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 26, 2004
___ 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1600 Stewart Avenue, Westbury, New York 11590
---------------------------------------------
(Address of principal executive offices)(Zip code)
(516) 237-6000
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(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year, if changed since last
report)
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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )
The number of shares outstanding of each of the Registrant's classes of common
stock:
29,223,686
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(Number of shares of Class A common stock outstanding as of January 31, 2005)
36,864,465
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(Number of shares of Class B common stock outstanding as of January 31, 2005)
1-800-FLOWERS.COM, Inc.
TABLE OF CONTENTS
INDEX
Page
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Part I. Financial Information
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets - December 26, 2004
(Unaudited) and June 27, 2004 1
Consolidated Statements of Income (Unaudited)-
Three and Six Months Ended December 26, 2004 and
December 28, 2003 2
Consolidated Statements of Cash Flows (Unaudited)-
Three and Six Months Ended December 26, 2004 and
December 28, 2003 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Item 4. Controls and Procedures 15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
18
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 26, June 27,
2004 2004
------------- --------------
(unaudited)
Assets
Current assets:
Cash and equivalents $86,794 $ 80,824
Short-term investments 19,086 22,550
Receivables, net 20,660 9,013
Inventories 27,675 19,625
Deferred income taxes 18,522 16,463
Prepaid and other 2,137 1,517
------------- --------------
Total current assets 174,874 149,992
Property, plant and equipment, net 41,642 42,460
Investments 3,687 8,260
Goodwill 42,189 34,529
Other intangibles, net 2,266 2,598
Deferred income taxes 9,146 13,548
Other assets 8,714 10,165
------------- --------------
Total assets $282,518 $261,552
============= ==============
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $81,017 $ 63,266
Current maturities of long-term debt and obligations under capital leases 2,925 3,022
------------- --------------
Total current liabilities 83,942 66,288
Long-term debt and obligations under capital leases 4,614 6,062
Other liabilities 3,108 2,812
------------- --------------
Total liabilities 91,664 75,162
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, 29,545,850
and 29,428,143 shares issued at December 26, 2004 and June 27, 2004,
respectively 295 295
Class B common stock, $.01 par value, 200,000,000 shares authorized, 42,144,465
shares issued at December 26, 2004 and June 27, 2004, respectively 421 421
Additional paid-in capital 256,474 255,829
Retained deficit (61,053) (67,047)
Treasury stock, at cost-326,023 and 52,800 Class A shares at December 26, 2004
and June 27, 2004, respectively and 5,280,000 Class B shares (5,283) (3,108)
------------- --------------
Total stockholders' equity 190,854 186,390
------------- --------------
Total liabilities and stockholders' equity $282,518 $261,552
============= ==============
See accompanying notes.
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 26, December 28, December 26, December 28,
2004 2003 2004 2003
---------------- ---------------- --------------- ----------------
Net revenues $230,014 $213,182 $327,528 $308,342
Cost of revenues 127,402 117,550 185,344 173,643
---------------- ---------------- --------------- ----------------
Gross profit 102,612 95,632 142,184 134,699
Operating expenses:
Marketing and sales 72,841 66,762 102,733 95,608
Technology and development 3,292 3,503 6,396 6,934
General and administrative 7,954 7,577 15,556 15,356
Depreciation and amortization 3,770 3,843 7,666 7,760
---------------- ---------------- --------------- ----------------
Total operating expenses 87,857 81,685 132,351 125,658
---------------- ---------------- --------------- ----------------
Operating income 14,755 13,947 9,833 9,041
Other income (expense):
Interest income 275 223 657 415
Interest expense (124) (186) (265) (419)
Other 21 (14) 25 (213)
---------------- ---------------- --------------- ----------------
Total other income (expense), net 172 23 417 (217)
---------------- ---------------- --------------- ----------------
Income before income taxes 14,927 13,970 10,250 8,824
Income taxes (6,223) (292) (4,256) (292)
---------------- ---------------- --------------- ----------------
Net income $8,704 $13,678 $5,994 $8,532
================ ================ =============== ================
Net income per common share:
Basic $0.13 $0.21 $0.09 $0.13
================ ================ =============== ================
Diluted $0.13 $0.20 $0.09 $0.12
================ ================ =============== ================
Weighted average shares used in the calculation of
net income per common share:
Basic 66,061 65,881 66,135 65,828
================ ================ =============== ================
Diluted 67,637 69,074 67,627 68,811
================ ================ =============== ================
See accompanying notes.
2
1-800-FLOWERS.COM, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended
--------------------------------
December 26, December 28,
2004 2003
--------------- --------------
Operating activities:
Net income $5,994 $8,532
Reconciliation of net income to net cash provided by operations:
Depreciation and amortization 7,666 7,760
Deferred income taxes 4,256 -
Bad debt expense 146 279
Other non-cash items - 157
Changes in operating items:
Receivables (11,078) (8,198)
Inventories (7,719) 1,941
Prepaid and other (620) (542)
Accounts payable and accrued expenses 15,765 16,154
Other assets 1,592 619
Other liabilities 296 219
--------------- --------------
Net cash provided by operating activities 16,298 26,921
Investing activities:
Purchase of investments (32,866) (23,018)
Sale of investments 40,903 36,250
Acquisition of business (9,674) -
Capital expenditures, net of non-cash expenditures (5,653) (4,296)
Other 2 145
--------------- --------------
Net cash (used in) provided by investing activities (7,288) 9,081
Financing activities:
Acquisition of treasury stock (2,175) -
Proceeds from employee stock options/purchase plan 645 1,005
Repayment of notes payable and bank borrowings (654) (528)
Payment of capital lease obligations (856) (862)
--------------- --------------
Net cash used in financing activities (3,040) (385)
--------------- --------------
Net change in cash and equivalents 5,970 35,617
Cash and equivalents:
Beginning of period 80,824 49,079
--------------- --------------
End of period $86,794 $84,696
=============== ==============
See accompanying notes.
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
three and six months ended December 26, 2004 are not necessarily indicative of
the results that may be expected for the fiscal year ending July 3, 2005.
The balance sheet information at June 27, 2004 has been derived from the audited
financial statements at that date.
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 27, 2004.
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.
Employee Stock Incentive Plans
The Company accounts for its stock option plans under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations. Accordingly, no stock-based compensation is reflected
in net income, as all options granted had an exercise price equal to the market
value of the underlying common stock on the date of grant and the related number
of shares granted is fixed at that point in time. The following table
illustrates the effect on net income and net income per share as if the Company
had applied the fair value recognition provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation", as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure."
Three Months Ended Six Months Ended
------------------------------- -----------------------------
December 26, December 28, December 26, December 28,
2004 2003 2004 2003
--------------- --------------- -------------- --------------
(in thousands, except per share data)
Net income - As reported $8,704 $13,678 $5,994 $8,532
Less: Stock based compensation 1,996 1,974 3,690 3,851
--------------- --------------- -------------- --------------
Net income - Pro forma $6,708 $11,704 $2,304 $4,681
=============== =============== ============== ==============
Net income per share:
Basic - As reported $0.13 $0.21 $0.09 $0.13
Basic - Pro forma $0.10 $0.18 $0.03 $0.07
Diluted - As reported $0.13 $0.20 $0.09 $0.12
Diluted - Pro forma $0.10 $0.17 $0.03 $0.07
The assumptions used to calculate the fair value of options granted are
evaluated and revised, as necessary, to reflect market conditions and
experience.
4
1-800-FLOWERS.COM, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(unaudited)
Comprehensive Income
For the three and six months ended December 26, 2004 and December 28, 2003, the
Company's comprehensive income was equal to the respective net income for each
of the periods presented.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123R, "Share-Based Payment" (SFAS 123R), which requires companies
to measure and recognize compensation expense for all stock-based payments at
fair value. SFAS 123R is effective for all interim periods beginning after June
15, 2005 and, thus, will be effective for the Company beginning with the first
quarter of fiscal 2006. The Company is currently evaluating the impact of
SFAS123R on its financial position and results of operations. See Employee Stock
Incentive Plans, above for information related to the pro forma effects on
reported net income and net income per share of applying the fair value
recognition provisions of the previous Statement of Financial Accounting
Standards (SFAS) 123, "Acounting for Stock Based Compensation," to stock-based
employee compensation.
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 26, December 28, December 26, December 28,
2004 2003 2004 2003
----------------- --------------- ---------------- ----------------
(in thousands, except per share data)
Numerator:
Net income $8,704 $13,678 $5,994 $8,532
================= =============== ================ ================
Denominator:
Weighted average shares outstanding 66,061 65,881 66,135 65,828
Effect of dilutive securities:
Employee stock options 1,576 3,193 1,492 2,983
----------------- --------------- ---------------- ----------------
Adjusted weighted-average shares and assumed
conversions 67,637 69,074 67,627 68,811
================= =============== ================ ================
Net income per common share:
Basic $0.13 $0.21 $0.09 $0.13
Diluted $0.13 $0.20 $0.09 $0.12
Note 3 - Goodwill and Intangible Assets
The change in the net carrying amount of goodwill is as follows:
December 26,
2004
----------------
(in thousands)
Goodwill - beginning of year $34,529
Acquisition of Winetasting Network 7,474
Other 186
-----------
Goodwill - end of period $42,189
===========
5
The Company's other intangible assets consist of the following:
December 26, 2004 June 27, 2004
---------------------------------------- ---------------------------------------
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 $3,277 $1,650 $4,927 $3,115 $1,812
Customer lists 3 years 910 809 101 910 657 253
Other 5 years 194 155 39 194 137 57
------------ -------------- ----------- ---------- --------------- ------------
6,031 4,241 1,790 6,031 3,909 2,122
Trademarks with
indefinite lives - 476 - 476 476 - 476
------------ -------------- ----------- ---------- --------------- ------------
Total identifiable
intangible assets $6,507 $4,241 $2,266 $6,507 $3,909 $2,598
============ ============== =========== ========== =============== ============
Estimated amortization expense is as follows: remainder of fiscal 2005 - $0.3
million, fiscal 2006 - $0.3 million, fiscal 2007 - $0.3 million, fiscal 2008 -
$0.3 million, fiscal 2009 - $0.3 million, and thereafter - $0.3 million.
Note 4 - Long-Term Debt
The Company's long-term debt and obligations under capital leases consist of the
following:
December 26, June 27,
2004 2004
---------------- -----------
(in thousands)
Commercial notes and revolving credit lines $4,890 $5,504
Seller financed acquisition obligations 45 85
Obligations under capital leases 2,604 3,495
---------------- -----------
7,539 9,084
Less current maturities of long-term debt and obligations under
capital leases 2,925 3,022
---------------- -----------
$4,614 $6,062
================ ===========
Note 5 - Income Taxes
At the end of each interim reporting period, the Company makes an estimate of
the 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. Income taxes have been included in the
accompanying financial statements on the basis of an estimated annual effective
rate of 41.6%. The primary reason that the tax rate differs from the 35%
statutory federal corporate income tax rate is due to state income tax expense.
Note 6 - Acquistion of The Winetasting Network
On November 15, 2004, the Company acquired The Winetasting Network, a Napa
Valley, California based distributor and direct-to-consumer wine marketer, for
$9.4 million, including acquisition costs and the retirement of $2.4 million of
long-term debt. The acquisition has been accounted for under the purchase method
of accounting in accordance with SFAS No. 141, "Business Combinations."
Accordingly, the purchase price was allocated to the assets acquired and
liabilities assumed based upon their estimated fair values at the acquisition
date. The preliminary allocation of the
6
purchase price consists of the following (in thousands):
Net current assets $(845)
Other non-current assets 80
Plant and equipment 798
Deferred tax assets 1,914
Goodwill 7,474
-----------
Total purchase price $9,421
===========
Note 7 - 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.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Forward Looking Statements
Certain of the matters and subject areas discussed in this Quarterly Report on
Form 10-Q contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements other than statements
of historical information provided herein are forward-looking statements and may
contain information about financial results, economic conditions, trends and
known uncertainties based on the Company's current expectations, assumptions,
estimates and projections about its business and the Company's industry. These
forward-looking statements involve risks and uncertainties. The Company's actual
results could differ materially from those anticipated in these forward-looking
statements as a result of several factors, including those more fully described
under the caption "Risk Factors that May Affect Future Results" within the
Company's Annual Report on Form 10-K. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis, judgment, belief or expectation only as of the date hereof. The
forward-looking statements made in this Quarterly Report on Form 10-Q relate
only to events as of the date on which the statements are made. The Company
undertakes no obligation to publicly update any forward-looking statements for
any reason, even if new information becomes available or other events occur in
the future.
Overview
For more than 25 years, 1-800-FLOWERS.COM, Inc. (NASDAQ: FLWS) has been the
leading innovator in the floral industry, taking the extra step to help people
connect and express themselves quickly and easily with exquisite floral gifts
crafted with care by renowned artisans and the nation's leading florists, as
well as distinctive non-floral gifts appropriate for any occasion or sentiment.
The Company provides gift solutions same day, any day, offering an unparalleled
selection of flowers, plants, gourmet foods and confections, gift baskets and
other impressive unique gifts. As always, satisfaction is guaranteed, and
customer service is paramount with quick, convenient ordering options, fast and
reliable delivery, and gift advisors always available. Customers can shop
1-800-FLOWERS.COM 24-hours a day, seven-days a week via the Internet
(http://www.1800flowers.com); by calling 1-800-FLOWERS(R) (1-800-356-9377); or
by visiting a Company-operated or franchised store. The 1-800-FLOWERS.COM family
of brands also includes home decor and garden merchandise from Plow & Hearth(R)
(1- 800-627-1712 or http://www.plowandhearth.com); premium popcorn and specialty
treats from The Popcorn Factory(R) (1-800-541-2676 or
http://www.thepopcornfactory.com); gourmet foods from GreatFood.com(R)
(http://www.greatfood.com); children's gifts from HearthSong(R)
(http://www.hearthsong.com) and Magic Cabin(R) (http://www.magiccabin.com) and
wine gifts from The Wine Tasting Network (www.ambrosiawine.com and
www.winetasting.com).
Results of Operations
Net Revenues
Three Months Ended Six Months Ended
----------------------------------------------- ---------------------------------------------
December 26, December 28, December 26, December 28,
2004 2003 % Change 2004 2003 % Change
-------------- ---------------- -------------- --------------- -------------- --------------
(in thousands)
Net revenues:
Telephonic $109,570 $113,374 (3.4%) $147,156 $153,745 (4.3%)
Online 107,686 90,878 18.5% 160,772 139,814 15.0%
Retail/fulfillment 12,758 8,930 42.9% 19,600 14,783 32.6%
-------------- ---------------- --------------- -------------- ---------------
Total net revenues $230,014 $213,182 7.9% $327,528 $308,342 6.2%
============== ================ =============== ==============
Net revenues consist primarily of the selling price of the merchandise, service
or outbound shipping charges, less discounts, returns and credits. The Company
grew its combined telephonic and online revenue by 6.4% and 4.9%, respectively,
during the three and six months ended December 26, 2004, due to an increase in
order volume resulting from: (i) the Company's strong brand name recognition,
(ii) continued leveraging of its existing customer base, and (iii) the success
of its marketing and merchandising efforts to enhance revenue growth in several
of its key gift items, including its gourmet gift foods, unique children's
gifts, and expanded line of gift baskets. Growth in these areas was tempered by
the growth of the Company's home decor gift items, which increased 1.8% for the
quarter, but reversed the negative sales trend experienced in this category
during the prior fiscal year and into the first quarter of fiscal 2005. As a
result, during the three and six months ended December 26, 2004, non-floral gift
8
products accounted for 66.3% and 57.8%, respectively, of total combined
telephonic and online net revenues, which was relatively consistent with the
same periods of the prior year.
The Company fulfilled approximately 3,635,000 and 5,042,000 orders through its
combined telephonic and online sales channels during the three and six months
ended December 26, 2004, an increase of 6.3% and 5.0%, respectively, over the
prior year periods. This growth was driven by the Company's online sales
channel, which experienced a 16.8% and 13.8% increase in order volume during the
three and six months ended December 26, 2004, respectively, in comparison to the
prior year periods, driven by improved conversion of qualified traffic through
the Company's websites, search engines and affiliates, and the continued
migration of customers from the Company's telephonic sales channel, which
experienced a corresponding 3.0% and 4.0% decrease in order volume in comparison
to the respective periods of the prior year. The Company's combined telephonic
and online average order values of $59.77 and $61.08 during the three and six
months ended December 26, 2004, were consistent with the same periods of the
prior year.
The online sales channel contributed 49.6% and 52.2% of total combined
telephonic and online revenues during the three and six months ended December
26, 2004, respectively, compared to 44.5% and 47.6% for the respective periods
of the prior year. The Company intends to continue to drive revenue growth
through its online sales channel, and continue the migration of its customers
from the telephone to the Web for several important reasons: (i) online orders
are less expensive to process than telephonic orders, (ii) online customers can
view the Company's full range of gift offerings, including non-floral gifts,
which yield higher gross margin opportunities, (iii) online customers can
utilize all of the Company's services, such as the various gift search
functions, order status check and reminder service, thereby deepening the
relationship with its customers and leading to increased order rates, and (iv)
when customers visit the Company online, it provides an opportunity to interact
with them in an electronic dialog via cost efficient marketing programs.
Retail/fulfillment revenues for the three and six months ended December 26, 2004
increased in comparison to the same periods of the prior year, primarily as a
result of increased membership and sales of product and service offerings to the
Company's BloomNet(TM) network, as well as the incremental revenue generated by
the acquisition of the Wine Tasting Network during the month of November 2004.
In order to extend the Company's leadership position in the floral and
thoughtful gift marketplace, the Company plans to increase its marketing
spending during the second half of fiscal 2005. In addition to increasing its
presence in online media, as well as broadcast advertising, the Company plans to
further expand its BloomNet operations to increase its market share, and build
out the technology platform, and increase the depth of its marketing programs
and personnel within its recently acquired wine gift business in support of the
Company's growing gourmet gift and gift basket product lines. While these
investments will impact the Company's earnings growth over the short term, over
the longer term, the Company believes that this strategy will enable it to
achieve sustainable double digit revenue growth and provide further leverage
within its business model and therefore improved profitability.
Gross Profit
Three Months Ended Six Months Ended
--------------------------------------------- ------------------------------------------------
December 26, December 28, December 26, December 28,
2004 2003 % Change 2004 2003 % Change
-------------- --------------- ------------- --------------- --------------- -------------
(in thousands)
Gross profit $102,612 $95,632 7.3% $142,184 $134,699 5.6%
Gross margin % 44.6% 44.9% 43.4% 43.7%
Gross profit consists of net revenues less cost of revenues, which is comprised
primarily of florist fulfillment costs (primarily fees paid directly to
florists), the cost of floral and non-floral merchandise sold from inventory or
through third parties, and associated costs including inbound and outbound
shipping charges. Additionally, cost of revenues include labor and facility
costs related to direct-to-consumer merchandise operations, as well as facility
costs on properties that are sublet to the Company's franchisees. Gross profit
increased during the three and six months ended December 26, 2004, in comparison
to the same periods of the prior year, primarily as a result of increased
revenue on the Company's online and retail fulfillment sales channels. Gross
margin percentage during the three and six months ended December 26, 2004
decreased in comparison to the prior year, by 30 basis points, primarily as a
result of the effect of increased shipping costs and holiday-season promotional
pricing.
9
As the Company implements its plan to restore sustainable growth in its home and
garden gift line, the Company expects that over the longer term it will continue
to grow its higher margin, non-floral business. However, during the remainder of
fiscal 2005, while varying by quarter due to seasonal changes in product mix,
the Company expects that its gross margin percentage will remain relatively
consistent with the results achieved during the fiscal year ended June 27, 2004.
Marketing and Sales Expense
Three Months Ended Six Months Ended
---------------------------------------------- ----------------------------------------------
December 26, December 28, December 26, December 28,
2004 2003 % Change 2004 2003 % Change
--------------- --------------- -------------- -------------- --------------- ---------------
(in thousands)
Marketing and sales $72,841 $66,762 9.1% $102,733 $95,608 7.5%
Percentage of net revenues 31.7% 31.3% 31.4% 31.0%
Marketing and sales expense consists primarily of advertising and promotional
expenditures, catalog costs, online portal agreements, 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 expenses increased as a percentage of net
revenues during the three and six months ended December 26, 2004, compared to
the same periods of the prior year as a result of increased spending in evolving
areas including search and affiliate marketing as well as in a variety of direct
marketing and broadcast advertising programs to promote "top of mind" brand
awareness both prior to and during the holiday shopping period. Partially
funding the increased spending were volume related operating efficiencies, and a
continued reduction in order processing costs. As a result of the Company's
cost-efficient customer retention programs, of the 2,515,000 and 3,457,000
customers who placed orders during the three and six months ended December 26,
2004, approximately 51.3% represented repeat customers, compared to 48.6 and
48.9%, in the respective prior year periods. In addition, as a result of the
strength of the Company's brands, combined with its cost-efficient marketing
programs, the Company added approximately 1,225,000 and 1,685,000 new customers
during the three and six months ended December 26, 2004, respectively.
During the remainder of fiscal 2005, the Company expects to increase its
marketing and sales spending in order to accelerate its rate of new customer
acquisition, while also leveraging its already significant customer base through
cost effective, customer retention initiatives. Such spending will include an
increasing presence in online search and affiliate relationships, as well as in
direct marketing and broadcast advertising programs. In addition, the Company
plans to add personnel to grow its BloomNet membership and support the
anticipated growth of its recently acquired wine business. As a result, over the
short term the Company expects that marketing and sales expense will increase as
a percentage of net revenues, enabling the Company to accelerate revenue growth
and thereby extend the Company's leadership in the floral and thoughtful gift
marketplace.
Technology and Development Expense
Three Months Ended Six Months Ended
---------------------------------------------- ----------------------------------------------
December 26, December 28, December 26, December 28,
2004 2003 % Change 2004 2003 % Change
-------------- --------------- --------------- -------------- --------------- --------------
(in thousands)
Technology and development $3,292 $3,503 (6.0%) $6,396 $6,934 (7.8%)
Percentage of net revenues 1.4% 1.6% 2.0% 2.2%
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. During the three and six months ended December
26, 2004, technology and development expense decreased in comparison to the same
periods of the prior year due to the Company's ability to internalize its
development functions and through continued centralization of key operating
functions across its brands, thereby cost effectively enhancing the content and
functionality of the Company's Web sites and improving the performance of its
fulfillment and customer service systems. During the three and six months ended
December 26, 2004, the Company expended $4.9 million and $10.0 million on
technology and development, of which $1.6 million and $3.6 million has been
capitalized.
10
Although over the longer term, the Company believes that it will continue to
demonstrate its ability to leverage its IT platforms, during the remainder of
fiscal 2005, the Company intends to improve the technology infrastructure of its
recently acquired wine business, and therefore expects that technology and
development spending as a percentage of net revenues will be consistent with, or
slightly higher than in prior years.
General and Administrative Expense
Three Months Ended Six Months Ended
---------------------------------------------- ---------------------------------------------
December 26, December 28, December 26, December 28,
2004 2003 % Change 2004 2003 % Change
---------------- --------------- -------------- -------------- --------------- ------------
(in thousands)
General and administrative $7,954 $7,577 5.0% $15,556 $15,356 1.3%
Percentage of net revenues 3.5% 3.6% 4.7% 5.0%
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
during the three and six months ended December 26, 2004 in comparison to the
same periods of the prior year, primarily as a result of the incremental
expenses associated with the acquisition of the Wine Tasting Network and
compliance with the Sarbanes Oxley Act, offset in part by lower payroll and cost
reduction initiatives.
Although the Company believes that its current general and administrative
infrastructure is sufficient to support existing requirements, as a result of
the incremental expenses associated with the Company's wine gift product line,
during the remainder of fiscal 2005, the Company expects that its general and
administrative expenses as a percentage of net revenue will be consistent with,
or slightly higher than the prior year.
Depreciation and Amortization Expense
Three Months Ended Six Months Ended
-------------------------------------------- ----------------------------------------------
December 26, December 28, December 26, December 28,
2004 2003 % Change 2004 2003 % Change
-------------- --------------- ------------ --------------- --------------- ------------
(in thousands)
Depreciation and amortization $3,770 $3,843 (1.9%) $7,666 $7,760 (1.2%)
Percentage of net revenues 1.6% 1.8% 2.3% 2.5%
Depreciation and amortization expense during the three and six months ended
December 26, 2004 decreased slightly over the same periods of the prior year,
reflecting the impact of the Company's declining rate of capital additions, and
the leverage of the Company's existing infrastructure.
Although the Company believes that continued investment in its infrastructure,
primarily in the areas of technology and development, including the improvement
and absorption of the technology platform of the Company's newly acquired wine
business, is critical to attaining its strategic objectives, the Company expects
that depreciation and amortization will continue to decrease as a percentage of
net revenues.
Other Income (Expense)
Three Months Ended Six Months Ended
-------------------------------------------- ---------------------------------------------
December 26, December 28, December 26, December 28,
2004 2003 % Change 2004 2003 % Change
-------------- --------------- ----------- --------------- --------------- ------------
(in thousands)
Interest income $275 $223 23.3% $657 $415 58.3%
Interest expense (124) (186) 33.3% (265) (419) 36.8%
Other 21 (14) 250.0% 25 (213) 111.7%
-------------- -------------- -------------- ---------------
$172 $23 647.8% $417 ($217) 292.2%
============== ============== ============== ===============
11
Other income (expense) consists primarily of interest income earned on the
Company's investments and available cash balances, offset by interest expense,
primarily attributable to the Company's capital leases and other long-term debt.
The increase in other income (expense) during the three and six months ended
December 26, 2004 was primarily attributable to higher interest income resulting
from an increase in average cash balances and interest rate returns, as well as
lower interest expense due to maturing capital lease obligations. Additionally,
during the six months ended December 26, 2004, other income (expense) increased
as a result of a loss incurred upon the conversion/relocation of a retail store
into a local fulfillment center in the prior year period.
Income Taxes
During the three and six months ended December 26, 2004 the Company recorded
income taxes of $6.2 million and $4.3 million, based upon the Company's
anticipated effective annualized income tax rate of approximately 41.6%. Until
the fourth quarter of the prior fiscal year, the Company had recorded a full
valuation allowance on its deferred tax assets, consisting primarily of net
operating loss carryforwards. At June 27, 2004, management of the Company
reassessed the valuation allowance previously established against its net
deferred tax assets. Based upon the Company's earnings history and projected
future taxable income, management determined that it is more likely than not
that the deferred tax assets would be realized, and, accordingly, at that time,
the Company removed the valuation allowance.
Liquidity and Capital Resources
At December 26, 2004, the Company had working capital of $90.9 million,
including cash and equivalents and short-term investments of $105.9 million,
compared to working capital of $83.7 million, including cash and equivalents and
short-term investments of $103.4 million, at June 27, 2004. In addition to its
cash and short-term investments, at December 26, 2004 and June 27, 2004, the
Company maintained approximately $3.7 million and $8.3 million, respectively, of
long-term investments, consisting primarily of investment grade corporate and
U.S. government securities.
Net cash provided by operating activities of $16.3 million for the six months
ended December 26, 2004 was primarily attributable to the Company's net income
as well as non-cash charges of depreciation and amortization and deferred income
taxes, offset in part by seasonal changes in working capital, including
receivables which increased in comparison to the prior year due to the timing of
the Christmas Holiday in relation to the Company's quarter end, and inventory,
which increased due to early buys of spring related merchandise which, in part,
is sourced from overseas, and expansion of inventory for sale to the Company's
BloomNet members for the upcoming floral holidays.
Net cash used in investing activities of $7.3 million for the six months ended
December 26, 2004 was primarily attributable to acquisition of the Wine Tasting
Network as well as capital expenditures, primarily related to the Company's
technology infrastructure, offset in part by maturities of long-term
investments.
Net cash used in financing activities of $3.0 million for the six months ended
December 26, 2004, resulted primarily from the acquisition of Company Class A
common stock, which was placed in treasury, and repayment of amounts outstanding
under the Company's credit facilities and long-term capital lease obligations,
offset in part by the net proceeds received from the exercise of employee stock
options.
12
At December 26, 2004, the Company's contractual obligations consist of:
Payments due by period
------------------------------------------------------------------------------
(in thousands)
Less than 1 1 - 3 3 - 5 More than 5
Total year years years years
----------- --------------- ------------ ------------- ---------------
Long-term debt $4,935 $1,268 $2,728 $939 -
Capital lease obligations 2,604 1,717 887 - -
Operating lease obligations 11,098 3,565 3,908 1,817 $1,808
Sublease obligations 8,301 2,424 3,230 2,086 561
Other cash obligations (*) 161 161 - - -
Purchase commitments (**) 14,611 14,611 - - -
----------- --------------- ------------ ------------- ---------------
Total $41,710 $23,746 $10,753 $4,842 $2,369
=========== =============== ============ ============= ================
(*) Other cash obligations include $0.2 million of franchise lease guarantees.
(**) Purchase commitments consist primarily of inventory and equipment purchase
orders made in the ordinary course of business
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial statements and results of
operations are based upon the consolidated financial statements of
1-800-FLOWERS.COM, Inc., which have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of these
financial statements requires management to make estimates and assumptions that
affect the reported amount of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an ongoing basis,
management 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, affects the Company's more significant judgments and estimates
used in preparation of its consolidated financial statements.
Revenue Recognition
Net revenues are generated by online, telephonic and retail fulfillment
operations 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.
Accounts Receivable
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of the Company's customers 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 periodically evaluates acquired businesses for potential impairment
indicators. Judgment regarding the existence of impairment indicators is based
on market conditions and operational performance of the Company. Future events
13
could cause the Company to conclude that impairment indicators exist and that
goodwill and other intangible assets associated with our acquired businesses are
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.
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 the Company will be able to
generate sufficient taxable income so that these assets will be realized. The
factors that the Company considers 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 December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123R, "Share-Based Payment" (SFAS 123R), which requires companies
to measure and recognize compensation expense for all stock-based payments at
fair value. SFAS 123R is effective for all interim periods beginning after June
15, 2005 and, thus, will be effective for the Company beginning with the first
quarter of fiscal 2006. The Company is currently evaluating the impact of
SFAS123R on its financial position and results of operations. See Note 1 of
notes to consolidated financial statements included in Part 1, Item 1 of this
report for information related to the pro forma effects on reported net income
and net income per share of applying the fair value recognition provisions of
the previous Statement of Financial Accounting Standards (SFAS) 123, "Acounting
for Stock Based Compensation," to stock-based employee compensation.
14
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
investment grade corporate and U.S. government securities. Under its current
policies, the Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
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 these
disclosure controls and procedures are effective. There were no changes in our
internal control over financial reporting during the quarter ended December 26,
2004 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
15
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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following table sets forth, for the months indicated, the Company's purchase
of common stock during the second quarter of fiscal 2005 which includes the
period September 27, 2004 through December 26, 2004.
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)
9/27/04 - 10/24/04 86.6 $8.44 86.6 $8,096
10/25/04 - 11/21/04 33.0 $8.22 33.0 $7,825
11/22/04 - 12/26/04 - $- - $7,825
----------------- ----------------- ------------------
Total 119.6 $8.38 119.6
On September 16, 2001, the Company's Board of Directors approved the repurchase
of up to $10.0 million of the Company's Class A common stock. All share
purchases were made in open-market transactions. The average price paid per
share is calculated on a settlement basis and excludes commission.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting of Stockholders was held on December 10,
2004.
The following nominees were elected as directors, each to serve until
the 2007 Annual Meeting or until their respective successors shall have
been duly elected and qualified, by the vote set forth below:
Nominee For Withheld
---------------------------- ----------------------------------- ------------------------------------------
John J. Conefry, Jr. 388,725,877 2,264,269
Leonard J. Elmore 388,689,663 2,300,483
Mary Lou Quinlan 382,768,589 8,221,557
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, T. Guy Minetti,
Jeffrey C. Walker and Kevin J. O'Connor.
The proposal to ratify the selection of Ernst & Young LLP, independent
public accountants, as auditors of the Company for the fiscal year
ending July 3, 2005 was approved by the vote set forth below:
For Against Abstain
------------------------- ----------------------------------- ------------------------------------------
390,400,623 580,581 8,942
ITEM 5. OTHER INFORMATION
Not applicable.
16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Certifications pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
On October 29, 2004, the Company filed a report on Form 8-K,
attaching its press release dated October 21, 2004, disclosing
financial results for its fiscal 2005 first quarter ended
September 26, 2004.
On November 16, 2004, the Company filed a report on Form 8-K,
announcing that it had acquired the Winetasting Network.
On January 31, 2005, the Company filed a report on Form 8-K,
attaching its press release dated January 18, 2005, disclosing
financial results for its fiscal 2005 second quarter ended
December 26, 2004.
17
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 4, 2005 /s/ James F. McCann
- --------------------------- ----------------------------------
James F. McCann
Chief Executive Officer
Chairman of the Board of Directors
(Principal Executive Officer)
Date: February 4, 2005 /s/ William E. Shea
- --------------------------- ----------------------------------
William E. Shea
Senior Vice President Finance and
Administration (Principal Financial
and Accounting Officer)