehensive loss

    (427 )     (75 )

Treasury stock, at cost – 11,513,975 and 10,818,437 Class A shares at December 28, 2014 and June 29, 2014, respectively, and 5,280,000 Class B shares at December 28, 2014 and June 29, 2014

    (59,483 )     (54,472 )

Total 1-800-FLOWERS.COM, Inc. stockholders' equity

    223,927       183,199  

Noncontrolling interest in subsidiary

    2,360       2,919  

Total equity

    226,287       186,118  

Total liabilities and equity

  $ 594,092     $ 267,569  

 

See accompanying Notes to Consolidated Financial Statements.

 

 
1

 

 

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

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

December 28,

2014

   

December 29,

2013

   

December 28,

2014

   

December 29,

2013

 

Net revenues

    534,275       266,337       660,978       389,385  

Cost of revenues

    293,850       155,360       367,240       227,111  

Gross profit

    240,425       110,977       293,738       162,274  

Operating expenses:

                               

Marketing and sales

    122,026       57,656       157,598       92,135  

Technology and development

    9,329       5,319       14,929       10,717  

General and administrative

    25,558       14,267       39,226       28,079  

Depreciation and amortization

    8,679       5,036       13,780       9,725  

Total operating expenses

    165,592       82,278       225,533       140,656  

Operating income

    74,833       28,699       68,205       21,618  

Interest expense and other, net

    2,638       418       3,391       710  

Income from continuing operations before income taxes

    72,195       28,281       64,814       20,908  

Income tax expense from continuing operations

    26,655       10,798       23,852       7,982  

Income from continuing operations

    45,540       17,483       40,962       12,926  

Income from discontinued operations, net of tax

    -       503       -       421  

Net income

  $ 45,540     $ 17,986     $ 40,962     $ 13,347  

Less: Net loss attributable to noncontrolling interest

    (231 )     (41 )     (559 )     (41 )

Net income attributable to 1-800-FLOWERS.COM, Inc.

  $ 45,771     $ 18,027     $ 41,521     $ 13,388  
                                 
                                 

Basic net income per common share attributable to 1-800-FLOWERS.COM, Inc.

                               

From continuing operations

  $ 0.71     $ 0.27     $ 0.65     $ 0.20  

From discontinued operations

    -       0.01       -       0.01  

Basic net income per common share

  $ 0.71     $ 0.28     $ 0.65     $ 0.21  
                                 

Diluted net income per common share attributable to 1-800-FLOWERS.COM, Inc.

                               

From continuing operations

  $ 0.68     $ 0.27     $ 0.62     $ 0.20  

From discontinued operations

    -       0.01       -       0.01  

Diluted net income per common share

  $ 0.68     $ 0.27     $ 0.62     $ 0.20  
                                 

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

                               

Basic

    64,443       64,016       64,195       63,907  

Diluted

    67,061       66,095       66,641       66,383  

 

See accompanying Notes to Consolidated Financial Statements.

 

 
2

 

 

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

Consolidated Statements of Comprehensive Income

(in thousands)

(unaudited)

 

   

Three Months Ended

   

Six Months Ended

 
   

December 28,

2014

   

December 29,

2013

   

December 28,

2014

   

December 29,

2013

 
           

(in thousands)

         

Net income

  $ 45,540     $ 17,986     $ 40,962     $ 13,347  

Other comprehensive loss (currency translation)

    (412 )     (12 )     (352 )     (12 )

Comprehensive income

    45,128       17,974       40,610       13,335  
                                 

Net loss attributable to noncontrolling interest

    (231 )     (41 )     (559 )     (41 )

Other comprehensive loss (currency translation) attributable to noncontrolling interest

    (170 )     -       (129 )     -  

Comprehensive loss attributable to noncontrolling interest

    (401 )     (41 )     (688 )     (41

Comprehensive income attributable to 1-800-FLOWERS.COM, Inc.

  $ 45,529     $ 18,015     $ 41,298     $ 13,376  

 

See accompanying Notes to Consolidated Financial Statements.

 

 
3

 

 

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

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

   

Six Months Ended

 
   

December 28,

2014

   

December 29,

2013

 
                 

Operating activities

               

Net income

  $ 40,962     $ 13,347  

Reconciliation of net income to net cash provided by operating activities, net of acquisitions:

               

Operating activities of discontinued operations

    -       (557 )

Depreciation and amortization

    13,780       9,725  

Amortization of deferred financing costs

    639       153  

Deferred income taxes

    (3,429 )     (870 )

Non-cash impact of write-offs related to warehouse fire

    29,522       -  

Insurance proceeds for warehouse fire related to property damage

    15,000       -  

Bad debt expense

    739       643  

Stock based compensation

    2,782       2,211  

Other non-cash items

    1,474       385  

Changes in operating items, excluding the effects of acquisitions:

               

Receivables

    (49,166 )     (26,059 )

Insurance receivable

    (14,945 )     -  

Inventories

    48,990       (2,057 )

Prepaid and other

    6,218       2,904  

Accounts payable and accrued expenses

    86,480       17,213  

Other assets

    (879 )     (155 )

Other liabilities

    35       947  

Net cash provided by operating activities

    178,202       17,830  
                 

Investing activities

               

Acquisitions, net of cash acquired

    (133,117 )     (1,385 )

Capital expenditures, net of non-cash expenditures

    (14,927 )     (9,832 )

Other

    641       9  

Net cash used in investing activities

    (147,403 )     (11,208 )
                 

Financing activities

               

Acquisition of treasury stock

    (5,011 )     (6,530 )

Proceeds from exercise of employee stock options

    1,788       17  

Proceeds from bank borrowings

    239,786       88,000  

Repayment of bank borrowings

    (165,895 )     (85,007 )

Debt issuance costs

    (5,602 )     -  

Other

    152       4  

Net cash provided by (used in) financing activities

    65,218       (3,516 )
                 

Net change in cash and equivalents

    96,017       3,106  

Cash and equivalents:

               

Beginning of period

    5,203       154  

End of period

  $ 101,220     $ 3,260  

 

See accompanying Notes to Consolidated Financial Statements.

  

 
4

 

 

Note 1 – Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared by 1-800-FLOWERS.COM, Inc. and subsidiaries (the “Company”) in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended December 28, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending June 28, 2015. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended June 29, 2014.

 

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, including the acquisition of Harry & David Holdings, Inc. (“Harry & David”) on September 30, 2014, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, is expected to generate nearly 50% of the Company’s annual revenues, and all of its earnings. Additionally, due to the number of major floral gifting occasions, including Mother's Day, Valentine’s Day and Administrative Professionals Week, revenues also rise during the Company’s fiscal third and fourth quarters in comparison to its fiscal first quarter. The Easter Holiday, which was on April 20th in fiscal 2014, falls on April 5th in fiscal 2015. As a result of the timing of Easter, during fiscal 2015, a portion of revenue and EBITDA associated with the Easter Holiday will shift into the Company’s fiscal third quarter, from its fiscal fourth 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.

 

Recent Accounting Pronouncements

 

In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which amends ASC 205, “Presentation of Financial Statements,” and ASC 360, “Property, Plant, and Equipment.” ASU No. 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company's operations and financial results should be presented as discontinued operations. This new accounting guidance is effective for the Company’s fiscal year ending July 3, 2016, and may be applied retrospectively. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This amended guidance will enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Expanded disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. This guidance will be effective for the Company’s fiscal year ending July 1, 2018 and may be applied retrospectively. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

 

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which amends ASC 740, “Income Taxes.” The amendments provide guidance on the financial statement presentation of an unrecognized tax benefit, as either a reduction of a deferred tax asset or as a liability, when a net operating loss carryforward, similar tax loss, or a tax credit carryforward exists. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 and may be applied on either a prospective or retrospective basis. The provisions are effective for the Company’s first quarter of fiscal year ending June 28, 2015. The adoption of these provisions did not have a significant impact on the Company’s consolidated financial statements.

  

5

 

 

Reclassifications

 

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

 

Note 2 – Net Income Per Common Share from Continuing Operations

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

December 28,

2014

   

December 29,

2013

   

December 28,

2014

   

December 29,

2013

 
      (in thousands, except per share data)  

Numerator:

                               

Net income from continuing operations

  $ 45,540     $ 17,483     $ 40,962     $ 12,926  

Less: Net loss attributable to noncontrolling interest

    (231 )     (41 )     (559 )     (41 )

Income from continuing operations attributable to 1-800-FLOWERS.COM, Inc.

  $ 45,771     $ 17,524     $ 41,521     $ 12,967  
                                 

Denominator:

                               

Weighted average shares outstanding

    64,443       64,016       64,195       63,907  

Effect of dilutive securities:

                               

Employee stock options (1)

    1,534       990       1,373       1,103  

Employee restricted stock awards

    1,084       1,089       1,073       1,373  
      2,618       2,079       2,446       2,476  
                                 

Adjusted weighted-average shares and assumed conversions

    67,061       66,095       66,641       66,383  
                                 

Net income per common share from continuing operations attributable to

1-800-FLOWERS.COM, Inc.

                               

Basic

  $ 0.71     $ 0.27     $ 0.65     $ 0.20  

Diluted

  $ 0.68     $ 0.27     $ 0.62     $ 0.20  

 

Note (1): 

The effect of options to purchase 0.3 million and 0.6 million shares for the three and six months ended December 28, 2014 and 1.2 million and 1.3 million shares for the three and six months ended December 29, 2013, respectively, were excluded from the calculation of net income per share on a diluted basis as their effect is anti-dilutive.

 

Note 3 – Stock-Based Compensation

 

The Company has a Long Term Incentive and Share Award Plan, which is more fully described in Note 12 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2014, 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

 
   

December 30,

2014

   

December 29,

2013

   

December 28,

2014

   

December 29,

2013

 
           

(in thousands)

         

Stock options

  $ 114     $ 113     $ 224     $ 211  

Restricted stock

    1,401       1,032       2,558       2,000  

Total

    1,515       1,145       2,782       2,211  

Deferred income tax benefit

    543       431       1,024       831  

Stock-based compensation expense, net

  $ 972     $ 714     $ 1,758     $ 1,380  

  

 
6

 

 

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

 

   

Three Months Ended

   

Six Months Ended

 
   

December 28,

2014

   

December 29,

2013

   

December 28,

2014

   

December 29,

2013

 
           

(in thousands)

         

Marketing and sales

  $ 500     $ 275     $ 817     $ 648  

Technology and development

    106       68       169       175  

General and administrative

    909       802       1,796       1,388  

Total

  $ 1,515     $ 1,145     $ 2,782     $ 2,211  

 

The following table summarizes stock option activity during the six months ended December 28, 2014:

 

   

Options

   

Weighted

Average

Exercise

Price

   

Weighted

Average

Remaining

Contractual

Term (years)

   

Aggregate

Intrinsic

Value

(000s)

 
                                 

Outstanding at June 29, 2014

    4,339,790     $ 3.80                  

Granted

    30,000     $ 7.41                  

Exercised

    (263,779 )   $ 6.69                  

Forfeited

    (216,474 )   $ 8.44                  

Outstanding at December 28, 2014

    3,889,537     $ 3.37       4.14     $ 19,280  
                                 

Options vested or expected to vest at December 28, 2014

    3,798,678     $ 3.39       4.08     $ 18,754  

Exercisable at December 28, 2014

    2,673,237     $ 3.76       3.04     $ 12,219  

 

As of December 28, 2014, the total future compensation cost related to non-vested options, not yet recognized in the statement of income, was $1.8 million and the weighted average period over which these awards are expected to be recognized was 4.3 years.

 

The Company grants shares of Common Stock to its employees that are subject to restrictions on transfer and risk of forfeiture until fulfillment of applicable service conditions and, in certain cases, holding periods (Restricted Stock). The following table summarizes the activity of non-vested restricted stock awards during the six months ended December 28, 2014:

 

   

Shares

   

Weighted

Average

Grant Date

Fair Value

 
                 

Non-vested at June 29, 2014

    2,686,685     $ 3.90  

Granted

    945,882     $ 8.02  

Vested

    (1,145,649 )   $ 3.48  

Forfeited

    (103,527 )   $ 6.95  

Non-vested at December 28, 2014

    2,383,391     $ 5.61  

 

The fair value of non-vested shares is determined based on the closing stock price on the grant date. As of December 28, 2014, there was $11.1 million of total unrecognized compensation cost related to non-vested restricted stock-based compensation to be recognized over the weighted-average remaining period of 2.6 years.  

 

 
7

 

 

Note 4 – Acquisitions and Dispositions

 

Acquisition of Harry & David

 

On September 30, 2014, the Company completed its acquisition of Harry & David Holdings, Inc (“Harry & David”), a leading multi-channel specialty retailer and producer of branded premium gift-quality fruit, gourmet food products and other gifts marketed under the Harry & David brands. The transaction, for a purchase price of $142.5 million, includes the Harry & David’s brands and websites as well as its headquarters, manufacturing and distribution facilities and orchards in Medford, Oregon, a warehouse and distribution facility in Hebron, Ohio and 48 Harry & David retail stores located throughout the country.

 

The total purchase price was allocated to the identifiable assets acquired and liabilities assumed based on our preliminary estimates of their fair values on the acquisition date. The Company is in the process of finalizing its allocation and this may result in potential adjustments to the carrying value of the respective recorded assets and liabilities, establishment of certain additional intangible assets, revisions of useful lives of intangible assets, and the determination of any residual amount that will be allocated to goodwill. Of the acquired intangible assets, $2.5 million was assigned to customer lists, which is being amortized over the estimated remaining life of 5 years, $14.7 million was assigned to trademarks, and $38.6 million was assigned to goodwill, which is not expected to be deductible for tax purposes. The goodwill recognized in conjunction with our acquisition of Harry & David 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. It also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce.

 

The following table summarizes the allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed at the date of acquisition of Harry & David:

 

   

Harry & David

Preliminary

Purchase Price

Allocation

 
   

(in thousands)

 

Current assets

  $ 124,245  

Intangible assets

    17,209  

Goodwill

    38,635  

Property, plant and equipment

    91,023  

Other assets

    111  

Total assets acquired

    271,223  

Current liabilities, including short-term debt

    104,335  

Deferred tax liabilities

    23,252  

Other liabilities assumed

    1,136  

Total liabilities assumed

    128,723  

Net assets acquired

  $ 142,500  

 

Operating results of Harry & David are reflected in the Company’s consolidated financial statements from the date of acquisition, within its Gourmet Food & Gift Baskets segment.

 

Harry & David contributed net revenues of $268.5 million and operating income of approximately $54.4 million from September 30, 2014 through December 28, 2014. These amounts are not necessarily indicative of the results of operations that Harry & David would have realized had it continued to operate as a stand-alone company during the period presented due to integration activities since the acquisition date, and due to costs that are now reflected in the Company’s unallocated corporate costs which are not allocated to Harry & David. 

 

 
8

 

 

As required by ASC 805, “Business Combinations,” the following unaudited pro forma financial information for the three and six months ended December 28, 2014 and December 29, 2013, give effect to the Harry & David acquisition as if it had been completed on July 1, 2013. The unaudited pro forma financial information is prepared by management for informational purposes only in accordance with ASC 805 and is not necessarily indicative of or intended to represent the results that would have been achieved had the acquisition been consummated as of the dates presented, and should not be taken as representative of future consolidated results of operations. The unaudited pro forma financial information does not reflect any operating efficiencies and/or cost savings that the Company may achieve, or any additional expenses or costs of integration that may be incurred, with respect to the combined companies. The pro forma information has been adjusted to give effect to items that are directly attributable to the acquisition and are expected to have a continuing impact on the combined results. The adjustments include amortization expense associated with acquired identifiable intangible assets, interest expense associated with bank borrowings to fund the acquisition, and elimination of transactions costs incurred that are directly related to the transactions and do not have a continuing impact on operating results from continuing operations, as well as purchase accounting adjustments related to Harry & David’s deferred revenues and step-up of inventory to fair value. The pro forma information has been adjusted to give effect to items that are directly attributable to the transactions and are expected to have a continuing impact on the combined results.

 

   

Three Months Ended

   

Six Months Ended

 
   

December 28,

2014

   

December 29,

2013

   

December 28,

2014

   

December 29,

2013

 

Net revenues from continuing operations

  $ 535,896     $ 526,763     $ 691,575     $ 681,519  

Income from continuing operations attributable to

1-800-FLOWERS.COM, Inc.

  $ 51,934     $ 58,298     $ 33,035     $ 41,086  

Diluted net income per common share attributable to

1-800-FLOWERS.COM, Inc.

  $ 0.78     $ 0.88     $ 0.50     $ 0.62  

 

The unaudited pro forma amounts above include the following adjustments:

 

 

(1)

An increase of net revenues and a decrease of cost of sales by $1.6 million and $4.8 million, respectively, to reflect the impact of purchase accounting adjustment related to Harry & David’s deferred revenue and inventory fair value step-up in both the three and six months ended December 28, 2014.

 

(2)

A decrease of operating expenses by $3.8 million and $12.3 million during the three and six months ended December 28, 2014, respectively, to eliminate transaction costs and other expenses directly related to the transaction that do not have a continuing impact on operating results from continuing operations.

 

(3)

An increase to interest expense by $1.1 million for six months ended December 28, 2014, and $1.2 million and $2.5 million for the three and six months ended December 29, 2013, respectively, to reflect the incremental impact of the 2014 Credit Facility utilized to finance the acquisition, assuming our new credit facility was in place on July 1, 2013.

 

(4)

The adjustments above were tax effected at the combined entity’s assumed effective tax rate for the respective periods.

 

(5)

The pro-forma adjustments above do not include the impact of the Fannie May fire – see Note 9 for details.

 
Acquisition of Fannie May retail stores

 

On June 27, 2014, the Company and GB Chocolates LLC (“GB Chocolates”) entered into a settlement agreement, resulting in the termination of the GB Chocolates franchise agreement, and its exclusive area development rights.

 

In conjunction with the settlement agreement, the Company and GB Chocolates entered into an asset purchase agreement whereby the Company repurchased 16 of the original 17 Fannie May retail stores sold to GB Chocolates in November 2011. The acquisition was accounted for using the purchase method of accounting in accordance with FASB guidance regarding business combinations. The purchase price of $6.4 million was financed utilizing available cash balances. 

 

The purchase price was allocated to the identifiable assets acquired and liabilities assumed based on our preliminary estimates of their fair values on the acquisition date. The Company is in the process of finalizing its allocation and this may result in potential adjustments to the carrying value of the respective recorded assets and liabilities, establishment of certain additional intangible assets, and the determination of any residual amount that will be allocated to goodwill. The goodwill resulting from this acquisition amounted to $5.8 million, which is expected to be deductible for tax purposes.

 

 

 

  

   

Preliminary
Purchase Price Allocation

 
   

(in thousands)

 

Current assets

  $ 105  

Property, plant and equipment

    487  

Goodwill

    5,781  

Net assets acquired

  $ 6,373  

 

Operating results of the acquired stores are reflected in the Company’s consolidated financial statements from the date of acquisition, within the Gourmet Food & Gift Baskets segment. Pro forma results of operations have not been presented, as the impact on the Company’s consolidated financial results would not have been material.

 

Acquisition of Colonial Gifts Limited

 

On December 3, 2013, the Company completed its acquisition of a controlling interest in Colonial Gifts Limited (iFlorist). iFlorist, located in the UK, is a direct-to-consumer marketer of floral and gift-related products sold and delivered throughout Europe. The acquisition was achieved in stages and was accounted for using the acquisition method of accounting in accordance with the Financial Accounting Standards Board’s (“FASB”) guidance regarding business combinations.

 

Prior to December 3, 2013, the Company maintained an investment in iFlorist in the amount of $1.6 million, which was included on the Company’s balance sheet within Other assets. This investment was accounted for under the cost method, as the Company’s ownership stake was 19.9%, and it did not have the ability to exercise significant influence.

 

On December 3, 2013, the Company acquired an additional interest in iFlorist, bringing the Company’s ownership interest to 56.2%. The acquisition of the additional interest was financed through the conversion of $2.0 million of notes owed by iFlorist to the Company, and a $1.6 million cash payment to iFlorist’s founders. Concurrent with the additional investment, the Company remeasured its initial equity investment in iFlorist, and determined that the acquisition date fair value approximated the Company’s carrying value of $1.6 million, and therefore no gain or loss was recognized. On the acquisition date, the Company also measured the fair value of the noncontrolling interest which amounted to $3.6 million. The acquisition-date fair values of the Company’s previously held equity interest in iFlorist and the noncontrolling interest were determined based on the market price the Company paid for its ownership interest in iFlorist on the acquisition date, assuming that a 20% control premium was paid to obtain the controlling interest. The following summarizes the fair values of the acquisition date purchase price components:

 

   

iFlorist Fair Value

of Purchase Price

Components

 
   

(in thousands)

 

Cash

  $ 1,640  

Converted debt

    1,964  

Initial equity investment

    1,629  

Noncontrolling interest

    3,616  

Total purchase price

  $ 8,849  

 

During the quarter ended December 28, 2014, the Company finalized the allocation of the purchase price to the identifiable assets acquired and liabilities assumed based on our estimates of their fair values on the acquisition date. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. The estimates and assumptions include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows. Of the acquired intangible assets, $0.7 million was assigned to customer lists, which is being amortized over the estimated remaining life of 3 years, $0.7 million was assigned to trademarks, and $7.9 million was assigned to goodwill, which is not expected to be deductible for tax purposes. As a result of cumulative tax losses in the foreign jurisdiction, offset in part by the deferred tax liability arising from the amortizable customer list which was considered a source of future income, the Company concluded that a full valuation allowance be recorded in such jurisdiction.

  

 
10 

 

 

The following table summarizes the final allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed at the date of the acquisition, as well as adjustments made during the measurement period:

 

   

iFlorist Preliminary

Purchase Price

Allocation

   

Measurement

Period Adjustments

(1)

   

iFlorist Final

Purchase Price

Allocation

 
   

(in thousands)

   

(in thousands)

   

(in thousands)

 

Current assets

  $ 856     $ -     $ 856  

Intangible assets

    3,177       (1,709 )     1,468  

Goodwill

    6,537       1,320       7,857  

Property, plant and equipment

    2,006       -       2,006  

Other assets

    30       -       30  

Total assets acquired

    12,606       (389 )     12,217  
                         

Current liabilities, including current maturities of long-term debt

    3,014       -       3,014  

Deferred tax liabilities

    648       (389 )     259  

Other liabilities assumed

    95       -       95  

Total liabilities assumed

    3,757       (389 )     3,368  

Net assets acquired

  $ 8,849     $ -     $ 8,849  

 

 

(1)

The measurement period adjustments were due to the finalization of valuations related to intangible assets and resulted in the following: a decrease to intangible assets and the related long-term deferred tax liabilities and an increase to goodwill.

 

The measurement period adjustments did not have a significant impact on our consolidated statements of income for the three and six months ended December 28, 2014. In addition, these adjustments did not have a significant impact on our consolidated balance sheet as of June 29, 2014. Therefore, we have not retrospectively adjusted this financial information.

 

The estimated fair value of the acquired trademarks 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 association with the trademarks and the overall composition of the acquired assets.

 

The estimated fair value of the acquired customer relationships was determined using the with and without method. This method calculates the debt-free cash flows generated under two scenarios: the with and without. Under the with scenario, it is assumed that the Company achieves full projections and includes both existing customers as of the valuation date as well as new customers acquired during the course of normal business. The without scenario, assumes that the Company has no existing customers, but rather builds to management projections as new customers are acquired. The differential between the cash flows under the two scenarios is then discounted to present value to determine the value of the customer list as of the valuation date.

 

Operating results of the Company’s membership interest in iFlorist are reflected in the Company’s consolidated financial statements from the date of acquisition, essentially all of which is included within the 1-800-Flowers.com Consumer Floral segment. Pro forma results of operations have not been presented, as the impact on the Company’s consolidated financial results would not have been material.

  

 
11 

 

 

Note 5 – Inventory

 

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

 

   

December 28,

2014

   

June 29,

2014

 
   

(in thousands)

 

Finished goods

  $ 30,823     $ 30,859  

Work-in-process

    34,109       8,566  

Raw materials

    5,876       19,095  
    $ 70,808     $ 58,520  

 

Note 6 – Goodwill and Intangible Assets

 

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

 

   

1-800-Flowers.com

Consumer Floral

   

BloomNet

Wire Service

   

Gourmet Food &

Gift Baskets

   

Total

 
   

(in thousands)

 
                                 

Balance at June 29, 2014

  $ 16,691     $ -     $ 43,475     $ 60,166  

Harry & David acquisition

    -       -       38,635       38,635  

iFlorist measurement period adjustment

    1,320       -       -       1,320  

iFlorist translation adjustment

    (429 )     -       -       (429 )

Other

    -       -       (2 )     (2 )

Balance at December 28, 2014

  $ 17,582     $ -     $ 82,108     $ 99,690  

 

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

 

     

December 28, 2014

   

June 29, 2014

 
 

Amortization

Period

(years)

 

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Net

   

Gross

Carrying

Amount

   

Accumulated

Amortization

   

Net

 
             

(in thousands)

                 
                                                   

Intangible assets with determinable lives

                                                 

Investment in licenses

14 - 16

  $ 7,420     $ 5,674     $ 1,746     $ 7,420     $ 5,621     $ 1,799  

Customer lists

3 - 10

    19,125       13,576       5,549       17,313       12,818       4,495  

Other

5 - 8

    2,538       2,538       -       2,538       2,538       -  
        29,083       21,788       7,295       27,271       20,977       6,294  
                                                   

Trademarks with indefinite lives

    51,763       -       51,763       38,322       -       38,322  

Total identifiable intangible assets

  $ 80,846     $ 21,788     $ 59,058     $ 65,593     $ 20,977     $ 44,616  

 

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. No material impairment was recognized for the three and six months ended December 28, 2014. Future estimated amortization expense is as follows: remainder of fiscal 2015 - $1.0 million, fiscal 2016 - $1.9 million, fiscal 2017 - $1.3 million, fiscal 2018 - $1.1 million, fiscal 2019 - $0.6 million and thereafter - $1.4 million.

  

 
12 

 

 

Note 7 – Investments

 

The Company has certain investments in non-marketable equity instruments of private companies. The Company accounts for these investments using the equity method if they provide the Company the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method is appropriate. The Company records equity method investments initially at cost, and adjusts the carrying amount to reflect the Company’s share of the earnings or losses of the investee. The Company’s equity method investments are comprised of a 32% interest in Flores Online, a Sao Paulo, Brazil based internet floral and gift retailer, that the Company made on May 31, 2012. The book value of this investment was $3.1 million as of December 28, 2014 and $3.2 million as of June 29, 2014, and is included in Other assets within the consolidated balance sheets. The Company’s equity in the net loss of Flores Online for three and six months ended December 28, 2014 and December 29, 2013 was less than $0.1 million and $0.2 million, respectively.

 

Investments in non-marketable equity instruments of private companies, where the Company does not possess the ability to exercise significant influence, are accounted for under the cost method. Cost method investments are originally recorded at cost, and are included within Other assets in the Company’s consolidated balance sheets. The aggregate carrying amount of the Company’s cost method investments was $0.7 million as of December 28, 2014 and $0.8 million as of June 29, 2014. In addition, the Company had notes receivable from a company it maintains an investment in of $0.3 million as of December 28, 2014 and $0.5 million as of June 29, 2014.

 

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 in Other assets in the consolidated balance sheets (see Note 10).

 

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

 

Note 8 –Debt

 

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

 

   

December 28,

2014

   

June 29,

2014

 
   

(in thousands)

 
                 

Revolver (1)

  $ -     $ -  

Term Loan (1)

    138,938       -  

Bank loan (2)

    269       343  

Other

    425       -  

Total debt

    139,632       343  

Less short-term debt

    14,944       343  

Long-term debt

  $ 124,688     $ -  

 

 

(1)

In order to finance the Harry & David acquisition, on September 30, 2014, the Company entered into a Credit Agreement with JPMorgan Chase Bank as administrative agent, and a group of lenders (the “2014 Credit Facility”), consisting of a $142.5 million five-year term loan (the “Term Loan”) with a maturity date of September 30, 2019, and a co-terminus revolving credit facility (the “Revolver”), with a seasonally adjusted limit ranging from $100.0 to $200.0 million, which may be used for working capital (subject to applicable sublimits) and general corporate purposes. The Term Loan is payable in 20 quarterly installments of principal and interest beginning in December 2014, with escalating principal payments at the rate of 10% in years one and two, 15% in years three and four, and 20% in year five, with the remaining balance of $42.75 million due upon maturity. Upon closing of the acquisition, the Company borrowed $136.7 million under the Revolver to re-pay amounts outstanding under the Company’s and Harry & David’s previous credit agreements, as well as to pay acquisition-related transaction costs.

     
    The 2014 Credit Facility requires that while any borrowings are outstanding the Company comply with certain financial and non-financial covenants, including the maintenance of certain financial ratios. Outstanding amounts under the 2014 Credit Facility bear interest at the Company’s option at either: (i) LIBOR, plus a spread of 175 to 250 basis points, as determined by the Company’s leverage ratio, or (ii) ABR, plus a spread of 75 to 150 basis points. The 2014 Credit Agreement is secured by substantially all of the assets of the Company and the Subsidiary Guarantors.

 

 

(2)

Bank loan assumed through the Company’s acquisition of a majority interest in iFlorist.

  

 
13 

 

 

Note 9. Fire at the Fannie May warehouse and distribution facility

 

On November 27, 2014, a fire occurred at the Company's Maple Heights, Ohio warehouse and distribution facility. While the fire did not cause any injuries, the building was severely damaged, rendering it inoperable for the key calendar 2014 holiday season, and all Fannie May and Harry London confections in the facility were destroyed.

 

As a result, the Company had limited supplies of its Fannie May Fine Chocolates and Harry London Chocolates products available in its retail stores as well as for its ecommerce and wholesale channels during the holiday season. While the Company implemented contingency plans to increase production for Fannie May Fine Chocolates and Harry London Chocolates products at its production facility in Canton, Ohio and to shift warehousing and distribution operations to alternate Company facilities, product availability was severely limited.

 

The impact of lost sales related to the fire was estimated to be $13.8 million with a loss of income from continuing operations before income taxes of $5.6 million during both the three and six months ended December 28, 2014. While the Company has restored operations, it is expected that revenues derived from our Fannie May and Harry London Chocolates business will continue to be impacted by the inability to meet customer requirements during the balance of the fiscal year, albeit to a significantly lesser amount than in our fiscal second quarter of 2015. While no insurance recoveries have been recorded to date related to lost sales, the Company expects that its property and business interruption insurance will cover these losses.

 

The following table reflects the incremental costs related to the fire and related insurance recovery for the three and six months ended December 28, 2014:

 

Loss on inventory

  $ 29,522  

Other fire related costs

    422  
      29,944  

Less: Fire related recoveries

    (29,944

)

Fire related charges, net

  $  

 

Through December 28, 2014, the Company has incurred fire related costs totaling $29.9 million, including a $29.5 million write-down of inventory. Based on the provisions of the Company's insurance policies and management's estimates, the losses incurred have been reduced by the estimated insurance recoveries. The Company has determined that recovery of the incurred losses, including amounts related to the retentions described above, is probable and recorded $29.9 million of insurance recoveries through December 28, 2014. In December 2014, the Company received $15.0 million of insurance proceeds, representing an advance of funds. As a result, the insurance receivable balance was $14.9 million as of December 28, 2014. In January 2014, the Company received an additional advance of $15.0 million, bringing the total amount recovered to date to $30.0 million.

 

Note 10 - Fair Value Measurements

 

Cash and cash equivalents, receivables, accounts payable and accrued expenses are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments. The Company’s long-term debt also approximates fair value due to the variable nature of the underlying interest. 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.

  

 
14 

 

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the guidance are described below:

  

Level 1

   

Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

   

Level 2

   

Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

   

Level 3

   

Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The following table presents by level, within the fair value hierarchy, financial assets and liabilities measured at fair value on a recurring basis as of December 28, 2014:

  

   

 

   

Fair Value Measurements

Assets (Liabilities)

 
      Carrying Value     

Level 1

   

Level 2

   

Level 3

 
                   

(in thousands)

 

Assets (liabilities):

                               

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

  $ 2,544     $ 2,544     $ -     $ -  
    $ 2,544     $ 2,544     $ -     $ -  

  

 

(1)

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

 

 

The following table presents, by level, within the fair value hierarchy, financial assets and liabilities measured at fair value on a recurring basis as of June 29, 2014:

  

           

Fair Value Measurements

Assets (Liabilities)

 
   

Carrying Value

   

Level 1

   

Level 2

   

Level 3

 
                   

(in thousands)

         

Assets (liabilities):

                               

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

  $ 2,146     $ 2,146     $ -     $ -  
    $ 2,146     $ 2,146     $ -     $ -  

  

 

(1)

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

 

 
15 

 

  

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 from continuing operations for the three and six months ended December 28, 2014 was 36.9% and 36.8% respectively, compared to 38.2% in the same periods of the prior year. The effective rate for fiscal 2015 and fiscal 2014 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes, which were partially offset by various permanent differences and tax credits.

   

The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various foreign countries. The Company concluded its federal examination for fiscal 2011 during the quarter ended December 29, 2013, however, fiscal years 2012 and 2013 remain subject to federal examination. Due to ongoing state examinations and non-conformity with the federal statute of limitations for assessment, certain states remain open from fiscal 2008. The Company commenced operations in foreign jurisdictions in 2012. The Company's foreign income tax filings are open for examination by its respective foreign tax authorities, mainly Canada 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 December 28, 2014 the Company has remaining unrecognized tax positions of approximately $0.6 million, including accrued interest and penalties of $0.1 million. The Company believes that none of its unrecognized tax positions will be resolved over the next twelve months.

 

Note 12 – Business Segments

 

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

 

 

1-800-Flowers.com Consumer Floral,

 

BloomNet Wire Service, and

 

Gourmet Food and 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 (1) below), nor does it include depreciation and amortization, other income and income taxes, or stock-based compensation and Harry & David transaction costs, both of 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

 

Net Revenues from Continuing Operations

 

December 28,

2014

   

December 29,

2013

   

December 28,

2014

   

December 29,

2013

 
           

(in thousands)

         
                                 

Segment Net Revenues:

                               

1-800-Flowers.com Consumer Floral

  $ 99,600     $ 97,133     $ 173,998     $ 168,682  

BloomNet Wire Service

    20,110       19,912       40,121       40,258  

Gourmet Food & Gift Baskets

    414,669       149,624       447,028       180,863  

Corporate (1)

    312       203       512       398  

Intercompany eliminations

    (416 )     (535 )     (681 )     (816 )

Total net revenues

  $ 534,275     $ 266,337     $ 660,978     $ 389,385  

  

 
16 

 

  

   

Three Months Ended

   

Six Months Ended

 

Operating Income from Continuing Operations

 

December 28,

2014

   

December 29,

2013

   

December 28,

2014

   

December 29,

2013

 
           

(in thousands)

         
                                 

Segment Contribution Margin:

                               

1-800-Flowers.com Consumer Floral

  $ 9,527     $ 8,680     $ 16,777     $ 15,109  

Bloomnet Wire Service (*)

    6,668       6,525       13,165       12,964  

Gourmet Food & Gift Baskets (*)

    90,455       31,044       88,020       28,997  

Segment Contribution Margin Subtotal

    106,650       46,249       117,962       57,070  

Corporate (**)

    (23,138 )     (12,514 )     (35,977 )     (25,727 )

Depreciation and amortization

    (8,679 )     (5,036 )     (13,780 )     (9,725 )

Operating income

  $ 74,833     $ 28,699     $ 68,205     $ 21,618  

 

 

(*)

Refer to Note 9 - Fire at the Fannie May warehouse and distribution facility.  On November 27, 2014, a fire occurred at the Company's Maple Heights, Ohio warehouse and distribution facility.  

As a result of the fire, the Company had limited supplies of its Fannie May Fine Chocolates and Harry London Chocolates products available in its retail stores as well as for its ecommerce and wholesale channels during the holiday season.  

The impact of lost sales related to the fire was approximately $13.8 million with an estimated impact to income from continuing operations before income taxes of $5.6 million during both the three and six months ended December 28, 2014. While the Company has restored operations, it is expected that revenues derived from our Fannie May and Harry London Chocolates business will continue to be impacted by the inability to meet customer requirements during the balance of the fiscal year, albeit to a significantly lesser amount than in our fiscal second quarter of 2015.  

 

 

(**)

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, and in the first and second quarters of fiscal 2015, transaction costs related to the acquisition of Harry & David, in the amount of $3.8 million and $4.5 million, respectively. In order to leverage the Company's infrastructure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions, other than those of the Customer Service Center, which are allocated directly to the above segments based upon usage, are included within corporate expenses, as they are not directly allocable to a specific segment. The Company has commenced integrating Harry & David into its operating platforms, and as such, their operating costs have been classified in a similar manner.

  

Note 13-Discontinued Operations

 

During the fourth quarter of fiscal 2013, the Company made the strategic decision to divest the e-commerce and procurement businesses of The Winetasting Network in order to focus on growth opportunities in its Gourmet Foods and Gift Baskets business segment. The Company closed on the sale of its e-commerce and procurement businesses on December 31, 2013. The Company has classified the results the e-commerce and procurement business of Winetasting Network as a discontinued operation for fiscal 2014.

  

 
17 

 

  

Results for discontinued operations are as follows:

 

   

Three Months Ended

   

Six Months Ended

 
   

December 28,

2014

   

December 29,

2013

   

December 28,

2014

   

December 29,

2013

 
   

(in thousands)

 

Net revenues from discontinued operations

  $ -     $ 755     $ -     $ 1,661  

Loss from discontinued operations, net of tax

  $ -     $ (374 )   $ -     $ (456 )

Adjustment to loss on sale of discontinued operations, net of tax

  $ -     $ 877     $ -     $ 877  

Income from discontinued operations, net of tax

  $ -       503     $ -     $ 421  

 

Note 14 – Commitments and Contingencies

 

Leases

 

The Company currently leases office, store facilities, and equipment under various leases through fiscal 2030. As these leases expire, it can be expected that in the normal course of business they will be renewed or replaced. Most lease agreements 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 has also entered into leases that are on a month-to-month basis. These leases are classified as either capital leases, operating leases or subleases, as appropriate.

 

As of December 28, 2014 future minimum payments under non-cancelable operating leases with initial terms of one year or more consist of the following:

 

   

Operating Leases

 
   

(in thousands)

 
         

2015

  $ 11,204  

2016

    20,728  

2017

    17,992  

2018

    14,249  

2019

    10,494  

Thereafter

    47,118  

Total minimum lease payments

  $ 121,785  

 

Legal Proceedings

 

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

 

Unfair Trade Practices:

 

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

  

 
18

 

 

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

 

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

 

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

 

On March 28, 2014, the Court issued a series of rulings disposing of all the pending motions in both the Consolidated Action and the Frank Action. Among other things, the Court dismissed several causes of action, leaving pending a claim for CUTPA violations stemming from Trilegiant’s refund mitigation strategy and a claim for unjust enrichment. Thereafter, the Court consolidated the Frank case into the Consolidated Action. On April 28, 2014 Plaintiffs moved for leave to appeal the various rulings against them to the United States Court of Appeals for the Second Circuit and to have a partial final judgment entered dismissing those claims that the Court had ordered dismissed. The Court has not yet ruled on this new motion. The Company has filed its answer to the complaint on May 12, 2014.

 

Edible Arrangements:

 

On November 20, 2014, a complaint was filed in the United States District Court for the District of Connecticut by Edible Arrangements LLC and Edible Arrangements International, LLC, alleging that the Company’s use of the terms “Fruit Bouquets,” “Edible,” “Bouquet,” “Edible Fruit Arrangements,” Edible Arrangements,” and “DoFruit” and its use of a six petal pineapple slice design in connection with marketing and selling edible fruit arrangements constitutes trademark infringement, false designation of origin, dilution, and contributory infringement under the federal Lanham Act, 29 USC § 1114 and 1125(a), common law unfair competition, and a violation of the Connecticut Unfair Trade Practices Act, Connecticut General Statutes § 42-110b (a). The Complaint alleges Edible Arrangements has been damaged in the amount of $97,411,000. The Complaint requests a declaratory judgment in favor of Edible Arrangements, an injunction against the Company’s use of the terms and design, an accounting and payment of the Company’s profits from its sale of edible fruit arrangements, a trebling of the Company’s profits from such sales or of any damages sustained by Edible Arrangements, punitive damages, and attorneys’ fees. On November 24, 2014, the Complaint was amended to add a breach of contract claim for use of these terms and the design, based on a contract that had been entered by one of the Company’s subsidiaries prior to its acquisition by the Company. The time for the Company to respond to the Complaint had been January 30, 2015, by Order of the Court entered December 15, 2014.

 

 
19 

 

 

On January 29, 2015, the Plaintiffs amended the Complaint to add one of the Company’s subsidiaries and to claim its damages were $ 101,436,000. Since the Complaint was amended, the time for the Company to respond to the Complaint and Amended Complaint was extended. By agreement, the date for response is set for February 27, 2015.
 

The Company believes there are substantial defenses to the claims and expects to defend the claims vigorously.

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

  

 
20

 

 

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

 

Forward Looking Statements

 

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) is intended to provide an understanding of our financial condition, change in financial condition, cash flow, liquidity and results of operations. The following MD&A discussion should be read in conjunction with the consolidated financial statements and notes to those statements that appear elsewhere in this Form 10-Q and in the Company’s Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those discussed or referred to in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption “Forward-Looking Information and Factors That May Affect Future Results” and under Part I, Item 1A, of the Company’s Annual Report on Form 10-K under the heading “Risk Factors.”

 

Overview

 

1-800-FLOWERS.COM, Inc. is the world’s leading florist and gift shop. For more than 38 years, 1-800-FLOWERS® (1-800-356-9377 or www.1800flowers.com) has been helping deliver smiles for our customers with gifts for every occasion, including fresh flowers and the finest selection of plants, gift baskets, gourmet foods, confections, candles, balloons and plush stuffed animals. As always, our 100% Smile Guarantee® backs every gift. 1-800-FLOWERS.COM was named a winner of the 2015 “Best Companies to Work for in New York State” award by The New York Society for Human Resource Management. 1-800-FLOWERS.COM was awarded the 2014 Silver Stevie Award, recognizing the organization's outstanding Customer Service and commitment to our 100% Smile Guarantee®. 1-800-FLOWERS.COM received a Gold Award for Best User Experience on a Mobile Optimized Site for the 2013 Horizon Interactive Awards.

 

The Company’s BloomNet® international floral wire service (www.mybloomnet.net) provides a broad range of quality products and value-added services designed to help professional florists grow their businesses profitably. The 1-800-FLOWERS.COM “Gift Shop” also includes gourmet gifts such as premium, gift-quality fruits and other gourmet items from Harry & David® (1-877-322-1200 or www.harryanddavid.com), popcorn and specialty treats from The Popcorn Factory® (1-800-541-2676 or www.thepopcornfactory.com); cookies and baked gifts from Cheryl’s® (1-800-443-8124 or www.cheryls.com); premium chocolates and confections from Fannie May® confections brands (www.fanniemay.com and www.harrylondon.com); gift baskets and towers from 1-800-Baskets.com® (www.1800baskets.com); incredible, carved fresh fruit arrangements from FruitBouquets.com (www.fruitbouquets.com); top quality steaks and chops from Stock Yards® (www.stockyards.com); as well as premium branded customizable invitations and personal stationery from FineStationery.com® (www.finestationery.com). The Company’s Celebrations® brand (www.celebrations.com) is a source for creative party ideas, must-read articles, online invitations and e-cards, all created to help people celebrate holidays and the everyday.

 

On September 30, 2014, the Company completed its acquisition of Harry & David Holdings, Inc (Harry & David), a leading multi-channel specialty retailer and producer of branded premium gift-quality fruit, gourmet food products and other gifts marketed under the Harry & David®, Wolferman’s® and Cushman’s® brands. The transaction, at a purchase price of $142.5 million, includes the Harry & David’s brands and websites as well as its headquarters, manufacturing and distribution facilities and orchards in Medford, Oregon, a warehouse and distribution facility in Hebron, Ohio and 48 Harry & David retail stores located throughout the country. Harry & David’s revenues were approximately $386 million in its fiscal 2014, with adjusted EBITDA of approximately $28 million.

 

Including the anticipated contribution of Harry & David from date of acquisition, the Company anticipates generating total annual net revenues in excess of $1.1 billion and Adjusted EBITDA of approximately $90.0 million for Fiscal 2015 (excluding stock based compensation, transaction costs and purchase accounting adjustments related to the Harry & David acquisition and the impact of the Fannie May warehouse fire). It should be noted that the revenue and Adjusted EBITDA projections for Fiscal 2015 do not include the results of Harry & David for the fiscal first quarter of the year, which is typically its lowest in terms of revenues and includes significant losses due to the seasonality of its business. The historical results of Harry & David, as well as applicable pro-forma results are included in the Company’s Form 8-K/A filed on December 16, 2014.

  

 
21

 

 

In order to finance the acquisition, on September 30, 2014, the Company entered into a Credit Agreement with JPMorgan Chase Bank as administrative agent, and a group of lenders (the “2014 Credit Facility”), consisting of a $142.5 million five-year term loan (the “Term Loan”) with a maturity date of September 30, 2019, and a co-terminus revolving credit facility (the “Revolver”), with a seasonally adjusted limit ranging from $100.0 to $200.0 million, which may be used for working capital (subject to the applicable sublimit) and general corporate purposes.

  

On November 27, 2014, a fire occurred at the Company's Maple Heights, Ohio warehouse and distribution facility. While the fire did not cause any injuries, the building was severely damaged, rendering it inoperable for the key calendar 2014 holiday season, and all Fannie May and Harry London confections in the facility were destroyed.

 
As a result, the Company had limited supplies of its Fannie May Fine Chocolates and Harry London Chocolates products available in its retail stores as well as for its ecommerce and wholesale channels during the holiday season. While the Company implemented contingency plans to increase production for Fannie May Fine Chocolates and Harry London Chocolates products at its state-of-the-art chocolate and confection
production facility in Canton, Ohio and to shift warehousing and distribution operations to alternate Company facilities, product availability was severely limited.

 

The impact of lost sales related to the fire was approximately $13.8 million with an estimated impact to income from continuing operations before income taxes of $5.6 million during both the three and six months ended December 28, 2014. While the Company has restored operations, it is expected that revenues derived from our Fannie May and Harry London Chocolates business will continue to be impacted by the inability to meet customer requirements during the balance of the fiscal year, albeit to a significantly lesser amount than in our fiscal second quarter of 2015. While no insurance recoveries have been recorded to date related to lost sales, the Company expects that its property and business interruption insurance will cover these losses.

 

During the fourth quarter of fiscal 2013, the Company made the strategic decision to divest the e-commerce and procurement businesses of The Winetasting Network in order to focus on growth opportunities in its Gourmet Foods and Gift Baskets business segment. The Company closed on the sale of its Winetasting Network business on December 31, 2013. The Company has classified for Fiscal 2014 and prior, the results of the e-commerce and procurement business of Winetasting Network as a discontinued operation.

 

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

  

 
22

 

 

Segment Information

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

Selected Financial Information - Segment Information

(in thousands)

 

   

Three Months Ended

 
   

December 28,

2014

   

Impact of

Warehouse

Fire

   

Impact of Purchase Accounting Adjustment to Deferred Revenue

   

Impact of Purchase Accounting Adjustment for Inventory Fair Value Step-Up

   

Impact of Harry &

David Transaction and Related Costs

   

Adjusted

Net

Revenue

   

December 29,

2013

   

%

Change

 

Net revenues from continuing operations:

                                                               

1-800-Flowers.com Consumer Floral

  $ 99,600     $ -     $ -     $ -     $ -     $ 99,600     $ 97,133       2.5 %

BloomNet Wire Service

    20,110       250       -       -       -       20,360       19,912       2.2 %

Gourmet Food & Gift Baskets

    414,669       13,596       1,621       -       -       429,886       149,624       187.3 %

Corporate

    312       -       -       -       -       312       203       53.7 %

Intercompany eliminations

    (416 )     -       -       -       -       (416 )     (535 )     22.2 %

Total net revenues from continuing operations

  $ 534,275     $ 13,846     $ 1,621     $ -     $ -     $ 549,742     $ 266,337       106.4 %

 

   

Three Months Ended

 
   

December 28,

2014

   

Impact of

Warehouse

Fire

   

Impact of Purchase Accounting Adjustment to Deferred Revenue

   

Impact of Purchase Accounting Adjustment for Inventory Fair Value Step-Up

   

Impact of Harry &

David Transaction and Related Costs

   

Adjusted

Gross

Profit

   

December 29,

2013

   

%

Change

 

Gross profit from continuing operations:

                                                               

1-800-Flowers.com Consumer Floral

  $ 38,577     $ -     $ -     $ -     $ -     $ 38,577     $ 37,643       2.5 %
      38.7 %     -       -       -       -       38.7 %     38.8 %        

BloomNet Wire Service

    11,075       50       -       -       -       11,125       10,764       3.4 %
      55.1 %     -       -       -       -       54.6 %     54.1 %        

Gourmet Food & Gift Baskets

    190,577       5,856       1,621       4,760       -       202,814       62,403       225.0 %
      46.0 %     -       -       -       -       47.2 %     41.7 %        

Corporate (*)

    196       -       -       -       -       196       167       17.4 %
      62.8 %     -       -       -       -       62.8 %     82.3 %        

Total gross profit from continuing operations

  $ 240,425     $ 5,906     $ 1,621     $ 4,760     $ -     $ 252,712     $ 110,977       127.7 %
      45.0 %     42.7 %     100.0 %     -       -       46.0 %     41.7 %        

 

   

Three Months Ended

 

EBITDA from continuing operations, excluding stock- based compensation

 

December 28,

2014

   

Impact of

Warehouse

Fire

   

Impact of Purchase Accounting Adjustment to Deferred Revenue

   

Impact of Purchase Accounting Adjustment for Inventory Fair Value Step-Up

   

Impact of Harry &

David Transaction and Related Costs

   

Adjusted

EBITDA

   

December 29,

2013

   

%

Change

 

Category Contribution Margin from continuing operations:

                                                               

1-800-Flowers.com Consumer Floral

  $ 9,527     $ -     $ -     $ -     $ -     $ 9,527     $ 8,680       9.8 %

BloomNet Wire Service

    6,668       50       -       -       -       6,718       6,525       3.0 %

Gourmet Food & Gift Baskets

    90,455       5,531       1,621       4,760       -       102,367       31,044       229.7 %

Category Contribution Margin Subtotal

    106,650       5,581       1,621       4,760       -       118,612       46,249       156.5 %

Corporate (*)

    (23,138 )     -       -       -       3,755       (19,383 )     (12,514 )     -54.9 %

EBITDA from continuing operations

  $ 83,512     $ 5,581     $ 1,621     $ 4,760     $ 3,755     $ 99,229     $ 33,735       194.1 %
                                                                 

Add: Stock-based compensation

    1,515       -       -       -       -       1,515       1,145       32.3 %

EBITDA from continuing operations, excluding stock-based compensation

  $ 85,027     $ 5,581     $ 1,621     $ 4,760     $ 3,755     $ 100,744     $ 34,880       188.8 %

 
23

 

 

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

Selected Financial Information - Segment Information (continued)

(in thousands)

 

   

Six Months Ended

 
   

December 28,

2014

   

Impact of

Warehouse

Fire

   

Impact of Purchase Accounting Adjustment to Deferred Revenue

   

Impact of Purchase Accounting Adjustment for Inventory Fair Value Step-Up

   

Impact of Harry &

David Transaction and Related Costs

   

Adjusted

Net

Revenue

   

December 29,

2013

   

%

Change

 

Net revenues from continuing operations:

                                                               

1-800-Flowers.com Consumer Floral

  $ 173,998     $ -     $ -     $ -     $ -     $ 173,998     $ 168,682       3.2 %

BloomNet Wire Service

    40,121       250       -       -       -       40,371       40,258       0.3 %

Gourmet Food & Gift Baskets

    447,028       13,596       1,621       -       -       462,245       180,863       155.6 %

Corporate

    512       -       -       -       -       512       398       28.6 %

Intercompany eliminations

    (681 )     -       -       -       -       (681 )     (816 )     16.5 %

Total net revenues from continuing operations

  $ 660,978     $ 13,846     $ 1,621     $ -     $ -     $ 676,445     $ 389,385       73.7 %

 

   

Six Months Ended

 
   

December 28,

2014

   

Impact of

Warehouse

Fire

   

Impact of Purchase Accounting Adjustment to Deferred Revenue

   

Impact of Purchase Accounting Adjustment for Inventory Fair Value Step-Up

   

Impact of Harry &

David Transaction and Related Costs

   

Adjusted

Gross

Profit

   

December 29,

2013

   

%

Change

 

Gross profit from continuing operations:

                                                               

1-800-Flowers.com Consumer Floral

  $ 67,311     $ -     $ -     $ -     $ -     $ 67,311     $ 65,601       2.6 %
      38.7 %     -       -       -       -       38.7 %     38.9 %        

BloomNet Wire Service

    22,151       50       -       -       -       22,201       21,547       3.0 %
      55.2 %     -       -       -       -       55.0 %     53.5 %        

Gourmet Food & Gift Baskets

    203,799       5,856       1,621       4,760       -       216,037       74,642       189.4 %
      45.6 %     -       -       -       -       46.7 %     41.3 %        

Corporate (*)

    477       -       -       -       -       477       484       -1.4 %
      93.2 %     -       -       -       -       93.2 %     121.6 %        

Total gross profit from continuing operations

  $ 293,738     $ 5,906     $ 1,621     $ 4,760     $ -     $ 306,026     $ 162,274       88.6 %
      44.4 %     42.7 %     100.0 %     -       -       45.2 %     41.7 %        

 

   

Six Months Ended

 

EBITDA from continuing operations, excluding stock- based compensation

 

December 28,

2014

   

Impact of

Warehouse

Fire

   

Impact of Purchase Accounting Adjustment to Deferred Revenue

   

Impact of Purchase Accounting Adjustment for Inventory Fair Value Step-Up

   

Impact of Harry &

David Transaction and Related Costs

   

Adjusted

EBITDA

   

December 29,

2013

   

%

Change

 

Category Contribution Margin from continuing operations:

                                                               

1-800-Flowers.com Consumer Floral

  $ 16,777     $ -     $ -     $ -     $ -     $ 16,777     $ 15,109       11.0 %

BloomNet Wire Service

    13,165       50       -       -       -       13,215       12,964       1.9 %

Gourmet Food & Gift Baskets

    88,020       5,531       1,621       4,760       -       99,932       28,997       244.6 %

Category Contribution Margin Subtotal

    117,962       5,581       1,621       4,760       -       129,924       57,070       127.7 %

Corporate (*)

    (35,977 )     -       -       -       4,468       (31,509 )     (25,727 )     -22.5 %
                                                                 

EBITDA from continuing operations

  $ 81,985     $ 5,581     $ 1,621     $ 4,760     $ 4,468     $ 98,415     $ 31,343       214.0 %
                                                                 

Add: Stock-based compensation

    2,782       -       -       -       -       2,782       2,211       25.8 %

EBITDA from continuing operations, excluding stock-based compensation

  $ 84,767     $ 5,581     $ 1,621     $ 4,760     $ 4,468     $ 101,197     $ 33,554       201.6 %
 
24

 

 

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

Selected Financial Information – Reconciliations of Historical Information

(in thousands)

 

   

Three Months Ended

   

Six Months Ended

 

Reconciliation of net income from continuing operations to adjusted net income from continuing operations attributable to 1-800-FLOWERS.COM, Inc.:

 

December 28,

2014

   

December 29,

2013

   

December 28,

2014

   

December 29,

2013

 

Income from continuing operations

  $ 45,540     $ 17,483     $ 40,962     $ 12,926  

Less: Net loss attributable to noncontrolling interest

    (231 )     (41 )     (559 )     (41 )

Income from continuing operations attributable to 1-800-FLOWERS.COM, Inc.

    45,771       17,524       41,521       12,967  

Add: Impact of warehouse fire, net of tax

    3,527       -       3,527       -  

Add: Purchase accounting adjustment to deferred revenue, net of tax

    1,024       -       1,024       -  

Add: Purchase accounting adjustment for inventory fair value step-up, net of tax

    3,008       -       3,008       -  

Add: Harry & David transaction and related costs, net of tax

    2,373       -       2,824       -  

Adjusted income from continuing operations attributable to

1-800-FLOWERS.COM, Inc.

  $ 55,703     $ 17,524     $ 51,904     $ 12,967  
                                 
                                 

Income per common share from continuing operations attributable to

1-800-FLOWERS.COM, Inc.

                               

Basic

  $ 0.71     $ 0.27     $ 0.65     $ 0.20  

Diluted

  $ 0.68     $ 0.27     $ 0.62     $ 0.20  
                                 

Adjusted net income per common share from continuing operations attributable to

1-800-FLOWERS.COM, Inc.

                               

Basic

  $ 0.86     $ 0.27     $ 0.81     $ 0.20  

Diluted

  $ 0.83     $ 0.27     $ 0.78     $ 0.20  
                                 

Weighted average shares used in the calculation of net income and adjusted net income per common share from continuing operations attributable to

1-800-FLOWERS.COM, Inc.

                               

Basic

    64,443       64,016       64,195       63,907  

Diluted

    67,061       66,095       66,641       66,383  

 

 

 
25

 

  

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

Selected Financial Information – Reconciliations of Historical Information (continued)

(in thousands)

 

   

Three Months Ended

   

Years Ended

 

Reconciliation of income from continuing operations attributable to 1-800-Flowers.com, Inc. to Adjusted EBITDA from Continuing Operations, excluding stock-based compensation(**):

 

December 28,

2014

   

December 29,

2013

   

December 28,

2014

   

December 29,

2013

 
                                 

Income from continuing operations attributable to

1-800-FLOWERS.COM, Inc.

  $ 45,771     $ 17,524     $ 41,521     $ 12,967  

Add:

                               

Interest expense and other, net

    2,638       418       3,391       710  

Depreciation and amortization

    8,679       5,036       13,780       9,725  

Income tax expense

    26,655       10,798       23,852       7,982  

Less:

                               

Net loss attributable to non-controlling interest

    231       41       559       41  

EBITDA from continuing operations

    83,512       33,735       81,985       31,343  
                                 

Add: Stock-based compensation

    1,515       1,145       2,782       2,211  

EBITDA from continuing operations, excluding stock-based compensation

    85,027       34,880       84,767       33,554  
                                 

Add: Impact of warehouse fire

    5,581       -       5,581       -  

Add: Purchase accounting adjustment to deferred revenue, net of tax

    1,621       -       1,621       -  

Add: Purchase accounting adjustment for inventory fair value step-up

    4,760       -       4,760       -  

Add: Harry & David transaction and related costs

    3,755       -       4,468       -  

Adjusted EBITDA from continuing operations, excluding stock-based compensation

  $ 100,744     $ 34,880     $ 101,197     $ 33,554  

 

 

(*)

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.

 

(**)

Performance is measured based on segment contribution margin or segment Adjusted EBITDA, reflecting 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, described above, depreciation and amortization, other income (net), nor does it include one-time charges or gains. 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.

  

 
26

 

 

Results of Operations

 

Net Revenues

 

   

Three Months Ended

   

Six Months Ended

 
   

December 28,

2014

   

December 29,

2013

   

% Change

   

December 28,

2014

   

December 29,

2013

   

Change

 
   

(dollars in thousands)

         

Net revenues:

                                               

E-Commerce

  $ 409,082     $ 180,095       127.1 %   $ 493,120     $ 260,975       89.0 %

Other

    125,193       86,242       45.2 %     167,858       128,410       30.7 %

Total net revenues

  $ 534,275     $ 266,337       100.6 %   $ 660,978     $ 389,385       69.7 %

 

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

 

During the three and six months ended December 28, 2014, revenues increased by 100.6% and 69.7%, respectively, in comparison to the same periods of the prior year, primarily as a result of the incremental revenue generated by Harry & David, which was acquired on September 30, 2014, as well as organic growth within all three business segments, after adjusting for estimated lost revenues associated with the Thanksgiving Day fire at the Company’s Fannie May warehouse and distribution center of $13.8 million and a $1.6 million revenue adjustment associated with purchase accounting related to the Harry & David acquisition. After adjusting for estimated lost revenue from the warehouse fire, and for the impact of purchase accounting adjustments to reduce the acquired value of Harry & David’s deferred revenue, pro-forma revenue increased by 106.4% and 73.7%, during the three and six months ended December 28, 2014, respectively. Excluding the impact of acquisitions, organic revenue, adjusted for the estimated lost revenue from the Fannie May warehouse fire, increased 4.8% and 3.9%, during the three and six months ended December 28, 2014, respectively.

 

E-commerce revenues (combined online and telephonic) increased by 127.1% and 89.0%, respectively, during the three and six months ended December 28, 2014, primarily as a result of the incremental e-commerce revenue generated by the recent acquisition of Harry & David, as well as organic growth from the Company’s Consumer Floral and Gourmet Food and Gift Baskets segments, offset by the estimated loss of revenues from the warehouse fire. Reflecting the incremental sales from Harry & David, the Company fulfilled approximately 5,302,000 and 6,616,000 orders through its e-commerce sales channels (online and telephonic sales) during the three and six months ended December 28, 2014, respectively, compared to 3,258,000 and 4,523,000 orders during the same periods of the prior year, while average order value was $77.16 and $74.53 during the three and six months ended December 28, 2014, compared to $55.11 and $57.52 during the same periods of the prior year.

 

Other revenues are comprised of the Company’s BloomNet Wire Service segment, as well as the wholesale and retail channels of its 1-800-Flowers.com Consumer Floral and Gourmet Food and Gift Baskets segments. Other revenues increased by 45.2% and 30.7%, respectively, during the three and six months ended December 28, 2014, in comparison to the same periods of the prior year, primarily as a result of the addition of Harry & David’s retail and wholesale revenue, offset in part by the estimated lost sales caused by the Thanksgiving Day warehouse fire.

 

The 1-800-Flowers.com Consumer Floral segment includes the operations of the 1-800-Flowers.com and iFlorist brands, which derive revenue from the sale of consumer floral products through their e-commerce sales channels (telephonic and online sales), royalties from its franchise operations, as well as the operations of Fine Stationery, an e-commerce retailer of personalized stationery, invitations and announcements. Net revenues increased 2.5% and 3.2%, respectively, during the three and six months ended December 28, 2014, in comparison to the same periods of the prior year, as a result of increased average order value and slightly higher order volume, and the incremental volume provided by iFlorist, which was acquired in December 2013. Excluding the impact of the acquisition of iFlorist, revenue growth within the 1-800-Flowers.com Consumer Floral segment during the three and six months ended December 28, 2014 was 1.8% and 2.1%, respectively.
 

The BloomNet Wire Service segment includes revenues from membership fees as well as other product and service offerings to florists. Net revenues increased 1.0% during the three months ended December 28, 2014 compared to the same period of the prior year as a result of network order volume related increases in transaction fees and clearinghouse revenue, as well as increased accessorial service revenue such as directory advertising, offset in part by slightly lower wholesale revenues, due in part to the aforementioned warehouse fire. Net revenues for the for the six months ended December 28, 2014, remained relatively flat as compared to the same period of the prior year, as network order volume related increases in revenue were offset by lower wholesale revenue due to the estimated lost sales from the warehouse fire and the west coast dock strike. Adjusted for the impact of the warehouse fire, net revenues increased 2.2% and 0.3% during the three and six months ended December 28, 2014, compared to the same periods of the prior year.

   
 
27

 

 

The Gourmet Food & Gift Baskets segment includes the operations of Harry & David, Cheryl’s, Fannie May Confections, The Popcorn Factory, 1-800-Baskets/DesignPac, and Stockyards.com. Revenue is derived from the sale of gourmet fruits, cookies, baked gifts, premium chocolates and confections, gourmet popcorn, gift baskets, and prime steaks and chops through the Company’s e-commerce sales channels (telephonic and online sales) and company-owned and operated retail stores under the Harry & David, Cheryl’s and Fannie May brand names, as well as wholesale operations. Net revenue during the three and six months ended December 28, 2014 increased by 177.1% and 147.2%, respectively, in comparison to the same periods of the prior year, driven primarily by the incremental revenue generated by Harry & David, which was acquired on September 30, 2014, and strong organic e-commerce growth from Cheryl’s and 1-800-Baskets, partially offset by reduced revenue from Fannie May, due to the Thanksgiving Day warehouse fire. After adjusting for the estimated lost revenue from the warehouse fire, and for the impact of purchase accounting adjustments to reduce the acquired value of Harry & David’s deferred revenue, pro-forma revenue for the Gourmet Food & Gift Baskets segment increased 187.3% and 155.6%, during the three and six months ended December 28, 2014. Excluding the revenue contribution of Harry & David, Gourmet Food & Gift Baskets organic revenue, adjusted for the estimated lost revenue from the Fannie May warehouse fire, increased 6.9% and 6.4%, during the three and six months ended December 28, 2014, respectively.

   

Gross Profit

   

   

Three Months Ended

   

Six Months Ended

 
   

December 28,

2014

   

December 29,

2013

   

% Change

   

December 28,

2014

   

December 29,

2013

   

% Change

 
   

(dollars in thousands)

         
                                                 

Gross profit

  $ 240,425     $ 110,977       116.6 %   $ 293,738     $ 162,274       81.0 %

Gross margin %

    45.0 %     41.7 %             44.4 %     41.7 %        

 

Gross profit consists of net revenues less cost of revenues, which is comprised primarily of florist fulfillment costs (mainly 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 during the three and six months ended December 28, 2014 increased by 116.6% and 81.0%, respectively, in comparison to the same periods of the prior year, primarily as a result of the incremental revenue and associated gross margins generated by Harry & David, which was acquired on September 30, 2014, as well as organic growth within all three business segments, after adjusting for estimated lost revenues associated with the Thanksgiving Day fire at the Company’s Fannie May warehouse and distribution center. After adjusting for estimated lost revenue from the warehouse fire of $13.8 million, and for the impact of Harry & David purchase accounting adjustments related to deferred revenue of $1.6 million and step-up of inventory to fair value of $4.8 million, gross profit during the three and six months ended December 28, 2014, increased by 127.7% and 88.6%, respectively, in comparison to the same periods of the prior year. Excluding the impact of acquisitions, organic gross profit, adjusted for the estimated lost revenue from the warehouse fire, increased 3.2% during both the three and six months ended December 28, 2014, respectively.

 

Overall gross margin percentages increased 330 basis points and 270 basis points to 45.0% and 44.4%, respectively, during the three and six months ended December 28, 2014, in comparison to the same periods of the prior year, primarily attributable to the aforementioned Harry & David acquisition, which earns higher margins due to its vertically integrated operations. After adjusting for estimated lost revenue from the warehouse fire, and for the impact of Harry & David purchase accounting adjustments related to deferred revenue and step-up of inventory to fair value, pro-forma gross margin percentage increased to 46.0% and 45.2%, during the three and six months ended December 28, 2014, respectively. Excluding the impact of acquisitions, organic gross margin percentage, adjusted for the estimated lost revenue from the warehouse fire, was 41.0% and 41.4% during the three and six months ended December 28, 2014, respectively.

 

 
28

 

 

The 1-800-Flowers.com Consumer Floral segment gross profit increased by 2.5% and 2.6%, respectively, during the three and six months ended December 28, 2014, in comparison to the same period of the prior year, due to the aforementioned increase in revenues (including the incremental revenues of iFlorist, acquired in December 2013), while gross margin percentage of 38.7% in both the three and six months ended December 28, 2014 declined 10 basis points and 20 basis points, respectively, primarily due to the lower margins earned by iFlorist.

 

The BloomNet Wire Service segment gross profit increased by 2.9% and 2.8%, respectively, and gross margin percentage increased 100 basis points and 170 basis points, to 55.1% and 55.2%, respectively, during the three and six months ended December 28, 2014, in comparison to the same periods of the prior year, primarily due to revenue mix, which included growth of higher margin transaction fees, directory advertising and other fees, offset by a reduction in lower margin wholesale product revenues due in part to the aforementioned warehouse fire.

 

The Gourmet Food & Gift Baskets segment gross profit increased by 205.4% and 173.0%, respectively, during the three and six months ended December 28, 2014, in comparison to the same period of the prior year, driven primarily by the incremental revenue generated by Harry & David, which was acquired on September 30, 2014, and strong organic e-commerce growth from Cheryl’s and 1-800-Baskets, partially offset by reduced revenue from Fannie May, due to the Thanksgiving Day warehouse fire. After adjusting for estimated lost revenue from the warehouse fire of $13.6 million, and for the impact of Harry & David purchase accounting adjustments related to deferred revenue of $1.6 million and step-up of inventory to fair value of $4.8 million, gross profit during the three and six months ended December 28, 2014, increased by 225.0% and 189.4%, respectively, in comparison to the same periods of the prior year. Excluding the impact of acquisitions, organic gross profit, adjusted for the estimated lost revenue from the warehouse fire, increased 4.0% and 4.7% during both the three and six months ended December 28, 2014, respectively. Gross margin percentage increased 430 basis points in both the three and six months ended December 28, 2014, to 46.0% and 45.6%, respectively, primarily attributable to the aforementioned Harry & David acquisition, which earns higher margins due to its vertically integrated operations. After adjusting for estimated lost revenue from the warehouse fire, and for the impact of Harry & David purchase accounting adjustments related to deferred revenue and step-up of inventory to fair value, pro-forma gross margin percentage increased to 47.2% and 46.7%, during the three and six months ended December 28, 2014, respectively. Excluding the impact of the acquisition of Harry & David, organic gross margin percentage, adjusted for the estimated lost revenue from the warehouse fire, was 40.6% during the three and six months ended December 28, 2014, respectively.
 

Marketing and Sales Expense

 

   

Three Months Ended

   

Six Months Ended

 
   

December 28,

2014

   

December 29,

2013

   

% Change

   

December 28,

2014

   

December 29,

2013

   

% Change

 
   

(dollars in thousands)

         
                                                 

Marketing and sales

  $ 122,026     $ 57,656       111.6 %   $ 157,598     $ 92,135       71.1 %

Percentage of net revenues

    22.8 %     21.6 %             23.8 %     23.7 %        

 

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 increased by 111.6% and 71.1%, respectively, during the three and six months ended December 28, 2014, in comparison to the same periods of the prior year primarily as a result of the incremental spend due to the acquisitions of Harry & David on September 30, 2014, and iFlorist in December 2013, as well as higher labor and facility costs associated with an increase in Fannie May store count, and an overall increase in variable costs due to sales volume. The increase in marketing and sales as a percentage of net revenues during the three months ended December 28, 2014 was due to the higher marketing and spend ratio of Harry & David, combined with the impact of the warehouse fire. Excluding the impact of acquisitions, organic marketing and sales as a percentage of net revenues, adjusted for the estimated lost revenue from the warehouse fire, was 21.6% and 23.6% during the three and six months ended December 28, 2014, respectively.

  

 
29

 

 

Technology and Development Expense

 

   

Three Months Ended

   

Six Months Ended

 
   

December 28,

2014

   

December 29,

2013

   

% Change

   

December 28,

2014

   

December 29,

2013

   

% Change

 
   

(dollars in thousands)

         
                                                 

Technology and development

  $ 9,329     $ 5,319       75.4 %   $ 14,929     $ 10,717       39.3 %

Percentage of net revenues

    1.7 %     2.0 %             2.3 %     2.8 %        

 

 

Technology and development expense consists primarily of payroll and operating expenses of the Company’s information technology group, costs associated with its web sites, 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 expenses increased 75.4% and 39.3%, while spend as a percentage of net revenues decreased to 1.7% and 2.3% during the three and six months ended December 28, 2014, respectively, compared to the same periods of the prior year due to the technology and development costs and expense ratio of Harry & David, which was acquired on September 30, 2014. Excluding the impact of acquisitions, organic technology and development expense as a percentage of net revenues, adjusted for the estimated lost revenue from the warehouse fire, was 2.0% and 2.7% during the three and six months ended December 28, 2014, respectively.

 

General and Administrative Expense

 

   

Three Months Ended

   

Six Months Ended

 
   

December 28,

2014

   

December 29,

2013

   

% Change

   

December 28,

2014

   

December 29,

2013

   

% Change

 
   

(dollars in thousands)

         
                                                 

General and administrative

  $ 25,558     $ 14,267       79.1 %   $ 39,226     $ 28,079       39.7 %

Percentage of net revenues

    4.8 %     5.4 %             5.9 %     7.2 %        

 

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 expense increased by 79.1% and 39.7%, respectively, during the three and six months ended December 28, 2014, compared to the same periods of the prior year, as a result of incremental general and administrative expense of Harry & David, acquired on September 30, 2014, and related transaction expenses of $3.8 million and $4.5 million during the three and six month periods ended December 28, 2014. Excluding the impact of acquisitions, organic general and administrative expense as a percentage of net revenues, adjusted for the estimated lost revenue from the warehouse fire, was 4.8% and 6.5% during the three and six months ended December 28, 2014, respectively.

 

Depreciation and Amortization Expense

 

   

Three Months Ended

   

Six Months Ended

 
   

December 28,

2014

   

December 29,

2013

   

% Change

   

December 28,

2014

   

December 29,

2013

   

% Change

 
   

(dollars in thousands)

         
                                                 

Depreciation and amortization

  $ 8,679     $ 5,036       72.3 %   $ 13,780     $ 9,725       41.7 %

Percentage of net revenues

    1.6 %     1.9 %             2.1 %     2.5 %        

 

 

 
30

 

 

Depreciation and amortization expense increased by 72.3% and 41.7%, respectively, during the three and six months ended December 28, 2014 in comparison to the same periods of the prior year, as a result of the incremental depreciation and amortization expenses of Harry & David, acquired on September 30, 2014, and the amortization of intangibles associated with the acquisition of iFlorist. Excluding the impact of acquisitions, organic depreciation and amortization expense as a percentage of net revenues, adjusted for the estimated lost revenue from the warehouse fire, was 1.8% and 2.5% during the three and six months ended December 28, 2014, respectively.
 

Interest Expense and other, net

 

   

Three Months Ended

   

Six Months Ended

 
   

December 28,

2014

   

December 29,

2013

   

% Change

   

December 28,

2014

   

December 29,

2013

   

% Change

 
   

(dollars in thousands)

         
                                                 

Interest expense and other, net

  $ 2,638     $ 418       531.1 %   $ 3,391     $ 710       377.6 %

 

Interest expense and other, net consists primarily of interest expense and amortization of deferred financing costs attributable to the Company’s credit facility, net of income earned on the Company’s available cash balances, as well as investment income by the Company’s Non-Qualified Deferred Compensation Plan, its equity interest in Flores Online, and foreign currency transaction gains and losses for the Company’s iFlorist subsidiary.

 

In order to finance the Harry & David acquisition, on September 30, 2014, the Company entered into a Credit Agreement with JPMorgan Chase Bank as administrative agent, and a group of lenders (the “2014 Credit Facility”), consisting of a $142.5 million five-year term loan (the “Term Loan”) with a maturity date of September 30, 2019, and a co-terminus revolving credit facility (the “Revolver”), with a seasonally adjusted limit ranging from $100.0 to $200.0 million, which may be used for working capital (subject to applicable sublimits) and general corporate purposes. The Term Loan is payable in 20 quarterly installments of principal and interest beginning in December 2014, with escalating principal payments at the rate of 10% in years one and two, 15% in years three and four, and 20% in year five, with the remaining balance of $42.75 million due upon maturity. Upon closing of the acquisition, the Company borrowed $136.7 million under the Revolver to re-pay amounts outstanding under the Company’s and Harry & David’s previous credit agreements, as well as to pay acquisition-related transaction costs.

 

Interest expense and other, net increased 531.1% and 377.6%, respectively, during the three and six months ended December 28, 2014 in comparison to the same periods of the prior year, as a result of the additional interest expense associated with the Term Loan used to finance the acquisition, as well as related working capital requirements of Harry & David.

 

Income Taxes 

 

The Company recorded income tax expense from continuing operations of $26.7 million and $23.9 million, respectively, during the three and six months ended December 28, 2014, compared to income tax expense from continuing operations of $10.8 million and $8.0 million, respectively for the same periods of the prior year. The Company’s effective tax rate from continuing operations for the three and six months ended December 28, 2014 was 36.9% and 36.8%, respectively, compared to 38.2% in the same periods of the prior year. The effective rate for fiscal 2015 and fiscal 2014 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes, which were partially offset by various permanent differences and tax credits. At December 28, 2014 the Company has remaining unrecognized tax positions of approximately $0.6 million, including accrued interest and penalties of $0.1 million. The Company believes that none of its unrecognized tax positions will be resolved over the next twelve months.

 

Discontinued Operations

 

During the fourth quarter of fiscal 2013, the Company made the strategic decision to divest the e-commerce and procurement businesses of The Winetasting Network in order to focus on growth opportunities in its Gourmet Foods and Gift Baskets business segment. The Company closed on the sale of its e-commerce and procurement businesses on December 31, 2013. The Company has classified the results the e-commerce and procurement business of Winetasting Network as a discontinued operation.

  

 
31

 

 

Results for discontinued operations are as follows:

 

   

Three Months Ended

   

Six Months Ended

 
   

December 28,

2014

   

December 29,

2013

   

December 28,

2014

   

December 29,

2013

 
   

(in thousands)

 

Net revenues from discontinued operations

  $ -     $ 755     $ -     $ 1,661  

Loss from discontinued operations, net of tax

  $ -     $ (374 )   $ -     $ (456 )

Adjustment to loss on sale of discontinued operations, net of tax

  $ -     $ 877     $ -     $ 877  

Income (loss) from discontinued operations, net of tax

  $ -     $ 503     $ -     $ 421  

 

Liquidity and Capital Resources

 

Cash Flows

 

At December 28, 2014, the Company had working capital of $54.6 million, including cash and cash equivalents of $101.2 million, compared to working capital of $17.5 million, including cash and cash equivalents of $5.2 million, at June 29, 2014.

 

Net cash provided by operating activities of $178.2 million for the six months ended December 28, 2014, was primarily due to the Company’s net income, adjusted by non-cash charges for depreciation and amortization, stock based compensation and the write-off of inventory related to the warehouse fire ($29.5 million), combined with the insurance proceeds from the warehouse fire ($15.0 million), and seasonal changes in working capital, including holiday related decreases in inventory and prepaid items and corresponding increases in accounts payable and accrued expense payments, partially offset by increased accounts receivable related to the recent holiday season, and remaining insurance receivable related to the warehouse fire.

 

Net cash used in investing activities of $147.4 million for the six months ended December 28, 2014, was primarily attributable to the acquisition of Harry & David on September 30, 2014 for $142.5 million ($133.1 million, net of cash acquired), capital expenditures related to the Company's technology infrastructure, and the completion of the building expansion of Cheryl’s bakery business, doubling the size of the facility in Ohio to accommodate growth of the Company’s cookie and brownie product line.

 

Net cash provided by financing activities of $65.2 million for the six months ended December 28, 2014 was attributable to borrowings under the Company’s 2014 Credit Facility used to finance the $142.5 million acquisition of Harry & David on September 30, 2014, offset by repayment of the Harry & David’s existing revolving credit facility borrowings of $62.4 million, debt issuance costs, and the acquisition of $5.0 million of treasury stock. As of December 28, 2014, all borrowings under the Company’s Revolver were repaid.

 

Credit Facility

 

In order to finance the acquisition of Harry & David, on September 30, 2014, the Company entered into a Credit Agreement with JPMorgan Chase Bank as administrative agent, and a group of lenders (the “2014 Credit Facility”), consisting of a $142.5 million five-year term loan (the “Term Loan”) with a maturity date of September 30, 2019, and a co-terminus revolving credit facility (the “Revolver”), with a seasonally adjusted limit ranging from $100.0 to $200.0 million, which may be used for working capital (subject to applicable sublimits) and general corporate purposes. The Term Loan is payable in 20 quarterly installments of principal and interest beginning in December 2014, with escalating principal payments at the rate of 10% in years one and two, 15% in years three and four, and 20% in year five, with the remaining balance of $42.75 million due upon maturity. Upon closing of the acquisition, the Company borrowed $136.7 million under the Revolver to re-pay amounts outstanding under the Company’s and Harry & David’s previous credit agreements, as well as to pay acquisition-related transaction costs.

  

 
32

 

  

The 2014 Credit Facility requires that while any borrowings are outstanding the Company comply with certain financial and non-financial covenants, including the maintenance of certain financial ratios. Outstanding amounts under the 2014 Credit Facility will bear interest at the Company’s option at either: (i) LIBOR, plus a spread of 175 to 250 basis points, as determined by the Company’s leverage ratio, or (ii) ABR, plus a spread of 75 to 150 basis points. The 2014 Credit Agreement is secured by substantially all of the assets of the Company and the Subsidiary Guarantors.

 

Despite the current challenging economic environment, the Company believes that cash flows from operations along with available borrowings from its 2014 Credit Facility will be a sufficient source of liquidity. Due to the seasonal nature of the Company’s business, and its continued expansion into non-floral products, including the acquisition of Harry & David, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, is expected to generate nearly 50% of the Company’s annual revenues, and all of its earnings. As a result, the Company expects to generate cash from operations during its second quarter, and then utilize that cash for operating needs during its fiscal third and fourth quarters, after which time the Company expects to borrow against its Revolver to fund pre-holiday manufacturing and inventory purchases. Borrowings under the Revolver typically peak in November, at which time cash generated from operations during the Christmas holiday shopping season are expected to enable the Company to repay working capital borrowings prior to the end of December..

   

Stock Repurchase Program

 

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. In March 2013, the Company’s Board of Directors authorized an increase of $20 million to its stock repurchase plan. As of December 28, 2014, $5.6 million remains authorized under the plan.

 

Contractual Obligations

 

There have been no material changes outside the ordinary course of business, related to the Company’s contractual obligations as discussed in the Annual Report on Form 10-K for the year ended June 29, 2014, except for additional operating leases assumed as part of the Harry & David acquisition – see Note 14 for a summary of future minimum payments under non-cancelable operating leases with initial terms of one year or more.

 
Critical Accounting Policies and Estimates

 

As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 29, 2014, the discussion and analysis of the Company’s financial condition and results of operations are based upon the consolidated financial statements of 1-800-FLOWERS.COM, Inc., 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 revenue recognition, accounts receivable, inventory, goodwill, other intangible assets and long-lived assets and income taxes. There have been no significant changes to the assumptions and estimates related to the Company’s critical accounting policies, since June 29, 2014.

  

 
33

 

 

Recent Accounting Pronouncements

 

In April 2014, the FASB issued ASU No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity,” which amends ASC 205, “Presentation of Financial Statements,” and ASC 360, “Property, Plant, and Equipment.” ASU No. 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company's operations and financial results should be presented as discontinued operations. This new accounting guidance is effective for the Company’s fiscal year ending July 3, 2016, and may be applied retrospectively. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This amended guidance will enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Expanded disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. This guidance will be effective for the Company’s fiscal year ending July 1, 2018 and may be applied retrospectively. We are currently evaluating the potential impact of adopting this guidance on our consolidated financial statements.

 

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists,” which amends ASC 740, “Income Taxes.” The amendments provide guidance on the financial statement presentation of an unrecognized tax benefit, as either a reduction of a deferred tax asset or as a liability, when a net operating loss carryforward, similar tax loss, or a tax credit carryforward exists. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013 and may be applied on either a prospective or retrospective basis. The provisions are effective for the Company’s first quarter of fiscal year ending June 28, 2015. The adoption of these provisions did not have a significant impact on the Company’s 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:

 

○     to achieve revenue and profitability;

 

○     to leverage its operating platform and reduce operating expenses;

 

○     to manage the increased seasonality of its business;

 

    to cost effectively acquire and retain customers;

 

○     to effectively integrate and grow acquired companies, including the recent acquisition of Harry & David;

 

○     to reduce working capital requirements and capital expenditures;

 

○     to compete against existing and new competitors;

 

○     to manage expenses associated with sales and marketing and necessary general and administrative and technology investments; and

 

○     to cost efficiently 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 levels of discretionary customer purchases of the Company’s products.

  

 
34

 

 

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 filing for the fiscal year ended June 29, 2014 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.

  

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

The Company is exposed to market risk from the effect of interest rate changes and changes in the market values of its investments.

 

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. Due to the currently low rates of return the Company is receiving on its cash equivalents, the potential for a significant decrease in short-term interest rates is low and, therefore, a further decrease would not have a material impact on the Company’s interest income. Borrowings under the Company’s credit facility bear interest at a variable rate, plus an applicable margin, and therefore exposes the Company to market risk for changes in interest rates. The effect of a 50 basis point increase in current interest rates on its interest expense would be approximately $0.2 million and $0.2 million during the three and six months ended December 28, 2014.

 

Investment Risk

 

The Company has certain investments in non-marketable equity instruments of private companies. The Company accounts for these investments using either the equity or the cost method. The Company reviews its investments for impairment when events and circumstances indicate that the decline in fair value of such assets below the carrying value is other-than-temporary. The Company’s analysis includes review of recent operating results and trends, recent sales/acquisitions of the investee securities, and other publicly available data. The current global economic climate provides additional uncertainty. Valuations of private companies are inherently more difficult due to the lack of readily available market data. As such, the Company believes that providing information regarding market sensitivities is not practicable.

 

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 December 28, 2014. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of December 28, 2014.

 

Changes in Internal Control over Financial Reporting

 

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 December 28, 2014, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

  

 
35

 

 

PART II. – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Legal Proceedings

 

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

 

Unfair Trade Practices:

 

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

 

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

 

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

 

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

 

On March 28, 2014, the Court issued a series of rulings disposing of all the pending motions in both the Consolidated Action and the Frank Action. Among other things, the Court dismissed several causes of action, leaving pending a claim for CUTPA violations stemming from Trilegiant’s refund mitigation strategy and a claim for unjust enrichment. Thereafter, the Court consolidated the Frank case into the Consolidated Action. On April 28, 2014 Plaintiffs moved for leave to appeal the various rulings against them to the United States Court of Appeals for the Second Circuit and to have a partial final judgment entered dismissing those claims that the Court had ordered dismissed. The Court has not yet ruled on this new motion. The Company has filed its answer to the complaint on May 12, 2014.

  

 
36

 

 

Edible Arrangements:

 

On November 20, 2014, a complaint was filed in the United States District Court for the District of Connecticut by Edible Arrangements LLC and Edible Arrangements International, LLC, alleging that the Company’s use of the terms “Fruit Bouquets,” “Edible,” “Bouquet,” “Edible Fruit Arrangements,” “Edible Arrangements,” and “DoFruit” and its use of a six petal pineapple slice design in connection with marketing and selling edible fruit arrangements constitutes trademark infringement, false designation of origin, dilution, and contributory infringement under the federal Lanham Act, 29 USC § 1114 and 1125(a), common law unfair competition, and a violation of the Connecticut Unfair Trade Practices Act, Connecticut General Statutes § 42-110b (a). The Complaint alleges Edible Arrangements has been damaged in the amount of $97,411,000. The Complaint requests a declaratory judgment in favor of Edible Arrangements, an injunction against the Company’s use of the terms and design, an accounting and payment of the Company’s profits from its sale of edible fruit arrangements, a trebling of the Company’s profits from such sales or of any damages sustained by Edible Arrangements, punitive damages, and attorneys’ fees. On November 24, 2014, the Complaint was amended to add a breach of contract claim for use of these terms and the design, based on a contract that had been entered by one of the Company’s subsidiaries prior to its acquisition by the Company. The time for the Company to respond to the Complaint had been January 30, 2015, by Order of the Court entered December 15, 2014.

 

On January 29, 2015, the Plaintiffs amended the Complaint to add one of the Company’s subsidiaries and to claim its damages were $ 101,436,000. Since the Complaint was amended, the time for the Company to respond to the Complaint and Amended Complaint was extended. By agreement, the date for response is set for February 27, 2015.

 
The Company believes there are substantial defenses to the claims and expects to defend the claims vigorously.

 

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

 

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 June 29, 2014.

  

 
37

 

 

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. In March 2013, the Company’s Board of Directors authorized an increase of $20 million to its stock repurchase plan. As of December 28, 2014, $5.6 million remains 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 2015, which includes the period June 30, 2014 through December 28, 2014:

 

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)

 
   

(in thousands, except average price paid per share)

         
                                 

6/30/14 – 7/27/14

    86.9     $ 5.58       86.9     $ 10,145  

7/28/13 – 8/31/14

    114.0     $ 5.14       114.0     $ 9.956  

9/1/14 – 9/28/14

    10.7     $ 5.97       10.7     $ 9,492  

9/29/14 – 10/26/14

    -       -       -     $ 9,492  

10/27/14 – 11/23/14

    416.2     $ 8.02       416.2     $ 6,152  

11/24/14 – 12/28/14

    67.7     $ 7.79       67.7     $ 5,621  
                                 

Total

    695.5     $ 7.19       695.5          

 

(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.

  

 
38

 

 

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

XBRL Instance Document

 

101.SCH

XBRL Taxonomy Extension Schema Document

 

101.CAL

XBRL Taxonomy Calculation Linkbase Document

 

101.DEF

XBRL Taxonomy Extension Definition Linlinkbase Document

 

101.LAB

XBRL Taxonomy Extension Label Document

 

101.PRE

XBRL Taxonomy Definition Presentation Document

 

* Filed herewith.

  

 
39

 

 

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 6, 2015   

/s/ James F. McCann 

 

 

James F. McCann 

 

 

Chief Executive Officer 

 

 

Chairman of the Board of Directors 

 

 

(Principal Executive Officer)    

 

 

 

 

     
     

Date: February 6, 2015    

/s/ William E. Shea 

 

 

William E. Shea 

 

 

Senior Vice President, Treasurer and  

 

  Chief Financial Officer (Principal  

 

Financial and Accounting Officer) 

 

 

 

40