1-800-FLOWERS.COM
Annual Report 2017

Plain-text annual report

2 0 1 7 A N N U A L R E P O R T C U S TO M E R E X P E R I E N C E I S O U R N U M B E R O N E P R O D U C T A maniacal focus on providing the very best customer experience – that is what sets 1-800-FLOWERS.COM, Inc. apart. As part of our ongoing mission to deliver smiles, the Company continues to explore and embrace new and emerging technolo- gies aimed at enhancing and innovating the way customers interact with our portfolio of brands. Most recently, 1-800-FLOWERS.COM, Inc. was an early adopter of the new Google Assistant transaction feature, providing gift-givers the ease and conve- nience of voice or text ordering. Other initiatives in fiscal 2017 included 1-800-Flowers.com’s launch of an online Customer Service Hub, enabling self-service and live chat support for order tracking and more, as well as the implementation of delivery windows, allowing customers to schedule specific hours for order arrival. Additionally, the Company’s interactive marketing and merchandising teams have been hard at work, elevating the overall shopping experience for the Harry & David brand online. These efforts are culminating in a completely updated brand look and feel, along with new online features and functional- ity, including updates to the popular Gift List and a new, dedicated portal for business-to-business gift-givers. The Company has also prioritized the curation of thoughtful content, advice and guidance to further solidify its reputation as a trusted gifting and celebrations resource for customers. These initiatives illustrate 1-800-FLOWERS.COM, Inc.’s relentless commitment to enhancing the customer experience, while always providing best-in-class ser- vice. As consumer behavior continues to shift at a rapid pace, the Company remains focused on identifying the best ways to engage with and serve our customers’ celebratory needs – wherever, whenever and however they prefer to shop. A B O U T 1 - 800 - F LO W E R S . CO M , I N C . 1-800-FLOWERS.COM, Inc. is a leading provider of gifts for all celebratory occasions. For the past 40 years, 1-800-Flowers.com® has been helping deliver smiles to customers with a 100% Smile Guarantee® backing every gift. The 1-800-FLOWERS.COM, Inc. family of brands also includes everyday gifting and entertaining products from Harry & David®, The Popcorn Factory®, Cheryl’s® cookies, 1-800-Baskets.com®, Wolferman’s®, Moose Munch® premium popcorn, Personalization Universe®, Simply ChocolateSM and FruitBouquets.com. The Company also of- fers top-quality steaks and chops from Stock Yards®. Service offerings such as Celebrations Passport®, Celebrations Rewards® and Celebrations Reminders® are designed to deepen relationships with customers across all brands. The Company’s BloomNet® international floral wire service provides a broad-range of products and services de- signed to help professional florists grow their businesses profitably. Additionally, the Company operates Napco, a resource for floral gifts and seasonal decor and DesignPac Gifts, LLC, a manufacturer of gift baskets and towers. 1-800-FLOWERS.COM, Inc. was named to the Stores® 2017 Hot 100 Retailers List by the National Retail Federation and also received the Gold award in the “Best Artificial Intelligence” category at the Data & Marketing Association’s 2017 International ECHO Awards for the Company’s groundbreaking implementation of an artificial intelligence- powered online gift concierge, Gwyn®. Shares in 1-800-FLOWERS.COM, Inc. are traded on the NASDAQ Global Select Market, ticker symbol: FLWS. F I N A N C I A L H I G H L I G H T S (From Continuing Operations) JULY 2, 2017 JULY 3, 2016 JUNE 28, 2015 JUNE 29, 2014 JUNE 30, 2013 (in millions, except percentages and per share data) Total Net Revenues Gross Profit Margin Operating Expense Ratio Adjusted EBITDA(1) Adjusted EPS $1,193.6 43.6% 39.7% $1,173.0 $1,121.5 43.4% 40.1% $ 87.2(2) $ 85.7(4) $ 80.7(6) $ 0.43(5) $ 0.34(7) $ 0.43(3) 44.1% 40.4% $756.3 41.7% 38.6% $ 48.6 $ 0.22 $735.5 41.5% 38.0% $ 49.1 $ 0.24 (1) Excludes stock-based compensation and non-qualified supplementary retirement plan investment appreciation and depreciation. (2) Adjusted EBITDA for fiscal 2017 excludes the items included in footnote (1), as well as Harry & David severance costs. (3) Adjusted EPS for fiscal 2017 excludes Harry & David severance charges and the gain on the sale of Fannie May Confections Brands. Fiscal year 2017 EPS as reported was $0.65. (4) Adjusted EBITDA for fiscal 2016 excludes the items included in footnote (1), as well as litigation settlement costs and integration costs, including severance costs, associated with Harry & David and the rightsizing of Fannie May. (5) Adjusted EPS for fiscal 2016 excludes the gain from insurance recovery on the Fannie May warehouse fire, loss on the sale of iflorist, the impairment of foreign equity method investment, Harry & David integration costs, litigation settlement costs, as well as severance expenses associated with Harry & David and the rightsizing of Fannie May. Fiscal year 2016 EPS as reported was $0.55. (6) Adjusted EBITDA for fiscal 2015 excludes the items in footnote (1), and includes Harry & David’s fiscal 2015 first quarter loss in order to present comparable full-year results and excludes one-time costs associated with the acquisition and integration of Harry & David and the impact of the Fannie May warehouse fire in November 2014. (7) Adjusted EPS for fiscal 2015 includes Harry & David’s fiscal 2015 first quarter loss in order to present comparable full-year results and excludes one-time costs associated with the acquisi- tion and integration of Harry & David and the impact of the Fannie May warehouse fire in November 2014. Fiscal year 2015 EPS, as reported, was $0.30. (8) Comparable revenues measures GAAP revenues adjusted for the effects of acquisitions, dispositions and other items affecting period to period comparability. TOTA L R E V E N U E S (From Continuing Operations In Millions) Adjusted EBITDA1 $1,173 $1,122 $1,194 F Y 17 % R E V E N U E S BloomNet® Wire Service 7% Gourmet Food & Gift Baskets $756 $736 $49.1 $48.6 $85.74 $87.22 $80.76 FY13 FY14 FY17 FY15 Fiscal 2017 Achievements FY16 56% 37% by Category July – September (Fiscal 1st Quarter) Consumer Floral April – June (Fiscal 4th Quarter) 14% by Season 20% 20% 46% • Grew Comparable Revenues(8) 3.1 percent to $1.19 Billion • Grew Adjusted EBITDA 1.8 percent to $87.2 Million • Completed sale of Fannie May Confections Brands to Ferrero International S.A. for $115 Million* (*$103.6 million net of working capital adjustments) January – March (Fiscal 3rd Quarter) October – December (Fiscal 2nd Quarter) Financial Report Insert See inside rear cover pocket TO O U R S H A R E H O L D E R S 2017 was another year of successful growth for the Company. Comparable revenues rose 3.1% percent for the year, which represents an acceleration from prior years. Our net income, earnings per share, EBITDA and free cash flow also rose year-over-year. In addition, during the year we made the strategic decision to sell the Fannie May Confections business. As a result of the sale, our balance sheet and finan- cial condition have never been stronger. This financial strength provides us with significant flexibility to further invest in our growth, both organically and through acquisitions. In ad- dition, in October 2017 our Board of Directors raised the share repurchase authorization to $30 million. early acceptance of our new digital marketing services also contributed. During the year, BloomNet opened a west coast distribution center housed on Harry & David’s Medford, Oregon campus. We also continued to expand BloomNet’s product offering – adding the new Bayberry Road line of jewelry and accesso- ries – a unique product line that helps our florist customers expand their offerings and grow their businesses. We are confident these initiatives will enable BloomNet to build on the positive trends we are seeing in its business, during fiscal 2018. During fiscal 2017, our Gourmet Food and Gift Baskets brands began to gain meaningful trac- tion in demand for everyday gifting occasions. Positive Results Across Our Celebratory Ecosystem During 2017, we achieved positive results and strengthened momentum across our entire portfolio of leading gift brands. Both of our floral businesses continued their growth trajectory. The 1-800-Flowers.com brand continued to expand its market leadership position, with comparable growth of 5.7% during the year. BloomNet also experienced growth, up more than 2.6% compared with the prior year. Revenue growth for these brands was driven by strong everyday gifting demand combined with strong growth for the Valentine’s Day holiday. We continue to make strategic investments in marketing and customer service, and are confident these investments will provide long-term ben- efits to 1-800-Flowers.com brand equity, and further enhance its leading market position. Our increased investments in customer service are already yielding results in the form of historically high customer satisfaction metrics. These investments help us deepen the relationships we have with our customers and increase their purchase frequency and retention. Consumer Floral also achieved a strong contribution margin driven by the key attributes of the 1-800-Flowers.com brand; truly original gifts that help our customers express themselves perfectly; a car- ing team that is obsessed with service, and a customer experience that is constantly being enhanced to make it easier for our customers to deliver a smile. BloomNet’s growth was driven by membership transaction fees and increased product sales in new channels, such as garden centers and nurseries. Positive results in directory ad sales and Harry & David, Cheryl’s Cookies, The Popcorn Factory and 1-800-Baskets.com brands experienced robust growth for Birth- day, Thank You, New Baby and Sympathy occasions. This growth is being driven by an increased focus on innovative new products designed specifically to help our customers send smiles for every- day celebrations. We are deeply committed to increasing our customers’ awareness of our everyday gifting offerings. This is a key focus for our gour- met food and gift baskets brands and we are pleased with the progress we are making in this area as we continue to experience growth in this segment. In our Harry & David business, during the second half of the fiscal year, we saw consumer demand growing at a healthy rate, reflecting the benefits of some of the changes that have been implemented, including: the consolidation of digital marketing responsibilities for Harry & David under our enterprise marketing and customer insights team; an increase in digital advertising programs in display, video, affiliates, social and mobile; the increased use of new software tools in our consolidated customer database to enhance targeting and to streamline catalog circula- tion; and numerous enhancements to our multi-brand website, specifically to improve navigation for Harry & David’s important gift list functionality. Harry & David also continued to expand and enhance its product offering with the successful rebranding of its Moose Munch line: adding hip new iconography to appeal to a younger customer demographic and adding new “snack-size” packaging to take advantage of the growth in sales of premium popcorn treats. As a result, you will be seeing more and more Moose Munch products showing up on the shelves of convenience stores and other local retailers as we gradually expand distribution through- out the country. In addition to adding more than $100 million to our already strong balance sheet, the sale of Fannie May to Ferrero International S.A. included a strategic commercial partnership. This provides us with access to Fannie May and Harry London products as well as Fer- rero’s world-renowned chocolate confectionery brands. Investing for Growth We continued to execute on our vision to build a best in class “Celebratory Ecosystem.” In early fiscal 2018, we launched our newest brand, Simply Chocolate, an exciting new destination for people to discover a curated assortment of chocolate gifts and join a passionate com- munity celebrating the love of chocolate. The Simply Chocolate marketplace features a broad range of iconic premium chocolate brands, including Fannie May, Ghirardelli and Godiva as well as some of the hottest chocolatiers and innovative artisans in the world, such as Norman Love, Vosges and Max Brenner, among others. We also added the Personalization Universe brand to our multi- brand website. With Personalization Universe, our customers can purchase customizable gifts for the special people in their lives, complete with names, photos, logos and more. This platform enables our customers to deliver a one-of-a-kind gift that is sure to be appreciated. Both sites were launched prior to the peak holiday season to in- troduce them to the millions of customers who will be visiting our sites for their holiday gifting and celebratory needs. For Harry & David, we have unveiled a fresh look, feel and tone across the website, mobile site, catalogs, emails and social media channels. As part of this brand refresh, new features and functionality have been introduced to elevate the gift- giving experience. The launch of these two new brands, as well as the comprehen- sive refresh of the Harry & David brand, reflect our continued investments in the key areas that provide us with leverage to accelerate growth. These include our operating capabilities, such as manufacturing, distribution and product development and our technology platforms, including our robust website and industry- leading mobile sites. Continuing the Momentum We have momentum in our Consumer Floral business where the 1-800-Flowers.com brand continues to extend its market leading position. We have momentum in our BloomNet business where our unique offering of innovative products and services and unsurpassed quality continues to separate BloomNet from the legacy wire services. And, we have momentum in our Gourmet Food and Gift Baskets businesses, including growing customer demand for Harry & David, increasing traction in everyday gifting across all the brands and solid growth in our gift baskets business in both the direct-to-consumer and wholesale channels. Importantly, we are also seeing positive trends in our customer file. We are growing the active customer files across the Company and we are increasing the life-time value metrics within the file, including purchase frequency, retention and average spend. We are doing this by being deeply focused on constantly en- hancing our customers’ experience by introducing them to our “All Star” family of brands, by providing them with value-added loyalty programs, including Celebrations Passport®, Celebrations Rewards® and Celebrations Reminders® and by always investing and innovating in how and where we engage with our customers. We are excited about the year ahead and we are well positioned to drive revenue growth across all three of our business segments in fiscal 2018. We have a solid plan in place to drive bottom line growth across the Company and to further build shareholder value. As we look to the new year, we are focused on building on the positive trends we are seeing in our business. We have an experi- enced and proven management team along with all our very tal- ented and hardworking associates across the Company. Together this represents a formidable force for the execution of our plans to deliver strong results for our shareholders. I am very proud of this team and pleased with the progress we have made, as well as the exciting opportunities which lay ahead. I would like to thank all our associates for their commitment to constantly improving our customers’ experience and for helping to Deliver Smiles. We thank all our shareholders for their continued support. Chris McCann, President & CEO 2 0 1 8 J A N U A R Y Januaryj a n u a r y J a n u a r y JANUARY Millions of customers depend on 1-800-FLOWERS.COM, Inc. to help them deliver smiles. Complement- ing our delicious gourmet foods and beautiful floral creations is our commitment to providing the finest customer experience. Toward this goal, we are rolling out several initiatives designed to enhance how customers interact with us. Among these is a new online self-service hub offering a comprehensive range of personalized information about each customer’s order. Other enhancements to our web- sites include guided navigation, improved express checkout, SMS messaging, increased site speed and delivery calendar/window updates. Further optimizing the customer experience from order through delivery is our highly talented customer service team. Exemplify- ing our dedication to excellence, the 1-800-Flowers.com® floral brand recorded the best customer care metrics in its history during FY17 and 1-800-Flowers.com was also awarded the prestigious Gold Stevie “e-Commerce Customer Service” award. 7 14 21 28 S U N D AY M O N D AY T U E S D AY 1 New Year’s Day 8 2 9 15 Martin Luther King Jr.’s Birthday (observed) 16 22 29 23 30 THURSDAY F R I D AY S AT U R D AY 4 1 11 18 25 5 12 19 26 6 13 20 27 W E D N E S D AY 3 10 17 24 31 2 0 1 8 F E B R U A R Y Februaryf e b r u a r y f e b r u a r y FEBRUARY Perhaps no other occasion embodies emotional feelings quite like Valen- tine’s Day. Helping every customer express the perfect sentiment on Cupid’s special day and all other gifting occasions throughout the year is our team, along with an exceptional collection of top quality gifts. In fiscal 2017, the Company continued its obsession with making certain each customer chooses the right gift for the right person to cre- ate the brightest of smiles. Whether it’s magnificent floral arrangements from 1-800-Flowers.com®, freshly carved Fruit Bouquets by 1800flowers.comSM or delectable gifts from our gourmet food brands including Harry & David®, Cheryl’s® cookies, The Popcorn Factory®, 1-800-Baskets.com®, Wolferman’s® and Stock Yards®, every gift has been specifically crafted to assist custom- ers in connecting with the important people in their lives. 1 4 11 18 25 S U N D AY M O N D AY T U E S D AY 5 12 6 13 19 Presidents’ Day 20 26 27 W E D N E S D AY THURSDAY F R I D AY S AT U R D AY 2 Groundhog Day 3 9 16 23 10 17 24 1 8 7 14 Valentine’s Day 15 22 21 28 m a r c h March m a r c h 2 0 1 8 H C R A M MARCH march In many ways, retail florists repre- sent the heartbeat of their local business communities. BloomNet® – the floral industry’s leading wire service innovator and a provider of products and services designed to help thousands of local professional florists increase their profitability – continually works to foster a sense of community among florists across the nation. In fiscal 2017, BloomNet® expanded the scope of its “Floriology” collection of services. New courses were added to the renowned Floriology Institute in Jacksonville, Florida where florists and floral designers gather to exchange ideas and benefit from hands-on training with leading industry experts. In addition, floriologyinstitute.com was launched, providing informative videos, insightful blog posts and information about the latest design techniques, as well as ideas for enhancing flower shop operations. Also part of the BloomNet® portfolio of florist resources is Floriology® Magazine, filled with step-by-step design ideas and inspiring success stories. 2 S U N D AY M O N D AY T U E S D AY 4 11 18 25 5 12 19 26 6 13 20 First Day of Spring 27  2 W E D N E S D AY THURSDAY F R I D AY S AT U R D AY 1 8 15 22 29 2 9 16 23 3 10 17St. Patrick’s Day 24 30 Passover Begins at Sunset 31 7 14 21 28 First Day of Spring 2 0 1 8 April APRIL April april A P R I L l i r p a During fiscal 2017 and into fiscal 2018, 1-800-FLOWERS.COM, Inc. broadened its focus on deepening relationships with customers by expanding its constantly evolving “Celebratory Ecosystem” and increasing the Company’s product offering. Leveraging our multi-brand website, extensive distribution capabilities, unparalleled customer service and ongoing deployment of leading-edge technologies, we widened our revenue opportunities with the introduction of two exciting product lines. The new Personalization Universe® brand features more than 10,000 one-of-a-kind gifts, including every- thing from piggy banks, storybooks and puzzles to home decor, wine bottles, sympathy items and much more – each personalized for individual recipients. The new Simply ChocolateSM brand offers a destination for indi- viduals to discover a curated assort- ment of gifts and join a passionate community celebrating the love of chocolate. S U N D AY M O N D AY T U E S D AY 1 Easter April Fools Day 8 15 22 2 9 16 3 10 17 23 Administrative Professionals’ Week Begins 24 29 30 W E D N E S D AY THURSDAY F R I D AY S AT U R D AY 4 11 18 52 12 19 2 5 Administrative Professionals’ Day 26 6 13 20 27 7 14 21 28  2 S U N D AY M O N D AY T U E S D AY 2 0 1 8 Y A MayM May may MAY m a y MAY Of course, the month of May is all about Mom, an opportunity to show how much we appreciate that uniquely special person who guided our first steps and lovingly shaped us into the people we are today. As our customers do for so many other celebratory occasions throughout the year, they know they can depend on 1-800-FLOWERS.COM, Inc. for thoughtful gifts that are sure to melt mom’s heart. For Mother’s Day 2017, the Company took the celebration a step further, engaging the market- place and increasing sales opportuni- ties by conducting a fun survey urg- ing people to recall those sometimes quirky “Mom-ism” expressions many of us fondly remember. Among the top sayings: “Because I said so”; “Don’t worry, everything will be OK”; “You’ll always be my baby”; and “I’m always here to listen.” 1 7 6 13 Mother’s Day 14 1 1 8 15 22 21 20 27 28 Memorial Day (observed) 29  2 W E D N E S D AY THURSDAY F R I D AY S AT U R D AY 2 1 9 16 23 30 3 10 17 24 31 4 5 Cinco dé Mayo 11 National Bring Your Mom to Work Day 12 18 25 29 19 26 30 S U N D AY M O N D AY T U E S D AY 2 0 1 8 j u n e June JUNE e n u j JUNE june Innovation is in our DNA at 1-800-FLOWERS.COM, Inc. In fiscal 2017 we continued to embrace emerging technologies that are enhancing customer engagement in mobile commerce and across social platforms. The Company is an early adopter of new advancements in Artificial Intelligence (A.I.) and machine learning that are driving the next wave of “Conversational Commerce,” including Facebook Messenger bots and Amazon Alexa platform skills that use natural language text or spoken voice commands to help customers search for and send great gifts. We have also recently launched several other cutting-edge initiatives. These include the introduction of Gwyn® (Gifts when you need) – an online personal gift concierge powered by IBM’s Watson A.I. platform – and we have implemented Google Assistant technology enabling customers to select gifts and place orders via voice or text using Android phones and other devices. 3 10 1 4 11 17 Father’s Day 18 24 25 2 5 12 19 26 W E D N E S D AY THURSDAY F R I D AY S AT U R D AY 1 8 7 14 Flag Day 15 21 First Day of Summer 22 28 29 6 13 20 27 2 9 16 23 30 S U N D AY M O N D AY T U E S D AY 2 0 1 8 Y L j u l y July JULY U J JULY july Everyone knows that the calendar year is filled with traditional gifting occasions. However, the wonder- ful ability to create smiles with the right gifts does not end there. 1-800-FLOWERS.COM, Inc. is con- stantly conveying to its customers that each and every day can be perfect for thoughtful gifting. The Company’s 1-800-Flowers.com® brand is an industry leader in every- day gifting and we are leveraging the relationship customers have with the brand to extend that market leadership to our gourmet food gift brands and increase customer interactions. These efforts are generating stronger opportuni- ties to capture a larger share of our customers’ year-round gifting deci- sions for such everyday occasions as birthdays, thank-yous, get well senti- ments, graduations, congratulations and expressions of sympathy. 2 1 8 15 22 2 9 16 23 29 Parents’ Day 30 3 10 17 24 31  2 W E D N E S D AY 4 Independence Day 5 11 18 25 12 19 26 THURSDAY F R I D AY S AT U R D AY 6 13 20 27 7 14 Bastille Day 21 28 2 0 1 8 august AugustA u g u s t august A U G U S T In fiscal 2017, the BloomNet® wire service broadened its spectrum of services designed to help retail florists grow their businesses. An example is the launch of BloomNet’s Floriology Digital Marketing Services program. The program was created to assist retail florists in building their brand loyalty while boosting their web sales. As part of the program, BloomNet® Technolo- gies experts collaborate with florists to maximize such important tools as Search Engine Optimization and Search Engine Marketing, working to assure that florists’ shops rank near the top on SEO results pages, and generating visits and touches from local and mobile customers alike. Adding to the opportunities for retail florists, BloomNet’s Napco division unveiled its 2018 Spring & Garden Trends Report, keeping florists a vital step ahead of what today’s floral and garden consumers are looking for. 5 12 19 26 S U N D AY M O N D AY T U E S D AY 6 National Friendship Week Begins 7 13 20 27 14 21 28 A U G U S T W E D N E S D AY THURSDAY F R I D AY S AT U R D AY 0 1 8 15 22 29 2 9 16 23 30 3 10 17 24 31 4 11 18 25 2 0 1 8 s e p t e m b e r September SEPTEMBER September Each year during the late summer and into the early fall, the rich soil of the picturesque countryside in Medford, Oregon yields what are considered by many the juiciest peaches and most flavorful pears in the world. The legacy and more than 100 years of agricultural experience behind Harry & David® peaches and Royal Riviera® pears began way back in 1914 when brothers Harry and David Holmes took over the family orchards. Today, thousands of trees in those same orchards are meticu- lously cared for and their delicious fruits are harvested with the very same expertise and attention to quality the Holmes brothers had always demanded. This level of care provides a truly sumptuous taste ex- perience for Harry & David custom- ers and their lucky recipients. S U N D AY M O N D AY T U E S D AY 1 4 2 3 Labor Day 9 Grandparents Day Rosh Hashanah Begins at Sunset 10 11 Patriot Day 16 17 18 Yom Kippur Begins at Sunset 23 First Day of Fall 24 25 30 Patriot Day W E D N E S D AY 2 5 12 19 26 6 13 20 27 THURSDAY F R I D AY S AT U R D AY 1 8 15 22 29 7 14 21 28 2 0 1 8 October October O C T O B E R OCTOBER Everyone likes to be rewarded for their hard work, recognized for their achievements, and thanked for their assistance. Helping to express all those thoughts and many more is the 1-800-FLOWERS.COM, Inc. Corporate Gifts division. During fiscal 2017 and into fiscal 2018, the division developed and launched several dedicated business-to-business self serve portals designed to support the business gifting market and drive incremental awareness of the Com- pany’s B2B services, brands and prod- ucts. Exclusive partnerships were also established with a number of top companies in the Telecom industry, driving business gifting promotions to a long list of companies and their many employees and members. Additionally, new partnerships were created within the airline industry, offering frequent flyers the opportunity to earn miles for their purchases of 1-800-FLOWERS.COM, Inc. products and helping to encourage repeat purchases. 1 S U N D AY M O N D AY T U E S D AY 1 8 Columbus Day (observed) 2 9 7 National Children’s Day 14 21 28 15 22 29 16 National Boss’s Day 23 30 1 W E D N E S D AY 3 4 11 18 25 10 17 24 31 Halloween THURSDAY F R I D AY S AT U R D AY 5 12 19 26 6 13 20 Sweetest Day 27 S U N D AY M O N D AY T U E S D AY 2 0 1 8 n o v e m b e r November NOVEMBER November 2 1 4 The holiday season has arrived, fam- ily and friends are gathering, and it’s the perfect time to share mouth- watering possibilities that are sure to make the season extra special. Utilizing a combination of creating brands internally and via acquisition, 1-800-FLOWERS.COM, Inc. has built a uniquely broad offering of gourmet food gifts encompassing an “All Star” family of leading gift brands. Customers can choose a wide range of palate-pleasing selections from Harry & David®, Cheryl’s® cookies, Wolferman’s®, The Popcorn Factory® and Simply ChocolateSM, along with amazing fresh fruit ar- rangements from Fruit Bouquets by 1800flowers.comSM and overflowing gift baskets from 1-800-Baskets.com®. Indeed, it’s a wonderful way to share a smile during the holidays and to also express thoughtful senti- ments for an ever-widening array of celebratory occasions throughout the entire year. 2 5 11 Veterans Day 12 18 25 19 26 6 Election Day 13 20 27  2 W E D N E S D AY THURSDAY F R I D AY S AT U R D AY 1 8 2 9 15 16 22 Thanksgiving Day 23 29 30 7 14 21 28 3 10 17 24 2 0 1 8 d e c e m b e r December December DECEMBER Enhancing the shopping experi- ence is an ongoing top priority for 1-800-FLOWERS.COM, Inc. In fiscal 2017, the Company’s Harry & David® brand began developing several new features including key func- tionality enhancements across its website, mobile site, catalogs, emails and social media channels. The brand then strategically launched those features for customers to take advantage of during the 2017 holidays. Among the many new features and functions are: all-new website design and easier site navigation; enhancements to its Gift List; a new corporate gifting portal; the ability for customers to send up to 100 different gifts in their cart to separate recipients; new mobile payment methods including Apple Pay and PayPal; new multi-media content; and more precise online order tracking. 2 9 S U N D AY M O N D AY T U E S D AY 1 4 11 18 25 Christmas Day Hanukkah Begins at Sunset 3 16 23 10 17 24 30 31 W E D N E S D AY THURSDAY F R I D AY S AT U R D AY 0 2 5 12 19 6 13 20 1 8 15 7 14 21 First Day of Winter 22 Christmas Day 26 First Day of Kwanzaa 27 28 29 B O A R D O F D I R E C TO R S James F. McCann Founder and Executive Chairman 1-800-FLOWERS.COM, Inc. Christopher G. McCann President and Chief Executive Officer 1-800-FLOWERS.COM, Inc. Geralyn R. Breig Former President Clarks, Americas Region Celia R. Brown Former EVP Group HR Director Willis Group James A. Cannavino IBM Company Senior Vice President Retired Eugene F. DeMark C.P.A. Area Managing Partner KPMG, LLP, Retired BankUnited Director Leonard J. Elmore Network Television Sports Analyst Attorney at Law Sean P. Hegarty Managing Partner Hegarty & Company Katherine Oliver Principal Bloomberg Associates Larry Zarin Senior Vice President Chief Marketing Officer Express Scripts, Inc. Retired Fiscal Year 2017 Financial Report Selected Financial Data 1-800-FLOWERS.COM, Inc. and Subsidiaries The selected consolidated statement of operations data for the years ended July 2, 2017, July 3, 2016 and June 28, 2015 and the consolidated balance sheet data as of July 2, 2017 and July 3, 2016, have been derived from the Company’s audited consolidated financial statements included elsewhere in this Annual Report. The selected consolidated statement of operations data for the years ended June 29, 2014 and June 30, 2013, and the selected consolidated balance sheet data as of June 28, 2015, June 29, 2014 and June 30, 2013, are derived from the Company’s audited consolidated financial statements which are not included in this Annual Report. The following tables summarize the Company’s consolidated statement of income and balance sheet data. The Company acquired Harry & David in September 2014, acquired iFlorist in December 2013 (subsequently disposed in October 2015), Pingg Corp. in May 2013 (subsequently disposed of in June 2015), and Fine Stationery, Inc. in May 2011 (subsequently disposed of in June 2015). The following financial data reflects the results of operations of these subsidiaries since their respective dates of acquisition. In May 2017, the Company completed the disposition of its Fannie May business. The following data reflects the results of operations of these subsidiaries until their dates of disposition. During the fourth quarter of fiscal 2013, the Company made the strategic decision to divest the e-commerce and procurement businesses of its Winetasting Network subsidiary in order to focus on growth opportunities in its Gourmet Foods and Gift Baskets business segment. The Company closed on the sale of its Winetasting Network business on December 31, 2013. As a result, the Company has classified the results of Winetasting Network as discontinued operations for fiscal 2014, 2013 and 2012. 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. 2 Selected Financial Data (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries *In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which amends ASC 835-30, “Interest – Imputation of Interest.” The Company adopted this ASU in fiscal 2017, and the impact of the adoption of the new guidance was to reclassify $3.6 million of deferred financing costs previously included within “Other Assets” to “Long-term debt” in the consolidated balance sheets as of July 3, 2016 – see Note 2. in Notes to Consolidated Financial Statements for details. We have not reclassified other fiscal years for the purposes of this presentation. Management’s Discussion and Analysis of Financial Condition and Results of Operations 1-800-FLOWERS.COM, Inc. and Subsidiaries Business Overview 1-800-FLOWERS.COM, Inc. and its subsidiaries (collectively, the “Company”) is a leading provider of gourmet food and floral gifts for all occasions. For the past 40 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 Company’s Celebra- tions suite of services including Celebrations Passport Free Shipping Program, Celebrations Rewards and Celebrations Reminders, are all designed to engage with customers and deepen relationships as a one-stop destination for all celebratory and gifting occasions. In 2017, 1-800-FLOWERS.COM, Inc. was named as the Gold Winner for The Golden Bridge Awards in the “New Products and Services” category for the company’s groundbreaking implementation of an artificial intelli- gence-powered online gift concierge, Gwyn®. Earlier in the year, 1-800-Flowers.com was awarded the Gold Stevie “e-Commerce Customer Service” Award, recogniz- ing the company’s innovative use of online technologies and social media to service the needs of customers. In addition, 1-800-FLOWERS.COM, Inc. was recognized as one of Internet Retailer’s Top 300 B2B e-commerce companies in 2015 and was also recently named in Internet Retailer’s 2016 Top Mobile 500 as one of the world’s leading mobile commerce sites. The company was included in Internet Retailer’s 2015 Top 500 for fast growing e-commerce companies. In 2015, 1-800-Flowers.com was named a winner of the “Best Companies to Work for in New York State” Award by The New York Society for Human Resource Management (NYS-SHRM). 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, Inc. “Gift Shop” also includes gourmet gifts such as premium, gift-quality fruits and other gourmet items from Harry & David® (1-877-322-1200) or www.harryanddavid.com), 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); gift baskets and towers from 1-800-Baskets.com® (www.1800baskets.com); premium English muffins and other breakfast treats from Wolferman’s (1-800-999-1910 or www.wolfermans.com); carved fresh fruit arrangements from FruitBouquets.com (www.fruitbouquets.com); and top quality steaks and chops from Stock Yards® (www.stockyards.com). 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, in turn, is influenced by macro economic issues such as unemployment, fuel and energy costs, trends in the housing market and availability of consumer credit. As such, the Company expects that its revenues will continue to be closely tied to changes in consumer sentiment. The Company has organized its operations into three categories, or segments: Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets, reflect- ing the way the Company evaluates its business perfor- mance and manages its operations. On May 30, 2017, the Company completed the sale of the outstanding equity of Fannie May Confections Brands, Inc., including its subsidiaries, Fannie May Confections, Inc. and Harry London Candies, Inc. (“Fannie May”) to Ferrero International S.A., a Luxembourg corporation 3 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries (“Ferrero”). The Company and Ferrero also entered into a transition services agreement whereby the Company will provide certain post-closing services to Ferrero and Fannie May related to the business of Fannie May and a commercial agreement with respect to the distribution of certain Ferrero and Fannie May products. On September 30, 2014, the Company completed its acquisition of Harry & David Holdings, Inc. (“Harry & David”), a leading multi-channel specialty retailer and producer of branded premium gift-quality fruit, gourmet food products and other gifts marketed under the Harry & David®, Wolferman’s® and Cushman’s® brands. During fiscal 2017, the Company was able to achieve a number of operational and financial milestones: (cid:127) Continued improved operating results – Overall revenues were $1.194 billion, an increase of 1.8% in comparison to fiscal 2016 (up 3.1% after adjusting for several issues affecting year over year comparability, discussed in more detail below within results of operations). Income from operations improved from $43.3 million in fiscal 2016 to $46.4 million in fiscal 2017, while Adjusted EBITDA improved from $85.7 million in fiscal 2016 to $87.2 million in fiscal 2017. These results were driven by revenue growth and improved operating performance within the Consumer Floral and BloomNet Wire Service segments, despite the competitive and promotional environment in which these businesses operate. These favorable results were partially offset by underperformance within the Gourmet Foods & Gift Baskets segment, primarily reflecting revenue declines within the Harry & David brand during the December 2016 holiday season. (cid:127) Strengthened balance sheet - Throughout fiscal 2017, the Company continued its responsible stewardship of shareholders’ capital. On May 30, 2017, the Company completed the sale of its Fannie May and Harry London brands, at a price of $115.0 million, which, when adjusted for a seasonal working capital reduction of $11.4 million, resulted in a gain of $14.6 million, while adding approximately $103.6 million of cash to its balance sheet. When combined with the Company’s improved operating results and amended credit facility, which in December 2016 was extended by approximately two years, to December 23, 2021, the Company believes that its strong balance sheet, and growing cash flows, provide it with significant liquidity and flexibility to invest and enhance future growth, both organically, as well as through potential acquisitions. (cid:127) Investment in business operations – In fiscal 2017, the Company continued to invest in the key areas that will allow for accelerated growth in the future, including: (i) Manufacturing, production and distribution - expanded production capacity for Cheryl’s, Harry & David orchard plantings and manufacturing, as well as fulfillment technology upgrades, (ii) Technology – improved multi-brand website functionality and industry award winning mobile transactional platforms, and (iii) Business Intelligence – customer database mining to effectively market and target key demographics (cid:127) Multi-Brand Customer Initiatives - The Company continued to expand its multi-brand customer initiatives, a key ingredient in our strategy to enhance customer engagement and facilitate long-term growth. The multi-brand website provides the customer with an enriched shopping experience using cross-brand marketing and merchandising programs and through the use of the Company’s Celebrations suite of services, including Celebrations Passport free shipping, Rewards and Reminders membership programs. (cid:127) Innovation and positioning for emerging technologies – The Company has built a reputation as an innovator and an early adopter of new technologies. This was illustrated by the Company’s initiatives in Conversational Commerce, including: (i) Floral industry-first applications on Facebook’s Messenger platform (ii) Voice enabled skill on Amazon’s Alexa platform (iii) Our own, Artificial Intelligence (“A.I.”) -powered gift concierge Gwyn® – which leverages IBM’s Watson platform to help us engage customers in a natural-language conversation to help guide them to the perfect gift across all of our brands. Recognizing the need to balance the Company’s short and long-term operating and financial objectives, a key tenet of the Company’s fiscal 2018 strategy, now that the sale of Fannie May has been completed, is to refocus efforts to grow revenues in the Gourmet Foods & Gift Baskets segment, with specific emphasis on re-invigorat- ing growth within Harry & David, while continuing to extend the 1-800-Flowers brand’s market leadership position. Reflecting the sale of the Fannie May business in fiscal 2017, the Company expects fiscal 2018 consoli- dated revenues to be in a range of $1.14 billion - to - $1.16 billion. In terms of bottom-line results, the Company expects EPS in a range of $0.46 - to - $0.48 (anticipating a normalized effective tax rate of 35 percent), and EBITDA in a range of $90 million - to - $93 million. Definitions of non-GAAP financial measures: We sometimes use financial measures derived from consolidated financial information, but not presented in our financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain of these are considered “non-GAAP financial measures” under the U.S. Securities and Exchange Commission rules. See below for the definitions and the reasons we use these non-GAAP financial measures. Where applicable, see the Category Information and the Results of Operations sections below for reconciliations of these non-GAAP measures to their most directly comparable GAAP financial measures. 4 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Comparable revenues: Comparable revenues measures GAAP revenues adjusted for the effects of acquisitions, dispositions, timing factors and other items affecting period to period comparability – see Results of Operations section below for details on how comparable revenues were calculated in each of the fiscal years presented. We believe that this measure provides management and investors with a more complete understanding of underlying revenue trends of established, ongoing operations by excluding the effect of activities which are subject to volatility and can obscure underlying trends. Management recognizes that the term “comparable revenues” may be interpreted differently by other compa- nies and under different circumstances. Although this may have an effect on comparability of absolute percentage growth from company to company, we believe that these measures are useful in assessing trends of the Company and its segments, and may therefore be a useful tool in assessing period-to-period performance trends. EBITDA and Adjusted EBITDA: We define EBITDA as net income (loss) before interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA, adjusted for certain items affecting period to period comparability. Adjusted EBITDA for fiscal 2017 excludes certain charges including severance and investment gains associated with the Company’s non-qualified 401k executive compensation plan, EBITDA and Adjusted EBITDA for fiscal 2016 exclude investment losses associated with the Company’s non-qualified 401k executive compensation plan, litigation settlement costs, as well as final integra- tion costs, including severance expenses, associated with Harry & David and the rightsizing of the Fannie May operations, prior to disposition. The Company presents EBITDA and Adjusted EBITDA because it considers such information meaningful supplemental measures of its performance and believes such information is frequently used by the investment community in the evaluation of similarly situated compa- nies. The Company uses EBITDA and Adjusted EBITDA as factors used to determine the total amount of incentive compensation available to be awarded to executive officers and other employees. The Company’s credit agreement uses EBITDA and Adjusted EBITDA to measure compliance with covenants, such as leverage and coverage. EBITDA and Adjusted EBITDA are also used by the Company to evaluate and price potential acquisition candidates. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP. Some of the limitations are: (a) EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, the Company’s working capital needs; (b) EBITDA and Adjusted EBITDA do 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 5 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 require- ments for such capital expenditures. EBITDA should only be used on a supplemental basis combined with GAAP results when evaluating the Company’s performance. Category contribution margin: We define category contribution margin as earnings before interest, taxes, depreciation and amortization, before the allocation of corporate overhead expenses. When viewed together with our GAAP results, we believe that category contribution margin provides manage- ment and users of the financial statements information about the performance of our business segments. Category contribution margin is used in addition to and in conjunction with results presented in accordance with GAAP and should not be relied upon to the exclusion of GAAP financial measures. The material limitation associated with the use of the category contribution margin is that it is an incomplete measure of profitability as it does not include all operating expenses or non- operating income and expenses. Management compen- sates for these limitations when using this measure by looking at other GAAP measures, such as operating income and net income. Adjusted net income and Adjusted net income per common share: We define Adjusted net income and Adjusted net income per common share as net income and net income per common share adjusted for certain items affecting period to period comparability. Adjusted net income and Adjusted net income per common share for fiscal 2017 exclude certain charges including Harry & David severance and the gain on the sale of Fannie May. Adjusted net income and Adjusted net income per common share for fiscal 2016 exclude: (i) the gain from insurance recovery on the Fannie May warehouse fire, (ii) loss on the sale of iFlorist, and the impairment of a foreign equity method investment, (iii) Harry & David integration costs, (iv) litigation settlement costs as well as (vi) severance expenses associated with Harry & David and the rightsizing of the Fannie May operations, prior to disposition. We believe that Adjusted net income and Adjusted net income per common share are meaningful measures because they increase the comparability of period to period results. Since these are not measures of performance calcu- lated in accordance with GAAP, they should not be considered in isolation of, or as a substitute for, GAAP Net income and net income per common share as indicators of operating performance and they may not be comparable to similarly titled measures employed by other companies. Category Information The table on the following page presents the net revenues, gross profit and category contribution margin from each of the Company’s business segments, as well as consolidated EBITDA and Adjusted EBITDA. Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries 6 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Reconciliation of Net income to Adjusted (non-GAAP) income attributable to 1-800-FLOWERS.COM, Inc.: Years Ended July 2, July 3, 2017 2016 (in thousands) Net income Less: Net loss attributable to noncontrolling interest Income attributable to 1-800-FLOWERS.COM, Inc. Adjustments to reconcile income attributable to 1-800-FLOWERS.COM, Inc. to Adjusted (non-GAAP) income attributable to 1-800-FLOWERS.COM, Inc. $ 44,041 $ 35,868 (1,007) –– 36,875 44,041 14,607 –– Deduct: Gain from sale of Fannie May 19,611 –– Deduct: Gain from insurance recovery on warehouse fire 2,121 –– Add back: Loss on sale/impairment of iFlorist 1,728 –– Add back: Impairment of foreign equity method investment 828 –– Add back: Harry & David integration costs 1,500 –– Add back: Litigation costs Add back: Severance costs 756 1,437 Add back: Income tax expense/ (benefit) effect on adjustments (1,025) 3,633 $ 29,165 $ 28,511 Adjusted (non-GAAP) income attributable to 1-800-FLOWERS.COM, Inc. Net income per common share attributable to 1-800-FLOWERS.COM, Inc. Basic Diluted Adjusted (non-GAAP) net income per common share attributable to 1-800-FLOWERS.COM, Inc. Basic Diluted Weighted average shares used in the calculation of GAAP income and Adjusted (non-GAAP) income per common share attributable to 1-800-FLOWERS.COM, Inc Basic Diluted $ 0.68 $ 0.57 $ 0.65 $ 0.55 $ 0.45 $ 0.44 $ 0.43 $ 0.43 65,191 64,896 67,735 67,083 7 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Reconciliation of income attributable to 1-800-Flowers.com, Inc. to Adjusted EBITDA, (Non-GAAP), excluding stock-based compensation: Years Ended July 2, July 3, 2017 2016 (in thousands) Income attributable to 1-800-FLOWERS.COM, Inc. Add: $ 44,041 $ 36,875 4,957 7,597 Interest expense and other, net 33,376 32,384 Depreciation and amortization Income tax expense 11,968 15,579 Loss on sale/impairment of iFlorist –– 2,121 Impairment of foreign equity method investment –– 1,728 Less: Net loss attributable to noncontrolling interest –– 1,007 Income tax benefit –– –– Gain from sale of Fannie May 14,607 –– Gain from insurance recovery on warehouse fire –– 19,611 EBITDA (non-GAAP) 79,735 75,666 Add: Integration costs –– 828 Add: Litigation settlement –– 1,500 Add: Compensation Charge related to NQ Plan Investment Appreciation 988 (122) Add: Severance costs 756 1,437 Adjusted EBITDA (non-GAAP) 81,479 79,309 Add: Stock-based compensation 5,694 6,343 Adjusted EBITDA (non-GAAP), excluding stock-based compensation $ 87,173 $ 85,652 (a) 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, and Executive and Customer Service Center functions, as well as Stock-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 segment. 8 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Results of Operations The Company’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to June 30. Fiscal years 2017 and 2015, which ended on July 2, 2017 and June 28, 2015, respectively consisted of 52 weeks. Fiscal year 2016, which ended on July 3, 2016, consisted of 53 weeks. Net Revenues Years Ended July 2, July 3, June 28, 2017 % Change 2016 % Change 2015 (dollars in thousands) Net revenues: E-Commerce $ 896,762 296,863 Other $1,193,625 1.6% $ 882,782 3.9% $ 849,853 6.8% 2.3% 271,653 290,242 4.6% $1,121,506 1.8% $1,173,024 Net revenues consist primarily of the selling price of the merchandise, service or outbound shipping charges, less discounts, returns and credits. During the year ended July 2, 2017, net revenues increased 1.8% in comparison to the prior year, as a result of growth within the Company’s Consumer Floral and BloomNet segments, with the 1-800-Flowers.com brand continuing to extend its market leadership position, driven by increased demand throughout the year, particularly during the Valentine’s Day holiday. The increases above were partially offset by a decline in Harry & David revenues, due to the closure of a number of underperforming retail locations, and a reduction in e-commerce demand, primarily during the Christmas holiday selling season, and the timing of certain factors including: (i) the closing of the Company’s sale of the Fannie May Confection Brands business on May 30, 2017, (ii) a 52-week fiscal year in fiscal 2017 versus 53- week fiscal year in fiscal 2016, reflecting the Company’s retail calendar, and (iii) the shift of Harry & David’s Fruit of the Month Club® cherries shipment out of the Company’s fiscal fourth quarter in fiscal 2017, due to a late harvest, into the first quarter of fiscal 2018. On a comparable basis, adjusting fiscal year 2016 GAAP revenues to remove: (i) the 53rd week ($8.0 million), (ii) Fannie May’s June 2016 revenues ($4.8 million) and (iii) the June 2016 Harry & David Fruit of the Month Club® cherry shipment ($2.4 million), net revenues during fiscal 2017 increased 3.1% in comparison to fiscal 2016. During the year ended July 3, 2016, net revenues increased 4.6% in comparison to the prior year, as a result of growth within the Gourmet Food and Gift Baskets segment due to the incremental revenue generated by Harry & David, which was acquired on September 30, 2014 (pre-acquisition revenues generated by Harry & David during the quarter ended September 28, 2014 was $29.4mm), the impact on prior year revenues of the Thanksgiving Day Fannie May warehouse fire (estimated to be $17.3mm), organic growth of 1-800-Flowers.com, Cheryl’s and 1-800-Baskets wholesale gift business, and the impact of the 53rd week in fiscal 2016, partially offset by the impact of the Sunday date placement of Valentine’s 9 Day, and the dispositions of the iFlorist and Fine Stationery businesses in October 2015 and June 2015, respectively (which generated a combined $12.1 million of incremental revenues in the prior year), slower recovery by the Fannie May brand after the fire, and a year-over-year reduction in the Harry & David store count. On a comparable basis, adjusting fiscal year 2016 GAAP revenues to remove the 53rd week ($8.3 million) and adjust fiscal year 2015 GAAP revenues to: (i) add Harry & David, first quarter of 2015 revenues ($29.4 million), (ii) add the estimated revenue impact of the Fannie May fire ($17.3 million), (iii) add Harry & David purchase accounting adjustments ($1.6 million), and (iv) remove Fine Stationery and iFlorist revenues ($12.1 million), net revenues during fiscal 2016 increased 0.6% in comparison to fiscal 2015. E-commerce revenues (combined online and tele- phonic sales channels) increased 1.6% during the year ended July 2, 2017 compared to the prior year, as a result of the aforementioned e-commerce growth within the Company’s Consumer Floral segment, partially offset by unfavorable e-commerce growth within the Gourmet Foods & Gift Baskets segment due to the Company’s sale of the Fannie May Confection Brands business on May 30, 2017, a decrease in demand within the Harry & David brand during the Christmas Holidays, and the shift of Harry & David’s Fruit of the Month Club® cherries shipment out of the Company’s fiscal fourth quarter in fiscal 2017, due to a late harvest, into the first quarter of fiscal 2018, as well as the impact of the 53rd week in fiscal 2016. The Company fulfilled approximately 12.3 million e-commerce orders, with an average order value of $73.12, during fiscal 2017, representing increases of 0.6% and 1.0%, respectively, compared to fiscal 2016. E-commerce revenues increased 3.9%, during the year ended July 3, 2016 compared to the prior year, due to growth within the Gourmet Food and Gift Baskets segment, as a result of the incremental revenue gener- ated by Harry & David, which was acquired on Septem- ber 30, 2014, the impact on prior year revenues of the Thanksgiving Day Fannie May warehouse fire, organic growth within the 1-800-Flowers.com Cheryl’s brands, and the impact of the 53rd week, and partially offset by the impact of the dispositions of iFlorist and Fine Statio- nery in October 2015 and June 2015, respectively, and the anticipated decline in revenues due to the Sunday date placement of Valentine’s Day. The Company fulfilled approximately 12.2 million e-commerce orders, with an average order value of $72.64, during fiscal 2016, representing increases of 1.4% and 2.4%, respectively, compared to fiscal 2015. Other revenues, comprised of the Company’s BloomNet Wire Service segment, as well as the whole- sale and retail sales channels of the 1-800-Flowers.com Consumer Floral and Gourmet Food and Gift Baskets segments, increased by 2.3% and 6.8% during fiscal 2017 and fiscal 2016, respectively. The increase in fiscal 2017 was attributable to the BloomNet segment which increased revenues through improvements in member- ship, transaction and ancillary service fees, as well as Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries from the Gourmet Food and Gift Baskets segment, resulting from wholesale growth within the Fannie May, Harry & David and 1-800-Baskets wholesale gift busi- nesses. This favorability was partially offset by a decrease in retail store sales within Fannie May, due to a decline in customer traffic, as well as a decline in Harry & David retail store sales due to the closure of several underperforming locations. The increase in fiscal 2016 was due to growth within the Gourmet Food and Gift Baskets segment, resulting from the incremental revenue generated by Harry & David, which was acquired on September 30, 2014, organic growth of Cheryl’s and 1-800-Baskets wholesale gift business, and the impact on prior year revenues of the Thanksgiving 2014 Fannie May warehouse fire, partially offset by the Sunday date placement of Valentine’s Day and a year-over-year reduction in the Harry & David store count. The 1-800-Flowers.com Consumer Floral segment includes the operations of the 1-800-Flowers.com brand, which derives revenue from the sale of consumer floral products through its e-commerce sales channels (tele- phonic and online sales) and royalties from its franchise operations, as well as iFlorist, a UK based e-commerce retailer of floral products (through the date of its disposi- tion in October 2015), and Fine Stationery, an e-com- merce retailer of stationery products (through the date of its disposition in June 2015). Net revenues during the fiscal year ended July 2, 2017 increased 4.5%, as a result of increased order demand throughout the year, and during the Valentine’s Day holiday in particular, when the Company was able to leverage the holiday’s Tuesday date placement, in comparison to the prior year when Valentine’s Day fell on a Sunday. The brand was success- ful at growing its “everyday” business , including birth- days, anniversaries, sympathy and “just because,” due to expanded merchandise assortments, including the Flirty Feline® floral arrangement, and efforts to capitalize on its same day/next day delivery capabilities. These increases were partially offset by the impact of the 53rd week fiscal 2016, reflecting the Company’s retail calen- dar. On a comparable basis, adjusting fiscal 2016 GAAP revenues to remove the 53rd week ($4.8 million), fiscal 2017 net revenues increased 5.7% in comparison to fiscal 2016. Net revenues during the fiscal year ended July 3, 2016 decreased 0.9% as a result of lower order volume resulting from the Sunday date placement of Valentine’s Day, and the dispositions of iFlorist and Fine Stationery, partially offset by organic growth by the 1-800-Flowers.com brand and the impact of the 53rd week. On a comparable basis, adjusting fiscal year 2016 GAAP revenues to remove the 53rd week ($4.8 million) and adjust fiscal year 2015 GAAP revenues to remove Fine Stationery and iFlorist revenues ($12.1 million), fiscal 2016 net revenues increased 0.8% in comparison to fiscal 2015. The BloomNet Wire Service segment includes revenues from membership fees as well as other product and service offerings to florists. Net revenues during the fiscal year ended July 2, 2017 increased 2.6% in com- parison to the prior year, due to an increase in order volume processed through the network, driven primarily by the increase in 1-800-Flowers volume noted above, which enabled BloomNet to generate increased member- ship, transaction and ancillary revenue improvements. These improvements were partially offset by lower wholesale product revenue as a result of decreased demand and network shop count. Net revenues during the fiscal year ended July 3, 2016 decreased 0.6% due to lower transaction and ancillary fee revenues as a result of unfavorable shop to shop order volume sent through the network due in part to the Sunday date placement of Valentine’s Day, partially offset by increased revenue as a result of BloomNet initiatives including the annualization of a florist transaction program implemented in the 3rd quarter of fiscal 2015. The Gourmet Food & Gift Baskets segment includes the operations of Harry & David, Wolferman’s, Stockyards, Cheryl’s, Fannie May (through the date of its disposition in May 2017), The Popcorn Factory and 1-800-Baskets/ DesignPac. Revenue is derived from the sale of gourmet fruits, cookies, baked gifts, premium chocolates and confections, gourmet popcorn, gift baskets, and prime steaks and chops through the Company’s e-commerce sales channels (telephonic and online sales) and company-owned and operated retail stores under the Harry & David, Cheryl’s and Fannie May (through the date of its disposition in May 2017) brand names, as well as wholesale operations. Net revenue during the fiscal year ended July 2, 2017 was consistent with fiscal 2016, as revenue growth within the Popcorn Factory, 1-800- Baskets/DesignPac, Fannie May and Cheryl’s brands was offset by a decline in Harry & David revenues, due to the closure of a number of underperforming retail locations, and a reduction in e-commerce demand, primarily during the Christmas holiday selling season, and the timing of certain factors including: (i) the Company’s sale of the Fannie May Confection Brands business on May 30, 2017, (ii) a 52-week fiscal year in fiscal 2017 versus 53- week fiscal year in fiscal 2016, reflecting the Company’s retail calendar, and (iii) the shift of Harry & David’s Fruit of the Month Club® cherries shipment out of the Company’s fiscal fourth quarter in fiscal 2017, due to a late harvest, into the first quarter of fiscal 2018. On a comparable basis, adjusting fiscal year 2016 GAAP revenues to remove: (i) the 53rd week ($3.2 million), (ii) Fannie May’s June 2016 revenues ($4.8 million) and (iii) the June 2016 Harry & David Fruit of the Month Club® cherry shipment ($2.4 million), net revenues during fiscal 2017 increased 1.6% in comparison to fiscal 2016. Net revenue during the fiscal year ended July 3, 2016 increased 9.2% in comparison to the prior year, as a result of the incremental revenue generated by Harry & David, which was acquired on September 30, 2014, and the impact on prior year revenues of the Thanksgiving Day Fannie May warehouse fire, organic growth of Cheryl’s and 1-800-Baskets wholesale gift business, and the impact of the 53rd week. On a compa- rable basis, adjusting fiscal year 2016 GAAP revenues to remove the 53rd week ($3.5 million) and adjust fiscal year 2015 GAAP revenues to: (i) add Harry & David, first quarter of 2015 revenues ($29.3 million), (ii) add esti- mated revenue impact of the Fannie May fire ($16.9 10 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries million), (iii) add Harry & David purchase accounting adjustments ($1.6 million), net revenues during fiscal 2016 increased 0.8% in comparison to fiscal 2015. In fiscal 2018, the Company expects to grow revenues across all three of its business segments with consolidated revenue in a range of $1.14 billion to $1.16 billion. Gross Profit Years Ended July 2, July 3, June 28, 2017 % Change 2016 % Change 2015 (dollars in thousands) Gross profit $520,281 Gross margin % 43.6% $517,458 44.1% 0.5% 6.2% $487,195 43.4% Gross profit consists of net revenues less cost of revenues, which is comprised primarily of florist fulfillment costs (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 0.5% during the fiscal year ended July 2, 2017 in comparison to the prior year, primarily as a result of the incremental revenue noted above, partially offset by a decline in gross profit margin as a result of annual shipping rate increases, product mix, and increased promotions during the year. Gross profit increased 6.2% during the fiscal year ended July 3, 2016 in comparison to the prior year, primarily as a result of the incremental revenue noted above, as well as a 70 basis points increase in gross profit margin due to sourcing and logistics synergy savings, the mix of sales associated with the recovery from the Thanksgiving Day Fannie May warehouse fire, and the impact of purchase accounting adjustments related to Harry & David’s inventory fair value step-up in the year ended June 28, 2015. The 1-800-Flowers.com Consumer Floral segment gross profit increased by 4.1% during the fiscal year ended July 2, 2017, in comparison to the prior year, as a result of the increase in revenues noted above, partially offset by a 20 basis point decrease in gross profit margin, from 40.8% to 40.6%. This decrease in gross profit margin was primarily due to annual shipping rate increases, as well as increased promotional activity during the year. The 1-800-Flowers.com Consumer Floral segment gross profit increased by 2.9% during the fiscal year ended July 3, 2016 in comparison to the prior year, due to an improvement in gross profit percentage of 160 basis points driven by the benefit of synergy savings, which reduced shipping costs, as well as sourcing improve- ments and reductions in discounts, partially offset by the decrease in revenues noted above. BloomNet Wire Service segment’s gross profit increased by 2.9% during the fiscal year ended July 2, 11 2017 in comparison to the prior year, as a result of the increase in sales noted above, as well as a 20 basis point increase in gross margin percentage, from 56.3% to 56.5%, related to sales mix. BloomNet Wire Service segment’s gross profit increased by 0.5% during the fiscal year ended July 3, 2016, in comparison to the prior year, while gross margin percentage increased 60 basis points, as a result of sales mix and lower rebates associ- ated with the decline in shop-to-shop order volume. The Gourmet Food & Gift Baskets segment gross profit decreased by 1.9% during the fiscal year ended July 2, 2017, in comparison to the prior year, due to a decrease of 80 basis points in gross profit margins, from 44.4% to 43.6%, as revenues were consistent with the prior year. The decrease in gross profit margin percentage was due to declines at Harry & David and Fannie May as a result of product mix and unfavorable volume-related absorp- tion, partially offset by favorable gross profit margins at Cheryl’s and DesignPac due to production process improvements and reduced shipping expenses due to improved ground shipping conversion rates. The Gourmet Food & Gift Baskets segment gross profit increased by 9.2% during the fiscal year ended July 3, 2016 in comparison to the prior year, as a result of the increase in revenues noted above. Gross margin percentage of 44.4% was consistent with the prior year as the difficulties encoun- tered by Fannie May in its efforts to recover after the fire were offset by the impact of purchase accounting adjust- ments related to Harry & David’s inventory fair value step-up in the year ended June 28, 2015. In fiscal 2018, the Company expects its gross profit to improve due to sales growth and stronger gross profit margin as a result of various initiatives we are implement- ing in manufacturing and the supply/fulfillment chain. Marketing and Sales Expense Years Ended July 2, July 3, June 28, 2017 % Change 2016 % Change 2015 (dollars in thousands) Marketing and sales $317,527 -0.2% $318,175 6.1% $299,801 Percentage of sales 26.6% 27.1% 26.7% 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. Marketing and sales expenses declined slightly and decreased as a percentage of revenues (26.6% in fiscal 2017 vs. 27.1% in fiscal 2016), as a result of a decrease in labor costs due to a reduction in performance based bonuses, as well as reductions in labor and facility costs associated with closure of a number of underperforming Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Harry & David retail locations, partially offset by higher marketing spend within the Consumer Floral segment, primarily around the Mother’s Day holiday. Marketing and sales expenses increased 6.1% (27.1% as a percentage of revenues) during the fiscal year ended July 3, 2016 compared to the prior year (26.7% as a percentage of revenues) primarily due to the incremental marketing expenses of Harry & David, which was acquired on September 30, 2014. During the fiscal year ended July 2, 2017, the Com- pany added approximately 3.6 million new e-commerce customers, compared to 3.5 million in both fiscal 2016 and 2015. Approximately 48% of customers who placed e-commerce orders during fiscal 2017 were repeat customers compared to approximately 50% in both fiscal 2016 and fiscal 2015. Technology and Development Expense Years Ended July 2, July 3, June 28, 2017 % Change 2016 % Change 2015 (dollars in thousands) Technology and development Percentage of $ 38,903 -0.8% $39,234 12.9% $34,745 sales 3.3% 3.3% 3.1% Technology and development expense consists primarily of payroll and operating expenses of the Company’s information technology group, costs associ- ated with its websites, including hosting, design, content development and maintenance and support costs related to the Company’s order entry, customer service, fulfillment and database systems. Technology and development expenses decreased 0.8% (3.3% as a percentage of revenues) during the fiscal year ended July 2, 2017 compared to the prior year (3.3% as a percentage of revenues) primarily due to lower labor costs, due to reduced headcount and a reduction in performance based bonuses, partially offset by increased license and maintenance costs related to system security, and platform improvements. Technology and development expenses increased 12.9% (3.3% as a percentage of revenues) during the fiscal year ended July 3, 2016 compared to the prior year (3.1% as a percentage of revenues) primarily due to the incremental technology and development costs of Harry & David, which was acquired on September 30, 2014. During the fiscal years ended July 2, 2017, July 3, 2016 and June 28, 2015, the Company expended $59.2 million, $60.6 million and $52.1 million, respectively, on technology and development, of which $20.3 million, $21.4 million, and $17.4 million, respectively, has been capitalized. 12 General and Administrative Expense Years Ended July 2, July 3, June 28, 2017 % Change 2016 % Change 2015 (dollars in thousands) General and administrative $ 84,116 -0.3% $ 84,383 -1.8% $ 85,908 Percentage of sales 7.0% 7.2% 7.7% General and administrative expense consists of payroll and other expenses in support of the Company’s executive, finance and accounting, legal, human re- sources and other administrative functions, as well as professional fees and other general corporate expenses. General and administrative expense decreased 0.3% (7.0% as a percentage of revenues) during the fiscal year ended July 2, 2017 in comparison to the prior year (7.2% as a percentage of revenues), as result of lower labor costs due to decreases in performance based bonuses, as well as certain prior year expenses that were not incurred in the current year, including Harry and David integration costs and the Edible Arrangements litigation settlement. These decreases were partially offset by increased health insurance costs, headcount and expense related to the Company’s Non-Qualified Deferred Compensation Plan (“NQDC”)(The Company has established an NQDC for certain members of senior management. The plan assets are classified as trading securities (see Note 10. in Notes to Consolidated Financial Statements for details) – in fiscal 2017, the Company recorded labor expense of approximately $1.0 million (compared to a benefit of $0.1 million during fiscal 2016), within “General and administrative” expenses, associated with an increase in amounts owed to partici- pants due to the appreciation of the fair value of partici- pant directed investments. The corresponding offset to this expense is an equivalent amount of investment income, which is recorded in “Other (income) expense, net”. Trading securities held in the NQDC are measured using quoted market prices at the reporting date and are included in the “Other assets,” with the corresponding liability to participants included in the “Other liabilities” within the consolidated balance sheets. General and administrative expense decreased 1.8% (7.2% as a percentage of revenues) during the fiscal year ended July 3, 2016 in comparison to the prior year (7.7% as a percentage of revenues), as result of synergistic savings, integration expenses incurred in the prior year, and a decrease in performance based bonuses and integration expenses, partially offset by the incremental general and administrative expenses of Harry & David, which was acquired on September 30, 2014. Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Depreciation and Amortization Years Ended Other (income) Expense, net Years Ended July 2, July 3, June 28, 2017 % Change 2016 % Change 2015 July 2, July 3, June 28, 2017 % Change 2016 % Change 2015 (dollars in thousands) Depreciation and amortization Percentage of $ 33,376 3.1% $ 32,384 11.2% $ 29,124 sales 2.8% 2.8% 2.6% Depreciation and amortization expense increased by 3.1% during the fiscal year ended July 2, 2017 in comparison to the prior year, as a result of recent increases in capital expenditures, primarily in support of the Company’s technology infrastructure, partially offset by the impact of the disposition of Fannie May. Depreciation and amortization expense increased by 11.2% during the fiscal year ended July 3, 2016 in comparison to the prior year, as a result of the incremen- tal depreciation and amortization expenses of Harry & David, acquired on September 30, 2014, including the impact of the additional intangibles amortization, as well as a result of the Company’s technology improvements. Interest Expense, net Years Ended July 2, July 3, June 28, 2017 % Change 2016 % Change 2015 (dollars in thousands) Interest expense, net $ 5,821 -12.8% $ 6,674 16.0% $ 5,753 Interest expense, net consists primarily of interest expense and amortization of deferred financing costs attributable to the Company’s credit facility (See Note 9. in Notes to Consolidated Financial Statements for details regarding the 2016 Credit Facility), net of income earned on the Company’s available cash balances. Interest expense, net decreased 12.8% during the year ended July 2, 2017 in comparison to the prior year, due to the reduction in the outstanding Term Debt due to principal payments during the year, partially offset by a $0.3 million write-off of deferred financing costs as a result of amending the Company’s credit facility in December 2016, and an overall increase in interest rates. Interest expense, net increased 16.0% during the year ended July 3, 2016 in comparison to the prior year, as a result of the additional interest expense and deferred financing costs associated with the term debt used to finance the Harry & David acquisition, entered into on September 30, 2014 and the additional interest expense on the Company’s revolver to fund the working capital requirements of Harry & David during the first quarter of the fiscal year. 13 (dollars in thousands) Other (income) expense, net $ (15,471) 4.3% $(14,839) 1,057.4% $1,550 Other (income) expense, net for the year ended July 2, 2017 consists primarily of a $14.6 million gain on the sale of Fannie May (see Note 4. in Notes to Consolidated Financial Statements for details), a $1.0 million investment gain related to the Company’s Non-Qualified Deferred Compensation Plan (see “General and Administrative” expense above), partially offset by a $0.1 million loss related to the Company’s equity in the net loss of Flores Online (see Note 2. in Notes to Consolidated Financial Statements for details). Other (income) expense, net for the year ended July 3, 2016 consists primarily of a $19.6 million gain on insurance recoveries related to the Fannie May ware- house fire (see Note 17. in Notes to Consolidated Financial Statements for details), offset by a $2.1 million loss on sale of iFlorist (see Note 4. in Notes to Consoli- dated Financial Statements for details), a $1.7 million impairment of the Company’s investment in Flores Online (see Note 2. in Notes to Consolidated Financial State- ments for details), and a $0.7 million impairment of cost method investments (see Note 2. in Notes to Consoli- dated Financial Statements for details). Income Taxes During the fiscal years ended July 2, 2017, July 3, 2016 and June 28, 2015, the Company recorded income tax expense from continuing operations of $12.0 million, $15.6 million and $10.9 million, respectively, resulting in an effective tax rate of 21.4%, 30.3% and 36.1%, respec- tively. The Company’s effective tax rate differed from the U.S. federal statutory rate of 35% primarily due to the impact of state income taxes, valuation allowance changes, rate differences, tax settlements, various tax credits/deductions as well as deductible stock-based compensation, as well as the tax effect of the Fannie May disposition (see Note 11. in Notes to Consolidated Financial Statements for details). At July 2, 2017 the Company’s total federal capital loss carryforwards were $23.7 million, which if not utilized, will expire in fiscal 2022. The Company’s state capital loss carryforwards was $1.0 million, which if not utilized, will begin to expire in fiscal 2022.The Company’s foreign net operating loss carryforward was $2.4 million, while the state net operating losses were $4.6 million, before federal benefit, which if not utilized, will begin to expire in fiscal 2018. Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Liquidity and Capital Resources Cash Flows At At July 2, 2017, the Company had working capital of $132.2 million, including cash and cash equivalents of $149.7 million, compared to working capital of 45.8 million, including cash and cash equivalents of $27.8 million at July 3, 2016. Net cash provided by operating activities of $61.0 million for the fiscal year ended July 2, 2017 was prima- rily related to net income, adjusted for non-cash charges for depreciation and amortization, stock-based compen- sation, deferred income taxes, bad debt expense and the gain on the sale of Fannie May, partially offset by working capital changes primarily related to timing of collection of trade receivables, accelerated inventory production to mitigate the impact of labor shortages experienced during the prior holiday season, partially offset by decreases in accounts payable and accrued expenses as a result of the timing of the inventory build. Net cash provided by investing activities of $78.3 million was attributable to the proceeds from the sale of Fannie May, partially offset by capital expenditures related to the Company’s technology infrastructure and Gourmet Foods & Gift Baskets production equipment. Cash proceeds from the sale of Fannie May excludes an $8.5 million of seasonal working capital adjustment, paid by the Company, to Ferrero, in the first quarter of fiscal 2018. Fiscal 2018 capital spending is expected to be consistent with fiscal 2017. Net cash used in financing activities of $17.4 million for the fiscal year ended July 2, 2017 was for term debt repayment on borrowings under the Company’s Credit Facility of $5.5 million, and the acquisition of $10.7 million of treasury stock, and $1.5 million of debt issuance costs related to the 2016 Amended Credit Agreement (see Note 9. in Notes to Consolidated Financial Statements for details), partially offset by proceeds from exercises of employee stock options of $0.3 million. As of July 2, 2017 there were no borrowings outstanding under the Company’s Revolver. Credit Facility See Note 9. in Notes to Consolidated Financial Statements for details regarding the 2016 Credit Facility. The Company believes that cash on hand, combined with cash flows from operations and available borrowings from its 2016 Credit Facility, will be a sufficient source of liquidity during fiscal 2018. Due to the seasonal nature of the Company’s business, and its continued expansion into non-floral products, including the acquisition of Harry & David, the Thanksgiving through Christmas holiday season, which falls within the Company’s second fiscal quarter, is expected to generate nearly 50% of the Company’s annual revenues, and all of its earnings. As a result, the Company expects to generate significant cash from operations during its second quarter, and then utilize that cash for operating needs during its fiscal third and fourth quarters, after which time the Company expects to borrow against its Revolver to fund pre-holiday manufac- turing and inventory purchases. Borrowings under the Revolver, which will be significantly lower than prior year as a result of cash generated from the sale of Fannie May, typically peak in November, at which time cash generated from operations during the Christmas holiday shopping season are expected to enable the Company to repay working capital borrowings prior to the end of December. Stock Repurchase Program The Company has a stock repurchase plan through which purchases can be made from time to time in the open market and through privately negotiated transactions, subject to general market conditions. The repurchase program is financed utilizing available cash. In October 2016, the Company’s Board of Directors authorized an increase to its stock repurchase plan of up to $25 million. The Company repurchased a total of $10.7 million (1,120,706 shares), $15.2 million (1,714,550 shares) and $8.4 million (1,056,038 shares) during the fiscal years ended July 2, 2017, July 3, 2016 and June 28, 2015, respectively, under this program. As of July 2, 2017, $17.2 million remains authorized under the plan. On August 30, 2017, the Company’s Board of Directors authorized an increase to its stock repurchase plan of up to $30.0 million. Contractual Obligations At July 2, 2017, the Company’s contractual obligations from continuing operations consist of: Payments due by period (in thousands) Less than More than Total 1 year 1 - 3 years 3 - 5 years 5 years Long-term debt obligations (including interest) Operating lease obligations Purchase commitments(*) Unrecognized tax liabilities Total $123,657 88,471 74,251 400 $286,779 $ 10,275 13,772 71,549 –– $ 95,597 $ 28,397 20,387 2,683 200 $ 51,666 $ 84,985 14,903 19 200 $ –– 39,409 –– –– $ 100,106 $ 39,409 (*) Purchase commitments consist primarily of inventory and equipment purchase orders made in the ordinary course of business. 14 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Critical Accounting Policies and Estimates The Company’s discussion and analysis of its financial position and results of operations are based upon the consolidated financial statements of 1-800- FLOWERS.COM, Inc., which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assump- tions that affect the reported amount of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, inventory and long-lived assets, including goodwill and other intangible assets related to acquisitions. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies, among others, affect its more significant judg- ments and estimates used in preparation of its consoli- dated financial statements. Revenue Recognition Net revenues are generated by e-commerce opera- tions from the Company’s online and telephonic sales channels as well as other operations (retail/wholesale) and primarily consist of the selling price of merchandise, service or outbound shipping charges, net of discounts, returns and credits. Net revenues are recognized primarily upon product delivery and do not include sales tax. Net revenues generated by the Company’s BloomNet Wire Service operations include membership fees as well as other product and service offerings to florists. Member- ship fees are recognized monthly in the period earned, and products sales are recognized upon product ship- ment with shipping terms primarily FOB shipping point. Accounts Receivable The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers or franchisees to make required pay- ments. In establishing the appropriate provisions for customer receivable balances, the Company makes assumptions with respect to their future collectability. The Company’s assumptions are based on an assess- ment of a customer’s credit quality as well as subjective factors and trends, including the aging of receivable balances. Once the Company considers the factors above, an appropriate provision is made, which takes into account the severity of the likely loss on the outstanding receivable balance based on the Company’s experience in collecting these amounts. If the financial condition of the Company’s customers or franchisees were to deterio- rate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inventory Inventories are valued at the lower of cost or market using the first-in, first-out method of accounting. The Company also records an inventory obsolescence reserve, which represents the difference between the cost of the inventory and its estimated realizable value, based on various product sales projections. This reserve is determined by analyzing inventory skus based on age, expiration, historical trends and requirements to support forecasted sales. In addition, and as necessary, the Company may establish specific reserves for future known or anticipated events. Business Combinations The Company accounts for business combinations in accordance with ASC Topic 805 which requires, among other things, the acquiring entity in a business combina- tion to recognize the fair value of all the assets acquired and liabilities assumed; the recognition of acquisition- related costs in the consolidated results of operations; the recognition of restructuring costs in the consolidated results of operations for which the acquirer becomes obligated after the acquisition date; and contingent purchase consideration to be recognized at their fair values on the acquisition date with subsequent adjust- ments recognized in the consolidated results of opera- tions. The fair values assigned to identifiable intangible assets acquired are determined primarily by using an income approach which is based on assumptions and estimates made by management. Significant assumptions utilized in the income approach are based on company specific information and projections which are not observable in the market and are therefore considered Level 3 measurements. The excess of the purchase price over the fair value of the identified assets and liabilities is recorded as goodwill. Operating results of the acquired entity are reflected in the Company’s consolidated financial statements from date of acquisition. Goodwill Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in each business combination, with the carrying value of the Company’s goodwill allocated to its reporting units, in accordance with the acquisition method of accounting. Goodwill is not amortized, but it is subject to an annual assessment for impairment, which the Company performs during the fourth quarter, or more frequently if events occur or circumstances change such that it is more likely than not that an impairment may exist. The Company tests goodwill for impairment at the reporting unit level. The Company identifies its reporting units by assessing whether the components of its operating segments constitute busi- nesses for which discrete financial information is available and management of each reporting unit regularly reviews the operating results of those components. In applying the goodwill impairment test, the Company has the option to perform a qualitative test (also known as “Step 0”) or a two-step quantitative test (consisting of “Step 1” and “Step 2”). Under the Step 0 test, the Com- 15 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries pany first assesses qualitative factors to determine whether it is more likely than not that the fair value of the reporting units is less than its carrying value. Qualitative factors may include, but are not limited to economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific events. If after assessing these qualitative factors, the Company determines it is “more-likely-than-not” that the fair value of the reporting unit is less than the carrying value, then performing the two-step quantitative test is necessary. The first step (“Step 1”) of the two-step quantitative test requires comparison of the fair value of each of the reporting units to the respective carrying value. If the carrying value of the reporting unit is less than the fair value, no impairment exists and the second step (“Step 2”) is not performed. If the carrying value of the reporting unit is higher than the fair value, Step 2 must be per- formed to compute the amount of the goodwill impair- ment, if any. In Step 2, the impairment is computed by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for the excess. The Company generally estimates the fair value of a reporting unit using an equal weighting of the income and market approaches. The Company uses industry accepted valuation models and set criteria that are reviewed and approved by various levels of management and, in certain instances, the Company engages third- party valuation specialists. Under the income approach, the Company uses a discounted cash flow methodology which requires management to make significant esti- mates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. For the market approach, the Company uses the guideline public company method. Under this method the Company utilizes information from comparable publicly traded companies with similar operating and investment characteristics as the reporting units, to create valuation multiples that are applied to the operating performance of the reporting unit being tested, in order to obtain their respective fair values. The Com- pany also reconciles the aggregate fair values of its reporting units determined in the first step (as described above) to its current market capitalization, allowing for a reasonable control premium. During fiscal 2017 and fiscal 2016 the Company performed a Step 0 analysis and determined that it was not “more likely than not” that the fair values of the reporting units were less than their carrying amounts. During fiscal 2015, the Company performed the two-step quantitative impairment test and determined that the estimated fair value of the Company’s reporting units significantly exceeded their respective carrying values (including goodwill allocated to each respective reporting unit). Future changes in the estimates and assumptions above could materially affect the results of our reviews for impairment of goodwill. However, as a measure of sensitivity, a 34% decrease in the fair value of the Company’s reporting units as of July 2, 2017, would have had no impact on the carrying value of the Company’s goodwill. In addition, a decrease of 100 basis points in our terminal (perpetual) growth rate or an increase of 100 basis points in our weighted-average cost of capital would still result in a fair value calculation exceeding our book value for each of our reporting units. Other Intangibles, net Other intangibles consist of definite-lived intangible assets (such as investment in licenses, customer lists, and others) and indefinite-lived intangible assets (such as acquired trade names and trademarks). The cost of definite-lived intangible assets is amortized to reflect the pattern of economic benefits consumed, over the esti- mated periods benefited, ranging from 3 to 16 years, while indefinite-lived intangible assets are not amortized. Definite-lived intangibles are reviewed for impairment whenever changes in circumstances or events may indicate that the carrying amounts are not recoverable. When such events or changes in circumstances occur, a recoverability test is performed comparing projected undiscounted cash flows from the use and eventual disposition of an asset or asset group to its carrying value. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, which is determined by discounting future cash flows. The Company tests indefinite-lived intangible assets for impairment at least annually, during the fourth quarter, or whenever changes in circumstances or events may indicate that the carrying amounts are not recoverable. In applying the impairment test, the Company has the option to perform a qualitative test (also known as “Step 0”) or a quantitative test. Under the Step 0 test, the Company assesses qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. Qualitative factors may include, but are not limited to economic conditions, industry and market considerations, cost factors, financial performance, legal and other entity and asset specific events. If after assess- ing these qualitative factors, the Company determines it is “more-likely-than-not” that the indefinite-lived intangible asset is impaired, then performing the quantitative test is necessary. The quantitative impairment test for indefinite- lived intangible assets encompasses calculating a fair value of an indefinite-lived intangible asset and compar- ing the fair value to its carrying value. If the carrying value exceeds the fair value, impairment is recognized for the difference. To determine fair value of other indefinite-lived intangible assets, the Company uses an income ap- proach, the relief-from-royalty method. This method assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use the comparable asset. Other indefinite-lived intangible assets’ fair values require significant judgments in determining both the assets’ estimated cash flows as well 16 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries as the appropriate discount and royalty rates applied to those cash flows to determine fair value. During fiscal 2017 and fiscal 2016 the Company performed a Step 0 analysis and determined that it is not “more likely than not” that the fair values of the indefinite- lived intangibles were less than their carrying amounts. During fiscal 2015, the Company performed the quantita- tive impairment test and determined that the estimated fair value of the Company’s intangibles exceeded their respective carrying value. Future changes in the esti- mates and assumptions above could materially affect the results of our reviews for impairment of intangibles. Income Taxes The Company uses the asset and liability method to account for income taxes. The Company has established deferred tax assets and liabilities for temporary differ- ences between the financial reporting bases and the income tax bases of its assets and liabilities at enacted tax rates expected to be in effect when such assets or liabilities are realized or settled. The Company recog- nizes as a deferred tax asset, the tax benefits associated with losses related to operations. Realization of these deferred tax assets assumes that we will be able to generate sufficient future taxable income so that these assets will be realized. The factors that the Company considers in assessing the likelihood of realization include the forecast of future taxable income and avail- able tax planning strategies that could be implemented to realize the deferred tax assets. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements on a particular tax position are measured based on the largest benefit that has a greater than a 50% likelihood of being realized upon settlement. The amount of unrecognized tax benefits (“UTBs”) is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax law, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. We recognize both accrued interest and penalties, where appropriate, related to UTBs in income tax expense. Assumptions, judgment and the use of estimates are required in determining if the “more likely than not” standard has been met when developing the provision for income taxes. Recent Accounting Pronouncements In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This amended guidance will enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Expanded disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. As we continue to evaluate the impact of this ASU, we have determined that the new standard will impact the following areas: the costs of producing and distributing the Company’s catalogs will be expensed upon shipment, instead of being capitalized and amor- tized in direct proportion to the actual sales; gift card breakage will be estimated based on the historical pattern of gift card redemption, rather than when redemp- tion is considered remote; the Company will defer revenue at the time the Celebrations Reward loyalty points are earned using a relative fair value approach, rather than accruing a liability equal to the incremental cost of fulfilling its obligations. We have further identified the timing of revenue recognition for e-commerce orders (shipping point versus destination) as a potential issue in our analysis, which is not expected to change the total amount of revenue recognized, but could accelerate the timing of when revenue is recognized. We plan to adopt this guidance beginning with the first quarter in the fiscal year ending June 30, 2019 on a retrospective basis with a cumulative adjustment to retained earnings. We are continuing to evaluate the impact that this ASU, and related amendments and interpretive guidance, will have on our consolidated financial statements, including the related disclosures. In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which amends ASC 835-30, “Interest – Imputation of Interest.” In order to simplify the presentation of debt issuance costs, ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, and not recorded as a separate asset. The Company adopted this standard effective July 4, 2016 and applied it retrospectively to all periods presented. The impact of the adoption of the new guidance was to reclassify $3.6 million of deferred financing costs previously included within “Other Assets” to “Long-term debt” in the consolidated balance sheets as of July 3, 2016. In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330).” The pronouncement was issued to simplify the measurement of inventory and changes the measurement from lower of cost or market to lower of cost and net realizable value. ASU 2015-11 is effective for the Company’s fiscal year ending July 1, 2018. The adoption of ASU 2015-11 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations. In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabili- ties.” The pronouncement requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant 17 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries assumptions used to estimate the fair value that is required to be disclosed for financial instruments mea- sured at amortized cost. This guidance will become effective for the Company’s fiscal year ending June 30, 2019. The adoption is not expected to have a significant impact on the Company’s consolidated financial statements. In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key informa- tion about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for the Company’s fiscal year ending June 28, 2020. We are currently evaluating the impact and expect the ASU will have a material impact on our consolidated financial statements, primarily to the consolidated balance sheets and related disclosures. In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” ASU No. 2016-09 affects all entities that issue share-based payment awards to their employees. ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company elected to early adopt the amendments in ASU 2016-09, in fiscal 2017. As a result, stock-based compensation excess tax benefits are reflected in the Consolidated Statements of Income as a component of the provision for income taxes, whereas they were previously recognized in equity. This change resulted in the recognition of excess tax benefits against income tax expenses, rather than additional paid- in capital, of $1.0 million for the year ended July 2, 2017. There was no impact on earnings per share since approximately 700,000 tax benefit shares for the year ended July 2, 2017, previously associated with the APIC pool calculation, are no longer considered in the diluted share computation. Additionally, our Consolidated Statements of Cash Flows now present excess tax benefits as an operating activity. This change has been applied prospectively in accordance with the ASU and prior periods have not been adjusted. Further, the Company has elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The cumulative effect of this change, which was recorded as compensation expense in fiscal 2017, was not material to the financial statements. In addition, this ASU allows entities to withhold an amount up to an employees’ maximum individual statutory tax rate in the relevant jurisdiction, up from the minimum statutory requirement, without resulting in liability classification of the award. We adopted this change on a modified retrospective basis, with no impact to our consolidated financial statements. Finally, this ASU clarified that the cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. This change does not have an impact on the Company’s consolidated financials as it conforms with its current practice. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces a new forward-looking “ex- pected loss” approach, to estimate credit losses on most financial assets and certain other instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. ASU 2016-13 is effective for the Company’s fiscal year ending July 4, 2021, and the guidance is to be applied using the modified-retrospective approach. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements. In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01),” which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. ASU 2017-01 is effective for the Company’s fiscal year ending June 30, 2019, with early adoption permitted, and should be applied prospectively. We do not expect the standard to have a material impact on our consolidated financial statements. In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates step two from the goodwill impairment test. Under ASU 2017- 04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. This guidance is effective for the Company’s fiscal year ending July 4, 2021, with early adoption permitted, and should be applied prospec- tively. We do not expect the standard to have a material impact on our consolidated financial statements. In February 2017, the FASB issued ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets.” This update clarifies the scope of accounting for the derecognition or partial sale of nonfinancial assets to exclude all businesses and nonprofit activities. ASU 2017-05 also provides a defini- tion for in-substance nonfinancial assets and additional guidance on partial sales of nonfinancial assets. This guidance will be effective for the Company’s fiscal year ending June 30, 2019 and may be applied retrospec- tively. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements. In May 2017, the FASB issued ASU No 2017-09, 18 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. An entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. ASU 2017- 09 is effective for the Company’s fiscal year ending June 30, 2019, with early adoption permitted, and should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements. Quantitative and Qualitative Disclosures About Market Risk The Company is exposed to market risk from the effect of interest rate changes and changes in the market values of its investments. Interest Rate Risk The Company’s exposure to market risk for changes in interest rates relates primarily to the Company’s investment of available cash balances and its long-term debt. The Company generally invests its cash and cash equivalents in investment grade corporate and U.S. government securities. Due to the currently low rates of return the Company is receiving on its cash equivalents, the potential for a significant decrease in short-term interest rates is low and, therefore, a further decrease would not have a material impact on the Company’s interest income. Borrowings under the Company’s credit facility bear interest at a variable rate, plus an applicable margin, and therefore expose the Company to market risk for changes in interest rates. The effect of a 50 basis point increase in current interest rates on the Company’s interest expense would be approximately $0.8 million during year ended July 2, 2017. Special Note Regarding Forward-Looking Statements This annual report contains forward-looking state- ments within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements represent the Company’s current expectations or beliefs concerning future events and can generally be identified by the use of statements that include words such as “estimate,” “expects,” “project,” “believe,” “antici- pate,” “intend,” “plan,” “foresee,” “likely,” “will,” or similar words or phrases. These forward-looking statements are subject to risks, uncertainties and other factors, many of which are outside of the Company’s control, which could cause actual results to differ materially from the results expressed or implied in the forward-looking statements, including, among others: the Company’s ability to achieve its guidance for revenue, EBITDA and EPS; its ability to manage the significant seasonality of its business; its ability to integrate the operations of acquired companies; its ability to cost effectively acquire and retain customers; the outcome of contingencies, including legal proceed- ings in the normal course of business; its ability to compete against existing and new competitors; its ability to manage expenses associated with sales and market- ing and necessary general and administrative and technology investments and general consumer sentiment and economic conditions that may affect levels of discretionary customer purchases of the Company’s products. The Company undertakes no obligation to publicly update any of the forward-looking statements, whether as a result of new information, future events or otherwise, made in this annual report or in any of its SEC filings except as may be otherwise stated by the Com- pany. For a more detailed description of these and other risk factors, and a list of definitions of non-GAAP terms, please refer to the Company’s SEC filings including the Company’s Annual Reports on Form 10-K and its Quarterly Reports on Form 10-Q. Consequently, you should not consider any such list to be a complete set of all potential risks and uncertainties. 19 Management’s Discussion and Analysis (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Quarterly Results of Operations The following table provides unaudited quarterly consolidated results of operations for each quarter of fiscal years 2017 and 2016. 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. The Company’s quarterly results may experience seasonal fluctuations – see the Seasonality section in Item 1 of the Company’s Annual Report on Form 10-K for details. Refer above to the Results of Operations section for a discussion of significant events and transactions. 20 Consolidated Balance Sheets 1-800-FLOWERS.COM, Inc. and Subsidiaries (in thousands, except share data) See accompanying Notes to Consolidated Financial Statements. 21 Consolidated Statements of Income 1-800-FLOWERS.COM, Inc. and Subsidiaries (in thousands, except per share data) See accompanying Notes to Consolidated Financial Statements. 22 Consolidated Statements of Comprehensive Income 1-800-FLOWERS.COM, Inc. and Subsidiaries (in thousands) Years Ended See accompanying Notes to Consolidated Financial Statements. 23 Consolidated Statements of Stockholders’ Equity 1-800-FLOWERS.COM, Inc. and Subsidiaries Years ended July 2, 2017, July 3, 2016 and June 28, 2015 (in thousands, except share data) Accumulated Total Common Stock Additional Retained Other 1-800-FLOWERS.COM, Inc. Class A Class B Paid-In Earnings Comprehensive Treasury Stock Stockholders’ Noncontrolling Total Shares Amount Shares Amount Capital (Deficit) Loss Shares Amount Equity Interest Equity Balance at June 29, 2014 38,119,398 $ 381 42,058,594 $ 420 $ 305,510 $ (68,565) $ (46) 16,098,437 $ 54,472 $ 183,228 $ 2,890 $ 186,118 Balance at June 28, 2015 42,875,291 429 39,310,044 393 319,108 (48,278) (371) 17,154,475 (62,832) 208,449 1,807 210,256 Net income Translation adjustment Conversion of Class B stock into Class A stock Stock-based compensation Exercise of stock options Excess tax benefit from stock-based compensation Acquisition of Class A treasury stock –– –– –– –– –– –– –– –– 2,748,550 1,154,173 853,170 27 (2,748,550) –– 12 –– 9 (27) –– –– –– –– –– 5,950 5,533 –– –– –– –– –– –– –– –– 2,115 –– 20,287 –– –– –– –– –– –– –– (325) –– –– –– –– –– Net income Translation adjustment Noncontrolling interest write-off Conversion of Class B stock into Class A stock Stock-based compensation Exercise of stock options Excess tax benefit from –– –– –– –– –– –– –– –– –– –– –– –– 4,047,040 879,863 1,044,255 40 (4,047,040) –– 9 –– 10 (40) –– –– stock-based compensation Acquisition of Class A treasury stock –– –– –– –– –– –– –– –– –– –– –– –– 6,334 3,507 2,400 –– 36,875 –– –– –– –– –– –– –– –– 165 60 –– –– –– –– –– –– –– 1,056,038 (8,360) 2,115 (8,360) –– –– –– –– –– –– –– –– –– –– –– –– –– –– –– –– –– –– –– –– –– –– –– 5,962 5,542 –– 6,343 3,517 –– –– 1,714,550 (15,223) 2,400 (15,223) Balance at July 3, 2016 48,846,449 488 35,263,004 353 331,349 (11,403) (146) 18,869,025 (78,055) 242,586 Net income Translation adjustment Conversion of Class B stock into Class A stock Stock-based compensation Exercise of stock options Acquisition of Class A treasury stock –– –– –– –– –– –– –– –– 1,361,401 965,429 54,500 –– 14 (1,361,401) –– –– –– 10 1 –– (14) –– –– –– –– –– –– 6,092 285 –– –– –– –– –– –– 44,041 –– (41) –– –– –– –– 44,041 (41) –– –– –– –– –– –– –– –– –– –– 1,120,706 (10,735) –– 6,102 286 (10,735) 20,287 (903) 19,384 (325) (180) (505) 36,875 (1,007) 35,868 4 2 165 60 87 (887) 252 (827) –– –– –– –– –– –– 5,962 5,542 2,115 (8,360) –– –– –– –– –– –– –– –– –– –– –– –– –– 6,343 3,517 2,400 (15,223) 242,586 44,041 (41) –– 6,102 286 (10,735) Balance at July 2, 2017 51,227,779 $ 513 33,901,603 $ 339 $ 337,726 $ 32,638 $ (187) 19,989,731 $(88,790) $ 282,239 $ –– $ 282,239 See accompanying Notes to Consolidated Financial Statements. Consolidated Statements of Cash Flows 1-800-FLOWERS.COM, Inc. and Subsidiaries (in thousands) Supplemental Cash Flow Information: - Interest paid amounted to $4.4 million, $5.0 million and $4.3 million, for the years ended July 2, 2017, July 3, 2016 and June 28, 2015, respectively. - The Company paid income taxes of approximately $6.8 million, $13.4 million and $5.1 million, net of tax refunds received, for the years ended July 2, 2017, July 3, 2016 and June 28, 2015, respectively. See accompanying Notes to Consolidated Financial Statements. 25 Notes to Consolidated Financial Statements 1-800-FLOWERS.COM, Inc. and Subsidiaries Note 1. Description of Business 1-800-FLOWERS.COM, Inc. and its subsidiaries (collectively, the “Company”) is a leading provider of gourmet food and floral gifts for all occasions. For the past 40 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 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, Inc. “Gift Shop” also includes gourmet gifts such as premium, gift-quality fruits and other gourmet items from Harry & David® (1-877-322-1200 or www.harryanddavid.com), 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); gift baskets and towers from 1-800-Baskets.com® (www.1800baskets.com); premium English muffins and other breakfast treats from Wolferman’s® (1-800-999- 1910 or www.wolfermans.com); carved fresh fruit arrange- ments from FruitBouquets.com (www.fruitbouquets.com); and top quality steaks and chops from Stock Yards® (www.stockyards.com). Note 2. Significant Accounting Policies Basis of Presentation The consolidated financial statements include the accounts of 1-800-FLOWERS.COM, Inc. and its subsidiar- ies (collectively, the “Company”). All significant intercom- pany accounts and transactions have been eliminated in consolidation. During fiscal 2017, 2016 and 2015 approximately 1%, 1% and 2% respectively, of consoli- dated net revenue came from international sources. Fiscal Year The Company’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to June 30. Fiscal years 2017 and 2015, which ended on July 2, 2017 and June 28, 2015, respectively consisted of 52 weeks. Fiscal year 2016, which ended on July 3, 2016, consisted of 53 weeks. Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assump- tions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of demand deposits with banks, highly liquid money market funds, United States government securities, overnight repur- chase agreements and commercial paper with maturities of three months or less when purchased. 26 Inventories Inventories are valued at the lower of cost or market using the first-in, first-out method of accounting. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation expense is computed using the straight-line method over the assets’ estimated useful lives. Amortization of lease- hold improvements and capital leases is computed using the straight-line method over the shorter of the estimated useful lives and the initial lease terms. The Company capitalizes certain internal and external costs incurred to acquire or develop internal-use software. Capitalized software costs are amortized on a straight-line basis over the estimated useful life of the software. Orchards in production, consisting of direct labor and materials, supervision and other items, are capitalized as part of capital projects in progress – orchards until the orchards produce fruit in commercial quantities. Upon attaining commercial levels of production the capital investments in these orchards are recorded as land improvements. Estimated useful lives are periodically reviewed, and where appropriate, changes are made prospectively. The Company’s property plant and equipment is depreci- ated using the following estimated lives: 10 - 40 Building and building improvements (years) Leasehold improvements (years) 3 - 10 Furniture, fixtures and production equipment (years) 3 - 10 3 - 7 Software (years) 15 - 35 Orchards in production and land improvements Property, plant and equipment are reviewed for impairment whenever changes in circumstances or events may indicate that the carrying amounts are not recoverable. Goodwill Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in each business combination, with the carrying value of the Company’s goodwill allocated to its reporting units, in accordance with the acquisition method of accounting. Goodwill is not amortized, but it is subject to an annual assessment for impairment, which the Company performs during the fourth quarter, or more frequently if events occur or circumstances change such that it is more likely than not that an impairment may exist. The Company tests goodwill for impairment at the reporting unit level. The Company identifies its reporting units by assessing whether the components of its operating segments constitute businesses for which discrete financial information is available and management of each reporting unit regularly reviews the operating results of those components. In applying the goodwill impairment test, the Company has the option to perform a qualitative test (also known as “Step 0”) or a two-step quantitative test (consist- ing of “Step 1” and “Step 2”). Under the Step 0 test, the Company first assesses qualitative factors to determine Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries whether it is more likely than not that the fair value of the reporting units is less than its carrying value. Qualitative factors may include, but are not limited to economic conditions, industry and market considerations, cost factors, overall financial performance of the reporting unit and other entity and reporting unit specific events. If after assessing these qualitative factors, the Company determines it is “more-likely-than-not” that the fair value of the reporting unit is less than the carrying value, then performing the two-step quantitative test is necessary. The first step (“Step 1”) of the two-step quantitative test requires comparison of the fair value of each of the reporting units to the respective carrying value. If the carrying value of the reporting unit is less than the fair value, no impairment exists and the second step (“Step 2”) is not performed. If the carrying value of the reporting unit is higher than the fair value, Step 2 must be per- formed to compute the amount of the goodwill impair- ment, if any. In Step 2, the impairment is computed by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized for the excess. The Company generally estimates the fair value of a reporting unit using an equal weighting of the income and market approaches. The Company uses industry accepted valuation models and set criteria that are reviewed and approved by various levels of management and, in certain instances, the Company engages third- party valuation specialists. Under the income approach, the Company uses a discounted cash flow methodology which requires management to make significant esti- mates and assumptions related to forecasted revenues, gross profit margins, operating income margins, working capital cash flow, perpetual growth rates, and long-term discount rates, among others. For the market approach, the Company uses the guideline public company method. Under this method the Company utilizes information from comparable publicly traded companies with similar operating and investment characteristics as the reporting units, to create valuation multiples that are applied to the operating performance of the reporting unit being tested, in order to obtain their respective fair values. The Com- pany also reconciles the aggregate fair values of its reporting units determined in the first step (as described above) to its current market capitalization, allowing for a reasonable control premium. During fiscal 2017 and fiscal 2016 the Company performed a Step 0 analysis and determined that it was not “more likely than not” that the fair values of the reporting units were less than their carrying amounts. During fiscal 2015, the Company performed the two-step quantitative impairment test and determined that the estimated fair value of the Company’s reporting units significantly exceeded their respective carrying values (including goodwill allocated to each respective reporting unit). Future changes in the estimates and assumptions above could materially affect the results of our reviews for impairment of goodwill. Other Intangibles, net Other intangibles consist of definite-lived intangible assets (such as investment in licenses, customer lists, and others) and indefinite-lived intangible assets (such as acquired trade names and trademarks). The cost of definite-lived intangible assets is amortized to reflect the pattern of economic benefits consumed, over the esti- mated periods benefited, ranging from 3 to 16 years, while indefinite-lived intangible assets are not amortized. Definite-lived intangibles are reviewed for impairment whenever changes in circumstances or events may indicate that the carrying amounts are not recoverable. When such events or changes in circumstances occur, a recoverability test is performed comparing projected undiscounted cash flows from the use and eventual disposition of an asset or asset group to its carrying value. If the projected undiscounted cash flows are less than the carrying value, then an impairment charge would be recorded for the excess of the carrying value over the fair value, which is determined by discounting future cash flows. The Company tests indefinite-lived intangible assets for impairment at least annually, during the fourth quarter, or whenever changes in circumstances or events may indicate that the carrying amounts are not recoverable. In applying the impairment test, the Company has the option to perform a qualitative test (also known as “Step 0”) or a quantitative test. Under the Step 0 test, the Company assesses qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. Qualitative factors may include, but are not limited to economic conditions, industry and market considerations, cost factors, financial performance, legal and other entity and asset specific events. If after assess- ing these qualitative factors, the Company determines it is “more-likely-than-not” that the indefinite-lived intangible asset is impaired, then performing the quantitative test is necessary. The quantitative impairment test for indefinite- lived intangible assets encompasses calculating a fair value of an indefinite-lived intangible asset and compar- ing the fair value to its carrying value. If the carrying value exceeds the fair value, impairment is recognized for the difference. To determine fair value of other indefinite-lived intangible assets, the Company uses an income ap- proach, the relief-from-royalty method. This method assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use the comparable asset. Other indefinite-lived intan- gible assets’ fair values require significant judgments in determining both the assets’ estimated cash flows as well as the appropriate discount and royalty rates applied to those cash flows to determine fair value. During fiscal 2017 and fiscal 2016 the Company performed a Step 0 analysis and determined that it is not “more likely than not” that the fair values of the indefinite- lived intangibles were less than their carrying amounts. During fiscal 2015, the Company performed the quantita- tive impairment test and determined that the estimated fair value of the Company’s intangibles exceeded their respective carrying value. Future changes in the esti- mates and assumptions above could materially affect the results of our reviews for impairment of intangibles. 27 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Business Combinations The Company accounts for business combinations in accordance with ASC Topic 805 which requires, among other things, the acquiring entity in a business combina- tion to recognize the fair value of all the assets acquired and liabilities assumed; the recognition of acquisition- related costs in the consolidated results of operations; the recognition of restructuring costs in the consolidated results of operations for which the acquirer becomes obligated after the acquisition date; and contingent purchase consideration to be recognized at their fair values on the acquisition date with subsequent adjust- ments recognized in the consolidated results of opera- tions. The fair values assigned to identifiable intangible assets acquired are determined primarily by using an income approach which is based on assumptions and estimates made by management. Significant assumptions utilized in the income approach are based on company specific information and projections which are not observable in the market and are therefore considered Level 3 measurements. The excess of the purchase price over the fair value of the identified assets and liabilities is recorded as goodwill. Operating results of the acquired entity are reflected in the Company’s consolidated financial statements from date of acquisition. Deferred Catalog Costs The Company capitalizes the costs of producing and distributing its catalogs. These costs are amortized in direct proportion to actual sales from the corresponding catalogs over a period not to exceed 12 months. Included within prepaid and other current assets was $2.7 million and $3.0million at July 2, 2017 and July 3, 2016 respec- tively, relating to prepaid catalog expenses. Investments The Company has certain investments in non-market- able equity instruments of private companies. The Com- pany accounts for these investments using the equity method if they provide the Company the ability to exercise significant influence, but not control, over the investee. Significant influence is generally deemed to exist if the Company has an ownership interest in the voting stock of the investee between 20% and 50%, although other factors, such as representation on the investee’s Board of Directors, are considered in determining whether the equity method is appropriate. The Company records equity method investments initially at cost, and adjusts the carrying amount to reflect the Company’s share of the earnings or losses of the investee. The Company’s equity method investments consist of a 30.0% interest in Flores Online, a Sao Paulo, Brazil based internet floral and gift retailer, that the Company made on May 31, 2012. The book value of this investment was $1.0 million as of July 2, 2017 and $1.1 million as of July 3, 2016, and is included in the “Other assets” line item within the Company’s consolidated balance sheets. The Company’s equity in the net loss of Flores Online for both the years ended July 2, 2017 and July 3, 2016 was $0.1 million. During the quarter ended September 27, 2015, the Company determined that the fair value of its investment in Flores Online was below its carrying value and that this decline was other-than-temporary. As a 28 result, the Company recorded an impairment charge of $1.7 million, which is included within the “Other (income) expense, net” line item in the Company’s consolidated statement of income in fiscal 2016. Investments in non-marketable equity instruments of private companies, where the Company does not possess the ability to exercise significant influence, are accounted for under the cost method. Cost method investments are originally recorded at cost, and are included within the “Other assets” line item within the Company’s consolidated balance sheets. The aggregate carrying amount of the Company’s cost method investments was $1.7 million as of July 2, 2017 (including a $1.5 million investment in Euroflorist – see Note 4. for details) and $1.7 million as of July 3, 2016. During the year ended July 3, 2016, the Company determined that the fair value of one of its cost method investments was below its carrying value and that the decline was other-than-temporary. As a result the Company recorded an impairment charge of $0.5 million, which is included within the “Other (income) expense, net” line items in the Company’s consolidated statements of income in fiscal 2016. The Company also holds certain trading securities associated with its Non-Qualified Deferred Compensation Plan (“NQDC Plan”). These investments are measured using quoted market prices at the reporting date and are included in Other assets in the condensed consolidated balance sheets (see Note 10. for details). Each reporting period, the Company uses available qualitative and quantitative information to evaluate its investments for impairment. When a decline in fair value, if any, is determined to be other-than-temporary, an impairment charge is recorded in the consolidated statement of operations. Concentration of Credit Risk Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company maintains cash and cash equivalents with high quality financial institutions. Concentration of credit risk with respect to accounts receivable is limited due to the Company’s large number of customers and their dispersion throughout the United States, and the fact that a substantial portion of receiv- ables are related to balances owed by major credit card companies. Allowances relating to consumer, corporate and franchise accounts receivable ($1.8 million at July 2, 2017 and $2.1 million at July 3, 2016) have been recorded based upon previous experience and management’s evaluation. Revenue Recognition Net revenues are generated by e-commerce opera- tions from the Company’s online and telephonic sales channels as well as other operations (retail/wholesale) and primarily consist of the selling price of merchandise, service or outbound shipping charges, net of discounts, returns and credits. Net revenues are recognized primarily upon product delivery and do not include sales tax. Net revenues generated by the Company’s BloomNet Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Wire Service operations include membership fees as well as other products and service offerings to florists. Member- ship fees are recognized monthly in the period earned, and products sales are recognized upon product shipment with shipping terms primarily FOB shipping point. Cost of Revenues Cost of revenues consists primarily of florist fulfillment costs (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 includes labor and facility costs related to manufacturing and production operations. Marketing and Sales Marketing and sales expense consists primarily of advertising expenses, catalog costs, online portal and search expenses, retail store and fulfillment operations (other than costs included in cost of revenues), and customer service center expenses, as well as the operat- ing expenses of the Company’s departments engaged in marketing, selling and merchandising activities. The Company expenses all advertising costs, with the exception of catalog costs (see Deferred Catalog Costs above), at the time the advertisement is first shown. Advertising expense was $137.5 million, $133.1 million and $130.6 million for the years ended July 2, 2017, July 3, 2016 and June 28, 2015, respectively. Technology and Development Technology and development expense consists primarily of payroll and operating expenses of the Company’s information technology group, costs associated with its websites, including hosting, content development and maintenance and support costs related to the Company’s order entry, customer service, fulfillment and database systems. Costs associated with the acquisi- tion or development of software for internal use are capitalized if the software is expected to have a useful life beyond one year and amortized over the software’s useful life, typically three to seven years. Costs associated with repair maintenance or the development of website content are expensed as incurred, as the useful lives of such software modifications are less than one year. Stock-Based Compensation The Company records compensation expense associ- ated with restricted stock awards and other forms of equity compensation based upon the fair value of stock-based awards as measured at the grant date. The cost associated with share-based awards that are subject solely to time- based vesting requirements is recognized over the awards’ service period for the entire award on a straight-line basis. The cost associated with performance-based equity awards is recognized for each tranche over the service period, based on an assessment of the likelihood that the appli- cable performance goals will be achieved. Derivatives and hedging The Company does not enter into derivative transac- tions for trading purposes, but rather, on occasion to manage its exposure to interest rate fluctuations. When entering into these transactions, the Company has managed its floating rate debt using interest rate swaps in order to reduce its exposure to the impact of changing interest rates on its consolidated results of operations and future cash outflows for interest. The Company did not have any open derivative positions at July 2, 2017 and July 3, 2016. Income Taxes The Company uses the asset and liability method to account for income taxes. The Company has established deferred tax assets and liabilities for temporary differ- ences between the financial reporting bases and the income tax bases of its assets and liabilities at enacted tax rates expected to be in effect when such assets or liabilities are realized or settled. The Company recog- nizes as a deferred tax asset, the tax benefits associated with losses related to operations. Realization of these deferred tax assets assumes that we will be able to generate sufficient future taxable income so that these assets will be realized. The factors that the Company considers in assessing the likelihood of realization include the forecast of future taxable income and avail- able tax planning strategies that could be implemented to realize the deferred tax assets. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements on a particular tax position are measured based on the largest benefit that has a greater than a 50% likelihood of being realized upon settlement. The amount of unrecognized tax benefits (“UTBs”) is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax law, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. We recognize both accrued interest and penalties, where appropriate, related to UTBs in income tax expense. Assumptions, judgment and the use of estimates are required in determining if the “more likely than not” standard has been met when developing the provision for income taxes. Net Income Per Share Basic net income per common share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common and dilutive common equivalent shares (consist- ing primarily of employee stock options and unvested restricted stock awards) outstanding during the period. Recent Accounting Pronouncements In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” This amended guidance will enhance the comparability of revenue recognition practices and will be applied to all contracts with customers. Expanded disclosures related to the nature, amount, timing, and uncertainty of revenue that is recognized are requirements under the amended guidance. As we continue to evaluate the impact of this ASU, we have determined that the new standard will 29 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries impact the following areas: the costs of producing and distributing the Company’s catalogs will be expensed upon shipment, instead of being capitalized and amor- tized in direct proportion to the actual sales; gift card breakage will be estimated based on the historical pattern of gift card redemption, rather than when redemption is considered remote; the Company will defer revenue at the time the Celebrations Reward loyalty points are earned using a relative fair value approach, rather than accruing a liability equal to the incremental cost of fulfilling its obligations. We have further identified the timing of revenue recognition for e-commerce orders (shipping point versus destination) as a potential issue in our analysis, which is not expected to change the total amount of revenue recognized, but could accelerate the timing of when revenue is recognized. We plan to adopt this guidance beginning with the first quarter in the fiscal year ending June 30, 2019 on a retrospective basis with a cumulative adjustment to retained earnings. We are continuing to evaluate the impact that this ASU, and related amendments and interpretive guidance, will have on our consolidated financial statements, including the related disclosures. In April 2015, the FASB issued ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs,” which amends ASC 835-30, “Interest – Imputation of Interest.” In order to simplify the presentation of debt issuance costs, ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, and not recorded as a separate asset. The Company adopted this standard effective July 4, 2016 and applied it retrospectively to all periods presented. The impact of the adoption of the new guidance was to reclassify $3.6 million of deferred financing costs previously included within “Other Assets” to “Long-term debt” in the consolidated balance sheets as of July 3, 2016. In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330).” The pronouncement was issued to simplify the measurement of inventory and changes the measurement from lower of cost or market to lower of cost and net realizable value. ASU 2015-11 is effective for the Company’s fiscal year ending July 1, 2018. The adoption of ASU 2015-11 is not expected to have a significant impact on the Company’s consolidated financial position or results of operations. In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabili- ties.” The pronouncement requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. This guidance will become effective for the Company’s fiscal year ending June 30, 2019. The adoption is not expected to have a significant impact on the Company’s consolidated financial statements. In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under this guidance, an entity is required to recognize right-of-use assets and lease liabilities on its balance sheet and disclose key informa- tion about leasing arrangements. This guidance offers specific accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This guidance is effective for the Company’s fiscal year ending June 28, 2020. We are currently evaluating the impact and expect the ASU will have a material impact on our consolidated financial statements, primarily to the consolidated balance sheets and related disclosures. In March 2016, the FASB issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting.” ASU No. 2016-09 affects all entities that issue share-based payment awards to their employees. ASU No. 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company elected to early adopt the amendments in ASU 2016-09, in fiscal 2017. As a result, stock-based compensation excess tax benefits are reflected in the Consolidated Statements of Income as a component of the provision for income taxes, whereas they were previously recognized in equity. This change resulted in the recognition of excess tax benefits against income tax expenses, rather than additional paid- in capital, of $1.0 million for the year ended July 2, 2017. There was no impact on earnings per share since approximately 700,000 tax benefit shares for the year ended July 2, 2017, previously associated with the APIC pool calculation, are no longer considered in the diluted share computation. Additionally, our Consolidated Statements of Cash Flows now present excess tax benefits as an operating activity. This change has been applied prospectively in accordance with the ASU and prior periods have not been adjusted. Further, the Company has elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The cumulative effect of this change, which was recorded as compensation expense in fiscal 2017, was not material to the financial statements. In addition, this ASU allows entities to withhold an amount up to an employees’ maximum individual statutory tax rate in the relevant jurisdiction, up from the minimum statutory requirement, without resulting in liability classification of the award. We adopted this change on a modified retrospective basis, with no impact to our consolidated financial 30 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries statements. Finally, this ASU clarified that the cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. This change does not have an impact on the Company’s consolidated financials as it conforms with its current practice. In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Mea- surement of Credit Losses on Financial Instruments.” ASU 2016-13 introduces a new forward-looking “expected loss” approach, to estimate credit losses on most financial assets and certain other instruments, including trade receivables. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands the disclo- sure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. ASU 016- 13 is effective for the Company’s fiscal year ending July 4, 2021, and the guidance is to be applied using the modi- fied-retrospective approach. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements. In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business (ASU 2017-01),” which revises the definition of a business and provides new guidance in evaluating when a set of transferred assets and activities is a business. ASU 2017-01 is effective for the Company’s fiscal year ending June 30, 2019, with early adoption permitted, and should be applied prospectively. We do not expect the standard to have a material impact on our consolidated financial statements. In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates step two from the goodwill impairment test. Under ASU 2017- 04, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value up to the amount of goodwill allocated to that reporting unit. This guidance is effective for the Company’s fiscal year ending July 4, 2021, with early adoption permitted, and should be applied prospec- tively. We do not expect the standard to have a material impact on our consolidated financial statements. In February 2017, the FASB issued ASU No. 2017-05, “Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets.” This update clarifies the scope of accounting for the derecognition or partial sale of nonfinancial assets to exclude all businesses and nonprofit activities. ASU 2017-05 also provides a definition for in-substance nonfinancial assets and additional guidance on partial sales of nonfinancial assets. This guidance will be effective for the Company’s fiscal year ending June 30, 2019 and may be applied retrospectively. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements. In May 2017, the FASB issued ASU No 2017-09, “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.” This ASU provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. An entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. ASU 2017- 09 is effective for the Company’s fiscal year ending June 30, 2019, with early adoption permitted, and should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the potential impact of adopting this guidance on our consolidated financial statements. Reclassifications Certain balances in the prior fiscal years have been reclassified to conform to the presentation in the current fiscal year. See “Recent Accounting Pronouncements” above regarding the impact of our adoption of ASU No. 2015-13. 31 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Note 3 – Net Income Per Common Share from Continuing Operations The following table sets forth the computation of basic and diluted net income per common share from continuing operations: Years Ended July 2, July 3, June 28, 2017 2016 2015 (in thousands, except per share data) Numerator: Net income $44,041 $35,868 $19,384 Less: Net loss attributable to noncontrolling interest Net income attributable to –– (1,007) (903) 1-800-FLOWERS.COM, Inc. $44,041 $36,875 $20,287 Denominator: Weighted average shares outstanding 65,191 64,896 64,976 Effect of dilutive securities: Employee stock options (1) Employee restricted stock awards Total effect of dilutive securities Adjusted weighted-average shares and assumed 1,519 1,294 1,561 1,025 893 1,065 2,544 2,187 2,626 conversions 67,735 67,083 67,602 Net income per common share from continuing operations attributable to 1-800-FLOWERS.COM, Inc. Basic $ 0.68 $ 0.57 $ 0.31 Diluted $ 0.65 $ 0.55 $ 0.30 Note (1): The effect of options to purchase 0.0 million, 0.1 million and 0.1 million shares for the years ended July 2, 2017, July 3, 2016 and June 28, 2015, respectively, were excluded from the calculation of net income per share on a diluted basis as their effect is anti-dilutive. Note 4. Acquisitions and Dispositions Disposition of Fannie May Confections Brands, Inc. On March 15, 2017, the Company and Ferrero Interna- tional S.A., a Luxembourg corporation (“Ferrero”), entered into a Stock Purchase Agreement (the “Purchase Agree- ment”) pursuant to which Ferrero agreed to purchase from the Company all of the outstanding equity of Fannie May Confections Brands, Inc., including its subsidiaries, Fannie May Confections, Inc. and Harry London Candies, Inc. (“Fannie May”) for total consideration of $115.0 million in cash, subject to seasonal working capital adjustment. At that time, the Company determined that the Fannie May business met the held for sale criteria, as prescribed by FASB ASC 360-10-45-9, but did not meet the criteria to qualify as a discontinued operation. On May 30, 2017, the Company completed the disposition of Fannie May, and in August 2017, the working capital adjustment was finalized, resulting in an $11.4 million reduction to the purchase price. The resulting gain on sale, in the amount of $14.6 million, is included within “Other (income) expense, net” in the Company’s consolidated statements of income for the fiscal year 2017. In connection with the working capital adjustment of $11.4 million, the Company has an $8.5 million payable to Ferrero, included in the“Accrued expenses” line item in the Company’s consolidated balance sheet as of July 2, 2017. Per FASB ASC 350-20-40, when a portion of reporting unit that constitutes a business is to be disposed of, goodwill associated with that business shall be included in the carrying amount of the business in determining the gain or loss on disposal. The amount of goodwill to be included in that carrying amount shall be based on the relative fair values of the business to be disposed of and the portion of the reporting unit that will be retained. Fannie May represented a business, as defined by FASB, and was included in the Company’s Gourmet Food & Gift Baskets reporting unit. As a result, we allocated $15.1 million of goodwill to the Fannie May business based on the relative fair value of Fannie May to the Gourmet Food & Gift Baskets reporting unit. The Company estimated the fair value of the Gourmet Food & Gift Baskets reporting unit in a manner consistent with its significant accounting policy for goodwill, described in Note 1 above. The Company and Ferrero also entered into a transition services agreement whereby the Company will provide certain post-closing services to Ferrero and Fannie May for a period of approximately 18 months, related to the business of Fannie May, and a commercial agreement with respect to the distribution of certain Ferrero and Fannie May products. Operating results of Fannie May are reflected in the Company’s consolidated financial statements through May 30, 2017, the date of its disposition, within its Gourmet Food & Gift Baskets segment. During fiscal 2017, Fannie May contributed net revenues of $85.6 million. Operating and pre-tax income during such period were not material. 32 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Acquisition of Harry & David On September 30, 2014, the Company completed its acquisition of Harry & David, a leading multi-channel specialty retailer and producer of branded premium gift-quality fruit, gourmet food products and other gifts marketed under the Harry & David brands. The transac- tion, for a purchase price of $142.5 million, includes the Harry & David’s brands and websites as well as its headquarters, manufacturing and distribution facilities and orchards in Medford, Oregon, a warehouse and distribution facility in Hebron, Ohio and 48 Harry & David retail stores located throughout the country. During the quarter ended June 28, 2015, the Com- pany finalized the allocation of the purchase price to the identifiable assets acquired and liabilities assumed based on its estimates of their fair values on the acquisi- tion date. The determination of the fair values of the acquired assets and assumed liabilities (and the related determination of estimated lives of depreciable tangible and identifiable intangible assets) requires significant judgment. The estimates and assumptions include the projected timing and amount of future cash flows and discount rates reflecting risk inherent in the future cash flows. Of the acquired intangible assets, $5.2 million was assigned to customer lists, which are being amortized over the estimated remaining lives of between 4 to 11 years, $35.5 million was assigned to trademarks, $1.1 million was assigned to leasehold positions and $16.0 million was assigned to goodwill, which is not expected to be deductible for tax purposes. The goodwill recognized in conjunction with our acquisition of Harry & David is primarily related to synergistic value created in terms of both operating costs and revenue growth opportunities, enhanced financial and operational scale, and other strategic benefits. It also includes certain other intangible assets that do not qualify for separate recognition, such as an assembled workforce. The following table summarizes the final allocation of the purchase price to the estimated fair values of assets acquired and liabilities assumed at the date of the acquisition: Harry & David Final Purchase Price Allocation (in thousands) Current Assets Intangible Assets Goodwill Property, plant and equipment Other assets Total assets acquired Current liabilities, including short-term debt Deferred tax liabilities Other liabilities assumed Total liabilities assumed Net assets acquired $126,268 41,827 16,042 105,079 (131) 289,085 104,513 42,048 24 146,585 $142,500 The estimated fair value of the acquired work in process and finished goods inventory was determined 33 utilizing the income approach. The income approach estimates the fair value of the inventory based on the net retail value of the inventory less operating expenses and a reasonable profit allowance. Raw materials inventory was valued at book value, as there have not been any significant price fluctuations or other events that would materially change the cost to replace the raw materials. The estimated fair value of the deferred revenue was determined based on the costs to perform the remaining services and/or satisfy the Company’s remaining obliga- tions, plus a reasonable profit for those activities. These remaining costs exclude sales and marketing expenses since the Deferred Revenue has already been “sold,” and no additional sales and marketing expenses will be incurred. The reasonable profit to be earned on the deferred revenue was estimated based on the profit mark-up that the Company earns on similar services. The estimated fair value of property, plant and equipment was determined utilizing a combination of the cost, sales comparison, market, and excess earnings method approaches, as follows: Under the cost approach a replacement cost of the asset is first determined based on replacing the real property with assets of equal utility and functionality, developed based on both the indirect and the direct cost methods. The indirect cost method includes multiplying the assets’ historical costs by industry specific inflationary trend factors to yield an estimated replacement cost. In applying this method, all direct and indirect costs including tax, freight, installation, engineering and other associated soft costs were considered. The direct cost method includes obtaining a current replacement cost estimate from the Company and equipment dealers, which includes all applicable direct and indirect costs. An appropriate depreciation allowance is then applied to the replacement cost based on the effective age of the assets relative to the expected normal useful lives of the assets, condition of the assets, and the planned future utilization of the assets. The determination of fair value also includes considerations of functional obsolescence and economic obsolescence, where applicable. The sales comparison approach was considered for certain real estate property. Under the sales comparison approach, an estimate of fair value is determined by comparing the property being valued to similar properties that have been sold within a reasonable period from the valuation date, applying appropriate units of comparison. The market approach was considered for certain assets with active secondary markets including agricul- tural equipment, automobiles, computer equipment, and general equipment, mobile equipment, packaging machinery and semi-tractors. Under the market approach market, comparables for the assets are obtained from equipment dealers, resellers, industry databases, and published price guides. The market comparables are then adjusted to the subject assets based on age, condition or type of transaction. All applicable direct and indirect costs are also considered and reflected in the final fair value determination. Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Disposition of Colonial Gifts Limited (“iFlorist”) During October 2015, the Company completed the sale of substantially all of the assets of iFlorist to Euroflorist AB (“Euroflorist”), a pan-European floral and gifting company headquartered in Malmo, Sweden. As consideration for the assets sold, the Company received an investment in Euroflorist with a fair value on the date of sale of approximately $1.5 million. (The Company will account for this investment using the cost method as it does not possess the ability to exercise significant influence over Euroflorist.). The Company recorded a loss on the sale in the amount of $2.1 million which is included within “Other (income) expense, net” in the condensed consolidated statements of operations. Note 5. Inventory The Company’s inventory, stated at cost, which is not in excess of market, includes purchased and manufactured finished goods for sale, packaging supplies, crops, raw material ingredients for manufac- tured products and associated manufacturing labor and is classified as follows: July 2, July 3, 2017 2016 (in thousands) Finished goods $ 34,476 $ 44,264 24,573 Work-in-process Raw materials 34,491 Total Inventory $75,862 $103,328 11,933 29,453 The fair value of orchards in production was deter- mined based on the excess earnings method under the income approach. This valuation approach assumed that the orchards’ production could be sold independently through a wholesale market rather than Harry & David’s retail channel. The excess earnings method required calculating future crop revenue as determined by multiplying the future crop volume in tons to be produced by the projected price per ton based on the USDA “Agricultural Prices” report released January 31, 2015 by the National Agricultural Statistics Services. Appropri- ate expenses were deducted from the sales attributable to the orchards and economic rents were charged for the return on contributory assets. The after-tax cash flows attributable to the asset were discounted back to their net present value at an appropriate rate of return and summed to calculate the value of the orchards. The estimated fair value of the acquired trademarks was determined using the relief from royalty method, which is a risk-adjusted discounted cash flow approach. The relief from royalty method values an intangible asset by estimating the royalties saved through ownership of the asset. The relief from royalty method requires identify- ing the future revenue that would be generated by the trademark, multiplying it by a royalty rate deemed to be avoided through ownership of the asset and discounting the projected royalty savings amounts back to the acquisition date. The royalty rate used in the valuation was based on a consideration of market rates for similar categories of assets. The discount rate used in the valuation was based on the Company’s weighted average cost of capital, the riskiness of the earnings stream association with the trademarks and the overall composition of the acquired assets. The estimated fair value of the acquired customer lists was determined using the excess earnings method under the income approach. This method requires identifying the future revenue that would be generated by existing customers at the time of the acquisition, considering an appropriate attrition rate based on the historical experi- ence of the Company. Appropriate expenses are then deducted from the revenues and economic rents are charged for the return on contributory assets. The after-tax cash flows attributable to the asset are discounted back to their net present value at an appropriate intangible asset rate of return and summed to calculate the value of the customer lists. Operating results of Harry & David are reflected in the Company’s consolidated financial statements from the date of acquisition, within its Gourmet Food & Gift Baskets segment. Harry & David contributed net revenues of $359.7 million and operating income of approximately $24.6 million from September 30, 2014 through June 28, 2015. These amounts are not necessarily indicative of the results of operations that Harry & David would have realized had it continued to operate as a stand-alone company during the period presented due to integration activities since the acquisition date, and due to costs that are now reflected in the Company’s unallocated corpo- rate costs which are not allocated to Harry & David. 34 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Note 6. Goodwill and Intangible Assets The following table presents goodwill by segment and the related change in the net carrying amount: BloomNet Gourmet Consumer Wire Food & Floral Service Gift Baskets Total Balance at June 28, 2015 Other Balance at July 3, 2016 Sale of Fannie May Balance at July 2, 2017 $ 17,582 (141) $ 17,441 –– $ 17,441 $ $ $ –– –– –– –– –– $ 59,515 711 $ 60,226 (15,077) 45,149 $ $ 77,097 570 $ 77,667 (15,077) $ 62,590 There were no goodwill impairment charges in any segment during the years ended July 2, 2017, July 3, 2016 and June 28, 2015. The Company’s other intangible assets consist of the following: July 2, July 3, 2017 2016 Amortization Gross Gross Period Carrying Accumulated Carrying Accumulated (years) Amount Amortization Net Amount Amortization Net (in thousands) Intangible assets with determinable lives Investment in licenses 14-16 years Customer lists 3-10 years Other 5-14 years $ 7,420 $ 5,937 8,227 2,045 12,184 2.946 $ 1,483 3,957 901 $ 7,420 $ 5,832 $ 1,588 5,184 967 21,144 3,665 15,960 2,698 Total intangible assets with determinable lives Trademarks with indefinite lives Total identifiable intangible assets 22,550 16,209 6,341 32,229 24,490 7,739 54,749 –– 54,749 71,261 –– 71,261 $77,299 $16,209 $61,090 $103,490 $24,490 $79,000 Intangible assets with determinable lives are reviewed for impairment whenever events or changes in circum- stances indicate that the carrying amount of an asset or asset group may not be recoverable. No material impairments were recognized for the years ended July 2, 2017, July 3, 2016 and June 28, 2015. The amortization of intangible assets for the years ended July 2, 2017, July 3, 2016 and June 28, 2015 was $1.4 million, $1.9 million and $2.1 million, respectively. Future estimated amortization expense is as follows: 2018 – $1.3 million, 2019 - $0.7 million, 2020 - $0.6 million, 2021 - $0.6 million, 2022 - $0.5 million, and thereafter - $2.6 million. 35 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Note 7. Property, Plant and Equipment Note 9. Long-Term Debt 47,293 72,912 Less: current maturities of July 2, July 3, 2017 2016 (in thousands) Land Orchards in production and land improvements Building and building improvements Leasehold improvements Production equipment and furniture and fixtures Computer and telecommunication equipment Software Capital projects in progress - orchards Property, plant and equipment, gross Accumulated depreciation and amortization Property, plant and equipment, net $ 30,789 $ 30,789 9,703 56,791 11,950 9,483 54,950 21,584 45,026 119,177 52,737 136,333 9,971 8,513 330,700 387,301 (169,319) (215,939) $161,381 $171,362 Depreciation expense for the years ended July 2, 2017, July 3, 2016 and June 28, 2015 was $32.0 million, $30.5 million and $27.0 million, respectively. Note 8. Accrued Expenses Accrued expenses consisted of the following: July 2, July 3, 2017 2016 (in thousands) Payroll and employee benefits Deferred revenue Accrued marketing expenses Gift card liability Fannie May working capital adjustment Accrued florist payout Other Accrued Expenses $22,767 $25,892 10,366 8,071 8,309 13,865 11,974 8,835 8,500 6,576 17,689 –– 6,746 6,682 $90,206 $66,066 The Company’s current and long-term debt consists of the following: July 2, July 3, 2017 2016 (in thousands) Revolver (1) Term Loan (1) Deferred Financing Costs Total debt $ $ –– –– 112,125 117,563 (3,560) (3,573) 113,990 108,565 long-term debt Long-term debt 7,188 $101,377 19,594 $ 94,396 (1) On December 23, 2016, the Company entered into an Amended and Restated Credit Agreement (the “2016 Amended Credit Agreement”) with JPMorgan Chase Bank as administrative agent, and a group of lenders. The 2016 Amended Credit Agreement amended and restated the Company’s credit agree- ment dated as of September 30, 2014 to, among other things, extend the maturity date of the $115.0 million outstanding term loan (“Term Loan”) and the revolving credit facility (the “Revolver”) by approximately two years to December 23, 2021. The Term Loan is payable in 19 quarterly installments of principal and interest beginning on April 2, 2017, with escalating principal payments, at the rate of 5% in year one, 7.5% in year two, 10% in year three, 12.5% in year four, and 15% in year five, with the remaining balance of $61.8 million due upon maturity. The Revolver, in the aggregate amount of $200 million, subject to seasonal reduction to an aggregate amount of $100 million for the period from January 1 through August 1, may be used for working capital and general corporate purposes, subject to certain restrictions. For each borrowing under the 2016 Amended Credit Agreement, the Company may elect that such borrowing bear interest at an annual rate equal to either: (1) a base rate plus an applicable margin varying from 0.75% to 1.5%, based on the Company’s consolidated leverage ratio, where the base rate is the highest of (a) the prime rate, (b) the highest of the federal funds rate and the overnight bank funding rate as published by the New York Fed, plus 0.5% and (c) an adjusted LIBO rate, plus 1% or (2) an adjusted LIBO rate plus an applicable margin varying from 1.75% to 2.5%, based on the Company’s consolidated leverage ratio. The 2016 Amended Credit Agreement requires that while any borrowings are outstanding the Company comply with certain financial covenants and affirmative covenants as well as certain negative covenants, that subject to certain exceptions, limit the Company’s ability to, among other things, incur additional indebtedness, make certain investments and make certain restricted payments. The Company was in compliance with these covenants as of July 2, 2017. The 2016 Amended Credit Agree- ment is secured by substantially all of the assets of the Company and the Subsidiary Guarantors. Future principal payments under the term loan are as follows: $7.2 million – fiscal 2018, $10.1 million – fiscal 2019, $12.9 million – fiscal 2020, $15.8 million - fiscal 2021, and $66.1 million thereafter. 36 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Note 10. Fair Value Measurements Cash and cash equivalents, trade and other receiv- ables, accounts payable and accrued expenses are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short- term nature of these instruments. Although no trading market exists, the Company believes that the carrying amount of its debt approximates fair value due to its variable nature. The Company’s investments in non- marketable equity instruments of private companies are carried at cost and are periodically assessed for other-than-temporary impairment, when an event or circumstances indicate that an other-than-temporary decline in value may have occurred. The Company’s remaining financial assets and liabilities are measured and recorded at fair value (see table below). The Company’s non-financial assets, such as definite lived intangible assets and property, plant and equipment, are recorded at cost and are assessed for impairment when an event or circumstance indicates that an other- than-temporary decline in value may have occurred. Goodwill and indefinite lived intangibles are tested for impairment annually, or more frequently if events occur or circumstances change such that it is more likely than not that an impairment may exist, as required under the accounting standards. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability, in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants at the measurement date. The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the guidance are described below: Level 1 Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access. Level 2 Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observ able data for substantially the full term of the assets or liabilities. Level 3 Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The following table presents by level, within the fair value hierarchy, financial assets and liabilities measured at fair value on a recurring basis: Fair Value Measurements Assets (Liabilities) Carrying Value Level 1 Level 2 Level 3 (in thousands) Assets (liabilities) as of July 2, 2017: Trading securities held in a “rabbi trust” (1) $6,916 $6,916 $ –– $ –– $6,916 $6,916 $ –– $ –– Assets (liabilities) as of July 3, 2016: Trading securities held in a “rabbi trust” (1) $4,852 $4,852 $ –– $ –– $4,852 $4,852 $ –– $ –– (1) The Company has established a Non-qualified Deferred Compensation Plan for certain members of senior management. Deferred compensation plan assets are invested in mutual funds held in a “rabbi trust” which is restricted for payment to participants of the NQDC Plan. Trading securities held in a rabbi trust are measured using quoted market prices at the reporting date and are included in the “Other assets” line item, with the corresponding liability included in the “Other liabilities” line item in the consolidated balance sheets. Note 11. Income Taxes Significant components of the income tax provision are as follows: Years Ended July 2, July 3, June 28, 2017 2016 2015 (in thousands) Current provision (benefit): Federal State Foreign Current income tax expense $11,859 1,758 –– $15,876 $ 6,630 1,840 (11) 2,703 –– 13,617 18,579 8,459 Deferred provision (benefit): Federal State Foreign Deferred income tax expense (benefit) (1,563) (90) 4 (2,949) (7) (44) 1,970 631 (130) (1,649) (3,000) 2,471 Income tax expense $11,968 $15,579 $10,930 37 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate is as follows: Years Ended July 2, July 3, June 28, 2017 2016 2015 Tax at U.S. statutory rates 35.0% State income taxes, net of federal tax benefit 35.0% 35.0% 2.3 Valuation allowance change (*) 14.9 Foreign rate differences Deductible stock-based 3.4 1.3 0.1 (2.6) 3.8 2.6 1.1 compensation (1.6) (0.2) (1.3) Domestic production deduction (2.1) (2.6) (2.2) Tax credits (1.7) (4.2) (3.9) Tax effect of disposition (*) (25.3) –– –– (0.2) 0.2 1.0 Other, net 30.3% 21.4% Effective tax rate 36.1% (*) rate impact due to the disposition of Fannie May – see discussion below. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The signifi- cant components of the Company’s deferred income tax assets (liabilities) are as follows: Years Ended July 2, July 3, 2017 2016 (in thousands) Deferred income tax assets: Loss and credit carryforwards Accrued expenses and reserves Stock-based compensation Deferred compensation Gross deferred $ 12,717 $ 6,901 4,626 2,565 1,950 7,267 2,991 1,540 income tax assets 18,699 Less: Valuation allowance (11,772) (4,936) 13,763 Deferred tax assets, net 10,086 21,858 Deferred income tax liabilities: Other intangibles (20,537) (24,357) Tax in excess of book depreciation (23,417) (24,923) Deferred tax liabilities (43,954) (49,280) Net deferred income tax liabilities $ (33,868) $(35,517) 38 A valuation allowance is provided when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The Company has established valua- tion allowances, primarily for net operating loss and capital loss carryforwards in federal, certain states, and for its Brazilian and Canadian subsidiaries. During fiscal 2017, the Company’s valuation allowance increased primarily as a result of the disposition of Fannie May (see Note 4. above for details), which generated a federal capital loss carryforward of $23.6 million, partially offset by a write-off of tax attributes of foreign dissolved entities consisting mainly of net operating losses which previously had a full valuation allowance. The Company does not expect to utilize the capital loss carryforward prior to expiration and has therefore provided for a full valuation allowance. At July 2, 2017, the Company’s total federal and state capital loss carryforwards were $23.7 million, which if not utilized, will expire in fiscal 2022. The Company’s foreign net operating loss carryforwards were $2.4 million, which if not utilized, will begin to expire in fiscal 2034. The Company files income tax returns in the U .S. federal jurisdiction, various state jurisdictions, and various foreign countries. The Company concluded its U.S. federal examination for fiscal 2014, however, fiscal years 2015 and 2016 remain subject to U.S. federal examination. Due to ongoing state examinations and nonconformity with the U.S. federal statute of limitations for assessment, certain states remain open from fiscal 2012. The Company commenced operations in foreign jurisdictions in 2012. The Company’s foreign income tax filings are open for examination by its respective foreign tax authorities, mainly Canada and the United Kingdom. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At July 2, 2017, the Company has an unrecognized tax benefit, including an immaterial amount of accrued interest and penalties, of approximately $0.4 million. During fiscal 2017, the unrecognized tax benefit decreased by $0.8 million as a result of federal and state tax settlements. The Company believes that no significant unrecognized tax positions will be resolved over the next twelve months. Note 12. Capital 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. During Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Stock based compensation expense is recorded within the following line items of operating expenses: Years Ended July 2, July 3, June 28, 2017(*) 2016 2015 (in thousands) Marketing and sales Technology and development General and administrative Total $1,624 $2,306 $1,866 315 3,755 493 3,544 $5,694 $6,343 392 3,704 $5,962 Stock-based compensation expense has not been allocated between business segments, but is reflected as part of Corporate overhead. (Refer to Note 15. Business Segments). (*) Excludes approximately $0.4mm of stock-based compensation expense recorded within the gain on the sale of Fannie May, resulting from the acceleration of vesting of shares for Fannie May personnel, upon completion of the disposition. Stock Options The weighted average fair value of stock options on the date of grant, and the assumptions used to estimate the fair value of the stock options using the Black-Scholes option valuation model, were as follows: Years Ended July 2, July 3, June 28, 2017 (1) 2016 (1) 2015 Weighted average fair value of options granted Expected volatility Expected life (in years) Risk-free interest rate Expected dividend yield n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a $4.86 52% 7.3 1.9% 0.0% (1) No options were granted during the fiscal years ended July 2, 2017 and July 3, 2016. The expected volatility of the option is determined using historical volatilities based on historical stock prices. The Company estimated the expected life of options granted based upon the historical weighted average. The risk-free interest rate is determined using the yield available for zero-coupon U.S. government issues with a remaining term equal to the expected life of the option. The Company has never paid a dividend, and as such the dividend yield is 0.0%. fiscal 2017 and fiscal 2016, 1,361,401 and 4,047,040 shares of Class B common stock, respectively, were converted into shares of Class A common stock. The Company has a stock repurchase plan through which purchases can be made from time to time in the open market and through privately negotiated transactions, subject to general market conditions. The repurchase program is financed utilizing available cash. In October 2016, the Company’s Board of Directors authorized an increase to its stock repurchase plan of up to $25 million. The Company repurchased a total of $10.7 million (1,120,706 shares), $15.2 million (1,714,550 shares) and $8.4 million (1,056,038 shares) during the fiscal years ended July 2, 2017, July 3, 2016 and June 28, 2015, respectively, under this program. As of July 2, 2017, $17.2 million remains authorized under the plan. On August 30, 2017, the Company’s Board of Directors authorized an increase to its stock repurchase plan of up to $30.0 million. The Company has stock options and restricted stock awards outstanding to participants under the 1-800- FLOWERS.COM 2003 Long Term Incentive and Share Award Plan (as amended and restated as of October 22, 2009, as amended as of October 28, 2011 and September 14, 2016) (the “Plan”). The Plan is a broad-based, long- term incentive program that is intended to provide incen- tives to attract, retain and motivate employees, consultants and directors in order to achieve the Company’s long-term growth and profitability objectives. The Plan provides for the grant to eligible employees, consultants and directors of stock options, share appreciation rights (“SARs”), restricted shares, restricted share units, performance shares, performance units, dividend equivalents, and other share-based awards (collectively “Awards”). Note 13. Stock Based Compensation The Plan is administered by the Compensation Committee or such other Board committee (or the entire Board) as may be designated by the Board (the “Commit- tee”). At July 2, 2017, the Company has reserved approxi- mately 6.2 million shares of common stock for issuance, including options previously authorized for issuance under the 1999 Stock Incentive Plan. The amounts of stock-based compensation expense recognized within operating income (*) in the periods presented are as follows: Years Ended July 2, July 3, June 28, 2017 2016 2015 (in thousands, except per share data) Stock options Restricted stock awards Total Deferred income tax benefit Stock-based compensation $ 446 5,248 5,694 2,213 $ 432 5,911 6,343 1,987 $ 459 5,503 5,962 2,087 expense, net $3,481 $4,356 $3,875 39 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries The following table summarizes stock option activity during the year ended July 2, 2017: Weighted Weighted Average Average Aggregate Exercise Remaining Intrinsic Options Price Contractual Term Value (000s) Outstanding beginning of period 2,182,234 $ 2.49 Granted –– $ –– Exercised (54,500) $ 5.22 Forfeited/Expired –– –– Outstanding end of period 2,127,734 $ 2.42 Options vested or expected to 3.8 years $15,608 vest at end of period 2,127,734 $ 2.42 3.8 years $15,608 1,478,734 $ 2.38 3.7 years $10,910 Exercisable at July 2, 2017 The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between the Company’s closing stock price on the last trading day of fiscal 2017 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on July 2, 2017. This amount changes based on the fair market value of the Company’s stock. The total intrinsic value of options exercised for the years ended July 2, 2017, July 3, 2016 and June 28, 2015 was $0.5, $4.2 million and $3.6 million, respectively. The following table summarizes information about stock options outstanding at July 2, 2017: Options Outstanding Options Exercisable Weighted- Average Weighted- Weighted- Remaining Average Average Options Contractual Life Exercise Options Exercise Exercise Price Outstanding (years) Price Exercisable Price 1.79 $ 2.22 - 2.44 $ $ 2.63 $ 3.26 - 10.20 1,000,000 32,000 1,010,000 85,734 2,127,734 3.3 2.5 4.3 4.4 3.8 $ 1.79 $ 2.43 $ 2.63 $ 7.31 $ 2.42 750,000 32,000 635,000 61,734 1,478,734 $ 1.79 $ 2.43 $ 2.63 $ 6.92 $ 2.38 As of July 2, 2017, the total future compensation cost related to non-vested options not yet recognized in the statement of operations was $0.8 million and the weighted average period over which these awards are expected to be recognized was 1.9 years. Restricted Stock The Company grants shares of Common Stock to its employees that are subject to restrictions on transfer and risk of forfeiture until fulfillment of applicable service conditions and, in certain cases, holding periods (Restricted Stock). The following table summarizes the activity of non- vested restricted stock during the year ended July 2, 2017: Weighted Average Grant Date Shares Fair Value Non-vested – beginning of period 2,017,069 $ 6.78 Granted 819,406 $ 9.88 Vested (965,429) $ 6.90 Forfeited (518,173) $ 9.72 Non-vested - end of period 1,352,873 $ 7.44 The fair value of non-vested shares is determined based on the closing stock price on the grant date. As of July 2, 2017, there was $5.4 million of total unrecognized compensation cost related to non-vested restricted stock- based compensation to be recognized over a weighted- average period of 1.9 years. 40 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Note 14. Employee Retirement Plans The Company has a 401(k) Profit Sharing Plan covering substantially all of its eligible employees. All employees who have attained the age of 21 are eligible to participate upon completion of one month of service. Participants may elect to make voluntary contributions to the 401(k) plan in amounts not exceeding federal guidelines. On an annual basis the Company, as determined by its board of directors, may make certain discretionary contributions. Employees are vested in the Company’s contributions based upon years of service. The Company suspended all contributions during fiscal years 2017, 2016 and 2015. The Company also has a nonqualified supplemental deferred compensation plan for certain executives pursuant to Section 409A of the Internal Revenue Code. Participants can defer from 1% up to a maximum of 100% of salary and performance and non-performance based bonus. Up until December 31, 2016, the Company matched 50% of the deferrals made by each participant during the applicable period, up to a maximum of $2,500. Effective January 1, 2017, the Company suspended contributions. Employees are vested in the Company’s contributions based upon years of participation in the plan. Distributions will be made to participants upon termination of employment or death in a lump sum, unless installments are selected. As of July 2, 2017 and July 3, 2016, these plan liabilities, which are included in “Other liabilities” within the Company’s consolidated balance sheets, totaled $6.9 million and $4.9 million, respectively. The associated plan assets, which are subject to the claims of the creditors, are primarily invested in mutual funds and are included in “Other assets” within the Company’s consolidated balance sheets. Company contributions during the years ended July 2, 2017, July 3, 2016 and June 28, 2015 were less than $0.1 million. Gains (losses) on these investments, were $1.0 million, ($0.1) million and $0.2 million for the years ended July 2, 2017, July 3, 2016 and June 28, 2015, are included in “Other (income) expense, net,” within the Company’s consolidated statements of income. Note 15. Business Segments The Company’s management reviews the results of the Company’s operations by the following three busi- ness segments: (cid:127) 1-800-Flowers.com Consumer Floral, (cid:127) BloomNet Wire Service, and (cid:127) Gourmet Food and Gift Baskets Segment performance is measured based on contribution margin, which includes only the direct controllable revenue and operating expenses of the segments. As such, management’s measure of profitabil- ity for these segments does not include the effect of corporate overhead (see (a) below), nor does it include depreciation and amortization, other (income) expense, net and income taxes, or stock-based compensation which is included within corporate overhead. Assets and liabilities are reviewed at the consolidated level by management and not accounted for by segment. Net Revenues Years Ended July 2, July 3, June 28, 2017 2016 2015 (in thousands) Net revenues: 1-800-Flowers.com Consumer Floral BloomNet Wire Service Gourmet Food & Gift Baskets Corporate Intercompany $ 437,132 $ 418,492 $ 422,199 87,700 85,483 85,968 670,677 670,453 613,953 1,102 1,066 1,020 eliminations (2,986) (2,470) (1,634) Total net revenues $1,193,625 $1,173,024 $1,121,506 Operating Income from Continuing Operations Years Ended July 2, July 3, June 28, 2017 2016 2015 (in thousands) Segment Contribution Margin: 1-800-Flowers.com Consumer Floral $51,860 $ 50,773 $ 43,529 BloomNet Wire Service Gourmet Food & Gift Baskets Segment Contribution Margin Subtotal 32,383 30,629 29,398 77,312 79,398 74,889 161,555 160,800 147,816 Corporate (a) (81,820) (85,134) (81,075) Depreciation and amortization (33,376) (32,384) (29,124) Operating income $ 46,359 $ 43,282 $ 37,617 (a) 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 Stock-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 segment. 41 Notes to Consolidated Financial Statements (continued) 1-800-FLOWERS.COM, Inc. and Subsidiaries Note 16. Commitments and Contingencies Leases The Company currently leases office, store facilities, and equipment under various leases through fiscal 2030. As these leases expire, it can be expected that in the normal course of business they will be renewed or replaced. Most lease agreements contain renewal options and rent escalation clauses and require the Company to pay real estate taxes, insurance, common area maintenance and operating expenses applicable to the leased properties. The Company has also entered into leases that are on a month-to-month basis. These leases are classified as either capital leases, operating leases or subleases, as appropriate. As of July 2, 2017 future minimum rental payments under non-cancelable operating leases with initial terms of one year or more consist of the following: Operating Leases (in thousands) 2018 2019 2020 2021 2022 Thereafter Total minimum lease payments $13,772 11,683 8,704 7,776 7,126 39,410 $88,471 At July 2, 2017, the total future minimum sublease rentals under non-cancelable operating sub-leases for land and buildings were $4.2 million. Rent expense was approximately $32.6 million, $34.3 million and $28.3 million for the years ended July 2, 2017, July 3, 2016 and June 28, 2015, respectively. Other Commitments The Company’s purchase commitments consist primarily of inventory, equipment and technology (hard- ware and software) purchase orders made in the ordinary course of business, most of which have terms less than one year. As of July 2, 2017, the Company had fixed and determinable off-balance sheet purchase commitments with remaining terms in excess of one year of approxi- mately $2.7 million, primarily related to the Company’s technology infrastructure. The Company had approximately $1.8 million in unused stand-by letters of credit as of July 2, 2017. Litigation There are various claims, lawsuits, and pending actions against the Company and its subsidiaries incident to the operations of its businesses. It is the opinion of management, after consultation with counsel, that the ultimate resolution of such claims, lawsuits and pending actions will not have a material adverse effect on the Company’s consolidated financial position, results of operations or liquidity. 42 Note 17. Fire at the Fannie May Warehouse and Distribution Facility On November 27, 2014, a fire occurred at the Company’s Maple Heights, Ohio warehouse and distribu- tion facility. While the fire did not cause any injuries, the building was severely damaged, rendering it inoperable for the key calendar 2014 holiday season, and all Fannie May and Harry London confections in the facility were destroyed. As a result, the Company had limited supplies of its Fannie May Fine Chocolates and Harry London Chocolates products available in its retail stores as well as for its ecommerce and wholesale channels during the 2014 holiday season. While the Company implemented contingency plans to increase production for Fannie May Fine Chocolates and Harry London Chocolates products at its production facility in Canton, Ohio and to shift warehousing and distribution operations to alternate Company facilities, product availability was severely limited, impacting revenue and earnings during the fiscal second and third quarters of fiscal 2015. The following table reflects the costs related to the fire and the insurance recovery and associated gain as of July 3, 2016: Fire-related Insurance Recovery (in thousands) Loss on inventory Other fire related costs Total fire related costs $ 29,587 5,802 35,389 Less: fire related insurance recoveries (55,000) $ (19,611) Fire related gain During the three months ended September 27, 2015, the Company and its insurance carrier reached final agreement, and during the three months ended Decem- ber 27, 2015, the Company received all remaining proceeds from its Fannie May fire claim. The agreement, in the amount of $55.0 million, provided for: (i) recovery of raw materials and work-in-process at replacement cost, and finished goods at selling price, less costs to complete the sale and normal discounts and other charges, as well as (ii) other incremental fire-related costs. The cost of inventory lost in the fire was approximately $29.6 million, while other fire-related costs amounted to approximately $5.8 million, including incremental contracted lease and cold storage fees which were incurred by the Company until the move back into its leased facility once the landlord completed repairs, during the Company’s third quarter of fiscal 2016. The resulting gain of $19.6 million is included in “Other (income) expense, net” in the consolidated statements of income for the year ended July 3, 2016. Management’s Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effectuated by the Company’s board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”), and includes those policies and procedures that: (cid:127) pertain to the maintenance of records that, in reason- able detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (cid:127) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made in accordance with authorization of management and directors of the Company; and (cid:127) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effective- ness to future periods are subject to the risk that controls may become inadequate because of changes in condi- tions, or that the degree of compliance with the policies or procedures may deteriorate. Management, including the Company’s Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of the Company’s internal control over financial reporting based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), (the COSO criteria). Based on this assessment, management concluded that the Company’s internal control over financial reporting was effective as of July 2, 2017.. The Company’s independent registered public accounting firm, BDO USA, LLP, audited the effectiveness of the Company’s internal control over financial reporting as of July 2, 2017. BDO USA, LLP’s report on the effec- tiveness of the Company’s internal control over financial reporting as of July 2, 2017 is set forth below. 43 Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders 1-800-Flowers.com, Inc. Carle Place, NY We have audited 1-800-Flowers.com, Inc. and Subsidiaries’ (the “Company”) internal control over financial reporting as of July 2, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organiza- tions of the Treadway Commission (the COSO criteria). The Company’s management is responsible for maintain- ing effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reason- able detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting prin- ciples, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, 1-800-Flowers.com, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of July 2, 2017, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of 1-800-Flowers.com, Inc. and Subsidiaries as of July 2, 2017 and July 3, 2016, and the related consolidated statements of income, comprehensive income, stockhold- ers’ equity, and cash flows for each of the three years in the period ended July 2, 2017, and our report dated September 15, 2017 expressed an unqualified opinion thereon. BDO USA, LLP Melville, New York September 15, 2017 44 Report of Independent Registered Public Accounting Firm Board of Directors and Stockholders 1-800-FLOWERS.COM, Inc. Carle Place, NY We have audited the accompanying consolidated balance sheets of 1-800-FLOWERS.COM, Inc. and Subsidiaries as of July 2, 2017 and July 3, 2016 and the related consolidated statements of income, comprehen- sive income, stockholders’ equity, and cash flows for each of the three years in the period ended July 2, 2017. These consolidated financial statements are the respon- sibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assur- ance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements and schedule. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of 1-800-FLOWERS.COM, Inc. and Subsidiaries at July 2, 2017 and July 3, 2016, and the results of their operations and their cash flows for each of the three years in the period ended July 2, 2017, in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), 1-800-FLOWERS.COM, Inc. and Subsidiaries internal control over financial reporting as of July 2, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated September 15, 2017 expressed an unqualified opinion thereon. BDO USA, LLP Melville, New York September 15, 2017 45 Market for 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 2, 2017 and July 3, 2016. High Low Year ended July 2, 2017 July 4, 2016 – October 2, 2016 October 3, 2016 – January 1, 2017 January 2, 2017 – April 2, 2017 April 3, 2017 – July 2, 2017 $ 9.99 $11.40 $11.05 $11.30 Year ended July 3, 2016 June 29, 2015 – September 27, 2015 $10.90 September 28, 2015 – December 27, 2015 $10.88 $ 8.42 December 28, 2015 – March 27, 2016 $ 8.38 March 28, 2016 – July 3, 2016 $ 8.78 $ 8.06 $ 8.67 $ 9.38 $ 7.92 $ 6.80 $ 6.11 $ 6.74 fiscal 2017 and fiscal 2016, 1,361,401 and 4,047,040 shares of Class B common stock, respectively, were converted into shares of Class A common stock. Holders As of September 5, 2017, there were approximately 255 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 5, 2017, there were approximately 8 stockhold- ers of record of the Company’s Class B common stock. Dividend Policy The Company has never declared or paid any cash dividends on its Class A or Class B common stock. 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. Purchases of Equity Securities by the Issuer The Company has a stock repurchase plan through which purchases can be made from time to time in the open market and through privately negotiated transac- tions, subject to general market conditions. The repur- chase program is financed utilizing available cash. In October 2016, the Company’s Board of Directors autho- rized an increase to its stock repurchase plan of up to $25 million. The Company repurchased a total of $10.7 million (1,120,706 shares), $15.2 million (1,714,550 shares) and $8.4 million (1,056,038 shares) during the fiscal years ended July 2, 2017, July 3, 2016 and June 28, 2015, respectively, under this program. As of July 2, 2017, $17.2 million remained authorized under the plan. 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 Total Number of Dollar Value of stock upon its transfer, with limited exceptions. During Shares Purchased as Shares that May Yet Part of Publicly Be Purchased Under Total Number of Average Price Announced Plans or the Plans or Programs Period Shares Purchased Paid Per Share (1) Programs (in thousands) (2) the Company’s purchase of common stock during the fiscal year ended July 2, 2017, which includes the period July 4, 2016 through July 2, 2017: The following table sets forth, for the months indicated, (in thousands, except average price paid per share) 07/04/16 - 07/31/16 08/01/16 - 08/28/16 08/29/16 - 10/02/16 10/03/16 - 10/30/16 10/31/16 - 11/27/16 11/28/16 - 01/01/17 01/02/17 - 01/29/17 01/30/17 - 02/26/17 02/27/17 - 04/02/17 04/03/17 - 04/30/17 05/01/17 - 05/28/17 05/29/17 - 07/02/17 95.0 100.0 123.6 119.3 286.9 4.1 59.5 90.3 –– –– 92.4 149.6 $ 9.31 $ 9.31 $ 9.21 $ 9.33 $ 9.41 $10.48 $10.11 $ 9.43 –– –– $10.50 $ 9.89 95.0 100.0 123.6 119.3 286.9 4.1 59.5 90.3 –– –– 92.4 149.6 $11,161 $10,227 $ 9,085 $23,883 $21,184 $21,141 $20,538 $19,686 $19,656 $19,656 $18,713 $17,229 Total (1) Average price per share excludes commissions and other transaction fees. (2) On August 30, 2017, the Company’s Board of Directors authorized an increase to its stock repurchase plan of up to $30.0 million. 1,120.7 1,120.7 $ 9.56 46 Comparison of 5 Year Cumulative Total Return* Among 1-800-Flowers.com, Inc., the Russell 2000 Index and the NASDAQ Non-Financial Index ■ 1-800-FLOWERS.COM, INC. ▼ Russell 2000 ● Nasdaq Non-Financial *$100 invested on 6/30/12 in stock or index, including reinvestment of dividends. Fiscal year ending June 30. 47 One Old Country Road, Suite 500 Carle Place, NY 11514 (516) 237-6000 Special Note Regarding Forward-Looking Statements This annual report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements repre- sent the Company’s current expectations or beliefs concern- ing future events and can generally be identified by the use of statements that include words such as “estimate,” “expects,” “project,” “believe,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will,” or similar words or phrases. These forward-looking statements are subject to risks, uncertainties and other fac- tors, many of which are outside of the Company’s control, which could cause actual results to differ materially from the results expressed or implied in the forward-looking statements, including, among others: the Company’s ability to achieve its guidance for revenue, EBITDA and EPS; its abil- ity to manage the significant seasonality of its business; its ability to integrate the operations of acquired companies; its ability to cost effectively acquire and retain customers; the outcome of contingencies, including legal proceedings in the normal course of business; its ability to compete against existing and new competitors; its ability to manage expenses associated with sales and marketing and necessary general and administrative and technology investments and general consumer sentiment and economic conditions that may affect levels of discretionary customer purchases of the Company’s products. The Company undertakes no obliga- tion to publicly update any of the forward-looking state- ments, whether as a result of new information, future events or otherwise, made in this annual report or in any of its SEC filings except as may be otherwise stated by the Company. For a more detailed description of these and other risk fac- tors, and a list of definitions of non-GAAP terms, please refer to the Company’s SEC filings including the Company’s An- nual Reports on Form 10-K and its Quarterly Reports on Form 10-Q. Consequently, you should not consider any such list to be a complete set of all potential risks and uncertainties. Stock Exchange Listing NASDAQ Global Select Market Ticker Symbol: FLWS Transfer Agent and Registrar American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, New York 11219 (718) 921-8200 Independent Auditors BDO USA, LLP 401 Broadhollow Road Suite 201 Melville, NY 11747 (631) 501-9600 SEC Counsel Cahill Gordon and Reindel LLP 80 Pine Street New York, NY 10005 (212) 701-3000 Shareholder Inquiries Copies of the Company’s reports on Forms 10-K and 10-Q as filed with the Securities and Exchange Commission and additional information about 1-800-FLOWERS.COM, Inc. may be obtained by visiting the Investor Relations section at www.1800flowersinc.com, by calling 516-237-6113, or by writing to: Investor Relations 1-800-FLOWERS.COM, Inc. One Old Country Road, Suite 500 Carle Place, NY 11514 Updated 7/15 Updated 7/15 Version 1 Version 2 Version 3 1800Baskets.com • logo color PMS 255 PMS 227 Version 5 Version 6 Version 7 One Old Country Road Suite 500 Carle Place, NY 11514 www.1800flowers.com (516) 237-6000 

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