1-800-FLOWERS.COM Inc. F4Q09 (Qtr End 06/28/2009) Earnings Call Transcript

Aug.20.09 | About: 1-800 FLOWERS.COM, (FLWS)


F4Q09 (Qtr End 06/28/2009) Earnings Call

August 20, 2009 11:00 am ET


Joseph Pititto - President of IR

Jim McCann - CEO

Bill Shea - CFO

Chris McCann - President


Eric Beder - Brean Murray

Kristine Koerber - JMP Securities

Anthony Lebiedzinski - Sidoti & Company

Alejandro Maldonado - Bayside Capital

Robert Nicholson - Pine Cobble Capital


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

Joseph Pititto

Thank you. Good morning and thank you all for joining us today to discuss the 1-800-FLOWERS.COM financial results for our fiscal 2009 fourth quarter and full year. My name is Joe 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 website at 1800flowers.com or you can call Patty Altadonna at 516-237-6113 to receive a copy of the release by email or fax.

In terms of structure, our call today will begin with brief formal remarks and then we'll open the call for your questions. Presenting today will be Jim McCann, CEO, Chris McCann, President and Bill Shea, Chief Financial Officer.

Before we begin, I need to remind everyone that a number of the statements that we'll make today maybe 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 adjusted results and 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 the recordings of today's call, the press released earlier today or any of the SEC filings except as maybe otherwise stated by the company.

I'll now turn the call over to Jim McCann.

Jim McCann

Fiscal 2009 was an incredibly challenging year during which we saw unprecedented changes in our economy. There was turmoil in the world financial markets, major financial institutions failed, the housing market slump intensified and unemployment increased dramatically.

As a result, consumer confidence fell to its lowest level on record. Under tremendous pressure, consumers reacted by dramatically reducing their spending. This weakness clearly impacted our business affecting our revenue and margins.

However, we were able to react effectively to the changes in the marketplace by accelerating the operating expense reduction programs we already had in place. As a result, during the year, we generated positive adjusted earnings per share and more than $36 million in adjusted EBITDA from continuing operations.

During the second half of fiscal 2009, we achieved the target of $50 million in operating cost savings from a fiscal 2010 which we discussed in our previous quarterly calls. This was on top of the more than $25 million in operating expenses that we had previously removed from our platform.

We accomplished this by leveraging our unique business model which features lower capital requirements compared with most other retailers. As a result, we believe we are positioned to drive improved bottom-line results in our current fiscal year and beyond.

Importantly, our expectation for strong growth in earnings, EBITDA and free cash flow for this fiscal year is not predicated on improvement in the consumer demand. We think it is prudent to assume that the current economic climate will continue to put pressure on consumers and dampen their discretionary spending. Should the economy improve, and consumers begin to increase their level of gift spending, we believe the strength of our brand combined with the flexibility of our business model will allow us to drive additional revenues and further enhancements to our profitability.

As part of the continuing evolution of our business, during fiscal 2009, we made a strategic decision to divest our Home and Children's Gift segment. This will allow us to focus all of our efforts and investments on our key business categories in Floral and Gourmet Gifts. These businesses leverage our platform best and offer the greatest opportunity for top and bottom line growth in the years ahead.

As a result, we have classified our Home and Children's Gift segments as a discontinued operation. This decision was not made lightly and it is important to note that the segments' day-to-day business activities will remain unchanged while we work toward a possible sale.

As we saw the decline in the consumer economy unfolding during the year, we intensified our focus on three key strategic priorities that drive our business in good times and challenging times.

These are first, Know and Take Care of our customer. We do this by providing the right products and best services to help them express themselves and connect to the important people in their lives. Second, maintain and enhance our financial strength and flexibility.

During the fiscal 2009, we aggressively reduced our operating costs while strengthening our balance sheet and adding flexibility to our capital structure, which I'll discuss more in a moment.

Third, we’ve continued to innovate and invest for the future. Our key investment focus areas are technology, such as our pioneering applications in mobile e-commerce on the iPhone, BlackBerry and in the fast-growing social networking world on Facebook and Twitter.

BloomNet is another investment focus area for us where we continue to grow our market share through the introduction of innovative new products and services such as our digital directory. Another is Celebrations.com, our customer engagement and content website focused on all things celebratory with [extra] device and new video content.

And finally, 1-800-BASKETS.COM, our newest brand which we'll be launching this fall to further expand our growth in the important gift food gifts category. We believe our continued focus on these key areas will enable us to drive the improved results during the current fiscal year and in the future.

Before I turn the call over to Bill, for his review on specific results and metrics for the quarter and the year, I would like to highlight a few additional areas. First in terms of our balance sheet, we finished the fiscal year with approximately $30 million in cash and no debt outstanding on our revolving credit facility.

As we previously announced, we revised our bank credit facility, where we prepaid $20 million of our term debt. We reduced our revolving credit line. We eliminated the net worth covenant and we revised our debt covenants to provide added flexibility.

In addition, we have reduced our capital expenditures by focusing on key projects with the highest return on investment. Capital expenditures in fiscal 2009 were approximately $19 million and we expect CapEx to be below $15 million this year. Combined with our focus on reducing inventories and working capital needs, we expect to generate significant growth in free cash flow this year compared with fiscal 2009.

Second, on the customer front, despite the weak economy more than five million customers came to us to help them and express themselves and connect with the important people in their lives. The strength of our brands which help us attract approximately 2.5 million new customers during the year and repeat customers represented more than 50% of our total orders.

We believe these metrics illustrate the success of our continued focus on deepening the relationships we have with our existing customers while attracting millions of new customers, even in a difficult environment. Looking ahead, we are focused on delivering the best end-to-end customer experience in our industry and the best product innovation and design with an expanded range of price points.

I'll now turn the call over to Bill. Bill?

Bill Shea

Thank you. As Jim noted, fiscal 2009 was characterized by dramatic weakness in the consumer economy. This caused us to accelerate our operating expense reduction programs to align our cost structure with market conditions. We also worked closely with our banks syndicates to revise our credit agreement, reducing our debt and providing additional flexibility in our loan covenants.

The weak economy also impacted valuation multiples, affecting goodwill and intangible values. And we made the strategic decision to divest our Home and Children's Gift segment and classified it as a discontinued operation. As a result of these factors, during fiscal 2009, we took several non-recurring charges which had a significant impact on our financial results.

First, in our Gourmet Food and Gift Basket category, we performed a detailed review of our goodwill and intangibles based upon changes in market evaluations in this environment and recorded a non cash impairment charge of $76 million in the fiscal third quarter. After further evaluation of the segment during the fourth quarter, we took an additional $9 million charge primarily related to customer lists and other intangibles.

It is important to note that this category has weathered the downturn in the consumer economy reasonably well and we continue to view the Gourmet Food and Gift Basket category as a key element on our future growth and profitability.

Second, in our fiscal second quarter, we recorded a non-cash impairment charge of $20 million related to our Home and Children's Gifts segment, essentially writing down the intangible value of this segment. During the third quarter, we retained an investment banker to help us set our strategic alternatives for this segment and subsequently we made a strategic decision to divest this segment and begin a sales process during the fourth quarter which we expect to complete during fiscal 2010.

As a result, we have classified this segment as a discontinued operation, excluding its results from our consolidated results of continuing operations and we took a non-cash impairment charge of $14.8 million in the fourth quarter.

Third, as we previously discussed, in April, we entered into an amended credit facility with our bank syndicate for which we took a non-cash charge of $3.2 million in the fourth quarter to write-off deferred financing cost.

Lastly, as part of our operating expense reduction initiatives, we implemented labor force reductions in both our third and fourth quarters resulting in severance charges of $1.5 million and $1 million respectively. During the fourth quarter, we also recorded an additional $400,000 in various restructuring charges.

Certainly, these charges have added quite a bit of complexity to our financial results for the fourth quarter and full year. We believe taking these charges in fiscal 2009, which with the exception of the severance costs or all non-cash charges, better position us as we head into fiscal '10.

As we have seen in our press release this morning, our Floral and Gourmet Food and Gift Basket categories are and will continue to be reported as continuing operations. The results of the Home and Children's Gift segment are condensed with their income or loss in any gains and losses on final disposition to be reported in discontinued operations.

Now, regarding specific financial results and key metrics for continuing operations. For the fiscal fourth quarter, total net revenues were $172.5 million, down 7.7% compared with $186.9 million in the prior year period.

Gross profit margin was 38.6%, down 220 basis points compared with 40.8% in the prior year period. This primarily reflects the weakness in the consumer economy and the resulting increase in promotional pricing.

Operating expense ratio excluding depreciation and amortization, goodwill and intangible impairments and severance and other restructuring cost was 37% compared with 34% reflecting increased marketing spending for our consumer floral business, seasonal operating losses associated with our recent acquisitions and the lower year-over-year revenues in the period.

As a result, adjusted EBITDA for continuing operations was $2.7 million compared with $12.7 million in the prior year period. Adjusted net loss from continuing operations for the quarter adjusted to the non-recurring charges previously discussed was $2.8 million or $0.04 per share compared with net income of $4.8 million or $0.07 per diluted share in the prior year period.

Net loss from continuing operations for the quarter including the aforementioned charges was $13.1 million or $0.21 per share compared with net income of $4.8 million or $0.8 per diluted share in the prior year period.

Results from discontinued operations for the quarter were a loss of $9.1 million or $0.14 per share compared with a loss of $500,000 or $0.01 per share in the prior year period. These results include the aforementioned pretax impairment charge of $14.8 million.

Net loss for the quarter, including discontinued operations and the aforementioned charges was $22.2 million or $0.35 per share compared with net income of $4.3 million or $0.07 per share in the prior year period.

In terms of full year results from continuing operations, revenues were $714 million compared with $739.2 million in fiscal 2008. Gross profit margin was 39.4% compared with 42.2% in the prior year, primarily reflecting promotional pricing as well as the impact of the lower gross margins associated with the wholesale businesses of DesignPac Gifts and Napco.

During the year, operating expenses, excluding depreciation amortization, goodwill and intangible impairments and severance and other restructuring costs were reduced by $10.4 million. As a result, operating expense ratio decreased 20 basis points to 34.3% compared with 34.5% in 2008.

The reduction in operating expenses reflected the early benefits from our operating cost reduction programs initiated during the second half of fiscal 2009. Somewhat offset by the incremental operating cost associated with DesignPac Gifts and Napco.

Our operating expense ratio was also influenced by the lower revenues for the year. As a result, adjusted EBITDA for continuing operations for the year was $36.5 million compared with $57.1 million in the prior year. Adjusted net income from continuing operations was $7.4 million or $0.11 per diluted share compared with $22 million or $0.34 per diluted share in fiscal 2008.

As a result of the aforementioned charges, net loss from continuing operations for the year was $66.5 million or $1.05 per share compared with net income of $22 million or $0.34 cents per share in the prior year. Results from discontinued operations for the year were a loss of $31.9 million or $0.50 per share compared with a loss of a $1 million dollars or $0.01 per share in the prior year.

Net loss for the year including discontinued operations was $98.4 million or $1.55 per share compared with net income of $21.1 million or $0.32 per diluted share in the prior year. The effective tax rate for continuing operations for the fourth quarter and the year was 26.5% and 18.7% respectively compared with 33% and 37.5% respectively in fiscal 2008. The principle cause of the lower effective tax rates relates to the significant impairment charges recorded during the year for which the company only get the partial tax benefit.

In terms of customer metrics from continuing operations, during the fourth quarter, e-commerce orders totaled $2,393,000 compared with 2,448,000 orders in the year ago period. For the year, e-commerce orders totaled 8,641,000 compared with 9,770,000 in fiscal 2008. Average order value during the quarter was $57.71, down 8.4% compared with $63.02 in the prior year period.

This reflected the expansion of our value priced product collections for Mother's Day as well as promotional pricing during the quarter. For the year, average order value was $57.69 down 3.5% compared with $59.79 in fiscal 2008.

During the fourth quarter, we added 700,000 new customers while concurrently stimulating repeat orders from existing customers who represented 60.5% of our total customers. For the year, we added 2.4 million new customers repeat orders representing 51.7% of total customers.

In terms of the category results, 1-800-FLOWERS.COM consumer floral business, revenues for the fiscal fourth quarter were $129 million compared with $149 million in the prior year period. Gross profit margin was 36.5% down 220 basis points compared with 38.7% in the prior year period primarily reflecting the challenging consumer economy and resulting increase in promotional pricing.

Category contribution margin was $13.5 million compared to $20.2 million in the prior year period. For the year, revenues in this category were 414.9 million compared with 491.7 million in the prior year. Gross profit margin was 36.6% compared with 38.7% in fiscal 2008.

As a result, category contribution margin for the fiscal year was $40.9 million compared to $63 million in the prior year. We define category contribution margin as earnings before interest, taxes, depreciation, amortization, goodwill and intangible impairment, severance and other restructuring costs and before the allocation of corporate expenses.

In our BloomNet Wire Service business, revenue for the fiscal fourth quarter increased 4.2% to $16.1 million compared with $15.5 million in the prior period. Gross profit margin was 55.2% compared with 56.8% in the prior year period. Category contribution margin was $4.3 million compared with $5.9 million in the prior year period. The lower category contribution margin in the fourth quarter reflected seasonal operating losses associated with the division of Napco acquisition and increased bad debt reserves reflecting the challenging economic climate.

For the year, revenues increased 19.5% to $63.9 million compared with $53.5 million in the prior year primarily reflecting the company's acquisition of Napco. Gross profit margin was 55.3% compared with 56.2% in the prior year. Category contribution margin increased 3.2% to $19.1 million compared with $18.5 million in the prior year period.

In our Gourmet Food and Gift Basket category, revenues for the fiscal fourth quarter increased 22% to $27.9 million compared with $22.9 million in the prior year period reflecting the shift of the Easter holiday back into the company's fourth quarter during this fiscal year.

Gross profit margin was 37.7% compared with 42.5% in the prior year period, primarily reflecting the higher mix of products sold in the lower margin wholesale channel and increased promotional activity to drive sales in the weak economy. As a result, category contribution margin in the fourth quarter was a loss of $2.7 million compared with a loss of $1.7 million in the prior year period.

This reflected a combination of factors including the lower gross profit margin in the period combined with higher operating cost associated with a full quarter of DesignPac Gifts operations compared with a partial quarter in the prior year period, and investment costs associated with the upcoming launch of the Company's 1-800-BASKETS.com brand, which will utilize the DesignPac Gifts platform.

For the full year, revenues in this category increased 22.4% to $240.2 million compared with $196.3 million in the prior year reflecting contributions from the company's DesignPac Gifts. Gross profit margin for the year was 39.1% compared with 46.7% in the prior year period. Again, primarily reflecting the lower wholesale margins associated with DesignPac Gifts.

Category contribution margin was $23.4 million compared with $24.6 million in the prior year period. It is important to note that until the recent economic downturn, we successfully enhanced the growth and profitability of our acquired businesses in this category by leveraging our business platform and among other initiatives, providing them with e-commerce capabilities that did not previously have.

In doing so, we have quickly become one of the leading players in this category with revenue run rate of close to a quarter of a billion dollars. We continue to see excellent potential for growth as well as enhanced profitability for this category going forward.

As I stated earlier, our category contribution margin results exclude costs associated with the company's enterprise shared services platform which includes, among other services, IT, HR, finance, legal and executive. These functions are operated under a centralized management platform, providing support services to the entire organization.

For the fiscal fourth quarter, corporate expenses from continuing operations including stock-based compensation and severance and other restructuring costs was $13.4 million compared with $11.7 million in the prior year period. For the full fiscal year corporate expenses was $49.5 million compared with $48.9 million in the prior year.

Turning to our balance sheet, at year end, our cash and investment position was $29.6 million compared with $12.1 million at the end of fiscal 2008 and we had no borrowings under our revolving credit line. Inventory was $45.9 million compared with $38.8 million in fiscal 2008. This excludes the Home and Children's Gift segment inventories for both periods, with the year-over-year increase reflecting higher inventories in BloomNet products, and our Gourmet Food and Gift Basket category.

Inventory at year end including the Home and Children's Gift segment was $68 million, down sequentially from fiscal 2009 third quarter inventory of $80 million and essentially flat with prior year.

We are focused on reducing inventory during fiscal 2010, while we're currently building inventory for the calendar year and holiday period, we anticipate inventory for the full year will be down compared with fiscal 2009. Thereby improving our working capital for the year and helping drive significant growth in free cash flow.

Regarding long-term debt, we finished the year with approximately $92 million in long-term debt. Going forward, our regularly scheduled debt payments will be approximately $5 million per quarter.

During fiscal 2009, the company generated approximately $8 million in free cash flow from continuing operations which we define as net cash provided by operating activities of continuing operations less capital expenditures.

Regarding guidance, as we stated in this morning's press release, we expect economic conditions for consumers will continue to be very challenging in fiscal 2010. Based on this outlook, we anticipate that revenues for the full fiscal year to be flatly down approximately 5% compared with fiscal 2009.

With that said, based on the reductions that we have achieved in our operating expense platform as well as the planned reductions in capital expenditure and working capital, we anticipate strong bottom line growth in fiscal 2010. We expect earnings per share from continuing operations to increase more than 30% compared with adjusted EPS from continuing operations in fiscal 2009.

EBITDA growth of more than 20% year-over-year compared with adjusted EBITDA from continuing operations in fiscal 2009 and significant growth tripling our free cash flow from continuing operations to more than $25 million during fiscal 2010.

In terms of seasonality for fiscal 2010, we anticipate quarterly revenues will continue in the following ranges. Q1, 15% to 17% of total revenues; Q2, 34% to 36% of total revenues; Q3, 23% to 25% of total revenues and Q4, 25% to 27% of total revenues.

In summary, while we anticipate continued weakness in consumer economy, we believe our reduced operating expenses combined with our lower capital expenditures and working capital needs will enable us to look a strong bottom line result in fiscal 2010.

I'll now turn the call over to Chris McCann.

Chris McCann

Thanks, Bill. To wrap up our formal comments, I would like to offer some additional color on the three key strategic priorities that Jim mentioned earlier. First, in terms of knowing and taking care of our customers, we've developed very specific personas for our good, better and best customers at each of our brands. Based on this data we’ve designed our marketing and advertising programs to reach each of these segments with an appropriate ROI and have pass to deepen our customer relationships.

Our goal is to introduce all of our customers to a broad range of products and services across all of our brands so that we can become part of all of the celebratory occasions. We've dedicated internal talent and resources to focus exclusively on enhancing all aspects of the customer experience.

As Jim said earlier, we are the leader in our category in this area but now we can get even better. To this end, we continue to enhance our customer service platform. The expansion of our home agent network has allowed us to retain highly trained and experienced agents who enjoy the flexibility from working at home. As a result, they provide us with increased productivity without fixed facility overhead costs.

We're also continually upgrading our award winning websites providing added functionality, better graphics, extended reminder services, simplified order selection and check out processes and much more. If you haven't visited the 1-800-FLOWERS.COM website recently, I encourage you to do so. You'll find the best functionality, best graphics, best customer experience in our category and we have numerous on-going additional upgrades planned that will put us even further ahead of the competition.

Along these lines this year, we will complete migration of all of our Gourmet Food and Gift brands [also our] first digital e-commerce platform which we have described you in the past. This will significantly improve their e-commerce capabilities while enhancing our cross band marketing and merchandising efforts. These efforts include the expansion of our successful Fresh Rewards loyalty program and our multi-brand gift cards.

Knowing our customers better enables us to better understand and service their needs. That's why we're expanding our value price gift offerings across all of our brands. In today's economy, while consumers are looking for value, they're not willing to compromise quality or convenience. A good example of how we address this in fiscal '09 was our 30 products for Under $30 floral gift collection for Mother's Day. This initiative resonated with our customers and enabled us to reverse the negative trend in order volume that we had seen earlier in the fiscal year.

We're using a knowledge gain from this initiative to design gift collections at a variety of price points that provide excellent value and quality, while maintaining and even improving our margins. Another way we are taking care of our customers is to engage them in a direct dialogue through our marketing and communication programs. Specifically, we're utilizing the new social networking channels that are increasingly more relevant to our customers compared with traditional media.

Once again, we were the pioneer in our space with our SPOT A MOM campaign for Mother's Day. This fully integrated campaign used Facebook, Twitter and engaged our network of hundreds of Mommy Bloggers to dramatically increase our reach. Evidence of our success came in a form of numerous media stories, [lording] our innovative use of social media.

Recently, we made headlines again in this area. First merchant to conduct e-commerce within Facebook. We work closely with Facebook to build this application and while order volume is just beginning, the tremendous media exposure we received reflected our long history of being a pioneer in embracing new technologies and new modes of communications.

In terms of maintaining our financial strength and flexibility, Jim and Bill have already covered the achievements we made and significantly reducing our operating expenses and enhancing our balance sheet. It is important to note that over the past few years, this focus has become engrained in our corporate culture.

Lastly, and perhaps most important, we must continue to innovate and invest for the future. In terms of technology, we launched the first mobile commerce applications in the floral and gift category on Blackberry and on the iPhone. And we'll soon be launching a mobile app for Google’s Android. I've already described our initial success in the social networking space with Facebook, Twitter and the Blogosphere and we continue to expand our efforts here. And we continue to expand our first digital e-commerce platform.

In terms of our brands, this fall we'll launch our newest brand, 1-800-BASKETS.COM which will leverage 1-800-FLOWERS.COM’s brand strength and tremendous web traffic. 1-800-BASKETS would be a true sister brand to 1-800-FLOWERS.COM with fully integrated functionality including the 'Fresh Rewards' loyalty program and a shared shopping cart among other features. We are very excited about 1-800-BASKETS.COM and you'll be hearing more about that as we move forward.

In our BloomNet business, we will continue to roll out new products and services designed to help our florist succeed in this challenging economy. We've enhanced our digital directory, still the first and only online directory in our industry. We've added video capabilities, new search functionality, product photo galleries and rich media advertising solutions to our [orphans]. All online and designed to be plug-and-play for our florists.

We've even launched the new BloomNet Facebook page along with programs to teach our florists how they can leverage social media world to help them engage their customers and improve retail traffic. We believe that these initiatives and many more like them under our three keys priorities are the keys to weathering the current economic environment and emerging a stronger and more profitable business and thereby build long-term shareholder value.

Joseph Pititto

Thanks, Chris. That concludes our formal remarks. We'll now open the call for your questions.

Question-and-Answer Session


(Operator Instructions). We will go first to Eric Beder with Brean Murray.

Eric Beder - Brean Murray

Could you talk a little bit what's happening with your florist as a group? How are they weathering this downturn and what are you guys doing to help them?

Chris McCann

Sure. I think that the retail is across the board if impacted by the downturn and florist, no exception. Just to give you a little bit of historical perspective, Eric, over the last 10 years or so, we've seen a decline in the number of retail flower shops in a range of 30% to 40%. That number of shops continues to decline, although not at the same pace as we had seen earlier. So what we're focused on as we have been for the last couple of years within BloomNet is providing a broad range of both products and services and integrating our florist more closely from the BloomNet group, more closely with the things we do promotionally on behalf of our retail brands.

So they can participate, for example, this coming year in our version of the SPOT A MOM Program for Mother's Day. That we have the right products and services at the right price points leveraging all buying power to pass on those savings to them that we introduce new services like the software services. So the things that we do that we can package and make available to retail florists they can do with their customers.

As Chris mentioned, there is a whole series of products and services that we've been packaging and making available to florists like all the changes we made to the digital directory online that they can avail themselves of to market their products and services to their local retail customers as well. So it's a focus on product services and improved price points so they can have a better advantage in the marketplace.

Eric Beder - Brean Murray

Secondly, on Martha Stewart, how is that going and is she going to be a part of the baskets thing, also?

Chris McCann

The Martha Stewart business is paced similar to what we've seen in the overall 1-800-FLOWERS and other gift businesses. It’s been challenged in the same way. Couple of things there. One is, we retooled the products and price points to make up more of a value statement as we have done with 1-800-FLOWERS. Yes, we fully expect that Martha Stewart brand will fully participate in the 1-800-BASKETS launch and frankly extending it to some of our other product categories.


We will go next to Kristine Koerber with JMP Securities.

Kristine Koerber - JMP Securities

A few questions here. First of all, can you tell me if you've had any interest in the Home and Children's Group thus far?

Jim McCann

Well, what we stated here today and previously, we said we were going to explore our strategic options. We've gone further today to say that we've decided to pursue a sale process. We're in a thick of that, and so we wouldn't comment more specifically than that.

Kristine Koerber - JMP Securities

Fannie Mae, can you just talk about what's going on at Fannie Mae, the trends you've seen at the stores and kind of your strategy going forward for the brand?

Chris McCann

Of course, sure. I think Fannie Mae we've seen some good results. It was mentioned during our formal remarks, the full business has faired reasonably well as the economy went through all the changes that we went through this past year. Again, one of the reasons we're in the gift food category to begin with is it gives our customers options, and what we find is that looking for different value and different price points, often they'll trade down maybe even from a floral bouquet to a one pound box of chocolate as a gift. So we're seeing some good trends there which have us fairly confident as we move into this next year.

Kristine Koerber - JMP Securities

Did you talk about, I don't know if I would have missed, the store opening plan for Fannie Mae going forward?

Jim McCann

Sure. This is Jim, Kristine. Well, in terms of stores, we acquired Fannie Mae a few years ago. It had about 30 stores. The store number now is around 70. We'll continue to look to expand the store count but not in significant numbers. We've shifted our emphasis there to look at a franchise model. When I say look at throughout the course of this past fiscal 2009, we took on all the necessary steps in terms of consulting and legal agreements to build a very robust franchising effort. So you would expect that our expansion of stores going forward within the Fannie Mae brand will be in a franchise model.

It's a really good concept. It really is good for the franchisees. It really is good for the brand and it really is good for the other parts of the business that we will maintain, the manufacturing, etcetera, because this footprint used to be much larger when it was in previous ownership's hands and it had gone to well over 300 stores. So we know exactly where we want to reopen stores based on historical performance levels and placements, but you can expect that that expansion going forward will be done in a very capital, effective way for us using a franchise model.

Kristine Koerber - JMP Securities

The 70 stores that you have now, will you continue to own those stores?

Jim McCann

The answer is yes, but we're open to all different kinds of possibilities there. As we begin down the path of franchising, clearly people are going to be approaching us about those stores because they are so successful. It will be open to dialogue there. Our plan right now is to maintain ownership of those stores or open to other possibilities.

Unlike the floral stores which we decided several years ago were best if we didn't own them in a company-owned fashion here and we divested those. We sold them to franchisees. That was a good idea. It's good for the franchisees. It was good for us. In this case, the plan is continue to own them, but we're open and flexible in our thinking there.

Kristine Koerber - JMP Securities

Then just lastly, your move or focus on the value products, is that just a response to the economic environment or will we see this as an ongoing strategy?

Jim McCann

I think Kristine this has always been an ongoing strategy about for many years. Now, we've taken a good, better, best merchandising strategy. I think it's just a matter of a different time, different economic times, what we emphasize. So clearly, for a couple of years, we launched our expert designer strategy right for a couple of years and that really worked well and culminated in relation with Martha Stewart. At this point in time, customers are looking to spend a little bit less in their expressive gifting needs. So we emphasize our good or better part of that merchandize strategy and hitting those value price points.


We will go next to Anthony Lebiedzinski with Sidoti & Company.

Anthony Lebiedzinski - Sidoti & Company

I was wondering if you guys could comment on what you're seeing in the competitive landscape, is it less promotional or more promotional? Can you give us just sort of more color on that?

Jim McCann

Well, I think overall for the last two quarters of the fiscal year, it was a very promotional environment. I think what you're seeing from a macro point of view is that if you look at any of the available public data in terms of web traffic, comScore, Google search results, the customer just stepped back quite a bit during the last 2.5 quarters. What Chris reported is by emphasizing our value pricing by being more aggressive promotionally. We're able to reverse the trend in order count from the first calendar quarter to the second calendar quarter or third fiscal, fourth fiscal, so we're encouraged by that.

So from a macro point of view, customers stepped back, we readjusted our expenses, emphasized our value pricing, introducing a whole line of other products with, for example, our 1-800-BASKETS product this quarter. So we think we're well-positioned in terms of value emphasis and broader range of giftable products available to our customers.

Anthony Lebiedzinski - Sidoti & Company

Then actually touching on the 1-800-BASKETS, when you guys launched this, how many SKUs will initially beyond that and then what's your expectation for the Christmas season?

Chris McCann

So one of the key things, Anthony, we are very excited about as you know we made the acquisition of DesignPac Gifts for this sole purpose and we're really excited about the product line that's been developed at 1-800-BASKETS. There will be a very robust SKU offering, making sure that we're hitting all of the appropriate needs for our customers. There will be a couple of hundred products that will be launched which we think really meets the customer need for their different occasions.

And as we look for this holiday season reflected in our overall expectations is we're still expecting some weak consumer demand. But we’re looking for really is really a brand awareness penetration with the 1-800-Flowers customer base who we know are buying these products from other companies. So really looking to make sure we get that awareness this holiday, migrate the existing business that exist now and really position this business for a significant growth over the next several years.

Jim McCann

And I think you can expect that this SKU count will continue to grow. One other things that has sort of encouraged about 1-800-BASKETS, as we've researched this with our customer base two things, one as Chris mentioned, these customers are already buying that Gourmet Gift and Gift Basket product from other vendors. So, our customer will walk away from them. And secondly, being in this category of [confected] gifts, gives us an opportunity to play in a much greater number of giftable occasions than we will with just our flowers or Gourmet Gift (inaudible) this puts us into many more categories with many more potential recipients and recipient types.

So, we have a much better portfolio of giftable products available to satisfy our customer's gifting needs across the calendar. So, we'll continue to add SKUs to it always will be a calling kind of activity. But we would expect that SKU count will continue throughout the years ahead.

Anthony Lebiedzinski - Sidoti & Company

Can you touch on what are you seeing with advertising rates nowadays? And also I know you talked about the social networking sites. Have you done anything else in terms of other media? What are your plans as far as your marketing and advertising budget going forward?

Jim McCann

Well, it is a mixed bag. I’ll ask Chris to touch on the social networking activities we are involved in. From a media point of view, the cost of media in the off-line world has obviously come down a great deal, but its effectiveness has come down as well. So, that's a, clearly you can get a lot more for your dollar, the question is what the impact to that dollar spend is.

We're encouraged by that, I think it gives us, as a smaller company, who prides [itself] from being a little bit creative, attempt (inaudible) some real good opportunity to expand our brand depth and its awareness among the targeted audiences. From a social networking point of view, clearly, the world has changed. And Chris will talk to you about some of the things we've done and plan to do in social networking.

Chris McCann

I think the key is making sure we take a fully integrated approach. And we've referenced some of the things we've done with Facebook, with Twitter; certainly the whole blogging community is a very important community for extending our reach. I don't think anyone really could say they figured it out yet, but we in our [DNA], we've dunked our head into the whole social networking space. So, we'll continue to learn and be on the forefront of figuring out what works there. But the key is making sure it's an integrated approach with our overall marketing campaign.

Jim McCann

Two things there, Chris. One is the Facebook announcement three weeks ago now, when we did the first commerce activity in Facebook totally contained within Facebook, as Chris mentioned in his remarks, we've got a lot of press for that. We should, it is an innovative kind of approach. We work closely with our vendors there. Our vendor called our vendor and also with Facebook there. So, I think what we did at Mother's Day shows where marketing is going. It was an integrated approach there, Chris.


And we'll go next to [Alejandro Maldonado] with Bayside Capital.

Alejandro Maldonado - Bayside Capital

Thank you. I wanted to ask you about organic growth, specifically for BloomNet and the Food and Gift Basket category for the fiscal year '09, please.

Bill Shea

For 2009, we saw BloomNet grow at about 20% from $53 million to about $63 million. That was aided by a BloomNet products addition that we had during the year. Overall guidance for the company going forward is that revenues would be down 0% to 5%, as we go forward.

Alejandro Maldonado - Bayside Capital

And for the Food and Gift Basket, what was the organic growth because you had the DesignPac acquisition. So, I'm just wondering what the organic growth for that was this past year.

Bill Shea

Again that, category grew 22% for the year, but was aided by the DesignPac acquisition that we acquired in April of last year which really represented all of the growth in the Food and Gift Basket category.

Alejandro Maldonado - Bayside Capital

Thanks. And then you mentioned revenue expectations to be down 0% to 5%. Is that a reflection of what you expect for Christmas season as well to be? I'm just wondering kind of like how those expectations vary for the different segments so for the Food and Baskets and floral versus BloomNet?

Bill Shea

We do believe as we go through fiscal '10, that is going to start out, the numbers will be softer at the beginning of the year. So, Q1 is going to be down certainly more than that. As we head into Q2, we do think it is going to be a soft economy for the holiday season. So, the numbers are going to be softer in Q2 and then as we get beyond that and we start talking again as much softer numbers from this fiscal year, we start seeing that reverse.

Jim McCann

Keep in mind what we saw this year, [Alejandro] is that we held up okay, during the first half of the fiscal year. It was right around the beginning of December with the consumer softened dramatically. Again looking at the [comp] point of view, it is our intention to be prudent and conservative in our forecast, so by forecasting, it will be flat to down 5% overall, obviously that's all organic.

We think that's prudent. We don't see any reason to get a gleeful about consumer spending in the near-term. You have 16 plus percent of the population unemployed or underemployed. You have just the consumer confidence and that's a lowest level ever recorded. With those things, we don't have any reason to say we're going to be completely different than the rest of the world. We're going to be optimistic, so we have our cost basis in fact in place.

Frankly, we have plans that if it were to turn worse, how we would adjust and adjust quickly to make sure we maintained our profitability but we're forecasting even in that environment to improve our profitability metrics quite dramatically and to do that with no growth. If it begins to grow, if the consumer turns at all to the fourth quarter or for the second half of the fiscal year, we're in terrific shape to really benefit from that.


And we'll go next to Robert Nicholson with Pine Cobble Capital.

Robert Nicholson - Pine Cobble Capital

A couple of real quick questions. I appreciate the detailed guidance for next year. On the cost side, the $50 million in savings that you plan to realize in 2010. I'm guessing that that number that you've given historically will go down a little bit after you remove the Home and Children's segment from your cost savings guidance.

Chris McCann

That's correct. Probably about a third of those savings came from what we've now classified as discontinued operations. Yes, it will be normalized going forward. Yes, we've achieved a little savings and about a third of them would go with the discontinued operations.

Bill Shea

We've described this in the past that the baseline for which we're measuring the 50 million savings with our fiscal '08 year adjusted for the acquisitions that we did. The pro forma '08 for the acquisitions of DesignPac and Napco and the operating expenses associated with that and then we start taking the costs out off of that and Jim mentioned, about a third or so of the identified savings relates to our Home and Children's Gift segment which is a discontinued operation.

Robert Nicholson - Pine Cobble Capital

Well it was 50 and then you take away, it sounds like you take away close to a third of it. How much did you actually realized during 2009 and how much is still to come going into next year?

Bill Shea

Nothing really, hardly any realized during 2009 because the expenses associated with taking those costs out. All of it will be realized in the fiscal year we just began.

Robert Nicholson - Pine Cobble Capital

Then I guess, maybe I'm missing the math here but I sort of took the midpoint of your revenue shortfall and flowed through at a really high contribution rate and factored in the savings that are still to come and added to the adjusted EBITDA that you just reported, I get to a number that looks to be healthfully above the low end of your EBITDA guidance.

Bill Shea

Bob, I think you need to clarify, you saw during the year that we actually had dropped our operating expenses over $10 million this year and that's on real numbers, that's not even accounting for the acquisitions of DesignPac and Napco. It was well over $20 million in reductions, so we have been realizing actually a number of the savings commensurate with the sales declines that we had.

Chris McCann

On a cash basis but then we had charges against those which disguise them.


With 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

Well, thank you all for your questions and your interest and if you have any additional questions, please give us a call.

In closing, I would like to point out one area of our innovation and investment that I believe is particularly pertinent to those of you on the call today. And that is that all of you carry mobile devices and this is a perfect opportunity for you to do a little research on 1-800-FLOWERS.COM by visiting us on your BlackBerry or your iPhone and placing some gift orders for those important people in your life.

Thank you for joining us on today's call and we look forward to speaking with you again soon.


Once again, that does conclude today's conference. We thank you for your participation.

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