June 3, 2019
After the issuance of Illinois-based FTD Companies Inc’s ($FTD) most recent 10-K, everyone and their mother — well, other than maybe United Parcel Service Inc. ($UPS)* — knew that FTD was headed towards a bankruptcy court near you. It arrived.
The company is a floral and gifting company operating primarily within the United States and Canada; it (and its affiliated debtors) specializes in providing floral, specialty foods, gift and related products to consumers (direct-to-consumer), retail florists and other retail locations. The company basks in the glory of its “iconic” “Mercury Man” logo, which it alleges is “one of the most recognized logos in the world.” Seriously? Hyperbole much?🙄
Maybe…not? This, for any sort of history nerd, is actually pretty interesting:
Originally called "Florists' Telegraph Delivery Association," FTD was the world's first flowers-by-wire service and has been a leader in the floral and gifting industry for over a century. The Debtors' story began in 1910 when thirteen American retail florists agreed to exchange orders for out-of-town deliveries by telegraph, thereby eliminating prohibitively lengthy transit times that made sending flowers to friends and relatives in distant locations almost impossible. The idea revolutionized the industry, and soon independent florists all over America were telegraphing and telephoning orders to each other using the FTD network. In 1914, FTD adopted the Roman messenger god as its logo and, in 1929, copyrighted the Mercury Man® logo as the official trademark for FTD.
This company is only slightly younger than Sears (1893). And so this bankruptcy filing is a bigger deal than meets the eye. This company revolutionized flower delivery, regularly innovating and expanding its reach over its decades in business. In 1923, FTD expanded to Britain. In 1946, FTD, FTD Britain and a European clearinghouse established what is now known as Interflora to sell flowers-by-wire around the world. In 1979, the company launched an electronic system to link florists together; and in 1994, it launched its first e-commerce site. In other words, this company always tackled the “innovator’s dilemma” head on, pivoting regularly over time to seize opportunities whenever and wherever they emerged. For quite some time, this was, at least for some time, an impressive operation — seemingly always one step ahead of disruption. WE ALL LIKELY TAKE FOR GRANTED JUST HOW EASY IT IS TO DELIVER FLOWERS THESE DAYS. These guys helped make it all possible. If ever a debtor was in need of a hype man, this company is it. A read of the bankruptcy papers barely gives you a sense for the history and legacy of this company.
Interestingly, for much of its history, the company was actually a not-for-profit. That’s right: a not-for-profit. Per the company:
For the majority of its existence, FTD operated as a not-for-profit organization run by its member florists. With the florists as its core, the Debtors' legacy business provided a powerful mix of a "local," authentic, and bespoke product, broad geographic range, and a commitment to exacting standards of quality and service. Moreover, the Debtors historically were devoted to creating an optimal product for their florist network, including through investment in innovation and technology and marketing the FTD brand and the floral industry overall. As a result, florists sought out FTD membership, and the FTD brand had (and still has) significant caché in the industry.
So what the hell happened? Well, the blood-sucking capitalists arrived knocking. Now-defunct Perry Capital acquired FTD in 1994 (the same year that the company established its web presence) and converted the company into a for-profit corporation. In 2000, the company IPO’d and in 2008, United Online (now owned by B.Riley Financial $RILY), merged with the company in a $800mm transaction consummated just prior to the financial crisis. Then, in 2013, FTD spun off from United Online, once again becoming a publicly-traded company on the NASDAQ exchange.
Throughout the company’s evolution, it pursued a strategy of dominating the floral market via strategic acquisitions (and, in the process, drew antitrust scrutiny a handful of times). In 2006, it acquired Interflora and in 2014, it acquired Provide Commerce LLC (ProFlowers) in a $430mm cash and equity transaction. The purchase was predicated upon uniting FTD’s B2B “Florist” business (read: FTD-to-retail-florists) and B2C (read: FTD-direct-to-consumer) businesses with Provide Commerce’s B2C model in such a way that would (i) offer customers greater choice, (ii) provide the company with expanded geographic and demographic reach, and (iii) promote cross-selling possibilities. Per the company:
…FTD anticipated that the Provide Acquisition would generate significant cost synergies through efficiencies in combined operations.
Ah, synergies. Is there anything more romantic than the thought of ever-elusive synergies?
The company incurred $120-200mm of debt to finance the transaction.** You know where this is headed. If not, well, please allow the company to spell it out for you:
Though the Provide Business Units have increased the Debtors' revenue (the Provide Business Units currently contribute more than 50% of the Debtors' total revenue) … certain shifts in the market, technological changes, and improvident strategic outcomes in connection with the implementation of the Provide Acquisition combined to (a) frustrate expectations regarding the earnings of the combined entity and (b) impair the Debtors' ability to refinance near-term maturities, which has driven the Debtors' need to commence these chapter 11 cases.
That sure escalated quickly. 😬
Let’s take a moment here, however, to appreciate what the company attempted to do. In the spirit of its long-time legacy of getting out ahead of disruption, the company identified a competitor that was quickly disrupting the floral business. Per the company:
ProFlowers had entered the floral industry as a disruptor by reimagining floral delivery to consumers. Unlike the Debtors' "asset-light" B2B business model, ProFlowers took ownership of the floral inventory and fulfilled orders directly through a company-operated supply chain. By sourcing finished bouquets directly from farms, limiting product selection, pricing strategically into the consumer demand curve, and leveraging analytically-driven direct response marketing to generate large volumes at peak periods (i.e., Valentine's Day and Mother's Day), ProFlowers appealed to a broad market of consumers who wanted an efficient order process coupled with lower cost purchases.
In addition to these potential opportunities, FTD also viewed the Provide Acquisition as the means to strategically position itself for success within a changing industry. At the time of the Provide Acquisition, the disruptive impact of ProFlowers was perceived as a threat to traditional business models within the floral industry (and to the Florist Member Network specifically). FTD was concerned that, if it failed to adapt and embrace shifting industry paradigms, competitors would take advantage and acquire ProFlowers to FTD's detriment. Accordingly, FTD effected the Provide Acquisition.
We clown on companies all of the time for failing to heed the signs of disruption. But, that’s not actually the case here. This company was, seemingly, on its game. Where it failed, however, was with the post-acquisition integration. It’s awfully hard to realize synergies when businesses effectively run as independent entities. Per the company:
In particular, a number of key post-acquisition targets, such as (a) floral brand alignment, (b) necessary technological investments in the combined business (e.g., the consolidation of technology/ecommerce platforms), and (c) the integration of marketing and business teams, have lagged. As a result, both the Provide Commerce and the Debtors' legacy brands suffered from internal friction and suboptimal structures within the Debtors' enterprise.
And while the company failed to integrate Provide Commerce, the industry never stopped evolving. Competitors didn’t just take the acquisition as a sign that they ought to fold up their tents and relinquish the flower industry to FTD. F*ck no. To the contrary, this is where…wait for it…AMAZON INC. ($AMZN) ENTERS THE PICTURE:***
While the Debtors struggled to unify their businesses and implement the Provide Acquisition, the floral industry – and consumer expectations – continued to evolve. Following the example set by ProFlowers, other companies began to deliver farm-sourced fresh bouquets directly to customers, increasing competition in the B2C space. In addition, the expanding influence of e-commerce platforms like Amazon transformed customer expectations, particularly with respect to ease of experience and the fast, free delivery of goods. Given the perishable and delicate nature of the product, delivery and service fees were standard in the floral industry. As e-commerce companies trained consumers to expect free or nominal cost delivery, floral service fees became anathema to many customers.
Well, Amazon AND venture capital-backed floral startups (i.e., The Bouqs Company - $43mm of VC funding) that could absorb losses in the name of customer acquisition.
The company also blames a significant number of trends that we’ve covered here in PETITION for its demise. Like, for instance, increased shipping and online marketing costs (long Facebook Inc. ($FB)), low barriers to entry for other DTC businesses (long Shopify Inc. ($SHOP)), and “the growing presence of grocers and mass merchants providing low-cost floral products and chocolate-dipped strawberries during peak holidays” (long Target Inc., ($T), Walmart Inc. ($WMT), Trader Joe’s, etc.).
Collectively, market pressures contributed to declining sales and decreased order volumes, impairing the B2C businesses' ability to leverage and capitalize on scale.
In other words, (a) chocolate-dipped strawberries have no f*cking moat whatsoever and (b) as with all other things retail, this is a perfect storm story that is best explained by factors beyond just the f*cking “Amazon Effect” (the most obvious one being: a ton of debt).
Consequently, the company has been mired in a year-plus-long process of triage; it tried to cap-ex its way out of problems, but that didn’t work; it brought in new leadership but…well…you see how that turned out; it attempted to “reinvent” its user experience to combat its techie VC-backed upstart competitors with no results; and, it sought to optimize efficiencies. None of this could stem the tide of underperformance, bolster liquidity, and, ultimately, prevent debt covenant issues. The company currently has $149.4mm of secured indebtedness on its balance sheet (comprised of a $57.4mm term loan and $92mm under a revolving credit facility). The company reports approximately $72.4mm of unsecured debt owed to providers of goods and services.
In a strange fit of irony, it was the most romantic holiday of the calendar year that spelled doom for FTD. The company’s Valentine’s Day 2018 was pathetic: aggregate consumer order volume declined 5% and, even when people did use FTD, the average order size fell by 3%.
Valentine’s Day 2019 was no better. The company materially underperformed projections again. In addition to constraining liquidity further, this had the added effect of cooling any interest prospective buyers might have in the company pre-bankruptcy.
So, where are we now?
The crown jewel of the company is the company’s B2B retail business. This segment generated $150.3mm in revenue and $42.7mm in operating income in 2018. Operating margin is approximately 30%. The B2C business (including FTD.com), on the other hand, lost $4.6mm in ‘18 (on $727.9mm of revenue) and had -1% operating margin in 2018. (PETITION Note: while these numbers are in many respects abysmal, its fun to think that if they belonged, sans debt, to one of those VC-backed upstarts, they’s probably be WAY GOOD ENOUGH for the company to IPO in today’s environment…flowers-as-a-service anyone?). Clearly, there is nothing “iconic” about this brand outside of the floral network/community.
Anywho, the company is selling the company for parts. On Mary 31, the company effectuated a sale of Interflora for $59.5mm. On June 2, the company entered into an asset purchase agreement with Nexus Capital Management LP for the purchase of certain FTD assets and the ProFlowers business for $95mm. It also entered into non-binding letters of intent to sell other assets, including Shari’s Berries to Farids & Co. LLC (which is owned by the founder of Edible Arrangements LLC, the gnarliest company we’ve ever encountered when it comes to gifts.).
All of which is to say, R.I.P. FTD. We’ll be sure to send flowers. From Bouqs.
*Why are we picking on UPS? It is listed as the largest unsecured creditor to the tune of $23.2mm. Surely they’ll be clamoring for “critical vendor” status given the core function they provide to FTD’s business.
**At one point the papers say, $120mm, at another $200mm.
***We didn’t actually realize this but, yes, of course you can buy fresh flowers on Amazon.
Jurisdiction: D. of Delaware (Judge Silverstein)
$57.4mm Term Loan
$72.4mm of Various Trade Claims
Legal: Jones Day (Heather Lennox, Brad Erens, Thomas Wilson, Caitlin Cahow) & (local) Richards Layton & Finger PA (Daniel DeFranceshi, Paul Heath, Brett Haywood, Megan Kinney)
Financial Advisor/CRO: AlixPartners LLP (Alan Holtz, Scott Tandberg, Jason Muscovich, Job Chan, Bassaam Fawad, J.C. Chang)
Investment Banker: Moelis & Company & Piper Jaffray Companies
Claims Agent: Omni Management Group (*click on the link above for free docket access)
Other Parties in Interest: