1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS) Q3 2024 Earnings Call Transcript

1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS) Q3 2024 Earnings Call Transcript May 2, 2024

1-800-FLOWERS.COM, Inc. beats earnings expectations. Reported EPS is $-0.26211, expectations were $-0.27. 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 day, and welcome to the Third Quarter Results Conference Call. All participants will be listen-only mode. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Andy Milevoj. Please go ahead.

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

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

Jim McCann : Thank you Andy, and good morning everyone. Thank you for joining us. This morning, I’ll begin with a brief overview of our third quarter performance and then turn it over to Tom, who will provide a business update. We will conclude with a financial review from Bill and then we’ll open it up to your questions. Over the last few quarters, we have been providing updates on our relationship innovation and work smarter initiatives that are centered on elevating the customer experience and driving efficiencies in all aspects of our business. Our organization continues to relentlessly execute on these initiatives, and you’ll hear a number of updates today on how we are actively managing our product portfolio and our pricing elasticity.

As we look at our third quarter performance, we continue to see a very complex consumer environment. Consumers continue to be deliberate and discerning with their purchases and are making thoughtful decisions. And although, there has been much discussion about the resilient economy, we continue to see a bifurcation of our lower versus middle and higher-income consumers. It’s not surprising that the lower-income consumer continues to be most pressured by inflationary forces and higher interest rates, while at the same time, credit card balances and the delinquency rates are on the rise. Our total third quarter revenue declined 9.1%, which includes lower wholesale and BloomNet revenue. As Bill will highlight further, our e-commerce revenue trends continue to improve sequentially.

Helping offset our top line softness, fiscal 2024 remains the year of our gross margin recovery. As we updated everyone last quarter, the pace of our margin recovery is occurring at a faster rate than we had originally anticipated at the beginning of the fiscal year. Our gross margin is benefiting from a combination of our Work Smarter initiatives that are largely centered on operating more efficiently and the reversion to the mean of certain commodity costs. As one of the aspects of Work Smarter, we took further action to optimize our workforce during the third quarter. While these decisions are difficult, these changes were made in response to the current environment and to appropriately allocate resources to the growth opportunities in our business.

I want to take this opportunity to express our gratitude to every team member who was affected for their personal contributions to our organization’s success. Beyond our cost optimization efforts, we are executing on our strategic initiatives to offer more solutions for our customers’ gift-giving needs. Since the founding of the company, we have been in the forefront of innovation. We have expanded our gifting options and made it easier for our customers to stay connected and celebrate with all the important people in their lives. We have a portfolio of brands and offer gifting options for every occasion. Most recently, we further expanded our offerings with the acquisition of Card Isle, which enhances our print on-demand personalized greeting card offerings and enables us to address a wider range of our customers’ expressive needs.

The addition of Card Isle gives our customers the ability to pair top quality personalized greeting cards with our extensive variety of gifts, across our family of brands or as a stand-alone greeting. We are excited for our expansion in the greeting card category, that further enhances the gifting experience we can provide our customers. Tom, will provide additional information on our strategic initiatives. Before we move on to the business update, I did want to take this opportunity to celebrate Harry & David’s 90th anniversary. It’s a truly remarkable milestone to celebrate 90 years of delivering gifts. From the time of Harry & David first hand delivered boxes appears nearly a century ago, sharing has been at the heart of what we do. While much has changed since 1934, Harry & David has been here all along, delivering extraordinary gifts that bring people together for life meaningful moments.

And now, I’ll turn the call over to Tom for our business update.

Tom 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 development, which encompasses new or enhanced product offerings, our merchandising efforts as well as user interface enhancements. Through these initiatives, we continuously evaluate our offerings, pricing and bundling opportunities to ensure we have appropriate price points for each of our customer segments, and that we are actively managing the pricing elasticity of our product portfolio. Turning to our performance. During the third quarter, we generated an adjusted EBITDA loss of $5.7 million essentially in line with prior year, despite the 9.1% decline in revenue.

Most notably our e-commerce revenue trends continued to improve sequentially, declining 4.9% for the quarter. As we look at what’s driving these trends, we continue to see a bifurcation between our lower income customers, reduce their purchases the most as compared to our middle and higher-income customers. Proof in point, was our Valentine’s Day selection of premium gifts that appeal to our luxury buyers and included our Shari’s Berries select offering, which are priced 25% to 50% higher than our standard offering. And our 100 long stem roses that retails for $399 and sold out. This demonstrates our pricing power and ability to increase AOV. As a result of this ongoing trend, our AOV increased 1.4%m as our upper income customers continued to represent a greater portion of our overall population, and they continue to gravitate towards our higher-priced bundled products that provide a great gift and value.

We recognize that our higher income customers have not meaningfully changed their behavior, and in many cases are trading up in price points. But our lower income customers, who are more affected by the macro economic environment, are being much more deliberate with their buying decisions. As a result, not only are we expanding our price points higher for luxury oriented customers. We also flexed lower for our lower income consumers to ensure that we have gifts for every occasion, at appropriate price points. Our focus on the customer journey providing thoughtful gifting options, and having the appropriate price points at each end of the spectrum from value to luxury, has never been greater. During the quarter, we introduced new product offerings, utilize innovative technology to extend the life of our world-famous pears, extending their selling season and increasing revenue.

We amplified our marketing efforts to evoke greater motions, with our brands and we expanded our lineup of gift products available for same-day delivery. Let me take a moment, to touch on each of these. In January, we launched Cheryl’s ice cream, which can also be paired with Cheryl’s cookies to make a great gift set. We continue to grow our Cheryl’s assortment to layer on complementary categories, as we did with the introduction of cupcakes, a year ago. At Harry & David, we had our longest Royal Riviera selling season on record. We accomplished this by using technology that enabled us to extend the selling season of our pears and offer them longer than we ever had into the spring. This enabled us to grow pear sales for the quarter, as our customers responded to the extending offering period.

This technology will yield an even greater benefit in fiscal 2025, as we were anticipating a strong pear crop due to the favorable weather conditions, our orchards have experienced this past winter. And we continue to see our higher income customers gravitate towards our higher value, higher priced gift bundles that combine gets more family of brands into a bundled set. For Valentine’s Day, we reintroduced our trios Bundles that featured 100 flowers, Harry & David wine, and Sherry’s berries, which exceeded our expectations with great sell-through. To differentiate our offerings from that of our competitors, we’re able to leverage our family of brands and the supply chain investments we’ve made to send these bundles as one extraordinary and elegant gift.

This not only provides for a much better and more memorable gifting experience, but it also reduces shipping costs by sending all the products in a single delivery. Turning to our marketing efforts, we are strategically incorporating storytelling to elevate our brands and make a meaningful impact on our customers. Effective storytelling evokes emotions, creates a stronger bond with our customers, and ultimately generates action. A great example of this was within our health and wellness brand with the launch of the Vital Choices featured catch on our website, blog, social, and external channels. Vital Choice provides customers with hundreds of healthy or better for you options, and we saw an opportunity to foster a stronger relationship with our customers who are interested in food that is healthy, natural, and convenient.

Beyond providing customers with useful product information, such as nutrition facts and serving suggestions, we dive deeper to share the story of the fishermen who are responsible for the catch, the differences between wild-caught fish and farmed fish, their sustainability efforts, and how they help bring it from the ocean to our customers’ plate. Same-day delivery for gifts has become increasingly important in today’s fast-paced world, and customers have come to expect convenience and speed. As a component of our strategic initiatives, our management team has been focused on expanding the number of products available for same-day delivery. By leveraging our BlueNet network, we have expanded the number of products available for same-day delivery to help customers celebrate special occasions, whether it’s a last-minute gift or a sudden celebration.

As part of this effort, we recently launched our Cheryl’s Same Day Delivery Program that features our best-selling cookies and the option for a cookie add-on to select 1-800-Flowers bouquets. We expect this to build over time, but most importantly, this is a great illustration of how we are differentiating ourselves in the marketplace by leveraging our e-commerce platform, our family of brands, and our fulfillment capabilities to offer customers an expanded array of products, convenience and speed, to be their gifting destination of choice. And now I’ll turn it over to Bill to provide the financial review.

Bill Shea: Thanks, Tom, and good morning. As Jim and Tom highlighted, we continue to operate in a complex consumer environment in which consumers continue to spend on certain categories while curtailing their spend in others. We also continue to see the divergence in our customer file, in which our higher-income customers continue to spend and gravitate towards our higher-priced offerings. As a result, our third quarter revenue declined 9.1% as compared to a year ago. This includes lower wholesale volume with our retail partners for this past Easter, as well as lower bloom net revenue. When we zoom in a little closer and look at our core consumer, our quarter-over-quarter e-commerce revenue trends continue to improve, declining 4.9% in the third quarter as compared to 6.6% in the prior quarter.

The improvement was partly due to the shift of Easter. Helping mitigate the revenue decline, our gross margin is continuing its reversion to the mean, improving 300 basis points to 36.6%. The improvement was led by lower freight costs, our inventory optimization efforts, labor efficiencies, as well as a decline in certain commodity costs. I want to take a moment to discuss a couple of external factors that have captured investors’ attentions over the past few months, including the Red Sea issues that impacted supply chains and the extraordinary rise in cocoa prices. Beginning with the supply chain, we are happy to report that our logistics team recently completed negotiations with our fiscal 2025 inbound freight costs and successfully negotiated lower rates for the fiscal year ahead, despite the geopolitical issues in the Middle East.

In terms of cocoa prices, we were fortunate to have locked in our fiscal 2024 and fiscal 2025 cocoa purchases with moderate price increases prior to the recent and much more dramatic increase in pricing. We will look to offset these moderate price increases in other areas. As Jim mentioned, we made the decision to initiate a reduction of our full-time workforce in response to the current business environment and to appropriately allocate resources to the growth opportunities within our business. This action is expected to yield annual savings of more than $10 million. In conjunction with this action, the Company incurred a $2.4 million of severance and related charges during the quarter. Third quarter operating expenses were 43.9% of sales, which includes the severance-related charges as compared to 53.9% in the prior-year period, which includes a goodwill and intangible asset impairment charge.

Operating expenses, excluding the impact of the severance-related charges, the appreciation or depreciation of investments in our company’s nonqualified compensation plan and the impairment charge recorded in the prior year period, were 42.4% of sales as compared with 38.8% in the prior year period. Operating expenses, excluding the same items just noted, declined $1.2 million as compared to the prior year period to $160.7 million. Net loss for the quarter was $16.9 million or $0.26 per share, which includes severance and related charges of $2.4 million or $0.02 per share, as well as a tax benefit of $0.04 per share related to the fiscal second quarter trademark impairment charge. In the prior year, net loss was $71 million or $1.10 per share, which included an after-tax non-cash goodwill and intangible asset impairment charge of $53.1 million.

The adjusted net loss was $18 million or $0.28 per share compared with an adjusted net loss of $17.8 million or $0.27 per share in the prior year period. Our third quarter adjusted EBITDA loss was $5.7 million, essentially flat as compared with an adjusted EBITDA loss of $5.5 million a year ago. As the gross margin recovery and our effort efforts to operate more efficiently helped mitigate the top line decline. Now, let’s review our segment results. Our Gourmet Food and Gift Baskets segment revenues declined 11.4% to $131 million compared with $147.9 million in the prior-year period. A large contributor to this decline was our wholesale business, which declined approximately $10 million as several retailers have reduced their orders for Easter in light of the consumer environment.

The segment e-commerce revenues declined 4.5%. Gross profit margin expanded 530 basis points to 29.9% compared with 24.6% in the prior-year period, benefiting from lower freight costs, the Company’s inventory and labor optimization efforts as well as the decline in certain commodity costs. Excluding the impact of the severance charge in the current period and the impairment charge a year ago, the adjusted segment contribution margin loss improved $6.3 million to a loss of $7.6 million compared with an adjusted income segment contribution margin loss of $13.9 million in the prior year period. In our Consumer Floral and Gifts segments, revenue decreased 5.1% to $221.2 million compared with $233 million a year ago. Gross profit margin expanded 140 basis points to 39.3% compared with 37.9% in the prior year period, improving on lower fulfillment costs and our logistics optimization efforts.

Segment contribution margin was $22.8 million, excluding the severance charge compared with segment contribution margin of $26.1 million in the prior year period. Now BloomNet segment. Revenues for the quarter decreased 26.1% to $27.3 million Revenues were impacted by lower order volume processed by BloomNet, which included an expected decline in orders by one of our business partners following their merger with a competitor. Gross profit margin was 45.4% compared with 42.5% in the prior year period, primarily reflecting higher margin, product mix and lower freight costs. Segment contribution margin was $7.6 million, excluding the severance charge compared with $11 million in the prior year period. Turning to our balance sheet our cash and investment position was $184 million at the end of the third quarter.

Inventory declined to $159.5 million compared with a inventory of $191.9 million at the end of last year’s third quarter. In terms of debt, we had $192.5 million in term debt and no borrowings under our revolving credit facility. As a result, our net debt was $8.5 million compared with $98.4 million at the end of last year’s third quarter. We continued to execute on our stock buyback program and repurchased $9.2 million of our stock through the first three quarters of the fiscal year. This amounts to approximately 948,000 shares that we repurchased at an average cost of $9.68 per share. Now let’s turn to our fiscal 2024 guidance. We are reaffirming our guidance and continue to expect total revenues to decline in the 7% to 9% range as compared with the prior year.

Our adjusted EBITDA 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. I will now turn the call back to Jim for his closing comments, before we open it up for Q&A.

Jim McCann: Thanks, Bill. Before we open it up to your questions, I want to tell you that I’m incredibly proud to share that 1-800-Flowers.Com has been recognized as one of America’s most trustworthy companies by Newsweek. I want to take this opportunity to congratulate and thank everyone in our organization for the hard work that contributed to this recognition. It’s an honor to have such a strong community of customers who trust us to help them get more, collect more and build more and better relationships, trusting our company matters and we look forward to continuing to build on this momentum. Now operator, if you would let’s open it up for any questions.

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Q&A Session

Operator: We will now begin the question and answer session. [Operator Instructions] Our first question comes from Michael Kupinski with NOBLE Capital Markets. Please go ahead.

Michael Kupinski: Thank you for taking the questions and congratulations on managing those costs. I was just wondering if you can talk a little bit about the commodity prices and obviously, continued to weaken in the quarter. Can you give us a sense of those commodities that were weak that were impactful in the quarter, what commodity prices are looking like and trending particularly, not just the cocoa, which obviously you talked about but maybe some of those commodities that might be a little stubborn and offer future prospects for lower prices and going forward.

Jim McCann: Michael, thank you for your question. This is Jim. Your commodity prices have been all over the place and I would tell you just in the last week, the change in cocoa prices has been extraordinary. We plan for next year to have a cocoa prices up quite a bit and what the impact on us would be. As Bill mentioned, though, we’re fortunate that we have locked in our availability and our pricing on cocoa through next year. So we’re a little bit protected from those wild swings, but still very conscious of it because it’s going to impact the overall market and impact our pricing the future. But we’re very pleased to see in the last couple of days, it’s over 20% decline in cocoa prices. So Bill, what other commodities? I know eggs and butter are two big components from your bakery and chocolate maker.

You’re very conscious of those prices and we’ve seen some wild swings there, a little color on where we are now and what impacts that might have on our overall cost going forward?

Bill Shea: Jim as you mentioned, eggs and butter are ones that have come down significantly of their highs and beginning to benefit – some benefit this year on those commodities. But other items like fuel, we were getting a benefit for most of this fiscal year and client of crossover, where fuel has risen and it’s a combination of both on the fuel side, combination of both what’s happening in the in the markets but the third-party calories continue to that’s a surcharge that they have and continue to play with the mild [indiscernible] that gone from a significant headwind, tailwind this past year. And right now it’s a slight – it’s a slight headwind as we head into fiscal 2025.

Jim McCann: And to answer Michael’s question overall, commodity prices, fuel being the biggest, it’s still a negative headwind overall on commodity costs because fuel is such a disproportionate part of our commodity mix.

Tom Hartnett: As we move forward, I think fuel has been a benefit to us in fiscal in fiscal ’24. But as we move forward fuel will be a headwind against this.

Michael Kupinski: Yes. Thank you for that color. And can you give me a sense of the decrease in shipping costs that surprisingly negotiated lower rates going forward? I was just wondering, if you can give us a sense of the shipping costs including ocean freight costs?

Bill Shea: Michael, we found that very surprising I would never have predicted that we lock in rates going forward that will lower who knew that we’d be talking and thinking about the Reg G and who sees it six months ago a year ago. It’s certainly a surprise to me, but we’ll have just finished a weaker we’re going to have to go those contract negotiations lower call it aftermarket.

Jim McCann: Yes. So several months ago, the spot market for ocean rates jumped dramatically probably doubled at the contractual rates that everybody had. The good news is that the carriers did honor the contractual rates. So we didn’t feel the impact of those spot market spikes, as we had entered into negotiations several deals back in back in March, we were concerned where rates would go for fiscal ’25, but we were able to successfully negotiate a core store of the four carriers that we use a slight decrease in our ocean rates as we head into fiscal 25. So those actually rates went into effect yesterday, May 1 and they run through May 31st of next year. On the Fedex side on the outbound shipping side, we always have modest contractual rates.

We talked a little bit about fuel. I know all of the surcharges that are outside of those rates but — we have been in between would fall under our model work smarter initiative with inventory optimization and logistics initiatives, we’ve been able to offset those rate increases this past year. So, through the nine months ended at the end of the third quarter, our actual cost per package is flat to slightly lower on a year-over-year basis. It has great than what we’ve done Michael to mitigate that those inbound freight costs. I’ll ask Tom to comment on this a bit where we purchase where we manufacture.

Tom Hartnett: Yeah so, as Michael asked we over time and still feeling the sting from the pandemic, we have shifted some of our volume to the states et cetera from a supply chain except — so you know just a raw number of containers we’re bringing in is less than it was of even sands where we’ve been in sales.

Michael Kupinski: Got you. Thanks for that color. And just final question if I may. You implemented cost cutting actions in your workforce in the quarter, how much of those actions could be viewed permanent?

Jim McCann: Michael, this is Jim. Yes, we reduced our workforce — salaried workforce in this quarter. Painful thing to do, but appropriate under our ongoing work smarter initiatives, where we’ll continue to look to say how can we operate more efficiently, how can we be more productive? And that’s going to result in us having a constant eye on our costs and part of our cost structure is obviously our talent. So they didn’t have any impact on last quarter because in the same quarter. We also have the related severance costs that go along with that. So it didn’t have any benefit in the last quarter. On an ongoing basis, we’re estimating about $10 million in reduced operating costs at the payroll level. And that is all permits.

Michael Kupinski: That’s all I have. Thank you.

Operator: Our next question comes from Alex Fuhrman with Craig-Hallum. Please go ahead.

Alex Fuhrman: Thanks very much for taking my question. I wanted to ask about same-day delivery. It certainly seems like in many ways that’s where the industry is heading, what are the economics on your orders look like compared to the rest of your business? And what do you think happens to your cost structure if it’s become table stakes over time.