1 800 Flowers Com Inc (FLWS) Q3 2020 Earnings Call Transcript

Good day, and welcome to the 1-800-FLOWERS.COM, Inc. Q3 2020 Results Conference Call. This event is being recorded. I would now like to turn the conference over to Joseph Pititto, Senior Vice President of Investor Relations. Please go ahead.

Thanks, Sarah. Good morning, and thank you for joining us today to discuss 1-800-FLOWERS.COM, Inc's financial results for our fiscal 2020 3rd quarter. For those of you who have not received a copy of our press release issued earlier this morning, the release can be accessed at the Investor Relations section of our corporate website at 1800flowersinc.com. Our call today will begin with brief formal remarks, and then we will open the call to your questions. Presenting today will be Chris McCann, CEO; and Bill Shea, CFO. Before we begin, I need to remind everyone that some of the statements that we will make today may be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed description of these risks and uncertainties, please refer to our press release issued this morning as well as our SEC filings, including the company's annual report on Form 10-K and quarterly reports on Form 10-Q. In addition, this morning, we will discuss certain supplemental financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables accompanying the company's press release issued this morning. The company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today's call, any recordings of today's call, the press release issued earlier today or in any of its SEC filings, except as may be otherwise stated by the company. I'll now turn the call over to Chris McCann.

Good morning, everyone. Thank you all for joining us this morning. I'd like to begin by acknowledging the unprecedented and extremely challenging period that we're all living in as a result of this COVID-19 crisis. I'm sure that many of us on today's call know someone or even have family or friends who have suffered during this pandemic. Our hearts go out to them, especially to those who have lost loved ones. I'd also like to recognize all those people working on the front lines of this crisis. They are truly our heroes. As you'll hear in our remarks today, we had a strong third quarter. Even with the challenges we faced as the COVID crisis set in that impacted the last few weeks of the period. I'm proud of the way our team moved quickly to respond to these challenges, from rapidly enhancing the health and safety of our associates to managing our supply chain. As we enter the fiscal fourth quarter, we've seen a very strong e-commerce demand, especially in our Gourmet Food brands. This demand acceleration has continued through the month of April, and you'll hear more about this later in the call this morning. In terms of the fiscal third quarter, our solid results for the period reflect a continuation of the momentum we've seen throughout the year. The double-digit consolidated revenue growth we achieved was driven by increases across all three of our business segments. In our Gourmet Food and Gift Baskets segment, a strong 27% growth reflected continuing positive trends in everyday gifting occasions and increased self-consumption, as well as contributions from Shari's Berries, which continues to perform ahead of expectations. Importantly, we saw our customer demand grow throughout the quarter and accelerate into our current fiscal fourth quarter in Harry & David, Cheryl's Cookies, The Popcorn Factory, 1-800-Baskets, Wolferman's Bakery, Stockyards, and Simply Chocolate, as customers increasingly turned to our extensive and highly relevant product offerings to help them stay connected and express their feelings during this difficult time. In our Consumer Floral segment, where the 1-800-Flowers brand continues to extend its market leadership with double-digit growth during the key Valentine's Day period, revenue growth and contribution margin for the quarter in this segment would have been even stronger were it not for the softer consumer demand in the last few weeks of March when we saw the impact of the COVID-19 crisis. This first took the form in limitations on gatherings for sympathetic occasions, such as wakes and funerals, and restrictions on deliveries to hospitals for get-well occasions. Importantly, as we enter the current fiscal fourth quarter, we've seen this pattern reverse itself as customers adapt to the new environment, sending gifts for these occasions and many more to their recipients' homes. As a result, we're seeing customers increasingly turn to the trusted 1-800-Flowers brand to help them express themselves and stay connected for holiday occasions such as Passover and Easter, as well as for everyday occasions. We're seeing similar patterns in our BloomNet business, where we continue to grow our market share position during Q3 with solid top and bottom line results for the quarter that would have been even stronger were it not for the impact of the COVID-19 crisis. Here, we are keenly focused on working closely with BloomNet's independent local florists across the country to support their businesses and help them weather the current challenging environment. Before I ask Bill to share some insights on our quarterly results and our reaffirmed guidance for the year, I think it's important to note that as we navigate these trying and uncertain times, the health and safety of our thousands of associates across the company, our BloomNet florists across the country, our suppliers and vendors, and our customers, is paramount to us. We have made and continue to make necessary changes across our operations and facilities, including manufacturing, warehousing, and distribution, to provide for the safety and well-being of our associates while maintaining our business continuity. We're well-positioned to respond to the consumer demand for our products, as evidenced by the growth we saw in our Gourmet Food and Gift Baskets segment during the third quarter. We will continue to be agile and maintain our ability to leverage our labor and manufacturing capacity while simultaneously managing our supply chain. Overall, we are well-positioned to meet the challenges of this environment by leveraging our operating platform that we've built over the years, combined with our diverse product line and deepening relationships with our customers. We remain committed to our mission to engage with our customers to help them express and connect sentiments that are more important than ever in the current environment. Now let me turn the call over to Bill to share his insights on our results and discuss the drivers behind our outlook for continued growth. Bill?

Thank you, Chris. We are very pleased with our strong results for the fiscal third quarter and for the first three quarters of our fiscal year. While there is significant uncertainty in the overall consumer environment due to the COVID-19 crisis, we are seeing very strong e-commerce demand for our Gourmet Food and Gift Baskets and our floral products for holidays and everyday gifting occasions. As Chris noted, we saw solid e-commerce growth throughout the third quarter, including a strong Valentine's Day holiday. As we ended the current fiscal fourth quarter, we saw an acceleration of demand for the Easter holiday period, and this continued throughout the month of April. As we look forward, we expect e-commerce demand trends will remain strong. With that said, there are some headwinds that will affect us in the current quarter and in the future. These include costs associated with the closing of our retail stores that took place in March in accordance with state and local regulations. In the case of our Harry & David retail stores, we recently made the difficult decision not to reopen 38 of the 39 locations. Our country village store in Medford, Oregon will remain open. This will result in a one-time charge in our fourth quarter for employee costs, lease obligations, and other store closing costs. In addition, we have seen a reduction in our wholesale business, which will impact our fourth quarter within our BloomNet and Gourmet Food and Gift Baskets segments. Additionally, we anticipate reduced wholesale orders for the year-end holiday season as our large wholesale customers are taking a cautious approach due to the uncertainty surrounding the impact of the COVID-19 crisis on the overall consumer economy. We have also waived certain fees to our BloomNet members for the month of April to help them weather the COVID-19 crisis. Lastly, we are seeing some increased costs associated with the changes we have made, and continue to make, to our manufacturing, warehouse, and distribution facilities to provide for the safety and well-being of our associates. These include: social distancing measures, enhanced facility cleaning and sanitizing schedules, and staggering production shifts, among other changes that have an impact on our overall operating efficiencies. With that said, the strong e-commerce demand we are seeing across our brands is offsetting the reduced revenues in these other channels as well as the incremental cost impacts. As a result, we are reaffirming our guidance for fiscal 2020, which I will discuss in a moment, and we continue to see opportunities to grow our business going forward. Now breaking down some of the key metrics for the third quarter: Total consolidated revenues grew 12.2% to $278.8 million compared with $248.4 million in the prior year period. This solid revenue growth across all three of our business segments, with the Gourmet Food and Gift Baskets up 27.1%, Consumer Floral up 5.4%, and BloomNet growing 7.9%. Importantly, revenue growth in all three segments during the quarter reflected the initial impact of the COVID-19 crisis. In Gourmet Food and Gift Baskets, e-commerce demand was up strongly at the end of March, with much of the increases related to the Easter holiday, most of which shipped and was recognized in April. In Consumer Floral, before dipping at the end of March, revenues were up approximately 9% throughout most of the quarter, including strong Valentine's holiday demand. And in BloomNet, revenues were up more than 10% throughout most of the quarter before it dipped in the last two weeks of the period. Consolidated gross profit for the quarter was 38.5%, down 80 basis points compared with 39.3% in the prior year period, primarily reflecting product mix. Operating expenses as a percentage of total revenues improved 270 basis points to 42.4% compared with 45.1% in the prior year period. This primarily reflected the strong revenue growth in the period, combined with the benefit from the company's nonqualified deferred compensation 401(k) plan. The combination of these factors resulted in an improvement of 45.5% in adjusted EBITDA loss for the quarter to $2.4 million compared with $4.4 million in the prior year period. The net loss for the quarter was $9.7 million or a loss of $0.15 per share. Excluding certain costs related to the company's planned acquisition of Personalization Mall, adjusted net loss for the quarter was $9 million or an adjusted loss of $0.14 per share compared with a net loss of $8.2 million or a loss of $0.13 per share in the prior year period. In terms of corporate expense, for fiscal third quarter, corporate expense, including stock-based compensation, improved to $21.4 million compared with $25.2 million in the prior year period. The improvement is related to a $3.9 million year-over-year impact associated with the company's nonqualified deferred 401(k) compensation plan. Turning to our balance sheet, at the end of the third quarter, our cash and investment position was $232.1 million. Our term debt balance, net of deferred financing costs, was $93.6 million, and we had no borrowings outstanding under the working capital line within our revolving credit facility. As a result, total net cash at the end of the quarter was $138.5 million. Inventory of approximately $74 million was in line with our expectations. Regarding guidance for the full fiscal year, as I stated earlier, we are reaffirming our guidance for the fiscal 2020 full year. This reflects the continued strong growth we have achieved through the first three quarters of the year, combined with the strong e-commerce demand we have seen through the first four weeks of the current fiscal fourth quarter. These positive trends are more than offsetting the headwinds that I mentioned earlier. As a result, our guidance for the year is as follows: total consolidated revenue growth of 8% to 9% compared with the prior year, including approximately 6% to 7% organic growth combined with the contributions from the Shari's Berries brand; EPS growth in the range of 15% to 17%; adjusted EBITDA growth in the range of 13% to 15%; and free cash flow for the year in the range of $45 million to $50 million. As we noted in our press release this morning, our guidance for EPS and adjusted EBITDA for the year excludes certain one-time costs associated with the decision we made this month not to reopen the Harry & David retail stores and certain costs associated with the planned acquisition of PersonalizationMall.com. I'll now turn the call back to Chris.

Thanks, Bill. So to sum up, we've seen strong growth momentum continuing through the first three quarters of our fiscal year. We achieved solid revenue growth across all three of our segments during the quarter, growth that, as Bill noted, would have been even stronger were it not for the impact of the COVID-19 crisis in the last two weeks of the period. Through the first four weeks of the current fiscal fourth quarter, we're seeing strong e-commerce demand across our brands, as customers—both new and existing—are turning to our expanded product offerings to help them express and connect. As we look ahead, the scale and overall economic impact of the crisis is still very difficult to assess. With that said, we are well-positioned to continue to grow our business. As a company with a focus on inspiring and enabling people to express and connect, we're well-positioned for the current and emerging consumer sentiment. This, coupled with our platform, product diversification, ability to engage our customers, and highly experienced management team, gives us confidence in our ability to manage our business in this unprecedented and rapidly changing environment. We remain focused on three key elements of our business strategy: taking care of the health and safety of our associates, our BloomNet florists, and our customers; maintaining our financial strength and flexibility; and continuing to invest in areas of our business that will help drive future growth. Now before I turn the call over to Sarah to begin Q&A, I'd like to thank all of our associates for their dedication and hard work during this incredibly challenging period. It is their commitment and innovative thinking that enables us as a company to engage with our customers to help them express themselves and connect—sentiments that are increasingly important during this difficult time. Sarah, if you could please repeat the Q&A instructions?

Our first question comes from Alex Fuhrman with Craig-Hallum.

Certainly, wishing everyone at 1-800-Flowers out in New York and around the country all the best during these tough times. I wanted to ask about how your business has progressed over the past 6 to 8 weeks? It sounds like business got softer there in late March and has now come back in many regards as stronger than before. Can you kind of walk us through how that's been impacting the different brands? It would seem like Gourmet Foods and floral, and certainly, your food brands kind of range from sweets to prepared meals. Just curious how each of those brands has performed in March and then in April? And then how you're expecting them to perform in your fourth quarter?

Great, Alex. I'll start, and then Bill can chime in as he sees fit. Well, if we look back when this really started to hit, the first thing we noticed was that our food brands performed well as soon as the crisis started, and have just really accelerated since then. The floral brands took a hit in the first couple of weeks of the crisis—specifically the last two weeks of March—so we were scrambling as we tried to manage that and put out the fires happening across the company. And again, management was meeting a couple of times a day on a regular basis, with things changing by the hour. But as we've seen business continue, the floral business then started to pick up really as we moved into April and has been accelerating since then. For all the reasons people look to express and connect, as a society, when we go into isolation, we yearn for those connections, and we're making all of these efforts that support that. So our product line, both floral and food brands, are fitting that consumer sentiment perfectly. Bill, do you want to chime in?

Yes. My only point, Alex, on top of that, is that we were indeed impacted at the end of the third quarter on Consumer Floral and BloomNet. I indicated that in my formal remarks, where we were trending towards 9% growth and BloomNet double-digit growth before the last two weeks of March. As Chris mentioned, the food brands did get a benefit almost immediately, but a lot of that was Easter demand, which didn't ship until April. While we got some benefit in the third quarter, most of the benefit we saw from the food brands will be recognized in the fourth quarter. And as Chris mentioned, there was a nice rebound of Consumer Floral almost right at the turn of the calendar on April 1.

That's right. And even when looking at Harry & David, with the stores being closed as we moved into March, that certainly impacted revenue. With Harry & David, we've been shifting to be more of an e-commerce business anyway. The Harry & David business started showing strength earlier on, followed by Cheryl's and The Popcorn Factory, and 1-800-Baskets. The e-commerce demand is actually outpacing our ability to keep up with it at this point.

Great. That's really helpful. And then if I could just ask, as a quick follow-up, all the strength you're seeing at Harry & David and the other Gourmet Foods brands, has that been primarily existing customers ordering more frequently and in larger quantities? Or are you acquiring a lot of new customers as well?

Sure, Alex. It's a combination of both. New customer growth is really strong, but so is existing customer activity. Passport customer activity has been fantastic. We're seeing that across the board. Even in Q3, we had new customer growth of 30%, and that's accelerated since then. What we're seeing happening to our customer file really positions us well as we move forward, especially with Passport, multi-brand customer behavior really strengthening the customer file.

Chris, may be you can just go a little deeper on your comments in sort of the marketplace. I think people are looking at e-commerce right now. We had eBay out last night talking about a tailing off of tailwinds. I'm curious what you are doing to maintain the influx of customers or the tailwind that you're seeing. Are there incremental incentives or anything specific you're doing to make sure that you retain the bump you're seeing in the marketplace? Also, what you’re seeing from a competitive standpoint? Are your competitors struggling more in this environment? Is this helping you build your lead?

Sure. Thank you, Dan. As I look at what's taking place in the marketplace, first and foremost, we look at consumer sentiment, rather than consumer confidence. We're going to go through some challenges as we see consumer confidence dipping. But overall, consumer sentiment has shifted to a place that fits our business and mission—helping people connect and express. We expect that to be a lasting change coming out of this crisis. We've seen how our capabilities position us well in front of that consumer sentiment, plus the ability to sustain our demand. As we ramp up our floral and Gourmet Food businesses for Mother's Day and beyond, we see good efficiency and effectiveness and are leaning into our marketing efforts because of it. The customer acquisition rates are helping our growth opportunities, both as we move into the Mother's Day holiday and afterward.

Have you seen any uptick in Passport usage as a result of this? Are you trying to funnel people more into that program?

Yes, we're seeing great uptick on both people signing up for Passport as well as the utilization from purchasing from Passport members as an increasing percentage of our overall active customer base. That’s growing nicely, alongside the overall customer file. Again, new customers are coming in, existing customers, and so on. So we are seeing really good participation there. Regarding the competitive set, we're not seeing anything special in the competitive market.

Any update on PMall?

The update is that our earlier statement, when litigation commenced around this transaction, is unfortunately all we can share at this point. It would be irresponsible to comment further due to the ongoing litigation.

Chris, you mentioned a big difference in your business now versus in the last recession is that you own Harry & David now. Can you talk about how Harry & David performed in the last recession? It is quite high-end priced. Are you considering modifying the product line or offering lower-priced options as we head into the recession?

Thank you, Linda. The key factor here is that we didn't own Harry & David during the last recession, so I won't comment on that. What we've been seeing is the continued growth of the Harry & David product line as we expand it. One area benefiting us well today is the Harry & David Gourmet prepared meals and various products. Overall, as we evolve as a company, we offer ways to express sentiments, from free e-cards to lower-priced items like Cheryl's cookie cards, ensuring people can connect.

In the Food and Gift Baskets, how much of the 27% growth was from the acquisition of Shari's Berries?

It's probably about half—so we saw Shari's Berries generate about 13% of the 27% growth, while about half of it is organic growth during the quarter.

So that shows that our organic growth is indeed significant during the quarter, and we've observed acceleration on the e-commerce side since then. With our approach to the holiday season, we're assessing various factors: supply chain, manufacturing and distribution capacity, and how to lean into the expected demand for the holiday season. We expect strong demand and want to capture as much of it as possible. Our plans for CapEx and technology spending remain unchanged, as the plans predate the current environment, allowing us to focus on maintaining strong e-commerce growth.

We're currently planning for the holiday season and fiscal '21 while continuously adjusting our strategies based on emerging data and insights.

Congratulations on your impressive numbers and outlook despite the crisis. Regarding the impact from COVID in the last quarter, were there any extra costs incurred?

Indeed, the team had to respond rapidly to continuous changes regarding social distancing and health concerns. Bill can provide more specific details.

While we did incur additional costs at the end of Q3, the strong e-commerce demand allowed us to drive incremental gross margin dollars. We did see a slight margin impact, and while some operating costs have increased, we're also managing our discretionary spending. You'll continue to see leverage in operating expenses into the fourth quarter.

Can you address your marketing efforts? Given the decreased media costs, how have your customer acquisition costs been affected?

We are seeing efficient returns on our marketing investments, allowing us to lean into our different brands, with strong customer acquisition rates and solid growth in our new customer base. Our marketing efforts focus on both capturing immediate demand and fostering long-term customer relationships through our Passport program, which has been growing steadily. Regarding the BloomNet wire service, we focus on supporting our independent local florists to compete successfully in their markets. Our florist support program provides needed financial, marketing, and supply benefits during this challenging time, and we’re preparing them for the upcoming Mother's Day surge and beyond.

Most of the florists have re-opened, though the status varies by location. The floral industry is increasingly being viewed as essential, allowing flower shops to operate, although they may have some operational adjustments to accommodate social distancing.

Can you discuss inventory disruption, particularly regarding suppliers from China?

In terms of our supplies, following initial disruptions from COVID-19, we’re able to secure products and mitigate risks. Overall, early on there was some difficulty from China, but the supply chain is now opening up, and we're managing the inventory well.

I want to thank everyone for joining us today. We appreciate your support and your questions. If you have any additional questions, please don't hesitate to reach out. Remember, Mother's Day is around the corner. Today, moms matter more than ever, so I encourage everyone to reach out to the moms in your lives.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.