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1-800-FLOWERS.COM, Inc. (NASDAQ:FLWS)

F1Q09 (Qtr End 09/30/08) Earnings Call Transcript

October 23, 2008, 11:00 am ET

Executives

Joseph Pititto – VP of IR

Jim McCann – Chairman and CEO

Bill Shea – SVP, Finance and Administration, Treasurer and CFO

Chris McCann – President

Analysts

Jennifer Watson – Goldman Sachs

Jeff Stein – Soleil Securities

Kristine Koerber – JMP Securities

Eric Beder – Brean Murray & Co., Inc.

Jim Leahy – Morgan Joseph

Operator

Good day everyone and welcome to the 1-800-FLOWERS.COM, Inc. fiscal 2009 first quarter results conference call. This call is being recorded. At this time for opening remarks and introduction, I would like to turn the call over to the company’s Vice President of Investor Relations Mr. Joseph Pititto. Mr. Pititto, please go ahead.

Joseph Pititto

Thank you, Connie. Good morning and thank you all for joining us today to discuss 1-800-FLOWERS.COM's financial results for our fiscal 2009 first quarter. My name is Joseph Pititto and I'm Vice President of Investor Relations. For those of you who have not received a copy of our press release issued earlier this morning, the release can be accessed at the Investor Relations section of our Web site at 1-800-FLOWERS.COM or you can call Patty Altadonna at 516-237-6113 to receive a copy of the release by e-mail or fax.

In terms of structure, our call today will begin with brief formal remarks and then we will open the call to your questions. Presenting today will be Jim McCann, CEO, and Bill Shea, CFO. Also joining us for the Q&A section of our call is Chris McCann, our President.

Before we begin, I need to remind everyone that a number of the statements that we will make today may be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed description of these risks and uncertainties, please refer to our press release issued this morning as well as our SEC filings, including the company's Annual Report on Form 10-K, and quarterly reports on Form 10-Q..

In addition, this morning we will discuss certain supplemental financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables accompanying the company's press release issued this morning. The company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today's call, and recordings of today's call, the press release issued earlier today or any of the SEC filings except as may be otherwise stated by the company.

I will now turn the call over to Jim McCann.

Jim McCann

Good morning everyone. For our fiscal first quarter, we grew revenues more than 8% to $158 million and increased EBITDA and EPS at double-digit rate. These results highlight the benefits from our recent acquisitions as well as our continued focus on enhancing our operating expense ratio and thereby driving improved bottom line results. We achieved these results in what is traditionally our lowest quarter in terms of revenues due to the lack of gifting holidays during the summer months.

Revenue growth for the period was driven by our recent acquisitions and continued strong market share growth in our BloomNet Wire Service business. DesignPac Gifts which we acquired at the end of April is performing very well. During our fiscal first quarter, we began shipping the orders that they received back in the Spring for this year’s holiday period and they are now in full swing for what looks to be a very good contribution for our fiscal fourth quarter and for the full year. BloomNet’s accelerated growth benefited from both the acquisitions we made in July as well as continued market share gains. BloomNet’s superior value proposition combined with its industry leading focus on quality and service is increasingly attractive to florists throughout the country particularly in the current economic climate. As a result, BloomNet is achieving increased penetration for its expanded suite of products and services.

We improved our operating expense ratio by 300 basis points during this quarter. This combined with our revenue growth enabled us to improve EBITDA by 40% or approximately $1.4 million and EPS by 12% or $0.01 per share. We expect to build on these results during the current fiscal second quarter, our largest in terms of revenue and profits.

If we turn to our gift brands Fannie May, Cheryl & Co. and the Popcorn Factory all generate the majority of their annual revenues and profits during the year-end holiday period. Adding to this will be the top and bottom line contributions from DesignPac Gifts. As a result, we anticipate good top line and strong bottom line performance in our current fiscal second quarter despite the very challenging economic environment which I will comment further in a few minutes.

Before I turn the call over to Bill for his review of specific results and metrics for the quarter, I would like to highlight a few additional areas. First turning to our balance sheet, we further strengthened our balance sheet and liquidity to an amended agreement with syndicate of banks led by JPMorgan Chase. The new credit facility increases our borrowing capacity by $150 million to $293 million. We are very pleased to have completed this new agreement at favorable rates and terms particularly considering the uncertainty in the credit markets today. This combined with our increasing cash flow positions us well to continue our growth strategy.

Secondly on the customer front, we attracted more than 460,000 new customers. We also achieved a repeat order rate of 64% illustrating the continued success of our efforts and deepen the relationships we have with our customers. These metrics illustrate the fact that even during difficult times our customers still have indeed and they can act and express themselves of the important people in their lives. We believe we are uniquely well positioned to help them with an expanded range of gifts and services that provide excellent value and commitments.

I would now like to turn the call over to Bill.

Bill Shea

Thank you, Jim. During the fiscal first quarter we achieved revenue growth of more than 8% reflecting the contributions from our recent acquisitions as well as a continued market share gains in our BloomNet Wire Service business. Most important, we enhanced our operating expense ratio by 300 basis points. As a result, we improved our EBITDA for the period by 40% to approximately $1.4 million to an EBITDA loss of $2 million compared with a loss of $3.4 million in the prior year period. Net loss improved 8.4% to $5.3 million or $0.08 per share compared with $5.8 million or $0.09 per share in last year’s first quarter. This was achieved in spite of traditionally lower revenues associated with our fiscal first quarter which lacks any gifting holidays.

I will provide specific financial results and key metrics for the first quarter. Total net revenues reached $158 million, an increase of 8.4% or $12.2 million compared with $145.8 million in the same period last year. During the quarter our e-commerce orders sold 1,553,000 compared with 1.654,000 orders in the year ago period. Average order size during the quarter was slightly higher at $69.37 compared with $69.22 in the prior year period. During the quarter we added 461,000 new customers. This was achieved by concurrently stimulating repeat orders from existing customers who represented approximately 64% of total revenues compared with 62% in the prior year period.

Gross margin for the quarter was 39.1% down 200 basis points primarily reflecting the impact of the margins associated with our recent acquisitions. Excluding the impact of these acquisitions, gross profit margin would have increased 10 basis points. The lower gross profit margin was more than offset by the improvement of 300 basis points in our operating expense ratio which primarily reflected the lower operating expenses associated with our recent acquisitions. Operating expense ratio for the quarter was 40.4% compared with 43.4% in the prior year period. This includes non-cash stock-based compensation expense at $1.2 million pre-tax compared with $1.5 million in the prior year period.

For the quarter, depreciation and amortization was $5.7 million compared with $4.9 million in the prior year period. Increase in depreciation and amortization is primarily attributable to our recent acquisitions. As a result of these factors, net loss for the quarter was $5.3 million or $0.08 per share compared with a loss of $5.8 million or $0.09 per share in the prior year period.

In terms of category results, in our 1-800-FLOWERS.COM consumer floral business, during the first quarter revenues were $83.5 million compared with $87.6 million in the prior year period. The lower revenues reflect the soft consumer economy combined with the year-over-year reduction in the number of company run retail stores. Gross profit margin for the quarter in this category was 38% compared with 38.9% in the prior year period primarily reflecting promotional pricing and higher fuel surcharges from our third-party shipping vendors on direct shipped products. The lower gross margin dollars were somewhat offset by enhanced operating leverage. As a result of these factors, category contribution margin was $10.7 million compared with $11.9 million in the prior year period. We define category contribution margin as earnings before interest, taxes, depreciation and amortization and before the allocation of corporate expense.

In our BloomNet Wire Service business, revenues increased 58.9% to $15.7 million compared with $9.9 million in the year-ago period. This accelerated growth was due to contributions from the acquisitions we made in this category in July combined with continued market share growth. Gross profit margin was 53.1% compared with 56.7% in the prior year period. This reflects product mix with BloomNet products business representing a larger percentage of total revenues due to the contribution of the aforementioned acquisition. The lower gross profit margin percentage was more than offset by strong revenue growth and significantly enhanced operating leverage resulting in the category contribution margin increase of 72.3% to $4.4 million compared with $2.6 million in last year’s first quarter.

In our gifts category, Home and Children’s Gifts segment revenues were $22.6 million compared with $24.7 million in the prior year period. This reflected our previous guidance for reduced marketing investments in this segment and improved bottom line results. Gross margin in this area improved 130 basis points to 42.6% compared with 41.3% in the prior year period reflecting continued enhancements and product sourcing and shipping initiatives. As a result of these factors, category contribution margin launch was $2.2 million compared with $2.3 million in the prior year period.

In our Gourmet Food and Gift Baskets category, revenues increased 60.5% to $37.2 million compared with $23.2 million in the prior year period. Gross margin was 32.3% compared with 40.9% in the year-ago period. Category contribution margin improved 52% or $964,000 to a loss of $891,000 compared with the loss of $1.9 million in the prior year period. The results in this category reflect contributions from DesignPac Gifts, which currently sells its products almost exclusively in the wholesale channel. Adjusting for this, revenues and category contribution margin in this segment would have been slightly down compared with the prior year period while gross margin would have improved slightly. We anticipate that DesignPac Gifts will provide a significantly larger contribution to revenues and category contribution margin compared with the first quarter during our current fiscal second quarter. As I stated earlier, the category contribution margin results exclude costs associated with the company’s enterprise shared services platform, which includes among other services IT, Human Resources, Finance, Legal and Executive. These functions are operated under a centralized management platform providing support services to the entire organization. For the fiscal first quarter, corporate expense including stock-based compensation expense was $14.1 million compared with $13.7 million in the prior year period. The increase reflects expenses and support of our recent acquisitions.

Turning to our balance sheet, as Jim mentioned in his earlier remarks, we have a strong balance sheet and excellent liquidity that we further enhanced during our fiscal first quarter to the expansion of our bank credit facility. Our new credit facility expands our borrowing capacity by $150 million to $293 million as comprised of $165 million available under our revolving credit line and $128 million in term loan debt. At the end of our first quarter our borrowings under the agreement were $125 million in term loan debt and $20 million outstanding under our revolving credit line. The borrowings under the credit line reflect the seasonality of our business specifically the increased investments and inventory and differed catalog costs in our gifts business for the upcoming holiday period. Our cash and investment position at the end of the quarter was approximately $3.5 million. Inventory of approximately $120 million was in line with management expectations and reflects the aforementioned buildup for the year-end holiday season including the inventories associated with our recent acquisitions. We anticipate that we will finish the current fiscal second quarter with significantly reduced inventories with no borrowings under our revolving credit line and a cash balance of approximately $100 million.

Regarding guidance, as we stated in this morning’s press release, we have reiterated our guidance for fiscal 2009 bottom line results which quotes an EBITDA growth of approximately 15% and EPS and free cash flow growth of 20%. The company defines free cash flow as net cash provided by operating activities minus capital expenditures. Regarding revenue guidance for the fiscal year, we have good visibility regarding anticipated revenue contributions from our recent acquisitions as well as from the continued market share growth in our BloomNet business. With that said, we believe that because of the uncertainty across the economic landscape consumers are under significant pressure to be cautious in their spending as we head into the key holiday shopping period. As a result, we believe it is prudent to moderate our revenue growth guidance to a range of 5% to 7%. In terms of our current fiscal second quarter, we expect the period to represent approximately 38% to 40% of our full year revenues.

In summary, as we enter our key fiscal second quarter we are focused on achieving profitable revenue growth while continuing to manage our operating expenses and thereby drive strong bottom line growth.

I will now turn the call back to Jim.

Jim McCann

To sum up, during this quarter, revenues grew more than 8% to $158 million. This growth particularly in the current climate illustrates the effectiveness of our strategy to grow our business to a combination of organic initiatives, business development and strategic acquisitions. We remain focused on leveraging our business platform to reduce our operating expense ratio. This resulted in a 300 basis point improvement and we anticipate further enhancements throughout the remainder of this year. As part of the anticipated revenue growth, we believe this will enable us to achieve our guidance for a strong EBITDA, EPS and free cash flow growth this year. It further strengthens our balance sheet and liquidity with our new credit agreement and we anticipate finishing the current fiscal second quarter with no borrowings under that revolver and a cash balance of approximately $100 million. This provides us with significant flexibility to be able to accelerate our revenue growth when the economy allows.

Looking ahead we are clearly aware of the uncertainty facing customers and businesses alike in today’s economic landscape. We know as we head into our key year-end holiday period that consumers are becoming increasing cautious with their spending. As a result, we believe we are being appropriately prudent in moderating our revenue growth guidance for the year. Nonetheless, we remain cautiously optimistic for the holiday period because we know our customers still have a need to connect and express themselves with the important people in their lives and we are well positioned to help them achieve that goal. It is important to note that we saw the consumer begin to pull back more than a year ago, we responded appropriately in our planning and execution and delivered strong bottom line growth for fiscal 2008. Looking ahead, we remain focused on growing our business while enhancing our operating expense ratio. We believe this focus will enable us to achieve our strong bottom line growth guidance for this fiscal 2009.

That concludes our formal remarks and Connie, if you would please restate the instructions so that we can begin the Q&A portion of the call.

Question-and-Answer Session

Operator

(Operator instructions) We’ll take our first question from Jennifer Watson from Goldman Sachs.

Jennifer Watson – Goldman Sachs

Thank you. Can you talk a little bit about where the bulk of the OpEx leverage is coming from? Are you guys benefiting from adding on these acquisitions and being able to take a lot of costs out of the acquisitions and essentially drive the revenue growth of these businesses once you combine them on the 1-800-FLOWERS platform and how you think about that going forward?

Jim McCann

Sure Jen. The answer to that question is with this acquisition, no. We really didn’t achieve a great deal of leverage in that business because of being able to put them on a platform business with incremental minor gains in that. What you are seeing from an OpEx point of view is continuing management of the acquisitions we have made in the past, the growth we have experienced in different businesses, the businesses we have created all of those continue to give us frankly increasing opportunities to improve our operating expenses. But I would not look to the – in normal circumstances, we expect to get some operating leverage because of the nature of this business we bought Design Pac Gifts to use it as a platform to grow our direct-to-consumer business, so there really was not a lot of synergistic savings in that acquisition.

Bill Shea

(inaudible) As we have been speaking about our OpEx ratio for a while now for the last couple of years, what we did is we went out and what we stated was we had assembled a lot of the pieces we wanted for our business going forward into the future and now we have kind of optimized that. We have been continually doing that. Now we are started to tweak our operating model and drive more efficiency. To mention that acquisition as an example that adds our operating capabilities and all of our other brands will be able to leverage going forward into the future.

Jennifer Watson – Goldman Sachs

Okay great, thank you. Just one more if I may, can you talk a little bit of the trend you are seeing to date in October and how if at all a shorter shopping period between the Thanksgiving holiday and the Christmas holiday, so I guess fewer weekends for parties, etc may affect your business and how you have taken that into consideration in your guidance?

Jim McCann

We like the old weekends because our customers shop during the week. So, our guidance fully reflects what we expect to happen in this quarter. Jen we turn to people like you to tell us what is going to happen in a macro environment and as we read the newspapers and the magazines and all the business publications in the last few days, it is pretty dire the forecast for the consumer for this quarter and possibly all the things that you publish. So, I think you can accept that our guidance moderated as we have is just trying to be prudent and reflective of what we are reading and anticipating from people who know the market even better than we do.

Jennifer Watson – Goldman Sachs

Okay great. Thank you very much.

Operator

We’ll take our next question from Jeff Stein from Soleil Securities.

Jeff Stein – Soleil Securities

Good morning guys. Question on your guidance, you took your revenue assumption down but you did not take your earnings per share guidance down, so I am wondering have you put a cushion into your revenue forecast when you started or is there something else that you have identified on the expense side to compensate for the revenue shortfalls that you now are anticipating?

Jim McCann

Jeff, I think you can see that the way we have been operating business for the last few years, as the consumer environment has gotten tough we have been able to continually manage those operating expenses, manage the way we do our business and frankly we get more excited everyday about the opportunities that are increasing and present themselves to us. Chris just mentioned the leverage we just anticipate with DesignPac Gifts that won’t incur this year because that leverages the growth of our direct-to-consumer business to really step on the gas pedal with 1-800 baskets of (inaudible) that we just introduced coming up next month a year ago. So, that has helped leverage opportunity to growth. So, in answer to your question, no we are not sandbagging, we are telling you what we think is a good opportunity. We think that there is more opportunity and we have more leverage at our disposal to manage the expense side of our business, we will continue to do that. You have seen us do that continually now for three or four years. Last year was a top year for consumer growth; we still have outside performance on our bottom line. And by the way, we are not establishing our future to do that. This is all within normal operating procedures, building a better company every day and we are still making investments that we think will serve us well in our future. Yes, DesignPac Gifts is one of those. But we also have – we said we grow two ways, organically through business development efforts and through strategic acquisitions. DesignPac Gifts is an example of a strategic acquisition for growth. We are still making investments in business development areas that will serve us well in the future. So we think we will have another good year from a bottom line performance as we did last and we think that our guidance properly reflects where we expect to be and we think we are making really good investments that will serve us this year and more especially next year.

Bill Shea

Jeff, there is one point that continues to hit home on, we have been talking a lot about our operating expense leverage, leveraging our platform and reducing our operating expenses for some time now. Fiscal ’08 was a good demonstration of how we are able to make adjustments throughout the year. We came out of fiscal ’07 with very strong top line growth and we anticipated the ability to continue to continue to grow the top line in fiscal ’08 and a little over a year ago the environment changed. We had to (inaudible) throughout fiscal ’08 to be able to still deliver very strong bottom line results while not getting the top line growth that we had originally planned for. So, I think last year demonstrates how we are able to manage the business this year. So, we are going to continue to make adjustments, in fact we did last year when we were not achieving the top line growth that we had originally hoped for.

Jim McCann

Bill your point there is you are really speaking to the flexibility in our operating model on a short term as well as long term basis. Were you able to adjust that spending throughout the year, the only way we are seeing growth on that (inaudible)?

Jeff Stein – Soleil Securities

I was just wondering if you could give any specific examples of that. Where are the pockets of I guess variable cost star that you could either pull out or add to on a relatively short notice, would it be marketing, would it be – where is it mainly coming from?

Jim McCann

I think you see the course of the company Jeff; I will give you a couple of examples. We saw that this was a tough period so you can see in the numbers that we spent less on marketing this quarter, we will spend that money this quarter because we would rather push it closer to the actual holiday gifting occasions. So, net-to-net for the year, our marketing will be up. So, the expense ratings are coming from our operating areas. We continue to add talent to the company. We continue to invest in our operating infrastructure, our service platforms, our delivery capabilities, our logistics infrastructure all of which we have been investing in the last several years and you are seeing the fruits of that. The more we do the more we think we can do. You will continue to see that leverage.

Jeff Stein – Soleil Securities

Question for Bill. In the first quarter you did call out fuel surcharges as being an area of pressure and gross margins and I am wondering now that we are beginning to see fuel charges back up, could that potentially be a benefit in Q2 and Q3 and maybe perhaps you could quantify the impact that had on Q1?

Jim McCann

Okay, Jeffrey, you saw gross margins were down 200 basis points in Q1 that really reflected the impact of the margins associated with whether acquisition margins would have been up10 basis points without those acquisitions. But where you did see margin pressure within the Consumer Floral piece of the business that was down 90 basis points that has impacted more by the fuel surcharges because it is separate fuel surcharges on ground delivery versus overnight express delivery. So, the component of the consumer floral business that we use third-party carriers is clearly impacted by that. We saw that peak in August and September those surcharges actually were at 34%. Historically it is high level. We have started to see that moderate down as everybody sees kind of prices at the pump coming down dramatically there are two points to that. One, overnight delivery, the surcharge is tight. The jet fuel not the diesel fuel that (inaudible) at the pump and there is a 60-day lag between the indexes that the surcharges are tied to and when they actually get reflected in our rates. So, we are opting those, those prices moderate which is certainly a good thing. They are still though in excess to where they were a year ago. So, we are going to still see clearly in Q2 and probably into Q3 the year-over-year increases in fuel surcharges. However we have also been working very hard with our (inaudible) carrier rates to negotiate better terms on base rates and that will help offset that to some degree.

Jeff Stein – Soleil Securities

Okay. So we should not expect to see a benefit in Q2 and Q3?

Jim McCann

Nothing different than what we forecast but we are hopeful that as fuel prices continue to decline and the indexes catch up that in the second half of the fiscal year there will be a benefit.

Jeff Stein – Soleil Securities

Okay, final question, the revenue shortfall that you are not anticipating, I presume that is coming mainly in your consumer floral business or is there also an element that you are anticipating and expecting now in the food gift business as well?

Jim McCann

I think what I would say we are seeing here Jeff is that the margin prices there are high so what are we are pushing to our customer, what they want and looking at the different kinds of price point and the fact that we are a flower shop with flowers and gifts and over the last several years built up that gift portfolio quite nicely gives us the flexibility to have the right price points for a more price sensitive customer who still has gifting and connective need. So we are anticipating those price points which have frankly a better margin and those gift products being the products that will have accelerated growth versus what we anticipate in the flower group.

Bill Shea

Jeff, just one other point, the Home and Children’s group too within that sector, there certainly we have seen pressure on that sector for some time now but that has continued.

Jeff Stein – Soleil Securities

Thanks guys.

Operator

(Operator instructions) We will go next to Kristine Koerber from JMP Securities.

Kristine Koerber – JMP Securities

Hi gentlemen. Couple of questions, can you comment on the promotional activity that you are planning for the December quarter in particular with Martha Stewart and then second, can you just talk about traffic to the Web site and conversion rates in particular?

Chris McCann

Sure, Kristine, this is Chris, as we look at promotional activities in the quarter as Jim mentioned earlier first of all our spending kind of goes later and later closer to the holiday and so we are making those adjustments specifically to the Martha Stewart product line. We are excited about some upside opportunity there. We introduced the Martha Stewart product line back in April, May timeframe really just getting introduced to our existing customer base. The marketing efforts behind that which is in cooperation with the Martha Stewart media properties really begin now, beginning in November we have a nice insert to the Martha Stewart living magazine integrations into the television and radio programs and all the properties Web properties. So the marketing behind that program really picks up now primarily through the Martha Stewart media properties. So, we are excited about that as well. Then as far as traffic through the Web, I think therefore what we are seeing right now is traffic is stable based on the fact that we are not promoting a lot currently. We will start to pick up now as we go closer to the holiday and our conversion rates are remaining consistent with what we have been seeing. We have recently made some changes to the 1-800-FLOWERS Web site which we think has some promise to actually increase conversion rate as we move closer to the holiday but that is where we knew we just launched this some new home pages on in the last two weeks so we are monitoring now to see what that delivers. Same thing on the food products, we have out there right now a new Web site from the Popcorn Factory which is out in customer preview mode, it has not been launched to the general public yet. We are hopeful that that can deliver some positive results. Based on the customer feedback we get this week will determine when we launch that Web site but we hope that we can launch that in the holiday season which will deliver some upside in conversion as well.

Jim McCann

This is part of a long continuing process of building new technology platforms, giving all of the gift branch in our shops the opportunity to have all the bells and whistles, so this is a continually evolving plan that we introduced about a year and a half ago and will take another year and a half frankly to draw a good completion.

Kristine Koerber – JMP Securities

Okay, just a follow-up on the marketing, you indicated that you expect marketing to be up for the full year, what kind of increase should we anticipate for the December quarter?

Jim McCann

Not significant, just how we move it within the quarter so that it is more proximate to the holiday, fishing with the fish so to speak.

Chris McCann

This is McCann again to my comment before Kristine with regard to the Home and Children’s group; you know we have taken some dollars and introduced some circ within that category and redeploying dollars elsewhere.

Bill Shea

Here is an example that we are reducing circ in our cost cutting efforts because at this point, in this economic climate, we don’t see the return on lifetime value for customer versus the spend that we have to do to acquire that customer.

Jim McCann

In the catalog businesses.

Bill Shea

Right.

Kristine Koerber – JMP Securities

Thank you.

Jim McCann

You bet.

Operator

We’ll take our next question from Eric Beder from Brean Murray & Co., Inc.

Eric Beder – Brean Murray & Co., Inc

Good morning.

Jim McCann

Good morning Eric.

Eric Beder – Brean Murray & Co., Inc

Could you talk a little bit about the changes at FTD in the current economic environment with the acquisition by United [ph] and how you are going to take advantage of those?

Jim McCann

I think what you see in BloomNet is it is a very strong performance this quarter is that what goes on around us does not really concern us, we are focused on growing our business, deepening our relationship with our existing floral customers and improving the suite of products and services that we deliver to them all the time. So, that’s why we are seeing our products business growing this quarter because we had the opportunity to leverage our platform. You have heard Chris and Bill talk about that today. We are leveraging our platform, our buying capability, our sourcing capability, getting a better integration against the things we want to do. So, we think we are raking market share in that area and we think we will continue to do that. Any uncertainty created by the competitors’ ownership just gives us more and more opportunity to accelerate that market share growth.

Eric Beder – Brean Murray & Co., Inc

Okay, how should we think about margin in this business now that you have bought – I remember you mentioned in the last conference call you talked about the new acquisition which was hard to us and it was going to bring lower margins but we didn’t really see that that much in Q1, how should we think about margins for BloomNet going forward with this new acquisition being layered in?

Jim McCann

Sure. Eric I think you did see some moderation of our contribution margin in BloomNet from the low 30s to the high 20s, that is primarily a reflection of our increased emphasis during this selling period on the product side of our business. I think what we have said in terms of longer term guidance is that as we introduce new product services, some are going to have more compressed margin, some a more robust margin and I would expect that you can plan for this year a slightly lower margin (inaudible) of BloomNet but we would expect over the long term it will moderate based on an introductory timeline to be among that aforementioned contribution margin.

Chris McCann

Eric really it is just the products that Jim was alluding to. So, yes a year ago we were in the high 20s but last year we were in the low 30s. The guidance we gave for this year we thought we would be in the high 20s.

Jim McCann

And we are saying that 27% for the quarter, we would expect that’s about where it will be 27%, 28% for the year and next year in all likelihood, although we are not giving next year’s guidance yet, we have got plans, we would expect in a longer term basis we are targeting a 30% contribution margin.

Eric Beder – Brean Murray & Co., Inc

Could you talk a little bit and I know you talked about this in the conference call and the DesignPac being – I know the DesignPac is a gift basket business but they also used to work with – how are you lining them up to sort of leveraging your production capabilities for chocolates, candies, cookies, popcorn, how is that leverage going to start to happen and when would you think we could see something like that if it is possible?

Jim McCann

I think what I would say there Eric is what we told you last about DesignPac is first and foremost we are very decided about the team, the company, its customers, the acquisition in general. What you will see is a collection of things happen. First the team integrating with what we do. We announced in the last call that even before the acquisition was consummated the design team at DesignPac started to work with some of our other gift food branches helping them redesign and redo their gift basket volume for this holiday quarter that happened. So, that’s a good impact but I don’t think one that you can jot down on a spread sheet and measure this quarter but it will clearly be a good contribution. Yes, they use lots of components in their gift food baskets that they can give a benefit left, should be a branded benefit left to our other gift branches. Our chocolate businesses in Fannie Mae, Fanny Farmer, Harry London in our baked goods company, Cheryl&Co and half a dozen other brand opportunities we have for exposure of those wonderfully good branded products in the DesignPac gift baskets that are sold through the best retailers in the country. So, that’s another opportunity but the biggest opportunity frankly for us is to sit over the top of their capability in terms of design, sourcing, confecting and delivering to our 1-800 baskets and our other direct-to-the consumer gift businesses and that you will start to see in this holiday period next year because that is a 12 to 18-month planning design, sourcing, confecting and distribution cycle. So, we are already well into that, we are frankly a little giddy and excited about the look on how things are coming together and how well the teams have integrated. So, the big benefit – yes, I think that company DesignPac Gifts will do well this current fiscal year. I think our partnering has helped to help to accelerate their growth rate because of relationship and capabilities but the real benefit comes next year and the year after and the year after that when we build a very big gift basket business that helps us as a company, helps us serve our customers better, and helps our BloomNet Wire a great deal to be in a gift category that I think is essential to any of us who are florists.

Eric Beder – Brean Murray & Co., Inc

This leads to my final question, where are we with Martha Stewart gift baskets and you just talked about selling gift baskets to florists and obviously that affects gift basket business in the BloomNet business, when should we see something from that too?

Jim McCann

I will answer the second part first then Chris will talk to you about what we are doing with Martha Stewart. We are in the design phases of those products now, we move into sourcing in the third fiscal quarter, the first calendar quarter of those products. So, I would say during the summer and fall of next year we will have the product line available for our BloomNet florists that we will introduce in the next spring and that is when you will start to see that benefit and this concerns your question –

Chris McCann

Good memory Eric as you recall our relationship with Martha Stewart in both from the floral and in the food gift basket side and we were able to kind of (inaudible) DesignPac involved in the design and production of the Martha Stewart gift basket line which launches on the 1-800 flower’s side in November.

Jim McCann

It is a small set of SKUs but one that we think each year will grow to be a bigger and bigger business. We are just introducing a few SKUs next month.

Eric Beder – Brean Murray & Co., Inc

Great, thank you.

Operator

(Operator instructions) We’ll get next to Jim Leahy from Morgan Joseph.

Jim Leahy – Morgan Joseph

Hi gentlemen, a couple of questions for you. First in terms of the guidance numbers, how much is it the downside, how much is it the takedown in the top line number despite beyond say the fiscal second quarter and kind of leads into the fiscal third and fiscal fourth quarter or is most of this tied to the holiday season?

Bill Shea

Hi Jim, it's Bill. I think it runs through the remainder of this fiscal year where we are seeing – you are still in the first quarter and you are seeing the effects of this soft economy. We are not anticipating in this guidance that that is going to turn around in the very near future. So, that is going to continue. So what you saw in Q1, you saw first off in consumer flow at the Home and Children’s line, those continued throughout this fiscal year.

Jim McCann

That is because of the flexibility of our business, it is because of the investments we are making in key strategic growth areas like BloomNet and our gourmet Food and Gift Baskets category and our leverage that we can put on our operating platform that we are still carried about a line growth that we left out there.

Bill Shea

Let me illustrate one point about the operating platform that Chris just referenced for you Jim. A few years ago we had a lot of retail flower shops that the company owned. We have been nurturing the ownership of those shops and re-engineering our platform away from ownership of those flower shops to putting those flower shops in the hands of good individual operators, family operators who can do a better job with them and give us as a company more flexibility allowing 1-800-FLOWERS to focus on what we do well and our franchise partners to focus on what they do well. So, we are down to only three, I think the number is about three company-owned stores right now and we will continue to gracefully exit those stores selling them to our franchises so that takes away from our top line number but it shows you how deliberately and consistently we have been engineering our platform to be an e-commerce company perfectly integrated where it gives us an opportunity, gives us good return on investment and gives us increased flexibility. So, that’s just one example of how we have been doing this. It is not something needless. We have been turning and squeaking and engineering our platform to give us that ultimate flexibility and give us some margin opportunities where appropriate.

Jim Leahy – Morgan Joseph

Then on to just how would you guys look at this current environment that we are in right now and how do you approach this environment from an M&A perspective? Are you guys getting more – do you see yourself being more aggressive in this environment in terms of multiples coming down or is it still some quarters off?

Jim McCann

Jim, I think we have been equally well positioned. We have a good operating platform; we have great efficiencies and improving efficiencies all the time. I think we have vertical integration where appropriate and a good example of that is design packed gifts. Look at all the different capabilities that gives us across the enterprise and to build what we think will be a pillar business for us and our florist members of BloomNet and we have not been exactly aggressive in acquisitions. Up until this last acquisition it was two years ago when we made the last and that was Fannie May and that has turned out to be terrific for us and for our florists. Again chocolate a nice price point, good value, a great gift, part of it every florist will carry. So we are very deliberate about flushing out the inventory mix. But I will tell you that with the balance sheet that we have and finishing this quarter with over $100 million in cash with a good capacity in it, I think the environment for M&A opportunities will be rich whether or not we will find the right companies that would help us in the very deliberate and strategic way that we have been approaching this is an open question and we are certainly not going to forecast that. I do think that these are still alive [ph] between expectation on price that a seller in a private environment would have and recognition of what has happened in a broader global and public marketplace. But I think that the next time they go to the bank for a credit facility to fund their expansion plans for the spring they will start to get a rude awakening. But I will tell you too that our criteria have changed. The kinds of things that we would even consider has changed and what we would pay for them has changed to reflect the environment. So near term I think that opportunities will be more but we are very prudent at how we spend our assets and which kind of things will help us today. We are not likely to be making investments as a five-year return to profitability. We might have been interested in it in the years gone by but in this environment we have a balance sheet and we are hell bound on protecting that and making sure that we only find things that are accretive and beneficial for us today and especially so tomorrow.

Jim Leahy – Morgan Joseph

Great thanks.

Operator

There are no further questions in the queue; I would like to turn the conference back over to Mr. McCann for any additional or closing remarks.

Jim McCann

Thank you, Connie. I think what you will see that we are greatly focused on making sure we manage our operating expenses, making sure we take advantage of opportunities for growth when they properly present themselves. We are not going to just chase top line for the heck of it. We are going to ensure that discipline and prudence that we have demonstrated over the last few years focused on improving our bottom line results. We have done a good job with that and I think the upcoming holidays give us further opportunities to do that and let me remind you that although we have had a major holiday for us in the flower business in our candy and in our chocolate and in our gift bakery businesses, Halloween is a very important holiday for us and it is just around the corner. So I encourage you if you have a little darlings that you would like to say happy Halloween to, or maybe if you are lucky enough like me to have a brand new granddaughter just arrive on the scene, we all have reasons to express ourselves in gifts and we have the right products at the right price so I want to encourage you to come on in or call up quick for those wonderful gifts for all those little goblins in your life at Halloween. Thank you for talking today and your interest and we look forward to chatting with you in the future.

Operator

This concludes today’s conference, we thank you for your participation. You may now disconnect.

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Source: 1-800-FLOWERS.COM, Inc. F1Q09 (Qtr End 09/30/08) Earnings Call Transcript

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