1 800 Flowers Com Inc (FLWS) Q1 2024 Earnings Call Transcript

Good morning, everyone, and welcome to the 1-800-FLOWERS.COM Incorporated 2024 First Quarter Results Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please also note today's event is being recorded. And at this time, I'd like to turn the floor over to Andy Milevoj, Senior Vice President of Investor Relations. Sir, please go ahead.

Good morning, and welcome to our fiscal 2024 first quarter earnings call. Joining us today are Jim McCann, Chairman and CEO; Tom Hartnett, President; and Bill Shea, CFO. Before we begin, I'd like to remind you that some of the statements we make on today's call are covered by the Safe Harbor disclaimer contained in our press release and public documents. During this call, we will make forward-looking statements with predictions, projections and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The company disclaims any obligation to update any of the forward-looking statements that may be made or discussed during this call. Additionally, we will discuss certain supplemental financial measures that were not prepared in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables of our earnings release. And now I'll turn the call over to Jim.

Thanks, Andy, and good morning, everyone. Thank you for joining us. This morning, I'll share a few of my thoughts on the current environment, and then I'll turn the call over to Tom, who will provide a business update. We will conclude with a financial update from Bill, and then we'll open it up for your questions. As we announced this morning, our first quarter performance came in line with our expectations. Most notably, our gross margin expanded quite substantially, led by an 830 basis point improvement within our Gourmet Foods and Gift Baskets segment. We began to turn the tide last fiscal year and are benefiting from certain macro trends that have started to revert to the mean of sorts, along with other favorable trends that Bill will discuss in more detail. Beyond these improvements, our organization has been executing on several key initiatives, including our Work Smarter initiative that is focused on operating more efficiently through the use of technology and automation and also includes our logistics, labor and inventory optimization efforts. Work Smarter is an evergreen initiative that we expect to provide benefits and be increasingly effective in the years ahead. Beyond Work Smarter, we've made great progress on our relationship innovation efforts, which Tom will highlight for you in a few minutes. It is important to remember that our fiscal first quarter, which is historically our smallest quarter by far, is comprised of everyday gifting occasions with no major holidays. As we turn our sights to the holiday period that we are now just beginning, we expect our sales trends to improve as our business has historically proven to be more resilient during holiday periods. Quite simply, we believe consumers tend to view holiday gifting as being more of a necessity rather than a purely discretionary purchase. They may trade up or trade down, but they'll look to buy gifts for the holiday periods. As Tom will discuss in more detail, we have never been better positioned to serve our customers and help them find the perfect gift for everyone on their list. We have introduced new product offerings, launched new tools to help our customers who may be lost for words, better express their sentiments, and we have broadened our price points both lower and higher to serve more budgets. We've also had a helping hand from Mother Nature who provided quite a bit of snow in Medford, Oregon this last winter, which helped us produce our best pear crop in the Rogue Valley since 2019. The pears, our number one sell in the season, are simply beautiful and delicious. Our Royal Riviera Pears are available for sale now. And if you haven't already, I highly recommend you place your order today. I'll now turn the call over to Tom. Tom, please take us through your business update.

Thanks, Jim, and good morning, everyone. Our first quarter adjusted EBITDA loss improved $5.5 million over the prior year to a loss of $22.5 million. Our results benefited from certain improving macro trends in our Work Smarter initiative that led to the 450 basis point improvement in gross profit margin and lower expenses, which mitigated the 11% sales decline. Heading into this fiscal year, we anticipated the bifurcation in our sales trends would persist with consumers moderating their spending on everyday gifting occasions while continuing to shop for the major holiday events. Our view was informed by our trends over the past fiscal year and the broader macro environment in which consumers continue to remain pressured by persistent inflation, higher interest rates and more recently, the resumption of student loan repayments. Knowing this, we expected our sales to be the most challenged during the first quarter as there are no major holiday occasions during the quarter and to begin to improve as we head into the holiday season. For the quarter, we attracted 680,000 new customers. Existing customers represented 70% of our revenue and our AOV increased approximately 5%. It's not surprising that in the current environment, our higher income customers are performing better, representing a greater portion of our customer base and revenues, which, in part, contributed to the AOV increase. And now, I'd like to share an update on some of our relationship innovation developments, which encompasses everything from new or enhanced product offerings, our merchandising efforts as well as user interface enhancements. We had a number of developments here and I'm excited to share a few of them with you today. Meet consumers where they are; we are expanding our price points, both higher and lower to accommodate our various customer segments, including those who are attracted to higher value, higher price point offerings, as well as those who are more price-sensitive in the current environment. For our customers looking for higher value offerings, we are offering new product bundles that combine a variety of products from our family of brands and delivering them in one gift box for the recipient. Continued focus on enhancing the customer experience led us to streamline the process to create a better experience for both the gift giver and the gift recipient. Customers can select from an increased selection of multi-brand bundles that will be sent to their gift recipient in one shipment. This is possible due to the investments we have made in our systems and our multi-brand distribution centers over the last few years. By leveraging our fulfillment network, we expanded our last mile delivery capabilities to offer customers same-day delivery of, not only floral, but also certain confection bundles. Customers can now order a beautiful 1-800-FLOWERS bouquet and bundle it with our Shari's Berries Cheesecake Bites or birthday cakes that can be delivered on the same day to help them celebrate a special occasion. Furthermore, we continue to add more options to our assortments. One that has been a standout is providing our customers with the option to choose one or two bottles of wine to go with some of our key gifts. Making it simple for our customers to add a second bottle of wine with their order has resulted in our customers adding a second bottle nearly 50% of the time. Speaking of making things simpler for our customers, just in time for the holidays, we are launching a new feature within our checkout process to make it easier for gift givers to express themselves. We were very innovative in our use of AI to offer customers free gifting tools to help them express themselves with their moms and dads during Mother's Day and Father's Day. We've taken that a step further and now empowering customers who may be lost for words with generative AI to help them craft the perfect message to be sent with their gift. Incorporated seamlessly within the checkout process, customers can respond to intuitive prompts, including recipient details, the occasion and desired tone to provide just the right message for their recipient. This truly gets to the heart of who we are, a company that helps people express themselves, improve their relationships and stay connected with the most important people in their lives. This effort is part of our ongoing AI roadmap to increase the use of this technology throughout our platform and enhance the user experience. For our corporate gifting partners, we're excited to leverage our acquisition of SmartGift and launched SmartGift for Business. This new offering revolutionizes the way organizations can build more and better relationships with their key stakeholders. SmartGift for Business provides an all-in-one system that tracks campaigns, measures success and provides recommendations for future efforts to help organizations maximize their business relationships. We are excited about the opportunities these enhancements present as we continue to grow our offerings and provide customers with a unique experience that they can only get from our family of brands. As you can see, our Work Smarter and relationship innovation efforts are having a clear and beneficial impact on our business. They are the driving principles of our business and we look forward to providing future updates on our progress in these areas. Now I'll turn it over to Bill to provide the financial review.

Thanks, Tom, and good morning, everyone. On our last call, we discussed our long-term historical trends and our expectation for our sales, gross profit margin and adjusted EBITDA metrics to revert to the mean over time. This includes returning to organic revenue growth and a gross profit margin in the low 40% range. Part of this reversion will be led by the external macro forces, such as the broader consumer environment and commodity prices and part will be led by our own Work Smarter and relationship innovation efforts that we expect to grow sales, increase margins and tightly manage expenses. As Jim and Tom highlighted, our first quarter performed according to our expectations, and we saw improving revenue trends, a significant improvement in gross margin and a reduction of expenses that led to a $5.5 million improvement in adjusted EBITDA. Let's take a moment to review each of these. Our quarter-over-quarter revenue trends improved with revenues declining 11.4% for the first quarter as compared to 14.8% during the fourth quarter of fiscal 2023, excluding the impact of the 53rd week in the fourth quarter of fiscal 2022. Gross profit margin, which was a real standout this quarter, increased 450 basis points over the last year to 37.9%. This was led by an 830 basis point improvement in our Gourmet Food and Gift Baskets segment. Gross margin benefited from several factors, including lower ocean freight costs, our strategic pricing initiatives, the decline in certain commodity costs, our automation efforts to operate more efficiently and better inventory management. We expect these variables to continue to be a tailwind throughout the fiscal year even as we cycle against the gross profit margin improvement that we began to realize in the second quarter of last year and to a greater extent in the second half of the year. Gross margin improvement, combined with our reduction in operating expenses enabled us to improve our year-over-year adjusted EBITDA loss by $5.5 million. As we look out to the holiday period, while the current consumer environment remains complex and discretionary consumer spending remains pressured, we believe that consumers will be more inspired to shop for the holidays. And as we witnessed a year ago, we anticipate that they will shop later in the period. Now let's review our key metrics for the quarter. Our first quarter revenues declined 11.4% compared to the year ago to $269.1 million. Gross profit margin increased 450 basis points over last year to 37.9%. Gross margin expansion was led by improvements across each of our business segments and most notably within the Gourmet Food and Gift Baskets segment, which increased 830 basis points to 31.5%. Beyond the gross margin improvement, we also reduced our operating expenses by $3.3 million or 2.3% for the quarter, as we remain steadfast in managing what is in our control and reducing expenses despite higher labor costs and inflationary increases. As a result, our first quarter adjusted EBITDA loss improved $5.5 million to $22.5 million as compared to the prior year despite the top-line pressure. Net loss for the quarter improved to $31.2 million or $0.48 per share as compared to a net loss of $33.7 million or $0.52 per share in the prior year. Now, let's review our segment results. Our Gourmet Food and Gift Baskets segment, revenues declined 9.3% to $98.1 million compared with $108.2 million in the prior year. Our wholesale revenue component was roughly flat compared with a year ago. This segment's gross profit margin expanded 830 basis points to 31.5% compared to 23.2% in the prior year period, improving on lower ocean freight costs, a decline in certain commodity prices and the company's strategic pricing initiatives and better inventory management. Segment contribution margin loss improved by $7.7 million to $11 million compared to the segment contribution margin loss of $18.7 million in the prior year period. This improvement primarily reflects the gross profit margin improvement, combined with more efficient marketing spend. Our Consumer Floral and Gifts segment, revenues decreased 12.3% to $142.2 million compared with $162.2 million a year ago. Profit margin expanded 140 basis points to 39.6% compared with 38.2% in the prior year period, improving our strategic pricing initiatives and lower ocean freight costs. Segment contribution margin was $8.8 million compared with segment contribution margin of $10.8 million in the prior year period, reflecting the lower revenue. The BloomNet segment. Revenues for the quarter decreased 13.5% to $28.9 million. Gross profit margin increased to 50.2%, improving 680 basis points compared with 43.4% in the prior year period, primarily reflecting strategic pricing initiatives, lower ocean freight costs and product mix. Segment contribution margin was $9.4 million compared with $9.5 million in the prior year period as the gross margin improvement helped offset revenue decline. Turning to our balance sheet. Our cash and investment position was $8.4 million at the end of the first quarter, seasonally low as we prepare for the holiday period. Inventory was $280.6 million compared with inventory of $342.6 million at the end of the same time last year, benefiting from this component of our Work Smarter initiative that is focused on operating more efficiently with lower inventory. In terms of debt, we reduced our total outstanding debt by $67.5 million as compared to last year. We had $197.5 million in term debt and borrowings of $35 million under our revolving credit facility in preparation for the upcoming holiday season. This compares to total outstanding debt of $300 million at the same time a year ago. We expect borrowings under the revolver to be fully paid during the fiscal second quarter. Regarding guidance for fiscal 2024, we continue to expect total revenues on a percentage basis to decline in the mid-single digits compared with the prior year, adjusted EBITDA to be in the range of $95 million to $100 million, and free cash flow to be in the range of $60 million to $65 million. Now I'll turn the call back to Jim for his closing comments before we open it up for Q&A.

Thanks, Bill. That was a good review. For us, the main takeaway from the first quarter was that, so far this year, essentially it's unfolding as we expected, and we are on a path of a multiyear reversion to the mean journey. While everyone's crystal ball on consumer behavior for the holiday period is a bit cloudy right now, with the enhancements we have made going into the holiday period, we have never been better positioned to help our customers celebrate the holidays with the important people in their lives. As Tom highlighted, we are providing consumers with a broader array of gifting options and price points to help them find a perfect gift for anyone on their list. We look forward to helping them nourish their relationships. After all, we know that the greatest gift of all is having more and better and more meaningful relationships. And now, we'll be happy to open the call for your questions.

Ladies and gentlemen, at this time, we'll begin the question-and-answer session. Our first question today comes from Michael Kupinski from Noble Capital Markets. Please go ahead with your question.

Thank you and congratulations. You actually performed better than my expectations for the quarter. It seems that revenue trends improved slightly and the adjusted EBITDA exceeded projections. Great job on that. I have a couple of questions. Regarding the new customers you've acquired this quarter, you mentioned that the higher income customers are doing better. Can you provide some insight into these new customers? Are they predominantly those higher income earners that you've observed?

Hi, Michael, this is Jim. Thanks for your question. I'm glad to hear you're satisfied, but we would have liked to perform better on the top line this quarter. Everything else appears to be on track. Regarding new customers, we’re uncertain. I'll have Tom provide you with the data. We're not clear if the improvement is coming from our existing customers, who are typically higher economic performers, or if the lower-end customers, who face more economic challenges, are simply not engaging with us. Tom, how would you interpret that?

Yes. Michael, we don't have exact figures on our new customers for this quarter, but our targeting efforts are more and more refined to go after our better cohorts. So I would expect that our new customers continue to evolve towards a higher demographic, if you will, higher household income. During the quarter, we did introduce new product offerings both at the high-end and at the low-end, but with our AOVs being up, a lot of that is driven by more customers buying the higher-end products.

So the question, I guess, that Michael is asking, is it just that they're buying more high-end products or there's fewer customers for the entry level price points?

Correct.

Probably a little combination of both.

And then it seems like you stepped up your marketing. Can you talk a little bit about pricing for marketing? Are you seeing weakness in the pricing? Is that another reason why you're stepping that up? Or can you give us a sense of your marketing campaigns?

Michael, I don't think we really stepped up marketing this quarter. In fact, I think we're keeping our powder dry because the CAC, the cost of acquiring a customer is still pretty stiff. Isn't it, Tom?

Yes, I think it certainly is moderated from where it once was. And depending on the platform, and we use a ton of them in a ton of different ways we market, there's some that are higher from a CPM, et cetera, basis and some are a little lower. So, overall, the environment is certainly not what it was a year or two back as far as being that level of efficiency.

So it's more expensive now.

It's more expensive now, yes.

Yes. And we didn't step up our marketing this quarter, did we?

No.

Okay, great. That's all I have. Thank you.

Thank you, Michael.

Our next question comes from Anthony Lebiedzinski from Sidoti. Please go ahead with your question.

Hi. Good morning. How are you guys doing?

Good, Anthony.

By the way, this is Stefan Guillaume on for Anthony Lebiedzinski. Sorry about that. I guess, my first question is, which commodity costs have you seen the most declines in and which ones are still pressuring your costs?

Bill will provide the specific data, but when we discuss a reversion to the mean, it's hopefully a multi-year process. We've seen some benefits this quarter and in the past few quarters. From a broader perspective, some areas have returned to more stable levels, particularly ocean freight, which had caused us significant issues a year ago and has now returned to nearly pre-pandemic rates. So that has almost fully reverted, and we hope it stays that way. The commodities side is where we've seen a significant increase after the issues with ocean freight. We produce a lot of baked goods, including chocolate products. All of our food items, like cookies, rely heavily on ingredients such as butter and eggs, and the costs for those commodities soared. They've come down somewhat but haven't reverted to their usual levels. Now, I’ll let Bill share the specific data.

Yes, so as Jim was alluding to, things like butter and eggs, even wheat have come off their significant highs. Eggs are actually back down to historical norms. Others are working their way down. Commodities like sugar and cocoa, big ingredients in some of our product lines, are still very high. And obviously, a big one is fuel. And while fuel has moderated a little bit over where its highs were a year ago, obviously, we all read about fuel and it's still very high versus historical norms.

Thank you for the call. I guess, my second question is, in the past calls, you have talked about optimizing logistics with your shipping partners, mostly FedEx. So as you prepare for the busy holiday season, how should we think about the potential benefits from this initiative?

Well, I think we have a program that we've referred to a few times this morning called our Work Smarter program, which Bill has been quarterbacking with a team of people across the enterprise. And you'll see that they've done lots of things. For example, we opened our East Coast large distribution center for our multi-brand operations. We opened that in Georgia 1.5 years ago. We spent a great deal of time and money on an automation project there in the last year. And we're seeing the fruits of that now. So that's one example. So freight out of our finished goods will come from that facility, which might have either come from our Ohio facility, which covers the Midwest, or our West Coast facilities in Oregon. So there's a significant freight savings by having a national footprint of major distribution centers. And we've also coordinated and distributed our products on a raw ingredients basis into finished goods facilities across the country as well. So we have deep freezer space now in Ohio and in Georgia, and we've had it for a long time in Oregon. But, Bill, give us a little bit more color on what our Work Smarter initiatives have yielded, particularly in the area that Stefan is asking us about in terms of logistics.

First off, we have a great working relationship with our carriers. And we do have long-term contracted rates that do have modest increases every year, but there are certain components of the rates that aren't capped.

They're variable.

They are somewhat unpredictable, with fuel being one of the main factors. We have started several logistic initiatives to help counteract these rate increases. Jim mentioned the opening of Atlanta recently, but much of our focus is on strategically placing inventory across the country. This allows us to be as close to the consumer as possible, enabling us to utilize a more affordable service while still satisfying customer delivery expectations. However, Work Smarter encompasses much more than just logistics. It involves various work streams aimed at increasing efficiency through technology and automation, including the logistics we discussed, as well as labor, inventory, and inventory management.

And we can't go much further in the call without mentioning AI, so that we're consistent with every other company on the planet.

Certainly. We have previously discussed our advancements in manufacturing and distribution automation. Significant investments were made in our facilities in Ohio, Medford, Oregon, and Atlanta to enhance our service center platform using automation and AI. We are utilizing bots in a self-service portal to elevate the customer experience. Additionally, our Work Smarter initiative has focused on inventory management, allowing us to align our inventory levels with current demand, which has resulted in savings in both working capital and inventory write-offs.

Why don't you touch on that inventory point? It might help Stefan to understand the achievements we've already had there. Last year at this time, inventory levels versus this year, and how we've spread the inventory out to meet where we anticipate demand to be, which gives us a freight savings and enables us to lower our overall inventory investment.

Yes, the inventory is down around $60 million or so, a little more than $60 million at the end of the first quarter this year versus it was a year ago. And we have it better placed around the country.

Well, we think we do.

And we're producing it in a more efficient manner, closer to the holiday. So we're saving on labor. We're ultimately saving on freight costs by having it better placed around the country.

Does that help you, Stefan?

Yes. And I guess that leads to my last question. Can you talk about seasonal labor availability and labor rates for the current holiday quarter? And how does that compare to last year?

Sure. It's a good story for us, Stefan, in that two years ago, so Christmas of '21, we really struggled. We wound up the season with 2,000 positions we never filled. And that just kicked us in the head from a labor cost point of view because it required so much overtime. Last year, we filled those spots better. And we just got reports as recently as Monday of this week that we're really not having a problem with labor anywhere in the country. Now, I will caution you that when we talk about reversion to the mean, we have no illusion that on the cost of labor side that there is a reversion to the mean to get back to pre-COVID levels. We were pre-COVID $12 to $13 an hour, Bill, for entry-level seasonal holiday help. And now it's much $20 or so. And that's not going back. That genie is not going back in a bottle. So, our planning anticipates that labor costs overall will be constant. I will say, though, the asterisk there is, it's not higher than it was last year for us.

That's right.

Thank you so much. I'll jump back into queue.

Thanks, Stefan.

Our next question comes from Alex Fuhrman from Craig-Hallum Capital Group. Please go ahead with your question.

Great. Thanks guys for taking my question. Jim, it sounds like you're pretty optimistic about your positioning for the holidays. Can you talk about what you're doing to attract consumers this holiday season that might be watching their spending a little more than in prior years?

Well, I don't want to be overly optimistic, but we're hopeful. That's probably a better word. The actions we are taking are part of a broader strategy. I won’t be the only one addressing this question; I'll let Tom and Bill share their thoughts too. Tom mentioned how we are expanding our range of price points on products. I believe there’s considerable potential on the higher end to offer more appealing products that might not attract the average consumer, but will certainly appeal to those looking to make a statement. We’ve often been surprised by the demand elasticity at higher price points, so we’re making a concerted effort in that direction. On the flip side, we were just discussing earlier this morning some comments made by Brian Cornell from Target on CNBC regarding their experiences, which resonate with us. The consumer with tighter budgets is currently facing challenges. I recently read an article by Greg Ip in the Wall Street Journal that noted the consumer sentiment index from the University of Michigan is at levels indicative of a recession. During a recent trip to LA, I took around 12 to 15 Uber rides, and every driver I encountered, all of whom were pleasant and provided good service, talked about the financial pressures they are facing. They mentioned rising fuel costs, rising housing costs, and food expenses. According to the Wall Street Journal, 62% of consumers are living paycheck to paycheck, and they don’t have the extra funds to spend on a $50 birthday gift from our brands. However, we believe that as we approach Thanksgiving, Halloween, and especially Christmas, consumers tend to shift from discretionary purchases to necessities. Tom, you might add that we have introduced many more price points that are affordable and attractive for consumers who are struggling a bit.

Yeah, Alex, it's Tom. We've definitely increased our offerings at lower price points. For the Harry & David brand, we have introduced a number of new products at $29.99. With our 1-800-FLOWERS brand, we’ve also added several lower price points than ever before on the site. Particularly with our other brands, we’re starting at price ranges between $15 and $19. We recognize that a segment of our customer base is experiencing financial pressure. Our goal is to meet them where they are so they can express their feelings during the holidays. We are truly focused on this.

But we've also introduced some higher price point items and some bundled products that combine some of the things that our more affluent consumer wants to buy. We've seen some positive responses to those items.

Tom, why don't you shed a little light on what the bundled product that Bill referenced, that we're seeing some good traction.

Yes, we talked about wine earlier. We have new products with Harry & David, including Christmas party items priced at $799. We also offer premium hard-side gift baskets for $500. We've noticed a portion of our consumers leaning towards these higher-priced items, and we're continuing to enhance that catalog.

The wine is a category we've talked about, especially Alex. Tom has mentioned it a few times. We primarily operate as a winery, growing grapes and making wine, which is a product with decent margins. Currently, we only sell it as an add-on. As Tom pointed out earlier, we've found that customers appreciate the option to add a bottle of wine to their food basket gift or bakery gift collection. More often, when we offer it at an affordable price, they opt for a second bottle to create a really appealing package. We're seeing strong interest in these bundles.

That's terrific. I thank you all three. Always good to hear your perspective on the consumer, especially heading into this holiday season.

Thanks, Alex.

And ladies and gentlemen, at this time, and showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.

Well, thanks, everyone, for joining us today. We want to wish everyone a wonderful holiday season. As I just mentioned, we are hopeful that the consumer will be there, and we have the right mix of products and services for them. You've heard all the things we've done to invest in our logistics and our capabilities to give them really good product, really fresh in a very inexpensive way to them just when they want it. So if you have any additional questions, please don't hesitate to get in touch with us. We're ready to engage with you and answer any questions you may have. So have a wonderful and healthy holiday season.

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.