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 31, 2006
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 (X) No ( )
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ( ) Accelerated filer(X) Non-accelerated filer ( )
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ( ) No (X)
The number of shares outstanding of each of the Registrant's classes of common
stock:
25,350,005
----------
(Number of shares of Class A common stock outstanding as of January 29, 2007)
36,858,465
----------
(Number of shares of Class B common stock outstanding as of January 29, 2007)
1-800-FLOWERS.COM, Inc.
TABLE OF CONTENTS
INDEX
Page
----
Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - December 31, 2006
(Unaudited) and July 2, 2006 1
Consolidated Statements of Income (Unaudited) - Three
and Six Months Ended December 31, 2006 and January 1,
2006 2
Consolidated Statements of Cash Flows (Unaudited) -
Three and Six Months Ended December 31, 2006 and
January 1, 2006 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
Item 4. Controls and Procedures 24
Part II. Other Information
Item 1. Legal Proceedings 25
Item 1A. Risk Factors 25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
Item 3. Defaults upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits 26
Signatures 27
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 31, July 2,
2006 2006
------------ ------------
(unaudited)
Assets
Current assets:
Cash and equivalents $ 25,998 $24,599
Receivables, net 30,413 13,153
Inventories 58,787 52,954
Deferred income taxes 10,596 17,427
Prepaid and other 11,183 10,347
------------ ------------
Total current assets 136,977 118,480
Property, plant and equipment, net 63,366 59,732
Goodwill 105,548 131,141
Other intangibles, net 54,055 29,822
Deferred income taxes 6,224 6,224
Other assets 1,624 1,235
------------ ------------
Total assets $367,794 $346,634
============ ============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 93,133 $ 63,870
Current maturities of long-term debt and obligations under capital leases 10,089 10,360
------------ ------------
Total current liabilities 103,222 74,230
Long-term debt and obligations under capital leases 73,084 78,063
Other liabilities 2,212 1,158
------------ ------------
Total liabilities 178,518 153,451
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued
Class A common stock, $.01 par value, 200,000,000 shares authorized, 29,949,560
and 29,872,183 shares issued at December 31, 2006 and July 2, 2006,
respectively 299 299
Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,138,465
shares issued at December 31, 2006 and July 2, 2006, respectively 421 421
Additional paid-in capital 264,946 262,667
Retained deficit (46,508) (56,011)
Treasury stock, at cost, 4,566,090 Class A shares at December 31, 2006 and
July 2, 2006, respectively and 5,280,000 Class B shares (29,882) (14,193)
------------ ------------
Total stockholders' equity 189,276 193,183
------------ ------------
Total liabilities and stockholders' equity $367,794 $346,634
============ ============
See accompanying Notes to Consolidated Financial Statements.
1
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
--------------------------------- ---------------------------------
December 31, January 1, December 31, January 1,
2006 2006 2006 2006
---------------- ---------------- --------------- ----------------
Net revenues $329,866 $277,829 $466,998 $390,594
Cost of revenues 177,889 152,837 260,207 219,576
---------------- ---------------- --------------- ----------------
Gross profit 151,977 124,992 206,791 171,018
Operating expenses:
Marketing and sales 99,037 87,874 141,407 126,098
Technology and development 5,201 4,797 10,362 9,566
General and administrative 13,931 10,357 27,274 20,993
Depreciation and amortization 3,834 3,809 8,578 7,333
---------------- ---------------- --------------- ----------------
Total operating expenses 122,003 106,837 187,621 163,990
---------------- ---------------- --------------- ----------------
Operating income 29,974 18,155 19,170 7,028
Other income (expense):
Interest income 254 141 591 356
Interest expense (2,425) (113) (4,253) (197)
Other (7) (143) 4 (137)
---------------- ---------------- --------------- ----------------
Total other income (expense), net (2,178) (115) (3,658) 22
---------------- ---------------- --------------- ----------------
Income before income taxes 27,796 18,040 15,512 7,050
Income taxes (10,874) (7,704) (6,009) (3,340)
---------------- ---------------- --------------- ----------------
Net income $16,922 $10,336 $9,503 $3,710
================ ================ =============== ================
Net income per common share:
Basic $0.26 $0.16 $0.15 $0.06
================ ================ =============== ================
Diluted $0.26 $0.16 $0.14 $0.06
================ ================ =============== ================
Weighted average shares used in the calculation
of net income per common share
Basic 65,094 65,065 65,144 65,076
================ ================ =============== ================
Diluted 66,089 66,395 66,103 66,395
================ ================ =============== ================
See accompanying Notes to Consolidated Financial Statements.
2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
-----------------------------
December 31, January 1,
2006 2006
------------- --------------
Operating activities:
Net income $9,503 $3,710
Reconciliation of net income to net cash provided by operations:
Depreciation and amortization 8,578 7,333
Deferred income taxes 6,831 3,070
Bad debt expense 734 160
Stock-based compensation 2,009 1,997
Other non-cash items 199 166
Changes in operating items:
Receivables (17,994) (4,455)
Inventories (6,182) (8,190)
Prepaid and other (836) (1,316)
Accounts payable and accrued expenses 29,263 33,840
Other assets (734) 4
Other liabilities 1,054 (452)
------------- --------------
Net cash provided by operating activities 32,425 35,867
Investing activities:
Acquisitions, net of cash acquired (347) (4,959)
Dispositions 630 -
Capital expenditures (10,477) (13,083)
Proceeds from sale of investments - 6,695
Other (163) 86
------------- --------------
Net cash used in investing activities (10,357) (11,261)
Financing activities:
Acquisition of treasury stock (15,689) (1,324)
Proceeds from employee stock options 270 179
Proceeds from bank borrowings 65,000 -
Repayment of notes payable and bank borrowings (69,954) (1,815)
Repayment of capital lease obligations (296) (735)
------------- --------------
Net cash used in financing activities (20,669) (3,695)
------------- --------------
Net change in cash and equivalents 1,399 20,911
Cash and equivalents:
Beginning of period 24,599 39,961
------------- --------------
End of period $25,998 $60,872
============= ==============
See accompanying Notes to Consolidated Financial Statements.
3
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1 - Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by 1-800-FLOWERS.COM, Inc. and subsidiaries (the "Company") in accordance with
accounting principles generally accepted in the United States for interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States 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
six months ended December 31, 2006 are not necessarily indicative of the results
that may be expected for the fiscal year ending July 1, 2007.
The balance sheet information at July 2, 2006 has been derived from the audited
financial statements at that date.
The information in this Quarterly Report on Form 10-Q should be read in
conjunction with the consolidated financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
July 2, 2006.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
accounting principles generally accepted in the United States 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.
Comprehensive Income
For the three and six months ended December 31, 2006 and January 1, 2006, the
Company's comprehensive net income was equal to the respective net income for
each of the periods presented.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 applies to all tax positions accounted for under SFAS No. 109,
"Accounting for Income Taxes" and defines the confidence level that a tax
position must meet in order to be recognized in the financial statements. The
interpretation requires that the tax effects of a position be recognized only if
it is "more-likely-than-not" to be sustained by the taxing authority as of the
reporting date. If a tax position is not considered "more-likely-than-not" to be
sustained then no benefits of the position are to be recognized. FIN 48 requires
additional disclosures and is effective as of the beginning of the first fiscal
year beginning after December 15, 2006. The Company is currently evaluating the
effect that the adoption of FIN 48 will have on its consolidated results of
operations and financial condition.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
Statement defines fair value, establishes a framework for measuring fair value
and expands disclosure about fair value measurements, and is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company is currently
evaluating the effect that the adoption of this Statement will have on its
consolidated results of operations and financial condition.
Reclassifications
Certain balances in the prior fiscal periods have been reclassified to conform
with the presentation in the current fiscal year.
4
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Note 2 - Net Income Per Common Share
The following table sets forth the computation of basic and diluted net income
per common share:
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
December 31, January 1, December 31, January 1,
2006 2006 2006 2006
----------------- --------------- ---------------- ----------------
(in thousands, except per share data)
Numerator:
Net income $16,922 $10,336 $9,503 $3,710
================= =============== ================ ================
Denominator:
Weighted average shares outstanding (*) 65,094 65,065 65,144 65,076
Effect of dilutive securities:
Employee stock options 893 1,297 866 1,294
Employee restricted stock awards 102 33 93 25
----------------- --------------- ---------------- ----------------
995 1,330 959 1,319
----------------- --------------- ---------------- ----------------
Adjusted weighted-average shares and assumed
conversions 66,089 66,395 66,103 66,395
================= =============== ================ ================
Net income per common share:
Basic $0.26 $0.16 $0.15 $0.06
================= =============== ================ ================
Diluted $0.26 $0.16 $0.14 $0.06
================= =============== ================ ================
(*) On December 28, 2006, the Company completed its repurchase of 3,010,740
shares of Class A Common Stock in a privately negotiated transaction. The
purchase price was $15,689,000, or $5.21 per share. The repurchase was
approved by the disinterested members of the Company's Board of Directors
and is in addition to the Company's existing stock repurchase authorization
of $20.0 million, of which $8.9 million remains authorized by unused.
Note 3 - Stock-Based Compensation
The Company has a Long Term Incentive and Share Award Plan, which is more fully
described in Note 11 of the Company's 2006 Annual Report on Form 10-K, that
provides for the grant to eligible employees, consultants and directors of stock
options, share appreciation rights (SARs), restricted shares, restricted share
units, performance shares, performance units, dividend equivalents, and other
share-based awards.
The amounts of stock-based compensation expense recognized in the periods
presented are as follows:
Three Months Ended Six Months Ended
---------------------------------- ----------------------------------
December 31, January 1, December 31, January 1,
2006 2006 2006 2006
----------------- ---------------- ---------------- ----------------
(in thousands, except per share data)
Stock options $482 $947 $1,338 $1,797
Restricted stock awards 507 113 671 200
----------------- ---------------- ---------------- -----------------
Total 989 1,060 2,009 1,997
Deferred income tax benefit 317 241 599 451
----------------- ---------------- ---------------- -----------------
Stock-based compensation expense, net $672 $819 $1,410 $1,546
================= ================ ================= ================
Impact on basic and diluted net income per
common share $0.01 $0.01 $0.02 $0.02
================= ================ ================= ================
5
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Stock-based compensation is recorded within the following line items of
operating expenses:
Three Months Ended Six Months Ended
--------------------------------- ------------------------------
December 31, January 1, December 31, January 1,
2006 2006 2006 2006
---------------- ---------------- ---------------- -------------
(in thousands, except per share data)
Marketing and sales $347 $371 $705 $701
Technology and development 148 159 301 299
General and administrative 494 530 1,003 997
---------------- ---------------- ---------------- -------------
Total $989 $1,060 $2,009 $1,997
================ ================ ================ =============
The weighted average fair value of stock options on the date of grant, and the
assumptions used to estimate the fair value of the stock options using the
Black-Scholes option valuation model granted during the respective periods were
as follows:
Three Months Ended Six Months Ended
--------------------------------- ------------------------------
December 31, January 1, December 31, January 1,
2006 2006 2006 2006
---------------- ---------------- ---------------- -------------
Weighted average fair value of
options granted $2.59 $3.09 $2.59 $3.11
Expected volatility 46.0% 46.0% 46.0% 46.0%
Expected life 5.3 yrs 5.3 yrs 5.3 yrs 5.3 yrs
Risk-free interest rate 4.50% 4.47% 4.50% 4.45%
Expected dividend yield 0.0% 0.0% 0.0% 0.0%
The expected volatility of the option is determined using historical
volatilities based on historical stock prices. The Company estimated the
expected life of options granted to be the average of the Company's historical
expected term from vest date and the midpoint between the average vesting term
and the contractual term. The risk-free interest rate is determined using the
yield available for zero-coupon U.S. government issues with a remaining term
equal to the expected life of the option. The Company has never paid a dividend,
and as such the dividend yield is 0.0%.
The following table summarizes stock option activity during the six months ended
December 31, 2006:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Options Price Term Value (000s)
----------------------------------------------------------
Outstanding at July 2, 2006 10,103,491 $8.09
Granted 50,000 $5.47
Exercised (64,620) $4.16
Forfeited (376,710) $9.71
-------------
Outstanding at December 31, 2006 9,712,161 $8.04 5.2 years $6,234
=============
Options vested or expected to vest at December 31, 9,678,383 $8.06 5.1 years $6,229
2006
Exercisable at December 31, 2006 7,485,722 $8.33 4.4 years $6,198
6
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
As of December 31, 2006, the total future compensation cost related to nonvested
options, not yet recognized in the statement of income, was $5.7 million and the
weighted average period over which these awards are expected to be recognized
was 3.2 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
Awards). The following table summarizes the activity of non-vested restricted
stock during the six months ended December 31, 2006:
Weighted
Average Grant
Date Fair
Shares Value
------------- ---------------
Non-vested at July 2, 2006 293,681 $7.44
Granted 715,699 $5.18
Vested (29,913) $6.66
Forfeited (35,637) $6.79
-------------
Non-vested at December 31, 2006 943,830 $5.78
=============
The fair value of nonvested shares is determined based on the closing stock
price on the grant date. As of December 31, 2006, there was $4.1million 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.
Note 4 - Acquisitions
The Company accounts for its business combinations in accordance with SFAS No.
141, "Business Combinations," which addresses financial accounting and reporting
for business combinations and requires that all such transactions be accounted
for using the purchase method. Under the purchase method of accounting for
business combinations, the aggregate purchase price for the acquired business is
allocated to the assets acquired and liabilities assumed based on their
estimated fair values at the acquisition date. Operating results of the acquired
entities are reflected in the Company's consolidated financial statements from
date of acquisition.
Acquisition of Fannie May Confections Brands, Inc.
On May 1, 2006, the Company acquired all of the outstanding common stock of
Fannie May Confections Brands, Inc. ("Fannie May Confections"), a manufacturer
and multi-channel retailer and wholesaler of premium chocolate and other
confections under the Fannie May, Harry London and Fanny Farmer brands. The
acquisition, for a purchase price of approximately $92.1 million in cash,
including estimated working capital adjustments and transaction costs, includes
a modern 200,000-square foot manufacturing facility in North Canton, Ohio and 52
Fannie May retail stores in the Chicago area, where the chocolate brand has been
a tradition since 1920. The purchase price is subject to "earn-out" incentives
which amount to a maximum of $4.5 million during the year ending July 1, 2007
and $1.5 million during the year ending June 29, 2008, upon achievement of
specified earnings targets. Fannie May Confections generated revenues of
approximately $75.0 million in its most recent fiscal year ended April 30, 2006.
As described further under "Long-Term Debt," in order to finance the
acquisition, on May 1, 2006, the Company entered into a secured credit facility
with JPMorgan Chase Bank, N.A., as administrative agent, and a group of lenders
(the "2006 Credit Facility"). The 2006 Credit Facility includes an $85.0 million
term loan and a $60.0 million revolving facility, which bear interest at LIBOR
plus 0.625% to 1.125%, with pricing based upon the Company's leverage ratio. At
closing, the Company borrowed $85.0 million of the term facility to acquire all
of the outstanding capital stock of Fannie May Confections.
7
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
During the quarter ended December 31, 2006, the Company completed the allocation
of the purchase price to individual assets acquired and liabilities assumed,
resulting in adjustments to the carrying value of Fannie May Confections'
recorded assets and liabilities, including revisions to the value and expected
lives of certain intangible assets, subject to amortization, and the residual
amount that was allocated to goodwill. As a result, during the three months
ended December 31, 2006, the Company recorded a reduction in amortization
expense in the amount of $0.6 million, reflecting the cumulative effect of the
change in estimated value had on prior periods.
Acquisition of Wind & Weather
On October 31, 2005, the Company acquired all of the outstanding common stock of
Wind & Weather, a Fort Bragg, California based direct marketer of weather-themed
gifts, with annual revenues of approximately $14.4 million during its then most
recently completed fiscal year ended March 31, 2005. The purchase price of
approximately $5.3 million, including acquisition costs, was funded utilizing
the Company's line of credit which was repaid during the Company's second
quarter utilizing cash generated from operations, and excludes the assumption of
Wind & Weather's $1.2 million balance on its seasonal working capital line. The
Company has since relocated the operations of Wind & Weather to its Madison,
Virginia facility, and terminated operations in California.
The following table summarizes the allocation of purchase price to the estimated
fair values of assets acquired and liabilities assumed at the date of
acquisitions of Fannie May Confections Brands and Wind & Weather:
Fannie May
Confections Wind & Weather
Purchase Price Purchase Price
Allocation Allocation
------------------ ------------------
(in thousands)
Current assets $21,979 $4,014
Property, plant and equipment 4,643 67
Intangible assets 37,879 2,560
Goodwill 37,266 2,703
Other 156 20
------------------ ------------------
Total assets acquired 101,923 9,364
------------------ ------------------
Current liabilities 4,929 3,810
Deferred tax liabilities 4,485 265
Other 399 39
------------------ ------------------
Total liabilities assumed $9,813 4,114
Net assets acquired $92,110 $5,250
================== ==================
Of the $40.4 million of acquired intangible assets related to the Fannie May
Confections and Wind & Weather acquisitions, $30.1 million was assigned to
trademarks that are not subject to amortization, while the remaining acquired
intangibles of $10.3 million were allocated primarily to customer related
intangibles which are being amortized over the assets' determinable useful life
of 3 - 10 years.
8
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Pro forma Results of Operation
The following unaudited pro forma consolidated financial information has been
prepared as if the acquisitions of Fannie May Confections and Wind & Weather had
taken place at the beginning of each fiscal year presented. The following
unaudited pro forma information is not necessarily indicative of the results of
operations in future periods or results that would have been achieved had the
acquisitions taken place at the beginning of the periods presented.
Three Months Ended Six Months Ended
--------------------------------- ------------------------------
December 31, January 1, December 31, January 1,
2006 2006 2006 2006
---------------- ---------------- ---------------- -------------
(in thousands, except per share data)
Net revenues $329,866 $314,641 $466,998 $439,356
Operating income $29,974 $27,316 $19,170 $15,241
Net income $16,922 $14,813 $9,503 $6,905
Net income per common share
Basic $0.26 $0.23 $0.15 $0.11
Diluted $0.26 $0.22 $0.14 $0.11
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 31, July 2,
2006 2006
---------------- -----------
(in thousands)
Finished goods $38,988 $36,689
Work-in-Process 4,169 3,370
Raw materials 15,630 12,895
----------- -----------
$58,787 $52,954
=========== ===========
Note 6 - Goodwill and Intangible Assets
The change in the net carrying amount of goodwill is as follows:
December 31,
2006
--------------
(in thousands)
Goodwill - beginning of year $131,141
Acquisition of Fannie May Confections-reclassification of indefinite
lived, non-amortizable tradenames (25,385)
Other (208)
--------------
Goodwill - end of period $105,548
==============
9
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
The Company's other intangible assets consist of the following:
December 31, 2006 July 2, 2006
---------------------------------------- ----------------------------------------
Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period Amount Amortization Net Amount Amortization Net
-------------- ------------- --------------- ----------- ----------- --------------- ------------
(in thousands)
Intangible assets with
determinable lives
Investment in licenses 14 - 16 years $4,927 $3,923 $1,004 $4,927 $3,762 $1,165
Customer lists 3 - 10 years 14,260 2,952 11,308 18,500 2,231 16,269
Other 5 - 8 years 2,604 537 2,067 1,754 252 1,502
------------- --------------- ----------- ----------- --------------- ------------
21,791 7,412 14,379 25,181 6,245 18,936
Trademarks with
indefinite lives 39,676 - 39,676 10,886 - 10,886
------------- --------------- ----------- ----------- --------------- ------------
Total identifiable
intangible assets $61,467 7,412 $54,055 $36,067 $6,245 $29,822
============= =============== =========== =========== =============== ============
Estimated future amortization expense is as follows: remainder of fiscal 2007 -
$1.3 million, fiscal 2008 - $2.7 million, fiscal 2009 - $2.6 million, fiscal
2010 - $2.5 million, fiscal 2011 - $1.9 million, and thereafter - $3.4 million.
Note 7 - Long-Term Debt
The Company's long-term debt and obligations under capital leases consist of the
following:
December 31, July 2,
2006 2006
---------------- -----------
(in thousands)
Term loan $80,750 $85,000
Commercial note 2,257 2,942
Seller financed acquisition obligations 23
Obligations under capital leases 166 458
----------- -----------
83,173 88,423
Less current maturities of long-term debt and obligations under
capital leases 10,089 10,360
----------- -----------
$73,084 $78,063
=========== ===========
In order to finance the acquisition of Fannie May Confections, on May 1, 2006,
the Company entered into a secured credit facility with JPMorgan Chase Bank,
N.A., as administrative agent, and a group of lenders (the "2006 Credit
Facility"). The 2006 Credit Facility includes an $85.0 million term loan and a
$60.0 million revolving facility, which bear interest at LIBOR plus 0.625% to
1.125%, with pricing based upon the Company's leverage ratio. At closing, the
Company borrowed $85.0 million of the term facility to acquire all of the
outstanding capital stock of Fannie May Confections. The Company is required to
pay the outstanding term loan in escalating quarterly installments, with the
final installment payment due on May 1, 2012. As of December 31, 2006, the
Company had no borrowings outstanding under the revolving credit facility.
Note 8 - 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
10
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
change in subsequent interim periods. The Company's effective tax rate for the
three and six months ended December 31, 2006 was 39.1% and 38.7%, respectively,
compared to 42.7% and 47.4% during the comparative three and six months ended
January 1, 2006. The effective tax rate includes the impact of stock-based
compensation recognized in accordance with SFAS No. 123(R), which resulted in
increases of approximately 0.2% and 1.0%, during the three and six months ended
December 31, 2006 respectively, and 1.1% and 5.5% during the three and six
months ended January 1, 2006, respectively, due to the associated book/tax
differences in accounting for incentive stock options.
Note 9 - Business Segments
During the first quarter of fiscal 2007, the Company segmented its organization
to improve execution and customer focus and to align its resources to meet the
demands of the markets it serves. The Company's management reviews the results
of the Company's operations by the following four business categories:
o 1-800-Flowers.com Consumer Floral;
o BloomNet Wire Service;
o Gourmet Food and Gift Baskets; and
o Home and Children's Gifts.
Category performance is measured based on contribution margin, which includes
only the direct controllable revenue and operating expenses of the categories.
As such, management's measure of profitability for these categories does not
include the effect of corporate overhead such as Information Technology, Human
Resources and Finance, which are operated under a centralized management
platform, providing services throughout the organization, nor does it include
share-based compensation, depreciation and amortization , other income (net),
and income taxes. Assets and liabilities are reviewed at the consolidated level
by management and not accounted for by category.
Three Months Ended Six Months Ended
----------------------------- -------------------------------
December 31, January 1, December 31, January 1,
Net revenues 2006 2006 2006 2006
------------- -------------- -------------- --------------
(in thousands)
Net revenues:
1-800-Flowers.com Consumer Floral $114,609 $103,300 $197,134 $179,575
BloomNet Wire Service 9,640 6,625 16,806 11,141
Gourmet Food & Gift Baskets 108,898 62,364 131,074 70,951
Home & Children's Gifts 97,975 106,169 122,570 128,845
Corporate (*) 418 500 1,796 1,899
Intercompany eliminations (1,674) (1,129) (2,382) (1,817)
------------- -------------- -------------- --------------
Total net revenues $329,866 $277,829 $466,998 $390,594
============= ============== ============== ==============
Three Months Ended Six Months Ended
----------------------------- -------------------------------
December 31, January 1, December 31, January 1,
Operating Income 2006 2006 2006 2006
------------- -------------- -------------- --------------
(in thousands)
Category Contribution Margin:
1-800-Flowers.com Consumer Floral $13,260 $9,275 $21,101 $15,191
BloomNet Wire Service 3,256 1,523 4,958 2,196
Gourmet Food & Gift Baskets 25,326 10,590 23,720 9,162
Home & Children's Gifts 3,838 11,231 1,783 9,289
------------- -------------- -------------- --------------
Category Contribution Margin Subtotal 45,680 32,619 51,562 35,838
Corporate (*) (11,872) (10,655) (23,814) (21,477)
Depreciation and amortization (3,834) (3,809) (8,578) (7,333)
------------- -------------- -------------- --------------
Operating income $29,974 $18,155 $19,170 $7,028
============= ============== ============== ==============
11
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
(*) Corporate expenses consist of the Company's enterprise shared service cost
centers, and include, among others, Information Technology, Human Resources,
Accounting and Finance, Legal, Executive and Customer Service Center
functions, as well as Share-Based Compensation. In order to leverage the
Company's infrastructure, these functions are operated under a centralized
management platform, providing support services throughout the organization.
The costs of these functions, other than those of the Customer Service
Center which are allocated directly to the above categories based upon
usage, are included within corporate expenses, as they are not directly
allocable to a specific category.
Note 10 - Commitments and Contingencies
Legal Proceedings
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its consolidated financial position,
results of operations or liquidity.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Forward Looking Statements
The section entitled "Forward Looking Information and Factors that May Affect
Future Results," provides a description of the risks and uncertainties that
could cause actual results to differ materially from those discussed in
forward-looking statements set forth in this report relating to the financial
results, operations and business prospects of the Company. Such forward-looking
statements are based on management's current expectations about future events,
which are inherently susceptible to uncertainty and changes in circumstances.
Overview
For more than 30 years, 1-800-FLOWERS.COM Inc. - "Your Florist of Choice(R)" -
has been providing customers around the world with the freshest flowers and
finest selection of plants, gift baskets, gourmet foods and confections, and
plush stuffed animals perfect for every occasion. 1-800-FLOWERS.COM(R) offers
the best of both worlds: exquisite, florist-designed arrangements individually
created by some of the nation's top floral artists and hand-delivered the same
day, and spectacular flowers delivered through its "Fresh From Our Growers (sm)"
program.
Customers can "call, click or come in" to shop 1-800-FLOWERS.COM twenty four
hours a day, 7 days a week at 1-800-356-9377 or www.1800flowers.com. Sales and
Service Specialists are available 24/7, and fast and reliable delivery is
offered same day, any day. As always, 100 percent satisfaction and freshness are
guaranteed. The 1-800-FLOWERS.COM collection of brands also includes home decor
and children's gifts from Plow & Hearth(R) (1-800-627-1712 or
www.plowandhearth.com), Problem Solvers(R) (www.problemsolvers.com), Wind &
Weather(R) (www.windandweather.com), Madison Place(sm) (www.madisonplace.com),
HearthSong(R) (www.hearthsong.com) and Magic Cabin(R) (www.magiccabin.com);
gourmet gifts including popcorn and specialty treats from The Popcorn Factory(R)
(1-800-541-2676 or www.thepopcornfactory.com); exceptional cookies and baked
gifts from Cheryl&Co.(R) (1-800-443-8124 or wwwcherylandco.com); premium
chocolates and confections from Fannie May Confections Brands
(www.fanniemay.com and www.harrylondon.com); gourmet foods from GreatFood.com(R)
(www.greatfood.com); wine gifts from Ambrosia(R) (www.ambrosia.com); gift
baskets from 1-800-BASKETS.COM(R) (www.1800baskets.com) and the BloomNet(R)
international floral wire service, which provides quality products and diverse
services to a select network of florists.
1-800-FLOWERS.COM, Inc. stock is traded on the NASDAQ market under ticker symbol
FLWS.
13
Category Information
During the first quarter of fiscal 2007, the Company segmented its
organization to improve execution and customer focus and to align its
resources to meet the demands of the markets it serves. The following table
presents the contribution of net revenues, gross profit and "EBITDA"
(earnings before interest, taxes, depreciation and amortization) from each
of the Company's business categories. Prior year information has been
restated for comparative purposes.
Three Months Ended Six Months Ended
--------------------------------------------- ---------------------------------------------
December 31, January 1, December 31, January 1,
Net Revenues 2006 2006 % Change 2006 2006 % Change
-------------- --------------- -------------- -------------- --------------- --------------
(in thousands)
Net revenues:
1-800-Flowers.com Consumer Floral $114,609 $103,300 10.9% $197,134 $179,575 9.8%
BloomNet Wire Service 9,640 6,625 45.5% 16,806 11,141 50.8%
Gourmet Food & Gift Baskets 108,898 62,364 74.6% 131,074 70,951 84.7%
Home & Children's Gifts 97,975 106,169 (7.7%) 122,570 128,845 (4.9%)
Corporate (*) 418 500 (16.4%) 1,796 1,899 (5.4%)
Intercompany eliminations (1,674) (1,129) (2,382) (1,817) (31.1%)
-------------- --------------- -------------- ---------------
Total net revenues $329,866 $277,829 18.7% $466,998 $390,594 19.6%
============== =============== ============== ===============
Three Months Ended Six Months Ended
--------------------------------------------- ---------------------------------------------
December 31, January 1, December 31, January 1,
Gross Profit 2006 2006 % Change 2006 2006 % Change
-------------- --------------- -------------- -------------- --------------- --------------
(in thousands)
Gross Profit:
1-800-Flowers.com Consumer Floral $45,504 39,349 15.6% $76,877 $68,550 12.1%
39.7% 38.1% 39.0% 38.2%
BloomNet Wire Service 5,777 3,496 65.2% 9,877 6,109 61.7%
59.9% 52.8% 58.8% 54.8%
Gourmet Food & Gift Baskets 52,706 29,611 78.0% 61,193 33,379 83.3%
48.4% 47.5% 46.7% 47.0%
Home & Children's Gifts 47,841 52,367 (8.6%) 58,007 62,057 (6.5%)
48.8% 49.3% 47.3% 48.2%
Corporate (*) 208 243 (14.4%) 940 1,039 (9.5%)
49.8% 48.6% 52.3% 54.7%
Intercompany eliminations (59) (74) (103) (116)
-------------- --------------- -------------- ---------------
Total gross profit $151,977 $124,992 21.6% $206,791 $171,018 20.9%
============== =============== ============== ===============
46.1% 45.0% 44.3% 43.8%
============== =============== ============== ===============
Three Months Ended Six Months Ended
--------------------------------------------- ---------------------------------------------
December 31, January 1, December 31, January 1,
EBITDA (**) 2006 2006 % Change 2006 2006 % Change
-------------- --------------- -------------- -------------- --------------- --------------
(in thousands)
Category Contribution Margin:
1-800-Flowers.com Consumer Floral $13,260 $9,275 43.0% $21,101 $15,191 38.9%
BloomNet Wire Service 3,256 1,523 113.8% 4,958 2,196 125.8%
Gourmet Food & Gift Baskets 25,326 10,590 139.2% 23,720 9,162 158.9%
Home & Children's Gifts 3,838 11,231 (65.8%) 1,783 9,289 (80.8%)
-------------- --------------- -------------- ---------------
Category Contribution Margin Subtotal 45,680 32,619 40.0% 51,562 35,838 43.9%
Corporate (*) (11,872) (10,655) (11.4%) (23,814) (21,477) (10.9%)
-------------- --------------- -------------- ---------------
EBITDA $33,808 $21,964 53.9% $27,748 $14,361 93.2%
============== =============== ============== ===============
(*) 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 Share-Based Compensation. In order to leverage
the Company's infrastructure, these functions are operated under a
centralized management platform, providing support services throughout the
organization. The costs of these functions, other than those of the
Customer Service Center, which are allocated directly to the above
categories based upon usage, are included within corporate expenses as they
are not directly allocable to a specific category.
14
(**)Performance is measured based on category contribution margin or category
EBITDA, reflecting only the direct controllable revenue and operating
expenses of the categories. As such, management's measure of profitability
for these categories does not include the effect of corporate overhead,
described above, nor does it include depreciation and amortization,
other income (net), and income taxes. Management utilizes EBITDA
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 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 (with additional
adjustments) to measure compliance with covenants such as interest coverage
and debt incurrence. EBITDA is also used by the Company to evaluate and
price potential acquisition candidates. EBITDA has 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.
Results of Operations
Net Revenues
Three Months Ended Six Months Ended
--------------------------------------------- ---------------------------------------------
December 31, January 1, December 31, January 1,
2006 2006 % Change 2006 2006 % Change
-------------- --------------- -------------- -------------- --------------- --------------
(in thousands)
Net revenues:
E-Commerce $270,159 $258,484 4.5% $379,418 $359,139 5.6%
Other 59,707 19,345 208.6% 87,580 31,455 178.4%
-------------- --------------- -------------- ---------------
Total net revenues $329,866 $277,829 18.7% $466,998 $390,594 19.6%
============== =============== ============== ===============
The Company's revenue growth of 18.7% and 19.6% during the three and six months
ended December 31, 2006, respectively, was due to a combination of organic
growth, as well as the acquisitions of Wind & Weather, a direct marketer of
weather-themed gifts, acquired on October 31, 2005, and Fannie May Confections
Brands, Inc. ("Fannie May Confections"), a manufacturer and retailer of premium
chocolates and other confections, acquired on May 1, 2006. Excluding the impact
of acquisitions, total revenue growth during the three and six months ended
December 31, 2006 was 3.4% and 5.2%, respectively, reflecting: (i) the Company's
strong brand name recognition, (ii) continued leveraging of its existing
customer base, and (iii) cost effective spending on its marketing and selling
programs, designed to improve customer acquisition and accelerate top-line
growth. The Company fulfilled approximately 4,375,000 and 6,012,000 orders
through its E-commerce sales channels (online and telephonic sales) during the
three and six months ended December 31, 2006, respectively, an increase of 2.1%
and 2.2% over the respective prior year periods. The Company's E-commerce
average order value of $61.69 and $63.06 during the three and six months ended
December 31, 2006, respectively, increased 2.2% and 3.2%, over the respective
prior year periods, primarily from a combination of product mix and pricing
initiatives. Other revenues, for the three and six months ended December 31,
2006, increased in comparison to the same periods of the prior year, primarily
as a result of the retail/wholesale contributions of Fannie May Confections
Brands, Inc., as well as the continued membership growth and wholesale floral
product and service offerings from the Company's BloomNet Wire Service category.
The 1-800-Flowers.com Consumer Floral category includes the 1-800-Flowers brand
operations which derives revenue from the sale of consumer floral products
through its E-Commerce sales channels (telephonic and online sales) and
company-owned and operated retail floral stores, as well as royalties from its
franchise operations. Net revenues during the three and six months ended
December 31, 2006 increased by 10.9% and 9.8% over the respective prior year
periods, primarily from a combination of increased average order value and order
volumes from its E-commerce sales channel, offset in part by lower retail sales
from its company-owned floral stores due to the planned transition of Company
stores to franchise ownership.
The BloomNet Wire Service category includes revenues from membership fees as
well as other service offerings to florists. Net revenues during the three and
six months ended December 31, 2006 increased by 45.5% and 50.8% over the
respective prior year periods, primarily as a result of increased florist
membership, as well as increased wholesale floral product sales.
15
The Gourmet Food & Gift Basket category includes the operations of the Cheryl &
Co., Fannie May Confections, The Popcorn Factory and The Winetasting Network
brands. Revenue is derived from the sale of cookies, baked gifts, premium
chocolates and confections, gourmet popcorn and wine gifts through its
E-commerce sales channels (telephonic and online sales) and company-owned and
operated retail stores under the Cheryl & Co. and Fannie May brands, as well as
wholesale operations. Net revenue during the three and six months ended December
31, 2006 increased by 74.6% and 84.7% over the respective prior year periods,
primarily as a result of the contribution of Fannie May Confections Brands, Inc,
and strong growth within the Cheryl & Co. brand.
The Home & Children's Gifts category includes revenues from Plow & Hearth, Wind
& Weather, Problem Solvers, Madison Place, HearthSong and Magic Cabin brands.
Revenue is derived from the sale of home decor and children's gifts through its
E-commerce sales channels (telephonic and online sales) or company-owned and
operated retail stores under the Plow & Hearth brand. Net revenue during the
three and six months ended December 31, 2006 decreased by 7.7% and 4.9% over the
respective prior year periods, due to a lack of new "hit" products and an
overall macro decline in customer demand within this category. Efforts to expand
titles outside of the core Plow & Hearth brand did not attract the level of
customer demand to justify the increase in marketing costs. The Company is in
the process of developing its go-forward plans, and has already implemented
management changes and initiated a comprehensive review of all of the operations
within this category.
Over the past several years, through a combination of organic efforts and
strategic acquisitions, the Company has rapidly grown its revenues, achieving a
solid base of business which is approaching $1 billion. The Company anticipates
that its revenue growth for fiscal 2007 will be at the low end of its previous
guidance range of 17-20 percent, as strong revenue growth in the Company's key
business categories of 1-800-Flowers Consumer Floral, BloomNet Wire Service and
Gourmet Food & Gift Baskets (which includes the Fannie May Confections brand,
acquired May 1, 2006) is expected to more than offset the lower revenue
contribution expected from its Home and Children's Gifts category.
Gross Profit
Three Months Ended Six Months Ended
--------------------------------------------- ---------------------------------------------
December 31, January 1, December 31, January 1,
2006 2006 % Change 2006 2006 % Change
-------------- --------------- -------------- -------------- --------------- --------------
(in thousands)
Gross profit $151,977 $124,992 21.6% $206,791 $171,018 20.9%
Gross margin % 46.1% 45.0% 44.3% 43.8%
Gross profit increased during the three and six months ended December 31, 2006,
in comparison to the same period of the prior year, primarily as a result of the
revenue growth described above. Gross margin percentage increased 110 basis
points and 50 basis points, to 46.1% and 44.3% during the three and six months
ended December 31, 2006, respectively, as a result of product mix, as well as
continued improvements in customer service, fulfillment and merchandising
programs.
The 1-800-Flowers.com Floral Consumer category gross profit for the three and
six months ended December 31, 2006 increased by 15.6% and 12.1% over the
respective prior year periods as a result of the aforementioned increase in net
revenues, as well as improvements in fulfillment logistics and pricing
initiatives, which resulted in an increase in gross margin percentage of 160
basis points and 80 basis points, to 39.7% and 39.0%, during the three and six
months ended December 31, 2006, respectively. These improvements more than
offset increases in carrier fuel charges experienced during the periods.
The BloomNet Wire Service category gross profit for the three and six months
ended December 31, 2006 increased by 65.2% and 61.7% over the respective prior
year periods as a result of increases in florist membership and floral wholesale
product sales. Gross margin percentage increased 710 basis points and 400 basis
points, to 59.9% and 58.8% during the three and six months ended December 31,
2006, respectively, primarily as a result of sales mix.
The Gourmet Food & Gift Basket category gross profit for the three and six
months ended December 31, 2006 increased by 78.0% and 83.3% over the respective
prior year periods primarily as a result of the incremental revenue generated by
Fannie May Confections Brands. Gross margin percentage increased by 90 basis
points to 48.4% during the three months ended December 31, 2006, as a result of
improved margins across all brands within the gourmet food and gift basket
category, but decreased by 30 basis points to 46.7% during the six months ended
December 31, 2006, primarily as a result of the seasonally lower margins of
Fannie May Confections in the September quarter.
16
The Home & Children's Gift category gross profit for the three and six months
ended December 31, 2006 decreased by 8.6% and 6.5% over the respective prior
year periods as a result of the aforementioned decline in sales. Gross margin
percentage declined 50 basis points and 90 basis points, to 48.8% and 47.3%
during the three and six months ended December 31, 2006, respectively, due to
sales mix and higher levels of discounting to move inventory.
During the remainder of fiscal 2007, although varying by quarter due to seasonal
changes in product mix, the Company expects that its gross margin percentage
will improve in relation to its comparable prior year quarter, primarily
through: (i) growth of its higher margin business categories including Cheryl &
Co. and Fannie May Confections, (ii) improved product sourcing, new product
development and process improvement initiatives implemented during the latter
half of the first quarter, and (iii) the contribution of the BloomNet Wire
Service business, which has completed its roll-out investment phase.
Marketing and Sales Expense
Three Months Ended Six Months Ended
--------------------------------------------- ---------------------------------------------
December 31, January 1, December 31, January 1,
2006 2006 % Change 2006 2006 % Change
-------------- --------------- -------------- -------------- --------------- --------------
(in thousands)
Marketing and sales $99,037 $87,874 12.7% $141,407 $126,098 12.1%
Percentage of net revenues 30.0% 31.6% 30.3% 32.3%
During the three and six months ended December 31, 2006, marketing and sales
expenses decreased from 31.6% and 32.3% of net revenue to 30.0% and 30.3% of net
revenues, reflecting improved operating leverage from a number of cost-saving
initiatives and the completion of the investment phase of the Company's BloomNet
Wire Service business, including the absorption of incremental personnel to
develop a member directory, increase BloomNet Technologies penetration and
expand membership. This leverage was achieved through significant improvement
within the Company's 1-800-Flowers Consumer Floral, BloomNet Wire Service and
Gourmet Food & Gift Baskets categories, as efforts to grow the Home and
Children's Gifts businesses through the introduction of titles outside of the
core Plow & Hearth brand did not attract the necessary level of customer demand
to justify the costs.
Marketing and sales expense increased over the prior year period by 12.7% and
12.1% during the three and six months ended December 31, 2007 as a result of
several factors, including: (i) incremental expenses associated with the recent
acquisition of Fannie May Confections, (ii) incremental variable costs to
accommodate higher sales volumes, and (iii) personnel associated with the
expansion of the BloomNet Wire Service business. During the three and six months
ended December 31, 2006, the Company added 1,246,000 and 1,794,000 new
e-commerce customers, representing decreases of 6.5% and 3.1% over the same
periods of the prior year, primarily due to the aforementioned sales decline
within the Home and Children's Gifts category. As a result of the Company's
effective customer retention efforts, 1,407,000 and 1,936,000 existing customers
placed e-commerce orders during the three and six months ended December 31,
2006, respectively, representing increases of 2.8% and 1.8% over the same
periods of the prior year. Of the 2,653,000 and 3,729,000 total customers who
placed e-commerce orders during the three and six months ended December 31,
2006, respectively, approximately 53.0% and 52.0% were repeat customers,
compared to 50.7% during both periods of the prior year, reflecting the
Company's ongoing focus on deepening the relationship with its existing
customers as their trusted source for gifts and services for all of their
celebratory occasions.
During fiscal 2007, the Company is focused on improving its operating expense
ratio through a number of cost saving initiatives, including catalog printing
and e-mail pricing improvements, as well as a review of the type, quantity and
effectiveness of its marketing programs. In addition to the improved operating
results expected now that the Company has completed the investment phase of its
BloomNet florist business, the Company expects that marketing and sales expense,
as a percentage of revenue, will continue to decrease in comparison to the prior
year.
17
Technology and Development Expense
Three Months Ended Six Months Ended
--------------------------------------------- ---------------------------------------------
December 31, January 1, December 31, January 1,
2006 2006 % Change 2006 2006 % Change
-------------- --------------- -------------- -------------- --------------- --------------
(in thousands)
Technology and development $5,201 $4,797 8.4% $10,362 $9,566 8.3%
Percentage of net revenues 1.6% 1.7% 2.2% 2.4%
During the three and six months ended December 31, 2006, technology and
development expense decreased to 1.6% and 2.2% of net revenue, respectively,
reflecting improved operating leverage, but increased over the respective prior
year periods by 8.4% and 8.3%, as a result of the incremental expenses
associated with the acquisition of Fannie May Confections, as well as for
increases in the cost of maintenance and license agreements required to support
the Company's technology platform. During the three and six months ended
December 31, 2006, the Company expended $7.2 million and $15.7 million on
technology and development, of which $2.0 million and $5.3 million has been
capitalized.
The Company believes that continued investment in technology and development is
critical to attaining its strategic objectives. While many of its
acquisition-related integration projects are complete, as a result of
incremental expenses associated with Fannie May Confections Brands, the Company
expects that its spending for the remainder of fiscal 2007 will remain
consistent or decrease slightly as a percentage of net revenues in comparison to
the prior year.
General and Administrative Expense
Three Months Ended Six Months Ended
--------------------------------------------- ---------------------------------------------
December 31, January 1, December 31, January 1,
2006 2006 % Change 2006 2006 % Change
-------------- --------------- -------------- -------------- --------------- --------------
(in thousands)
General and administrative $13,931 $10,357 34.5% $27,274 $20,993 29.9%
Percentage of net revenues 4.2% 3.7% 5.8% 5.4%
General and administrative expense increased 34.5% and 29.9% during the three
and six months ended December 31, 2006, respectively, and by 50 basis points and
40 basis points of net revenues in comparison to the respective prior year
periods, primarily as a result of: (i) incremental expenses associated with
Fannie May Confections Brands, (ii) incremental travel expenses associated with
the expansion of the Company's BloomNet Wire Service business, and (iii) higher
insurance costs.
Although the Company believes that its current general and administrative
infrastructure is sufficient to support existing requirements and drive
operating leverage, as a result of the incremental expenses associated with
Fannie May Confections, including costs associated with Sarbanes-Oxley
compliance, the Company expects that its general and administrative expenses as
a percentage of net revenue during the remainder of fiscal 2007 will be
consistent with the prior year period.
Depreciation and Amortization Expense
Three Months Ended Six Months Ended
--------------------------------------------- ---------------------------------------------
December 31, January 1, December 31, January 1,
2006 2006 % Change 2006 2006 % Change
-------------- --------------- -------------- -------------- --------------- --------------
(in thousands)
Depreciation and amortization $3,834 $3,809 (0.7%) $8,578 $7,333 17.0%
Percentage of net revenues 1.2% 1.4% 1.8% 1.9%
Depreciation and amortization expense increased by 0.7% during the three months
ended December 31, 2006 in comparison to the prior year period. During the
quarter ended December 31, 2006, the Company completed the allocation of the
purchase price of Fannie May Confections to the individual assets acquired and
18
liabilities assumed, resulting in adjustments to the carrying value of recorded
assets and liabilities, including revisions to the value and expected lives of
certain intangible assets, subject to amortization, and the residual amount that
was allocated to goodwill. As a result, during the three months ended December
31, 2006, the Company recorded a reduction in amortization expense in the amount
of $0.6 million, reflecting the impact that the change in estimated value had on
prior periods.
Depreciation and amortization expense increased 17.0% during the six months
ended December 31, 2006 as a result of the incremental amortization expense
related to the intangibles established as a result of the acquisitions of Wind &
Weather and Fannie May Confections, as well as depreciation associated with
recently completed technology projects designed to provide improved
order/warehouse management functionality across the enterprise.
The Company believes that continued investment in its infrastructure, primarily
in the areas of technology and development, including the improvement of the
technology platforms are critical to attaining its strategic objectives. As a
result of these improvements, but primarily as a result of the increase in
amortization expense associated with intangibles established as a result of
recent acquisitions, the Company expects that depreciation and amortization for
the remainder of fiscal 2007 will remain consistent or increase slightly as a
percentage of net revenues in comparison to the prior year.
Other Income (Expense)
Three Months Ended Six Months Ended
----------------------------- -------------------------------
December 31, January 1, December 31, January 1,
2006 2006 2006 2006
--------------------------------------------------------------
(in thousands)
Interest income $254 $141 $591 $356
Interest expense (2,425) (113) (4,253) (197)
Other (7) (143) 4 (137)
-------------- ------------- --------------- ---------------
($2,178) ($115) ($3,658) $22
============== ============= =============== ===============
The decrease in other income (expense) during the three and six months ended
December 31, 2006, in comparison to prior year periods was the result of higher
interest expense on the Company's 2006 Credit Facility, offset in part by
slightly higher interest income, resulting primarily from an increase in rates.
The Company utilized an $85.0 million term loan to finance its acquisition of
Fannie May Confections, and during the quarter, had borrowed under its line of
credit to fund working capital needs. The Company had repaid all borrowings
under its Line of Credit by December 31, 2006.
Income Taxes
During the three and six months ended December 31, 2006 and January 1, 2006, the
Company recorded income tax expense of $10.9 million and $6.0 million,
respectively. The Company's effective tax rate for the three and six months
ended December 31, 2006 was 39.1% and 38.7%, respectively, compared to 42.7% and
47.4% during the comparative three and six months ended January 1, 2006. The
effective tax rate includes the impact of stock-based compensation recognized in
accordance with SFAS No. 123(R), which resulted in increases of approximately
0.2% and 1.0%, during the three and six months ended December 31, 2006
respectively, and 1.1% and 5.5% during the three and six months ended January 1,
2006, respectively, due to the associated book/tax differences in accounting for
incentive stock options.
Liquidity and Capital Resources
At December 31, 2006, the Company had working capital of $33.8 million,
including cash and equivalents of $26.0 million, compared to working capital of
$44.3 million, including cash and equivalents and short-term investments of
$24.6 million, at July 2, 2006.
Net cash provided by operating activities of $32.4 million for the six months
ended December 31, 2006 was primarily attributable to net income, non-cash
charges for depreciation and amortization and deferred income taxes as well as
seasonal increases accounts payable and accrued expenses, offset in part by
increases in inventory and receivables related to Fannie May Confections
wholesale business.
Net cash used in investing activities of $10.4 million for the six months ended
December 31, 2006 was primarily attributable to capital expenditures related to
the Company's technology infrastructure.
Net cash used in financing activities of $20.7 million for the six months ended
December 31, 2006, was primarily due to: (i) scheduled repayments of the
Company's term loan used to finance its acquisition of Fannie May Confections,
(i) repayment of amounts borrowed under the Company's line of credit which was
used to fund working capital requirements prior to the holiday selling season,
and (iii) the repurchase of 3,010,740 shares of treasury stock.
19
On May 1, 2006, the Company entered into a secured credit facility with JPMorgan
Chase Bank, N.A., as administrative agent, and a group of lenders (the "2006
Credit Facility"). The 2006 Credit Facility includes an $85.0 million term loan
and a $60.0 million revolving credit facility, which bear interest at LIBOR plus
0.625% to 1.125%, with pricing based upon the Company's leverage ratio. At
closing, the Company borrowed $85.0 million of the term facility to acquire all
of the outstanding capital stock of Fannie May Confections Brands, Inc. The
Company is required to pay the outstanding term loan in quarterly installments,
with the final installment payment due on May 1, 2012. The 2006 Credit Facility
contains various conditions to borrowing, and affirmative and negative financial
covenants.
The Company has historically utilized cash generated from operations to meet its
cash requirements, including all operating, investing and debt repayment
activities. However, due to the Company's continued expansion into non-floral
products, including the acquisition of Fannie May Confections Brands, as well as
its recent acquisition of $15.7 million of treasury stock, during the second
half of fiscal 2007, the Company expects to borrow against its line of credit to
fund working capital requirements, which have increased during this time period
as a result of increased inventory and pre-holiday manufacturing requirements.
The Company expects that all such amounts will be repaid prior to the end of its
fiscal year.
On May 12, 2005, the Company's Board of Directors increased the Company's
authorization to repurchase the Company's Class A common stock up to $20
million, from the previous authorized limit of $10 million. Any such purchases
could be made from time to time in the open market and through privately
negotiated transactions, subject to general market conditions. The repurchase
program will be financed utilizing available cash. As of December 31, 2006, the
Company had repurchased 1,510,050 shares of common stock for $11.1 million. As
noted above, on December 28, 2006, the Company completed its repurchase of
3,010,740 shares of Class A Common Stock in a privately negotiated transaction.
The purchase price was $15,689,000, or $5.21 per share. The repurchase was
approved by the disinterested members of the Company's Board of Directors and is
in addition to the Company's existing stock repurchase authorization of $20.0
million, of which $8.9 million remains authorized by unused.
At December 31, 2006, the Company's contractual obligations consist of:
Payments due by period
-----------------------------------------------------------------------------------
(in thousands)
Less than 1 1 - 3 years More than 5
Total year 3 - 5 years years
----------- --------------- ------------ ------------- ----------------
Long-term debt $99,652 $14,569 $31,770 $40,283 $13,030
Capital lease obligations 188 119 32 25 12
Operating lease obligations 62,976 7,639 16,381 10,734 28,222
Sublease obligations 5,402 968 2,558 1,303 573
Purchase commitments (*) 25,642 25,642 - - -
----------- --------------- ------------ ------------- ----------------
Total $193,860 $48,937 $50,741 $52,345 $41,837
=========== =============== ============ ============= ================
(*) Purchase commitments consist primarily of inventory, equipment purchase
orders and online marketing agreements made in the ordinary course of business.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial position and results of
operations are based upon the consolidated financial statements of
1-800-FLOWERS.COM, Inc., which have been prepared in accordance with U.S.
generally accepted accounting principles. The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amount of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities. On an ongoing basis, management
20
evaluates its estimates, including those related to revenue recognition,
inventory and long-lived assets, including goodwill and other intangible assets
related to acquisitions. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities. Actual
results may differ from these estimates under different assumptions or
conditions. Management believes the following critical accounting policies,
among others, affect its more significant judgments and estimates used in
preparation of its consolidated financial statements.
Revenue Recognition
Net revenues are generated by E-commerce operations from the Company's online
and telephonic sales channels as well as other operations (retail/fulfillment)
and primarily consist of the selling price of merchandise, service or outbound
shipping charges, less discounts, returns and credits. Net revenues are
recognized upon product shipment. Shipping terms are FOB shipping point.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers or franchisees to make required
payments. If the financial condition of the Company's customers or franchisees
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
Inventory
The Company states inventory at the lower of cost or market. In assessing the
realization of inventories, we are required to make judgments as to future
demand requirements and compare that with inventory levels. It is possible that
changes in consumer demand could cause a reduction in the net realizable value
of inventory.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the
net assets acquired and is evaluated annually for impairment. The cost of
intangible assets with determinable lives is amortized to reflect the pattern of
economic benefits consumed, on a straight-line basis, over the estimated periods
benefited, ranging from 3 to 16 years.
The Company performs an annual impairment test as of the first day of its fiscal
fourth quarter, or earlier if indicators of potential impairment exist, to
evaluate goodwill. Goodwill is considered impaired if the carrying amount of the
reporting unit exceeds its estimated fair value. In assessing the recoverability
of goodwill, the Company reviews both quantitative as well as qualitative
factors to support its assumptions with regard to fair value. Judgment regarding
the existence of impairment indicators is based on market conditions and
operational performance of the Company. Future events could cause the Company to
conclude that impairment indicators exist and that goodwill and other intangible
assets associated with our acquired businesses is impaired.
Capitalized Software
The carrying value of capitalized software, both purchased and internally
developed, is periodically reviewed for potential impairment indicators. Future
events could cause the Company to conclude that impairment indicators exist and
that capitalized software is impaired.
Stock-based Compensation
SFAS No. 123R requires the measurement of stock-based compensation expense based
on the fair value of the award on the date of grant. The Company determines the
fair value of stock options issued by using the Black-Scholes option-pricing
model. The Black-Scholes option-pricing model considers a range of assumptions
related to volatility, dividend yield, risk-free interest rate and employee
exercise behavior. Expected volatilities are based on historical volatility of
the Company's stock price. The dividend yield is based on historical experience
and future expectations. The risk-free interest rate is derived from the US
Treasury yield curve in effect at the time of grant. The Black-Scholes model
also incorporates expected forfeiture rates, based on historical behavior.
Determining these assumptions are subjective and complex, and therefore, a
change in the assumptions utilized could impact the calculation of the fair
value of the Company's stock options.
21
Income Taxes
The Company has established deferred income tax assets and liabilities for
temporary differences between the financial reporting bases and the income tax
bases of its assets and liabilities at enacted tax rates expected to be in
effect when such assets or liabilities are realized or settled. The Company has
recognized as a deferred tax asset the tax benefits associated with losses
related to operations, which are expected to result in a future tax benefit.
Realization of this deferred tax asset assumes that we will be able to generate
sufficient future taxable income so that these assets will be realized. The
factors that we consider in assessing the likelihood of realization include the
forecast of future taxable income and available tax planning strategies that
could be implemented to realize the deferred tax assets.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48 applies to all tax positions accounted for under SFAS no. 109,
"Accounting for Income Taxes" and defines the confidence level that a tax
position must meet in order to be recognized in the financial statements. The
interpretation requires that the tax effects of a position be recognized only if
it is "more-likely-than-not" to be sustained by the taxing authority as of the
reporting date. If a tax position is not considered "more-likely-than-not" to be
sustained then no benefits of the position are to be recognized. FIN 48 requires
additional disclosures and is effective as of the beginning of the first fiscal
year beginning after December 15, 2006. The Company is currently evaluating the
effect that the adoption of FIN 48 will have on its consolidated results of
operations and financial condition.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements". This
Statement defines fair value, establishes a framework for measuring fair value
and expands disclosure about fair value measurements, and is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. The Company is currently
evaluating the effect that the adoption of this Statement will have on its
consolidated results of operations and financial condition.
Forward Looking Information and Factors that May Affect Future Results
Our disclosure and analysis in this report contain forward-looking information
about the Company's financial results and estimates, business prospects that
involve substantial risks and uncertainties. From time to time, we also may
provide oral or written forward-looking statements in other materials we release
to the public. Forward-looking statements give our current expectations or
forecasts of future events. You can identify these statements by the fact that
they do not relate strictly to historic or current facts. They use words such as
"will," "anticipate," "estimate," "expect," "project," "intend," "plan,"
"believe," "target," "forecast" and other words and terms of similar meaning in
connection with any discussion of future operating or financial performance. In
particular, these include statements relating to future actions, future
performance, new products and product categories, the outcome of contingencies,
such as legal proceedings, and financial results. Among the factors that could
cause actual results to differ materially are the following:
o the Company's ability:
o to achieve solid, sustainable revenue growth;
o to maintain and enhance its online shopping web sites to attract
customers;
o to successfully introduce new products and product categories;
o to successfully integrate acquisitions, including the acquisition of
Fannie May Confections Brands, Inc.;
o to cost effectively acquire and retain customers;
o to compete against existing and new competitors;
o to manage expenses associated with necessary general and
administrative and technology investments;
o to cost efficiently manage inventories; and
o to grow its revenues and leverage its operating infrastructure to
enhance profitability;
o general consumer sentiment and economic conditions that may affect
levels of discretionary customer purchases of the Company's products;
and
22
o competition from existing and potential new competitors.
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 July
2, 2006 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 1, of that filing under the heading "Risk
Factors that May Affect Future Results". We incorporate that section of that
Form 10-K in this filing and investors should refer to it. You should understand
that it is not possible to predict or identify all such factors. Consequently,
you should not consider any such list to be a complete set of all potential
risks or uncertainties.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's earnings and cash flows are subject to fluctuations due to changes
in interest rates primarily from its investment of available cash balances in
money market funds. While the Company currently does not use interest rate
derivative instruments to manage exposure to interest rate changes, in order to
finance the acquisition of Fannie May Confections, on May 1, 2006, the Company
entered into a secured credit facility. The credit facility includes an $85.0
million term loan and a $60.0 million revolving facility, which bear interest at
LIBOR plus 0.625% to 1.125%, with pricing based upon the Company's leverage
ratio.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
the Chief Executive Officer and Chief Financial Officer, we have evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e) as of the end
of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of the period covered by this report, these disclosure controls and procedures
are effective in alerting them in a timely manner to material information
required to be disclosed in the Company's periodic reports filed with the SEC.
There were no changes in our internal control over financial reporting (as such
term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the six
months ended December 31, 2006 that have materially affected, or are reasonably
likely to materially affect, our internal controls over financial reporting.
24
PART II. - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is subject to legal proceedings and claims
arising in the ordinary course of business. The Company is not aware of any such
legal proceedings or claims that it believes will have, individually or in the
aggregate, a material adverse effect on its business, consolidated financial
position, results of operations or liquidity.
ITEM 1A. RISK FACTORS.
There have been no material changes from the risk factors disclosed in Part 1,
Item 1, of the Company's Annual Report on Form 10-K for the fiscal year ended
July 2, 2006.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth, for the months indicated, the Company's purchase
of common stock during the first half of fiscal 2007 which includes the period
July 3, 2006 through December 31, 2006.
Total Number of Dollar Value of
Shares Purchased as Shares that May Yet
Part of Publicly Be Purchased Under
Total Number of Average Price Announced Plans or the Plans or
Period Shares Purchased Paid Per Share Programs Programs
-----------------------------------------------------------------------------------------------------------------
(in thousands, except average price paid per share)
7/3/06 - 7/30/06 - $- - $8,863
7/31/06 - 8/27/06 - $- - $8,863
8/28/06 - 10/1/06 - $- - $8,863
10/2/06 - 10/29/06 - $- - $8,863
10/30/06 - 11/26/06 - $- - $8,863
11/27/06 - 12/31/06 3,010.7 $5.21 - $8,863
----------------- ----------------- ---------------------
Total 3,010.7 $5.21 -
On May 12, 2005, the Company's Board of Directors increased the Company's
authorization to repurchase the Company's Class A common stock up to $20
million, from the previous authorized limit of $10 million. All share purchases
were made in open-market transactions. The average price paid per share is
calculated on a settlement basis and excludes commission.
On December 28, 2006, the Company completed its repurchase of 3,010,740 shares
of Class A Common Stock in a privately negotiated transaction. The purchase
price was $15,689,000, or $5.21 per share. The repurchase was approved by the
disinterested members of the Company's Board of Directors and is in addition to
the Company's existing stock repurchase authorization of $20.0 million, of which
$8.9 million remains authorized by unused.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on December 7,
2006.
The following nominees were elected as directors, each to serve until
the 2009 Annual Meeting or until their respective successors shall
have been duly elected and qualified, by the vote set forth below:
Nominee For Withheld
---------------------------- ----------------------------------- --------------------------------------
Jeffrey C. Walker 390,037,034 657,659
Deven Sharma 390,150,721 543,972
The following Directors who were not nominees for election at this
Annual Meeting will continue to serve on the Board of Directors of the
Company: James F. McCann, Christopher G. McCann, John J. Conefry, Jr.,
Leonard J. Elmore and Mary Lou Quinlan.
The proposal to ratify the appointment of Ernst & Young LLP as the
Company's independent registered public accounting firm for the fiscal
year ending July 1, 2007 was approved by the vote set forth below:
For Against Abstain
------------------------- ----------------------------------- --------------------------------------
390,611,161 76,098 7,434
There were no broker non-votes for this proposal.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 Certifications 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.
26
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 8, 2007 /s/ James F. McCann
----------------------- ----------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Date: February 8, 2007 /s/ William E. Shea
----------------------- -----------------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)