1-800-Flowers.Com, Inc. F4Q08 (Qtr End 06/29/08) Earnings Call Transcript

Aug. 7.08 | About: 1-800 FLOWERS.COM, (FLWS)

1-800-Flowers.Com, Inc. (NASDAQ:FLWS)

F4Q08 Earnings Call

August 7, 2008 11:00 am ET

Executives

Joseph Pititto - Investor Relations

Jim McCann - Chief Executive Officer

Bill Shea - Chief Financial Officer

Chris McCann - President

Analysts

Jennifer Watson - Goldman Sachs

Eric Beder - Brean Murray

Jeff Stein - Soleis Securities

Analyst for Jim Leahy - Morgan Joseph

Anthony Lebiedzinski - Sidoti & Co

Operator

Welcome to the 1-800-Flowers.Com, Inc. fiscal 2008 fourth quarter results conference call. (Operator Instructions) 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.

Joseph Pititto

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 www.1-800-Flowers.com or you can call [Paddy Afthana] at 516-237-6113 to receive a copy of the release by email of 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 today for the Q-and-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 meeting 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 of 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 on the tables accompanying the company’s press release issued this morning. The company expressly disclaims any intend or obligation to updated any of the forward-looking statements made in today’s call and in accordance with today’s call, the press release issued earlier today or any of the SEC filings, except as maybe otherwise stated by the company.

I’ll now turn the call over Jim McCann.

Jim McCann

As we announced in this mornings press release during fiscal 2008 we increased our net income and EPS by more than 20% and generated approximately $38 million in free cash flow despite the challenging economic environment that impacted consumer demand throughout the year. We accomplished by continuing to focus on the key strategic priorities that we’ve outlined to you in the past, including leveraging the strength of our brand to deepen our relationship with our millions of customers as their preferred florist and gift shop.

We achieved profitable growth by targeting our marketing and merchandizing programs and focusing on our key business categories and we enhanced our operating expense ratio by leveraging our platform. On this last point, during the year we improved our operating expense ratio by 70 basis points through a broad range of ongoing programs designed to improve the operating efficiency and reduce cost. As a result of these efforts we increased net income by 23% to $21 million or $0.32 per share. We grew EBITDA approximately 10% to $58 million and we generated free cash flow of more than $38 million.

Before I turn the call over to Bill for his review of the financial results and metrics, I’d like to highlight a few additional points. First in our core 1-800-Flowers.com brand we enhanced market leadership position to innovate our marketing and merchandizing programs including the expansion of our Fresh Rewards Loyalty program, the industry’s first and still only loyalty program.

Fresh Rewards has attracted millions of customers, many of them new to our brand that when they sign up, these customers tend to purchase more frequently and at a higher average order value. Fresh Rewards enables us to deepen our relationship with our customers and introduce them to the broad range of products in our shop. This year we plan to roll the Fresh Rewards program out across all of our brands to enhance our ECVR, Enterprise Customer Value which we have told you in the past and talked about it in previous calls.

Starting in April, we introduced our exclusive partnership with Martha Stewart. We are very excited about our plans to expand this program during fiscal 2009, beginning with a stepped-up media program this fall. This will include the additional Martha Stewart gift baskets to our offering as well as significantly increased joint marketing and advertising efforts, leveraging both our own marketing programs as well as the powerful Martha Stewart media properties.

We believe this innovative relationship leveraging the best of the both brands life style icon of Martha Stewarts unparallel design talent with 1-800-Flowers market leadership position. It gives us differentiation and a competitive advantage which will enable us to grow revenues even in this current economy.

Second, during fiscal 2008 our BloomNet wire service business continues to gain market share by establishing itself as the industry’s leading innovator. The introduction of our digital directory, the industry’s first and only online florist resource has been very successful with thousands of florists adopting the new technology as they join the digital age. In addition many of these florists are also opting into BloomNet’s industry leading green efforts by turning the florists to forest program which allows florists to benefit the environment by eliminating the need of a paper based directory and in return have BloomNet plant trees on their behalf.

During the year BloomNet saw increased market penetrations for their suite of technology services including website hosting and retail store management systems as more and more florists are choosing BloomNet as their preferred wire service. On our product front we recently enhanced BloomNet’s growth outlook through a small asset acquisition in July. These assets complement BloomNets existing product offerings and enable us to expand and deepen our relationships with of florists towards the goal of helping them not just survive but to thrive even in this environment.

In our Gourmet Food and Gift Baskets category, throughout fiscal 2008 we expanded our offerings with new product launches and increased customization capabilities in our Sherwin Company and the popcorn factory brands as well as continued strong e-commerce growth for Fanny Mae confectionaries. During the fourth quarter we announced the acquisition of DesignPac Gifts, a leading designer and assembler of Gourmet Gift Baskets, Gourmet Food gift hampers and gift sets including a broad range of branded and private legal components.

DesignPac Gifts brings excellent capabilities and experience in the design, sourcing, production and distribution of gift baskets and gift sets, as well as strong relationships with many of the leading retailers throughout the country. We expect to leverage these capabilities and relationships to significantly boost our 1800 Baskets business as well as enhance the growth and profitability of our Gourmet Gift Brands during fiscal 2009 and in the years ahead.

As we announced in late April, when we closed this acquisitions DesignPac Gifts does the majority of its sales in the calendar for the quarter holiday period, our second fiscal quarter. As a result it was dilutive for our EPS in fiscal 2008 fourth quarter when we made the acquisition; however we expect it to be nicely accretive during this fiscal 2009.

In our home and children’s gift business as we have guided at the beginning of the year we continue to focus on reducing costs and improving the bottom line performance of this business. During the year we discontinued two underperformance titles, we further strengthened the management team, particularly in the areas of software and logistics, we revised catalogue circulation and marketing programs and we stepped up new product development and sourcing efforts with a focus on unique proprietary gifts. As a result category contribution improved almost $5 million to a profit of $3.5 million compared with the loss of a little over $1 million in fiscal 2007.

While the Home Decor category has been hit particularly hard by the macro economy, we believe the changes that we’ve made in this business will enable us to continue to improve profitability this year and going forward. In terms of customer metrics we impacted more than 3.4 million new customers at fiscal 2008.

Approximately seven million e-commerce customers placed orders during the year with nearly 50% of them being repeat customers. We believe these metric illustrate our ability to leverage the strength of our brand to attract the millions of new customers while deepening our relationships with our existing customers by helping them connect and express themselves to the important people in their lives. This will serve us well going forward at the consumer rebounds.

I will now turn the call over to Bill so that he can take you through the details of our financial results and key metrics for the quarter.

Bill Shea

During fiscal 2008 we achieved solid bottom line growth despite a week consume economy that impacted top line growth. We accomplished this through continued focus on the programs that we’ve described to you in the past to leverage our business platform and reduce cost throughout the enterprise. This focus which we believe will enable us to further reduce our operating expense ratio in fiscal 2009 and beyond positions us well to drive stronger profitability from the incremental sales growth that we expect to generate organically and through our acquisitions.

Now regarding specific financial results and key metrics for the fourth quarter and full year; total net revenues for the fourth quarter were $219.8 million compared to $231.8 million in the prior year period. Gross profit margin was 41.5% compared with 42.7% in the prior year period. This primarily reflects the promotional environment, an increase in fuel surcharges from our third party shipping providers which is somewhat off set by product cost improvements that we achieved through our sourcing initiatives.

Operating expense ratio excluding depreciation and amortization was 36% compared to 35.3% reflecting the operating cost associated with our Design Pac Gifts acquisition in April. As a result EBITDA was $12.2 million compared with $17.1 million in the prior year period and then income for the quarter with $4.3 million or $0.07 per deluded share compared with $6.6 million or $0.10 per deluded share in the prior year period.

It is important to note that the fiscal 2008 fourth quarter results reflect the impact of several factors that the company considers non-comparable, including the shift of the Easter holiday into the company’s fiscal third quarter, the operating cost associated with the acquisition during the period of DesignPac gifts which due to the seasonality of that business has minimal revenues during the period that offset overhead expenses, the inclusion of the prior year period of various properties associated with BloomNet's Floral Design Guide which is sold once every three years.

Adjusting for these factors among others, the company believes that revenues, gross margins, operating expense ratio, EBITDA and EPS for the fiscal 2008 fourth quarter would have been essentially unchanged compared with the prior year period.

In terms of fiscal 2008 full year results, revenues were $919.4 million compared with $912.6 million in fiscal 2007. Gross profit margin was 42.8% compared with 43% in the prior year period; again primarily reflecting the increase in fuel surcharges as well as the increase in promotional activity somewhat offset by improvements in our product costs from our sourcing initiatives.

Operating expense ratio, excluding depreciation and amortization improved 70 basis points to 36.5% compared with fiscal 2007. As a result, EBITDA out for the year grew 9.3% with $57.7 million compared with $52.8 million in the prior year and net income for the year increased 23% to $21.1 million or $0.32 per diluted share compared with $17.1 million or $0.26 per diluted share in the prior year.

During the year the company implemented certain tax aiding strategies that reduced our effective tax rate to approximately 37% for fiscal 2008. Going forward we anticipate our tax rate would be approximately 38.5% to 39%. Regarding stock based compensation; for the fiscal fourth quarter, stock based compensation expense was approximately $200,000; for the full year it was approximately $3.5 million.

Turning to customer metrics; during the fourth quarter e-commerce orders totaled $2.7 million, compared with $2.94 million orders in the prior year period. For the year e-commerce orders totaled $11.5 million compared with $11.6 million in fiscal 2007. Average order value during the quarter increased to $67.98 compare with $67.10 in the prior year period. For the year average order value increased to $65.21 compared with $64.40 in fiscal 2007. This increase primarily reflected a combination of product mix, increased add-on sales and some pricing initiatives.

During the fourth quarter we added 810,000 new customers while concurrently stimulating repeat orders from existing customers who represented 60.8% of total customers. For the year we added 3.4 million new customers with repeat orders representing 49.4% of total customers. Regarding category results; in our consumer floral business during the fourth quarter and full year, revenues for the quarter were $149 million compared with $154 million in the prior period, primarily reflecting the shift of Easter into the company’s fiscal third quarter to its earliest date placement in the company’s history. As we’ve noted in the past, the early date placing for Easter significantly diminishes the size of the holiday into weather issues and the lack of consumer focus.

For the year, total net revenues were $491.7 million up slightly compared with $491.4 million in the prior year. A gross profit margin for both fourth quarter and the year was 38.7% compared with 40.2% and 39.3% respectively in the corresponding prior year periods. This reflects the aforementioned impact of rising fuel surcharges as well as the increased promotional activity. As a result to these factors, category contribution margin for the fourth quarter was $20.3 million compared with $24.7 million in the prior year period, while category contribution margin for the year was $63.1 million compared with $65.2 million in the prior year.

The company defines category EBITDA as Earnings before Interest, Taxes, Depreciation and Appreciation and before the allocation of corporate overhead expenses. In our BloomNet wire service business revenue for the fourth quarter increased 4.2% to $15.5 million compared with $14.8 million in the prior year period. Adjusted for the prior year periods inclusion of roughly $2 million related to the floral selection guides, sales of which occur only every third year, revenue growth would have been comparable to the full year growth rate.

For the year revenues increased 20.5% to $53.5 million compared with $44.4 million in the prior period. Gross profit margin for the fourth quarter was 56.8% compared with 56.3% in the prior. Category contribution margin for the fourth quarter increased 10.4% to $5.9 million compared with $5.4 million in the prior year period. Category contribution margin for the year increased 30.7% to $18.5 million compared with $14.2 million in the prior year.

As Jim mentioned in his remarks earlier, in July we made a small asset acquisition that will enhance BloomNet’s Product offering and deepen our relationship with our florist members. As a result BloomNet’s revenue growth will accelerate during fiscal 2009, while gross margin and contribution margin percent will moderate based upon the wholesale nature of the product we are offering. However, we expect gross margin dollars and contribution margin dollars will increase during the year as a result of the anticipated strong revenue growth.

In our Gourmet Food and Gift Baskets business, revenue for the fourth quarter declined 11.9% to $22.9 million compared with $25.9 million in the prior year period, primarily reflecting the shift of the Easter holiday into the company’s third quarter. For the year revenues increased 1.9% to $196.3 million compared with $192.7 million in the prior year.

Gross profit margin for the fourth quarter was 42.5% compared with 44.7% in the prior year period, again primarily reflecting the shift of the Easter holiday and product mix. For the year gross profit margin increased 90 basis points to 46.7% compared with 45.8% in the prior year. Category contribution margin for the fourth quarter was a loss of $1.7 million compared with a profit of $793,000 in the prior year period reflecting both the operating losses associated with the DesignPac Gifts acquisition and the shift of the Easter holiday into the company’s third quarter during the current fiscal year.

Category contribution margin for the year was $24.6 million compared with $26.4 million in the prior year, primarily reflecting the operating cost associated with DesignPac Gifts acquisition. Adjusted for this, category contribution margin for the year would have been comparable with the prior year. In our Home and Children's Gifts category, for the fourth quarter revenues were $32.9 million compared with $37.4 million in the prior year period.

Revenues for the fiscal year were $180.2 million down 3.6% compared with $187 million in the prior year, reflecting the elimination of the Madison Place and Problem Solvers titles. Revenue during the fiscal year for the category’s core business brands, including Plow&Hearth, Wind and Weather, HearthSong and Magic Cabin, were comparable with the prior year. Gross profit margin in the fiscal fourth quarter was 46% compared with 45.5% in the prior year period. For the fiscal year gross margin was 45.2% compared with 45.9% in the prior year.

Category contribution margin for the fourth quarter was a profit of $226,000 compared with a loss of $111,000 in the prior year period. For the year category contribution margin was $3.4 million, representing an improvement of $4.7 million compared with a loss of $1.2 million in the prior year. This reflects significant improvement achieved in the category’s operating expenses, including reduced marketing expenses related to the discontinued titles.

Category EBIDTA results exclude cost 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 fourth quarter corporate expenses were $12.4 million compared with $13.7 million in the same period last year. For the full fiscal year corporate expenses were $51.8 million compared with $51.7 million in the prior year.

Turning to our balance sheet; at year end our cash position was $12.1 million compared with $16.1 million at the end of fiscal 2007. During fiscal 2008, the company generated $38 million in free cash flow which we defined as net cash provided by operating activities less capital expenditures. This figure includes the cash tax benefits of approximately $8.5 million primarily related to the utilization of our NOL. In addition to the $20 million of capital expenditures already included in our free cash flow calculation, cash uses during fiscal 2008 were repayment of debt of $10 million and approximately $38 million used in our DesignPac Gifts acquisition.

Regarding long term debt; we finish the year with approximately $68 million in long term debt down from approximately $78 million at the end of fiscal 2007. Inventory of $67.3 million was up approximately $5 million compared with the prior year. This increase primarily reflects the acquisition of DesignPac Gifts.

Regarding guidance; as we stated in this morning’s press release, while we do not anticipate any significant improvement in the current economic environment, we do expect to achieve revenue growth in excesses of 10% compared with fiscal 2008. We expect this enhanced revenue growth to come from a combination of organic initiatives and contributions from our recent acquisitions.

Among the organic initiatives that we believe will drive profitable growth; are the first year benefit from the exclusive relationship with Martha Stuart throughout the 1-800-Flowers brand and BloomNet, BloomNet’s expanded products and services offerings designed to deepened our relationship with florists and increase market share gains, continued strong e-commerce channel growth of Fanny Mae confections, accelerated growth falling under basket.com as it begins to leverage the DesignPac Gifts platform, new websites and product launches along with expanded customization capabilities from Cheryl & Company and The Popcorn Factory and the expansion of our cross marketing and merchandizing efforts across all our brands.

In addition we expect to improve gross profit margins in most of our businesses despite the economic climate through a combination of sourcing, product mix and pricing initiatives. However, we expect consolidated gross profit margin will decline slightly in fiscal 2007 reflecting the lower profit percentage associated with our recent acquisitions. It is important to note that these businesses have relatively low operating expenses and as a result we expect them to be accreted to our EBITDA and EPS for the year.

During fiscal 2009 we expect to further enhance of operating expense ratio by approximately 50 to 100 basis points. Combined with the anticipated revenue growth the company expects these efforts will enable us to grow EBITDA by approximately 15% and EPS by approximately 20% for fiscal 2009. Turning to the seasonality for fiscal 2009 and reflecting the continued growth in our Gourmet Food and Gift Basket category which has the majority of its business in our fiscal second quarter, we anticipate quarterly revenues will be in the following ranges: Q1, 14% to 16% of total revenues; Q2, 38% to 40% of total revenues; Q3, 21% to 23% of total revenues and Q4, 23% to 25% of total revenues.

In summary, as we enter fiscal 2009, we will continue to focus on driving profitable revenue growth and further leveraging our operating platform thereby significantly enhancing EBITDA, EPS and free cash flow.

I will now turn the call back to Jim.

Jim McCann

As you’ve just heard we achieved strong bottom line growth for fiscal 2008 despite the environment. To recap for the year, we improved our operating expense ratio by 70 basis points. We increased EBITDA by approximately 10%, we increased EPS by 23% and we generated $38 million in free cash flow.

In terms of our Floral and Gift categories, we enhanced our market leadership position for 1-800 Flowers.com with the introduction of our exclusive relationship with Martha Stewart Living OMNI Media. We believe this relationship will presents excellent growth potential in fiscal 2009 and beyond.

BloomNet continued to build its market share as the industries leading innovator in this key category. In Gift Baskets we expended our e-commerce capabilities of Fanny Mae and we added DesignPac Gifts. This is an excellent platform that we believe will boost our 1-800 Baskets business and top-line and bottom-line growth for this category.

In this area, we are now at a revenue run rate of more than $250 million making us a leading provider of Gourmet Food Gifts. We continue to see excellent growth opportunities in this business for both our organic initiatives as well as acquisitions. In our Home and Children’s business, despite the economic headwinds in this category we have improved our bottom-line results significantly and we anticipate further improvements this year.

For year fiscal 2009 we expect to see enhanced revenue growth and increased profit contributions across all of our businesses. We will achieve these targets by continuing to leverage our platform to drive improvements in our operating expense ratio while working to deepen our relationship with our customers as their preferred florist and gift shop, helping them connect and express themselves with important people in their lives.

To wrap we clearly recognize the we are in a tough economic environment. With that said we believe we are well positioned and continue to make investments in our business that drives both new term and long term growth and profitability.

Our $20 million in capital expenditures enables us to upgrade and expand our technology platform, totaled our goal of enhancing our customer’s experience. Our strong cash generation capabilities enable us to make smart accretive acquisitions that enhance our revenue growth opportunities as well as our profitability providing a very attractive return.

Our new product development efforts expand our offerings for our customers and thereby deepen those relationships and our targeted marketing programs enable us to cost effectively attract millions of new customers while deepening our relationships with our existing customer base. We believe that these efforts will enable us to continue to grow our business profitably and build long term shareholder value.

Now that concludes our formal remarks, so Jeff our operator, we’ll now open the call for the questions; Jeff.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jennifer Watson - Goldman Sachs ma’am.

Jennifer Watson – Goldman Sachs

Can you discuss a little bit about the traction of Martha Stewart to date and what kind of trends in traffic and conversion you’ve seen that give you confidence that will help to accelerate growth for fiscal year ‘09?

Jim McCann

We just began the introduction of the Martha Stewart relationship and the product line in April, so it had a very recent start. We put our first real media reference behind in the fall. We think that this will grow year after year after year as we introduce more products, get aligned, more focused, but anecdotally it’s been very well received by both our customers and our BloomNet florists. Chris what would you add to that? Apparently, Chris would not like to add anything to that, but Jen we’re happy with how it’s begun, the initial phase; the BloomNet sell through has been terrific in terms of florists and we’re really excited about the lust that we brought to the retail floor category with our Martha Stuart Collection.

Jennifer Watson – Goldman Sachs

Do you expect to be pushing marketing behind that in the September quarter or do you think you’ll wait until early October?

Jim McCann

No, we’ll start in October actually. We’ll get ready for the Thanksgiving and Christmas purchase. We have some things here on grandparent’s day that we’ll start, but when I say in the fall I mean in the October, November, December quarter.

Jennifer Watson – Goldman Sachs

I know that fuel surcharges are impacting the gross margin line, but if you could just talk a little bit more about what’s going on with the shipping rates that you’re being charged, because obviously your volumes are increasing or staying flat year-to-year and are you guys seeing a benefit in terms of pre unit shipping rates?

Jim McCann

Bill will give you the specifics Jen, but I’ll tell you what I’m very proud of is clearly any of us who use the carrier have fuel surcharges passed on to us and of course they have been particularly tough this year, but you can see from our performance that we’ve been able to primarily offset those by the operating efficiencies as we bring the existing businesses we have and it gives us more confidence as we develop our acquire other businesses that we can further leverage our operating expense ratio to mitigate the effects of that. Bill would you give some specifics here.

Bill Shea

Yes Jen as our published rates, fuel surcharges on expressed products and overnight deliveries are like at 32%, so all of a sudden you have a shipping charge of $15.00, all of a sudden that base rate turns to $20.00 very quickly, so it is significant on ground. The fuel surcharges are about 12%, so we’re at $8.00 of delivery goes up to about $9.00, so it not as impactful, but certainly on the express products and when we have perishable products, we have to send express, it is dramatic. Kind of the company’s DNA is continuing to work to reduce our operating expenses.

It seems to go back to one of our brands and including our shipping brand, we continue to get relief where we can, so we continue to work with our areas to control that and then in other areas where the sourcing initiatives or logistic areas to transfer express delivery and the ground delivery because we can get the product closer to the home, that is way of us controlling those expenses.

Jim McCann

I think on Bill’s last point there, I think all those fuel surcharges are considerable Jen as Bill just highlighted. I think the response we’ve gotten from our primary common carrier has been very good in terms of helping us to really knit themselves into our logistic operations in our strategic planning effort, so that we are doing things that will further mitigate those impacts in the future and should there be any let outs in those fuel surcharges we are particularly well positioned to drop those benefits to the bottom line because of all the ways we are knitting ourselves into their organization and leveraging the vast knowledge that they have about sourcing, logistics and knitting ourselves right up alongside them in terms of being able to learn from those organizations to change our company so that we are well positioned to handle those increases should they come in the future as well.

Operator

Your next question comes from Eric Beder - Brean Murray..

Eric Beder – Brean Murray

Could we talk a little bit about BloomNet. I want to talk about one of your major competitors, obviously just about to be acquired and I assume that offers you an opportunity to get a little more aggressive with some of your florists in terms of BloomNet. How have you responded to the impending FTD merger?

Jim McCann

I think that what we are seeing with BloomNet is that we’ve had terrific success. In the three years that the company now exists we are seeing warmly and widely increased in the market place. Clearly that’s had an impact on our competitors although our intention was to frankly -- it was necessary for us to be successful for them to have secured those. The acquisition clearly was not a secret in the market place that that company was available for sales or actively for sale for quite some time. We’re not concerned that this acquire has particular leverage, so frankly we wish them well, we hope everything goes smoothly for them and we don’t frankly think it impacts our life very much at all.

Chris McCann

I’ll add by saying we’re really happy with the way BloomNet has really been accepted in the market place We have the membership numbers at where we want them and our focus has always been on getting the best quality florists as part of the network and our focus now has really been adjusting to make sure that we are delivering value to them. We’re delivering an increasing number of orders into each and every one of our BloomNet members, products and services to each of our BloomNet members and our florists are really responding very positively by supporting BloomNet. So as the change in the market place happens we think we are very well positioned because of the value that we’re delivering to our florists.

Eric Beder – Brean Murray

In terms of Bloom Net and Martha Stewart I know you are ramping up the percentage of product that’s offered the same day, what has been the response on it. It has been out for about four months and the florists that have been picked and taken on the program?

Jim McCann

The florists who are participating in the Martha Stewart program have been very, very happy with the results to date. Again it’s been early with an introduction during the spring holidays to make sure that we kind of earned the program in and now we’re giving our efforts up to the full push. So we see throughout our relationship with Martha Stewart, they never increased in percentage the same day. I can’t necessarily project what that percentage will be Q1, Q2, Q3, Q4 etc this year, but what we are finding is the customers are really looking for that product from us and through the various delivery mechanisms that we have whether it be overnight or more importantly on an increasing basis you pointed out through our BloomNet florists.

Chris McCann

Eric that will change a little bit with each skew introduction; so a lot of times we’ll introduce a product and it will be available primarily almost exclusively in an express modality, to reassure the buying we can make good projections and the supply chain and the florist chain can catch up with that and then have a good foundation from that introductory knowledge to project inventory needs and number of BloomNet florists participating in the need to cover those particular skews. So it will change overall and it will change by skew. It’s similar to how we’ve introduced other products, some of our by chocolate products and all, we stopped and expressed, proved the model, make a forecast able, project able assumption in terms of inventory needs and BloomNet participation and then move it into the BloomNet distribution channel.

Eric Beder – Brean Murray

On Martha Stewart, could you talk a little about the economics for the Martha Stewart in terms of licensing and are you still finding that it is still a more higher margin product that the base delivery by the florist or some other people?

Jim McCann

Yes, we could have got them all. Martha is a three year deal, it’s a license deal with her, so we pay her a license fee on a pro rate basis. It is a higher average, it’s a higher margin. What we’ve done during the introductory phase is we were promoting that offering so we didn’t get the margin benefit in Q4 but we’ll get that going forward.

Operator

(Operator Instructions) Your next question comes from Jeff Stein - Soleil Securities.

Jeff Stein - Soleis Securities

The NOL benefit, will that continue in to fiscal 2009 and if so roughly by how much?

Jim McCann

Unfortunately we didn’t have enough losses from the past year Jeff, so Bill will give you the color on exactly what happened.

Bill Shea

Now we basically have used that up Jeff. We were able free off some state NOLs this year to do some tax planning, that lowered our effective tax rate to that 37%. We expected our effective tax rate going forward to be in that 38.5% to 39%, so we have certain strategies in place to get it below statutory rates, but the NOL is for the most part used up.

Jeff Stein - Soleis Securities

Bill perhaps you can give us a little bit more color on DesignPac and the impact that had on your fourth quarter both from a revenue and an EBITDA stand point?

Jim McCann

Well I can tell you that had no impact on our revenue side, but Bill will tell you the bottom line for that.

Bill Shea

Yes Jeff, DesignPac is a very seasonal business, so really for the months of May through August it really has no revenue to speak of; it is all a stock in September but it really is a second quarter business. As we kind of highlighted in our release, DesignPac was a big part of the year-over-year lower income this quarter, so we had DesignPac, we had the shift in Easter and we had the BloomNet fall selection guide. Those items combined if we added them, that would have made all our metrics in the fourth quarter this year very comfortable in some cases some better than a year and DesignPac was a big piece of that.

Jeff Stein - Soleis Securities

Was it a couple of pennies, two pennies, three pennies, would that be fair?

Bill Shea

Within that range, absolutely.

Jeff Stein - Soleis Securities

The acquisition that you made at BloomNet, could you tell us a little bit about that and what the nature of the product is?

Jim McCann

Well as we have mentioned in the past BloomNet will grow and we think we have won a fairly large company and its going to grow in different steps and right now that’s why we are pursuing right now is to enhance our revenue growth in BloomNet, deepen our relationship with our BloomNet florists on the product side. So we had an opportunity as we build out virtual product business to acquire in this case, some assets, some knowledge as well that came with it to enhance our product sales. So, in consequence to that you will see ramped up revenue, so last year we grew BloomNet more than 20%, the bottom line grew 30% and we’re forecasting better than that or accelerated growth this year.

One of the contributing factors as to require these assets just a very small acquisition, but worth it in terms of physical assets and what came with that was a few people who we’ve worked with for 10 years, we’ve known, who can enhance our logistics sourcing and distribution capabilities also some of our design capabilities, for those products that we know our florists need just to fulfill our orders, not to mention their own business, so we have an accelerated growth.

Our consequence I will remind you about that; we mentioned in our remarks and Bill touched on it specifically. We’ve been producing a margin in BloomNet in spite of its fast growth rate of 30%, that heavy mix of service offerings they have. Now we’re going to be step a little harder on the gas paddle, on the product offerings, so you will see the gross margin dollars go up, but this percentage will come down three or four points, so let’s call it 26% because we’re accelerating that part of the growth.

Now it could be next year that we accelerate more of the service components and that changes our gross profit margin percentage but we’re focused on deepening our relationship, acquiring assets that we can now lever and make a part of what we do, take costs out of what we do and better position us to serve the BloomNet florists.

Jeff Stein - Soleis Securities

But Jim it sounds to me like this particular acquisition wasn’t necessarily a new product for the portfolio, its more people and perhaps expertise rather than a product that you’re going to be selling into the florist.

Jim McCann

It is a collection of products, products that we have already been in but not deep enough to properly service the customer. So yes, you are right in terms of it just enhances our ability to do what we do now and gives us a more depth, but nothing beyond the product line parameters that we already established that we want to make available to our BloomNet florists.

Jeff Stein - Soleis Securities

Could you talk a little bit about how you expect to get the word out on 1800 baskets? How is that going to be marketed to your customers?

Jim McCann

I’ll ask Chris to give you some more specifics here, but just from a top line point of view, 1-800-flowers, 1-800-baskets clearly we want them to be seen as sister brands. When you walk into our shop physically which is hard to do or in any conference environment we have a range of products as your florist and gift shop that we want to merchandize in front of you.

The merchandizing mix will shift and change by holiday, by season and with different emphasis so we have our flowers, our plants, our lifestyle gift ware products, our confectionary products balloons and plush, our Gourmet Food products and we are the anchor of 1-800 baskets product which is our custom gift baskets and gift baskets for all those key gift able occasions as well. So that’s what we want to do from a macro pictures.

DesignPac Gifts we have been so excited about this, since this is a kernel of capability that frankly would have taken us five to ten years, certainly five plus years to build on that a one person kind of basis. We already launched 1-800 Baskets, it’s a very successful launch, it’s a good solid business, now we get to put an infrastructure beneath that, that’s fairly dramatic, but what we caution you on Jeff and what Chris will touch on now is, because of that planning cycle; that is everything was designed and sold and sought, last year to this year they’ll have a benefit and a contribution to 1-800 Basket this year, but as that management team gets their arms around 1-800 Baskets, the real impact will come in the next fiscal year. Chris what would you add on the impact of DesignPac Gifts?

Chris McCann

Well that’s right, so this year because of the planning cycle really the impact will come from some improvement that we can make in the product offering through the design capabilities of DesignPac, but they are somewhat limited due to the planning cycle. As far as getting the word out as Jim mentioned we really will focus on the 1-800 Flowers customer base because it’s such a natural sister brand to the 1800 Flower brand and really the benefit or the ability to do that will come as we make continued enhancements into our fresh digital e-commerce platform.

We’ll be launching two of our food brands in September and October Sher win company and The Popcorn factory up on to that platform. We’ll continue to make regular version enhancement of our capabilities and then 1-800 Baskets really will launch on to that platform in Q3, Q4 time frames next year, really positioning for the next holiday season and utilizing those across marketing capabilities is the primary vehicle that will give the word out of 1-800 Basket.

Jim McCann

One of the early edge on the benefits of our new increased capabilities with 1-800 Baskets is that merchandising and design team has been able in near-term, frankly even before we officially closed, to impact the design, look and feel our gift basket offering that were already in the pipeline as well as for especially brands like Fanny Mae, Cheryl & Company and even our Martha Stuart collection because DesignPac Gift has already had a relationship with Martha Stuart, so this married up very nicely.

Operator

Your next question comes from Analyst for Jim Leahy - Morgan Joseph.

Jim Moran - Morgan Joseph

Hi guys this is Jim Moran for Analyst for Jim Leahy. Could you give me a little more color on how you plan to target your marketing spending given the week consumer environment?

Bill Shea

Yes, I’ll jump in on that one. Really what we are doing, each of our brands has been really focused on utilizing the capabilities we have been investing for the past couple of years on really understanding our customers, the data warehouses that we have been building. So utilizing that capability, each brand has a design target a persona of the design target. So we are utilizing that information to really determine where we have to spend our marketing dollars, which new customers are almost profitable for us to acquire.

We are very happy with the new customer rates that we were able to achieve this past year in excess of three million new customers. If we could continue that rate and at the targeted more efficient capability that we’re bringing to the table, we believe that will help drive that ECV, the Enterprise Customer Value for us. So utilizing those capabilities to make sure where online we’re positioning our advertising and very critically where off line we’re positioning our advertising.

The same thing in our direct mail capability, just getting more and more efficient through our model and targeting capabilities is helping us to maintain the customer acquisition cost below $20.00 as we set at our threshold and then also just continue to drive more efficiency. In this economy, this type of environment we have to do that. I think we have proven that we are able to maintain our efficiencies and marketing spend this past year and you’ll see us continue to do that go forward next year.

Jim McCann

Yes Jim I just wanted to add to that. The other thing that we’ll be doing are fresh start (Inaudible) and we’ll be able to role that out across the other brands by the end of this year and we think that will be an extremely effective way for us to grow the environments of the economic decline.

Jim Moran - Morgan Joseph

Okay great and following on that one, do you expect some marketing spending to be down year-over-year or where do you see that going after fiscal 2009?

Bill Shea

We planned to in absolute dollars to continue to invest behind our brands and their business as Chris was alluding to before though. The allocation of those dollars will be where we can get on our best return. We’ve been very focused on driving down our operating course, for the most they’ve been in the non-marketing area, but we expect to have growth this year both through organic as well as our acquisitions and we expect to invest behind that. So we’re going to have this great bottom-line performance without savaging our future by cutting our marketing spend.

Jim Moran - Morgan Joseph

Right, okay make sense and then finally for me; is there anyway you can quantify the size of the Martha Stewart related business this past quarter?

Jim McCann

It’s very small; it’s just introduced, so it’s small. Other than that the building blocks for the future isn’t consequential.

Bill Shea

Yes, Jim but one point is while we go forward we think Martha Stewart will drive incremental revenue for us. As this was an introductory phase it really was people coming to the 1-800 Flowers site for the most part and then us promoting on the 1-800 Flowers site for people to try the market product line which we’re all very happy with and we think it’ll ultimately drive repeat business, but it really was cannibalizing the old one, it’s wasn’t really driving incremental growth this quarter. We think that as we move forward it will be driving incremental growth for the company.

Jim McCann

As you use general media and not just use the existing traffic while you get that benefit and of course with the Martha Stewart OMNI Media relationship, as we get fast fits in the fourth quarter and as we get in to the holiday skews those have a BloomNet benefit from our product sales point of view as well.

Operator

Your next question comes from Anthony Lebiedzinski - Sidoti & Company.

Anthony Lebiedzinski – Sidoti & Co.

I think you guys have done a good job with reducing your expenses; the question is how much more can you do and would you say that most of the expense cuts are behind you at this point?

Jim McCann

On the contrary Anthony as Bill mentioned earlier we have not made this part of our DNA. As we grow both organically and through acquisitions these capabilities are not one time; they just continue to find more and more ways that we can prove our prophecies, sometimes that involves capital and you can see we’ve not cutter capital expenditures, we’ve increase them; we’ve not cut our marketing expenditures, we increase them and we we’ve been able to do that while we’ve been dramatically improving our bottom-line, which is evidenced that we are investing for the future and in fact we think that there are more process improvements available to us this year and next and we evenly match it and Anthony that’s why we gave guidance that we would be able to drive down our operating points as a percent of revenue to other 50 to 100 basis points going forward.

Anthony Lebiedzinski – Sidoti & Co.

Can you give us some examples as to what you plan to do, for achieving these expense savings?

Jim McCann

Our couple of areas will be on the labor firm with our service center organization we announced about six weeks ago, the closing of one of our larger call center operations as we transition more of our calls to our home agent program which is driving efficiencies.

Chris McCann

Which is driving both efficiencies and quality improvements as we invested in the technology to allow to us to run our own home agent network over the last two years, now we’re beginning to see the fruits of that because we have a better work force, a more highly motivated, more highly educated, we stay longer, we can invest more in training, all at the same time we are reducing our cost of servicing for the increasing number of our customers we have.

Jim McCann

And it’s really related to kind of part of our DNA. What we’ve internalized a couple of years ago was a process for continuing process improvement, so we continue to at our business process, we continue to go back to vendors from a sourcing prospective to drive down our work, that will be continual and that will continue to take course out of our organization.

Anthony Lebiedzinski – Sidoti & Co.

And the June quarter, it seems like after you’ve taken to account the calendar shift so that your organic sales were about flat, is that a correct assumption?

Jim McCann

Yes.

Anthony Lebiedzinski – Sidoti & Co.

Okay, now my question is that what gave you the confidence that you can improve sales organically in fiscal ’09 in this tuff retail environment?

Chris McCann

Actually Paul mentioned that in his formal remarks and we specifically put those piece of information in our press release today, a number of things that we talked about of course is getting a two year benefit from the Martha Stewart relationship we think is going to help us both on the consumer side and BloomNet.

BlooNet’s expanded parts and services which Jim discussed at length here is going to significantly increase the growth rate that we saw in the top-line to BloomNet. This past year that number will go up to quite a bit this year. Fanny Mae’s e-commerce channel by the way continues to growth at a very nice double digit pace and we expect that to grow further in fiscal ’09.

Cheryl & Company, The Popcorn factory are both going to be launched as Chris mentioned earlier on our residential platform. They have new product introductions and new customization capabilities that we’ll market aggressively and then we’ve come down the path that our VCD efforts increased focused on cross marketing and the merchandizing as Jim pointed out on our full shop, that’s going to be the main part of the business and Fresh Rewards is part of that.

Jim McCann

And what I’d underline here in term of just revisiting the things we talked about in terms of giving us the confidence for this year is BloomNet and BloomNet is a real leverage point for us. We’ve targeted ourselves up ahead with our retail florist members of BloomNet that their success is important to us, as a matter fact we get more excited.

Even though we’re projecting more than 30% bottom-line growth this year which I think is pretty remarkable and we’re saying it’s only going to decelerate, we’re getting more excited everyday about the program; how Mark Hans and his team in BloomNet are retooling our efforts, making sure that we do the things, that we use our human capital as well as our dollar resources to make sure we are doing those things that both are a margin opportunity to us at the same time we’re doing things that genuinely benefit and help those retail florists.

So if you look at the company, yes our consumer business continues to go and in each category we have great confidence. Of course, we have 1-800 Baskets which I think will become very, very big part of our business. So you have two or three business within our shop, in terms of the back room of our shop; be it BloomNet, be it our confectionary business and also our basket business, each of which can become several hundred million dollar companies.

In the case of BloomNet not operating within a normal retail margin and with e-commerce accompanying that 10% range that the others will do, but in fact operate something in excess of 25% operating margin. So that gives us great confidence not only for this year that we’ll be able to achieve the results we said and even hopefully exceed them, but obviously even it will be greater in the years ahead as the 1-800 Baskets comes online, as our confectionary efforts really start the yield.

We’ve acquired companies, small companies that fit nicely in our sharp mix offering. When we accelerate our growth from 1% or 2% we’ve grown each of those companies in the last three years more than $20 million in sales. So, we have the history to say why we are confident about that growth.

Anthony Lebiedzinski – Sidoti & Co.

Okay and my last question is can you comment on the current promotional environment; what are you seeing from your competitors; if you could just give us some color about that, that will be great Thanks?

Jim McCann

Chris would you answer that for him?

Chris McCann

Certainly coming out of the fourth quarter will cost a lot of promotional activities (Inaudible) What we are seeing though is several companies gearing up their promotional activities for the upcoming holiday season, in the Gourmet food category as well as the flora category. With that said we think we are very comfortable, very confident with our capabilities and our plans that we have in place with the results that we are have guided through so far this year.

Jim McCann

On just a anecdotal note, one of the retailers we work with, I most admire is Cosco and we were concerned about their forecast their going forward and as you drill down on that, our relationship with them is actually growing above the anticipated levels and we think there is so much more we can do with them and learn from them because they think the gifting segment in their shops will not experience the same on the layer that they’re seeing other product categories. In fact they think their gifting segment will actually accelerate in the fourth quarter, so that’s just anecdotal in terms of their view, but it makes us good with smart good partners like that to see the gifting business growing.

Operator

There are no further questions at this time.

Jim McCann

Gentlemen I’d like to thank you all for your questions and for your interest and if you have any additional questions, please contact us. In closing I’d like to offer a traditional remind; as we head back to the last weeks of summer don’t forget that back to school season is fast approaching and at 1-800 Flower.com we have a collection of the perfect gifts, including gift baskets, Fanny Mae chocolates, delicious cookies and bakery gifts from Cheryl & Company, Gourmet popcorn from the Popcorn Factory and much more to help you send your back-to-schooler off with a smile, so call quick or come in today. Thanks and we look forward to chatting with you next quarter.

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