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1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS) Q1 2024 Earnings Call Transcript

1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS) Q1 2024 Earnings Call Transcript November 5, 2023

Operator: Good morning, everyone, and welcome to the 1-800-FLOWERS.COM Incorporated 2024 First Quarter Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note today's event is being recorded. And at this time, I'd like to turn the floor over to Andy Milevoj, Senior Vice President of Investor Relations. Sir, please go ahead.

Andy Milevoj: Good morning, and welcome to our fiscal 2024 first 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.

James McCann: Thanks, Andy, and good morning, everyone. Thank you for joining us. This morning, I'll share a few of my thoughts on the current environment, and then I'll turn the call over to Tom, who will provide a business update. We will conclude with a financial update from Bill, and then we'll open it up for your questions. As we announced this morning, our first quarter performance came in line with our expectations. Most notably, our gross margin expanded quite substantially, led by an 830 basis point improvement within our Gourmet Foods and Gift Baskets segment. We began to turn the tide last fiscal year and are benefiting from certain macro trends that have started to revert to the mean of sorts, along with other favorable trends that Bill will discuss in more detail.

Beyond these improvements, our organization has been executing on several key initiatives, including our Work Smarter initiative that is focused on operating more efficiently through the use of technology and automation and also includes our logistics, labor and inventory optimization efforts. Work Smarter is an evergreen initiative that we expect to provide benefits and be increasingly effective in the years ahead. Beyond Work Smarter, we've made great progress on our relationship innovation efforts, which Tom will highlight for you in a few minutes. It is important to remember that our fiscal first quarter, which is historically our smallest quarter by far is comprised of everyday gifting occasions with no major holidays. As we turn our sights to the holiday period that we now just beginning, we expect our sales trends to improve as our business has historically proven to be more resilient during holiday periods.

Quite simply, we believe consumers tend to view holiday gifting as being more of a necessity rather than a purely discretionary purchase. They may trade up or trade down, but we'll look to buy gifts for the holiday periods. As Tom will discuss in more detail, we have never been better positioned to serve our customers and help them find the perfect gift for everyone on their list. We have introduced new product offerings, launched new tools to help our customers who may be lost for words, better express their sentiments, and we have broadened our price points both lower and higher to serve more budgets. We've also had a helping hand from Mother Nature who provided quite a bit of snow in Medford, Oregon this last winter, which helped us produce our best pear crop in the Rogue Valley since 2019.

The pears, our number one sell in the season are simply beautiful and delicious. Our Royal Riviera Pears are available for sale now. And if you have it already, I highly recommend you place your order today. I'll now turn the call over to Tom. Tom, please take us through your business update.

Thomas Hartnett: Thanks, Jim, and good morning, everyone. Our first quarter adjusted EBITDA loss improved $5.5 million over the prior year to a loss of $22.5 million. Our results benefited from certain improving macro trends in our Work Smarter initiative that led to the 450 basis point improvement in gross profit margin and lower expenses, which mitigated the 11% sales decline. Heading into this fiscal year, we anticipated the bifurcation in our sales trends would persist with consumers moderating their spending on everyday gifting occasions while continuing to shop for the major holiday events. Our view was informed by our trends over the past fiscal year and the broader macro environment in which consumers continue to remain pressured by persistent inflation, higher interest rates and more recently, the resumption of student loan repayments.

Knowing this, we expected our sales to be the most challenged during the first quarter as there are no major holiday occasions during the quarter and to begin to improve as we head into the holiday season. For the quarter, we attracted 680,000 new customers. Existing customers represented 70% of our revenue and our AOV increased approximately 5%. It's not surprising that in the current environment, our higher income customers are performing better, representing a greater portion of our customer base and revenues, which in part contributed to the AOV increase. And now, I'd like to share an update on some of our relationship innovation developments, which encompasses everything from new or enhanced product offerings, our merchandising efforts as well as user interface enhancements.

We had a number of developments here and I'm excited to share a few of them with you today. Meet consumers where they are, we are expanding our price points, both higher and lower to accommodate our various customer segments, including those who are attracted to higher value, higher price point offerings, as well as those who are more price-sensitive in the current environment. For our customers looking for higher value offerings, we are offering new product bundles that combine a variety of products from our family of brands and delivering them in one gift box for the recipient. Continued focus on enhancing the customer experience led us to streamline the process to create a better experience for both the gift giver and the gift recipient.

Customers can select from an increased selection of multi-brand bundles that will be sent to their gift recipient in one shipment. This is possible due to the investments we have made in our systems and our multi-brand distribution centers over the last few years. And by leveraging our fulfillment network, we expanded our last mile delivery capabilities to offer customers same-day delivery of, not only floral, but also certain confection bundles. Customers can now order a beautiful 1-800-FLOWERS bouquet and bundle it with our Shari's Berries Cheesecake Bites or birthday cakes that can be delivered on the same-day to help them celebrate a special occasion. Furthermore, we continue to add more options to our assortments. One that has been a standout is providing our customers with the option to choose one or two bottles of wine to go with some of our key gifts.

A vibrant flower shop full of fresh-cut flowers and colorful arrangements.
A vibrant flower shop full of fresh-cut flowers and colorful arrangements.

Making it simple for our customers to add a second bottle of wine with their order has resulted in our customers adding a second bottle of nearly 50% of the time. Speaking of making things simpler for our customers, just in time for the holidays, we are launching a new feature within our checkout process to make it easier for gift givers to express themselves. We were very innovative in our use of AI to offer customers free gifting tools to help them express themselves with their moms and dads during Mother's Day and Father's Day. We've taken that a step further and now empowering customers with, who may be lost for words, with generative AI to help them craft the perfect message to be sent with their gift. Incorporated seamlessly within the checkout process, customers can respond to intuitive prompts, including recipient details, the occasion and desire tone to provide just the right message for their recipient.

This truly gets up to the heart of who we are, a company that helps people express themselves, improve their relationships and stay connected with the most important people in their lives. This effort is part of our ongoing AI road map to increase the use of this technology throughout our platform and enhance the user experience. For our corporate gifting partners, we're excited to leverage our acquisition of SmartGift and launched SmartGift for Business. This new offering revolutionizes the way organizations can build more and better relationships with their key stakeholders. SmartGift for Business provides an all-in-one system that tracks campaigns, measure success and provides recommendations for future efforts to help organizations maximize their business relationships.

We are excited about the opportunities these enhancements present as we continue to grow our offerings and provide customers with a unique experience that they can only get from our family of brands. As you can see, our Work Smarter and relationship innovation efforts are having a clear and beneficial impact on our business. They are the driving principles of our business and we look forward to providing future updates on our progress in these areas. Now I'll turn it over to Bill to provide the financial review.

William Shea: Thanks, Tom, and good morning, everyone. On our last call, we discussed our long-term historical trends and our expectation for our sales, gross profit margin and adjusted EBITDA metrics to revert to the mean over time. This includes returning to organic revenue growth and a gross profit margin in the low 40% range. Part of this reversion will be led by the external macro forces, such as the broader consumer environment and commodity prices and part will be led by our own Work Smarter and relationship innovation efforts that we expect to grow sales, increase margins and tightly manage expenses. As Jim and Tom highlighted, our first quarter performed according to our expectations, and we saw improving revenue trends, a significant improvement in gross margin and a reduction of expenses that led to a $5.5 million improvement in adjusted EBITDA.

Let's take a moment to review each of these. Our quarter-over-quarter revenue trends improved with revenues declining 11.4% for the first quarter as compared to 14.8% during the fourth quarter of fiscal 2023, excluding the impact of the 53rd week in the fourth quarter of fiscal 2022. Gross profit margin, which was a real standout this quarter, increased 450 basis points over the last year to 37.9%. This was led by an 830 basis point improvement in our Gourmet Food and Gift Baskets segment. Gross margin benefited from several factors, including lower ocean freight costs, our strategic pricing initiatives, the decline in certain commodity costs, our automation efforts to operate more efficiently and better inventory management. We expect these variables to continue to be a tailwind throughout the fiscal year even as we cycle against the gross profit margin improvement that we began to realize in the second quarter of last year and to a greater extent in the second half of the year.

Gross margin improvement, combined with our reduction in operating expenses enabled us to improve our year-over-year adjusted EBITDA loss by $5.5 million. As we look out to the holiday period, while the current consumer environment remains complex and discretionary consumer spending remains pressured, we believe that consumers will be more inspired to shop for the holidays. And as we witnessed a year ago, we anticipate that they will shop later in the period. Now let's review our key metrics for the quarter. Our first quarter revenues declined 11.4% as compared to the year ago to $269.1 million. Gross profit margin increased 450 basis points over last year to 37.9%. Gross margin expansion was led by improvements across each of our business segments and most notably within the Gourmet Food and Gift Baskets segment, which increased 830 basis points to 31.5%.

Beyond the gross margin improvement, we also reduced our operating expenses by $3.3 million or 2.3% for the quarter, as we remain steadfast in managing what is in our control and reducing expenses despite higher labor costs and inflationary increases. As a result, our first quarter adjusted EBITDA loss improved $5.5 million to $22.5 million as compared to the prior year despite the top line pressure. Net loss for the quarter improved to $31.2 million or $0.48 per share as compared to a net loss of $33.7 million or $0.52 per share in the prior year. Now, let's review our segment results. Our Gourmet Food and Gift Baskets segment, revenues declined 9.3% to $98.1 million compared with $108.2 million in the prior year. Our wholesale revenue component was roughly flat compared with a year ago.

This segment's gross profit margin expanded 830 basis points to 31.5% compared to 23.2% in the prior year period, improving on lower ocean freight costs, a decline in certain commodity prices and the company's strategic pricing initiatives and better inventory management. Segment contribution margin loss improved by $7.7 million to $11 million compared to the segment contribution margin loss of $18.7 million in the prior year period. This improvement primarily reflects the gross profit margin improvement, combined with more efficient marketing spend. Our Consumer Floral and Gifts segment, revenues decreased 12.3% to $142.2 million compared with $162.2 million a year ago. Profit margin expanded 140 basis points to 39.6% compared with 38.2% in the prior year period, improving our strategic pricing initiatives and lower ocean freight costs.

Segment contribution margin was $8.8 million compared with segment contribution margin of $10.8 million in the prior year period, reflecting the lower revenue. The BloomNet segment. Revenues for the quarter decreased 13.5% to $28.9 million. Gross profit margin increased to 50.2%, improving 680 basis points compared with 43.4% in the prior year period, primarily reflecting strategic pricing initiatives, lower ocean freight costs and product mix. Segment contribution margin was $9.4 million compared with $9.5 million in the prior year period as the gross margin improvement helped offset revenue decline. Turning to our balance sheet. Our cash and investment position was $8.4 million at the end of the first quarter, seasonally low as we prepare for the holiday period.

Inventory was $280.6 million compared with inventory of $342.6 million at the end of the same time last year, benefiting from this component of our Work Smarter initiative that is focused on operating more efficiently with lower inventory. In terms of debt. We reduced our total outstanding debt by $67.5 million as compared to last year. We had $197.5 million in term debt and borrowings of $35 million under our revolving credit facility in preparation for the upcoming holiday season. This compares to total outstanding debt of $300 million at the same time a year ago. We expect borrowings under the revolver to be fully paid during the fiscal second quarter. Regarding guidance for fiscal 2024. We continue to expect total revenues on a percentage basis to decline in the mid-single digits as compared with the prior year.

Adjusted EBITDA to be in the range of $95 million to $100 million and 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. That was a good review. For us, the main takeaway from the first quarter was that, so far this year, essentially it's unfolding as we expected, and we are on a path of a multiyear reversion to the mean journey. While everyone's crystal ball on consumer behavior for the holiday period is a bit cloudy right now, with the enhancements we have made going into the holiday period, we have never been better positioned to help our customers celebrate the holidays with the important people in their lives. As Tom highlighted, we are providing consumers with a broader array of gifting options and price points to help them find a perfect gift for anyone on their list. We look forward to helping them nourish their relationships. After all, we know that the greatest gift of all is having more and better and more meaningful relationships. And now, we'll be happy to open the call for your questions.

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