1-800-FLOWERS.COM Q3 2023 Earnings Call Transcript

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May 11, 2023

There are 10 speakers on the call.

Operator

Good day, and welcome to the 1800flowers.com Third Quarter 2023 Results Conference Call. All participants will be in listen only mode. Please note, today's event is being recorded. I would now like to turn the conference over to Andy Molloy, Senior Vice President of Investor Relations. Please go ahead.

Speaker 1

Good morning, and welcome to our fiscal 2023 3rd quarter earnings call. Joining us today are Chris McCann, CEO Tom Hartnett, President and Bill Shea, CFO. Before we begin the call, I'd like to remind you that some of the statements we make on today's call are covered by the Safe Harbor disclaimer 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.

Speaker 1

Additionally, we will discuss Certain supplemental financial measures that were not prepared in accordance with GAAP. Reconciliation of these non GAAP financial measures

Speaker 2

Thank you, everyone, and good morning. Our Q3 performance reflects a continuation of the three trends that we've experienced Throughout this fiscal year, one, we continue to see a cautious consumer that's facing a number of macroeconomic pressures, including ongoing inflationary pressures, rising interest rates and, of course, fears of a recession. In response, consumers continue to moderate their spending on discretionary items and, in our case, everyday gifting occasions. It's important to note that consumer behavior remains complex in the current environment. Consumers remain pressured by higher prices on nondiscretionary items.

Speaker 2

They continue to increase their spending on post pandemic travel and experiences, while reducing their spending in other discretionary areas. Our approach is to ensure that we have many options at key price points across our brands to maximize conversion and customer value no matter the occasion or budget. 2nd, our gross margin continues to gradually improve With our 3rd quarter margin benefiting from our strategic pricing initiatives and lower ocean freight costs. And 3, we are managing the business well in this environment. As a company, we have and we will continue to focus our efforts on being strong stewards of our shareholders' capital.

Speaker 2

We continue to invest in developing stronger customer relationships and in the long term growth of our business, while simultaneously identifying opportunities to operate more efficiently. As a result of our expense optimization efforts, We were able to improve our adjusted EBITDA performance despite the softer top line. Now let's take a closer look at our Q3. Anticipating this year's demand compression into a couple of days for the Valentine's Day holiday, our team was well prepared to manage the last minute surge in demand With a variety of product offerings. In addition to our traditional floral offerings, Valentine's Day customers gravitated towards our one of a kind gifts that only we can offer through our family of brands.

Speaker 2

Popular bundles included Flowers and Sherry's Berries, which sold out early, Our confection bundles that pair cheesecake bites with cake pops, floral paired with confections and our newest pairing, and provide customers with great value. We continue to see our customers trade up in price points to unlock that additional value with our AOV increasing 3.8% over last year. Diving deeper into our food businesses, Sherry's Berries were a popular choice and had a strong performance for Valentine's Day. Their offerings resonated with our customers and provided a great gifting option for our value oriented customers. Going from February into March, we focused on continuing that momentum by creating additional holiday related celebratory moments.

Speaker 2

A great example of this was the success we had at Sheryl's for Patrick's Day with its shamrock frosted cookies. And once again, we use the power of our portfolio to offer customers a great St. Patrick's Day assortment that consisted of items from several of our brands, leading to a double digit increase in bundled sales. As we look ahead to the balance of our fiscal year, we expect consumer discretionary spending to remain challenged. We have begun to benefit from lower ocean freight costs and expect to see continual gross margin improvement during the Q4 and into our next fiscal year.

Speaker 2

Over time, we expect our Food Group margins to recover as we benefit from our automation initiatives and as commodity costs decline. And as Bill will discuss in further detail, we are being prudent with our promotional and advertising expenses as well as our labor costs. As we look beyond the current horizon, we remain very optimistic about our long term prospects. We expect to emerge from the post pandemic downturn As a stronger company and we continue to see tremendous opportunities to grow our business both organically and through strategic acquisitions. Recent examples of our initiatives to support organic growth include expanding the Cheryl's Cookies brand into cupcakes, which builds on the brand's equity and expands our product line.

Speaker 2

The introduction of our gifts and more online marketplace, which features curated items from local sellers across more than 15 new categories, including home decor, spa gifts and party baskets. And we relaunched our Smile Farms collection with an expanded assortment of everyday gifting products. We have also been big believers in testing and The first question comes from the line of the line of the line of the line of the line of the line of the line of the line of We moved quickly to create a fun and playful way to intertwine the emerging AI technology with our gift giving experience. Just in time for Mother's Day, we launched the 1-eight 100 Flowers MOMverse. Now MOMverse is an AI composer powered by ChatGPT that enables customers to create original one of a kind verses, including personalized poems and songs for their moms.

Speaker 2

We've seen our customers engage, have fun and create some great poems and lyrics for their special moms. We plan to further leverage this technology In addition to our organic efforts, as many of you know, we also believe in further fueling our growth through acquisitions. In January, we announced the acquisition of the Things Remembered brand. We have spent the last few months developing a new Things Remembered website on our e commerce

Speaker 1

platform and recently launched that

Speaker 2

site in mid April. I encourage you all And recently launched that site in mid April. I encourage you all to visit it. This was a perfect example of a tuck in acquisition whose in the personalization category and the B2B gifting space. To further bolster our B2B gifting capabilities, We more recently completed the acquisition of SmartGift, a leading technology platform that facilitates easy and thoughtful gifting and recognition experiences.

Speaker 2

Corporate gifting represents less than 10% of our total sales today, and we believe there is a significant opportunity for us to grow our B2B sales. We plan to leverage SmartGift's technology platform to accomplish this. Their platform provides innovative, This is a great example of how we are investing in our technology platform to And we are offering more ways to build and maintain meaningful relationships, Before I turn it over to Bill for the financial review, I wanted to highlight something that is near and dear to us. March was Developmental Disabilities Awareness And it provides an opportunity to show allyship for people in the disabled community. And for us, it's an opportunity to share how proud we are to Their work generates purpose and pride, enhances life skills Enforces socialization.

Speaker 2

This year, we relaunched an expanded Smile Farms collection that features an assortment of everyday gifting products. Smile Farms is working every day to shape a better future where people with special needs are valued for their real contributions they make in their workplaces and communities, and we are extremely proud to work closely with them. Now, let me turn the call over to Bill for his financial review.

Speaker 3

Thank you, Chris. Before I get into the results of the quarter, I want to address the impairment charge we took on the Food Group's goodwill and intangible assets. As many of you know, accounting standards require us to periodically review the value of goodwill and intangible assets. Over the past year and a half, our Food Group gross margins have been challenged by unprecedented headwinds, including the availability and cost of labor, historically high commodity costs, high ocean and outbound transportation costs, our promotional environment and inventory challenges. While we have addressed several of these factors and a number of these matters are improving based on macro trends, the reality is The gross margins in this segment have not improved at the pace we had originally anticipated.

Speaker 3

This factor as well as the ongoing macro environment and its impact on the consumer required us to reevaluate the value of the intangibles on our balance sheet and we recorded a $64,000,000 Pre tax non cash charge in the quarter. The last time we took a charge of this nature was 14 years ago in 2,009. We expect our Food Group gross margins to improve going forward both in the short term and the long term. To that point, We have already seen ocean freight return to pre pandemic levels. Labor is now available and rates have stabilized and certain commodity costs have come off their highs, including fuel, eggs and butter.

Speaker 3

With that, we'll turn to our financial review. Our 3rd quarter revenues declined 11.1% as compared to a year ago, as consumers continued to be pressured by several macroeconomic challenges and in turn moderated their spending. Despite the top line pressure, our 3rd quarter adjusted EBITDA loss Our gross margins improved 80 basis points from 32.8% to 33.6% led by our Consumer Floral and Gifts and BloomNet segments. Our margins improved on our strategic pricing initiatives combined with lower ocean freight costs. And as Chris highlighted earlier, our entire company is focused on expense optimization efforts, which enabled us to reduce operating expenses.

Speaker 3

Operating expenses, excluding the impairment charge, stock based compensation, appreciation or depreciation of investments in the company's non qualified compensation And the costs associated with a legal settlement in the prior year period were 38.1% of total sales or flat with the prior year period, as lower advertising and labor costs were offset by higher depreciation and amortization due to our capital investments in technology and automation. On a dollar basis, excluding the aforementioned items, we reduced adjusted operating expenses by $19,500,000 Excluding depreciation and amortization, our operating expense ratio improved 40 basis points. And as a reminder, this was on lower revenue base. Net Net loss for the quarter was $71,000,000 or $1.10 per share, which includes an after tax non cash goodwill and intangible asset impairment charge of $53,100,000 or $0.82 per share. The adjusted net loss was $17,800,000 or 0.27 dollars per share compared with an adjusted net loss of $21,000,000 or $0.32 a share in the prior year period.

Speaker 3

Now let's review our segment results. Our Gourmet Food and Gift Baskets segment revenues decreased 11.7% to $147,900,000 compared 25.3 percent in the prior year period, declining on continued higher commodity costs, increased promotional activity and overhead cost deleveraging. As I just noted, we have begun to see commodity costs such as eggs and butter begin to improve and we expect to see year over year gross margin improvement in our 4th quarter. Segment contribution margin without the impairment charge was a loss of $13,900,000 $14,200,000 a year ago. In our Consumer Floral and Gift segment, revenues decreased 11.8 percent to $233,000,000 compared with $264,200,000 in the prior year period.

Speaker 3

Gross profit margin increased to 37.9% compared with 36.7% in Segment contribution margin was $26,100,000 compared with $20,500,000 the prior year. In our Bluenet segment, revenues for the quarter decreased 3.8 percent to $37,000,000 compared with $38,400,000 in the prior year period. Gross profit margin of 42.5 percent improved 380 basis points as compared to 38.7% in the prior year, again benefiting from our strategic pricing initiatives combined with lower ocean freight costs. Segment contribution margin was $11,000,000 compared with $9,800,000 in the prior year period. Now turning to our balance sheet.

Speaker 3

Our cash and investment at the end of last year's Q3. As a reminder, one of our key initiatives for the fiscal year is to significantly reduce inventory levels, And we are on track to accomplish that. In terms of debt, we had $148,100,000 in term debt and no borrowings under our revolving credit facility. And regarding guidance for fiscal 2020 3 guidance based on our year to date performance. We now expect our fiscal 2023 revenues to decline approximately 8%.

Speaker 3

As a reminder, this includes the impact of 1 last week in fiscal 'twenty three as compared to fiscal 'twenty two, which was a 53 week year for us. However, as a result of our cost optimization efforts And the margin improvement we've experienced since the Q2, we have been able to mitigate the sales decline and are raising our fiscal 2023 adjusted EBITDA guidance. We now expect adjusted EBITDA to be in the range of $85,000,000 to $90,000,000 We We expect to generate more than $75,000,000 in free cash flow in the current year, representing an improvement of more than $135,000,000 as compared to a year ago. I'll now turn the call back to Chris.

Speaker 2

Thanks, Bill. To recap our performance for this quarter, we were able to offset softer top line performance With improved margins and through our expense management efforts, consumers remain cautious in the face of several macroeconomic pressures, including the ongoing inflationary pressures, rising interest rates and fears of a recession. Our goal is to ensure that we have options at key price points across our brands to maximize conversion and customer value no matter the occasion or budget. As a management team, we are focusing our efforts on the areas that are within our control and have mostly mitigated these top line challenges through gross margin improvement and our expense management efforts. Our margins are improving and are benefiting from lower inbound freight costs.

Speaker 2

We expect margins to continue to improve as commodities costs, which have remained stubbornly high, revert to their mean over time. As we look beyond the current horizon, we remain very optimistic about our long term prospects. We expect to emerge from the post pandemic downturn And now we'll open the call

Operator

Today's first question comes from Dan Kouros with Dimensional and Company. Please go ahead.

Speaker 4

Great. Thanks. Good morning. Man, Chris, we've come a long way. I can't say I On a more serious note, I know the history of this company, so I'm going to but I'm going to ask this question anyway because this is very topical right now.

Speaker 4

There's been a general rightsizing of offerings this year. And even if we kind of all assume the consumer pressure will Eventually be transitory. So the question I want to ask you is kind of 2 parts. 1, how are you looking at the entire portfolio of your offerings As you try to gain share, but stay mindful of efficiencies. And 2, on the tougher part of the question on promotional activity, You've been raising price, although I know that's not a blanket statement, but AOV has come up and you're now seeing margin But you may have a unique opportunity to push bundled deals and drive increased stickiness in cross brand pollination, which has always been the story here.

Speaker 4

But that would probably cost you a little bit in this environment. So if you could kind of address those two things, I'd appreciate it.

Speaker 2

Sure, Dan. Thanks for the questions Thanks for your recognition on our quick movements with the Chat GPT product. The team is having a lot of fun with that right now. But as we look at what's happening in the marketplace, we think there's an We are going to actually lean in a little bit here. So when we look at what we are bringing to the table for our customers and what we are always cautious introducing too much complexity, but at the same time look to leverage our platform wherever we can to increase our product offerings In a smooth fashion, I think a great example of that is what we've done recently with the tuck in acquisition of Things Remembered.

Speaker 2

Because it's such an easy tuck in onto the platform that we've already built in the personalization space, we're able to do something like that and make it easy. Now the challenge Okay, how do we merchandise that in front of the customer and put that in front of the customer. So that's constant improvements we're making in search in the navigational

Speaker 5

We recognize we have this huge portfolio of different products to meet all kinds of different budgets and occasions, But the most important thing is putting the most relevant products in front of our customers at the right time. So we are very focused on that.

Speaker 2

Right. And then I'd look at the AOV, and I think the AOV is a combination of a couple of things here then. The strategic pricing that we I think as Tom pointed out, our customer base is broad and it covers many different ages and many different demographics So it's our objective to make sure we have a broad assortment at key price So again, I'll come back and I'll finish this comment on the Chat GPT. That's giving customers an opportunity We want that engagement and that's what we're seeing continue to develop with our customer base.

Speaker 4

Yes. I mean, I guess that what maybe what I'm more trying to get at if I ask the question and Tom sort of alluded to it, but I mean, having the strong customer file that you have, that you've built over all these years, in this environment telling people, hey, we'll cover I saw you just ordered this, We'll cover all your other gifting options with birthdays coming up in the next 3 months at 10% off, just incrementally creative ways to in a challenged Consumer environment get either more subscription like consumers and then cross pollinate. Just if you could touch on Any efforts you have in those areas I think would be helpful.

Speaker 2

Sure. And I'll ask Tom to provide some color, but I think specifically we start right off with our Passport Based on our multi brand or multi category customer cohorts, I mean that's where we're really driving and getting the benefit and seeing the results from them. Today, over 20 plus

Speaker 5

You touched on it, Dan. Subscriptions is a focus of ours and continue to move forward and still working on providing what we think is a great opportunity Cross brand subscription, so a customer can really mix that product assortment up. I think we're very focused On continuing to engage with our most valuable customers, we're continuing to augment the analytics and quite frankly Machine learning around how we look at long term value of customers and those that we think we can

Speaker 2

This in the past, one of the best performing marketing programs we have is what you alluded to, Dan, the reminder capabilities, the reminder programs. And So again, showing us another level of engagement if they're proactively doing that, I mean, this is brand new for us. That should give us a really good conversion on those reminders.

Speaker 4

Got it. That's super helpful color. Good to see the margin improvement as well and I'll let everybody else ask Questions about that. So thanks for taking my questions.

Speaker 1

Thanks, Dan.

Operator

And our next question today comes from Anthony Lebiedzinski with Sidoti and Company. Please go ahead.

Speaker 6

Yes, good morning and thank you for taking the questions. And again, also nice to see the margin improvement as well. So as far as Passport membership, can you comment a little bit? I know you guys don't give out Specific numbers on a quarterly basis, but just overall, just curious about the trend lines, what you've seen as far as the New members signing up or renewals and just give us a general sense as to what you're seeing within the Passport program, that would be great.

Speaker 5

Good morning, Anthony. It's Tom. We're seeing consistent revenues, consistent customers with our Passports. About 20% of our revenue today is with our Passport customers and we're seeing those customers Hold up much better than our overall customer trends, both our Passport customers and our multi brand customers.

Speaker 6

Got it. Thanks for that, Tom. And then, as far as the strategic pricing initiatives, just wondering, which Areas of the business have you seen the most success with? Just curious about that.

Speaker 2

Yes. For the most part, I think what we've seen is we've seen the most success really on the food side of things and again on higher price point items. As we've mentioned in the past, Getting pricing increases on some of the lower price point items like a personalization wall is more difficult. But whether it be floral or food When you move up over $7,500 that's where you're able to get a couple of dollars and more price more strategically. Again, those are going to be your customers the demographics of your cohorts buying there are going to be those less affected by the inflationary prices for those of your Higher household income customers that are driving that mix.

Speaker 2

Yes. As we mentioned,

Speaker 7

the Consumer Floral and Gifts And BlueNet segment will have increased margins during the quarter and part of that was the strategic pricing that we had.

Speaker 6

Got it. Yes. Thanks for that. And then, in terms of your balance sheet, you guys have some debt that's Coming up, I think I believe the term loan is maturing next May. With everything going on within the banking world, just Wondering about your confidence level about your ability to refinance that?

Speaker 3

Yes. We're going through we've been

Speaker 7

in discussions With our syndicate group and with JP Morgan who leads our syndicate group, and we're in the process of working through that right now.

Speaker 6

Okay, terrific. Okay, well, thank you very much and best of luck. I'll pass it on.

Speaker 2

Thanks, Anthony.

Operator

And our next question today comes from Michael Kupinski with Noble Capital Markets. Please go ahead.

Speaker 8

Thank you. I offer my congratulations on the margins as well. I have a couple of How much of the improvement in gross margins was pricing versus freight cost?

Speaker 7

Yes, I think, Michael, probably about half or so is pricing. We're able to move some pricing on BloomNet on some of the Sales products that we had and on Flow, we made some adjustments. What we have is We call it strategic because it is somewhat surgical in what we're doing there. But I would say about half of that from that. And then We are starting to get the benefit of much lower ocean pricing.

Speaker 7

Although that has not fully Flown through our P and L, yes, we're going to get much more benefit in fiscal 'twenty four on ocean because we're still selling Inventory that was bought with higher ocean price. So we're getting some benefit from ocean, but not the full benefit yet.

Speaker 2

But just for clarity there, Bill, we are expecting to improve gross margin in Q4 as well. Without question. Okay.

Speaker 8

Got you. And then what is the revenue impact from the extra week?

Speaker 3

Yes, it probably impacts

Speaker 7

The year about a little more than 1% and for the quarter probably around 4 So it's a $20,000,000 $25,000,000 impact.

Speaker 8

Got you. So the guidance for Q4, which is implied given your 8% decline for the full year, you would actually you're not looking for an acceleration in the rate of decline. You're just kind of looking for

Speaker 7

That's correct. If you go through the math of getting to that 8% guidance or around 8 If you back out the extra week, there's a little bit of a benefit in Q3 3 for Easter, which obviously takes away from Q4, but yes, the trend lines would be very similar.

Speaker 8

Got you. And then can you talk a little bit about the In terms of optimizing your margins, what type of commodities should we look for and monitor?

Speaker 3

Yes, there are certain our food groups are impacted by a lot

Speaker 7

of different commodities. What we've indicated in the release was that we have started to see a break in liquid eggs or eggs And butter. Also fuel has come off its high. We didn't get the benefit of fuel in Q3. We will start getting the benefit of fuel being lower.

Speaker 7

If you remember, a year ago at this point in time, fuel was going up. Now it is So fuel will be lower, eggs and butter will be lower. Things like Cocoa and sugar, which are big commodities that we use are remaining at historical highs. And even with respect to eggs And butter, they're certainly down off their highs, but they're not back to historical norms yet.

Speaker 8

Got you. That's all I have. Thank you. Thank you, Mike.

Operator

Thank you. Today's next question comes from Linda Bolton Weiser with D. A. Davidson. Please go ahead.

Speaker 9

Yes. Hello. So I was just wondering, you had mentioned in your comments a little bit of higher promotional activity in the food business, that sounded like a little bit of pricing competition from competitors or something. Can you elaborate on what that was that

Speaker 7

Yes, Linda, as we're we've discussed and even in previous calls, probably really More relates to a movement of inventory and with the soft consumer, while the large majority of our inventory We do have certain commitments that we made on perishable products that we had to move through. So we were more promotional So, as Tom was alluding to, we have price points

Speaker 3

at all levels for all consumers and at Various times we do have to be

Speaker 7

a little more promotional, but really the larger promotional activity I was referring to really relates to the movement of inventory.

Speaker 9

Okay. And then, you mentioned I think you mentioned lower advertising costs year over year. That's

Speaker 5

It's our overall advertising. I think we're being very focused on being more efficient with our advertising dollar, leveraging our existing And making sure we're focused on acquiring the customers that we think are going to have

Speaker 7

Hey, Linda, this is Bill. Just getting back on the inventory, just wanted to emphasize that This year, one of our big strategic initiatives was to drive down our inventory. A year ago, we were buying inventory heavy because of A lot of the supply chain has improved. If you look at the end of the Q3, our inventory was $191,000,000 versus $215,000,000 a year ago at this point in time, so down around $25,000,000 or so, and we expect that to accelerate as we move through Q4 because this time last year, we were building inventory because of the supply chain challenges and we're not. So we're going to be in A much better inventory position through this quarter and the end of the fiscal year and starting fiscal 'twenty four than we were a year ago.

Speaker 9

Okay. And then finally, I think you sort of gave a differentiation between Things Remembered and how they're kind of positioned differently, but I'm wondering are there still items that they each sell That somehow you can leverage procurement or something because you're buying similar items and it's going to give you a higher volume or Is there anything like that that you can leverage by actually having both businesses under one roof?

Speaker 5

Yes. It's Tom again. Definitely, I mean just to start out, we do look at the product assortments as complementary. The Average on the things remembered AOV is more like $20 to $25 higher than a personalization mold product. However, we are already seeing, and we just as a matter of practicality as We acquired the brand.

Speaker 5

We were left in a pretty shallow inventory position for Things Remembered and we've been offering up a lot The appropriate products from the Personalization Wall brand, and that has we've seen some good early successes there. And on Flipside, the products that we do have in stock, we are merchandising some of those on the Personalization And as we're bringing things together, all our product assortment is being brought live in the enterprise portfolio. So we're

Speaker 2

So while there is that cross merchandising capability between those two brands and

Speaker 9

And then just one final thing. Just can you clarify, I know that, PMOL had shown up on the creditors list for Bed Bath and Beyond. And you indicated that it might be an erroneous representation or something. Is there any way to explain because it was an $11,000,000 amount, It was quite a bit on the list. Can you explain like what that was exactly?

Speaker 3

Yes. We're not sure where

Speaker 7

the $11,000,000 came from. We

Speaker 3

did do Business

Speaker 7

with Bed Bath and Beyond through Pmall, they were the prior owners of Pmall. We had about a $2,000,000 exposure back in the

Operator

Thank you. And our next question is a follow-up from Michael Kupinski with Noble Capital Markets. Please go ahead.

Speaker 8

Thank you. You provided guidance in terms of free cash flow. I was just

Speaker 2

I think we continue to really focus on the opportunities to grow our business, Michael. I think what you've been seeing us is making the investments in our business that really put us in the position we're in today, which I think is an extremely strong position So we look at investing in the business. Obviously, we look at M and A activity to return value to shareholders, whether that be a more transformative M and like PMOL or tuck in like Things Remembered is an example there. So we're always constantly looking at that spectrum. And then of course, we do have a stock buyback program that's in place on an annual basis to make sure we're managing share count there.

Speaker 2

And in

Speaker 8

Got you. And can you just talk a little bit about the M and A environment? Is there do you think are there things out there that are looking attractive?

Speaker 2

We're always staying active, so there's always a list of companies on our discussion list, our target list that seem attractive from a

Speaker 8

And

Operator

And ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for any final remarks.

Speaker 2

Thank you, Rocco, and thank you all for joining us this morning. We encourage you to all take care of your moms and all the moms in your life. They're Very well deserving of it. And I also encourage you to take Dan's point from the top, go try our mom verse product.

Operator

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.

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