1 800 Flowers Com Inc 10-Q for FY2021 Q1
1 800 Flowers Com Inc (FLWS)
About this 10-Q
1 800 Flowers Com Inc filed this 10-Q on November 6, 2020, covering the quarter ended September 27, 2020 (FY2021 Q1).
Headline figures
Quarter ended September 27, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $283.77M
- up 51.5% from $187.26M a year earlier
- Net loss
- $9.76M
- compared with a net loss of $15.27M a year earlier
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
For the quarterly period ended
or
For the transition period from ___ to ___
Commission File No.
1-800-FLOWERS.COM, Inc.
(Exact name of registrant as specified in its charter)
| | |
| (State of incorporation) | (I.R.S. Employer Identification No.) |
| | ( |
| (Address of principal executive offices) (Zip code) | (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading symbol(s) | Name of each exchange on which registered |
| | | |
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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☐ Large accelerated filer |
| ☑ |
| ☐ Non-accelerated filer |
| |
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| |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
The number of shares outstanding of each of the Registrant’s classes of common stock as of October 30, 2020:
| Class A common stock: | |
| Class B common stock: | |
1-800-FLOWERS.COM, Inc.
FORM 10-Q
For the quarterly period ended September 27, 2020
PART I. – FINANCIAL INFORMATION
ITEM 1. – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1-800-FLOWERS.COM, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except for share data)
| September 27, 2020 | June 28, 2020 | |||||||
| (unaudited) | ||||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Trade receivables, net | ||||||||
| Inventories | ||||||||
| Prepaid and other | ||||||||
| Total current assets | ||||||||
| Property, plant and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Goodwill | ||||||||
| Other intangibles, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders' Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Current maturities of long-term debt | ||||||||
| Current portion of long-term operating lease liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term debt | ||||||||
| Long-term operating lease liabilities | ||||||||
| Deferred tax liabilities | ||||||||
| Other liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, par value, shares authorized, issued | ||||||||
| Class A common stock, par value, shares authorized, and shares issued at September 27, 2020 and June 28, 2020, respectively | ||||||||
| Class B common stock, par value, shares authorized, and shares issued at September 27, 2020 and June 28, 2020 | ||||||||
| Additional paid-in-capital | ||||||||
| Retained earnings | ||||||||
| Accumulated other comprehensive loss | ( | ) | ( | ) | ||||
| Treasury stock, at cost, and Class A shares at September 27, 2020 and June 28, 2020, respectively, and Class B shares at September 27, 2020 and June 28, 2020 | ( |
) | ( |
) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
1-800-FLOWERS.COM, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except for per share data)
(unaudited)
| Three Months Ended | ||||||||
| September 27, 2020 | September 29, 2019 | |||||||
| Net revenues | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Marketing and sales | ||||||||
| Technology and development | ||||||||
| General and administrative | ||||||||
| Depreciation and amortization | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Interest expense, net | ||||||||
| Other income (expense), net | ( | ) | ||||||
| Loss before income taxes | ( | ) | ( | ) | ||||
| Income tax benefit | ( | ) | ( | ) | ||||
| Net loss and comprehensive loss | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted net loss per common share | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted weighted average shares used in the calculation of net loss per common share | ||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
1-800-FLOWERS.COM, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
(unaudited)
| Three Months Ended September 27, 2020 and September 29, 2019 | |||||||||||||||||||||||||||||||||||||||||
| Common Stock | Additional | Retained | Accumulated | Total | |||||||||||||||||||||||||||||||||||||
| Class A | Class B | Paid-in | Earnings | Other | Treasury Stock | Stockholders’ | |||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | (Deficit) | Comprehensive Loss | Shares | Amount | Equity | ||||||||||||||||||||||||||||||||
| Balance at June 28, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | |||||||||||||||||||||||||||||||||||||||||
| Conversion – Class B into Class A | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Acquisition of Class A treasury stock | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance at September 27, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
| Balance at June 30, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | - | ( | ) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | |||||||||||||||||||||||||||||||||||||||||
| Exercise of stock options | |||||||||||||||||||||||||||||||||||||||||
| Acquisition of Class A treasury stock | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Balance at September 29, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
1-800-FLOWERS.COM, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Three months ended | ||||||||
| September 27, 2020 | September 29, 2019 | |||||||
| Operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of deferred financing costs | ||||||||
| Deferred income taxes | ( | ) | ( | ) | ||||
| Bad debt expense | ( | ) | ||||||
| Stock-based compensation | ||||||||
| Other non-cash items | ||||||||
| Changes in operating items: | ||||||||
| Trade receivables | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid and other | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ( | ) | ||||||
| Other assets and liabilities | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Investing activities: | ||||||||
| Acquisitions, net of cash acquired | ( | ) | ( | ) | ||||
| Capital expenditures, net of non-cash expenditures | ( | ) | ( | ) | ||||
| Purchase of equity investments | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Acquisition of treasury stock | ( | ) | ( | ) | ||||
| Proceeds from exercise of employee stock options | ||||||||
| Proceeds from bank borrowings | ||||||||
| Repayment of notes payable and bank borrowings | ( | ) | ( | ) | ||||
| Debt issuance cost | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net change in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents: | ||||||||
| Beginning of period | ||||||||
| End of period | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
1-800-FLOWERS.COM, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by 1-800-FLOWERS.COM, Inc. and Subsidiaries (the “Company”) in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended September 27, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending June 27, 2021. These financial statements should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended June 28, 2020, which provides a more complete understanding of our accounting policies, financial position, operating results and other matters.
The Company’s quarterly results may experience seasonal fluctuations. Subsequent to the acquisition of Harry & David in fiscal 2015 and through fiscal 2019, due to the seasonal nature of the Company’s business, and its continued expansion into non-floral products, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, historically generated nearly 50% of the Company’s annual revenues, and all of its earnings. However, with the onset of the pandemic of the novel strain of coronavirus (“COVID-19”), the Company experienced a significant increase in its revenues and earnings during its fourth quarter of fiscal 2020. These trends have continued through the first four weeks of its fiscal 2021 second quarter. Our customers have increasingly turned to our brands and our expanded product offerings to help them connect and express themselves during the recent COVID-19 pandemic and our “everyday” gifting product line has seen increased volume. While the continuing impacts of COVID-19 are difficult to predict, the Company expects that its fiscal second quarter will continue to be its largest in terms of revenues and earnings, although increases in the Company’s “everyday” business have and are expected to continue to lessen the seasonality of our business. Due to the number of major floral gifting occasions, including Mother's Day, Valentine’s Day, Easter and Administrative Professionals Week, revenues also rise during the Company’s fiscal third and fourth quarters in comparison to its fiscal first quarter.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
COVID-19
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of COVID-19, including tax relief and government loans, grants and investments. The CARES Act did not have a material impact on the Company’s consolidated financial statements during the three months ended September 27, 2020.
The Company is closely monitoring the impact of COVID-19 on its business, including how it will affect its customers, workforce, suppliers, vendors, franchisees, florists, and production and distribution channels, as well as its financial statements. The extent to which COVID-19 impacts the Company’s business and financial results will depend on numerous evolving factors, including, but not limited to: the magnitude and duration of COVID-19, the extent to which it will impact macroeconomic conditions, including interest rates, employment rates and consumer confidence, the speed of the anticipated recovery, and governmental, business and individual consumer reactions to the pandemic. The Company assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to the Company and the unknown future impacts of COVID-19 as of September 27, 2020 and through the date of this report. The accounting matters assessed included, but were not limited to, the Company’s allowance for doubtful accounts and credit losses, inventory and related reserves and the carrying value of goodwill and other long-lived assets. While there was not a material impact to the Company’s consolidated financial statements as of and for the quarter ended September 27, 2020, the Company’s future assessment of these factors and the evolving factors described above, could result in material impacts to the Company’s consolidated financial statements in future reporting periods.
Revenue Recognition
Net revenue is measured based on the amount of consideration that we expect to receive, reduced by discounts and estimates for credits and returns (calculated based upon previous experience and management’s evaluation). Service and outbound shipping charged to customers are recognized at the time the related merchandise revenues are recognized and are included in net revenues. Inbound and outbound shipping and delivery costs are included in cost of revenues. Net revenues exclude sales and other similar taxes collected from customers.
A description of our principal revenue generating activities is as follows:
| ● | E-commerce revenues - consumer products sold through our online and telephonic channels. Revenue is recognized when control of the merchandise is transferred to the customer, which generally occurs upon shipment. Payment is typically due prior to the date of shipment. |
| ● | Retail revenues - consumer products sold through our retail stores. Revenue is recognized when control of the goods is transferred to the customer, at the point of sale, at which time payment is received. |
| ● | Wholesale revenues - products sold to our wholesale customers for subsequent resale. Revenue is recognized when control of the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms are typically 30 days from the date control over the product is transferred to the customer. |
| ● | BloomNet Services - membership fees as well as other service offerings to florists. Membership and other subscription-based fees are recognized monthly as earned. Services revenues related to orders sent through the floral network are variable, based on either the number of orders or the value of orders, and are recognized in the period in which the orders are delivered. The contracts within BloomNet Services are typically month-to-month and as a result no consideration allocation is necessary across multiple reporting periods. Payment is typically due less than 30 days from the date the services were performed. |
Deferred Revenues
Deferred revenues are recorded when the Company has received consideration (i.e. advance payment) before satisfying its performance obligations. As such, customer orders are recorded as deferred revenue prior to shipment or rendering of product or services. Deferred revenues primarily relate to e-commerce orders placed, but not shipped, prior to the end of the fiscal period, as well as for monthly subscription programs, including our Fruit of the Month Club and Celebrations Passport program.
Our total deferred revenue as of June 28, 2020 was $
Recently Issued Accounting Pronouncements - Adopted
Financial Instruments – Measurement of Credit Losses. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces a new forward-looking “expected loss” approach, to estimate credit losses on most financial assets and certain other instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. We adopted ASU 2016-13 for the Company’s fiscal 2021 (quarter ending September 27, 2020), using the modified-retrospective approach. There was no material impact of adopting this guidance on our consolidated financial statements.
Goodwill – Impairment Test. In January 2017, the FASB issued ASU No. 2017-04, "Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment," which eliminates step two from the goodwill impairment test. Under ASU 2017-04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. We adopted this guidance for the Company’s fiscal 2021 (quarter ending September 27, 2020), on a prospective basis. There was no material impact of adopting this guidance on our consolidated financial statements.
Note 2 – Net Income (Loss) Per Common Share
Basic net loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed using the weighted-average number of common shares outstanding during the period, and excludes the dilutive potential common shares (consisting of employee stock options and unvested restricted stock awards), as their inclusion would be antidilutive. As a result of the net loss for the three months ended September 27, 2020 and September 29, 2019, there is no dilutive impact to the net loss per share calculation for the respective periods.
Note 3 – Stock-Based Compensation
The Company has a Long Term Incentive and Share Award Plan, which is more fully described in Note 12 and Note 13 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2020, that provides for the grant to eligible employees, consultants and directors of stock options, restricted shares, and other stock-based awards.
The amounts of stock-based compensation expense recognized in the periods presented are as follows:
| Three Months Ended | ||||||||
| September 27, 2020 | September 29, 2019 | |||||||
| (in thousands) | ||||||||
| Stock options | $ | $ | ||||||
| Restricted stock | ||||||||
| Total | ||||||||
| Deferred income tax benefit | ||||||||
| Stock-based compensation expense, net | $ | $ | ||||||
Stock-based compensation is recorded within the following line items of operating expenses:
| Three Months Ended | ||||||||
| September 27, 2020 | September 29, 2019 | |||||||
| (in thousands) | ||||||||
| Marketing and sales | $ | $ | ||||||
| Technology and development | ||||||||
| General and administrative | ||||||||
| Total | $ | $ | ||||||
Stock based compensation expense has not been allocated between business segments, but is reflected as part of Corporate overhead (see Note 12 - Business Segments).
Stock Options
The following table summarizes stock option activity during the three months ended September 27, 2020:
|
Options | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| (in years) | (in thousands) | |||||||||||||||
| Outstanding at June 28, 2020 | $ | |||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | ( | ) | $ | |||||||||||||
| Forfeited | $ | |||||||||||||||
| Outstanding at September 27, 2020 | $ | $ | ||||||||||||||
| Exercisable at September 27, 2020 | $ | $ | ||||||||||||||
As of September 27, 2020, the total future compensation cost related to non-vested options, not yet recognized in the statement of income, was $
Restricted Stock
The Company grants shares of Common Stock to its employees that are subject to restrictions on transfer and risk of forfeiture until fulfillment of applicable service and performance conditions and, in certain cases, holding periods (Restricted Stock). The following table summarizes the activity of non-vested restricted stock awards during the three months ended September 27, 2020:
|
Shares | Weighted Average Grant Date Fair Value | |||||||
| Non-vested at June 28, 2020 | $ | |||||||
| Granted | $ | |||||||
| Vested | ( | ) | $ | |||||
| Forfeited | ( | ) | $ | |||||
| Non-vested at September 27, 2020 | $ | |||||||
The fair value of non-vested shares is determined based on the closing stock price on the grant date. As of September 27, 2020, there was $
Acquisition of PersonalizationMall
On February 14, 2020, 1-800-Flowers.com, Inc. (the “Company”), 800-Flowers, Inc., a wholly-owned subsidiary of 1-800-Flowers.com, Inc. (the “Purchaser”), PersonalizationMall.com, LLC (PersonalizationMall), and Bed Bath & Beyond Inc. (“Seller”), entered into an Equity Purchase Agreement (the “Purchase Agreement”) pursuant to which Seller agreed to sell to the Purchaser, and the Purchaser agreed to purchase from Seller, all of the issued and outstanding membership interests of PersonalizationMall for $
The total purchase price was allocated to the identifiable assets acquired and liabilities assumed based on our preliminary estimates of their fair values on the acquisition date. The fair values assigned to PersonalizationMall’s tangible and intangible assets and liabilities assumed are considered preliminary and are based on the information that was available as of the date of the acquisition. The Company is in the process of finalizing its allocation and this may result in potential adjustments to the carrying value of the respective recorded assets and liabilities, establishment of certain additional intangible assets, revisions of useful lives of intangible assets, establishment of potential acquisition contingencies, and the determination of any residual amount that will be allocated to goodwill. As additional information becomes available, the preliminary purchase price allocation may be revised during the remainder of the measurement period, which will not exceed 12 months from the acquisition date. Any such revisions or changes may be material.
The following table summarizes the preliminary allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed at the assumed acquisition date of June 28, 2020:
| PersonalizationMall’s Preliminary Purchase Price Allocation | ||||
| (in thousands) | ||||
| Assets Acquired: | ||||
| Inventories | $ | |||
| Other assets | ||||
| Property, plant and equipment | ||||
| Operating lease right-of-use assets | ||||
| Goodwill | ||||
| Other intangibles | ||||
| Total assets acquired | $ | |||
| Liabilities assumed: | ||||
| Accounts payable and accrued expenses | $ | |||
| Operating lease liabilities | ||||
| Total liabilities assumed | ||||
| Net assets acquired | $ | |||
The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. The estimates and assumptions include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows.
Acquired inventory, consisting of raw materials and supplies, was valued at book value, as there have not been any significant price fluctuations or other events that would materially change the cost to replace the raw materials.
Property, plant and equipment was valued at book value (cost less accumulated depreciation and amortization), due to the nature of the assets, which included recently acquired production equipment and leasehold improvements for the PersonalizationMall's production facility, which became operational in September 2019.
Based on the valuation as of August 3, 2020, of the acquired intangible assets, $
The estimated fair value of the acquired trade names was determined using the relief from royalty method, which is a risk-adjusted discounted cash flow approach. The relief from royalty method values an intangible asset by estimating the royalties saved through ownership of the asset. The relief from royalty method requires identifying the future revenue that would be generated by the trademark, multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. The royalty rate used in the valuation was based on a consideration of market rates for similar categories of assets. The discount rate used in the valuation was based on the PersonalizationMall's weighted average cost of capital, the riskiness of the earnings stream association with the trademarks and the overall composition of the acquired assets.
The estimated fair value of the acquired customer lists was determined using the excess earnings method under the income approach. This method requires identifying the future revenue that would be generated by existing customers at the time of the acquisition, considering an appropriate attrition rate based on the historical experience of the Company. Appropriate expenses are then deducted from the revenues and economic rents are charged for the return on contributory assets. The after-tax cash flows attributable to the asset are discounted back to their net present value at an appropriate intangible asset rate of return and summed to calculate the value of the customer lists.
As required by ASC 805, “Business Combinations,” the following unaudited pro forma financial information for the three months ended September 27, 2020 and September 29, 2019, give effect to the PersonalizationMall acquisition as if it had been completed on July 1, 2019. The unaudited pro forma financial information is prepared by management for informational purposes only in accordance with ASC 805 and is not necessarily indicative of or intended to represent the results that would have been achieved had the acquisition been consummated as of the dates presented, and should not be taken as representative of future consolidated results of operations. The unaudited pro forma financial information does not reflect any operating efficiencies and/or cost savings that the Company may achieve with respect to the combined companies. The pro forma information has been adjusted to give effect to nonrecurring items that are directly attributable to the acquisition.
| Three months ended September 27, 2020 | Three months ended September 29, 2019 | |||||||
| (in thousands) | ||||||||
| Net revenues | $ | $ | ||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
The unaudited pro forma amounts above include the following adjustments:
| - | A decrease of operating expenses by $ | |
| - | An increase of operating expenses by $ | |
| - | An increase in interest expense of $ | |
| - | The combined pro forma results were tax effected using the Company's effective tax rate for the respective periods |
Acquisition of Shari’s Berries
On August 14, 2019, the Company completed its acquisition of the Shari’s Berries business ("Shari's Berries"), a leading provider of dipped berries and other specialty treats, through a bankruptcy proceeding of certain assets of the gourmet food business of the FTD Companies, Inc. The transaction, for a purchase price of $
During the quarter ended June 28, 2020, the Company finalized the allocation of the purchase price to the identifiable assets acquired and liabilities assumed based on its estimates of their fair values on the acquisition date. Of the acquired intangible assets, $
The following table summarizes the allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed at the date of the acquisition:
| Shari’s Berries Purchase Price Allocation | ||||
| (in thousands) | ||||
| Current assets | $ | |||
| Intangible assets | ||||
| Goodwill | ||||
| Total assets acquired | ||||
| Current liabilities | ||||
| Net assets acquired | $ | |||
The estimated fair value of the acquired tradenames was determined using the relief from royalty method, which is a risk-adjusted discounted cash flow approach. The relief from royalty method values an intangible asset by estimating the royalties saved through ownership of the asset. The relief from royalty method requires identifying the future revenue that would be generated by the trademark, multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. The royalty rate used in the valuation was based on a consideration of market rates for similar categories of assets. The discount rate used in the valuation was based on the Company’s weighted average cost of capital, the riskiness of the earnings stream associated with the trademarks and the overall composition of the acquired assets.
The estimated fair value of the acquired customer lists was determined using the excess earnings method under the income approach. This method requires identifying the future revenue that would be generated by existing customers at the time of the acquisition, considering an appropriate attrition rate based on the historical experience of the Company. Appropriate expenses are then deducted from the revenues and economic rents are charged for the return on contributory assets. The after-tax cash flows attributable to the asset are discounted back to their net present value at an appropriate intangible asset rate of return and summed to calculate the value of the customer lists.
Operating results of the Shari’s Berries brand are reflected in the Company’s consolidated financial statements from the date of acquisition, within the Gourmet Foods & Gift Baskets segment. Pro forma results of operations have not been presented, as the impact on the Company’s consolidated financial results would not have been material.
The Company’s inventory, stated at cost, which is not in excess of market, includes purchased and manufactured finished goods for sale, packaging supplies, crops, raw material ingredients for manufactured products and associated manufacturing labor and is classified as follows:
| September 27, 2020 | June 28, 2020 | |||||||
| (in thousands) | ||||||||
| Finished goods | $ | $ | ||||||
| Work-in-process | ||||||||
| Raw materials | ||||||||
| Total inventory | $ | $ | ||||||
Note 6 – Goodwill and Intangible Assets
The following table presents goodwill by segment and the related change in the net carrying amount:
| Consumer Floral & Gifts | BloomNet | Gourmet Foods & Gift Baskets | Total | |||||||||||||
| (in thousands) | ||||||||||||||||
| Balance at June 28, 2020 | $ | $ | $ | $ | ||||||||||||
| Acquisition of PersonalizationMall | ||||||||||||||||
| Balance at September 27, 2020 | $ | $ | $ | $ | ||||||||||||
The Company’s other intangible assets consist of the following:
| September 27, 2020 | June 28, 2020 | |||||||||||||||||||||||||||
| Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net | Gross Carrying Amount | Accumulated Amortization | Net | ||||||||||||||||||||||
| (in years) | (in thousands) | |||||||||||||||||||||||||||
| Intangible assets with determinable lives | ||||||||||||||||||||||||||||
| Investment in licenses | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
| Customer lists | ||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||
| Total intangible assets with determinable lives | ||||||||||||||||||||||||||||
| Trademarks with indefinite lives | - | - | ||||||||||||||||||||||||||
| Total identifiable intangible assets | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||
Intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Future estimated amortization expense is as follows: remainder of fiscal 2021 - $
Equity investments without a readily determinable fair value
Investments in non-marketable equity instruments of private companies, where the Company does not possess the ability to exercise significant influence, are accounted for at cost, less impairment (assessed qualitatively at each reporting period), adjusted for observable price changes from orderly transactions for identical or similar investments of the same issuer. These investments are included within “Other assets” in the Company’s consolidated balance sheets. The aggregate carrying amount of the Company’s cost method investments was $
Equity investments with a readily determinable fair value
The Company also holds certain trading securities associated with its Non-Qualified Deferred Compensation Plan (“NQDC Plan”). These investments are measured using quoted market prices at the reporting date and are included within the “Other assets” line item in the consolidated balance sheets (see Note 10 - Fair Value Measurements).
The Company’s current and long-term debt consists of the following:
| September 27, 2020 | June 28, 2020 | |||||||
| (in thousands) | ||||||||
| Revolver (1) | $ | $ | ||||||
| Term Loans (1) | ||||||||
| Deferred financing costs | ( | ) | ( | ) | ||||
| Total debt | ||||||||
| Less: current debt | ||||||||
| Long-term debt | $ | $ | ||||||
| (1) | On May 31, 2019, the Company and certain of its U.S. subsidiaries entered into a Second Amended and Restated Credit Agreement (the “2019 Credit Agreement”) with JPMorgan Chase Bank, N.A. as administrative agent, and a group of lenders. The 2019 Credit Agreement amended and restated the Company’s existing amended and restated credit agreement dated as of December 23, 2016 (the “2016 Credit Agreement”) to, among other modifications: (i) increase the amount of the outstanding term loan (“Term Loan”) from approximately $
On August 20, 2020, the Company, the Subsidiary Guarantors, JPMorgan Chase Bank, N.A. as administrative agent, and a group of lenders entered into a First Amendment (the “First Amendment”) to the 2019 Credit Agreement. The First Amendment amends the 2019 Credit Agreement (together ‘the 2020 Credit Agreement”) to, among other modifications, (i) increase the aggregate principal amount of the existing Revolver commitments from $
The 2020 Credit Agreement requires that while any borrowings or commitments are outstanding the Company comply with certain financial covenants and affirmative covenants as well as certain negative covenants that, subject to certain exceptions, limit the Company’s ability to, among other things, incur additional indebtedness, make certain investments and make certain restricted payments. The Company was in compliance with these covenants as of September 27, 2020. The 2020 Credit Agreement is secured by substantially all of the assets of the Company. |
Future principal payments under the Term Loan and New Term Loan are as follows: $
Note 9 - Property, Plant and Equipment
The Company’s property, plant and equipment consists of the following:
| September 27, 2020 | June 28, 2020 | |||||||
| (in thousands) | ||||||||
| Land | $ | $ | ||||||
| Orchards in production and land improvements | ||||||||
| Building and building improvements | ||||||||
| Leasehold improvements | ||||||||
| Production equipment | ||||||||
| Furniture and fixtures | ||||||||
| Computer and telecommunication equipment | ||||||||
| Software | ||||||||
| Capital projects in progress - orchards | ||||||||
| Property, plant and equipment, gross | ||||||||
| Accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| Property, plant and equipment, net | $ | $ | ||||||
Note 10 - Fair Value Measurements
Cash and cash equivalents, trade and other receivables, prepaids, accounts payable and accrued expenses are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments. Although no trading market exists, the Company believes that the carrying amount of its debt approximates fair value due to its variable nature. The Company’s investments in non-marketable equity instruments of private companies are carried at cost and are periodically assessed for other-than-temporary impairment, when an event or circumstances indicate that an other-than-temporary decline in value may have occurred. The Company’s remaining financial assets and liabilities are measured and recorded at fair value (see table below). The Company’s non-financial assets, such as definite lived intangible assets and property, plant and equipment, are recorded at cost and are assessed for impairment when an event or circumstance indicates that an other-than-temporary decline in value may have occurred. Goodwill and indefinite lived intangibles are tested for impairment annually, or more frequently, if events occur or circumstances change such that it is more likely than not that an impairment may exist, as required under the accounting standards.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the guidance are described below:
| Level 1 |
| Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access. |
| Level 2 |
| Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. |
| Level 3 |
| Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following table presents by level, within the fair value hierarchy, financial assets and liabilities measured at fair value on a recurring basis:
|
Carrying Value | Fair Value Measurements Assets (Liabilities) | |||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||
| (in thousands) | ||||||||||||||||
| As of September 27, 2020: | ||||||||||||||||
| Trading securities held in a “rabbi trust” (1) | $ | $ | $ | $ | ||||||||||||
| Total assets (liabilities) at fair value | $ | $ | $ | $ | ||||||||||||
| As of June 28, 2020: | ||||||||||||||||
| Trading securities held in a “rabbi trust” (1) | $ | $ | $ | $ | ||||||||||||
| Total assets (liabilities) at fair value | $ | $ | $ | $ | ||||||||||||
|
| (1) | The Company has established an NQDC Plan for certain members of senior management. Deferred compensation plan assets are invested in mutual funds held in a “rabbi trust,” which is restricted for payment to participants of the NQDC Plan. Trading securities held in a rabbi trust are measured using quoted market prices at the reporting date and are included in the “Other assets” line item, with the corresponding liability included in the “Other liabilities” line item in the consolidated balance sheets. |
At the end of each interim reporting period, the Company estimates its effective income tax rate expected to be applicable for the full year. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The Company’s effective tax rate for the three months ended September 27, 2020 was
The Company files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and various foreign countries. The Company is currently undergoing its U.S. federal examination for fiscal however, fiscal years 2018 and 2019 remain subject to U.S. federal examination. Due to ongoing state examinations and nonconformity with the U.S. federal statute of limitations for assessment, certain states remain open from fiscal The Company's foreign income tax filings from fiscal are open for examination by its respective foreign tax authorities, mainly Canada, Brazil, and the United Kingdom.
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At September 27, 2020, the Company has an unrecognized tax benefit, including interest and penalties, of approximately $
The Company’s management reviews the results of its operations by the following business segments:
• Consumer Floral & Gifts,
• BloomNet, and
• Gourmet Foods & Gift Baskets
Segment performance is measured based on contribution margin, which includes only the direct controllable revenue and operating expenses of the segments. As such, management’s measure of profitability for these segments does not include the effect of corporate overhead (see (a) below), nor does it include depreciation and amortization, other (income) expense, net and income taxes, or stock-based compensation. Assets and liabilities are reviewed at the consolidated level by management and not accounted for by segment.
| Three Months Ended | ||||||||
| Net Revenues: | September 27, 2020 | September 29, 2019 | ||||||
| Segment Net Revenues: | (in thousands) | |||||||
| Consumer Floral & Gifts | $ | $ | ||||||
| BloomNet | ||||||||
| Gourmet Foods & Gift Baskets | ||||||||
| Corporate | ||||||||
| Intercompany eliminations | ( | ) | ( | ) | ||||
| Total net revenues | $ | $ | ||||||
| Three Months Ended | ||||||||
| Operating Income (Loss): | September 27, 2020 | September 29, 2019 | ||||||
| (in thousands) | ||||||||
| Segment Contribution Margin: | ||||||||
| Consumer Floral & Gifts | $ | $ | ||||||
| BloomNet | ||||||||
| Gourmet Foods & Gift Baskets | ( | ) | ( | ) | ||||
| Segment Contribution Margin Subtotal | ||||||||
| Corporate (a) | ( | ) | ( | ) | ||||
| Depreciation and amortization | ( | ) | ( | ) | ||||
| Operating loss | $ | ( | ) | $ | ( | ) | ||
(a) Corporate expenses consist of the Company’s enterprise shared service cost centers, and include, among other items, Information Technology, Human Resources, Accounting and Finance, Legal, Executive and Customer Service Center functions, as well as Stock-Based Compensation. In order to leverage the Company’s infrastructure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions, other than those of the Customer Service Center, which are allocated directly to the above categories based upon usage, are included within corporate expenses as they are not directly allocable to a specific segment.
The following tables represent a disaggregation of revenue from contracts with customers, by channel:
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||||||||
| September 27, 2020 | September 29, 2019 | |||||||||||||||||||||||||||||||
| Consumer Floral & Gifts | BloomNet | Gourmet Foods & Gift Baskets | Consolidated | Consumer Floral & Gifts | BloomNet | Gourmet Foods & Gift Baskets | Consolidated | |||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Net revenues | ||||||||||||||||||||||||||||||||
| E-commerce | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Retail | ||||||||||||||||||||||||||||||||
| Wholesale | ||||||||||||||||||||||||||||||||
| BloomNet services | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||||||||
| Eliminations | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Net revenues | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The Company currently leases plants, warehouses, offices, store facilities, and equipment under various leases through fiscal 2034. Most lease agreements are of a long-term nature (over a year), although the Company does also enter into short-term leases, primarily for seasonal needs. Lease agreements may contain renewal options and rent escalation clauses and require the Company to pay real estate taxes, insurance, common area maintenance and operating expenses applicable to the leased properties. The Company accounts for its leases in accordance with ASC 842. At contract inception, we determine whether a contract is, or contains, a lease by determining whether it conveys the right to control the use of the identified asset for a period of time, by assessing whether we have the right to obtain substantially all of the economic benefits from use of the identified asset and the right to direct the use of the identified asset.
At the lease commencement date, we determine if a lease should be classified as an operating or a finance lease (we currently have no finance leases) and recognize a corresponding lease liability and a right-of-use asset on our Balance Sheet. The lease liability is initially and subsequently measured as the present value of the remaining fixed minimum rental payments (including base rent and fixed common area maintenance) using discount rates as of the commencement date. Variable payments (including most utilities, real estate taxes, insurance and variable common area maintenance) are expensed as incurred. The right-of-use asset is initially and subsequently measured at the carrying amount of the lease liability adjusted for any prepaid or accrued lease payments, remaining balance of lease incentives received, unamortized initial direct costs, or impairment charges relating to the right-of-use asset. Right-of-use assets are assessed for impairment using the long-lived assets impairment guidance. The discount rate used to determine the present value of lease payments is our estimated collateralized incremental borrowing rate, based on the yield curve for the respective lease terms, as we generally cannot determine the interest rate implicit in the lease.
We recognize expense for our operating leases on a straight-line basis over the lease term. As these leases expire, it can be expected that in the normal course of business they will be renewed or replaced. Renewal option periods are included in the measurement of lease liability, where the exercise is reasonably certain to occur. Key estimates and judgments in accounting for leases include how we determine: (1) lease payments, (2) lease term and (3) the discount rate used in calculating the lease liability.
Additional information related to our leases is as follows:
| Three Months Ended | ||||
| September 27, 2020 | ||||
| (in thousands) | ||||
| Lease costs: | ||||
| Operating lease costs | $ | |||
| Variable lease costs | ||||
| Short-term lease cost | ||||
| Sublease income | ( | ) | ||
| Total lease costs | $ | |||
| Three Months Ended | ||||
| September 27, 2020 | ||||
| (in thousands) | ||||
| Cash paid for amounts included in measurement of operating lease liabilities | $ | |||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | |||
| September 27, 2020 | ||||
| (in thousands) | ||||
| Weighted-average remaining lease term - operating leases |
| |||
| Weighted-discount rate - operating leases | % | |||
Maturities of lease liabilities in accordance with ASC 842 as of September 27, 2020 are as follows (in thousands):
| Remainder of 2021 | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total Future Minimum Lease Payments | ||||
| Less Imputed Remaining Interest | ||||
| Total | $ |
Note 14 – Commitments and Contingencies
Litigation
Bed Bath & Beyond:
On April 1, 2020, the Seller commenced an action against the Company in the Court of Chancery for the State of Delaware, which is captioned Bed Bath & Beyond Inc. v. 1-800-Flowers.com, et ano., C.A. (the “Complaint”), alleging a breach of the Equity Purchase Agreement (the “Agreement”), dated February 14, 2020, between Seller, PersonalizationMall, the Company and the Purchaser, pursuant to which the Seller agreed to sell to Purchaser, and the Purchaser agreed to purchase from Seller, all of the issued and outstanding membership interests of PersonalizationMall. The action was initiated after the Company requested a reasonable delay in the closing under the Purchase Agreement due to the unprecedented circumstances created by COVID-19. The Complaint requested an order of specific performance to consummate the transaction under the Purchase Agreement plus attorney’s fees and costs in connection with the action. The Company filed its answer to the Complaint on April 17, 2020 and an order governing expedited proceedings was approved on April 9, 2020 that set a trial date for late September 2020. On July 21, 2020, the Company and Seller entered into a settlement agreement, pursuant to which the Company agreed to move forward with its purchase of PersonalizationMall for $
In addition, there are various claims, lawsuits, and pending actions against the Company and its subsidiaries incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the final resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) is intended to provide an understanding of our financial condition, change in financial condition, cash flow, liquidity and results of operations. The following MD&A discussion should be read in conjunction with the consolidated financial statements and notes to those statements that appear elsewhere in this Form 10-Q and in the Company’s Annual Report on Form 10-K, for the year ended June 28, 2020. The following discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those discussed or referred to in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption “Forward-Looking Information and Factors That May Affect Future Results,” under Part I, Item 1A, of the Company’s Annual Report on Form 10-K, for the year ended June 28, 2020 under the heading “Risk Factors” and Part II-Other Information, Item 1A in this Form 10-Q.
Overview
1-800-FLOWERS.COM, Inc. and its subsidiaries (collectively, the “Company”) is a leading provider of gifts designed to help customers express, connect and celebrate. The Company’s business platform features our all-star family of brands, including: 1-800-Flowers.com®, 1-800-Baskets.com®, Cheryl’s Cookies®, Harry & David®, PersonalizationMall.com®, Shari’s Berries®, FruitBouquets.com®, Moose Munch®, The Popcorn Factory®, Wolferman’s Bakery® and Simply Chocolate®. We also offer top-quality steaks and chops from Stock Yards®. Through the Celebrations Passport® loyalty program, which provides members with free standard shipping and no service charge across our portfolio of brands, 1-800-FLOWERS.COM, Inc. strives to deepen relationships with customers. The Company also operates BloomNet®, an international floral service provider offering a broad-range of products and services designed to help professional florists grow their businesses profitably; Napco℠, a resource for floral gifts and seasonal décor; and DesignPac Gifts, LLC, a manufacturer of gift baskets and towers.
1-800-FLOWERS.COM, Inc. was recognized as the 2019 Mid-Market Company of the Year by CEO Connection.
Shares in 1-800-FLOWERS.COM, Inc. are traded on the NASDAQ Global Select Market, ticker symbol: FLWS.
For additional information, see Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview” of our Annual Report on Form 10-K for the year ended June 28, 2020.
Acquisition of PersonalizationMall
On August 3, 2020, the Company completed its acquisition of PersonalizationMall.com LLC ("PersonalizationMall"), a leading ecommerce provider of personalized products. The extensive offerings of PersonalizationMall include a wide variety of personalization processes such as sublimation, embroidery, digital printing, engraving and sandblasting, while providing an industry-leading customer experience based on a fully integrated business platform that includes a highly automated personalization process and rapid order fulfillment.
The Company used a combination of cash on its balance sheet and its existing credit facility to fund the $245.0 million purchase (subject to certain working capital and other adjustments), which included its newly renovated, leased 360,000 square foot state-of-the-art production and distribution facility, as well as customer database, tradenames and website. PersonalizationMall’s revenues were approximately $171.2 million in its fiscal 2020.
Amended Credit Agreement
Subsequent to, but in contemplation of the acquisition, on August 20, 2020, the Company entered into a First Amendment to its 2019 Credit Agreement to: (i) increase the aggregate principal amount of the existing Revolver commitments from $200.0 million to $250.0 million, (ii) establish a new tranche of term A-1 loans in an aggregate principal amount of $100.0 million (the “New Term Loan”), (iii) increase the working capital sublimit with respect to the Revolver from $175.0 million to $200.0 million, and (iv) increase the seasonally-reduced Revolver commitments from $100.0 million to $125.0 million for the period from January 1 through August 1 for each fiscal year of the Company. The $100.0 million proceeds of the New Term Loan were used to repay the $95.0 million borrowing that had been drawn on its existing Revolver to finance the acquisition, as well as financing fees of approximately $2.0 million (See Note 8 - Debt, in Item 1. for details).
COVID-19 Impact
In response to the global pandemic, the Company has taken actions to promote employee safety and business continuity, informed by the guidelines set forth by local, state and federal government and health officials. These initiatives include developing a “Pandemic Preparedness and Response Plan,” establishing an internal “nerve center” to allow for communication and coordination throughout the business, designing workstream teams to promote workforce protection and supply chain management, and dedicating resources to support customers, vendors, franchisees, and our BloomNet member florists.
The COVID-19 pandemic has affected, and will continue to affect, our operations and financial results for the foreseeable future. While there is significant uncertainty in the overall consumer environment due to the COVID-19 crisis, we continue to see strong e-commerce demand for gourmet foods and gift baskets and our floral and personalized products and anticipate that this trend will continue. With that said, there are headwinds (and resulting increased costs) that have been, and will continue to impact our operations during the foreseeable future, including the following:
| ● |
Retail store closures – on March 20, 2020, in response to government actions, and for the safety of its employees, the Company temporarily closed its Cheryl’s and Harry & David retail stores. Affected employees were provided with Company-paid special COVID leave pay through April 3rd, as the nation and the Company worked to understand the extent and potential length of the crisis. On April 14th, the difficult decision was made to permanently close 38 of our 39 Harry & David retail stores. As a result, the Company incurred a charge of approximately $5.2 million in our fourth quarter for lease obligations, employee costs and other store closure costs. Annual revenues attributable to the closed locations was approximately $33.0 million. |
| ● |
Wholesale volume reductions - we have seen a reduction in our wholesale business as a result of COVID-19, which impacted our first quarter results within our Gourmet Foods and Gift Baskets segment as many of our large wholesale customers are taking a cautious approach to the upcoming holidays due to the uncertainty surrounding the future impact of COVID-19 on their brick and mortar retail stores. |
| ● |
Increased operating costs - 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 wellbeing of our associates, including: required social distancing, enhanced facility cleaning and sanitizing schedules, and staggered production shifts. |
| ● |
Fulfillment capacity constraints – the nationwide increase in e-commerce volume is expected to result in third-party carrier capacity constraints in addition to increased delivery costs. |
The scale and overall economic impact of the COVID-19 crisis is still very difficult to assess. However, the Company believes that the operating platform it has built over the years, combined with its diversified product line, and ability to engage with its customers will allow it to successfully navigate this challenging 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, our vendors and our customers, |
| ● |
Maintaining our financial strength and flexibility, and |
| ● |
Continuing to invest in areas of our business that can help drive future growth. |
Company Guidance
Due to the significant uncertainty in the overall economy related to the ongoing COVID-19 pandemic, the Company is not providing guidance for its full fiscal 2021 year at this time.
Regarding the fiscal second quarter:
| o |
Based on the continued strong ecommerce growth momentum that has carried into October, the Company expects to achieve total consolidated revenue growth for its second fiscal quarter in a range of 22-to-26 percent, compared with the prior year period. |
| o |
The anticipated strong revenue growth in the quarter reflects expected e-commerce revenue growth of more than 40 percent, including contributions from PersonalizationMall, somewhat offset by lower wholesale orders and reduced retail revenues (reflecting the closing of the Harry & David retail stores in fiscal 2020). |
| o |
The Company anticipates that the aforementioned revenue growth combined with contributions from PersonalizationMall will help offset certain headwinds, including increased costs from third-party shipping vendors, higher labor expenses and higher operating costs due to the COVID-19 pandemic, |
| o |
As a result, the Company anticipates achieving Adjusted EBITDA and EPS growth in a range of 18.0-to-23.0 percent for the quarter, compared with the prior year period. |
Definitions of non-GAAP Financial Measures:
We sometimes use financial measures derived from consolidated financial information, but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain of these are considered "non-GAAP financial measures" under the U.S. Securities and Exchange Commission rules. See below for definitions and the reasons why we use these non-GAAP financial measures. Where applicable, see the Segment Information and Results of Operationssections below for reconciliations of these non-GAAP measures to their most directly comparable GAAP financial measures. These non-GAAP financial measures are referred to as “adjusted" or “on a comparable basis” below.
EBITDA and adjusted EBITDA
We define EBITDA as net income (loss) before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA adjusted for the impact of stock-based compensation, NQDC Plan investment appreciation/depreciation, and for certain items affecting period to period comparability. See Segment Information for details on how EBITDA and adjusted EBITDA were calculated for each period presented.
The Company presents EBITDA and adjusted EBITDA because it considers such information meaningful supplemental measures of its performance and believes such information is frequently used by the investment community in the evaluation of similarly situated companies. The Company uses EBITDA and adjusted EBITDA as factors to determine the total amount of incentive compensation available to be awarded to executive officers and other employees. The Company's credit agreement uses EBITDA and adjusted EBITDA to measure compliance with covenants such as interest coverage and debt incurrence. EBITDA and adjusted EBITDA are also used by the Company to evaluate and price potential acquisition candidates.
EBITDA and adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP. Some of the limitations are: (a) EBITDA and adjusted EBITDA do not reflect changes in, or cash requirements for, the Company's working capital needs; (b) EBITDA and adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company's debts; and (c) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and EBITDA does not reflect any cash requirements for such capital expenditures. EBITDA should only be used on a supplemental basis combined with GAAP results when evaluating the Company's performance.
Segment contribution margin and adjusted segment contribution margin
We define segment contribution margin as earnings before interest, taxes, depreciation and amortization, before the allocation of corporate overhead expenses. Adjusted segment contribution margin is defined as contribution margin adjusted for certain items affecting period-to-period comparability. See Segment Information for details on how segment contribution margin was calculated for each period presented.
When viewed together with our GAAP results, we believe segment contribution margin and adjusted segment contribution margin provide management and users of the financial statements meaningful information about the performance of our business segments.
Segment contribution margin and adjusted segment contribution margin are used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. The material limitation associated with the use of the segment contribution margin and adjusted segment contribution margin is that they are an incomplete measure of profitability as they do not include all operating expenses or non-operating income and expenses. Management compensates for these limitations when using this measure by looking at other GAAP measures, such as operating income and net income.
Adjusted net income (loss) and adjusted or comparable net income (loss) per common share
We define adjusted net income (loss) and adjusted or comparable net income (loss) per common share as net income (loss) and net income (loss) per common share adjusted for certain items affecting period to period comparability. See Segment Information below for details on how adjusted net income (loss) and adjusted or comparable net income (loss) per common share were calculated for each period presented.
We believe that adjusted net income (loss) and adjusted or comparable net income (loss) per common share are meaningful measures because they increase the comparability of period to period results.
Since these are not measures of performance calculated in accordance with GAAP, they should not be considered in isolation of, or as a substitute for, GAAP net income (loss) and net income (loss) per common share, as indicators of operating performance and they may not be comparable to similarly titled measures employed by other companies.
The following table presents the net revenues, gross profit and segment contribution margin from each of the Company’s business segments, as well as consolidated EBITDA, and adjusted EBITDA.
| Three Months Ended |
||||||||||||||||||||||||
| September 27, 2020 |
PersonalizationMall Litigation and Transaction Costs |
Harry & David Store Closure Costs |
As Adjusted (non-GAAP) September 27, 2020 |
September 29, 2019 |
% Change |
|||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Net revenues: |
||||||||||||||||||||||||
| Consumer Floral & Gifts |
$ | 161,546 | $ | 161,546 | $ | 90,768 | 78.0 | % | ||||||||||||||||
| BloomNet |
32,738 | 32,738 | 25,440 | 28.7 | % | |||||||||||||||||||
| Gourmet Foods & Gift Baskets |
89,929 | 89,929 | 71,215 | 26.3 | % | |||||||||||||||||||
| Corporate |
106 | 106 | 195 | -45.6 | % | |||||||||||||||||||
| Intercompany eliminations |
(547 | ) | (547 | ) | (355 | ) | -54.1 | % | ||||||||||||||||
| Total net revenues |
$ | 283,772 | $ | - | $ | - | $ | 283,772 | $ | 187,263 | 51.5 | % | ||||||||||||
| Gross profit: |
||||||||||||||||||||||||
| Consumer Floral & Gifts |
$ | 65,586 | $ | 65,586 | $ | 36,050 | 81.9 | % | ||||||||||||||||
| 40.6 | % | 40.6 | % | 39.7 | % | |||||||||||||||||||
| BloomNet |
14,838 | 14,838 | 12,958 | 14.5 | % | |||||||||||||||||||
| 45.3 | % | 45.3 | % | 50.9 | % | |||||||||||||||||||
| Gourmet Foods & Gift Baskets |
35,007 | 35,007 | 27,042 | 29.5 | % | |||||||||||||||||||
| 38.9 | % | 38.9 | % | 38.0 | % | |||||||||||||||||||
| Corporate |
49 | 49 | 96 | -49.0 | % | |||||||||||||||||||
| 46.2 | % | 46.2 | % | 49.2 | % | |||||||||||||||||||
| Total gross profit |
$ | 115,480 | $ | - | $ | - | $ | 115,480 | $ | 76,146 | 51.7 | % | ||||||||||||
| 40.7 | % | - | - | 40.7 | % | 40.7 | % | |||||||||||||||||
| EBITDA (non-GAAP): |
||||||||||||||||||||||||
| Segment Contribution Margin (non-GAAP) (a): |
||||||||||||||||||||||||
| Consumer Floral & Gifts |
$ | 19,236 | $ | 19,236 | $ | 8,524 | 125.7 | % | ||||||||||||||||
| BloomNet |
10,421 | 10,421 | 8,357 | 24.7 | % | |||||||||||||||||||
| Gourmet Foods & Gift Baskets |
(2,581 | ) | (405 | ) | (2,986 | ) | (6,600 | ) | 54.8 | % | ||||||||||||||
| Segment Contribution Margin Subtotal |
27,076 | - | (405 | ) | 26,671 | 10,281 | 159.4 | % | ||||||||||||||||
| Corporate (b) |
(31,697 | ) | 4,890 | (26,807 | ) | (23,299 | ) | -15.1 | % | |||||||||||||||
| EBITDA (non-GAAP) |
(4,621 | ) | 4,890 | (405 | ) | (136 | ) | $ | (13,018 | ) | 99.0 | % | ||||||||||||
| Add: Stock-based compensation |
2,393 | 2,393 | 1,765 | 35.6 | % | |||||||||||||||||||
| Add: Compensation charge related to NQDC Plan Investment Appreciation |
980 | 980 | (44 | ) | 2327.3 | % | ||||||||||||||||||
| Adjusted EBITDA (non-GAAP) |
$ | (1,248 | ) | $ | 4,890 | $ | (405 | ) | $ | 3,237 | $ | (11,297 | ) | 128.7 | % | |||||||||
| Reconciliation of net loss to adjusted net loss (non-GAAP): |
Three Months Ended |
|||||||
| September 27, 2020 |
September 29, 2019 |
|||||||
| (in thousands, except per share data) | ||||||||
| Net loss |
$ | (9,762 | ) | $ | (15,271 | ) | ||
| Adjustments to reconcile net loss to adjusted net loss (non-GAAP) |
||||||||
| Add: Personalization Mall litigation and transaction costs |
4,890 | |||||||
| Deduct: Harry & David store closure cost adjustment |
(405 | ) | ||||||
| Deduct: Income tax (benefit) on adjustments |
(1,242 | ) | ||||||
| Adjusted net loss (non-GAAP) |
$ | (6,519 | ) | $ | (15,271 | ) | ||
| Basic and diluted net loss per common share |
||||||||
| Basic |
$ | (0.15 | ) | $ | (0.24 | ) | ||
| Diluted |
$ | (0.15 | ) | $ | (0.24 | ) | ||
| Basic and diluted adjusted net loss per common share (non-GAAP) |
||||||||
| Basic |
$ | (0.10 | ) | $ | (0.24 | ) | ||
| Diluted |
$ | (0.10 | ) | $ | (0.24 | ) | ||
| Weighted average shares used in the calculation of net loss and adjusted net loss per common share |
||||||||
| Basic |
64,320 | 64,503 | ||||||
| Diluted |
64,320 | 64,503 | ||||||
| Reconciliation of net loss to adjusted EBITDA (non-GAAP): |
Three Months Ended |
|||||||
| September 27, 2020 |
September 29, 2019 |
|||||||
| (in thousands) | ||||||||
| Net loss |
$ | (9,762 | ) | $ | (15,271 | ) | ||
| Add: |
||||||||
| Interest expense, net |
41 | 679 | ||||||
| Depreciation and amortization |
8,840 | 7,635 | ||||||
| Less: |
||||||||
| Income tax benefit |
3,740 | 6,061 | ||||||
| EBITDA |
(4,621 | ) | (13,018 | ) | ||||
| Add: Stock-based compensation |
2,393 | 1,765 | ||||||
| Add: Compensation charge related to NQDC plan investment appreciation/(depreciation) |
980 | (44 | ) | |||||
| Add: Personalization Mall litigation and transaction costs |
4,890 | |||||||
| Deduct: Harry & David store closure cost adjustment |
(405 | ) | ||||||
| Adjusted EBITDA |
$ | 3,237 | $ | (11,297 | ) | |||
| (a) Segment performance is measured based on segment contribution margin or segment Adjusted EBITDA, reflecting only the direct controllable revenue and operating expenses of the segments, both of which are non-GAAP measurements. As such, management’s measure of profitability for these segments does not include the effect of corporate overhead, described above, depreciation and amortization, other income (net), and other items that we do not consider indicative of our core operating performance. |
||||||||
| (b) Corporate expenses consist of the Company’s enterprise shared service cost centers, and include, among other items, Information Technology, Human Resources, Accounting and Finance, Legal, Executive and Customer Service Center functions, as well as Stock-Based Compensation. In order to leverage the Company’s infrastructure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions, other than those of the Customer Service Center, which are allocated directly to the above categories based upon usage, are included within corporate expenses as they are not directly allocable to a specific segment. |
||||||||
Net revenues
| Three Months Ended |
||||||||||||
| September 27, 2020 |
September 29, 2019 |
% Change |
||||||||||
| (dollars in thousands) |
||||||||||||
| Net revenues: | ||||||||||||
| E-Commerce |
$ | 238,863 | $ | 129,050 | 85.1 | % |
||||||
| Other |
44,909 | 58,213 | -22.9 | % |
||||||||
| Total net revenues |
$ | 283,772 | $ | 187,263 | 51.5 | % |
||||||
Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits.
Net revenues increased 51.5% during the three months ended September 27, 2020, respectively, compared to the same period of the prior year, due to higher revenues across our three segments (+40.6% vs prior year on a pro-forma basis, excluding the impact of PersonalizationMall, acquired on August 3, 2020, which is included in our Consumer Floral & Gifts segment, and contributed incremental revenue of $20.4 million during the quarter), as the Company was able to leverage its unique business platform, advanced technology stack, and manufacturing, distribution and logistics capabilities, reflecting the strategic marketing and merchandising investments that the Company has made across its brands. The positive trends we have been seeing in everyday gifting occasions during non-holiday periods, accelerated by the growth of e-commerce shopping during the pandemic, has resulted in significant increases in customer demand and customer file growth.
Disaggregated revenue by channel follows:
| Three Months Ended |
Three Months Ended |
|||||||||||||||||||||||||||||||
| September 27, 2020 |
September 29, 2019 |
|||||||||||||||||||||||||||||||
| Consumer Floral & Gifts |
BloomNet |
Gourmet Foods & Gift Baskets |
Consolidated |
Consumer Floral & Gifts |
BloomNet |
Gourmet Foods & Gift Baskets |
Consolidated |
|||||||||||||||||||||||||
| (in thousands) |
||||||||||||||||||||||||||||||||
| Net revenues |
||||||||||||||||||||||||||||||||
| E-Commerce | $ | 159,792 | $ | - | $ | 79,071 | $ | 238,863 | $ | 89,088 | $ | - | $ | 39,962 | $ | 129,050 | ||||||||||||||||
| Retail |
946 | - | 1,573 | 2,519 | 939 | - | 7,490 | 8,429 | ||||||||||||||||||||||||
| Wholesale |
- | 11,292 | 9,285 | 20,577 | - | 8,748 | 23,763 | 32,511 | ||||||||||||||||||||||||
| BloomNet services |
- | 21,446 | - | 21,446 | - | 16,692 | - | 16,692 | ||||||||||||||||||||||||
| Other |
808 | - | - | 808 | 741 | - | - | 741 | ||||||||||||||||||||||||
| Corporate |
- | - | - | 106 | - | - | - | 195 | ||||||||||||||||||||||||
| Eliminations |
- | - | - | (547 | ) |
- | - | - | (355 | ) |
||||||||||||||||||||||
| Net revenues |
$ | 161,546 | $ | 32,738 | $ | 89,929 | $ | 283,772 | $ | 90,768 | $ | 25,440 | $ | 71,215 | $ | 187,263 | ||||||||||||||||
Revenue by sales channel:
E-commerce revenues (combined online and telephonic) increased by 85.1% during the three months ended September 27, 2020, compared to the same period of the prior year, as a result of growth within the Gourmet Foods & Gift Baskets segment of 97.9%, and growth within the Consumer Floral & Gifts segment of 79.4% (which includes incremental PersonalizationMall revenue of $20.4 million since the acquisition date of August 3, 2020). During the three months ended September 27, 2020, the Company fulfilled approximately 3.0 million orders through its e-commerce sales channels (online and telephonic sales), an increase of 67.0% compared to the same period of the prior year, while average order value increased 1.4% to $72.19.
Other revenues are comprised of the Company’s BloomNet segment, as well as the wholesale and retail channels of its Consumer Floral & Gifts and Gourmet Foods & Gift Baskets segments. Other revenues decreased by 22.9% during the three months ended September 27, 2020, compared to the same period of the prior year, due to a decline within the Gourmet Foods & Gift Baskets segment of 65.3%, primarily due to a decline in wholesale volume as big-box retail store customers have reduced order volumes due to the pandemic, and the closure of the Harry and David retail store operations in the fourth quarter of fiscal 2020, partially offset by an increase in BloomNet Wire Service segment revenues of 28.7%.
Revenue by segment:
Consumer Floral & Gifts – this segment, which historically has consisted primarily of the operations of the 1-800-Flowers.com brand, but now includes revenues attributable to PersonalizationMall subsequent to its August 3, 2020 acquisition date, derives revenue from the sale of consumer floral products and gifts through its e-commerce sales channels (telephonic and online sales), retail stores, and royalties from its franchise operations. Net revenues increased 78.0% during the three months ended September 27, 2020, compared to the same period of the prior year, reflecting: (i) the marketing and merchandising investments made in our flagship brand, which have driven our growth and market share gains over the past two years, and have positioned the brand to leverage its operating platform and capture the revenue driven by the accelerated growth of e-commerce shopping during the pandemic, as well as (ii) the incremental revenues of PersonalizationMall. Excluding the revenues derived from PersonalizationMall, segment pro-forma revenue growth was 55.5%.
BloomNet - revenues in this segment are derived from membership fees, as well as other product and service offerings to florists. Net revenues increased 28.7% during the three months ended September 27, 2020, compared to the same period of the prior year, primarily due to increased: (i) settlement processing revenues, due to the higher florist-to-florist order volume, (ii) transaction, reciprocity and membership fees, driven primarily by increased order volume sent through the network, and (iii) favorable wholesale demand throughout the quarter.
Gourmet Foods & Gift Baskets – this segment includes the operations of Harry & David, Wolferman’s, Stock Yards, Cheryl’s Cookies, The Popcorn Factory, 1-800-Baskets/DesignPac, and Shari’s Berries (acquired on August 14, 2019). Revenue is derived from the sale of gourmet fruits, cookies, baked gifts, premium chocolates and confections, gourmet popcorn, gift baskets, dipped berries, and prime steaks and chops through the Company’s e-commerce sales channels (telephonic and online sales) and company-owned and operated retail stores under the Harry & David and Cheryl’s brand names, as well as wholesale operations. Net revenues increased 26.3% during the three months ended September 27, 2020, compared to the same period of the prior year, primarily due to favorable e-commerce revenues across the segment, partially offset by reduced wholesale and retail volumes. The e-commerce demand growth is the result of increased penetration of “everyday” volume within the segment, accelerated by the impacts of the COVID-19 pandemic as product offerings, convenience, and brand sentiment resonated with customers. Wholesale volume within the segment declined in comparison to prior year as big-box retail store customers have reduced orders due to uncertainty surrounding holiday foot-traffic in brick and mortar locations as a result of the pandemic, while retail volume is down primarily as a result of the closure of the Harry and David retail store operations in the fourth quarter of fiscal 2020.
Gross profit
| Three Months Ended |
||||||||||||
| September 27, 2020 |
September 29, 2019 |
% Change |
||||||||||
| (dollars in thousands) |
||||||||||||
| Gross profit |
$ | 115,480 | $ | 76,146 | 51.7 | % |
||||||
| Gross profit % |
40.7 | % |
40.7 | % |
||||||||
Gross profit consists of net revenues less cost of revenues, which is comprised primarily of florist fulfillment costs (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 includes labor and facility costs related to direct-to-consumer and wholesale production operations, as well as payments made to sending florists related to order volume sent through the Company’s BloomNet network.
Gross profit increased 51.7% during the three months ended September 27, 2020, compared to the same period of the prior year, as a result of the increase in revenues noted above. Gross profit percentage was consistent during the respective three months ended September 27, 2020, compared to the same period of the prior year, as higher margins in the Consumer Floral & Gifts (due to the acquisition of PersonalizationMall, which carries higher margins) and Gourmet Foods & Gift Basket segments were offset by lower margins in the BloomNet segment.
Consumer Floral & Gifts segment - Gross profit increased by 81.9% during the three months ended September 27, 2020, compared to the same period of the prior year, as a result of the revenue increase noted above and the increase in gross margin percentage, of 90 basis points to 40.6%, due to the acquisition of PersonalizationMall which carries higher margins, partially offset by lower margins on florist fulfilled products due to higher florist fulfillment costs.
BloomNet segment - Gross profit increased by 14.5% during the three months ended September 27, 2020, compared to the same period of the prior year, due to the increase in revenue noted above, partially offset by a decline in gross margin percentage of 560 basis points to 45.3%, due to higher rebates (higher florist-to-florist volume) and unfavorable wholesale product margins due to the impact of tariffs, and higher shipping and merchandise costs.
Gourmet Foods & Gift Baskets segment - Gross profit increased by 29.5% during the three months ended September 27, 2020, compared to the same period of the prior year, due to the revenue increase noted above, as well as an increase in gross profit percentage of 90 basis points to 38.9%, primarily as a result of lower promotions, favorable channel mix and overhead overhead absorption, partially offset by increased transportation costs.
Marketing and sales expense
| Three Months Ended |
||||||||||||
| September 27, 2020 |
September 29, 2019 |
% Change |
||||||||||
| (dollars in thousands) |
||||||||||||
| Marketing and sales |
$ | 80,285 | $ | 56,839 | 41.2 | % |
||||||
| Percentage of net revenues |
28.3 | % |
30.4 | % |
||||||||
Marketing and sales expense consists primarily of advertising and promotional expenditures, catalog costs, online portal and search costs, retail store and fulfillment operations (other than costs included in cost of revenues) and customer service center expenses, as well as the operating expenses of the Company’s departments engaged in marketing, selling and merchandising activities.
Marketing and sales expense increased 41.2% during the three months ended September 27, 2020, compared to the same period of the prior year, primarily due to increased advertising spend within the Consumer Floral & Gifts and Gourmet Foods & Gift Baskets segments, due to the Company’s incremental marketing efforts designed to accelerate revenue growth and capture market share, partially offset by operational efficiencies and platform leverage attributable to the revenue growth. The investment spend was successful in driving significant enterprise growth, while improving overall operating expense leverage and reducing enterprise reliance on promotional pricing, thereby further reinforcing the premium positioning of the Company’s portfolio of brands. As a result, marketing and sales as a percentage of net revenues were 28.3%, favorable to prior year of 30.4%.
Technology and development expense
| Three Months Ended |
||||||||||||
| September 27, 2020 |
September 29, 2019 |
% Change |
||||||||||
| (dollars in thousands) |
||||||||||||
| Technology and development |
$ | 11,603 | $ | 10,803 | 7.4 | % |
||||||
| Percentage of net revenues |
4.1 | % |
5.8 | % |
||||||||
Technology and development expense consists primarily of payroll and operating expenses of the Company’s information technology group, costs associated with its websites, including hosting, design, content development and maintenance and support costs related to the Company’s order entry, customer service, fulfillment and database systems.
Technology and development expenses increased 7.4% during the three months ended September 27, 2020, compared to the same periods of the prior year, primarily due to increased labor costs, including the incremental labor associated with PersonalizationMall, increased hosting costs due to higher usage of cloud storage applications, and higher maintenance and license costs, including security and platform enhancements.
General and administrative expense
| Three Months Ended |
||||||||||||
| September 27, 2020 |
September 29, 2019 |
% Change |
||||||||||
| (dollars in thousands) |
||||||||||||
| General and administrative |
$ | 28,213 | $ | 21,522 | 31.1 | % |
||||||
| Percentage of net revenues |
9.9 | % |
11.5 | % |
||||||||
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 31.1% during the three months ended September 27, 2020, compared to the same period of the prior year, primarily due to PersonalizationMall transaction and litigation costs of $4.9 million, as well as higher labor costs, due to PersonalizationMall and investment earnings on the Company’s Non-Qualified Deferred Compensation Plan assets (offset within Other (income) expenses noted below), and COVID-19 related expenses.
Depreciation and amortization expense
| Three Months Ended |
||||||||||||
| September 27, 2020 |
September 29, 2019 |
% Change |
||||||||||
| (dollars in thousands) |
||||||||||||
| Depreciation and amortization |
$ | 8,840 | $ | 7,635 | 15.8 | % |
||||||
| Percentage of net revenues |
3.1 | % |
4.1 | % |
||||||||
Depreciation and amortization expense during the three months ended September 27, 2020 increased 15.8%, compared to the same period of the prior year due to the incremental depreciation and customer list amortization associated with PersonalizationMall.
Interest (income) expense, net
| Three Months Ended |
||||||||||||
| September 27, 2020 |
September 29, 2019 |
% Change |
||||||||||
| (dollars in thousands) |
||||||||||||
| Interest expense, net |
$ | 1,040 | $ | 595 | 74.8 | % |
||||||
Interest expense, net consists primarily of interest expense and amortization of deferred financing costs attributable to the Company’s credit facility (See Note 8 - Debt, in Item 1. for details), net of income earned on the Company’s available cash balances.
Interest expense, net increased 74.8% during the three months ended September 27, 2020, compared to the same period of the prior year, as a result of lower interest income on the Company’s outstanding cash balances due to lower interest rates. Interest expense was consistent with the prior year, as the impact of lower interest rates on existing debt was offset by the incremental interest expense associated with the New Term Loan, which was used to partially finance the acquisition of PersonalizationMall.
Other (income) expense, net
| Three Months Ended |
||||||||||||
| September 27, 2020 |
September 29, 2019 |
% Change |
||||||||||
| (dollars in thousands) | ||||||||||||
| Other income (expense), net |
$ | 999 | $ | (84 | ) |
1289.3 | % |
|||||
Other expense, net for the three months ended September 27, 2020 consists primarily of investment gain on the Company’s Non-Qualified Deferred Compensation Plan assets.
Income Taxes
The Company recorded income tax benefits of $3.7 million and $6.1 million during the three months ended September 27, 2020, and September 29, 2019, respectively. The Company’s effective tax rate for the three months ended September 27, 2020 was 27.7% compared to 28.4% in the same period of the prior year. The effective rate for the three months ended September 27, 2020 differed from the U.S. federal statutory rate of 21% due to state income taxes and nondeductible expenses for executive compensation and transaction costs, which were partially offset by various permanent differences and tax credits, including excess tax benefits from stock-based compensation. The effective rate for the three months ended September 29, 2019 differed from the U.S. federal statutory rate of 21%, primarily due to state income taxes and nondeductible expenses for executive compensation, which were partially offset by various permanent differences and tax credits, including excess tax benefits from stock-based compensation. At September 27, 2020, the Company has an unrecognized tax benefit, including interest and penalties, of approximately $1.3 million. The Company believes that $1.0 million of unrecognized tax positions will be resolved over the next twelve months.
Liquidity and Capital Resources
Liquidity and borrowings
The Company's principal sources of liquidity are cash on hand, cash flows generated from operations and borrowings available under the 2020 Credit Agreement (see Note 8 - Debt in Item 1 for details). At September 27, 2020, the Company had working capital of $41.5 million, including cash and cash equivalents of $11.0 million, compared to working capital of $198.3 million, including cash and cash equivalents of $240.5 million, at June 28, 2020.
Due to the seasonal nature of the Company’s business, and its continued expansion into non-floral products, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, historically generated nearly 50% of the Company’s annual revenues, and all of its earnings. However, with the onset of the COVID-19 pandemic, the Company experienced a significant increase in its revenues and earnings during its fourth quarter of fiscal 2020, and these trends have continued through the Company’s fiscal 2021 first quarter. Our customers have increasingly turned to our brands and our expanded product offerings to help them connect and express themselves during the recent COVID-19 pandemic and our “everyday” gifting product line has seen increased volume. While the continuing impacts of COVID-19 are difficult to predict, the Company expects that its fiscal second quarter will continue to be its largest in terms of revenues and earnings, although increases in the Company’s “everyday” business have and are expected to continue to lessen the seasonality of our business. During the first quarter of fiscal 2021, the Company borrowed $25.0 million under its revolving credit agreement in order to fund pre-holiday manufacturing and inventory procurement requirements. Working capital borrowings typically peak in November, after which time cash generated from operations during the Christmas holiday shopping season are expected to enable the Company to repay such borrowings.
While we believe that our sources of funding will be sufficient to meet our anticipated operating cash needs for at least the next twelve months, any projections of future cash needs and cash flows are subject to substantial uncertainty. We continually evaluate, and will, from time to time, consider the acquisition of, or investment in, complementary businesses, products, services, capital infrastructure, and technologies, which might affect our liquidity requirements or cause us to require additional financing.
To date, we have not identified any material liquidity deficiencies as a result of the COVID-19 pandemic. Based on the information currently available to us, we do not expect the impact of COVID-19 to have a negative impact on our liquidity. We will continue to monitor and assess the impact COVID-19 may have on our business and financial results. See Part II. Item 1A. “Risk Factors” and Part I. Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further information.
Cash Flows
Net cash used in operating activities of $90.7 million, for the three months ended September 27, 2020, was primarily attributable to the Company’s net loss during the period, combined with seasonal changes in working capital, including increases in inventory, trade receivables and prepaid and other, partially offset by non-cash charges for depreciation and amortization and stock-based compensation.
Net cash used in investing activities of $258.2 million, for the three months ended September 27, 2020, was primarily attributable to the acquisition of PersonalizationMall for $250.9 million, capital expenditures of $7.0 million related to the Company's technology initiatives, as well as manufacturing production and warehousing equipment.
Net cash provided by financing activities of $119.4 million, for the three months ended September 27, 2020, was from proceeds of bank borrowings of $220.0 million, including the Company’s New Term Loan in the amount of $100.0 million, which was used to repay borrowing then outstanding under the Company’s Revolver in the amount of $97.5 million.
Stock Repurchase Program
See Item 2 in Part II below for details.
Contractual Obligations
At September 27, 2020, the Company’s contractual obligations consist of:
| ● |
Long-term debt obligations - payments due under the Company's 2020 Credit Agreement (see Note 8 - Debt in Item 1 for details). |
| ● |
Operating lease obligations – payments due under the Company’s long-term operating leases (see Note 13 - Leases in Item 1 for details). |
| ● |
Purchase commitments - consisting primarily of inventory and IT related equipment purchase orders and license agreements made in the ordinary course of business – see below for the contractual payments due by period. |
| Payments due by period |
||||||||||||||||||||||||||||
| (in thousands) |
||||||||||||||||||||||||||||
| Remaining Fiscal 2021 |
Fiscal 2022 |
Fiscal 2023 |
Fiscal 2024 |
Fiscal 2025 |
Thereafter |
Total |
||||||||||||||||||||||
| Purchase commitments |
$ | 90,897 | $ | 4,104 | $ | 3,595 | $ | 1,170 | $ | - | $ | - | $ | 99,766 | ||||||||||||||
Critical Accounting Policies and Estimates
As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 28, 2020, the discussion and analysis of the Company’s financial condition and results of operations are based upon the consolidated financial statements of 1-800-FLOWERS.COM, Inc., which have been prepared in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Management bases its estimates and assumptions on historical experience and on various other factors that are believed to be reasonable under the circumstances, and management evaluates its estimates and assumptions on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. The Company’s most critical accounting policies relate to goodwill, other intangible assets and income taxes. There have been no significant changes to the assumptions and estimates related to the Company’s critical accounting policies, since June 28, 2020.
Recently Issued Accounting Pronouncements
See Note 1 - Accounting Policies in Item 1 for details regarding the impact of accounting standards that were recently issued on our consolidated financial statements.
Forward Looking Information and Factors that May Affect Future Results
Our disclosure and analysis in this report contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent the Company’s current expectations or beliefs concerning future events and can generally be identified by the use of statements that include words such as “estimate,” “project,” “believe,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will,” “goal,” “target” or similar words or phrases. These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of the Company’s control that could cause actual results to differ materially from the results expressed or implied in the forward-looking statements, including:
| ● |
the Company’s ability: |
|
|
o to achieve revenue and profitability; |
|
|
o to leverage its operating platform and reduce operating expenses; |
|
|
o to manage the increased seasonality of its business; |
|
|
o to cost effectively acquire and retain customers; |
|
|
o to effectively integrate and grow acquired companies; |
|
|
o to reduce working capital requirements and capital expenditures; |
|
|
o to compete against existing and new competitors; |
|
|
o to manage expenses associated with sales and marketing and necessary general and administrative and technology investments; and |
|
|
o to cost effectively manage inventories; |
| ● |
the outcome of contingencies, including legal proceedings in the normal course of business |
| ● |
general consumer sentiment and economic conditions that may affect levels of discretionary customer purchases of the Company’s products; and |
| ● |
the impact of COVID-19 on our business and financial statements. |
We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risks, uncertainties and inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could vary materially from past results and those anticipated, estimated or projected. Investors should bear this in mind as they consider forward-looking statements.
We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-Q, 8-K and 10-K reports to the Securities and Exchange Commission. Our Annual Report on Form 10-K filing for the fiscal year ended June 28, 2020 listed various important factors that could cause actual results to differ materially from expected and historic results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995. Readers can find them in Part I, Item 1A, of that filing under the heading “Cautionary Statements Under the Private Securities Litigation Reform Act of 1995”. We incorporate that section of that Form 10-K in this filing and investors should refer to it. In addition, please refer to additional risk factors in Part II, Item 1A in this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from the effect of interest rate changes.
Interest Rate Risk
The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment of available cash balances and its long-term debt. The Company generally invests its cash and cash equivalents in investment grade corporate and U.S. government securities. Due to the currently low rates of return the Company is receiving on its cash equivalents, the potential for a significant decrease in short-term interest rates is low and, therefore, a further decrease would not have a material impact on the Company’s interest income. Borrowings under the Company’s 2020 Credit Agreement bear interest at a variable rate, plus an applicable margin, and therefore expose the Company to market risk for changes in interest rates. The effect of a 50 basis point increase in current interest rates on the Company’s interest expense would be approximately $0.1 million during the three months ended September 27, 2020.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of September 27, 2020. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 27, 2020.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the Company’s evaluation required by Rules 13a-15(d) or 15d-15(d) of the Securities Exchange Act of 1934 during the quarter ended September 27, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. To the extent our normal procedures and controls related to our financial close or other reporting processes were adversely impacted by the COVID-19 outbreak, we took appropriate actions and safeguards to reasonably ensure the fair presentation of the financial statements in accordance with GAAP.
Litigation
Bed Bath & Beyond:
On April 1, 2020, the Seller commenced an action against the Company in the Court of Chancery for the State of Delaware, which is captioned Bed Bath & Beyond Inc. v. 1-800-Flowers.com, et ano., C.A. (the “Complaint”), alleging a breach of the Equity Purchase Agreement (the “Agreement”), dated February 14, 2020, between Seller, PersonalizationMall, the Company and the Purchaser, pursuant to which the Seller agreed to sell to Purchaser, and the Purchaser agreed to purchase from Seller, all of the issued and outstanding membership interests of PersonalizationMall. The action was initiated after the Company requested a reasonable delay in the closing under the Purchase Agreement due to the unprecedented circumstances created by COVID-19. The Complaint requested an order of specific performance to consummate the transaction under the Purchase Agreement plus attorney’s fees and costs in connection with the action. The Company filed its answer to the Complaint on April 17, 2020 and an order governing expedited proceedings was approved on April 9, 2020 that set a trial date for late September 2020. On July 21, 2020, the Company and Seller entered into a settlement agreement, pursuant to which the Company agreed to move forward with its purchase of PersonalizationMall for $245.0 million, subject to certain working capital and other adjustments. The transaction closed on August 3, 2020. In connection with the settlement agreement, the parties executed a Stipulation and Proposed Order of Dismissal, resulting in the voluntary dismissal with prejudice of the litigation relating to the transaction.
In addition, there are various claims, lawsuits, and pending actions against the Company and its subsidiaries incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the final resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity.
There were no material changes to the Company’s risk factors as discussed in Part 1, Item 1A-Risk Factors in the Company’s Annual Report on Form 10-K for the year ended June 28, 2020.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company has a stock repurchase plan through which purchases can be made from time to time in the open market and through privately negotiated transactions, subject to general market conditions. The repurchase program is financed utilizing available cash. On June 27, 2019, the Company’s Board of Directors authorized an increase to its stock repurchase plan of up to $30.0 million. As of September 27, 2020, $18.2 million remained authorized under the plan.
The following table sets forth, for the months indicated, the Company’s purchase of common stock during the first three months of fiscal 2021, which includes the period July 1, 2020 through September 27, 2020:
| Period |
Total Number of Shares Purchased |
Average Price Paid Per Share (1) |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs |
||||||||||||
| (in thousands, except average price paid per share) |
||||||||||||||||
| 06/29/20 - 07/26/20 |
- | $ | - | - | $ | 19,320 | ||||||||||
| 07/27/20 - 08/23/20 |
- | $ | - | - | $ | 19,320 | ||||||||||
| 08/24/20 - 09/27/20 |
36,355 | $ | 29.94 | 36,355 | $ | 18,231 | ||||||||||
| Total |
36,355 | $ | 29.94 | 36,355 | ||||||||||||
(1) Average price per share excludes commissions and other transaction fees.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None.
| 31.1 |
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| 31.2 |
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| 32.1 |
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| 101.INS |
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Inline XBRL Instance Document |
| 101.SCH |
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Inline XBRL Taxonomy Extension Schema Document |
| 101.CAL |
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Inline XBRL Taxonomy Calculation Linkbase Document |
| 101.DEF |
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Inline XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB |
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Inline XBRL Taxonomy Extension Label Document |
| 101.PRE |
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Inline XBRL Taxonomy Definition Presentation Document |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
* Filed herewith.
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.
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1-800-FLOWERS.COM, Inc. (Registrant) |
| Date: November 6, 2020 |
/s/ Christopher G. McCann Christopher G. McCann |
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| Date: November 6, 2020 |
/s/ William E. Shea |
Exhibit 31.1
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(RULE 13a-14 (a))
I, Christopher G. McCann, certify that:
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(1) |
I have reviewed this quarterly report on Form 10-Q of 1-800-FLOWERS.COM, Inc.; |
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(2) |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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(3) |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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(4) |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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(5) |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: November 6, 2020 |
/s/ Christopher G. McCann |
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Christopher G. McCann |
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Chief Executive Officer, |
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Director and President |
Exhibit 31.2
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
(RULE 13a-14(a))
I, William E. Shea, certify that:
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(1) |
I have reviewed this quarterly report on Form 10-Q of 1-800-FLOWERS.COM, Inc.; |
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(2) |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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(3) |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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(4) |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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(a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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(b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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(c) |
evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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(d) |
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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(5) |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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(a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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(b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
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Date: November 6, 2020 |
/s/ William E. Shea |
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William E. Shea |
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Senior Vice President, Treasurer and |
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Chief Financial Officer |
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Exhibit 32.1
CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of 1-800-FLOWERS.COM, Inc. (the “Company”) hereby certifies, to the best of such officer's knowledge, that:
(1) the Quarterly Report on Form 10-Q of the Company for the quarter ended September 27, 2020, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of 1934; as amended; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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Dated: November 6, 2020 |
/s/ Christopher G. McCann |
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Christopher G. McCann Chief Executive Officer, Director and President |
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Dated: November 6, 2020 |
/s/ William E. Shea |
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William E. Shea Senior Vice President, Treasurer and Chief Financial Officer |
These certifications are furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by such Act, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Such certifications will not be deemed to be incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that the Company specifically incorporates them by reference.