10-K 1 tenk.htm 1-800-FLOWERS COM 10-K 7-3-2011 tenk.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM 10-K

    x           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 
         For the fiscal year ended July 3, 2011                                            

or

    ¨           TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-26841

1-800-FLOWERS.COM, Inc.
(Exact name of registrant as specified in its charter)

             DELAWARE                                                                                                                                                                                                  11-3117311
(State or other jurisdiction of                                                                                                                                                                               (I.R.S. Employer
incorporation or organization)                                                                                                                                                                             Identification No.)
One Old Country Road, Carle Place, New York 11514
(Address of principal executive offices)(Zip code)

(516) 237-6000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class                                                                Name of each Exchange on which registered
     Class A common stock, par value $0.01 per share                                                              The Nasdaq Stock Market, Inc.
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. Yes  No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                                            Yes  No 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer                                                                                                        Accelerated filer þ
Non-accelerated filer   (Do not check if a smaller reporting company)          Smaller reporting company 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No þ
 
The aggregate market value of the voting stock held by non-affiliates of the registrant, computed by reference to the closing price as of the last business day of the registrant’s most recently completed second fiscal quarter, December 26, 2010, was approximately $71,897,000.  The registrant has no non-voting common stock.
 
 27,366,611
(Number of shares of class A common stock outstanding as of September 9, 2011)

36,858,465
(Number of shares of class B common stock outstanding as of September 9, 2011)

DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant’s Definitive Proxy Statement for the 2011 Annual Meeting of Stockholders (the Definitive Proxy Statement) are incorporated by reference into Part III of this Report.

 
 

 
1-800-FLOWERS.COM, INC.
 FORM 10-K
For the fiscal year ended July 3, 2011
INDEX
Part I.
   
    Item 1.
 
    Item 1A.
 
    Item 1B.
 
    Item 2.
 
    Item 3.
 
    Item 4.
 
Business
 
Risk Factors
 
Unresolved Staff Comments
 
Properties
 
Legal Proceedings
 
(Removed and Reserved)
 
                           11
 
                           18
 
                           19
 
                           19
 
                           20
Part II.
   
    Item 5.
 
 
    Item 6.
 
    Item 7.
 
    
    Item 7A.
 
     Item 8.
 
    Item 9.
 
 
    Item 9A.
 
    Item 9B.
 
Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
 
Selected Financial Data
 
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
 
Quantitative and Qualitative Disclosures about Market Risk
 
Financial Statements and Supplementary Data
 
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
 
Controls and Procedures
 
Other Information
 
22
 
24
 
 
26
 
43
 
43
 
 
43
 
 43
 
 46
 
 
Part III.
   
    Item 10.
 
    Item 11.
 
    Item 12.
 
 
    Item 13.
 
    Item 14.
Directors, Executive Officers and Corporate Governance
 
Executive Compensation
 
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
 
Certain Relationships and Related Transactions, and Director Independence
 
Principal Accounting Fees and Services
 46
 
 46
 
 
 46
 
 46
 
 46
 
Part IV.
   
    Item 15.
Exhibits, Financial Statement Schedules
 47
    Signatures
 
 
 
 
 

 

 

PART I

Item 1. BUSINESS

The Company

1-800-FLOWERS.COM, Inc. is the world’s leading florist and gift shop. For more than 35 years, 1-800-FLOWERS® (1-800-356-9377 or www.1800flowers.com) has been helping deliver smiles for our customers with gifts for every occasion, including fresh flowers and the finest selection of plants, gift baskets, gourmet foods, confections, candles, balloons and plush stuffed animals. As always, our 100% Smile Guarantee backs every gift. The 1-800-FLOWERS.COM Mobile Flower & Gift Center was named winner of the 2010 “Best Mobile App for E-commerce” by DPAC (Digiday’s Publishing & Advertising Awards) and the 2010 Mobile App of the Year Award in the “Best Shopping” category by RIS (Retail Info Systems). 1-800-FLOWERS.COM was also rated number one vs. competitors for customer service by STELLAService and named by the E-Tailing Group as one of only nine online retailers out of 100 benchmarked to meet the criteria for Excellence in Online Customer Service. 1-800-FLOWERS.COM has been honored in Internet Retailer’s “Hot 100: America’s Best Retail Web Sites” for 2011 and was one of only five retailers to receive the 2011 Customer Innovation Award from Avaya for transforming the business through innovative use of business communications and collaboration technologies. The Company’s BloomNet® international floral wire service (www.mybloomnet.net) provides a broad range of quality products and value-added services designed to help professional florists grow their businesses profitably.

The 1-800-FLOWERS.COM “Gift Shop” also includes gourmet gifts such as popcorn and specialty treats from The Popcorn Factory® (1-800-541-2676 or www.thepopcornfactory.com); cookies and baked gifts from Cheryl’s (1-800-443-8124 or www.cheryls.com); premium chocolates and confections from Fannie May® confections brands (www.fanniemay.com and www.harrylondon.com); gift baskets and towers from 1-800-Baskets.com® (www.1800baskets.com); and wine gifts from Winetasting.com® (www.winetasting.com). The Company’s Celebrations® brand (www.celebrations.com) is a leading online destination for fabulous party ideas and planning tips and FineStationery.com® (www.finestationery.com) is the premier site for unique, customizable invitations, announcements and greeting cards. 1-800-FLOWERS.COM, Inc. is involved in a broad range of corporate social responsibility initiatives including continuous expansion and enhancement of its environmentally-friendly “green” programs as well as various philanthropic and charitable efforts.

During the fourth quarter of fiscal 2009, the Company made the strategic decision to divest its Home & Children’s Gifts business segment to focus on its core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets categories.  On January 25, 2010, the Company completed the sale of these businesses; refer to the Consolidated Financial Statements “Discontinued Operations” for a further discussion.  Consequently, the Company has classified the results of operations of its Home & Children’s Gifts segment as discontinued operations for all periods presented.

Shares in 1-800-FLOWERS.COM, Inc. are traded on the NASDAQ Global Select Market, ticker symbol: FLWS.

References in this Annual Report on Form 10-K to “1-800-FLOWERS.COM” and the “Company” refer to 1-800-FLOWERS.COM, Inc. and its subsidiaries. The Company’s principal offices are located at One Old Country Road, Suite 500, Carle Place, NY 11514 and its telephone number at that location is (516) 237-6000.

The Origins of 1-800-FLOWERS.COM

The Company’s operations began in 1976 when James F. McCann, its Chairman and Chief Executive Officer, acquired a single retail florist in New York City, which he subsequently expanded to a 14-store chain.  Thereafter, the Company modified its business strategy to take advantage of the rapid emergence of toll-free calling. The Company acquired the right to use the toll-free telephone number 1-800-FLOWERS, adopted it as its corporate identity and began to aggressively build a national brand around it.  The Company believes it was one of the first companies to embrace this new way of conducting business.

In order to support the growth of its toll-free business and to provide superior customer service, the Company developed an operating infrastructure that incorporated the best available technologies.  Over time, the Company implemented a sophisticated transaction processing system that facilitated rapid order entry and fulfillment, an advanced telecommunications system and multiple customer service centers to handle increasing call volume.
 
 
 
1

 
To enable the Company to deliver products reliably nationwide on a same-day or next-day basis and to market pre-selected, high-quality floral products, the Company created BloomNet®, a nationwide network including independent local florists selected for their high-quality products, superior customer service and order fulfillment and delivery capabilities.

The Company’s online presence has enabled it to expand the number and types of products it can effectively offer to its customers. As a result, the Company has developed relationships with customers who purchase products for both a broad range of celebratory gifting occasions as well as for everyday personal use.  The Company has broadened its product offering to include products that a customer could expect to find in a high-end florist shop, including a wide assortment of cut flowers and plants, candy, balloons, plush toys, giftware and gourmet gift baskets.  The Company has also significantly expanded its presence in the gourmet food and gift baskets category, which the Company has identified as having significant revenue and earnings growth potential, through a combination of organic initiatives and strategic acquisitions.

The Company’s Strategy

1-800-FLOWERS.COM’s objective is to become the leading authority on thoughtful gifting, to serve an expanding range of our customers’ celebratory needs, thereby helping our customers express themselves and connect with the important people in their lives.  The Company will continue to build on the trusted relationships with our customers by providing them with ease of access, tasteful and appropriate gifts, and superior service.

The Company believes that 1-800-FLOWERS.COM is one of the most recognized brands in the floral and gift industry. The strength of its brand has enabled the Company to extend its product offerings beyond the floral category into complementary products, which include gourmet popcorn, cookies and related baked and snack food products, premium chocolate and confections, wine gifts and gourmet gift baskets. This extension of gift offerings helps our customers in all of their celebratory occasions, and will enable the Company to increase the number of purchases and the average order value by existing customers who have come to trust the 1-800-FLOWERS.COM brand, as well as continue to attract new customers.

The Company believes its brands are characterized by:

·  
Convenience.  All of the Company’s product offerings can be purchased either via the web and wireless devices, or via the Company’s toll-free telephone numbers, 24 hours a day, seven days a week, for those customers who prefer a personal gift advisor to assist them.  The Company offers a variety of delivery options, including same-day or next-day service throughout the world.
·  
Quality.  High-quality products are critical to the Company’s continued brand strength and are integral to the brand loyalty that it has built over the years.  The Company offers its customers a 100% satisfaction guarantee on all of its products.
·  
Delivery Capability.  The Company has developed a market-proven fulfillment infrastructure that allows delivery on a same-day, next-day and any-day basis.  Key to the Company’s fulfillment capability is an innovative “hybrid” model which combines BloomNet (comprised of independent florists operating retail flower shops, Company-owned stores, and franchised stores), with its distribution centers located in California, Delaware, Florida, Illinois, New York and Ohio, and third-party vendors who ship directly to the Company’s customers.  These fulfillment points are connected by the Company’s proprietary “BloomLink®” communication system, a secure internet-based system through which orders and related information are transmitted.
·  
Selection.  Over the course of a year, the Company offers more than 2,900 varieties of fresh-cut flowers, floral arrangements and plants, and more than 4,700 SKUs of gifts, gourmet foods and gift baskets, cookies, chocolates and wines.
·  
Customer Service.  The Company strives to ensure that customer service, whether online, wireless, via the telephone, or in one of its retail stores is of the highest caliber.  The Company operates a customer service center at its headquarters in New York, and employs a network of home agents to provide helpful assistance on everything from advice on product selection to the monitoring of the fulfillment and delivery process.

As part of the Company’s continuing effort to serve the thoughtful gifting needs of its customers, and leverage its business platform, where appropriate, the Company intends to expand the breadth of the 1-800-Flowers.com brand.  The Company intends to accomplish this through organic growth, and where appropriate, through acquisition of complementary businesses.   In keeping with this strategy, in May 2011, the Company purchased selected assets of Fine Stationery, Inc., a retailer of personalized stationery, invitations and announcements, and in March 2011, acquired selected assets of Mrs. Beasley’s Bakery, LLC, a baker and marketer of cakes, muffins and gourmet gift baskets. In March 2009, the Company purchased selected assets of Geerlings & Wade, Inc., a retailer of wine and related products.  In July 2008, the Company acquired selected assets of Napco Marketing Corp., a wholesale merchandiser and marketer of products designed primarily for the floral industry, which complement the product line already offered by BloomNet.  In April 2008, the Company acquired DesignPac Gifts, LLC, a designer, assembler and distributor of wholesale gourmet gift baskets, gourmet food towers and gift sets, including a broad range of branded and private label components, which in turn facilitated the Company’s ability to launch its direct-to-customer gift baskets 1-800-Baskets.com in November 2009 by leveraging 1-800-Flowers.com strong brand equity, online traffic and customer database along with the product design, sourcing and confecting capabilities of DesignPac.  In May 2006, the Company acquired Fannie May Confections Brands, Inc., a manufacturer and direct retailer of premium chocolates and confections, through its Fannie May®, Harry London® and Fanny Farmer® brands. In March 2005, the Company acquired Cheryl & Co., a manufacturer and direct marketer of premium cookies and related baked gift items, and, in November 2004, The Winetasting Network, a distributor and direct-to-consumer marketer of wine, now marketed under the winetasting.com URL. These acquisitions have enabled the Company to more fully develop its gourmet food and gift baskets product line, which the Company has identified as having significant growth and earnings potential.

 
2

 
As a complement to the Company’s own brands and product lines, the Company has formed strategic relationships with Lenox®, Waterford®, Crabtree & Evelyn®, Yankee Candle® and Junior’s® Cheescakes. The Company also continues to develop signature products in order to provide its customers with differentiated products and further its position as a destination for all of their gifting needs.   During fiscal 2010, the Company terminated its exclusive three year merchandising and marketing relationship with Martha Stewart Living Omnimedia, which included Martha Stewart for 1-800-Flowers.com™, a co-branded line of fresh, seasonal flower arrangements and plants which began in April of fiscal 2008, as a result of lower than anticipated customer demand for the premium priced products, thus ending the program with one year remaining on the original agreement.

As a provider of gifts to consumers and wholesalers for resale to consumers, the Company is subject to changes in consumer confidence and the economic conditions that impact our customers. Demand for the Company’s products is affected by the financial health of our customers, which is influenced by macro economic issues such as unemployment, fuel and energy costs, weakness in the housing market and unavailability of consumer credit.  During the recent economic downturn, the demand for our products, compared to pre-recessionary levels, has been adversely affected by the reduction in consumer spending.

Anticipating continued economic pressure, during fiscal 2011, the Company took a more conservative view of the economy, and focused on achieving growth and enhancing its results through areas of the business over which it had more control. Throughout the year, the Company saw improving trends in terms of revenue growth, gross margin and contribution margin.  Revenue returned to growth in our fiscal third quarter, and continued into our fiscal fourth quarter, resulting in annual year-over-year growth. This was achieved in a challenging environment through a merchandising strategy that focused on providing our customers with truly original products, the success of which can be seen in increased average order value and improved return on investment in marketing programs.  All of the above factors resulted in improved operating results.

Reflecting the continued uncertainty in the consumer economy, the Company does not anticipate significant improvements in consumer demand for discretionary purchases during fiscal 2012.  With this in mind, the Company plans to continue its strategy of focusing on areas of its business where it believes it can exert control and thereby affect enhanced results, including:

·  
leveraging the Company’s operating cost structure;
·  
merchandising initiatives that emphasize truly original product designs and product line extensions;
·  
marketing programs that provide improved return on investment by engaging directly with customers to deepen our relationship with them;
·  
manufacturing and sourcing enhancements that can help mitigate commodity and shipping price increases and deliver increased gross profit margins, and;
·  
continuous innovation

For fiscal 2012, the Company expects to build on the positive trends that it has shown during fiscal 2011, including increases in revenue, gross margin and contribution margin in its Consumer Floral business as well as continued top and bottom line growth in its BloomNet and Gourmet Food and Gift Baskets categories. The Company will continue to focus on the three principles that it believes will drive long-term profitable growth:

·  
Know and Take Care of Our Customer – by providing the right products and the best services to help them express themselves and deliver smiles.  This is evidenced in 1-800-FLOWERS.COM recent number one ranking vs. competitors for customer service by STELLAService as well as being named by the E-Tailing Group as one of only nine online retailers out of 100 benchmarked to meet the criteria for Excellence in Online Customer Service.
·  
Maintain and enhance our Financial Strength and Flexibility - by seeking ways to reducing our operating costs while strengthening our balance sheet and adding flexibility to our capital structure.  During fiscal 2010, the Company completed the sale of its non-strategic Home and Children’s Gifts business and used the proceeds to further pay down term debt, strengthening its balance sheet and revising its bank credit facility to provide additional flexibility; and in the first quarter of fiscal 2012, completed the sale of certain assets of its WinetastingNetwork wine fulfillment services business.
·  
Continue to Innovate and Invest for the Future – in new technology opportunities such as mobile e-commerce, where the Compnay was awarded the 2010 “Best Mobile App for E-commerce” by DPAC (Digiday’s Publishing & Advertising Awards) and the 2010 Mobile App of the Year Award in the “Best Shopping” category by RIS (Retail Info Systems). In addition, 1-800-FLOWERS.COM has been honored in Internet Retailer’s “Hot 100: America’s Best Retail Web Sites” for 2011 and was one of only five retailers to receive the 2011 Customer Innovation Award from Avaya for transforming the business through innovative use of business communications and collaboration technologies.
 

 
 
3

 
Business Categories

The Company has segmented its organization in the following three business categories: Consumer Floral, Gourmet Food and Gift Baskets, and BloomNet Wire Service business.  The Consumer Floral business category includes the operations of the Company’s flagship brand, 1-800-Flowers.com, Celebrations, and FineStationery.com, while the Gourmet Food and Gift Baskets category includes the operations of Fannie May Confections Brands, Cheryl’s (which includes Mrs. Beasley’s), The Popcorn Factory, Winetasting.com,  DesignPac and 1-800-Baskets. The BloomNet Wire Service includes the operations of BloomNet, BloomNet Technologies, and Napco.  (Refer to Note 15, Business Segments included within Part II, Item 8: Financial Statements and Supplementary Data.)

During the fourth quarter of fiscal 2009, the Company made the strategic decision to divest its Home & Children’s Gifts business segment to focus on its core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets categories.  On January 25, 2010, the Company completed the sale of these businesses; refer to the Consolidated Financial Statements “Discontinued Operations” for a further discussion.  Consequently, the Company has classified the results of operations of its Home & Children’s Gifts segment as discontinued operations for all periods presented.

The Company’s Products and Service Offerings

The Company offers a wide range of products including fresh-cut flowers, floral arrangements and plants, gifts, popcorn, gourmet foods and gift baskets, cookies, chocolates, candy and wine. In order to maximize sales opportunities, products are not exclusive to certain brands, and may be sold across business categories. In addition to selecting its core products, the Company’s merchandising team works closely with manufacturers and suppliers to select and design products that meet the seasonal, holiday and other special needs of its customers.

The Company’s differentiated and value-added product offerings create the opportunity to have a relationship with customers who purchase items not only for gift-giving occasions but also for everyday consumption. The Company’s merchandising team works closely with manufacturers and suppliers to select and design its floral, gourmet foods and gift baskets, as well as other gift-related products that accommodate our customers' needs to celebrate a special occasion or convey a sentiment. As part of this continuing effort, the Company intends to continue to develop differentiated products and signature collections that customers have embraced and come to expect, while eliminating marginal performers from its product offerings.

In each of the last three fiscal years, virtually all of the Company’s revenues have been derived from domestic sources. The Company’s product selection consists of:

Flowers & Plants.  The Company offers fresh-cut flowers and floral arrangements for all occasions and holidays, available for same-day delivery.  The Company provides its customers with a choice of florist designed products, flowers delivered through its Fresh From Our Growers® program, and unique floral creations from our floral artisans.  The Company also offers a wide variety of popular plants to brighten the home and/or office, and accent gardens and landscapes.

 
4

 
Gourmet Foods and Gift Baskets. The Company manufactures premium cookies and baked gift items under the Cheryl’s and Mrs. Beasley’s brands, which are delivered in beautiful and innovative gift baskets and containers, providing customers with a variety of assortments to choose from.  The Popcorn Factory brand pops premium popcorn and specialty snack products, while Fannie May Confections Brands manufactures premium chocolate and candy under the Fannie May, Harry London and various private label brand names. During the second quarter of fiscal 2010, the Company launched a new co-branded website which featured the 1-800-BASKETS.COM® brand, a collection of gourmet gift baskets confected by DesignPac.  Additionally, through its winetasting.com business, the Company offers its customers an array of different wines from around the world. Currently, restrictions exist in many states regarding interstate shipment of wine. As such, these items are only available in selected states. Many of the Company’s gourmet products are packaged in seasonal, occasion specific or decorative tins, fitting the “giftable” requirement of individual customers, while also adding the capability to customize the tins with corporate logos and other personalized features for the Company’s corporate customers’ gifting needs.

BloomNet Products and Services. The Company’s BloomNet business provides its members with products and services, including: (i) clearinghouse services, consisting of the settlement of orders between sending florists (including the 1-800-Flowers.com brand) and receiving florists, (ii) advertising, in the form of member directories, including the industry’s first on-line directory, (iii) communication services, by which BloomNet florists are able to send and receive orders and communicate between members, using Bloomlink®, the Company’s proprietary electronic communication system, (iv) other services including web hosting and point of sale, and (v) wholesale products, which consist of branded and non-branded floral supplies, enabling member florists to reduce their costs through 1-800-Flowers purchasing leverage, while also ensuring that member florists will be able to fulfill 1-800-Flowers.com brand orders based on recipe specifications. While maintaining industry-high quality standards for its 1-800-Flowers.com brand customers, the Company offers florists a compelling value proposition, offering products and services that its florists need to grow their business and to enhance profitability.

Marketing and Promotion

The Company’s marketing and promotion strategy is designed to strengthen the 1-800-FLOWERS.COM brands, increase customer acquisition, build customer loyalty, and encourage repeat purchases. The Company’s goal is to make its brands synonymous with thoughtful gifting.  To do this, the Company intends to invest in its brands and acquisition of new customers through the use of selective on and off-line media, direct marketing, public relations and strategic Internet relationships, while cost-effectively capitalizing on the Company’s large and loyal customer base.

The Company’s strong appeal and brand recognition provide it with significant marketing opportunities.  For example, the Company was featured in an episode of Undercover Boss, providing a great opportunity for all of its brands to receive broad national exposure in front of an estimated 15 million viewers.

Enhance its Customer Relationships.  The Company intends to deepen its relationship with its customers and be their trusted resource to fulfill their need for quality, tasteful gifts.  It plans to encourage more frequent and extensive use of its branded web sites, by continuing to provide product-related content and interactive features which will enable the Company to reach its customers during non-holiday periods, thereby increasing everyday purchases for birthdays, anniversaries, weddings, and sympathy. Examples of these efforts include the Company’s “Spot-a-Mom” program and Celebration’s series of books which enhance engagement through customer generated content. In addition, through customer panel research, the 1-800-Flowers.com brand recently introduced a number of new signature products designed to increase everyday purchases, including the successful introduction of the “a DOG-able™” collection, a variety of dog-shaped arrangements of fresh carnations through the 1-800-Flowers brand, which build upon the successful “Birthday Cake” and “Happy Hour” collections.  As of July 3, 2011, the Company’s total database of unique customers numbered approximately 36.2 million (18.8 million of which have transacted business with the Company within the past 36 months).

In order to attract new customers and to increase purchase frequency and average order value of existing customers, the Company markets and promotes its brands and products as follows:

Strategic Online Relationships.  The Company promotes its products through strategic relationships with leading Internet portals, search engines and online networks.  The Company’s online relationships include, among others Facebook, Google, AOL, Yahoo! and Microsoft.

 
5

 
Affiliate and Co-Marketing Promotions.  In addition to securing alliances with frequently visited web sites, the Company has developed an affiliate network that includes thousands of web sites operated by third parties. Affiliate participation may be terminated by them or by the Company at any time.  These web sites earn commissions on purchases made by customers referred from their sites to the Company’s web site. In order to expand the reach of its marketing programs and stretch its marketing dollars, the Company has established a number of co-marketing relationships and promotions to advertise its products.

E-mails. The Company is able to capitalize on its customer database of approximately 36.2 million unique customers (18.8 million of which have transacted business with the Company within the past 36 months), by utilizing cost-effective, targeted e-mails to notify customers of product promotions, remind them of upcoming gifting occasions and convey other marketing messages.

Direct Mail and Catalogs.  The Company uses its direct mail promotions and catalogs to increase the number of new customers and to increase purchase frequency of its existing customers. Through the use of catalogs, the Company can utilize its extensive customer database to effectively cross-promote its products.  In addition to providing a direct sale mechanism, these catalogs drive on-line sales and will attract additional customers to the Company’s web sites. For the year ended July 3, 2011, the Company mailed in excess of 22 million branded catalogs.

Off-line Media.  The Company utilizes off-line media, including television, radio and print to market its brands and products.  Off-line media allows the Company to reach a large number of customers and to target particular market segments.

The Company’s Web Sites

The Company offers floral, plant, gift baskets, gourmet foods, chocolate and candies, plush and specialty gift products through its co-branded 1-800-FLOWERS.COM (www.1800flowers.com) and 1-800-BASKETS.COM (www.1800baskets.com) web site. Customers can come to the Company’s web sites directly or be linked by one of the Company’s portal providers, search engine, or affiliate relationships. These include AOL (keyword:flowers), Yahoo!,  Microsoft and Google, as well as thousands of online affiliate program members and social media sites such as Facebook. The Company also offers premium chocolates and confections from Fannie May Fine Chocolates, (www.fanniemay.com and www.harrylondon.com), premium popcorn and specialty food products through The Popcorn Factory (www.thepopcornfactory.com), exceptional baked cookies and baked gifts from Cheryl’s (www.cheryls.com), and wine gifts from Winetasting.com, (www.winetasting.com) web sites.  The Company’s Fine Stationery premier site (www.finestationery.com) offers customers a vast array of unique, customizable invitations, announcements and greeting cards.  More than 70% of online revenues are derived from traffic coming directly to one of the Company’s Universal Resource Locators (“URL’s”).

The Company’s web sites allow customers to easily browse and purchase its products, promote brand loyalty and encourage repeat purchases by providing an inviting customer experience.  The Company’s web sites offer customers detailed product information, complete with photographs, personalized shopping services, including search and order tracking, contests, sweepstakes, gift-giving suggestions and reminder programs, party tips and planning, and information about special events and offers. The Company has designed its web sites to be fast, secure and easy to use and allows customers to order products with minimal effort. The Company’s web sites include the following key features in addition to the variety of delivery and shipping options (same day/next day) and 24 hour/7 day customer service that are available to all its customers.

During fiscal 2012, the Company will begin launching a multi-brand web-site, enabling its customers to access all of its family of brands through “tabs” on one URL.

Technology Infrastructure

The Company believes it has been and continues to be a leader in implementing new technologies and systems to give its customers the best possible shopping experience, whether online or over the telephone. Through the use of customized software applications, the Company is able to retrieve, sort and analyze customer information to enable it to better serve its customers and target its product offerings.  The Company’s online and telephonic orders are fed directly from the Company’s secure web sites, or with the assistance of a gift advisor, into a transaction processing system which captures the required customer and recipient information.  The system then routes the order to the appropriate Company distribution center, or for florist fulfilled or drop-shipped items, selects a florist or other vendor to fulfill the customer's order and electronically transmits the necessary information using BloomLink®, the Company’s proprietary communication system, assuring timely delivery. In addition, the Company’s gift advisors have electronic access to this system, enabling them to assist in order fulfillment and subsequently track other customer and/or order information.

 
6

 
The Company’s technology infrastructure, primarily consisting of the Company’s web sites, transaction processing, manufacturing and warehouse management, customer databases and telecommunications systems, is built and maintained for reliability, security, scalability and flexibility.  To minimize the risk of service interruptions from unexpected component or telecommunications failure, maintenance and upgrades, the Company has built full back-up and system redundancies into those components of its systems that have been identified as critical.

Fulfillment and Manufacturing Operations

The Company’s customers primarily place their orders either online or over the telephone. The Company’s development of a hybrid fulfillment system, which enables the Company to offer same-day, next-day and any-day delivery, combines the use of BloomNet (comprised of independent florists operating retail flower shops, franchise florist shops and a small number of Company-owned stores), with the Company-owned distribution centers and brand-name vendors who ship directly to the Company’s customers.  While providing a significant competitive advantage in terms of delivery options, the Company’s fulfillment system also has the added benefit of reducing the Company’s capital investments in inventory and infrastructure. All of the Company’s products are backed by a 100% satisfaction guarantee, and the Company’s business is not dependent on any single third-party supplier.

To ensure reliable and efficient communication of online and telephonic orders to its BloomNet members and third party gift vendors, the Company developed BloomLink®, a proprietary and secure internet-based communications system which is available to all BloomNet members and third-party gift vendors. The Company also has the ability to arrange for international delivery of floral products through independent wire services and direct relationships.

Fulfillment and manufacturing of products is as follows:

Flowers and Plants.  A majority of the Company’s floral orders are fulfilled by one of the Company’s BloomNet members, allowing the Company to deliver its floral products on a same-day or next-day basis to ensure freshness and to meet its customers’ need for immediate gifting.  In addition, the Company is better positioned to ensure consistent product quality and presentation and offer a greater variety of arrangements, which creates a better experience for its customers and gift recipients. The Company selects retail florists for BloomNet based upon the florist's design staff, facilities, quality of floral processing, and delivery capabilities and allocates orders to members within a geographical area based on historical performance of the florist in fulfilling orders, and the number of BloomNet florists currently serving the area. The Company regularly monitors BloomNet florists’ performance and adherence to the Company’s quality standards to ensure proper fulfillment.
 
 
The Company’s relationships with its BloomNet members are non-exclusive.  Many florists, including many BloomNet florists, also are members of other floral fulfillment organizations.  The BloomNet agreements generally are cancelable by either party with ten days notification and do not guarantee any orders, dollar amounts or exclusive territories from the Company to the florist.   In certain instances, the Company is required to fulfill orders through non-BloomNet members, and transmits these orders to the fulfilling florist using the communication system of an independent wire service or via telephone.

In addition to its florist designed product, the Company offers its customers an alternative to florist designed products through its Fresh From Our Growers® program, and by providing for a full array of products from bouquets to unique floral arrangements designed by our floral artisans.

As of July 3, 2011, the Company operates 2 floral retail stores located in New York and 1 fulfillment center.  In addition, the Company has over 100 franchised stores, located within the United States.  Company-owned stores serve as local points of fulfillment and enable the Company to test new products and marketing programs.

Gourmet Foods and Gift Baskets.  In order to take advantage of improved margins, better control quality and to offer premium branded signature products in the Gourmet Food and Gift Baskets product category, the Company has acquired several gourmet food retailers with manufacturing operations. The Company’s premium chocolates are manufactured and distributed from its 189,000 square foot production facility in Akron, Ohio, and the Company’s cookie and baked gifts are fulfilled from its 176,000 square foot baking and distribution center in Obetz, Ohio, while its premium popcorn and related snack products are shipped from the Company’s 154,000 square foot manufacturing and distribution center located in Lake Forest, Illinois.  The Company’s wine gift and fulfillment services are provided through a 68,000 square foot fulfillment center in Napa, California.  (In the first quarter of fiscal 2012, the Company completed the sale of certain assets of its WinetastingNetwork wine fulfillment services business, and entered into a fulfillment agreement with the buyer to handle the Company’s direct-to-consumer wine business orders.) Gift basket confection and fulfillment for both wholesale and 1-800-Baskets.com is handled by DesignPac Gifts LLC, through its 249,000 square foot distribution center located in Melrose Park, IL. As of July 3, 2011, the Company operates 85 Fannie May/Harry London and 9 Cheryl’s retail stores.

 
7

 
Seasonality

The Company’s quarterly results may experience seasonal fluctuations. Due to the Company’s expansion into non-floral products, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, generates the highest proportion of the Company’s annual revenues. In addition, as the result of a number of major floral gifting occasions, including Mother's Day and Administrative Professionals Week, revenues also rise during the Company’s fiscal fourth quarter. Finally, results during the Company’s fiscal first quarter are negatively impacted by the lack of major gift-giving holidays, and the disproportionate amount of overhead incurred during this slow period.

Accordingly, a disproportionate amount of operating cash flows are generated in the Company’s fiscal second and fourth quarters. In preparation for the Company’s second quarter holiday season, the Company significantly increases its inventories, and therefore, corresponding cash requirements, which traditionally have been financed by cash flows from operations and bank lines of credit, are highest during the latter part of the Company’s fiscal first quarter, peaking within its second fiscal quarter. The Company has historically repaid all revolving bank lines of credit with cash generated from operations, prior to the end of the Company’s fiscal second quarter.

Competition

The growing popularity and convenience of e-commerce has continued to give rise to established businesses on the Internet. In addition to selling their products over the Internet, many of these retailers sell their products through a combination of channels by maintaining a web site, a toll-free phone number and physical locations.  Additionally, several of these merchants offer an expanding variety of products and some are attracting an increasing number of customers.  Certain mass merchants have expanded their offerings to include competing products and may continue to do so in the future. These mass merchants, as well as other potential competitors, may be able to:

·  
undertake more extensive marketing campaigns for their brands and services;
·  
adopt more aggressive pricing policies; and
·  
make more attractive offers to potential employees, distributors and retailers.

In addition, the Company faces intense competition in each of its individual product categories.  In the floral industry, there are various providers of floral products, none of which is dominant in the industry. The Company’s competitors include:

·  
retail floral shops, some of which maintain toll-free telephone numbers and web sites;
·  
online floral retailers;
·  
catalog companies that offer floral products;
·  
floral telemarketers and wire services; and
·  
supermarkets, mass merchants and specialty retailers with floral departments.

Similarly, the plant, gift basket, gourmet foods and wine categories are highly competitive. Each of these categories encompasses a wide range of products, is highly fragmented and is served by a large number of companies, none of which is dominant.  Products in these categories may be purchased from a number of outlets, including mass merchants, telemarketers, retail specialty shops, online retailers and mail-order catalogs.

The Company believes the strength of its brands, product selection, customer relationships, technology infrastructure and fulfillment capabilities position it to compete effectively against its current and potential competitors in each of its product categories.  However, increased competition could result in:

·  
price reductions, decreased revenues and lower profit margins;
·  
loss of market share; and
·  
increased marketing expenditures.

These and other competitive factors may adversely impact the Company’s business and results of operations.

 
8

 
Government Regulation and Legal Uncertainties

The Internet continues to evolve and there are laws and regulations directly applicable to e-commerce. Legislatures are also considering an increasing number of laws and regulations pertaining to the Internet, including laws and regulations addressing:

·  
user privacy;
·  
pricing;
·  
content;
·  
connectivity;
·  
intellectual property;
·  
distribution;
·  
taxation;
·  
liabilities;
·  
antitrust; and
·  
characteristics and quality of products and services.

Further, the growth and development of the market for online services may prompt more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. The adoption of any additional laws or regulations may impair the growth of the Internet or commercial online services. This could decrease the demand for the Company’s services and increase its cost of doing business. Moreover, the applicability to the Internet of existing laws regarding issues like property ownership, taxes, libel and personal privacy is uncertain. Any new legislation or regulation that has an adverse impact on the Internet or the application of existing laws and regulations to the Internet could have a material adverse effect on the Company’s business, financial condition and results of operations.

States or foreign countries might attempt to regulate the Company’s business or levy additional sales or other taxes relating to its activities.  Because the Company’s products and services are available over the Internet anywhere in the world, multiple jurisdictions may claim that the Company is required to do business as a foreign corporation in one or more of those jurisdictions.  Failure to qualify as a foreign corporation in a jurisdiction where the Company is required to do so could subject it to taxes and penalties. States or foreign governments may charge the Company with violations of local laws.


Intellectual Property and Proprietary Rights

The Company regards its service marks, trademarks, trade secrets, domain names and similar intellectual property as critical to its success. The Company has applied for or received trademark and/or service mark registration for, among others, “1-800-FLOWERS.COM”, “1-800-FLOWERS”, “1-800-Baskets”, “GreatFood.com”, “The Popcorn Factory”, “TheGift.com”, “Geerlings & Wade”, “Cheryl’s”, “Mrs. Beasley’s”, “Celebrations”, “FineStationery.com”, “DesignPac”, “Napco”, “Fannie May” and “Harry London”.  The Company also has rights to numerous domain names, including www.1800flowers.com, www.800flowers.com, www.1800baskets.com, www.flowers.com, www.greatfood.com, www.thepopcornfactory.com, www.ambrosiawine.com, www.winetasting.com, www.finestationery.com, www.cheryls.com, www.fanniemay.com, www.harrylondon.com, www.geerwade.com, www.celebrations.com, www.designpac.com, www.mybloomnet.net, and www.napcoimports.com.  In addition, the Company has developed transaction processing and operating systems as well as marketing data, and customer and recipient information databases.

The Company relies on trademark, unfair competition and copyright law, trade secret protection and contracts such as confidentiality and license agreements with its employees, customers, vendors and others to protect its proprietary rights. Despite the Company’s precautions, it may be possible for competitors to obtain and/or use the Company’s proprietary information without authorization or to develop technologies similar to the Company’s and independently create a similarly functioning infrastructure.  Furthermore, the protection of proprietary rights in Internet-related industries is uncertain and still evolving.  The laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the United States.  The Company’s means of protecting its proprietary rights in the United States or abroad may not be adequate.

 
9

 
The Company intends to continue to license technology from third parties, including Oracle, Microsoft, IBM, Verizon and AT&T, for its communications technology and the software that underlies its business systems.  The market is evolving and the Company may need to license additional technologies to remain competitive. The Company may not be able to license these technologies on commercially reasonable terms or at all.

Third parties have in the past infringed or misappropriated the Company’s intellectual property or similar proprietary rights.  The Company believes infringements and misappropriations will continue to occur in the future.  The Company intends to police against infringement and misappropriation. However, the Company cannot guarantee it will be able to enforce its rights and enjoin the alleged infringers from their use of confusingly similar trademarks, service marks, telephone numbers and domain names.

In addition, third parties may assert infringement claims against the Company.  The Company cannot be certain that its technologies or its products and services do not infringe valid patents, trademarks, copyrights or other proprietary rights held by third parties.  The Company may be subject to legal proceedings and claims from time to time relating to its intellectual property and the intellectual property of others in the ordinary course of its business.  Intellectual property litigation is expensive and time-consuming and could divert management resources away from running the Company’s business.

Employees

As of July 3, 2011, the Company had a total of approximately 2,300 full and part-time employees. During peak periods, the Company substantially increases the number of customer service, manufacturing and retail and fulfillment personnel. The Company’s personnel are not represented under collective bargaining agreements and the Company considers its relations with its employees to be good.

 
 
10

 
 


Item 1A. Risk Factors

Cautionary Statements Under the Private Securities Litigation Reform Act of 1995

Our disclosures and analysis in this Form 10-K contain some forward-looking statements that set forth anticipated results based on management’s plans and assumptions. From time to time, we also provide forward-looking statements in other statements we release to the public as well as oral forward-looking statements. Such statements give our current expectations or forecasts of future events; they do not relate strictly to historical or current facts. We have tried, wherever possible, to identify such statements by using words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan, “believe” and similar expressions in connection with any discussion of future operating or financial performance. In particular, these include statements relating to future actions; the effectiveness of our marketing programs; the performance of our existing products and services; our ability to attract and retain customers and expand our customer base; our ability to enter into or renew online marketing agreements; our ability to respond to competitive pressures; expenses, including shipping costs and the costs of marketing our current and future products and services; the outcome of contingencies, including legal proceedings in the normal course of business; and our ability to integrate acquisitions.

We cannot guarantee that any forward-looking statement will be realized, although we believe we have been prudent in our plans and assumptions. Achievement of future results is subject to risk, uncertainties and potentially inaccurate assumptions. Should known or unknown risks or uncertainties materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected. You should bear this in mind as you consider forward looking statements.

We undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our 10-Q and 8-K reports to the SEC. Also note we provide the following cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to our business. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by the Private Securities Litigation Reform Act of 1995.

The financial and credit markets have been and continue to experience unprecedented disruption, which may  have an adverse effect on our customers’ spending patterns and in turn our business, financial condition and results of operations.  Consumer spending patterns are difficult to predict and are sensitive to the general economic climate, the consumer’s level of disposable income, consumer debt, and overall consumer confidence. The ongoing global financial crisis affecting the banking system and financial markets has resulted in a low level of consumer confidence. During the past few years, the volatility and disruption in the financial markets have reached unprecedented levels.  This financial crisis has impacted and may continue to impact our business in a number of ways.  Included among these current and potential future negative impacts are reduced demand and lower prices for our products and services.  We are currently operating in challenging macroeconomic conditions, which may continue during fiscal 2012.

The Company’s operating results may fluctuate, and this fluctuation could cause financial results to be below expectations.  The Company’s operating results may fluctuate from period to period for a number of reasons. In budgeting the Company’s operating expenses for the foreseeable future, the Company makes assumptions regarding revenue trends; however, some of the Company’s operating expenses are fixed in the short term. Sales of the Company’s products are seasonal, concentrated in the fourth calendar quarter, due to the Thanksgiving and Christmas-time holidays, and the second calendar quarter, due to Mother's Day and Administrative Professionals’ Week.  In anticipation of increased sales activity during these periods, the Company hires a significant number of temporary employees to supplement its permanent staff and the Company increases its inventory levels.  If revenues during these periods do not meet the Company’s expectations, it may not generate sufficient revenue to offset these increased costs and its operating results may suffer.
 
 
 
11

 

 
The Company’s quarterly operating results may significantly fluctuate and you should not rely on them as an indication of its future results.  The Company’s future revenues and results of operations may significantly fluctuate due to a combination of factors, many of which are outside of management’s control. The most important of these factors include:
 
·  
 seasonality;
·  
 the retail economy;
·  
 the timing and effectiveness of marketing programs;
·  
 the timing of the introduction of new products and services;
·  
 the Company’s ability to find and maintain reliable sources for certain of its products;
·  
 the timing and effectiveness of capital expenditures;
·  
 the Company’s ability to enter into or renew online marketing agreements; and
·  
 competition.

The Company may be unable to reduce operating expenses quickly enough to offset any unexpected revenue shortfall. If the Company has a shortfall in revenue without a corresponding reduction to its expenses, operating results may suffer. The Company’s operating results for any particular quarter may not be indicative of future operating results. You should not rely on quarter-to-quarter comparisons of results of operations as an indication of the Company’s future performance.  It is possible that results of operations may be below the expectations of public market analysts and investors, which could cause the trading price of the Company’s Class A common stock to fall.

Consumer spending on flowers, gifts and other products sold by the Company may vary with general economic conditions.  If general economic conditions continue to deteriorate and the Company’s customers have less disposable income, consumers may spend less on its products and its quarterly operating results may suffer.

During peak periods, the Company utilizes temporary employees and outsourced staff, who may not be as well-trained or committed to its customers as its permanent employees, and if they fail to provide the Company’s customers with high quality customer service the customers may not return, which could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.  The Company depends on its customer service department to respond to its customers should they have questions or problems with their orders. During peak periods, the Company relies on its permanent employees, as well as temporary employees and outsourced staff to respond to customer inquiries. These temporary employees and outsourced staff may not have the same level of commitment to the Company’s customers or be as well trained as its permanent employees. If the Company’s customers are dissatisfied with the quality of the customer service they receive, they may not shop with the Company again, which could have a material adverse effect on its business, financial condition, results of operations and cash flows.

If the Company’s customers do not find its expanded product lines appealing, revenues may not grow and net income may decrease.  The Company’s business historically has focused on offering floral and floral-related gift products. Although the Company has been successful in its expanded product lines including plants, gift baskets, popcorn, gourmet food and wine and unique or specialty gifts, it expects to continue to incur significant costs in marketing these products.  If the Company’s customers do not continue to find its product lines appealing, the Company may not generate sufficient revenue to offset its related costs and its results of operations may be negatively impacted.

If the Company fails to develop and maintain its brands, it may not increase or maintain its customer base or its revenues.  The Company must continue to develop and maintain the 1-800-FLOWERS.COM brands to expand its customer base and its revenues. In addition, the Company has introduced and acquired other brands in the past, and may continue to do so in the future.  The Company believes that the importance of brand recognition will increase as it expands its product offerings.  Many of the Company’s customers may not be aware of the Company’s non-floral products. If the Company fails to advertise and market its products effectively, it may not succeed in establishing its brands and may lose customers leading to a reduction of revenues.

The Company’s success in promoting and enhancing the 1-800-FLOWERS.COM brands will also depend on its success in providing its customers high-quality products and a high level of customer service. If the Company’s customers do not perceive its products and services to be of high quality, the value of the 1-800-FLOWERS.COM brands would be diminished and the Company may lose customers and its revenues may decline.

A failure to establish and maintain strategic online relationships that generate a significant amount of traffic could limit the growth of the Company’s business. Although the Company expects a significant portion of its online customers will continue to come directly to its website, it will also rely on third party web sites, search engines and affililates with which the Company has strategic relationships for traffic. If these third-parties do not attract a significant number of visitors, the Company may not receive a significant number of online customers from these relationships and its revenues from these relationships may decrease or remain flat.  There continues to be strong competition to establish or maintain relationships with leading Internet companies, and the Company may not successfully enter into additional relationships, or renew existing ones beyond their current terms. The Company may also be required to pay significant fees to maintain and expand existing relationships. The Company’s online revenues may suffer if it does not enter into new relationships or maintain existing relationships or if these relationships do not result in traffic sufficient to justify their costs.

 
12

 
If local florists and other third-party vendors do not fulfill orders to the Company’s customers' satisfaction, customers may not shop with the Company again. In many cases, floral orders placed by the Company’s customers are fulfilled by local independent florists, a majority of which are members of BloomNet.  The Company does not directly control any of these florists. In addition, many of the non-floral products sold by the Company are manufactured and delivered to its customers by independent third-party vendors. If customers are dissatisfied with the performance of the local florist or other third-party vendors, they may not utilize the Company’s services when placing future orders and its revenues may decrease.

If a florist discontinues its relationship with the Company, the Company’s customers may experience delays in service or declines in quality and may not shop with the Company again. Many of the Company’s arrangements with local florists for order fulfillment may be terminated by either party with 10 days notice. If a florist discontinues its relationship with the Company, the Company will be required to obtain a suitable replacement located in the same geographic area, which may cause delays in delivery or a decline in quality, leading to customer dissatisfaction and loss of customers.

If a significant number of customers are not satisfied with their purchase, the Company will be required to incur substantial costs to issue refunds, credits or replacement products. The Company offers its customers a 100% satisfaction guarantee on its products. If customers are not satisfied with the products they receive, the Company will either replace the product for the customer or issue the customer a refund or credit. The Company’s net income would decrease if a significant number of customers request replacement products, refunds or credits and the Company is unable to pass such costs onto the supplier.

Increased shipping costs and labor stoppages may adversely affect sales of the Company’s products. Many of the Company's products are delivered to customers either directly from the manufacturer or from the Company’s fulfillment centers located in California, Illinois, New York, Ohio and Florida.  The Company has established relationships with Federal Express, UPS and other common carriers for the delivery of these products. If these carriers were to increase the prices they charge to ship the Company’s goods, and the Company passes these increases on to its customers, its customers might choose to buy comparable products locally to avoid shipping charges. In addition, these carriers may experience labor stoppages, which could impact the Company’s ability to deliver products on a timely basis to our customers and adversely affect its customer relationships.

If the Company fails to continuously improve its web site, it may not attract or retain customers.  If potential or existing customers do not find the Company’s web site a convenient place to shop, the Company may not attract or retain customers and its sales may suffer. To encourage the use of the Company’s web site, it must continuously improve its accessibility, content and ease of use. Customer traffic and the Company’s business would be adversely affected if competitors' web sites are perceived as easier to use or better able to satisfy customer needs.

Competition in the floral, plant, gift basket, gourmet food and wine, and specialty gift industries is intense and a failure to respond to competitive pressure could result in lost revenues.  There are many companies that offer products in these categories. In the floral category, the Company’s competitors include:

·  
retail floral shops, some of which maintain toll-free telephone numbers, and web sites;
·  
online floral retailers;
·  
catalog companies that offer floral products;
·  
floral telemarketers and wire services; and
·  
supermarkets, mass merchants and specialty gift retailers with floral departments.

Similarly, the plant, gift basket, gourmet food, cookie, candy, wine, and specialty gift categories are highly competitive. Each of these categories encompasses a wide range of products and is highly fragmented. Products in these categories may be purchased from a number of outlets, including mass merchants, retail shops, online retailers and mail-order catalogs.

 
13

 
Competition is intense and the Company expects it to increase. Increased competition could result in:

·  
price reductions, decreased revenue and lower profit margins;
·  
loss of market share; and
·  
increased marketing expenditures.

These and other competitive factors could materially and adversely affect the Company’s results of operations.

If the Company does not accurately predict customer demand for its products, it may lose customers or experience increased costs.  In the past, the Company did not need to maintain a significant inventory of products.  However, as the Company expands the volume of non-floral products offered to its customers, the Company will be required to increase inventory levels and the number of products maintained in its warehouses. If the Company overestimates customer demand for its products, excess inventory and outdated merchandise could accumulate, tying up working capital and potentially resulting in reduced warehouse capacity and inventory losses due to damage, theft and obsolescence.  If the Company underestimates customer demand, it may disappoint customers who may turn to its competitors.  Moreover, the strength of the 1-800-FLOWERS.COM brands could be diminished due to misjudgments in merchandise selection.

If the supply of flowers for sale becomes limited, the price of flowers could rise or flowers may be unavailable and the Company’s revenues and gross margins could decline.  A variety of factors affect the supply of flowers in the United States and the price of the Company’s floral products. If the supply of flowers available for sale is limited due to weather conditions, farm closures, economic conditions, or other factors, prices for flowers could rise and customer demand for the Company’s floral products may be reduced, causing revenues and gross margins to decline.  Alternatively, the Company may not be able to obtain high quality flowers in an amount sufficient to meet customer demand.  Even if available, flowers from alternative sources may be of lesser quality and/or may be more expensive than those currently offered by the Company.

Most of the flowers sold in the United States are grown by farmers located abroad, primarily in Colombia, Ecuador and Holland, and the Company expects that this will continue in the future.  The availability and price of flowers could be affected by a number of factors affecting these regions, including:

·  
import duties and quotas;
·  
agricultural limitations and restrictions to manage pests and disease;
·  
changes in trading status;
·  
economic uncertainties and currency fluctuations;
·  
severe weather;
·  
work stoppages;
·  
foreign government regulations and political unrest; and
·  
trade restrictions, including United States retaliation against foreign trade practices.

The Company’s franchisees may damage its brands or increase its costs by failing to comply with its franchise agreements or its operating standards. The Company’s franchise business is governed by its Uniform Franchise Disclosure Document, franchise agreements and applicable franchise law. If the Company’s franchisees do not comply with its established operating standards or the terms of the franchise agreements, the 1-800-FLOWERS.COM brands may be damaged. The Company may incur significant additional costs, including time-consuming and expensive litigation, to enforce its rights under the franchise agreements. Additionally, the Company is the primary tenant on certain leases, which the franchisees sublease from the Company. If a franchisee fails to meet its obligations as subtenant, the Company could incur significant costs to avoid default under the primary lease. Furthermore, as a franchiser, the Company has obligations to its franchisees. Franchisees may challenge the performance of the Company’s obligations under the franchise agreements and subject it to costs in defending these claims and, if the claims are successful, costs in connection with their compliance.

If third parties acquire rights to use similar domain names or phone numbers or if the Company loses the right to use its phone numbers, its brands may be damaged and it may lose sales.  The Company’s Internet domain names are an important aspect of its brand recognition.  The Company cannot practically acquire rights to all domain names similar to www.1800flowers.com, or its other brands, whether under existing top level domains or those issued in the future.  If third parties obtain rights to similar domain names, these third parties may confuse the Company’s customers and cause its customers to inadvertently place orders with these third parties, which could result in lost sales and could damage its brands.

 
14

 
Likewise, the phone number that spells 1-800-FLOWERS is important to the Company’s brand and its business. While the Company has obtained the right to use the phone numbers 1-800-FLOWERS, 1-888-FLOWERS and 1-877-FLOWERS, as well as common toll-free "FLOWERS" misdials, it may not be able to obtain rights to use the FLOWERS phone number as new toll-free prefixes are issued, or the rights to all similar and potentially confusing numbers. If third parties obtain the phone number which spells "FLOWERS" with a different prefix or a toll-free number similar to FLOWERS, these parties may also confuse the Company’s customers and cause lost sales and potential damage to its brands.  In addition, under applicable FCC rules, ownership rights to phone numbers cannot be acquired. Accordingly, the FCC may rescind the Company’s right to use any of its phone numbers, including 1-800-FLOWERS  (1-800-356-9377).

A lack of security over the Internet may cause Internet usage to decline and cause the Company to expend capital and resources to protect against security breaches.  A significant barrier to electronic commerce over the Internet has been the need for secure transmission of confidential information and transaction information.  Internet usage could decline if any well-publicized compromise of security occurred. Additionally, computer “viruses” may cause the Company’s systems to incur delays or experience other service interruptions.  Such interruptions may materially impact the Company’s ability to operate its business.  If a computer virus affecting the Internet in general is highly publicized or particularly damaging, the Company’s customers may not use the Internet or may be prevented from using the Internet, which would have an adverse effect on its revenues.  As a result, the Company may be required to expend capital and resources to protect against or to alleviate these problems.

The Company’s business could be injured by significant credit card, debit card and gift card fraud.  Customers typically pay for their on-line or telephone orders with debit or credit cards as well as a portion of their orders using gift cards.  The Company’s revenues and gross margins could decrease if it experienced significant credit card, debit card and gift card fraud. Failure to adequately detect and avoid fraudulent credit card, debit card and gift card transactions could cause the Company to lose its ability to accept credit cards or debit cards as forms of payment and/or result in charge-backs of the fraudulently charged amounts and/or significantly decrease revenues. Furthermore, widespread credit card, debit card and gift card fraud may lessen the Company’s customers’ willingness to purchase products through the Company’s web sites or toll-free telephone numbers.  For this reason, such failure could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.

Unexpected system interruptions caused by system failures may result in reduced revenues and harm to the Company’s brand.  In the past, particularly during peak holiday periods, the Company has experienced significant increases in traffic on its web site and in its toll-free customer service centers.  The Company’s operations are dependent on its ability to maintain its computer and telecommunications systems in effective working order and to protect its systems against damage from fire, natural disaster, power loss, telecommunications failure or similar events.  The Company’s systems have in the past, and may in the future, experience:

·  
system interruptions;
·  
long response times; and
·  
degradation in service.

The Company’s business depends on customers making purchases on its systems.  Its revenues may decrease and its reputation could be harmed if it experiences frequent or long system delays or interruptions or if a disruption occurs during a peak holiday season.

If the Company’s telecommunications providers do not adequately maintain the Company’s telephone service, the Company may experience system failures and its revenues may decrease.  The Company is dependent on telecommunication providers to provide telephone services to its customer service centers.  Although the Company maintains redundant telecommunications systems, if these providers experience system failures or fail to adequately maintain the Company’s systems, the Company may experience interruptions and its customers might not continue to utilize its services.  If the Company loses its telephone service, it will be unable to generate revenue.  The Company’s future success depends upon these third-party relationships because it does not have the resources to maintain its telephone service without these or other third parties.  Failure to maintain these relationships or replace them on financially attractive terms may disrupt the Company’s operations or require it to incur significant unanticipated costs.

Interruptions in Teleflora’s Dove System or a reduction in the Company’s access to this system may disrupt order fulfillment and create customer dissatisfaction.  A minimal portion of the Company’s customers' orders are communicated to the fulfilling florist through a third party system.  This system is an order processing and messaging network used to facilitate the transmission of floral orders between florists.  If this system experiences interruptions in the future, the Company could experience difficulties in fulfilling some of its customers' orders and those customers might not continue to shop with the Company.

 
15

 
The Company's operating results may suffer due to economic, political and social unrest or disturbances.  Like other American businesses, the Company is unable to predict what long-term effect acts of terrorism, war, or similar unforeseen events may have on its business.  The Company’s results of operations and financial condition could be adversely impacted if such events cause an economic slowdown in the United States, or other negative effects that cannot now be anticipated.

If the Company is unable to hire and retain key personnel, its business may suffer.  The Company’s success is dependent on its ability to hire, retain and motivate highly qualified personnel.  In particular, the Company’s success depends on the continued efforts of its Chairman and Chief Executive Officer, James F. McCann, and its President, Christopher G. McCann, as well as its senior management team which help manage its business.  The loss of the services of any of the Company’s executive management or key personnel or its inability to attract qualified additional personnel could cause its business to suffer and force it to expend time and resources in locating and training additional personnel.

Many governmental regulations may impact the Internet, which could affect the Company’s ability to conduct business. Any new law or regulation, or the application or interpretation of existing laws, may decrease the growth in the use of the Internet or the Company’s web site.  The Company expects there will be an increasing number of laws and regulations pertaining to the Internet in the United States and throughout the world.  These laws or regulations may relate to liability for information received from or transmitted over the Internet, online content regulation, user privacy, taxation and quality of products and services sold over the Internet.  Moreover, the applicability to the Internet of existing laws governing intellectual property ownership and infringement, copyright, trademark, trade secret, obscenity, libel, employment, personal privacy and other issues is uncertain and developing.  This could decrease the demand for the Company’s products, increase its costs or otherwise adversely affect its business.

Regulations imposed by the Federal Trade Commission may adversely affect the growth of the Company’s Internet business or its marketing efforts.  The Federal Trade Commission has proposed regulations regarding the collection and use of personal identifying information obtained from individuals when accessing web sites, with particular emphasis on access by minors.  These regulations may include requirements that the Company establish procedures to disclose and notify users of privacy and security policies, obtain consent from users for collection and use of information and provide users with the ability to access, correct and delete personal information stored by the Company.  These regulations may also include enforcement and redress provisions.  Moreover, even in the absence of those regulations, the Federal Trade Commission has begun investigations into the privacy practices of other companies that collect information on the Internet.  One investigation resulted in a consent decree under which an Internet company agreed to establish programs to implement the principles noted above.  The Company may become a party to a similar investigation, or the Federal Trade Commission's regulatory and enforcement efforts, or those of other governmental bodies, may adversely affect its ability to collect demographic and personal information from users, which could adversely affect its marketing efforts.

Unauthorized use of the Company’s intellectual property by third parties may damage its brands.  Unauthorized use of the Company’s intellectual property by third parties may damage its brands and its reputation and may likely result in a loss of customers.  It may be possible for third parties to obtain and use the Company’s intellectual property without authorization.  Third parties have in the past infringed or misappropriated the Company’s intellectual property or similar proprietary rights.  The Company believes infringements and misappropriations will continue to occur in the future. Furthermore, the validity, enforceability and scope of protection of intellectual property in Internet-related industries is uncertain and still evolving.  The Company has been unable to register certain of its intellectual property in some foreign countries and furthermore, the laws of some foreign countries are uncertain or do not protect intellectual property rights to the same extent as do the laws of the United States.

Defending against intellectual property infringement claims could be expensive and, if the Company is not successful, could disrupt its ability to conduct business.  The Company has been unable to register certain of its intellectual properties in some foreign countries, including, “1-800-Flowers.com”, “1-800-Flowers” and “800-Flowers”. The Company cannot be certain that the products it sells, or services it offers, do not or will not infringe valid patents, trademarks, copyrights or other intellectual property rights held by third parties.  The Company may be a party to legal proceedings and claims relating to the intellectual property of others from time to time in the ordinary course of its business.  The Company may incur substantial expense in defending against these third-party infringement claims, regardless of their merit.  Successful infringement claims against the Company may result in substantial monetary liability or may materially disrupt its ability to conduct business.

 
16

 
The Company does not collect sales or consumption taxes in some jurisdictions.  In addition to the Company’s retail store operations, the Company collects sales or other similar taxes in states where the Company’s ecommerce channel has applicable nexus. Our customer service and fulfillment networks, and any further expansion of those networks, along with other aspects of our evolving business, may result in additional sales and use tax obligations. Currently, U.S. Supreme Court decisions restrict the imposition of obligations to collect state and local sales taxes with respect to remote sales. However, an increasing number of states have considered or adopted laws that attempt to impose obligations on out-of-state retailers to collect taxes on their behalf. A successful assertion by one or more states that we should collect sales or other taxes where we do not do so could result in substantial tax liabilities, including for past sales, penalties and interest, as well as decrease our ability to compete with traditional retailers, and otherwise harm our business.

A failure to integrate our acquisitions may cause the results of the acquired company, as well as the results of the Company to suffer.  The Company has opportunistically acquired a number of companies over the past several years. Additionally the Company may look to acquire additional companies in the future.  As part of the acquisition process, the Company embarks upon a project management effort to integrate the acquisition onto our information technology systems and management processes.  If we are unsuccessful in integrating our acquisitions, the results of our acquisitions may suffer, management may have to divert valuable resources to oversee and manage the acquisitions, the Company may have to expend additional investments in the acquired company to upgrade personnel and/or information technology systems and the results of the Company may suffer. 

Product liability claims may subject the Company to increased costs. Several of the products the Company sells, including perishable food and alcoholic beverage products may expose it to product liability claims in the event that the use or consumption of these products results in personal injury or property damage. Although the Company has not experienced any material losses due to product liability claims to date, it may be a party to product liability claims in the future and incur significant costs in their defense.  Product liability claims often create negative publicity, which could materially damage the Company’s reputation and its brands.  Although the Company maintains insurance against product liability claims, its coverage may be inadequate to cover any liabilities it may incur.

The wine industry is subject to governmental regulation. The alcoholic beverage industry is subject to extensive specialized regulation under state and federal laws and regulations, including the following matters: licensing; the payment of excise taxes; advertising, trade and pricing practices; product labeling; sales to minors and intoxicated persons; changes in officers, directors, ownership or control; and, relationships among product producers, importers, wholesalers and retailers. While the Company believes that it is in material compliance with all applicable laws and regulations, in the event that it should be determined that the Company is not in compliance with any applicable laws or regulations, the Company could become subject to cease and desist orders, injunctive proceedings, civil fines, license revocations and other penalties which could have a material adverse effect on the Company’s business and its results of operations.

In addition, the alcoholic beverage industry is subject to potential legislation and regulation on a continuous basis including in such areas as direct and Internet sales of alcohol. Certain states still prohibit the sale of alcohol into their jurisdictions from out of state wineries and/or retailers.  There can be no assurance that new or revised laws or regulations, increased licensing fees, specialized taxes or other regulatory requirements will not have a material adverse effect on the Company’s business and its results of operations. While, to date, the Company has been able to obtain and retain licenses necessary to sell wine at retail, the failure to obtain renewals or otherwise retain such licenses in one or more of the states in which the Company operates would have a material adverse effect on the Company’s business and its results of operations. The Company’s growth strategy for its wine business includes expansion into additional states; however, there can be no assurance that the Company will be successful in obtaining the required permits or licenses in any additional states.  From time to time, the Company may introduce new marketing initiatives, which may be expected to undergo regulatory scrutiny. There can be no assurance that such initiatives will not be stymied by regulatory criticism.

The Company is dependent on common carriers to deliver its wine shipments.  The company uses UPS and FedEx to deliver its wine shipments. If UPS or FedEx were to terminate delivery services for alcoholic beverages in certain states, as it did in 1999 in Florida, Nevada and Connecticut, the Company would likely incur significantly higher shipping rates that would have a material adverse effect on the Company’s business and its results of operations. If any state prohibits or limits intrastate shipping of alcoholic beverages by third party couriers, the Company would likely incur significantly higher shipping rates that would have a material adverse effect on the Company’s business and its results of operations.


 
17

 
There are various health issues regarding wine consumption. Since 1989, federal law has required health-warning labels on all alcoholic beverages. Although an increasing number of research studies suggest that health benefits may result from the moderate consumption of wine, these suggestions have been widely challenged and a number of groups advocate increased governmental action to restrict consumption of alcoholic beverages. Restrictions on the sale and consumption of wine or increases in the taxes imposed on wine in response to concerns regarding health issues may have a material adverse effect on the Company’s business and operating results. There can be no assurance that there will not be legal or regulatory challenges to the industry as a whole, and any such legal or regulatory challenge may have a material adverse effect on the Company’s business and results of operations.

The price at which the Company’s Class A common stock will trade may be highly volatile and may fluctuate substantially. The stock market has from time to time experienced price and volume fluctuations that have affected the market prices of securities, particularly securities of companies with Internet operations. As a result, investors may experience a material decline in the market price of the Company’s Class A common stock, regardless of the Company’s operating performance.  In the past, following periods of volatility in the market price of a particular company's securities, securities class action litigation has often been brought against that company. The Company may become involved in this type of litigation in the future.  Litigation of this type is often expensive and diverts management's attention and resources and could have a material adverse effect on the Company’s business and its results of operations.

 
Additional Information
 
The Company’s internet address is www.1800flowers.com. We make available, through the investor relations tab located on our website at www.1800flowersinc.com, access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after they are electronically filed with or furnished to the Securities and Exchange Commission. All such filings on our investor relations website are available free of charge. (The information posted on the Company’s website is not incorporated into this Annual Report of Form 10-K.)

A copy of this annual report on Form 10-K is available without charge upon written request to: Investor Relations, 1-800-FLOWERS.COM, Inc., One Old Country Road, Suite 500, Carle Place, NY 11514. In addition, the SEC maintains a website (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.


Item 1B. Unresolved Staff Comments

We have received no written comments regarding our current or periodic reports from the staff of the SEC that were issued 180 days or more preceding the end of our fiscal year ended July 3, 2011 that remain unresolved.

 
18

 
 


Item 2.                      PROPERTIES

 
Location
 
Type
 
Principal Use
 
Square      
Footage     
 
 
Ownership
             
Commerce, CA
Office
Administrative
    500  
    leased    
               
Napa, CA
Office and warehouse
Distribution, administrative and customer service                                 
    68,000  
        leased   
               
Wilmington, DE
Office and warehouse
Distribution, administrative and customer service
    27,000  
             leased
               
Jacksonville, FL
Office and warehouse
Distribution and administrative
    180,000  
owned                
               
Lake Forest, IL
Office, plant and warehouse
Manufacturing, distribution and administrative
    148,000  
             leased
               
Melrose Park, IL
Office and warehouse
Distribution, administrative and customer service
    249,000  
             leased
               
Reno, NV
Warehouse
Distribution
    50,000  
leased                
               
Carle Place, NY
Office
Headquarters and customer service
    92,000  
leased                
               
Bethpage, NY
Warehouse
Distribution
    35,000  
leased                
               
Akron, OH
Office, plant and warehouse
Manufacturing, distribution and administrative
    189,000  
              leased    
               
Maple Heights, OH
Warehouse
Distribution
    165,000  
leased                
               
Obetz, OH
Warehouse
Distribution
    176,000  
leased                
               
Westerville, OH
Office, plant and warehouse
Manufacturing, distribution and administrative
    150,000  
              owned   
               
Albany, NY (*)
Warehouse
Distribution
    42,000  
leased               
               
Ardmore, OK (**)
Office
Customer service
    24,000  
leased               
               
Chicago, IL (***)
Office
Administrative and customer service
    18,000  
leased               

 
 (*)    Facility was closed in December 2010.
 
(**)   Facility was closed during August 2008 and lease term expired November 30, 2010.
 
(***) Facility was closed during July 2010.

In addition to the above properties, the Company leases approximately 214,000 square feet for owned or franchised retail stores and local fulfillment centers with lease terms typically ranging from 5 to 20 years.  Some of its leases provide for a minimum rent plus a percentage rent based upon sales after certain minimum thresholds are achieved.  The leases generally require the Company to pay insurance, utilities, real estate taxes and repair and maintenance expenses. In general, our properties are well maintained, adequate and suitable for their purposes.
 
 
Item 3.                      LEGAL PROCEEDINGS

From time to time, the Company is subject to legal proceedings and claims arising in the ordinary course of business.

On December 21, 2007, Plaintiff, Thomas Molnar, on behalf of himself and a putative class, filed suit against the Company claiming false advertising, unfair business practices, and unjust enrichment seeking unspecified monetary damages.  The Company admitted to no wrongdoing with respect to this matter, but entered into a settlement agreement with the parties to this matter in order to avoid protracted litigation. The presiding trial Judge’s Order Granting Final Approval of the Class Action Settlement and Entry of Judgment was issued May 17, 2010. The Company has sent out the applicable notices to the class members, and the Company provided for the cost of the settlement of approximately $0.9 million within its general and administrative expenses in fiscal 2010.

 
19

 
On November 10, 2010, a purported class action complaint was filed in the United States District Court for the Eastern District of New York naming the Company (along with Trilegiant Corporation, Inc., Affinion, Inc. and Chase Bank USA, N.A.) as defendants in an action purporting to assert claims against the Company alleging violations  arising under the  Connecticut Unfair Trade Practices Act among other statutes, and for breach of contract and unjust enrichment in connection with certain post-transaction marketing practices in which certain of the Company’s subsidiaries previously engaged with certain third-party vendors.  Plaintiffs seek to have this case certified as a class action and seek restitution and other damages, all in an amount in excess of $5 million.  The Company intends to defend this action vigorously. 

In 2009, the United States Senate Committee on Commerce, Science and Transportation commenced an investigation of post-transaction marketing practices and the Company was one of many involved in that investigation. The Company fully complied with all requests from the committee. In addition, the Company received a civil investigative demand from the Attorney General of the State of New York regarding the same activities. The Company fully complied with that investigation, supplied the information sought and voluntarily entered into an Assurance of Discontinuance with the Attorney General’s Office in December 2010.  As part of the resolution of that matter, the Company paid the sum of $325,000 to a fund to be used for consumer education, consumer redress and costs and fees of the investigation.

There are no assurances that additional legal actions will not be instituted in connection with the Company’s former post-transaction marketing practices involving third party vendors nor can we predict the outcome of any such legal action.


Item 4.                      REMOVED AND RESERVED



 
 
20

 


EXECUTIVE OFFICERS OF THE REGISTRANT
 
The following individuals were serving as executive officers of the Company and certain of its subsidiaries on September 16, 2011:
 
Name
Age
 
Position with the Company
       
James F. McCann…………………………...
60
 
Chairman of the Board and Chief Executive Officer
Christopher G. McCann……………………
50
 
Director, President, 1-800-Flowers.com, Inc. and President, Floral Group
Stephen J. Bozzo…………………………....
56
 
Senior Vice President and Chief Information Officer
Gerard M. Gallagher…………………..........
58
 
Senior Vice President of Business Affairs, General Counsel, and Corporate Secretary
William E. Shea……………………………..
52
 
Senior Vice President, Treasurer, and Chief Financial Officer
David Taiclet………………………………..
48
 
President of Gourmet Foods and Gift Baskets
 

 
 
James F. McCann has served as the Company's Chairman of the Board and Chief Executive Officer since inception. Mr. McCann has been in the floral industry since 1976 when he began a retail chain of flower shops in the New York metropolitan area. Mr. McCann is a member of the board of directors of Willis Holdings Group. James F. McCann is the brother of Christopher G. McCann, a Director and the President of the Company.
 
 
Christopher G. McCann has been the Company's President since September 2000 and prior to that had served as the Company's Senior Vice President. Mr. McCann has been a Director of the Company since inception. In June 2010, Mr. McCann was also named President of the Floral Group, which consists of the Consumer Floral and BloomNet Wire Service businesses. Mr. McCann is a member of the Board of Trustees of Marist College. Christopher G. McCann is the brother of James F. McCann, the Company's Chairman of the Board and Chief Executive Officer.
 
 
Stephen J. Bozzo has been the Company's Chief Information Officer since May 2007.  Prior to joining the Company, Mr. Bozzo served as Chief Information Officer for the International Division of MetLife Insurance Company since 2001. Mr. Bozzo’s business background includes senior executive positions at Bear Stearns Inc. as Managing Director-Principle, AIG as Senior Vice President, Telecommunications and Technical Services and Chase Manhattan Bank, where he was Senior Vice President, Global Telecommunications.
 
 
Gerard M. Gallagher has been the Company's Senior Vice President, General Counsel and Corporate Secretary since August 1999 and has been providing legal services to the Company since its inception. Mr. Gallagher is the founder and a managing partner in the law firm Gallagher, Walker, Bianco and Plastaras, based in Mineola, New York, specializing in corporate, litigation and intellectual property matters since 1993. Mr. Gallagher is duly admitted to practice before the New York State Courts and the United States District Courts of both the Eastern District and Southern District of New York.
 
 
William E. Shea has been the Company's Senior Vice President of Finance and Administration and Chief Financial Officer since September 2000. Before holding his current position, Mr. Shea was our Vice President of Finance and Corporate Controller after joining the Company in April 1996. From 1980 until joining the Company, Mr. Shea was a certified public accountant with Ernst & Young LLP.
 
 
David Taiclet has been the Company's President of Gourmet Foods and Gift Baskets since June 2009.  Prior to June 2009, Mr. Taiclet served as Chief Executive Officer of the Fannie May Confections Brands since April 2006, upon our acquisition of the company.  Prior thereto and commencing in January 1995, Mr. Taiclet was a Co-Founder of a business that ultimately became known as Fannie May Confections Brands, Inc. (formerly Alpine Confections, Inc.), a multi-branded and multi-channel retailer, manufacturer, and distributor of confectionery and specialty food products.   From May 1991 to January 1995, Mr. Taiclet served in a variety of management positions with Cargill, Inc, including the Strategy and Business Development Group.  Cargill, Inc. is an international marketer, processor and distributor of food, financial and industrial products.  Mr. Taiclet also served four years of active duty in the U.S. Army, attaining the rank of Captain.

 
21

 
 


PART II

Item 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

1-800-FLOWERS.COM’s Class A common stock trades on The NASDAQ Global Select Market under the ticker symbol “FLWS.”  There is no established public trading market for the Company’s Class B common stock. The following table sets forth the reported high and low sales prices for the Company’s Class A common stock for each of the fiscal quarters during the fiscal years ended July 3, 2011 and June 27, 2010.

   
High
   
Low
 
Year ended July 3, 2011
           
     June 28, 2010 – September 26, 2010
  $ 2.56        $ 1.52     
     September 27, 2010 – December 26, 2010
  $ 2.75        $ 1.67     
     December 27, 2010 – March 27, 2011
  $ 3.22        $ 2.18     
     March 28, 2011 – July 3, 2011
  $ 3.84        $ 2.26     
                 
Year ended June 27, 2010
               
     June 29, 2009 – September 27, 2009
  $ 3.52        $ 1.73     
     September 28, 2009 – December 27, 2009
  $ 4.88        $ 2.05     
     December 28, 2009 – March 28, 2010
  $ 2.75        $ 1.78     
     March 29, 2010 – June 27, 2010
  $ 3.66        $ 2.17     

Rights of Common Stock

Holders of Class A common stock generally have the same rights as the holders of Class B common stock, except that holders of Class A common stock have one vote per share and holders of Class B common stock have 10 votes per share on all matters submitted to the vote of stockholders.  Holders of Class A common stock and Class B common stock generally vote together as a single class on all matters presented to the stockholders for their vote or approval, except as may be required by Delaware law. Class B common stock may be converted into Class A common stock at any time on a one-for-one share basis. Each share of Class B common stock will automatically convert into one share of Class A common stock upon its transfer, with limited exceptions.
 
 
Holders

As of September 1, 2011, there were approximately 302 stockholders of record of the Company’s Class A common stock, although the Company believes that there is a significantly larger number of beneficial owners.  As of September 1, 2011, there were approximately 14 stockholders of record of the Company’s Class B common stock.

Dividend Policy

Although the Company has never declared or paid any cash dividends on its Class A or Class B common stock, the Company anticipates that it will generate increasing free cash flow in excess of its capital investment requirements.  Although the Company has no current intent to do so, the Company may choose, at some future date, to use some portion of its cash for the purpose of cash dividends.  

Resales of Securities

36,868,450 shares of Class A and Class B common stock are "restricted securities" as that term is defined in Rule 144 under the Securities Act.  Restricted securities may be sold in the public market from time to time only if registered or if they qualify for an exemption from registration under Rule 144 or 701 under the Securities Act.  As of September 1, 2011, all of such shares of the Company’s common stock could be sold in the public market pursuant to and subject to the limits set forth in Rule 144.  Sales of a large number of these shares could have an adverse effect on the market price of the Company’s Class A common stock by increasing the number of shares available on the public market.

 
22

 
Purchases of Equity Securities by the Issuer

On January 21, 2008, the Company’s Board of Directors authorized an increase in its stock repurchase plan which when added to the $8.7 million remaining on its earlier authorization, increased the amount available to repurchase to $15.0 million. Any such purchases could be made from time to time in the open market and through privately negotiated transactions, subject to general market conditions. The repurchase program will be financed utilizing available cash. As of July 3, 2011, $11.8 million remains authorized but unused.

Under this program, as of July 3, 2011, the Company had repurchased 2,569,713, shares of common stock for $14.5 million, of which $0.5 million (168,207 shares), $0.9 million (342,821 shares) and $0.8 million (397,899 shares) were repurchased during the fiscal years ending July 3, 2011, June 27, 2010 and June, 28, 2009, respectively.
 
 
The following table sets forth, for the months indicated, the Company’s purchase of common stock during the fiscal year ended July 3, 2011, which includes the period June 28, 2010 through July 3, 2011:

 
 
 
 
Period
 
 
 
Total Number of Shares Purchased
   
 
 
 Average Price Paid Per Share
   
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
   
Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs 
 
                         
   
(in thousands, except average price paid per share)
       
                         
6/28/10 – 7/25/10
    -     $ -       -     $ 12,278  
7/26/10 – 8/22/10
    7.7     $ 1.69       7.7     $ 12,265  
8/23/10 – 9/26/10
    1.8     $ 2.35       1.8     $ 12,261  
9/27/10 – 10/24/10
    19.0     $ 1.76       19.0     $ 12,228  
10/25/10 – 11/21/10
    26.9     $ 1.78       26.9     $ 12,180  
11/22/10 – 12/26/10
12/27/10 – 1/23/11
1/24/11 – 2/20/11
2/21/11 – 3/27/11
   
-
-
0.8
-
   
$
$
$
$
-
-
2.74
-
     
-
-
0.8
-
   
$
$
$
$
12,180
 12,180
 12,178
 12,178
 
3/28/11 - 4/24/11                   -        -      12,178  
4/25/11 - 5/22/11      112.1     $  3.15        112.1     $  11,825  
5/23/10 - 7/3/11      -     $  -        -     $  11,825  
Total
    168.2     $ 2.70       168.2          
 


 
 
23

 
Item 6.                      SELECTED FINANCIAL DATA

The selected consolidated statement of operations data for the years ended July 3, 2011, June 27, 2010 and June 28, 2009 and the consolidated balance sheet data as of July 3, 2011 and June 27, 2010, have been derived from the Company’s audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K. The selected consolidated statement of operations data for the years ended June 29, 2008 and July 1, 2007, and the selected consolidated balance sheet data as of June 28, 2009, June 28, 2008, and July 1, 2007, are derived from the Company’s audited consolidated financial statements which are not included in this Annual Report on Form 10-K.

The following tables summarize the Company’s consolidated statement of operations and balance sheet data. The Company acquired selected assets of Fine Stationery, Inc. in May 2011, Mrs. Beasley’s Bakery LLC in March 2011, Geerlings & Wade, Inc. in March 2009, Napco Marketing Corp. in July 2008 and DesignPac Gifts, LLC in April 2008.  The following financial data reflects the results of operations of these subsidiaries since their respective dates of acquisition.  During the fourth quarter of fiscal 2009, the Company made the strategic decision to divest its Home & Children’s Gifts business segment to focus on its core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets categories.  On January 25, 2010, the Company completed the sale of these businesses; refer to the Consolidated Financial Statements “Discontinued Operations” for a further discussion.  Consequently, the Company has classified the results of operations of its Home & Children’s Gifts segment as discontinued operations for all periods presented.  This information should be read together with the discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company’s consolidated financial statements and notes to those statements included elsewhere in this Annual Report on Form 10-K.

     
Years ended
 
   
Consolidated Statement of Operations Data:
 
July 3,
2011
   
June 27,
2010
   
June 28,
2009
   
June 29,
2008
   
July 1,
2007,
 
 
 
               (in thousands, except per share data)        
 
Net revenues:
                             
 
E-commerce
  $ 485,377     $ 469,974     $ 498,519     $ 584,174     $ 576,627  
 
Other
    204,410       197,736       215,431       155,037       149,023  
 
     Total net revenues
    689,787       667,710       713,950       739,211       725,650  
 
Cost of revenues
    409,703       401,908       432,744       426,916       419,083  
 
Gross profit
    280,084       265,802       281,206       312,295       306,567  
 
Operating expenses:
                                       
 
Marketing and sales
    174,758       172,640       175,839       183,430       180,238  
 
    Technology and development
    20,424       17,952       21,000       19,611       18,871  
 
General and administrative
    50,774       50,450       50,451       52,107       50,236  
 
    Depreciation and amortization
    20,715       21,378       21,010       17,822       15,353  
 
    Goodwill and intangible impairment
    -       -       85,438       -       -  
 
     Total operating expenses
    266,671       262,420       353,738       272,970       264,698  
                                           
 
Operating income (loss)
    13,413       3,382       (72,532 )     39,325       41,869  
 
Other income (expense), net
    (4,077 )     (5,752 )     (9,295 )     (4,170 )     (6,133 )
                                           
 
Income (loss) from continuing operations before income taxes
    9,336       (2,370 )     (81,827 )     35,155       35,736  
 
Income tax expense (benefit) from continuing operations
    3,614       (282 )     (15,326 )     13,126       14,755  
 
Income (loss) from continuing operations
    5,722       (2,088 )     (66,501 )     22,029       20,981  
 
Income (loss) from discontinued operations, before income taxes
    -       (1,723 )     (39,754 )     (1,785 )     (6,727 )
 
Income tax expense (benefit) from discontinued operations
    -       410       (7,838 )     (810 )     (2,864 )
 
Income (loss) from discontinued operations
    -       (2,133 )     (31,916 )     (975 )     (3,863 )
 
Net income (loss)
  $ 5,722     $ ( 4,221 )   $ ( 98,417 )   $ 21,054     $ 17,118  
                                           
 
Net income  (loss) per common share (basic):
                                       
 
     From continuing operations
  $ 0.09     $ (0.03 )   $ (1.05 )   $ 0.35     $ 0.33  
 
     From discontinued operations
    -       (0.03 )     (0.50 )     (0.02 )     (0.06 )
 
Net income (loss) per common share (basic)
  $ 0.09     $ (0.07 )   $ (1.55 )   $ 0.33     $ 0.27  
                                           
 
Net income (loss) per common share (diluted):
                                       
 
     From continuing operations
  $ 0.09     $ (0.03 )   $ (1.05 )   $ 0.34     $ 0.32  
 
     From discontinued operations
    -       (0.03 )     (0.50 )     (0.01 )     (0.06 )
 
Net income (loss) per common share (diluted)
  $ 0.09     $ (0.07 )   $ (1.55 )   $ 0.32     $ 0.26  
                                           
 
Weighted average shares used in the calculation of net income (loss) per common share:
                                       
 
Basic
    64,001       63,635       63,565       63,074       63,786  
 
    Diluted
    65,153       63,635       63,565       65,458       65,526  
 
 
 
24

 
 

 
               
As of
             
   
July 3,
2011
   
June 27,
2010
   
June 28, 
 2009
   
June 29, 
 2008
   
July 1, 
 2007
 
               
(in thousands)
             
Consolidated Balance Sheet Data:
                             
Cash and equivalents and short-term investments
  $ 21,442     $ 27,843     $ 29,562     $ 12,124     $ 16,087  
Working capital
    17,778       22,963       43,679       33,416       51,419  
Total assets
    256,951       256,086       286,127       371,338       352,507  
Long-term liabilities
    32,243       48,745       73,945       63,739       78,911  
Total stockholders' equity
    141,661       132,626       133,783       231,465       201,031  
 
 
 
 
25

 

 
Item 7.                      MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) is intended to provide an understanding of our financial condition, change in financial condition, cash flow, liquidity and results of operations. The following MD&A discussion should be read in conjunction with the consolidated financial statements and notes to those statements that appear elsewhere in this Form 10-K. The following discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption “Forward-Looking Information” and under Item 1A — “Risk Factors.”

Description of Business

1-800-FLOWERS.COM, Inc. is the world’s leading florist and gift shop. For more than 35 years, 1-800-FLOWERS® (1-800-356-9377 or www.1800flowers.com) has been helping deliver smiles for our customers with gifts for every occasion, including fresh flowers and the finest selection of plants, gift baskets, gourmet foods, confections, candles, balloons and plush stuffed animals. As always, our 100% Smile Guarantee backs every gift. The 1-800-FLOWERS.COM Mobile Flower & Gift Center was named winner of the 2010 “Best Mobile App for E-commerce” by DPAC (Digiday’s Publishing & Advertising Awards) and the 2010 Mobile App of the Year Award in the “Best Shopping” category by RIS (Retail Info Systems). 1-800-FLOWERS.COM was also rated number one vs. competitors for customer service by STELLAService and named by the E-Tailing Group as one of only nine online retailers out of 100 benchmarked to meet the criteria for Excellence in Online Customer Service. 1-800-FLOWERS.COM has been honored in Internet Retailer’s “Hot 100: America’s Best Retail Web Sites” for 2011 and was one of only five retailers to receive the 2011 Customer Innovation Award from Avaya for transforming the business through innovative use of business communications and collaboration technologies. The Company’s BloomNet® international floral wire service (www.mybloomnet.net) provides a broad range of quality products and value-added services designed to help professional florists grow their businesses profitably.

The 1-800-FLOWERS.COM “Gift Shop” also includes gourmet gifts such as popcorn and specialty treats from The Popcorn Factory® (1-800-541-2676 or www.thepopcornfactory.com); cookies and baked gifts from Cheryl’s (1-800-443-8124 or www.cheryls.com); premium chocolates and confections from Fannie May® confections brands (www.fanniemay.com and www.harrylondon.com); gift baskets and towers from 1-800-Baskets.com® (www.1800baskets.com); and wine gifts from Winetasting.com® (www.winetasting.com). The Company’s Celebrations® brand (www.celebrations.com) is a leading online destination for fabulous party ideas and planning tips and FineStationery.com® (www.finestationery.com) is the premier site for unique, customizable invitations, announcements and greeting cards. 1-800-FLOWERS.COM, Inc. is involved in a broad range of corporate social responsibility initiatives including continuous expansion and enhancement of its environmentally-friendly “green” programs as well as various philanthropic and charitable efforts.

During the fourth quarter of fiscal 2009, the Company made the strategic decision to divest its Home & Children’s Gifts business segment to focus on its core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets categories.  On January 25, 2010, the Company completed the sale of these businesses; refer to the Consolidated Financial Statements “Discontinued Operations” for a further discussion.  Consequently, the Company has classified the results of operations of its Home & Children’s Gifts segment as discontinued operations for all periods presented.

Shares in 1-800-FLOWERS.COM, Inc. are traded on the NASDAQ Global Select Market, ticker symbol: FLWS.

As a provider of gifts to consumers and wholesalers for resale to consumers, the Company is subject to changes in consumer confidence and the economic conditions that impact our customers. Demand for the Company’s products is affected by the financial health of our customers, which is influenced by macro economic issues such as unemployment, fuel and energy costs, weakness in the housing market and unavailability of consumer credit.  During the recent economic downturn, the demand for our products, compared to pre-recessionary levels, has been adversely affected by the reduction in consumer spending.

 
26

 
Anticipating continued economic pressure, during fiscal 2011, the Company took a more conservative view of the economy, and focused on achieving growth and enhancing its results through areas of the business over which it had more control. Throughout the year, the Company saw improving trends in terms of revenue growth, gross margin and contribution margin.  Revenue returned to growth in our fiscal third quarter, and continued into our fiscal fourth quarter, resulting in annual year-over-year growth. This was achieved in a challenging environment through a merchandising strategy that focused on providing our customers with truly original products, the success of which can be seen in increased average order value and improved return on investment in marketing programs.  All of the above factors resulted in improved operating results.

Reflecting the continued uncertainty in the consumer economy, the Company does not anticipate significant improvements in consumer demand for discretionary purchases during fiscal 2012.  With this in mind, the Company plans to continue its strategy of focusing on areas of its business where it believes it can exert control and thereby affect enhanced results, including:

·  
leveraging the Company’s operating cost structure;
·  
merchandising initiatives that emphasize truly original product designs and product line extensions;
·  
marketing programs that provide improved return on investment by engaging directly with customers to deepen our relationship with them;
·  
manufacturing and sourcing enhancements that can help mitigate commodity and shipping price increases and deliver increased gross profit margins, and;
·  
continuing investments for the future, particularly in social and mobile commerce initiatives, growing the 1-800-Baskets.com business and expanded franchising opportunities in its Fannie May and 1-800-Flowers brands.

For fiscal 2012, the Company expects to build on the positive trends that it has shown during fiscal 2011, including increases in revenue, gross margin and contribution margin in its Consumer Floral business as well as continued top and bottom line growth in its BloomNet and Gourmet Food and Gift Baskets categories. As a result, the Company anticipates consolidated revenue growth for the full year in the low-to-mid-single digit range as well as year-over-year increases in EBITDA, EPS and Free Cash Flow.

 
 
27

 
Category Information

The following table presents the contribution of net revenues, gross profit and category contribution margin from each of the Company's business categories, as well as consolidated EBITDA (and for fiscal 2010 and 2009, Adjusted EBITDA) (earnings before interest (including write-off of deferred financing costs), taxes, depreciation and amortization, goodwill and intangible impairment and severance and other restructuring costs). As noted previously, the Company’s Home & Children’s Gifts segment has been classified as discontinued operations and therefore excluded from category information below.

   
Years Ended
 
     Net Revenues from Continuing Operations:
 
July 3,
2011
   
% Change
   
June 27,
2010
   
% Change
   
June 28,
2009
 
 
             
(in thousands)
             
                               
     Net revenues from continuing operations:
                             
1-800-Flowers.com Consumer Floral (*)
  $ 369,198       0.7 %   $ 366,516       (7.2 %)   $ 394,782  
BloomNet Wire Service
    73,281       18.4 %     61,883       (2.6 %)     63,515  
Gourmet Food & Gift Baskets
    247,574       3.2 %     239,942       (7.3 %)     258,710  
Corporate (**)
    1,150       7.4 %     1,071       (4.3 %)     1,119  
Intercompany eliminations
    (1,416 )     (16.8 %)     (1,702 )     59.2 %     (4,176 )
     Total net revenues from continuing operations
  $ 689,787       3.3 %   $ 667,710       (6.5 %)   $ 713,950  

       
   
Years Ended
 
     Gross Profit from Continuing Operations:
 
July 3,
2011
   
% Change
   
June 27,
2010
   
% Change
   
June 28,
2009
 
               
(in thousands)
             
                               
     Gross profit:
                             
                               
1-800-Flowers.com Consumer Floral (*)
  $ 140,162       8.5 %   $ 129,239       (11.4 %)   $ 145,881  
      38.0 %             35.3 %             37.0 %
                                         
BloomNet Wire Service
    36,877       5.7 %     34,890       (1.4 %)     35,374  
      50.3 %             56.4 %             55.7 %
                                         
Gourmet Food & Gift Baskets
    102,472       1.5 %     100,990       0.8 %     100,187  
      41.4 %             42.1 %             38.7 %
                                         
Corporate (**)
    573       (16.1 %)     683       136.3 %     289  
                                         
Intercompany eliminations
    -               -               (525 )
     Total gross profit from continuing operations
  $ 280,084       5.4 %   $ 265,802       (5.5 %)   $ 281,206  
      40.6 %             39.8 %             39.4 %


 

 
28

 




 
   
Years Ended
 
Adjusted  EBITDA (***) from Continuing Operations:
 
      July 3,
       2011
   
          % Change
   
     June 27,
      2010
   
% Change
   
       June 28,
     2009
 
     Category Contribution Margin (***):
             
(in thousands)
             
                               
1-800-Flowers.com Consumer Floral (*)
  $ 32,669       47.6 %   $ 22,141       (43.0 %)   $ 38,830  
BloomNet Wire Service
    20,195       6.0 %     19,051       1.5 %     18,764  
Gourmet Food & Gift Baskets
    28,833       5.6 %     27,303       11.0 %     24,606  
     Category Contribution Margin Subtotal
    81,697       19.3 %     68,495       (16.7 %)     82,200  
Corporate (**)
    (47,569 )     (8.8 %)     (43,735 )     9.4 %     (48,284 )
Goodwill and intangible impairment
    -       -       -       -       (85,438 )
     EBITDA
    34,128       37.8 %     24,760       148.1 %     (51,522 )
Goodwill and intangible impairment
    -       -       -       -       85,438  
Severance and other restructuring costs
    -       -       -       -       2,543  
Litigation settlement
    -       -       898       -       -  
Termination of Martha Stewart marketing agreement
    -       -       1,931       -       -  
Termination of post sale 3rd party marketing agreement
    -       -       1,039       -       -  
     Adjusted EBITDA from continuing operations
  $ 34,128       19.2 %   $ 28,628       (21.5 %)   $ 36,459  


   
Years Ended
 
    Discontinued operations:
 
    July 3,
     2011
   
       % Change
   
   June 27,
  2010
   
% Change
   
June 28,
2009
 
 
             
(in thousands)
             
                               
Net revenues from discontinued operations
    -       -     $ 87,852       (38.9 %)   $ 143,746  
Gross profit from discontinued operations
    -       -       40,905       (39.3 %)     67,439  
Adjusted EBITDA from discontinued operations
    -       -       4,640       280.6 %     (2,569 )
                                         

(*)    During the second quarter of fiscal 2010 the Company launched the 1-800-Baskets.com brand which is included within the results of the Gourmet Food & Gift Baskets category.  Prior period results, which had previously been included within the 1-800-Flowers Consumer Floral category, have been reclassified accordingly.
 
(**)  Corporate expenses consist of the Company’s enterprise shared service cost centers, and include, among other items, Information Technology, Human Resources, Accounting and Finance, Legal, Executive and Customer Service Center functions, as well as Share-Based Compensation.  In order to leverage the Company’s infrastructure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions, other than those of the Customer Service Center, which are allocated directly to the above categories based upon usage, are included within corporate expenses as they are not directly allocable to a specific category.
 
(***) Performance is measured based on category contribution margin or consolidated EBITDA (and for fiscal 2010 and 2009, Adjusted EBITDA), reflecting only the direct controllable revenue and operating expenses of the categories. As such, management’s measure of profitability for these categories does not include the effect of corporate overhead, described above, depreciation and amortization, other income (net), nor does it include one-time charges. Management utilizes EBITDA, and adjusted financial information, as a performance measurement tool because it considers such information a meaningful supplemental measure of its performance and believes it is frequently used by the investment community in the evaluation of companies with comparable market capitalization. The Company also uses EBITDA and adjusted financial information as one of the factors used to determine the total amount of bonuses available to be awarded to executive officers and other employees.  The Company’s credit agreement uses EBITDA and adjusted financial information to measure compliance with covenants such as interest coverage and debt incurrence.  EBITDA and adjusted financial information is also used by the Company to evaluate and price potential acquisition candidates.  EBITDA and adjusted financial information have limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP. Some of these limitations are: (a) EBITDA does not reflect changes in, or cash requirements for, the Company's working capital needs; (b) EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company's debts; and (c) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA does not reflect any cash requirements for such capital expenditures. Because of these limitations, EBITDA should only be used on a supplemental basis combined with GAAP results when evaluating the Company's performance.

 

 
 
29

 
Due to the Company’s strategic decision to divest its Home & Children’s Gifts segment and classify it as Discontinued Operations, as well as other one-time charges incurred during fiscal 2010 and 2009 (Goodwill and intangible impairment; Deferred financing cost write-off; Severance and other restructuring costs; Litigation settlement; and Termination of marketing agreements), the following Non-GAAP reconciliation table has been included within MD&A.

Reconciliation of Net Income (Loss) from Continuing Operations to EBITDA and Adjusted EBITDA from Continuing Operations:

   
Years ended
 
 
 
 
July 3,
2011
   
June 27,
 2010
   
June 28,
 2009
 
             (in thousands)        
     Net income (loss) from continuing operations:
  $ 5,722     $ (2,088 )   $ (66,501 )
     Add:
                       
Interest expense
    4,200       5,571       6,364  
Depreciation and amortization
    20,715       21,378       21,010  
Deferred financing cost write-off
    -       340       3,245  
Income tax expense
    3,614       -       -  
Less:
                       
Interest income
    123       159       314  
Income tax benefit
    -       282       15,326  
     EBITDA
    34,128       24,760       (51,522 )
Goodwill and intangible impairment
    -       -       85,438  
Severance and other restructuring costs
    -       -       2,543  
Litigation settlement
    -       898       -  
Termination of Martha Stewart marketing agreement
    -       1,931       -  
Termination of post sale 3rd party marketing agreement
    -       1,039       -  
     Adjusted EBITDA from continuing operations
  $ 34,128     $ 28,628     $ 36,459  

 
 
30

 
Results of Operations

The Company’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to June 30.  Fiscal year 2011 which ended on July 3, 2011 consisted of 53 weeks, whereas fiscal years 2010 and 2009 which ended on June 27, 2010, and June 28, 2009 respectively, consisted of 52 weeks.

Net Revenues

   
Years Ended
 
   
  July 3,
 2011
   
     % Change 
   
June 27,
2010
   
   % Change
   
June 28, 
2009
 
   
(in thousands)
 
Net revenues:
                             
   E-Commerce
  $ 485,377       3.3 %   $ 469,974       (5.7 %)   $ 498,519  
   Other
    204,410       3.4 %     197,736       (8.2 %)     215,431  
                                         
    $ 689,787       3.3 %   $ 667,710       (6.5 %)   $ 713,950  

Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits.

During the fiscal year ended July 3, 2011 revenues increased by 3.3% over the prior year period, as a result of growth across all categories, including almost 1.0% growth within the Consumer Floral category, reversing the trend after two years of revenue declines, as well as continued growth in its BloomNet wire service and Gourmet Food and Gift Baskets categories.

During the fiscal year ended June 27, 2010, revenues decreased 6.5% compared to the prior year period, primarily as a result of weakness in the retail economy which resulted in lower wholesale order volumes from DesignPac Gifts, which is included within the Company’s Gourmet Food & Gift Baskets category, combined with lower demand within the 1-800-Flowers Consumer Floral business, and from weakness in wholesale product sales within the BloomNet WireService business. Fiscal 2010 was further impacted by the termination of the Company’s third-party marketing program during the second quarter of fiscal 2010.

The Company fulfilled approximately 8.1 million, 8.4 million and 8.6 million orders through its e-commerce (combined online and telephonic) sales channel during fiscal 2011, 2010 and 2009, respectively, while average order value increased to $59.58 in fiscal 2011, compared to $55.71 in fiscal 2010 and $57.65 in fiscal 2009. This shift reflects the change in the Company’s marketing and merchandising strategy which focused on innovative and original products designed to “wow” our customers’ gift recipients.  In comparison, during fiscal 2010, the Company relied more heavily on promotional pricing and markdowns, and free shipping offers promoted by the 1-800-Flowers brand during the fiscal 2010 key floral holidays in an effort to increase demand, in response to consumers’ preference for lower price-point products.

Other revenues increased 3.4% during fiscal 2011, in comparison to the prior year period primarily as a result of the aforementioned sales growth in the BloomNet Wire Service business, whereas other revenues during fiscal 2010 decreased in comparison to the prior year, primarily as a result of the decline in DesignPac and Napco’s wholesale order volume.

The 1-800-Flowers.com Consumer Floral category includes the operations of the 1-800-Flowers brand which derives revenue from the sale of consumer floral products through its E-Commerce sales channels (telephonic and online sales) and company-owned and operated retail floral stores, as well as royalties from its franchise operations. In addition, during May 2011, the Company acquired selected assets of Fine Stationery, an e-commerce retailer of personalized stationery, invitations and announcements. While included in the operating results of the Consumer Floral category during fiscal 2011, the operation of this acquisition did not have a material impact on results during fiscal 2011. Net revenues for the Consumer Floral category during the fiscal year ended July 3, 2011 increased by 0.7% over the prior year period as a result of continued strategic focus on: (i) upgrading merchandising programs, (ii) re-focusing the brand’s marketing message, and (iii) enhancing the efficiency of its advertising spending.  These efforts resulted in improvements in revenues, gross margin and contribution margin.

During fiscal 2010, net revenues decreased by 7.2% over the prior year period as a result of lower order volumes due to soft consumer demand caused by the weakened economy.  Fiscal 2010 revenue was negatively impacted by a combination of the Sunday day-placement and severe snow storms across much of the country during the Valentine’s Day holiday, as well as the termination of the Company’s third-party marketing program during the second quarter of fiscal 2010. After seeing improving revenue trends leading up to the fiscal 2010 Valentine’s Day holiday, the Company made the strategic decision to increase its marketing spending and offered customers a free shipping/no service charge promotion in order to spur demand and accelerate the anticipated return to revenue growth with the brand. Although these programs resulted in an increase in order count and new customer acquisition, the lift in orders was insufficient to offset the associated decline in average order and gross margin, and combined with the increase in advertising spending required to support the promotion, resulted in significantly lower category contribution margin. These negative trends continued, at a less dramatic rate, for Mother’s Day and through the end of fiscal 2010.

 
31

 
The BloomNet Wire Service category includes revenues from membership fees as well as other product and service offerings to florists.  Net revenues during the fiscal year ended July 3, 2011 increased by 18.4% over the prior year period, primarily as a result of growing revenues associated with increased shop-to-shop order volume. While this order volume positively impacts revenues, at the present time, the impact on gross margin and contribution margin is significantly less than BloomNet’s normal margin. However, BloomNet expects to continue to monetize this increased order volume through increasing membership, technology, services and product fees. Net revenues during the fiscal year ended June 27, 2010 decreased by 2.6% over the prior year period, primarily due to lower wholesale product sales from Napco, as florists scaled back purchases as a result of the weakness in the retail economy.

The Gourmet Food & Gift Basket category includes the operations of 1-800-Baskets, Cheryl’s Cookies & Brownies, Fannie May Chocolates, The Popcorn Factory, The Winetasting Network and DesignPac businesses.  Revenue is derived from the sale of cookies, baked gifts, premium chocolates and confections, gourmet popcorn, wine gifts and gift baskets through its E-commerce sales channels (telephonic and online sales) and company-owned and operated retail stores under the Cheryl’s and Fannie May brands, as well as wholesale operations.  During the second quarter of fiscal 2010, the Company launched a new co-branded website which featured the 1-800-BASKETS.COM® brand, a re-merchandised collection of gourmet gift baskets confected by DesignPac.  Fiscal 2009 revenues from gourmet gift baskets, which were previously included within the 1-800-Flowers.com Consumer Floral category, have been reclassified to conform to current year presentation.  Net revenue during the fiscal year ended July 3, 2011 increased by 3.2% compared to the prior year period, primarily as a result of e-commerce sales growth from 1-800-Baskets.com and Cheryl’s brands, as well as sales volume through the Winetasting Network, partially offset by reduced wholesale volume from DesignPac. Net revenues during the fiscal year ended June 27, 2010 decreased by 7.3% over the prior year period as a result of lower revenue from DesignPac, due to significant reductions in wholesale orders.

For fiscal 2012, the Company expects to build on the positive trends that it has shown in recent quarters, including increases in revenue in its Consumer Floral business as well as continued top and bottom line growth in its BloomNet and Gourmet Food and Gift Baskets categories. As a result, the Company anticipates consolidated revenue growth for the full year in the low-to-mid-single digit range.


Gross Profit

   
Years Ended
 
   
July 3,
2011
   
% Change
   
June 27,
2010
   
% Change
   
June 28,
2009
 
   
(in thousands)
 
                               
Gross profit
  $ 280,084       5.4 %   $ 265,802       (5.5 %)   $ 281,206  
Gross margin %
    40.6 %             39.8 %             39.4 %

Gross profit consists of net revenues less cost of revenues, which is comprised primarily of florist fulfillment costs (primarily fees paid directly to florists), the cost of floral and non-floral merchandise sold from inventory or through third parties, and associated costs including inbound and outbound shipping charges. Additionally, cost of revenues include labor and facility costs related to direct-to-consumer and wholesale production operations.

Gross profit increased during the fiscal year ended July 3, 2011, compared to the prior year, due to the combination of increased revenues across all categories as described above, as well as an 80 basis point improvement in gross margin percentage, resulting from improved merchandising programs and reduced promotional activities within the Company’s 1-800-Flowers.com Consumer Floral category, more than offsetting fuel and commodity cost increases, and the margin impact of the third-party marketing program which was discontinued in December 2009.  Gross profit decreased during the fiscal year ended June 27, 2010, as a result of the decline in revenues in comparison to the prior year period, while gross margin percentage increased 40 basis points as a result of product mix associated with the impact of lower wholesale revenues from DesignPac, as well as improved manufacturing and supply chain operating efficiencies, offset in part by continued reliance on promotional pricing and the termination of the Company’s high margin post sale third-party marketing program.

 
32

 
The 1-800-Flowers.com Consumer Floral category gross profit and gross profit margin percentage increased by 8.5% and 270 basis points, respectively, during the fiscal year ended July 3, 2011, compared to the prior year period, due to the higher revenue, as described above, and gross margin improvements due to the aforementioned improvements in merchandising programs and reductions in promotional activity, as well as the impact of the termination of the Martha Stewart marketing agreement during the fourth quarter of fiscal 2010.  During the fiscal year ended June 27, 2010, gross profit and gross profit margin percentage decreased by 11.4% and 170 basis points, respectively, over the prior year period, as a result of decreased sales volume and promotional pricing, partially offset by supply chain improvements.  Fiscal 2010 gross margin percentage was also negatively impacted by the aforementioned termination of the Company’s third-party marketing program, the early termination charge associated with the Martha Stewart marketing agreement, and the free-shipping/no-service charge promoted for the fiscal 2010 Valentine’s Day holiday in order to improve consumer demand. Although order volume increased as a result of the Valentine’s Day promotion, the improvement was insufficient to offset the decrease in average order value and the impact on gross margin percentage, ultimately resulting in a decline in gross profit.

The BloomNet Wire Service category gross profit increased by 5.7% during the fiscal year ended July 3, 2011, compared to the prior year period, as a result of the above mentioned increase in shop-to-shop order volume. While the cost of these orders negatively affected gross margin percentage, these orders generated increased net revenues and gross margin dollars. BloomNet expects to continue to monetize this increased order volume and thereby improve gross margin over time.  During fiscal 2010, gross profit from the BloomNet Wire Service category decreased by 1.4% compared to the prior year period, while gross margin percentage increased 70 basis points, as a result of sales mix due to the aforementioned decrease in lower margin floral wholesale product revenue.

The Gourmet Food & Gift Baskets category gross profit increased by 1.5% and 0.8% during the fiscal years ended July 3, 2011 and June 27, 2010, respectively.  The increased gross profit during fiscal 2011 was attributable to sales mix, whereby higher margin e-commerce sales growth within the 1-800-Baskets and Cheryl’s brands and retail store revenue growth by the Fannie May brand, more than offset the impact of the loss of lower margin wholesale order volume from DesignPac, whereas the gross profit increase during fiscal 2010 was a result of improved gross margin performance, which offset the revenue decline primarily attributable to DesignPac. During the fiscal year ended July 3, 2011, the gross margin percentage decreased by 70 basis points, reflecting the above mentioned change in sales mix, as well as increased fuel and commodity prices, whereas, the gross margin percentage in fiscal 2010 increased 340 basis points due to the reduction in lower margin DesignPac sales volume, as well as improved gross margins resulting from manufacturing efficiencies and reduced promotional pricing across all other businesses within the category.

For fiscal 2012, the Company expects its gross margin percentage will improve in comparison to fiscal 2011 as a result of a reduction in promotional activity, as well as improvements in product sourcing, supply chain and manufacturing efficiencies

Marketing and Sales Expense

   
Years Ended
 
   
July 3,
2011
   
% Change
   
June 27,
2010
   
% Change
   
June 28,
2009
 
   
(in thousands)
 
                               
Marketing and sales
  $ 174,758       1.2 %   $ 172,640       (1.8 %)   $ 175,839  
Percentage of sales
    25.3 %             25.9 %             24.6 %

Marketing and sales expense consists primarily of advertising and promotional expenditures, catalog costs, online portal and search costs, retail store and fulfillment operations (other than costs included in cost of revenues) and customer service center expenses, as well as the operating expenses of the Company’s departments engaged in marketing, selling and merchandising activities.

 
33

 
During the fiscal year ended July 3, 2011, marketing and sales expense increased by 1.2%, compared to the prior year period, as a result of: (i) an increase in compensation expense, due to incentive compensation, reflecting the improved operating results during the current year, as well as new initiatives for franchising and store growth, and (ii) variable costs associated with the increase in revenue, offset by reductions in advertising spending, reflecting the Company’s continued focus on improving its merchandising programs, re-focusing the marketing messages, and enhancing the efficiency of the advertising efforts. As a result, marketing and sales expenses as a percentage of net revenues decreased from 25.9% in fiscal 2010 to 25.3% in fiscal 2011. During the fiscal year ended June 27, 2010, marketing and sales expense decreased by 1.8% as a result of a number of cost-reduction initiatives, including: (i) savings in catalog printing and co-mailing costs and planned reductions in customer prospecting, (ii) reductions in variable costs associated with the decline in revenue, and (iii) the impact of severance incurred in the prior year.  Marketing and sales expense increased as a percentage of sales during the fiscal year ended June 27, 2010, as a result of: (i) sales mix caused by the reduction of wholesale basket products by DesignPac which operate with a low level of marketing and sales expense, and (ii) the Valentine’s Day holiday promotions implemented by the 1-800-Flowers Consumer Floral brand which did not generate sufficient revenue to support the level of advertising spend.

During each of the fiscal years ended July 3, 2011 and June 27, 2010, the Company added approximately 2.3 million new e-commerce customers, compared to 2.4 million in fiscal 2009.  Of the 4.8 million total customers who placed e-commerce orders during fiscal 2011, approximately 52% were repeat customers, consistent with fiscal 2010 and 2009, reflecting the Company’s focus on deepening the relationship with its existing customers as their trusted source for gifts and services for all of their celebratory occasions.

Technology and Development Expense

   
Years Ended
 
   
July 3,
2011
   
% Change
   
June 27,
2010
   
% Change
   
June 28,
2009
 
   
(in thousands)
 
                               
Technology and development
  $ 20,424       13.8 %   $ 17,952       (14.5 %)   $ 21,000  
Percentage of sales
    3.0 %             2.7 %             2.9 %

Technology and development expense consists primarily of payroll and operating expenses of the Company’s information technology group, costs associated with its web sites, including hosting, design, content development and maintenance and support costs related to the Company’s order entry, customer service, fulfillment and database systems.

During the fiscal year ended July 3, 2011, technology and development expense increased by 13.8% over the prior year period, as a result of increased labor costs required to support and implement recent website improvements, as well as from higher incentive compensation expense in comparison to the prior year, partially offset by reductions in the cost of hosting the Company’s technology platforms, as a result of footprint reductions and sourcing savings. During the fiscal year ended June 27, 2010, technology and development expense decreased by 14.5% over the prior year as a result of decreased labor/consulting costs due to re-sizing initiatives, as well as a reduction in the number and size of hosting sites.

During the fiscal years ended July 3, 2011, June 27, 2010, and June 28, 2009 the Company expended $32.6 million, $29.3 million, and $35.7 million, respectively, on technology and development, of which $12.2 million, $11.4 million, and $14.7 million, respectively, has been capitalized.

General and Administrative Expense

   
Years Ended
 
   
July 3,
2011
   
% Change
   
June 27,
2010
   
% Change
   
June 28,
2009
 
   
(in thousands)
 
                               
General and administrative
  $ 50,744       0.6 %   $ 50,450       0.1 %   $ 50,451  
Percentage of sales
    7.4 %             7.6 %             7.1 %

General and administrative expense consists of payroll and other expenses in support of the Company’s executive, finance and accounting, legal, human resources and other administrative functions, as well as professional fees and other general corporate expenses.

 
34

 
General and administrative expense was relatively consistent with the prior year, but decreased as a percentage of net revenues from 7.6% in fiscal 2010 to 7.4% in fiscal 2011, as a result of reduced health insurance costs due to plan redesign and reductions in legal fees associated with litigation which was settled in the prior year, offset by higher incentive compensation expense due to improved financial performance.  During fiscal 2010, general and administrative expense was consistent with the prior year period, but increased as a percentage of sales, as a result of a litigation settlement of approximately $0.9 million, offset by reduced labor and operating costs related to the Company’s re-sizing initiatives implemented during fiscal 2009.

Depreciation and Amortization

   
Years Ended
 
   
July 3,
2011
   
% Change
   
June 27,
2010
   
% Change
   
June 28,
2009
 
   
(in thousands)
 
                               
Depreciation and amortization
  $ 20,715       (3.0 %)   $ 21,378       1.8 %   $ 21,010  
Percentage of sales
    3.0 %             3.2 %             2.9 %

Depreciation and amortization expense decreased by 3.0% during the fiscal year ended July 3, 2011 in comparison to the prior year period as a result of the Company’s efforts over the last three years to reduce capital expenditures.  During the fiscal year ended June 27, 2010 depreciation and amortization expense increased by 1.8% in comparison to the prior year period, primarily as a result of the incremental amortization related to the intangibles established as a result of the acquisition of DesignPac in April 2008, as well as capital additions for technology platform improvements.

Goodwill and Intangible Impairment

The Company performs an annual impairment test during its fiscal fourth quarter, or earlier, if indicators of potential impairment exist, to evaluate its goodwill and intangible assets.  While the Company determined that there was no impairment during fiscal 2011 or 2010, during fiscal 2009 the Gourmet Food & Gift Basket segment experienced declines in revenue and operating performance when compared to prior years and their strategic outlook. The Company believes that this weak performance was attributable to reduced consumer spending due to the overall weakness in the economy. Based upon the expectation of a continuation of the current economic downturn, supported by lower order quantities received for the upcoming holiday season by certain wholesale customers, coupled with a decline of the Company’s market capitalization and contraction of public company multiples, during the year ended June 28, 2009, the Company recorded goodwill and intangible impairment charges of $85.4 million.  Of the total impairment charge, approximately $65.6 million was related to goodwill and $19.8 million was related to intangibles.

Other Income (Expense)

   
Years Ended
 
   
July 3,
2011
   
% Change
   
June 27,
2010
   
% Change
   
June 28,
2009
 
   
(in thousands)
 
                               
Interest income
  $ 123       (22.6 %)   $ 159       (49.4 %)   $ 314  
Interest expense
    (4,200 )     24.6 %     (5,571 )     12.5 %     (6,364 )
Deferred financing write-off
    -       100 %     (340 )     89.5 %     (3,245 )
    $ (4,077 )     29.1 %   $ (5,752 )     38.1 %   $ (9,295 )

Other income (expense) consists primarily of interest expense and amortization of deferred financing costs, primarily attributable to the Company’s long-term debt and revolving line of credit, partially offset by income earned on the Company’s investments and available cash balances.

 
35

 
Net borrowing costs decreased during the fiscal years ended July 3, 2011 and June 27, 2010, in comparison to the respective prior year periods, due to scheduled paydowns and prepayments of amounts outstanding under the Company’s term loans, as well as reduced working capital borrowings. During fiscal 2009, the impact of the reduction in outstanding borrowings was partially offset by increases in interest rates, in part due to the interest rate swap that the Company entered into during July 2009, in accordance with its credit facility agreement.

Income Taxes

During the fiscal year ended July 3, 2011, the Company recorded income tax expense of $3.6 million, resulting in an effective tax rate of 38.7%.   During the fiscal years ended June 27, 2010 and June 28, 2009, the Company recorded an income tax benefit of $0.3 million and $15.3 million, respectively, resulting in an effective tax rate of 11.9% and 18.7%, respectively.  The Company’s effective tax rate for the fiscal years ended July 3, 2011 and June 27, 2010, differed from the U.S. federal statutory rate of 35% primarily due to the impact of state income taxes and non-deductible stock-based compensation, partially offset by various tax credits, whereas the effective tax rate for the fiscal year ended June 28, 2009 differed from the U.S. federal statutory rate of 35% primarily due to the impact of the non-deductible portions of the goodwill and other intangible impairment charges of $85.4 million and various tax credits, partially offset by state income taxes.

At July 3, 2011, the Company’s federal net operating loss carryforwards were approximately $19.7 million, which, if not utilized, will begin to expire in fiscal year 2025.

Discontinued Operations

During the fourth quarter of fiscal 2009, the Company made the strategic decision to divest its Home & Children’s Gifts business segment to focus on its core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets categories.  On January 25, 2010, the Company completed the sale of these businesses; refer to the Consolidated Financial Statements “Discontinued Operations” for a further discussion.  Consequently, the Company has classified the results of operations of its Home & Children’s Gifts segment as discontinued operations for all periods presented.

Results for discontinued operations are as follows:

   
Years Ended
 
   
July 3,
2011
   
       % Change
   
June 27,
2010
   
% Change
   
June 28,
2009
 
 
             
(in thousands)
             
                               
Net revenues from discontinued operations
    -       -     $ 87,852       (38.9 %)   $ 143,746  
Gross profit from discontinued operations
    -       -     $ 40,905       (39.3 %)   $ 67,439  
Operating loss from discontinued operations
    -       -     $ (1,723 )     95.7 %   $ (39,754 )
(including losses on disposal of $5.2 million and $14.7 million during the years ended June 27, 2010 and June 28, 2009, respectively, and impairment charges of $20.0 million during the year ended June 27, 2009)
                                       
Loss from discontinued operations
    -       -     $ (2,133 )     93.3 %   $ (31,916 )

The Home & Children’s Gifts category includes revenues from Plow & Hearth, Wind & Weather, HearthSong and Magic Cabin brands.  Revenue is derived from the sale of home decor and children’s gifts through its E-commerce sales channels (telephonic and online sales) and company-owned and operated retail stores under the Plow & Hearth brand.

During the fiscal year ended June 27, 2010, net revenues from discontinued operations decreased by 38.9% over the prior year period as a result of lower E-commerce sales volume due to the sale of the business on January 25, 2010, and therefore fiscal 2010 results only include sales through the date of disposition. Further contributing to the revenue decline was reduced consumer spending, particularly in the home décor product category, and a planned reduction in catalog circulation, as well as lower retail store sales due to a store closure and a decline in customer traffic.

 
36

 
During the fiscal year ended June 28, 2009, net revenues from discontinued operations decreased by 20.2% over the prior year period primarily as a result of lower order volume from the E-commerce sales channel, due to a combination of reduced consumer spending, particularly in the home décor product category, and a planned reduction in catalog circulation, including the elimination of the Madison Place and Problem Solvers catalog titles in fiscal 2008.  Further contributing to the revenue decline were lower retail store sales, compared to the same periods of the prior year, due to a decline in customer traffic.

Gross profit from discontinued operations during the fiscal years ended June 27, 2010 and June 28, 2009, decreased by 39.3% and 17.2%, respectively, compared to the prior year periods as a result of the aforementioned revenue declines.  Gross margin percentage during fiscal 2010 decreased 30 basis points to 46.6% due to promotional activity, while during fiscal 2009, the gross margin percentage increased 170 basis points to 46.9%, benefiting from enhanced product sourcing and shipping initiatives.

Despite the aforementioned decline in revenues, operating income (loss) from discontinued operations during the fiscal year ended June 27, 2010, excluding the impact of goodwill and intangible impairment and loss on sale, increased by approximately $8.5 million over the prior year period driven by significant reduction in operating expenses, primarily related to reduced catalog circulation costs and other operating cost reduction initiatives. Fiscal 2009 operating income (loss) includes approximately $0.4 million of restructuring costs associated with the Company’s cost reduction initiatives.

During fiscal 2009, the Home and Children’s Gift segment experienced significant declines in revenue and operating performance when compared to prior years and their strategic outlook. The Company believes that this weak performance was attributable to reduced consumer spending due to the overall weakness in the economy, and in particular, as a result of the continued decline in demand for home décor products. As a result of these factors, as well as the Company’s plans to resize this category based on the expectation of continued weakness in the home décor retail sector, upon completion of the Company’s impairment analysis, the goodwill and intangibles related to this reporting unit were deemed to be fully impaired. Therefore the Company recorded a goodwill and intangible impairment charge of $20.0 million related to this business segment.  In the fourth quarter ended June 28, 2009, the Company made the strategic decision to divest its Home & Children’s Gifts business segment and recorded a charge of $14.7 million to write-down the assets of the discontinued business to management’s estimate of their fair value.

On January 25, 2010, the Company completed the sale of the assets and certain related liabilities of its Home & Children’s Gifts business. The sales price of the assets was $17.0 million, subject to adjustments for changes in working capital (net proceeds amounted to $10.5 million). Based upon the carrying value of the assets held for sale, the Company recorded a loss of $5.3 million during the fiscal year ended June 27, 2010, including transaction, severance and transition obligations.


 
 
37

 

Quarterly Results of Operations

The following table provides unaudited quarterly consolidated results of operations for each quarter of fiscal years 2011 and 2010.  The Company believes this unaudited information has been prepared substantially on the same basis as the annual audited consolidated financial statements and all necessary adjustments, consisting of only normal recurring adjustments, have been included in the amounts stated below to present fairly the Company’s results of operations. The operating results for any quarter are not necessarily indicative of the operating results for any future period.
                                                                 
   
   Jul. 3,
  2011
   
 Mar. 27,
2011
   
 Dec. 26,
 2010
   
 Sep. 26,
 2010
   
  Jun. 27,
  2010
   
  Mar. 28,
  2010
   
  Dec. 27,
  2009
   
  Sep. 27,
  2009
 
   
(in thousands, except per share data)
 
Net revenues:
                             
E-commerce (telephonic/online)
  $ 142,059     $ 117,506     $ 154,599     $ 71,213     $ 130,444     $ 113,030     $ 151,660     $ 74,840  
   Other
    45,026       45,273       80,803       33,308       34,983       42,483       86,794       33,476  
         Total net revenues
    187,085       162,779       235,402       104,521       165,427       155,513       238,454       108,316  
Cost of revenues
    112,619       99,574       136,570       60,940       102,455       96,100       138,791       64,562  
                                                                 
Gross profit
    74,466       63,205       98,832       43,581       62,972       59,413       99,663       43,754  
                                                                 
Operating expenses:
                                                               
Marketing and sales
    50,180       43,812       50,848       29,918       44,459       46,729       51,976       29,476  
Technology and development
    5,578       5,179       4,786       4,881       4,688       4,183       4,525       4,556  
General and administrative
    13,133       12,930       12,831       11,880       11,946       11,297       14,673       12,534  
Depreciation and amortization
    5,064       5,230       5,286       5,135       5,607       5,482       5,343       4,946  
     Total operating expenses
    73,955       67,151