1-800-Flowers.Com Inc

NASDAQ:FLWS

Q2-2026 Earnings Call

[Operator]

Good day, and welcome to the 1-800-FLOWERS.COM Fiscal 2026 Second Quarter Earnings Conference Call. [Operator Instructions] Please note that 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.

[Andy Milevoj, executive]

Good morning, and welcome to our fiscal 2026 second 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 tables of our earnings release.

And now I'll turn the call over to Adolfo.

[Adolfo Villagomez, executive]

Thanks, Andy, and good morning, everyone. The holiday season was operationally strong and most importantly, our operations ran smoothly throughout the period. We addressed the order management system issues that we experienced last year, and the stability of our systems this holiday season represents a clear and substantial improvement.

Revenue came in slightly below our expectations, reflecting our continued focus on improving marketing contribution margin and changes in search engine results page, including increased paid placements and AI-driven content, which negatively impacted organic visibility and direct traffic. While direct traffic declined more than we anticipated during the holiday period, this was partially offset by stronger performance in our B2B and wholesale businesses. At the same time, we continue to execute on our marketing strategy, which is focused on improving profitability and efficiency as well as the quality and effectiveness of our paid and earned traffic over time. We believe this approach is important to building a more sustainable and disciplined demand generation model.

During the second quarter, we continued to make steady progress on the key initiatives we outlined earlier this year to stabilize the business and support future growth. One of the most important changes this quarter was simplifying our organization and moving to a function-based operating structure. Previously, we were organized by individual brands, which created duplication, limited collaboration and slow decision-making. The new structure is already driving greater efficiency, clearer ownership and improved collaboration across the business. As part of this transformation, we reduced costs and streamlined the organization through workforce reductions and leadership realignments. While these were difficult decisions, they were necessary to improve accountability and better align resources with our strategic priorities. Additionally, we're also reducing layers, applying best practices more consistently and enabling faster, more effective decision-making across functions. With this structure and recent leadership additions in place, the team is now fully focused on execution.

To support this next phase, I am pleased to share that Alex Zelikovsky joined us as our Chief Information Officer. Alex brings more than 25 years of technology leadership experience and will lead our enterprise-wide technology strategy, including IT applications, data architecture, cybersecurity and business intelligence, as we modernize our platforms and support our AI and optimization initiatives.

We also continue to make progress in improving the efficiency of our marketing investments. During the quarter, we saw improvement in our ad spend to sales ratio as we reduced marketing spend on a dollar basis. Marketing contribution margin in Q2 was impacted by the scale of the holiday quarter and the decline in direct traffic. While this approach can create some pressure on the top line in the near term, we believe it is an important step toward building a more sustainable and profitable demand generation model.

As part of this more disciplined approach, we also evaluated our physical retail performance during the holiday season. Our pop-up stores were intentionally designed as short-term pilots during the holiday season and provided valuable insight into customer behavior, product preferences and how customers engage with our brands in a physical retail environment. Based on the results of these tests, we concluded that the return on invested capital for the temporary pop-up stores was not attractive. As a result, we do not plan to pursue additional pop-up locations. Instead, as part of our testing culture, we are redesigning our retail approach to evaluate a full year store concept that is better suited for a permanent year-round location. This will allow us to apply what we learned from the holiday tests while taking a more disciplined approach to capital deployment as we look to optimize and selectively grow our multichannel strategy over time.

As we move into the Valentine's Day period, our teams are focused on applying this more disciplined marketing approach to a key gifting occasion with an emphasis on execution, merchandising and improving the customer experience. Looking ahead, we expect several key initiatives to drive improved performance. Our updated marketing approach is driving a better ad-to-sales ratio. Enhancements to product discoverability are improving conversion across our online experiences. The elimination of unprofitable initiatives is sharpening our focus on core businesses, and the continued expansion of our third-party marketplace offerings, including Uber, DoorDash, Amazon and Walmart.com is growing rapidly and expanding our reach to customers across the channels where they are shopping today. Together, these efforts are helping us build a more stable foundation for future growth over time.

With our leadership team now fully in place, we are confident we have the right team executing against a clear and focused strategy that will continue to improve performance. While there is still meaningful work ahead, the progress we are making gives us confidence that we are moving in the right direction.

And now I will turn the call over to James for the financial review.

[James Langrock, executive]

Thanks, Adolfo, and good morning, everyone. During the second quarter, revenue came in below our prior view, driven by our continued focus on improving marketing contribution margin and changes in search engine results pages that negatively impacted direct traffic. As a result, our e-commerce revenue declined, which was partially mitigated by growth in our wholesale business. Our gross margin declined due to lower fixed cost absorption, higher commodity costs and the impact of tariffs. At the same time, our ongoing cost reduction initiatives helped mitigate the impact on overall profitability.

As Adolfo discussed, we continue to meaningfully improve the efficiency of our operating model. Our cost actions, including organizational simplification, workforce reductions and tighter expense management are beginning to benefit the business. While we are executing on our cost reduction actions and realizing savings on a run rate basis, the full benefit of those actions is not yet reflected in our P&L. In the near term, the savings are being partially offset by consulting fees incurred as part of the work to identify, implement and operationalize these initiatives. These consultant costs are temporary and largely front-loaded. As implementation progresses, we expect a greater portion of the run rate savings to be retained in the business and increasingly reflected in our P&L over time. To date, we have already achieved approximately $15 million in annualized run rate cost savings for fiscal 2026. As previously discussed, we continue to expect to achieve approximately $50 million of total cost savings on a run rate basis across fiscal 2026 and fiscal 2027.

Now let's review our performance. Consolidated revenue for the second quarter decreased by 9.5%. This included a 22.7% decline in Consumer Floral and Gifts segment, a 3.8% decline in the Gourmet Foods and Gift Baskets segment, and a 3.1% decline in the BloomNet segment. These results were primarily driven by a strategic shift towards more efficient marketing spending as well as greater-than-expected decline in direct traffic.

Turning to gross margin. Our second quarter gross margin decreased 120 basis points to 42.1% compared with 43.3% in the prior year period. This was primarily due to deleveraging on the sales decline, combined with the impact of higher tariff, commodity and shipping costs. Operating expenses for the second quarter decreased $23.4 million to $221.1 million as compared with the prior year period, primarily due to lower marketing and labor costs. Excluding items affecting period-to-period compatibility (sic) [ comparability ] and the impact of the company's nonqualified deferred compensation plan in both periods, operating expenses declined $25.9 million as compared to prior year to $213.2 million. As a result of these factors, our second quarter adjusted EBITDA was $98.1 million compared with adjusted EBITDA of $116.3 million in the prior year period.

Now turning to our balance sheet. At quarter end, our net cash position was $42.3 million, cash balance was $193.3 million and inventory was $148.9 million. Borrowings under the revolver were fully repaid during the fiscal second quarter. Looking ahead to the second half of the year, we do not expect progress to be linear. However, we remain focused on executing our strategic initiatives and continuing to advance our cost reduction efforts. We believe this disciplined approach will allow us to further stabilize the business and position the company for improved performance over time.

In addition, it is worth noting that Valentine's Day falls on a Saturday this year, which historically has been a more challenging day placement compared to midweek holidays. As we move forward, our focus remains on strengthening the foundation of the business. This includes improving efficiency, maintaining cost discipline and ensuring we are positioned to capitalize on future growth opportunities as the turnaround progresses.

For the second half of fiscal 2026, we expect revenue to decline in the low double-digit range, reflecting a continued focus on improving marketing contribution margin, the impact of changes to search engine result pages on direct traffic and tougher comparisons following higher levels of less efficient marketing spend in the prior year. For the second half of fiscal year 2026, we expect adjusted EBITDA to decline slightly compared to the prior year. On a normalized basis, for the second half of fiscal 2026, adjusted EBITDA is expected to increase slightly year-over-year, excluding approximately $12 million of anticipated incentive compensation and consultant costs in the period. Ongoing cost optimization initiatives and organizational streamlining efforts are expected to offset top line pressure.

And now we'll open the call for Q&A. Operator, please provide instructions for those interested in asking a question.

[Operator]

[Operator Instructions] The first question comes from Anthony Lebiedzinski with Sidoti & Company.

[Anthony Lebiedzinski, analyst]

So first on the Consumer Floral and Gifts segment, it was down more than we expected. Was that mostly driven by Pmall? Or -- can you provide any additional color on that?

[James Langrock, executive]

Yes. So Anthony, Pmall was down more than Flowers during the quarter. A lot of it was driven, as we said in our prepared remarks, on the inefficient marketing spend. We were spending heavily on Pmall and pulled down quite a bit of the marketing spend this quarter and improved their ad spend ratio as well as their overall contribution margin percentage. So a lot of that was known, Anthony, but they were impacted the most by the marketing spend -- the inefficient marketing spend last year versus this year. So that was the main driver. But yes, Pmall was a bigger component of the decline than the Flowers business.

[Anthony Lebiedzinski, analyst]

That's very helpful color, James. So just wondering also if you're seeing any different behaviors from your Passport members, whether you've seen still outperformance versus nonmembers. Can you comment on that, and whether or not there's been any movement in terms of your Passport membership?

[Adolfo Villagomez, executive]

Anthony, it's Adolfo. At a high level, our Passport members perform a lot better than non-Passport members. That has been the case. Having said that, we're getting feedback from our customers that the value proposition on our loyalty program needs to improve. And even though the current loyalty program is doing okay, we believe we can do it a lot better. So the team has already made investments, and we're getting ready to significantly improve our loyalty program over the next few months. But those customers are our most loyal customers.

[Anthony Lebiedzinski, analyst]

Okay. And then as we think about the revenue guidance for the back half of the year, which segments do you think will perform better than others? Or do you think it will be kind of consistent more or less across the brands and different segments?

[Adolfo Villagomez, executive]

So let me take that, and then I'll pass it to James. The way to think about our business is, so James just shared that the performance of Pmall was slightly behind Flowers. And as you also see, Food was way ahead of the other 2 businesses. To start with, the main driver was the exposure to incremental spend in fiscal year 2025, which is one of the reasons we wanted to move away from the Brand President role. They were not sharing of best practices. So in that order, Pmall, Flowers and Food, that's how much more marketing spend they used in 2025 to drive growth.

So as you know, we implemented marketing contribution margin, and that is actually working quite well. And this is why we are able to lower marketing spend while improving marketing contribution margin dollars. Now over the second half, primarily what you are seeing is just a mix shift. During the first half, Harry & David, our food business, is significantly more important. The second half, the Flowers business is the one that is the most important and represents the majority of our revenues. So the performance is consistent, if not slightly improving versus the first half, it's just a mix shift.

[Anthony Lebiedzinski, analyst]

That's very helpful.

[James Langrock, executive]

And Anthony, as you mentioned, another thing to take into consideration is Valentine's Day falls on a Saturday this year. So that obviously has an impact on a year-over-year comparison as well.

[Adolfo Villagomez, executive]

Well, there's going to be an impact, but we are preparing for it.

[Anthony Lebiedzinski, analyst]

Got it. Okay. So just to follow up quickly on the Valentine's Day placement, obviously, on a Saturday, which is the least favorable time frame. Are you planning to do anything significantly different from a marketing perspective given the day placement? Just wondering if you could comment on that.

[Adolfo Villagomez, executive]

Yes. The merchandising and marketing strategy adjusted for that. And again, we are preparing for it. We are not just assuming it's going to happen. So we are trying to reverse that trend. So we are absolutely prepared for that.

[Anthony Lebiedzinski, analyst]

Got you. Okay. And the last question for me, just more or less kind of housekeeping. Can you just comment on order volumes and AOV for the quarter?

[James Langrock, executive]

Yes. So Anthony, for the quarter, our AOV was up 5.2% and order volume was down about 16%.

[Operator]

The next question comes from Michael Kupinski with NOBLE Capital Markets.

[Michael Kupinski, analyst]

I just kind of want to circle back to the Floral segment for a second. Given your shift in marketing initiatives, I was just wondering outside of Pmall, can you talk a little bit about the decline you've seen in Floral? Do you feel that maybe -- are you still seeing gains in share in Consumer Floral? And then I was wondering how do your initiatives change your competitive positioning, not just for Floral, but maybe for your other channels as well?

[Adolfo Villagomez, executive]

So at this point, Michael, the focus is in the bottom line. We believe that with a better marketing approach and honestly, a better merchandising strategy. As we said, this year is a transition year. So we are going to be better positioned for the future. As you know, our Flowers business has 2 segments, one that depends on the florist and the other that is direct. We are proactively managing the business to minimize the impact on our florist network. So again, it's a transition year, and I believe it's going to make us stronger in the future. But I think this transition to being focused on driving profitable traffic versus just driving traffic to drive revenue growth, you're seeing the impact in the short term on the top line.

[Michael Kupinski, analyst]

Got you. And I was hopeful that, I guess, we would start to begin to see a little bit of improvement on the commodity prices. And you indicated that you're still seeing pressure there. I was just wondering if you can talk a little bit about commodity price trends, particularly I know that we are still seeing pressure on chocolate and so forth. But can you just kind of give us your overall feel about commodity trends going forward?

[James Langrock, executive]

Yes, Michael, as you mentioned, cocoa is still, on a year-over-year basis, is up quite significantly. But we're seeing the other commodities, eggs, butter and sugar starting to come down and stabilize. And at this point, we're seeing that those should no longer be a headwind in the back half of the year, assuming they hold, but we are seeing improvement in the other commodities, but cocoa is still elevated.

[Michael Kupinski, analyst]

And then, I guess, what are the biggest swing factors that could positively or negatively impact the full year performance at this point?

[James Langrock, executive]

One of them is obviously, we're working on the cost savings initiatives. We implemented $15 million of cost savings in Q2. We are continuing to implement cost savings initiatives. So to the extent that we could accelerate some of those cost savings, that will help the bottom line. And then obviously, if we get some upside on the top line, that always helps as well, Michael. But right now, we're controlling what we can control. And the one lever would be on the cost savings if we can accelerate some of those savings. So that's kind of the big one that we can control right now.

[Adolfo Villagomez, executive]

Yes. The other thing, building on that, the new functional structure that we have live since November, the whole intention of doing that is to bring best-in-class functional practices. I think the best example right now or the hope that is going to give us a lot of top line growth is merchandising. We have a new merchandising leader, Nelson Tejada, who has commercial experience, and we completely changed the leadership of the Flowers business to bring more pricing and assortment planning discipline to that business.

As we start gathering facts and start gathering data, being more disciplined on our retail practices, comparing our pricing versus competitors, we are finding that we have lots of opportunities for improvement that little by little are going to improve the business over time. So we believe that what you are going to see is as these functional levers start taking action, I mentioned in the prepared remarks also product discoverability. We have tests going right now that significantly improve conversion as we improve our online experience. So those are going to be tailwinds to the business. And so as we said, I mean, we're very optimistic that bringing best-in-class practices to the functional areas, merchandising, online and even now the growth in our external marketplaces, I mean, it's from a small base, but it's growing significantly, we believe that all of those will be positive factors on the performance of the business going forward.

[Michael Kupinski, analyst]

Got you. And just a couple of quick ones here. Interestingly, GDP numbers were pretty strong in the third quarter. Interest rates are coming down, albeit modestly. The consumer confidence is super weak. And traditionally, your business follows consumer confidence. And I was just wondering, what are you seeing in terms of the consumer at this point, and kind of give us your thoughts of what you're seeing out there?

[James Langrock, executive]

So on the consumer front, we are still seeing the bifurcation. We still feel that the higher end household income is holding up better, Michael. And we're still seeing some softness on the lower end household income spectrum. So we're kind of still seeing that trend.

[Michael Kupinski, analyst]

Got you. I can't think of a period where you've gone through such a big corporate reorganization. In the past, during periods like this, you've kind of looked and we were able to pick up some pretty interesting companies and made some acquisitions. And how are you thinking about capital allocation priorities right now in terms of just the reinvestment, shareholder returns and things like that?

[James Langrock, executive]

I mean, as Adolfo mentioned, and we've been mentioning, Michael, we're looking at fiscal 2026 as like a foundational year for us. So the priority right now is really on stabilizing the performance and building the capabilities, as Adolfo mentioned, within the organization for sustainable profitable growth. So clearly, we're taking a disciplined approach, and we'll allocate capital towards operational efficiencies, customer experience improvements and adding technology capabilities. But clearly, if there's something out there that makes sense, we would look at it. But right now, we're really focused on the turnaround and the foundation setting from a capital allocation standpoint.

[Michael Kupinski, analyst]

Would there be anything that you would sell?

[Adolfo Villagomez, executive]

I mean, at this point, the more we strengthen the core, the better we are going to be. So everything is on the table.

[Operator]

The next question comes from Doug Lane with Water Tower Research.

[Douglas Lane, analyst]

James, remind me, you do not take consultant costs out of your adjusted profit numbers, right? They're included in there at this point. Is that right?

[James Langrock, executive]

Correct. Yes, they are in there.

[Douglas Lane, analyst]

So at some point, they'll roll off. So I don't know if you've talked about how long you expect the consultants to be working for you? Is this going to be a couple of quarters, a couple of years? Just any kind of characterization there?

[James Langrock, executive]

Yes. So Doug, what we said is the consultant costs are front-loaded. So we believe right now that the costs will kind of last through this fiscal year through June, and then they'll stop going into fiscal 2027. That doesn't mean if we see an opportunity where we think we may need some help with some initiatives that we're working on that they may not come back. But right now, the consultant costs will go through the end of the year. And that's going to total roughly about $11 million of consultant costs this year that will be in our -- but we're not adding back to the adjusted EBITDA.

[Douglas Lane, analyst]

Got it. And just switching gears here. You talked about Valentine's Day being on a Saturday. Isn't Easter a little earlier this year? Is that going to impact the timing between the third quarter and the fourth quarter?

[James Langrock, executive]

Yes. Easter falls, I think, April 4. So that actually -- a lot of the orders will come in, in the end of March. So that will be a shift in the quarter. And actually, with Easter falling a little further away from Mother's Day, it does help us as well. So that day placement is helpful. So there will be a shift into Q3, but also typically, that day placement is a little better. The closer Easter is to Mother's Day, that's not as strong for us. So the day placement we like in early April.

[Douglas Lane, analyst]

Got it. That makes sense. And also looking at the sales number here, the total number was literally within $1 million of our forecast, but Floral missed by $30 million and Food beat by $30 million. So there's a big divergence between Floral and Food here. And you've touched on it, but what do you think is the real source of the deterioration in the Floral and Gifts business and the better-than-expected performance in the Food and Gift Baskets business?

[Adolfo Villagomez, executive]

So I mean, again, I mentioned the impact in 2025 of incremental marketing spend. I think it was significant in Flowers. The Food business was a lot more disciplined, although they also overspent a little. The second factor that is important is Food is a lot more exposed to B2B, and that business has been very solid for us. So those are the factors. There's some other competitive things, but those 2 are primarily the difference between one and the other.

[Douglas Lane, analyst]

Is this also where we see that bifurcated consumers since Pmall's in the Floral side and Harry & David's on the Food side, and they're clearly opposite ends of the economic spectrum?

[Adolfo Villagomez, executive]

Probably, yes.

[Douglas Lane, analyst]

Okay. Fair enough. Lastly, could you talk a little bit about what your learnings were in the quarter from your pop-up stores?

[Adolfo Villagomez, executive]

So I mean, again, as I said in the prepared remarks, we have a strategic belief that we eventually should become an omnichannel player. Today, we have physical retail stores that are EBITDA positive and have a very attractive return on invested capital. There was a belief on the pop-up stores that, hey, we're going to open them. They will not only drive sales, but they will also drive brand awareness in the locations where they are and probably the sales would increase online. There was a little of that. But one of the things we're trying to implement, James and I, going forward is capital discipline. If the return on invested capital is not attractive, we are simply not going to do it. And I think it's twice that we tested the pop-ups and twice that we're below expectations. So enough is enough.

Having said that, as I said, we're still looking for that physical retail model. So you will see us testing things. But again, these tests are with the idea to find a way to significantly grow the physical retail segment of our business. But definitely, it's not going to be through pop-up stores.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Adolfo Villagomez for any closing remarks.

[Adolfo Villagomez, executive]

Thank you 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 second quarter, we continued to make progress on the initiatives that matter most, including simplifying the organization, improving cost efficiency and strengthening our leadership team and broadening our customer reach.

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 future growth over time. We appreciate your continued interest in and support of the company, and we look forward to keeping you updated on our progress.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.