Prepared remarks
Good day, and welcome to the 1-800-FLOWERS.COM, Inc. Fiscal Year 2026 Third Quarter Earnings Conference Call. The operator provided instructions for participation. Please note this event is being recorded. I would now like to turn the conference over to Andy Milevoj, Senior Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to our fiscal 2026 third quarter earnings call. Joining us on today's call are Adolfo Villagomez, Chief Executive Officer; and James Langrock, Chief Financial Officer. Before we begin, I'd like to remind you that some of the statements we make on today's call are covered by the safe harbor disclaimer contained in our press release and public documents. During this call, we will make forward-looking statements with predictions, projections and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The company disclaims any obligation to update any of the forward-looking statements that may be made or discussed during this call. Additionally, we will discuss certain supplemental financial measures that were not prepared in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the table of our earnings release. And now I'll turn the call over to Adolfo.
Thanks, Andy, and good morning, everyone. As we move through fiscal 2026, we remain focused on stabilizing the business and building a stronger foundation for future growth. During the third quarter, we continue to make progress on the key initiatives we outlined earlier this year, and we are starting to see early signs that our actions are improving execution and the overall customer experience. I want to start with our Valentine's Day performance, which is an important indicator of that progress. This year, we delivered a significantly improved customer experience with strong gains across our key service metrics. These results reflect better execution, stronger processes and a clear focus across the organization on delivering a high-quality experience for our customers. Importantly, this progress validates many of the structural and operational changes we have been implementing. We are now beginning to see tangible evidence that these actions are improving performance across key areas of the business. While there is still work to do, we are encouraged by these results and the direction of the business. From a category perspective, our Gourmet Foods and Gift Baskets segment performed better than our Consumer Floral and Gifts segment. As James will discuss in more detail, this reflects the Easter timing shift and the heavier level of inefficient marketing spend in our Consumer Floral and Gifts segment a year ago, combined with our focus on improving marketing contribution margin. As part of our efforts to broaden our customer reach, we also continue to expand our presence across third-party marketplaces. Ahead of Valentine's Day, we launched a new partnership with Instacart. This builds on our strategy to meet customers where they are already shopping and to expand access to our floral and gifting value proposition. Through this partnership, our offerings are now available on the Instacart app, supported by our network of local florists. This increases speed and accessibility, particularly during peak occasions while also supporting our florist partners and introducing our brands to new customers. At the same time, we're strengthening our focus on the customer experience across our digital platforms. During the quarter, we fully implemented AI-powered sorting and ranking on 1-800-FLOWERS.com. This brings customer-selected best sellers to the top of our product rankings and reflects a more AI-driven customer-first approach. This is an important step in modernizing the business. Historically, product placement was more heavily influenced by merchants. Today, we are prioritizing the products customers choose, which improves the overall shopping experience and results in higher sales. We are simplifying the shopping experience by reducing choice in certain areas to make it easier for customers to find the right gift. In addition, we are evolving how we operate our floral business, including how we balance florist-fulfilled orders with shipments fulfilled from our distribution centers. We are now operating these areas in a more coordinated way with our florist-fulfilled product team and direct shipment team working together on assortment decisions. This approach has multiple advantages. It improves the overall value proposition for our customers by simplifying the shopping experience, improving conversion and better aligning pricing for similar bouquets. Importantly, we made significant progress on our cost savings initiatives, achieving our previously announced $50 million in savings 2-year target in less than a year. This reflects the discipline and execution across the organization and strengthens our ability to reinvest in the business while continuing to improve efficiency. As we realize these savings, we are beginning to thoughtfully reinvest a portion back into the business to support our strategic priorities, including marketing and customer experience. These results are driven by the continued progress we are making on our cost and efficiency initiatives. As part of our transition to a function-driven operating model, we have streamlined the organization, improving alignment, driving synergies and enabling more efficient decision-making across the business. Since January 2025, we have reduced core headcount by approximately 20% as we align resources with our strategic priorities and improve efficiency across the organization. We are beginning to see cost savings from these actions, although in the short term, they are partially offset by consultant costs, incentive compensation and tariffs. Looking ahead, as our strategic initiatives take hold, we are beginning to shift toward a more balanced approach that includes targeted marketing investments to support future growth. Last year, our marketing efforts were heavily focused on bottom of the funnel activities, primarily focused on driving transactions, and we did not have the systems or infrastructure in place to effectively drive customer retention. Over the past 9 months, we have made meaningful progress in developing those capabilities. We are now in a position to begin rebuilding our brands. We're also expanding our reach to younger customers through top and mid-funnel initiatives, including influencer marketing and platforms like Instagram and TikTok. At the same time, we're improving our ability to retain customers. As I mentioned earlier, we have significantly enhanced the customer experience by improving areas such as delivery fees and overall customer satisfaction, which are key drivers of long-term retention. Beginning in the fourth quarter, we're accelerating and testing these targeted marketing investments. While these efforts are expected to take time to translate into revenue, they are an important step in rebuilding demand in a more sustainable way. As part of this shift, we expect marketing spend in the fourth quarter as a percent of sales to be approximately flat compared to the prior year period. In addition to these marketing investments, we're also beginning to invest in building out our Martech stack. These investments will begin in the fourth quarter and continue into the next fiscal year as we strengthen the capabilities needed to support long-term growth. More broadly, while cost discipline remains a priority, we believe these actions, combined with our structural improvements are strengthening the foundation to stabilize the business and enable long-term growth. Now I will turn the call over to James for the financial review.
Thanks, Adolfo, and good morning, everyone. During the third quarter, revenue came in line with our expectations, reflecting continued execution against our disciplined marketing approach and the ongoing impact of changes in search engine results and pressure on direct traffic. Valentine's Day was consistent with our expectations, particularly given the difficult day placement as the holiday fell on a Saturday and during President's Day weekend. As we progressed into March, we began to see a moderation in the rate of revenue decline in our Consumer Floral and Gift segment as we anniversaried some of the strategic shifts in our marketing approach. From a category perspective, our Gourmet Foods and Gift Baskets segment performed meaningfully better than our Consumer Floral and Gift segment during the quarter. Gourmet Foods and Gift Baskets segment benefited from an approximate 5% revenue lift from the timing of Easter. This performance also reflects the more pronounced impact of prior year inefficient marketing spend in our Consumer Floral and Gift segment, along with ongoing changes in search engine results and pressure on direct traffic. During the quarter, we recorded a noncash goodwill and trade name impairment charge related to our Consumer Floral and Gift segment and the Personalization Mall trade name. While this impacted earnings, it did not affect cash flow. From a profitability standpoint, we saw improvement in our ad-to-sales ratio and marketing contribution margin compared to last year. Overall, our contribution margin improved year-over-year, reflecting stronger pricing discipline and improved marketing efficiency. Our efforts to streamline operations and manage costs are beginning to have a positive impact on the business. As of the third quarter, we have achieved the full $50 million in annualized run rate cost savings that we had initially targeted across fiscal year 2026 and fiscal year 2027, ahead of plan. Building on this progress, we are now targeting an incremental $15 million to $20 million in additional run rate cost savings over the next fiscal year. This brings our total identified cost savings opportunity to approximately $65 million to $70 million, spanning both cost of goods sold and operating expense reductions, reflecting continued opportunities to streamline the business and improve efficiency. Importantly, we are being thoughtful about how we deploy these savings. As we move into the fourth quarter and into next fiscal year, we are transitioning from a primary focus on marketing contribution margin toward a more balanced approach that includes strategic investment. This shift is expected to impact our fourth quarter performance. As part of this shift, we are accelerating and testing targeted marketing investments, including top and mid-funnel initiatives, which are intended to support longer-term demand generation and may take time to translate into revenue. Consistent with this approach, we expect total marketing spend as a percentage of sales in the fourth quarter to be approximately flat compared to the prior year period. In addition, we are beginning to invest in enhancing our digital experience and expanding our Martech capabilities, which will support improved customer acquisition, retention and overall marketing effectiveness over time. Investments will begin in the fourth quarter and continue into the next fiscal year. This approach reflects our focus on building a stronger and more sustainable operating foundation by balancing profitability with the investments needed to stabilize the business and position it for future growth. Now let's review our third quarter performance. Consolidated revenue for the quarter decreased 11.6%. Our Gourmet Foods and Gift Baskets segment was essentially flat. Our Consumer Floral and Gifts segment declined 18.7% and our BloomNet segment declined 5.9% for the reasons discussed earlier. Excluding the impact of system-related issues in the prior year period, our gross margin improved 10 basis points to 33.2%, reflecting benefits from our cost reduction initiatives, partially offset by tariffs, commodity costs and fixed cost absorption. Excluding items affecting period-to-period compatibility and the impact of the company's nonqualified deferred compensation plan in both periods, operating expenses declined $16.4 million as compared to prior year to $144.3 million. As a result of these factors, our third quarter adjusted EBITDA loss was $31.2 million compared with an adjusted EBITDA loss of $34.9 million in the prior year period, reflecting a modest year-over-year improvement. Now turning to our balance sheet. At quarter end, net debt was $94.3 million, compared with $75.3 million a year ago. Our cash balance was $51 million at the end of the third quarter. Inventory was $146 million, compared with $160 million a year ago. In terms of our debt, we had $145 million in term debt and no borrowings under our revolving credit facility as compared with $160 million a year ago. As we look ahead, we continue to view fiscal 2026 as a foundational year focused on stabilizing the business, improving execution and building a stronger platform for long-term growth. Our strategic priorities remain centered on enhancing our customer-first approach, expanding third-party distribution, improving marketing efficiency and driving structural cost savings. We believe these actions are strengthening the foundation for sustainable revenue and profit growth over time. Fiscal year 2026, we expect revenue to decline by approximately 10% to 12% as compared with the prior year and adjusted EBITDA to be approximately breakeven within a range of plus or minus $2 million, which includes approximately $22 million of anticipated incentive compensation and consultant costs incurred during the fiscal year. These expectations reflect our more disciplined marketing strategy, ongoing changes in search engine results affecting organic traffic and our transition toward a more efficient demand generation model. Now we'll open the call for Q&A. Operator, please provide instructions for those interested in asking a question.
Questions and answers
The operator provided instructions for participants. Our first question comes from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.
Good to hear that you had a successful Valentine's Day even with an adverse calendar day placement. So I guess, first on that topic, can you share any additional details as far as the customer experience metrics that improved? And what are some of the learnings from that holiday that you're looking to apply towards Mother's Day, which is coming up in a few days?
Anthony, this is Adolfo. There are a lot of learnings coming out of Valentine's Day. We're literally transforming the business from a merchandising perspective, a digital perspective and marketing. By the way, our post-purchase experience has significantly improved. Before I go to the learnings, I also want to be mindful that between Valentine's Day and Mother's Day, there is not a lot of room to make a lot of changes. You need to buy flowers ahead of time, so you can make some changes, but not all of them. Mother's Day is going to do better across those metrics, but don't expect the full performance impact just yet. As we think about the changes we're making, let me start with digital. It used to be that the merchants would place a buy and they decided, 'Hey, you're buying roses,' or 'You are buying lilies.' They would be at the top of the product page, which is where most customers make a decision. Sixty-five percent of the sales come above the fold on any website. So if you don't have the right product, your conversion declines. As I mentioned, we are now using AI-driven sorting and ranking. Number one, conversion is improving. Most importantly, we are also finding out what customers really want and what they are willing to pay, not only by type of spend, but also by delivery method and delivery fees they are willing to pay. So we learned a lot from that perspective. From a marketing perspective, the reason Flowers did worse than Food is our marketing spend there last year was heavily unproductive. As an example, we were buying transactions for $40 and making $20 margin on each transaction. That looks like acquisition, but if you don't retain the customer, you are just wasting dollars. So we're working on lowering our customer acquisition cost and improving our retention. The second one requires the Martech stack. We're making improvements, but we are not 100% there yet. On the first one, the team started experimenting with top-of-funnel and mid-funnel. In the past, the company wouldn't like that because there was so much focus on the transaction and the measurement capabilities led you to believe that buying clicks was the most effective marketing method. What we are finding out as we have better measurement capabilities is that's not true. If you do it right, top-of-funnel and mid-funnel investments also drive customer acquisition. They also allow you to acquire younger customers, which is better longer term. The team was experimenting with podcasts, TikTok, Instagram, all of them with successful results that will be expanded in the future. From an assortment perspective, we started testing the mix between florist delivery and direct shipment from our warehouses. In the past, because inventory was owned by us, the manual sorting and ranking favored direct delivery, which, combined with the assortment we were offering there, led to lower conversion. Then at the end of the event, because we had a lot of inventory, there was heavy discounting. We are managing through that. There were huge learnings during Valentine's Day. Some of those are being applied on Mother's Day, and we continue to learn in Mother's Day. I'm actually excited about the learnings and the implications for assortment. It's a process. On operations, these are things you don't see short term on the balance sheet. Our customer satisfaction post-purchase increased. Calls to the call center declined on a per-order basis. Now that we're also using AI in the call center, we're able to be significantly more productive with a better customer experience. So all in all, it was one event among multiple businesses, but a lot of learnings; some are being applied during Mother's Day and will be fully applied during upcoming holidays. I'm very optimistic about the improvements to the overall experience in the future.
Just switching gears to the cost savings program. You talked about completing the $50 million cost savings program, but you're also looking to reinvest some of that into the business. How should we think about cost savings on a net basis? And maybe you could just talk about OpEx versus cost of goods, how to think about that?
So Anthony, to answer the second question, right now, the $50 million savings is probably split equally between cost of goods sold and SG&A. As you think of the cost savings, some of those savings will be reflected, but not all will flow through this year. Near term, we have consulting costs for implementing initiatives. We still have headwinds around tariffs and commodity costs. Those offset some benefits. You'll see the consulting costs start to drop in FY '27; we will no longer have those consulting costs, so more of the savings will flow through. We're being very thoughtful on how we deploy those savings. As you look into '27, those savings give us more flexibility, but we're going to be deliberate on how we deploy them and start investing back in the business. It will not be a dollar-for-dollar flow-through through EBITDA. We haven't given guidance for FY '27 yet, but think of it in that context: we have the savings, but we will deploy some of them into investments, so it will not be a dollar-for-dollar flow-through on EBITDA.
Right. Okay. And can you just remind us about the consultant costs—how much for this fiscal year?
The consultant costs and incentive compensation together are about $22 million in this year's P&L. The consultant costs are about $12 million to $13 million of that.
Our next question comes from Michael Kupinski with NOBLE Capital Markets. Please go ahead.
With your changes in marketing, have you kind of opened the door to competitors? And I was just wondering if you can talk a little bit about whether or not you have seen increased marketing from competitors, especially during Valentine's or certainly around Mother's Day, particularly from low-cost providers like Bouqs or any impact from them, for instance? And I know the business is heavily correlated to consumer confidence. I was wondering if you can determine whether or not there was an impact by the war in Iran. And then also, can you talk a little bit about your third-party platforms like Amazon and DoorDash? What percent of revenue do you expect to achieve from marketplaces like that over the next 2 to 3 years?
Short answer is yes. Flowers is a very competitive business, especially during events. Google makes it easy for anybody to buy other people's brands, which is primarily why if you only focus on buying clicks, your customer acquisition cost becomes significantly higher. What we are doing now is leveraging the brand awareness of 1-800-FLOWERS.com. Anywhere I go, people tell me they think our company is the only one that gets natural or direct traffic and that everybody else needs to buy clicks. To generate more natural traffic you need to continue to build the brand, and that's what we are doing. Bottom-of-the-funnel transactions do not build a brand; they just lead to transactions. Middle and top funnel build the brand and awareness so you're in the subconscious of the customer and, eventually, when they have a need, they think about you. We've been successful in some of those efforts, but as James mentioned, you need to make investments. Sometimes top-of-the-funnel investments take time to show benefits. We're being cautious about how we invest and learn about the business. The most important asset we have is our brand, and we hadn't invested in it for a while; we are reversing that. We're reinvesting in the digital experience. Product discoverability on the website is improving. We have new enhancements every day and are improving our ability to retain customers. That flywheel will differentiate us versus competitors: personalization to the customer, a better experience, AI to drive reminders and recommendations to increase conversion. We're modernizing the brand to continue building awareness. On the impact of the war in Iran, it's very difficult to see that in the numbers. What we are seeing is that higher-income spenders are doing okay and lower-income are not, which shows in the AOV and what is selling. That hasn't changed much since I joined the company. On marketplaces, our approach is twofold. Selling on professional e-commerce marketplaces like Amazon teaches us a lot about operations and what drives conversion. We've learned a lot in the last 6 months since we started selling on Amazon. Looking out three years, sales outside our own e-commerce site should definitely be in the double digits of the company's revenue. We're pursuing marketplaces like Amazon, Walmart and Etsy, and delivery service providers for our flowers business like Instacart, DoorDash and Uber Eats. The intention is to be where customers are shopping. We have manufacturing and represent florists, so being in those channels is important. It's early days, but it's growing quickly from low numbers and we're optimistic about it.
And as we think of the inflection point coming out of the growth phase of the company, what would be the true baseline growth rate now? Historically, we looked at 3% to 5% revenue growth and about 8% EBITDA growth. Any thoughts on baseline growth rate coming out of this inflection point?
So Michael, we're not giving guidance yet for FY '27. We believe longer term, further out, we would get back to those growth rates.
Let me build on that, Michael. It's a process and we are sequencing. When I joined about a year ago, we were declining at a rate of over 20%. From there, you need to stop that decline, get to a few positive days, then positive weeks in one business and then grow the entire company. We are seeing positive days and positive weeks in some businesses. It's a process. At some point we want the company to grow; we're building a different business model, moving from manual to AI technology-driven. I'm cautiously optimistic about what this company can deliver, but it's a process. We're ahead of where we thought we would be, but there's still a lot of work to do.
It sounds like you made a lot of progress.
Our next question comes from Doug Lane with Water Tower Research. Please go ahead.
Just staying on the whole margin cost side of things. It looks like your EBITDA outlook this year improved a little bit despite the fact that you have $10 million more of the incentive comp and consulting costs running through it than you had last quarter. It looks like the underlying margin outlook has improved pretty decently since you last reported results. Where are the two or three key areas that you're seeing the improved margins on the EBITDA level?
Part of it is we are starting to see some of the cost benefits flow through on the gross margin. On the floral side, with the florist-fulfilled versus direct, we're seeing more pricing discipline and more targeted promotional activity, and better coordination between florist-fulfilled and direct shipment. We're seeing overall improvement in gross margin and improved AOV. We're being more consistent with pricing decisions and reducing discounts, which improves margin quality. Part of that is still offset by higher tariff, commodity and shipping costs. Overall, our gross margin was up about 10 basis points year-over-year, so we're starting to see that flow through and the strategy is working.
I wanted to probe because you have the $10 million more of consultants and incentive comp, and you've also got a commodity cost environment that arguably has deteriorated since you last reported. Are the commodity inputs actually down? What are you really seeing from your internal cost savings efforts? It sounds like it's a little more than obvious from the numbers on the surface.
I want to be clear that the $22 million is an annualized number, not just for the quarter. From a commodity perspective, cocoa prices are still elevated year-over-year. We are seeing butter, flour and eggs down year-over-year, so we're starting to see some relief there. We're seeing some impact on fuel surcharges for outbound shipping because of higher oil prices. Inbound fuel impact hasn't hit yet because we have contracts in place for the remainder of the year. So yes, we have commodity headwinds with cocoa, some relief on other commodities, and the impact of tariffs, but we are getting the benefit of cost savings and better pricing discipline. That's why you're seeing gross margin up slightly year-over-year.
Are you still expecting the consultants to roll off at the end of June? Or will they spill over into '27?
The consulting costs roll off at the end of June. We will not have those starting July 1.
Tariffs as well—you'll begin to anniversary the implementation of tariffs in 2025. So the tariff impact should begin to recede in the first part of fiscal '27 as well, right?
Yes. There are still tariffs in place, but we will start to anniversary that and start to see the benefit of lower tariff rates in 2027.
You noted marketing spend as a percent of sales will be flat in the June quarter. Going forward, is the base case that improved marketing efficiency will lower that percent as a base case? I know you're not giving guidance for '27, but directionally?
Potentially, some savings in cost of goods sold and SG&A will be redeployed into marketing. So it's not necessarily that marketing as a percent of sales will go down in FY '27 since we plan strategic investments in marketing.
Building on that, 1-800-FLOWERS.com is a very different company now because every investment we make is evaluated and measured versus a control group. We are making investments and testing them. If there is a lift in sales or margin, it goes forward. If there isn't, we fail fast and move on. We are not making crazy investments; we are experimenting and measuring. Our future requires finding ways to drive growth. The investments in marketing, the Martech stack, and digital capabilities are targeted to drive efficiencies in conversion, traffic and assortment. Every investment is tested and measured; then we decide whether it goes forward. The $50 million in run rate savings we have are partly for the bottom line and partly to fund investments. When we invest, it's because we want to see a return, which should help the company in the midterm.
This concludes our question-and-answer session. I would like to turn the conference back over to Adolfo Villagomez for any closing remarks.
Thank you all once again for joining us today and for your continued support. Fiscal 2026 continues to be a year of stabilization for the company. During the third quarter, we continued to make progress on the initiatives that matter most, and we're beginning to see tangible evidence that these actions are improving execution, strengthening the customer experience and driving more disciplined performance across the business. We're also taking the next step in our transformation as we begin to balance cost discipline with targeted investments, supported by the progress we have made on our cost savings initiatives. These investments, including marketing and digital capabilities, are beginning in the fourth quarter and will continue into the next fiscal year to support stabilization and future growth. While we recognize that progress will not be linear, we remain focused on executing our strategy with discipline and consistency. The actions we are taking today are intended to stabilize the business and build a strong and durable foundation to support improved performance over time. We appreciate your continued interest in and support of the company, and we look forward to keeping you updated on our progress. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.