1-800-FLOWERS.COM(FLWS) - 2022 Q4 - Annual Report

Part I Business Overview 1-800-FLOWERS.COM, Inc. is a leading gift provider with a brand portfolio across three segments, facing seasonal demand and competition - The company operates as a leading provider of gifts through a family of brands, aiming to be a one-stop destination for celebratory needs[10][14] - The business is structured into three main segments: Consumer Floral & Gifts, Gourmet Foods & Gift Baskets, and BloomNet, a service provider for the floral industry[17][25][23] - The company's business is highly seasonal, with the Thanksgiving through Christmas holiday period (second fiscal quarter) accounting for over 40% of annual revenues and all of its earnings[54][55] - As of July 3, 2022, the company had approximately 4,700 full and part-time employees, none of whom are represented by collective bargaining agreements[70] Risk Factors The company faces significant risks from macroeconomic conditions, operational challenges, cybersecurity threats, and legal and regulatory compliance - Macroeconomic conditions, such as inflation and consumer discretionary spending patterns, significantly affect the business. The COVID-19 pandemic has created substantial uncertainty regarding demand, operating costs, and supply chain stability[78][79][81] - The company's operating results are highly seasonal and can fluctuate significantly, with the fourth calendar quarter being the most critical period. A shortfall in revenue during peak seasons could disproportionately impact annual results[95][96] - The business is exposed to significant information technology risks, including cybersecurity threats, system interruptions, and credit card fraud, which could damage customer relationships and harm the brand[119][124] - A material weakness in internal controls over logical access and segregation of duties in certain IT environments was identified, which could result in material misstatements in financial statements if not remediated[128] - Legal and regulatory risks include unauthorized use of intellectual property, product liability claims for perishable food and alcohol, and evolving privacy laws (e.g., from the FTC) that could increase compliance costs[129][136][142] Unresolved Staff Comments The company reports no unresolved written comments from the SEC staff that were issued 180 days or more before the end of the fiscal year - As of the fiscal year ended July 3, 2022, there are no unresolved written comments from the SEC staff[145] Properties The company owns and leases various properties across the US for manufacturing, distribution, administration, and farming operations Key Owned and Leased Properties as of July 3, 2022 | Location | Principal Use | Square Footage / Acreage | Ownership | | :--- | :--- | :--- | :--- | | Medford, OR | Manufacturing, distribution, administrative | 1,103,000 sq ft | Owned | | Bolingbrook, IL | Manufacturing, distribution, administrative | 361,176 sq ft | Leased | | Hebron, OH | Manufacturing, distribution, administrative | 330,900 sq ft | Owned | | Jackson County, OR | Farming (Orchards) | 1,590 acres | Owned | | Jericho, NY | Headquarters | 92,700 sq ft | Leased | Legal Proceedings Information regarding legal proceedings is detailed in Note 17 of the financial statements - For details on legal proceedings, refer to Note 17 in Part IV, Item 15 of this report[147] Mine Safety Disclosures This section is not applicable to the company - The company has no mine safety disclosures to report[148] Part II Market for Common Equity and Share Repurchases The company's Class A common stock trades on NASDAQ, features a dual-class structure, repurchased shares in FY2022, and does not pay dividends - The company has a dual-class stock structure: Class A (FLWS) has one vote per share, while Class B (not publicly traded) has ten votes per share[152][153] Share Repurchases (Fiscal Year 2020-2022) | Fiscal Year | Shares Repurchased | Total Cost (millions) | | :--- | :--- | :--- | | 2022 | 1,592,555 | $38.2 | | 2021 | 862,290 | $22.4 | | 2020 | 754,458 | $10.7 | - As of July 3, 2022, $33.2 million remains authorized for future repurchases under the company's stock repurchase plan[155] - The company has never declared or paid cash dividends on its common stock and does not plan to in the foreseeable future[162] Management's Discussion and Analysis (MD&A) FY2022 revenues grew 4.0% to over $2.2 billion, but profitability declined significantly due to inflation, with Adjusted EBITDA falling to $99.0 million Fiscal 2022 Key Financial Results vs. Fiscal 2021 | Metric | Fiscal 2022 | Fiscal 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Net Revenues | $2,207.9M | $2,122.2M | 4.0% | | Gross Profit | $821.7M | $896.4M | -8.3% | | Gross Margin | 37.2% | 42.2% | -500 bps | | Operating Income | $42.1M | $149.1M | -71.8% | | Net Income | $29.6M | $118.7M | -75.0% | | Adjusted EBITDA | $99.0M | $213.1M | -53.5% | | Diluted EPS | $0.45 | $1.78 | -74.7% | - The company completed the acquisition of Vital Choice, a seafood provider, for $20.0 million on October 27, 2021, and Alice's Table, a lifestyle experience business, for $1.4 million (cash and non-cash) on December 31, 2021[175][176] - For fiscal 2023, the company anticipates Q1 revenues will decline by 3.0% to 6.0% year-over-year due to cautious consumer spending. The Adjusted EBITDA loss for Q1 is projected to be between $28.0 million and $33.0 million[181] Results of Operations FY2022 revenue grew 4.0% to $2.21 billion, but gross margin contracted to 37.2% due to rising costs, significantly impacting operating income Net Revenues by Channel (in thousands) | Channel | FY 2022 | FY 2021 | % Change | | :--- | :--- | :--- | :--- | | E-Commerce | $1,934,648 | $1,879,550 | 2.9% | | Other | $273,237 | $242,695 | 12.6% | | Total | $2,207,885 | $2,122,245 | 4.0% | Net Revenues by Segment (in thousands) | Segment | FY 2022 | FY 2021 | % Change | | :--- | :--- | :--- | :--- | | Consumer Floral & Gifts | $1,059,570 | $1,025,015 | 3.4% | | BloomNet | $145,702 | $142,919 | 1.9% | | Gourmet Foods & Gift Baskets | $1,004,272 | $955,607 | 5.1% | - Gross margin decreased by 500 basis points to 37.2% in FY2022 from 42.2% in FY2021. This was primarily due to macro-economic headwinds including supply chain disruptions, increased commodity and labor costs, and higher shipping expenses[227][229] - Marketing and sales expense increased 7.2% to $571.7 million, representing 25.9% of sales, up from 25.1% in the prior year, due to higher advertising rates and efforts to drive revenue[238][239] - General and administrative expense decreased 12.6% to $102.3 million, primarily due to lower performance-related bonuses and a loss on non-qualified deferred compensation plan investments[247][248] Liquidity and Capital Resources The company's liquidity relies on cash, operating cash flows, and its credit facility, with working capital and cash equivalents significantly decreasing in FY2022 Cash and Working Capital (in millions) | Metric | July 3, 2022 | June 27, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $31.5 | $173.6 | | Working capital | $82.5 | $134.1 | Summary of Cash Flows (FY 2022, in millions) | Cash Flow Category | Amount | | :--- | :--- | | Net cash provided by operating activities | $5.2 | | Net cash used in investing activities | ($89.7) | | Net cash used in financing activities | ($57.6) | - The company expects to borrow against its Revolver in Q1 FY2023 to fund pre-holiday inventory builds and repay these borrowings by the end of Q2 FY2023[264] Critical Accounting Policies and Estimates Critical accounting policies involve significant judgment for goodwill, other intangible assets, and income taxes, requiring annual impairment tests and future taxable income estimates - Goodwill impairment testing is a critical estimate. For the fiscal 2022 annual test, the company performed a quantitative Step 1 analysis. The fair values of the Consumer Floral & Gifts and Gourmet Foods & Gift Baskets reporting units exceeded their carrying amounts by approximately $128 million and $40 million, respectively[275][381] - The valuation of indefinite-lived intangible assets, such as trademarks, is performed annually using a relief-from-royalty method, which requires significant judgment on royalty and discount rates[283] - Accounting for income taxes requires management to assess the realizability of deferred tax assets based on forecasts of future taxable income and available tax planning strategies[286][408] Market Risk Disclosures The company's primary market risk exposure is to interest rate changes, affecting its variable-rate long-term debt - The company is exposed to interest rate risk primarily through its variable-rate borrowings under its credit facility[291] - A 50 basis point (0.50%) increase in interest rates would have resulted in an approximate $1.0 million increase in interest expense for fiscal year 2022[291] Controls and Procedures Management concluded disclosure controls were ineffective as of July 3, 2022, due to a material weakness in IT controls, leading to an adverse audit opinion - Management concluded that disclosure controls and procedures were not effective as of July 3, 2022[294] - A material weakness was identified in internal control over financial reporting related to deficiencies in controls over logical access and segregation of duties in certain IT environments[301][302] - The independent registered public accounting firm, BDO USA, LLP, issued an adverse opinion on the company's internal control over financial reporting as of July 3, 2022[306][339] - Management has initiated remediation efforts, including redesigning logical access and enhancing segregation of duties, starting in the first quarter of fiscal 2023[303] Part III Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees Information for Items 10-14, covering directors, executive officers, corporate governance, compensation, and accountant fees, is incorporated by reference from the 2022 Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the company's 2022 Proxy Statement[318][320][321] Part IV Exhibits and Financial Statements This section presents the consolidated financial statements for FY2022 and BDO USA, LLP's report, including an adverse opinion on internal controls and identifying goodwill valuation as a critical audit matter Consolidated Balance Sheet Data (in thousands) | Account | July 3, 2022 | June 27, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $31,465 | $173,573 | | Inventories | $247,563 | $153,863 | | Total current assets | $348,238 | $400,059 | | Goodwill | $213,287 | $208,150 | | Total Assets | $1,094,891 | $1,076,679 | | Liabilities & Equity | | | | Total current liabilities | $265,697 | $265,938 | | Long-term debt, net | $142,497 | $161,512 | | Total Liabilities | $585,482 | $567,609 | | Total Stockholders' Equity | $509,409 | $509,070 | - The independent auditor, BDO USA, LLP, identified the valuation of goodwill for the Gourmet Foods & Gift Baskets reporting unit as a critical audit matter due to the significant and subjective management estimates involved in determining its fair value[342][345] - Note 4 details the acquisitions of PersonalizationMall ($250.9 million), Vital Choice ($20.3 million), and Alice's Table ($1.3 million)[423][439][448] - Note 17 discloses litigation, including a settled dispute with Bed Bath & Beyond over the PersonalizationMall acquisition and a pending settlement for a class action lawsuit related to call center workers, with a maximum liability of $3.3 million[509][510]