1 800 FLOWERS COM INC Q2 2026 earnings call

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.

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 continued 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 multi-channel 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's 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.

Thanks, Adolfo, and good morning, everyone. During the second quarter, revenue came in below our prior view, driven by a 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 & Gifts segment, a 3.8% decline in the Gourmet Foods & 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 and the impact of the company's non-qualified deferred compensation plan in both periods, operating expenses declined $25.9 million, as compared with the 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. Now, we'll open the call for Q&A. Operator, please provide instructions for those interested in asking a question.