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 27, 2021. 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 27, 2021under the heading "Risk Factors" and Part II-Other Information, Item 1A in this Form 10-Q. Business 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®, Vital Choice®, Stock Yards® and Simply Chocolate®. 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 and gift industry service provider offering a broad-range of products and services designed to help members grow their businesses profitably; Napco?, a resource for floral gifts and seasonal décor; and DesignPac Gifts, LLC, a manufacturer of gift baskets and towers.
For more 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 27, 2021.
Acquisition of PersonalizationMall
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 millionpurchase (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 millionduring its fiscal year ended February 29, 2020 - see Note 4 - Acquisitions in Item 1. Acquisition of Vital Choice On October 27, 2021, the Company completed its acquisition of Vital Choice Seafood LLC("Vital Choice"), a provider of wild-caught seafood and sustainably farmed shellfish, pastured proteins, organic foods, and marine-sourced nutritional supplements. The Company utilized its existing credit facility to fund the $20.0 millionpurchase (subject to certain working capital and other adjustments), which included tradenames, customer lists, websites and operations. Vital Choice revenues were approximately $27.8 millionduring its most recent year ended December 31, 2020 - see Note 4 - Acquisitions in Item 1. 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 millionto $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 millionto $200.0 million, and (iv) increase the seasonally-reduced Revolver commitments from $100.0 millionto $125.0 millionfor the period from January 1 through August 1for each fiscal year of the Company. The $100.0 millionproceeds of the New Term Loan were used to repay the $95.0 millionborrowing that had been drawn on its existing Revolver to finance the acquisition, as well as financing fees of approximately $2.0 millionOn November 8, 2021, the Company, entered into a Second Amendment to the Company's existing credit agreement, to, among other modifications, decrease the interest margins and LIBOR floor applicable to the existing tranche of term A-1 loans (See Note 8 - Debt, in Item 1. for details). 20
Table of Contents 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 are governed by our "Pandemic Preparedness and Response Plan," which established an internal "nerve center" to assist efforts surrounding: communication and coordination throughout the business, workforce protection and supply chain management, and support for the Company's customers, vendors, franchisees, and our
BloomNetmember florists. The COVID-19 pandemic, and its related impacts, 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. With that said, we have experienced significant headwinds that have, and will continue to impact our operations during the foreseeable future, including:
? Rising labor costs – in addition to significant increases in wage rates
necessary to attract workers in a highly competitive environment, which has
exacerbated by the shrinking labor pool available, we are seeing
increased costs associated with the changes we have made, and continue to
do, at our manufacturing, warehousing and distribution facilities to provide
for the safety and well-being of our associates, including:
distancing, free COVID-19 testing, enhanced cleaning and disinfection of facilities
schedules, staggered production shifts and enhanced sickness benefits.
? Supply chain constraints – the national increase in e-commerce volume has
resulted in third-party carrier capacity constraints and higher delivery
costs, while shortages of shipping capacity have resulted in significant
cost increases, on both direct ocean container charges, as well as port storage and related charges and inbound trucking fees. The scale and overall economic impact of the COVID-19 crisis continues to evolve and it is difficult to assess its effects both on customer behavior and input costs. While both consumer confidence and spending are expected to continue to face headwinds from inflation and potential winter surges of the pandemic, demand has remained relatively strong. Our 7.5% and 7.9% revenue growth for the three and six months ended
December 26, 2021, was on top of the 44.8% and 46.4% growth that we achieved in the same periods of the prior year when ecommerce demand spiked during the early stages of the pandemic. From a cost perspective, anticipated headwinds from widely reported ocean container pricing, storage and demurrage fees, as well as inbound and outbound transportation charges, combined with labor shortages and rate increases, significantly exceeded expectations during the quarter. Additionally, marketing rates escalated beyond the more normalized rates we saw in the year ago holiday quarter. These inflationary headwinds ultimately offset both contributions from our revenue growth, and initiatives to offset these headwinds, which included strategic pricing increases, pre-building of inventory, and deploying warehouse and distribution facility automation, negatively impacting our gross margins and bottom-line results. Company Guidance
The Company is updating its guidance for fiscal 2022, reflecting results reported for the first half of the year, as well as its outlook for the remainder of the year. The updated guidelines include:
? Growth in total revenue of 7.0% to 9.0%, compared to the previous year
year; ? Adjusted EBITDA in a range of
$140.0 million-to- $150.0 million; ? EPS in a range of $0.90-to- $1.00per diluted share, and; ? The Company anticipates that Free Cash Flow for the year will be down
significantly compared to the previous year based on its updated forecasts and
its intention to use its strong balance sheet to continue investing in stocks
to support his growth plans and weather the headwinds he sees in the macro
The Company’s guidance for the year is based on several factors, including:
? continued headwinds associated with the ongoing pandemic, rising costs
for labor, inbound and outbound shipping, and marketing, and for consumers
concerns about rising price inflation are somewhat offset by;
? the Company’s ability to continue to attract new customers and add new members
to its Celebrations Passport® loyalty program, which contributes to
increased frequency, retention and cross-category/cross-brand purchases.
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 Commissionrules. See below for definitions and the reasons why we use these non-GAAP financial measures. Where applicable, see the Segment Information and Results of Operations sections below for reconciliations of these non-GAAP measures to their most directly comparable GAAP financial measures. We do not provide a reconciliation of adjusted EBITDA guidance to net income guidance or a reconciliation of free cash flow guidance to net cash provided by operating activities because doing so would require unreasonable efforts at this time, because of the uncertainty and variability of the nature and amount of certain components of various necessary GAAP components, including for example those related to compensation, tax items, amortization or others that may arise during the year, and the Company's management believes such reconciliations would imply a degree of precision that would be confusing or misleading to investors. 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 earnings (loss) and adjusted or comparable net earnings 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. 22
We believe that adjusted net earnings (loss) and adjusted or comparable net earnings (loss) per common share are meaningful measures because they increase comparability results from period to period.
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. Free Cash Flow We define free cash flow as net cash provided by operating activities, less capital expenditures. The Company considers free cash flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by the business after the purchases of fixed assets, which can then be used to, among other things, invest in the Company's business, make strategic acquisitions, strengthen the balance sheet, and repurchase stock or retire debt. Free cash flow is a liquidity measure that is frequently used by the investment community in the evaluation of similarly situated companies. Since free cash flow is not a measure of performance calculated in accordance with GAAP, it should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP. A limitation of the utility of free cash flow as a measure of financial performance is that it does not represent the total increase or decrease in the company's cash balance for the period. 23
Table of Contents Segment Information
The following table presents net revenues, gross profit and segment contribution margin for each of the Company’s business segments, as well as consolidated EBITDA and adjusted EBITDA.
Three Months Ended As Adjusted As Adjusted (non-GAAP) PersonalizationMall Harry & (non-GAAP) December 26, December 26, December Litigation & David
2021 Transaction Costs
2021 27, 2020 Transaction costs Closure costs 2020
Change Net revenues: Consumer Floral & Gifts
$ 315,083$ - $ 315,083 $ 305,357$ - $ - $ 305,3573.2 % BloomNet 37,930 37,930 34,051 34,051 11.4 % Gourmet Foods & Gift Baskets 590,946 590,946 538,265 538,265 9.8 % Corporate 69 69 135 135 -48.9 % Intercompany eliminations (984 ) (984 ) (552 ) (552 ) -78.3 % Total net revenues $ 943,044$ - $ 943,044 $ 877,256$ - $
Gross profit: Consumer Floral & Gifts
$ 130,025 $ 130,025 $ 134,474 $ 134,474-3.3 % 41.3 % 41.3 % 44.0 % 44.0 % BloomNet 16,021
16,021 16,820 16,820 -4.8 % 42.2 % 42.2 % 49.4 % 49.4 % Gourmet Foods & Gift Baskets 232,239 232,239 246,890 246,890 -5.9 % 39.3 % 39.3 % 45.9 % 45.9 % Corporate 165 165 62 62 166.1 % 239.1 % 239.1 % 45.9 % 45.9 % Total gross profit
$ 378,450$ -
$ 378,450 $ 398,246$ - $ - $ 398,246-5.0 % 40.1 % - 40.1 % 45.4 % - - 45.4 % EBITDA (non-GAAP): Segment Contribution Margin (non-GAAP) (a): Consumer Floral & Gifts $ 38,156$ - $ 38,156 $ 45,657$ - $ - $ 45,657-16.4 % BloomNet 11,887 11,887 12,141 12,141 -2.1 % Gourmet Foods & Gift Baskets 110,502 110,502 135,621 (78 ) 135,543 -18.5 % Segment Contribution Margin Subtotal 160,545 - 160,545 193,419 - (78 ) 193,341 -17.0 % Corporate (b) (32,228 ) 59 (32,169 ) (34,757 ) 513 (34,244 ) 6.1 % EBITDA (non-GAAP) 128,317 59 128,376 158,662 513 (78 ) 159,097 -19.3 % Add: Stock-based compensation 2,291 2,291 2,965 2,965 -22.7 % Add: Compensation charge related to NQDC Plan InvestmentAppreciation 2,425 2,425 2,227 2,227 8.9 % Adjusted EBITDA (non-GAAP) $ 133,033$ 59 $ 133,092 $ 163,854$ 513 $ (78 ) $ 164,289-19.0 % 24
Table of Contents Six Months Ended As Adjusted As Adjusted (non-GAAP) PersonalizationMall Harry & (non-GAAP) December 26, December 26, December Litigation & David Store
2021 Transaction Costs 2021 27, 2020 Transaction Costs Closure Costs 2020 Change Net revenues: Consumer Floral & Gifts
$ 496,312$ - $ 496,312 $ 466,903$ - $ - $ 466,9036.3 % BloomNet 68,764 68,764 66,789 66,789 3.0 % Gourmet Foods & Gift Baskets 688,428 688,428 628,194 628,194 9.6 % Corporate 114 114 241 241 -52.7 % Intercompany eliminations (1,201 ) (1,201 ) (1,099 ) (1,099 ) -9.3 % Total net revenues $ 1,252,417$ - $ 1,252,417 $ 1,161,028$ - $ - $ 1,161,0287.9 % Gross profit: Consumer Floral & Gifts $ 206,028 $ 206,028 $ 200,060$ - $ -
$ 200,0603.0 % 41.5 % 41.5 % 42.8 % 42.8 % BloomNet 31,430 31,430 31,658 - - 31,658 -0.7 % 45.7 % 45.7 % 47.4 % 47.4 % Gourmet Foods & Gift Baskets 266,402 266,402 281,897 - - 281,897 -5.5 % 38.7 % 38.7 % 44.9 % 44.9 % Corporate 104 104 111 - - 111 -6.3 % 91.2 % 91.2 % 46.1 % 46.1 % Total gross profit $ 503,964$ - $ 503,964 $ 513,726$ - $ - $ 513,726-1.9 % 40.2 % - 40.2 % 44.2 % - - 44.2 % EBITDA (non-GAAP): Segment Contribution Margin (non-GAAP) (a): Consumer Floral & Gifts $ 57,346$ - $ 57,346 $ 64,893$ - $ - $ 64,893-11.6 % BloomNet 22,747 22,747 22,562 - - 22,562 0.8 % Gourmet Foods & Gift Baskets 102,829 102,829 133,040 - (483 ) 132,557 -22.4 % Segment Contribution Margin Subtotal 182,922 - 182,922 220,495 - (483 ) 220,012 -16.9 % Corporate (b) (63,959 ) 515 (63,444 ) (66,454 ) 5,403 - (61,051 ) -3.9 % EBITDA (non-GAAP) 118,963 515 119,478 154,041 $ 5,403 $ (483 ) $ 158,961-24.8 % Add: Stock-based compensation 5,296 5,296 5,358 5,358 -1.2 % Add: Compensation charge related to NQDC Plan Investment Appreciation 2,992 2,992 3,207 - - 3,207 -6.7 % Adjusted EBITDA (non-GAAP) $ 127,251$ 515 $ 127,766 $ 162,606$ 5,403 $ (483 ) $ 167,526-23.7 % 25
Reconciliation of net income to adjusted net income (non-GAAP): Three Months Ended Six Months Ended December 26, December December December 2021 27, 2020 26, 2021 27, 2020 Net income
$ 88,468 $ 113,677 $ 75,269 $ 103,915Adjustments to reconcile net income to adjusted net income (non-GAAP) Add: Transaction costs 59 513 515 5,403 Deduct: Harry & David store closure cost adjustment - (78 ) - (483 ) Deduct: Income tax effect on adjustments 65 125 (108 ) (1,117 ) Adjusted net income (non-GAAP) $ 88,592 $ 114,237
Basic and diluted net income per common share Basic
$ 1.36 $ 1.76 $ 1.16 $ 1.61Diluted $ 1.34 $ 1.71 $ 1.14 $ 1.56Basic and diluted adjusted net income per common share (non-GAAP) Basic $ 1.36 $ 1.76 $ 1.16 $ 1.67Diluted $ 1.34 $ 1.72 $ 1.15 $ 1.62Weighted average shares used in the calculation of net income and adjusted net income per common share Basic 65,261 64,728 65,161 64,524 Diluted 65,969 66,543 65,954 66,593 Reconciliation of net income to adjusted EBITDA (non-GAAP): Three Months Ended Six Months Ended December December December December 26, 2021 27, 2020 26, 2021 27, 2020 Net income $ 88,468 $ 113,677 $ 75,269 $ 103,915Add: Interest expense, net (734 ) (330 ) 198 (289 ) Add: Depreciation and amortization 12,588 11,060 23,558 19,900 Add: Income tax expense 27,995 34,255 19,938 30,515 EBITDA 128,317 158,662 118,963 154,041 Add: Stock-based compensation 2,291 2,965 5,296 5,358 Add: Compensation charge related to NQDC plan investment appreciation 2,425 2,227 2,992 3,207 Add: Transaction costs 59 513 515 5,403 Deduct: Harry & David store closure cost adjustment - (78 ) - (483 ) Adjusted EBITDA $ 133,092 $ 164,289 $ 127,766 $ 167,526(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 Centerfunctions, 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. 26
Table of Contents Results of Operations Net revenues Three Months Ended Six Months Ended December December December 26, December 27, 26, 2021 27, 2020 % Change 2021 2020 % Change (dollars in thousands) Net revenues: E-Commerce
$ 827,522 $ 777,8106.4 % $ 1,090,893 $ 1,016,6737.3 % Other 115,522 99,446 16.2 % 161,524 144,355 11.9 % Total net revenues $ 943,044 $ 877,2567.5 % $ 1,252,417 $ 1,161,0287.9 %
Net revenue consists primarily of the sale price of merchandise, service, or shipping charges, less discounts, returns, and credits.
Net revenues increased 7.5% and 7.9% during the three months and six months ended
December 26, 2021, respectively, compared to the same periods of the prior year, due to higher revenues across our three segments. Adjusted for the non-comparative impact of PersonalizationMall and Vital Choice, which were acquired on August 3, 2020, and October 27, 2021, respectively, consolidated revenues grew 6.9% and 6.3%, in comparison to the prior year periods. This revenue growth was during one of our most challenging year-over-year comparisons, as it followed the 44.8% and 46.4% revenue growth we reported for the three and six months ended December 27, 2020, respectively, which was accelerated by the growth of e-commerce shopping during the pandemic, and as we faced significant headwinds affecting revenue growth, including limited availability of production and distribution labor, escalating supply-chain disruptions that caused shortages of key components for some holiday products, increased digital marketing costs and the resurgence of COVID-19 pandemic cases across the country. This illustrates the strong growth momentum that we have been building over the past several years, as a result of increased recognition and relevance for our family of brands for everyday gifting and connective occasions, which was complemented by an expanded product assortment, including PersonalizationMall and Vital Choice products. We also continued to see growth in our customer file and Celebrations Passport loyalty program, which helps drive increased cross-brand purchasing, purchase frequency, retention, and customer life-time value.
Revenues disaggregated by channel are as follows:
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