1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS) Q2 2024 Earnings Call Transcript

1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS) Q2 2024 Earnings Call Transcript February 1, 2024

1-800-FLOWERS.COM, Inc. beats earnings expectations. Reported EPS is $1.27, expectations were $1.22. FLWS isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the 1-800-Flowers.Com Fiscal 2024 Second Quarter and Year End Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Andy Milevoj, Senior Vice President, Investor Relations. Please go ahead.

Andy Milevoj: Good morning, and welcome to our fiscal 2024 second quarter earnings call. Joining us today are Jim McCann, Chairman and CEO; Tom Hartnett, President; and Bill Shea, our CFO. Before we begin, I’d like to remind you that some of the statements we make on today’s call are covered by the safe harbor disclaimer contained in our press release and public documents. During this call, we will make forward-looking statements with predictions, projections, and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The company disclaims any obligation to update any of the forward-looking statements that may be made or discussed during this call.

Additionally, we will discuss certain supplemental financial measures that were not prepared in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables of our earnings release. And now, I’ll turn the call over to Jim.

James McCann: Thanks, Andy, and good morning, everyone. Thank you for joining us. This morning, I’ll begin with a brief overview of our second-quarter performance and then turn it over to Tom, who will provide a business update. We will conclude with financial review from Bill, and then we’ll open the call for your questions. Heading into the second quarter, we expected our sales trends to improve, our gross profit margin recovery to continue and our operating expenses to decline. Our performance was essentially in line with our expectations, as our gross profit margin recovery and expense optimization efforts helped to offset what turned out to be a softer than anticipated consumer environment. Most notably, our gross profit margin expanded nicely.

And as Bill will highlight further, our pace of margin recovery is happening at a good rate. This was our fifth consecutive quarter of year-over-year margin expansion and we are well on our path to returning to our historical mean annual gross margin rate in the low 40% range. Our gross profit margin is benefiting from a combination of a reversion to the mean of certain commodity costs and our work smarter initiatives that are centered on operating more efficiently. As Tom will highlight further, we are regularly evaluating opportunities to improve our top line through our relationship innovation initiatives and this performance will only further be buoyed by the improvements we are seeing in our gross and operating margins. Before I ask Tom to provide the business update, I did want to take this opportunity to highlight a new organization that we are very proud to partner with this holiday season.

As many of you know, Smile Farms is our signature philanthropic partner whose mission is to create meaningful work opportunities for people with disabilities. Their work generates purpose and pride, enhances life skills, and fosters socialization. This holiday season, we are proud to partner with another organization whose mission is closely aligned with that of Smile Farms. During this past holiday season, we partnered with a non-profit called the First Step Staffing to employ approximately 350 individuals in our Atlanta distribution facility. First Step Staffing is an organization that provides employment opportunities and resources to homeless individuals who want to reenter the workforce and improve their lives. They not only provide employment opportunities, but they also provide additional support services such as providing transportation to and from work to position these individuals for success.

They are a terrific organization that does great work and we are glad to be able to partner with them. Now, I’ll turn the call over to Tom for the business update.

Thomas Hartnett: Thanks, Jim, and good morning, everyone. Today, I’ll provide an update on our business performance, as well as an update on our relationship innovation developments, which encompasses new or enhanced product offerings, our merchandising efforts, as well as user interface enhancements. During the second quarter, we generated $130.1 million in adjusted EBITDA as our Work Smarter efficiency initiatives, combined with improving macroeconomic factors contributed to a 230 basis point improvement in our gross profit margin. Our quarter-over-quarter revenue trends continued to improve, but we encountered a softer consumer environment, especially amongst our lower-income tier customers. As lower-income customers continue to be most impacted by the macroeconomic pressures, we continue to see this customer cohort reduce purchases the most.

Conversely, AOV increased approximately 3% as our upper-income customers continue to represent a greater portion of our overall population and they continue to gravitate towards our higher price bundle products that provide a great gift and value. During the first half of our fiscal year, we have been prudent with our marketing spend in a challenging consumer environment in which we didn’t see an adequate return on investment. As Jim mentioned, under our relationship innovation efforts, we are regularly evaluating our offerings, pricing, and bundling opportunities to ensure we have appropriate price points for each of our customer segments and we are actively managing the pricing elasticity of our product portfolio. Our focus on the customer journey, providing thoughtful gifting options, and having the appropriate pricing at all ends of the spectrum from value to luxury has never been greater.

During the second quarter, we introduced lower price points and emphasized gifts that are in our lower price ranges to attract customers who may be more price-sensitive. This includes providing new value offerings such as our Flowers and Fields collection at 1-800-Flowers that features custom-crafted bouquets that match an array of sentiments and provide great value beginning at 39.99. And we continue to lean into new products and bundling offerings for customers who are looking to wow their recipients. Bundles allow us to feature products from our different brands and conveniently ship them to the recipient in the same package. This is also a great way to introduce our customers to our family of brands and give us a competitive advantage by marketing these bundles across multiple brand websites.

These gift bundles provide great value to our customers and we continue to see customers trade up in price points for these wonderful gifts. As an example, we leverage Personalization Mall to launch a set of food gifts, with a personalized item such as our Harry & David charcuterie gift bundled with a personalized maple cutting board. This program was launched as a test and it has exceeded our expectations. We believe there is a lot of opportunity here and it once again demonstrates how our brands can complement one another and give our customers an elevated experience compared to others in the market. As we look ahead to Valentine’s Day, this year we have a slightly better date placement than we had a year ago, as it’s midweek and a few days past the Super Bowl, which should be favorable to us.

We are excited about our new trio bundle that features our 1-800-Flowers roses, Harry & David wine, and Shari’s Berries to create a magnificent gift. This trio bundle combines gifts from three of our brands and ships them in a single box that can be delivered overnight. They are sure to provide an extraordinary experience for the recipient and is a great last-minute gift idea. Through our Gift & More marketplace, which features curated items from local sellers, we can offer customers a broader assortment of gifts across a number of categories including jewelry, spa, gardening and home decor, to name a few. Providing customers with a variety of gifting options is a core strength of ours. We have an amazing family of brands and products that we can leverage to help our customers express every sentiment.

Now I’ll turn it over to Bill to provide the financial review.

William Shea: Thanks, Tom, and good morning, everyone. Jim and Tom highlighted, we continue to see significant improvements in our gross profit margin, remain steadfast in our Work Smarter initiatives that are focused on operating more efficiently through the use of technology and automation and also includes our logistics, labor, and inventory optimization efforts. This enabled us to offset what turned out to be a softer-than-expected second-quarter top-line performance. Going into the second quarter, we expected the consumer environment for discretionary spending to remain pressured, but to improve as compared to the past few quarters. Quarter-over-quarter sales trends did improve with our total revenue declining 8.4% and our e-commerce revenue declining 6.6%.

But we had anticipated the pace of improvement to occur at a faster rate. Our gross margin improvement helped to offset the softer top line. The pace of improvement is better than we anticipated. Second quarter gross margin improved 230 basis points to 43.3% and this was on top of the 90 basis points improvement a year ago. This represents our 5th consecutive quarter of year-over-year improvement. As Jim said, we are well on our path to returning to our historical gross profit margin rate and by the end of this fiscal year, we now expect to be at approximately 40%. Our gross margin benefited from lower inbound freight costs, a decline in certain commodity costs, lower labor costs, and our Work Smarter initiatives that are driving operational efficiencies.

A great example of these efficiencies include the labor savings we’ve been able to produce through our automation efforts. Our main distribution facilities in Medford, Oregon and Atlanta are all in their second or third year of automation, and we continue to achieve further productivity gains. Reduced the labor cost per package at these facilities by approximately 4% for the month of December and the first half of the current fiscal year as compared to a year ago. Additionally, due to our inventory optimization efforts, our inventory levels were in good shape heading into and out of the holiday season, leading to fewer inventory write-offs. We also had a helping hand from Mother Nature, who provided us with good weather this holiday season, leading to fewer shipping delays and related customer credits.

These factors helped to offset a more promotional environment, as well as a new fuel shipping surcharge that was introduced later in the holiday period. We also continued to optimize expenses and excluding the impairment charge and the accounting impact of the non-qualified compensation plan on our P&L, we reduced our operating expenses by $10.8 million as compared to a year ago. As a result of these factors, our second quarter adjusted EBITDA was $130.1 million, as compared to $131.4 million in the prior year. Before we review net income for the quarter, I want to address the non-cash impairment charge we took in the Consumer Floral and Gifts group segment related to the Personalization Mall trademark. As many of you know, we periodically review the value of our intangible assets.

Our revenue forecast for Personalization Mall, combined with a higher discount rate resulting from the higher interest rate environment required us to reevaluate the value of the intangibles on our balance sheet. Consequently, we recorded a $19.8 million non-cash impairment charge for our Personalization Mall business during the quarter. Net income for the quarter was $62.9 million or $0.97 per share, including the non-cash impairment charge of $19.8 million or $0.30 per share. Adjusted net income was $82.7 million or a $1.27 per share compared with adjusted net income of $82.7 million or $1.28 per share in the prior year period. Let’s review segment results. Our Gourmet Food and Gift Baskets segment revenues declined 8.2% to $540 million, compared with $588.4 million in the prior year period.

Contributed to this decline was our wholesale business, which declined $18.7 million as several retailers had reduced their orders last spring for the holiday season in light of the consumer environment. This segment’s gross profit margin expanded 220 basis points to 43.2%, compared with 41% in the prior year period, benefiting from lower freight costs, a decline in certain commodity costs, lower labor costs, and lower inventory write-offs. Segment contribution margin declined $5.4 million to $118.2 million compared with segment contribution margin of $123.5 million in the prior year period, primarily due to the revenue decline. In our Consumer Floral & Gifts segment, revenues decreased 8% to $254.8 million, compared with $277 million a year ago.

Profit margin expanded 230 basis points to 42.8%, compared with 40.5% in the prior year period, improving on lower freight and labor costs. Segment contribution margin, excluding the impairment charge was $30.4 million compared with segment contribution margin of $27.9 million in the prior year period. Now BloomNet segment. Revenues for the quarter decreased 17.1% to $27.2 million. Revenues were impacted by the lower order volume processed by BloomNet, which included the expected decline in orders by one of our business partners following their merger with a competitor. Gross profit margin was 47.6% compared with 42.2% in the prior year period, primarily reflecting lower freight costs, as well as product mix. Segment contribution margin was $9.1 million, compared with $9.3 million in the prior year period.

Turning to our balance sheet. Our cash and investment position was $312 million at the end of the second quarter. Inventory declined to $161.3 million with inventory of $201.1 million at the end of last year’s second quarter. In terms of debt, we had $195 million in term debt and no borrowings under our revolving credit facility. As a result, our net cash was $117 million, compared with $34.7 million at the end of last year’s second quarter. During the quarter, we entered into a 10b5-1 stock repurchase plan and repurchased $5.4 million of our stock under this plan as of last Friday. This amounts to approximately 550,000 shares that were repurchased at an average cost of $9.73 per share. Let’s turn to our guidance. We are lowering our fiscal 2024 revenue guidance, while maintaining our adjusted EBITDA guidance as we expect our gross margin improvement combined with our expense optimization efforts to offset a softer revenue outlook.

Fiscal 2024, we now expect total revenues on a percentage basis to decline in the 7% to 9% range as compared with the prior year. We are affirming our adjusted EBITDA guidance to be in the range of $95 million to $100 million and our free cash flow to be in the range of $60 million to $65 million. Now, I’ll turn the call back to Jim for his closing comments before we open it up for Q&A.

James McCann: Thanks, Bill. As we look back on the first half of the year and forward to the second half, our quarter-over-quarter sales trends continue to move in the right direction, albeit at a slower pace. We expect this to be offset by the gross profit margin recovery, which is now occurring at a faster pace than we expected. Combined with our relationship innovation and Work Smarter initiatives, we are having a clear and direct impact on our business. We expect these factors to further fuel our performance in a broader consumer discretionary environment improves. While it’s difficult to predict when the consumer environment and in particular for the lower-income consumer is going to become more favorable, we believe our results will only be further buoyed by our relationship innovation and Work Smarter initiatives that are evergreen and well underway.

Now, before I open the call to your questions, a public service announcement. The Valentine holiday is only a couple of weeks away and we suggest you place your orders for all those special people in your life today. Now, your questions.

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Q&A Session

Operator: [Operator Instructions] The first question comes from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Unidentified Analyst: Good morning. This is Alex on for Anthony. My first question is regarding the Celebrations Passport members. Could you share a little bit more about spending of those members during the holiday season versus non-members? And give a little bit of color around passport membership and order frequency and whether that changed much from the prior year?

James McCann: Good morning, Alex. This is Jim. Too bad Anthony isn’t here. That was the best pronunciation of his name we’ve heard so far, and he missed it. But to your question, Alex, Tom will give you the details on your question. But I would say, overall, the Passport customer is behaving as it has and as it continues now for quite a number of years. I think you’ll hear later on that we are — we have a lot of programmatic plans to enhance the Passport program. It’s gradually moving from just a free shipping capability to now a loyalty program, special offers. So this is a special group of people and we’re trying to treat them in the special way that we should. So we have a stream of programs that you’ll see introduced throughout the course of this year. But Tom, as to the specifics of Alex’s question – spending patterns of…

Thomas Hartnett: Yes. So trend lines year-over-year are the same as a year ago, which we continue to see that Passport customer purchasing 2 times to 3 times more than our average customer. So all those signs continue to move in the same direction.

William Shea: And the Passport customer represents about 20% of our revenues.

Thomas Hartnett: Right.

Unidentified Analyst: Appreciate the color. Thank you, guys. And I think you commented that commodity costs are normalizing to the mean. Curious about one other cost regarding ocean freight. Given some of the Houthi attacks and the Red Sea, are you seeing any significant freight cost increases?

James McCann: Alex, Bill will give you the color on that, but who would have thought a year ago that we’d be talking about Houthis, but we are, and we’re anticipating some impact, but we haven’t yet. Bill, specifically what’s going on with ocean freight costs?

William Shea: Yes, due to the Houthi attacks in the Red Sea, certainly the spot markets have jumped up pretty dramatically on ocean freight. We have contracted rates that basically carry us through the end of the fiscal year, and so far the carriers have honored those rates. The bigger unknown is how long the issues in the Red Sea persist and whether that affects future negotiations and next year’s holiday season. We begin negotiations for those rates in a few months and a lot will depend on what happens in that area.

James McCann: So, Alex, overall color on that too is, like so many companies that are U.S. based, we’re taking the steps we can, longer range, to lessen our dependency for those commodity items that we do import so that we can source them domestically. I think pretty much every company in the U.S. has started a program like that. We’ll continue to pursue that. But if the tensions in the Red Sea area continue into the summertime, we would anticipate that they would have an impact on our holiday imports that primarily arrive in the summertime. But we’re — as Bill said, through the end of the fiscal year, the June fiscal year-end, we don’t anticipate a hit.

Unidentified Analyst: Appreciate the color there. And last question from me. Curious how you guys are thinking about acquisition opportunities for ’24, ’25?

James McCann: Well, I’d say, we’re always in the market looking to see if there’s a way that we can flesh out the offerings we have for our customers or find a service that would be beneficial to our service offerings, a suite of service offerings we have for our customers. And the third area that we look for acquisitions to help us is with talent acquisitions. I would say, there’s a lot available right now because I think the cost of capital, which has changed so dramatically in the last 12 months, 24 months, has really put the — a hurt on so many companies. So there’s lots available, but we’re being very judicious about what we look at and really being disciplined about does it genuinely help us, does it genuinely make us a better company, does it improve our service offering for our customers? So we’re active. There’s a lot available, but I wouldn’t expect that we’re going to be doing anything too dramatic.

Unidentified Analyst: I appreciate all the context there. Thanks for taking questions.

James McCann: Sure. Thanks, Alex.

Operator: And our next question comes from Michael Kupinski with NOBLE Capital Markets. Please go ahead.

Michael Kupinski: Thank you, and thank you for taking my questions. A couple of them. Can you talk about — maybe I’m going to parse the commodity price opportunity there. Can you talk about how commodity prices and where they are relative to the mean — in terms of maybe a percent? So you can kind of give us a sense of what are the opportunities left yet from where we are right now in terms of commodity prices relative to the means?