1-800-Flowers.Com Inc (FLWS) 2002 Q4 法說會逐字稿

Welcome to the 1-800-FLOWERS.COM fourth quarter fiscal year 2002 financial results conference call. During the presentation, all participants will be in a listen only mode. Afterwards, you will be invited to participate in the question and answer session. At that time, if you have a question, please press the 1 followed by the 4 on your telephone. As a reminder, this conference is being recorded Wednesday, August 07, 2002. I would now like to turn the conference over to Joseph Pititto, Vice President of Investor Relations for 1-800-FLOWERS.COM. Please go ahead sir.

Thank you [Sally]. Good morning and thank you all for joining us today to discuss 1-800-FLOWERS.COM financial results for our fiscal 2002 fourth quarter and full year. My name is Joseph Pititto and I am Vice President, Investor Relations. For those of you who have not received the copy of our press release issued earlier this morning can recently access with the Investor Relations section of our website at 1-800-FLOWERS.COM or you can call [indiscernible] at 516-237-6113 to receive the copy of the release by e-mail or fax. In terms of structure our call will begin today with a brief formal remark and then we will open the call for your questions. Presenting today will be Jim McCann, CEO and Will Shea CFO. Before we begin I need to remind everyone that a number of statements that we will make today may be forward-looking within the meaning of the Private Securities Litigation Reform Act, 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 SEC filings including the company's annual report on Form 10-K and quarterly reports on Form 10-Q. The company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today's call, any recordings of today's call, the press release issued earlier today or in any of the SEC filings except as may be otherwise stated by the company. I will now turn the call over to Jim McCann.

Thank Joe. Good morning everyone. I have discussed in this mornings press release we are pleased with our operating results for fiscal 2002 fourth quarter and for the full year. [indiscernible] will provide you with the specific metrics for both periods. I will tell you that in spite of what was and is a difficult economic environment, we achieved our true potential financial goals of solid revenue growth and enhanced operating margins. This is evidenced in our fiscal 2002 revenue growth of 12 percent which was [indiscernible] by a 19 percent increase in our online revenues and more important during the year we achieved targeted EBITDA of more than a $11 million, an improvement of $35 million when compared to the prior year. Two years ago, we advised you that we are modifying our approach in future growth. This modification took us from a higher [spend] higher growth profile typical of the late 1990s to one of building solid, a sustainable growth with lower spending requirements. We believe that it was, - will allow us to achieve two important objectives. First, it would demonstrate the financial leverage in our business by producing operating margins that would grow at rates greater than our revenues which in turn would two accelerate return to the EBITDA and EPS positive. Our fiscal 2002 results reflect the benefits of this initiative and we will continue to drag our business in this manner. Going forward, we will continue to leverage our existing asset base to cost efficiently attract new customers and to expand our [indiscernible] products and services which will enable us to deepen our customer relationships. In doing so, we believe that we will meet our financial objectives and thereby drive shareholder value. More important on our future growth, we will maintain our strategy of low capital deployment which may [marginalize] our investment in fixed assets and inventory. Also [indiscernible] we do make in fixed assets will continue to be primarily in the area of technology that will help us enhance our services to our customers in our operating efficiencies. With respect to inventory we will continue to work in close [indiscernible] with our networks of independent vendors who handle most of the inventory [indiscernible] responsibilities. We believe that this low investment profile will allow us to generate return on invested capital that are tied in most of specialty retail sector. It will also enable us to produce increasing levels of free cash flow which will add to our already strong balance sheet. Before I turn the call over to William, I would like to address some global issues that I believe are on everyone's minds these days as they think about Corporate America. First in the area of accounting [indiscernible] and the issue surrounding the quality of reported earnings. I am happy to say unequivocally that we had no such issues. We are currently finalizing our fiscal 2002 order, which we believe, as always, will be straightforward without any issues.

Second, the question of expensing stock options. I will stop by saying that we embrace equity-based incentives and believe that they help to rank the goals and objectives of our employees with those of our shareholders. For us stock options are a part of what we believe is a well-balanced and competitive compensation program that also includes salary, bonus and benefits. As such, the share dilution from our option program is less than 5 percent and considerably less than current stock price levels. Therefore, any accounting changes would have a minimal impact on our results and we don't perceive any problems adopting whatever rules the regulators ultimately decide upon.

Third, in the area of stock sales by insiders. Since becoming a public company three years ago, we have had minimal selling by insiders. Under a 10B51 selling program that includes my brother Christopher and myself, such sales that we have instituted, those sales represent an average of less than 1 percent per year of our total holdings, as such it would take more than 100 years to liquidate our position.

On the last area, I want to cover about these global concerns is over whether or not companies - the strategy of some companies of building their businesses using aggressive acquisition strategy. Our focus has always been to build our company through organic growth and to the opportunistic way an attractive acquisition candidate comes our way. Going forward, we plan to continue this focus. Day-to-day our energies will be directed to drive organic growth. However, when the right acquisition opportunity arises, one that hedges our products and services offerings and has a requisite financial profile we had the financial strength to more aggressively - to mover aggressively to close a deal as well as the integration skills and the experience necessary to make sure that they work. Now, to cover those global issues, I will now turn the call over to William. William.

Thank you James. As James indicated, we are pleased with our operating results for the fiscal 2002 fourth quarter and full year. We believe our results are strong in a number of key areas. In particular, our [gains] profit margin and our ability to leverage our infrastructure to reduce our operating expense ratio. These factors when combined with our revenue provided a significantly improved bottom-line. Regarding specific metrics for the fourth quarter, [goal-line] revenues reached 140.3 million an increase of 6.1 percent compared with 132.3 million in the same period last year. It should be noted that fiscal 2002 fourth quarter revenues reflects a $4 million negative impact associated with the shift of the Easter holiday into the third quarter when compared with the prior year when the holiday was included in the fiscal fourth quarter. Combined online telephonic revenues grew 6.4 percent to 132.2 million compared with a 124.3 million a year ago. Online revenues grew 9.3 percent to 68.5 million compared with 62.7 million in the fourth quarter last year. Online revenues equaled 48.8 percent of total net revenues for the fourth quarter of fiscal 2002 compared with 47.4 percent in the same period last year. Telephonic revenues increased 3.4 percent to 63.7 million compared with 61.6 million in the prior year period. And our retail [indiscernible] revenues increased 1.5 percent to 8.1 million compared with 8 million in the year ago period.

In keeping with our strategy of low capital deployment in fixed assets during the quarter, we continued to reduce our company-owned stock count which is now at 28 down from 40 in the year ago period. A number of these stores were converted to franchises which allowed it to attain a brand name market while reducing our capital investments [indiscernible]. We plan to continue a gradual reduction of our store count primarily through conversion to franchises over the next several quarters. Customers continued to embrace our traded product offerings as 40.12 percent of combined online and telephonic revenues came from non-flower guests. This is up from 35.9 percent in the fourth quarter last year. The combination of product mix along with operational efficiencies and effective customer service efforts helped us to increase our gross profit margin by 100 basis points during the quarter to 40.8 percent compared with 39.8 percent in the same period last year. During the quarter our combined online and telephonic orders totaled 2,023,000 compared with 1,954,000 orders in the year ago. Specifically, online orders increased to 1,168,000 representing 57.7 percent of combined online and telephonic orders compared with 1,091,000 online orders or 55.8 percent in the period last year. Average [oversize] during the quarter increased to $65 compared with $63 and 59 cents in the prior year. During the quarter, we added 788,000 new customers with 452,000 or 57.3 percent come to us online.

Total operating expenses for the quarter 52.1 million or 37.1 percent of total net revenues compared with 52.3 million or 39.5 percent of total net revenues in the fourth quarter last year. As a result of our revenue growth higher growths profit margin and reduced operating expenses, the company achieved a $4.7 million improvement in operating income compared to the prior year. For the period operating income was 5.1 million representing an operating margin of 3.7 percent compared with an operating income of 409,000 or 0.3 percent margin a year ago. EBITDA operative for the quarter came at 9.1 million representing a $2.7 million improvement compared with EBITDA of 6.4 million in last year's fourth quarter. Net income of 5.5 million for the quarter represents a $5.2 million improvement compared with net income of 226,000 in the prior year. On a per share basis this represents an 8 cents per share improvement compared with last year. Now for the fiscal 2002 full year, total revenues increased 12.4 percent or 497.2 million compared with 442.2 million in fiscal 2001. This increase was driven by a 19.3 percent rise in online revenues to 218.2 million representing 43.9 percent of total revenues compared with 182.9 million representing 41.4 percent last year. Telephonic revenues grew 7.9 percent with 248.9 million compared with 230.7 million in fiscal 2001. Gross profit margin for fiscal 2002 increased 160 basis points 41 percent compared with 39.4 percent in fiscal 2001. Margin improvements with the result of increased sales of higher margin non-floral gifts, which accounted for approximately 46 percent of total sales compared with 41 percent in fiscal 2001 combined with continuing focus on customer service and operational efficiencies.

EBITDA for fiscal 2002 was 11.4 million, an improvement of 35.2 million compared with an EBITDA loss of 23.8 in fiscal 2001. Net loss for the year was 1.5 million or 2 cents per share representing an improvement of approximately 40 million compared with a net loss of 41.3 million or 64 cents per share a year ago. Regarding our balance sheet, our cash and investment position as of June 30,2002 was 73 million. It's to be noted that this balance includes the impact of true cash payments totaling 14.7 million made during the fourth quarter. Specifically, 7.3 million as part our acquisition at the Popcorn factory and a scheduled $7.4 million pre-payment by an interactive marketing agreement. We anticipate that while cash will be reduced somewhat during the current fiscal first quarter as we build them into the important calendar yearend of our shopping. We will be increasingly cash free during fiscal 2003 and we expect to generate net of $50 million of free cash flow for the year. Inventory of 15.6 million in environment management expectations and remains low relative to revenues obstructing one of the key strengths of our business model. Now we will provide some guidance for fiscal 2003. As we stated in our press release this morning we anticipate total revenue growth for fiscal 2003 will be in the range of 14 and 19 percent compared with fiscal 2002, demonstrating the company's ability to grow despite continued uncertainty in the overall economy.

Gross profit margin for the year is expected to increase to a range of 41.5 to 4.2 percent reflecting the continuing make shift to higher margin on floral gifts coupled with operational efficiencies in our focus on providing excellent customer service. We anticipate that online sales represent approximately 45 to 50 percent of total combined online and [indiscernible] revenue for 2003 and non-floral sales will represent 50 to 55 percent of the total. As non-floral gifts continue to increase as a percent of total sales, the seasonality of our business has shifted such that our largest quarter in terms of revenue and gross margin is expected to be our fiscal quarter. The calendar year end period which includes the holiday shopping season. Based on this trend, we expect revenues will be in the following ranges, Q1, 40 to 60 percent of total revenues, Q2 35 to 37 percent of total revenues, Q3 21 to 23 percent total revenues, and Q4 25 to 28 percent of total revenues. For the full fiscal year in addition to the anticipated revenue growth and higher growth margin, we anticipate achieving the [fees] reduction in our operating expenses as a percent of total revenues. As a result we expect to generate EBITDA of fiscal 2003 in excess of 30 million and EPS of more than 20 cents per share. As Jim noted earlier because our business model does not require significant investments in brick and mortar facilities. Capital expenses are expected to continue to decline during fiscal 2003. We expect CapEx for the year to be approximately 13 million down from approximately 15 million last year and more than 20 million each of the two years prior. As a result, as I mentioned earlier we anticipate generating free cash flow in excess of $15 million in that year. As we noted in the past the current fiscal first quarter, the summer season is traditionally our lowest in terms of revenue due to the lack of any major gift giving holidays. Because it is a low period we traditionally use this time to implement technology upgradings and begin ramping up our marketing efforts for the calendar fourth quarter holiday shopping period. These factors physically result in EBITDA and EPS losses for the period. However, we anticipate reducing these losses in the current fiscal 2003 first quarter. Even after a drop in the incremental overhead associated with the recently acquired Popcorn Factory business to a combination of revenue and margin growth in continued leveraging of our operating infrastructure.

In summary, we believe we are well positioned to execute against our plans to grow revenues cost effectively and to improve our operating margins in fiscal 2003 and beyond. I will now turn the call back to Jim.

Yeah, fourth quarter, indeed a full year that had many challenges. We were able to deliver what we believe are very good results. Importantly, the favorable trends as reported on our last quarterly conference call are continuing. These include on the customer access front, an increasing percentage of new customers and total business coming to us online where we have lower service cost, enhanced margin, and more customer interaction opportunities. On product mix, the strong growth in our non-floral gift categories is providing a higher growth profit margin as well as the opportunity to increase the number of gifting occasions our customers come to us for. And on customer relationships, we are deepening our relationships with our existing customers, mining our date of birth basis of more than 10 million customers to cost effective marketing programs that stimulate both loyalty and frequency. In addition, we have already seen good tractions in some of our newest measures including our product opening front, the expansion of our offerings in gift baskets and gourmet gifts, plants and plush stuffed animals, categories on which we believe we can gain market share fulfillment. Further leveraging our unique fulfillment network to provide same day and next day deliveries for an expanding range of these non-floral gifts including candy, [linux] and water filled giftware, plush [indiscernible] all in addition to our traditional floral offerings. Corporate gifting, the expansion of our corporate gifting network where we are developing strategic product categories and gifting capabilities such as personalization that we anticipate will accelerate our growth in this area and finally continuity offerings. We have expanded our continuity gift programs, which allow our customers to immediately send gifts. They keep on giving month after month after month. Now as we look forward, we are confident that we can continue most efficiently to attract millions of new customers annually and stimulating increasing repeat business from our large base of existing customers and thereby achieve sustainable [indiscernible] double-digit revenue growth. We believe we can further enhance our overall profit margins to expanded business partnerships with such great brand names give companies that is Linux, [Waterbird], [Boyz], Hershey's and others that we expect to bring to our customers in fiscal 2003 and beyond. Given our strong balance sheet we will continue to be opportunistic in making a creed of acquisitions that help us to expand our gift products and service offerings and thereby have the opportunity to deepen our relationships with our customers. And most importantly, we believe that our revenue growth combined with the increasing leverage that we are getting from the assets that we have built during our more than 25 years as a gift retailer will enable us to significantly grow our EBITDA, EPS, and free cash flow margins. This year and beyond and thereby build that on current shareholder value. That concludes our formal remark. However, before we open the call to your questions, I would like to address one question that we heard recently from a number of investors and analysts and that is whether or not Softbank has recently been selling any of their shares. The answer to that questions is, no. As an affiliate they are [precluded] by the company's internal policies from any trading during our current blank out period. Moreover, as were stated by Softbank, you know, press release dated June 26, while reserving and like to do so in the future they have no immediate plans to reduce their position in the company. I like to now ask our moderator, [Kelly] if she would re-instruct people on how they can ask their questions if they like to ask, Kelly.

Thank you, ladies and gentlemen, if you wish to register a question, you're need to press the 1 followed by the 4 on your telephone. You will hear three tone prompts to acknowledge your request. If your question has been answered and you wish to withdraw your following request you may [indiscernible] by pressing the 1 followed by the 3. If you are using a speakerphone, please pick up your handset before entering your request, one moment please for the first question. Catherine Watters with Credit Suisse First Boston, please go ahead.

Thanks very much. Can you, in terms of revenue growth guidance you gave for '03, can you talk about, what have you begun in terms of economic recovery?

I will answer that quickly, this is Jim, what we have begun is anticipated where we are, we didn't anticipate any substantial improvement in the economic condition.

Okay, and secondly can you just a little bit more about the customer metrics next quarter and looks like this may have been the first quarter in a while where the total number of active customers was down. Is that more vigorous a case of the economic environment or is the penetration issue there? Thanks.

No, I think on the contrary, I think we saw both, an increase in the number of new customers we had which would normally suggest that we had a decline in our repeat rate but in fact, we had the opportunity, we had an increase in our repeat rate of our existing customers. At the same time, we acquired more customers than we did last year. So both metrics are both pointing in all directions for us and I am not sure what else you will be looking at.

You know, [indiscernible] about that. Thanks very much.

Okay.

Your next question is from Arvind Bhatia with SWS Securities, please go ahead.

Good morning, just quickly you just following on that same question. You told the economic recovery, the 14 to 19 percent range, that you guys are providing. What would make the 14 percent become 19 percent and vice versa?

In terms of the guidance that we gave, as Jim just said, we did not build into that any expectation of recovering in economy. We kind of expect the economy to move along at the sluggish pace it has been moving along. So, the 14 to 19 is really based on what we see out there and what we've achieved in the fourth quarter in recent months. Well, to get it to 19 as opposed to 14 is just, you know, execution on our part.

Yeah, I think that the opportunities surprises for us in any direction are the continuing impact of the marketing progress we have in place, particularly the continued increase in the repeat rate of our customers to the cost effective marketing programs that we have been directing our existing customer base. So as we looked at it, that is the opportunities of goal there for us to go to the higher-end side and the higher end of our own internal expectations about what we are able to do. So I think the - James said is correct. The things that would make that vary are not the economic circumstances, but our own ability to execute frankly.

Okay, I also wondering, if there is a way for us to get more information in terms of monthly data from you guys, the equivalent of a same-store sales number for the bricks and mortar retailers, is that the possibility? And then another question is regarding the buyback with the stock down substantially from the beginning of this year and is the company thinking in terms of a buyback?

Well, first with respect to providing monthly information, Arvind frankly this is the first time we have had that request and it's something, you know, it's an interesting, you know, concept; it's something we will look at and come back to everyone in the near term on that.

I think - I'll handle the second part of your question, but further on the first question Arvind about monthly data. Our same-store sales kind of numbers. The interesting thing about us is we are basically one store, it's a virtual store, so our numbers all are same-store sales for us, [indiscernible] attention focuses. Now with regard to the stock buyback, interesting question, one that we received from our investor community in the last couple of days and I'm glad you asked the question today. We approved as a company, our board approved last fall, in the tumultuous date after September 11, the ability for us as a company to do a buyback. Obviously, we have been in a blackout period and continue to be in that for the next few days, but we do have that authorization and frankly at these levels it's something that we have to continually review and explore and we will.

Can you remind us what the authorization total is roughly?

I don't recall what the authorization was, I think it was a [few] million shares.

This is Joe again, I know its in excess of a million shares, I will get back to you with the exact number.

Okay, more than a million, okay, and then in terms of the discussions - on going discussions, regarding a number of CEOs and CFOs required to sign their financials. First of all - well, my thinking is you are not required to, because there is a threshold of revenue level after which people are required to sign that, but number 1, are you going to sign that anyway or can you help us there?

Good question, I'm glad you asked that because that helps when we are trying to put clarity on everything and as you pointed out in your question Arvind because we don't meet the barrier - the threshold barrier of $1.2 billion, we are not required to. But trust and be assured that whether its regard to stock options or signing your financials, we have no issues with any of those requirements as we could reasonably anticipate they will come from the governing authorities and we will easily and comfortably comply. On the other hand we don't see any reason with our good solid state to find reason to grandstand, so to speak, or to pick and choose on a [buck-based] style from possible new requirements to single out whether or not to do it. So when it is required we will be very happy and comfortable to do, but as a smaller company we are not going to take the opportunity to grandstand and pick which ones we will do and when we will do them. When it happens we are comfortable and ready.

Okay Bill, then another question on tax loss carry forwards. Do you have that number handy Bill, what that number is, and when do you anticipate paying taxes again?

Okay. It is between 95 and 100 million and will be some time in 2005, fiscal 2005.

[Carter] and then final question on The Popcorn Factory, it is a two-part question. One, how much was that as a percentage of the revenue in the June quarter, I know you acquired it in May, and how is that been integrated in to your core business so far?

Well, I will cover that, Bill correct me if I am wrong, but it is virtually no revenue, virtually none. For the first two quarters that we were on, the partial fourth fiscal quarter and this current summer quarter, our first fiscal quarter. What we do while we don't have revenues, we do charge the expenses of that acquisition. It is a heavily fourth counter quarter, second fiscal quarter business [indiscernible]. So while we have probably about a $ 1 million in carrying expenses during the fiscal fourth quarter, we probably have in excess of a $ 1 million and a half in carrying expenses during this fiscal first quarter with relative speaking no revenue at all. We are comfortable with that. We are comfortable with the timing that we made the acquisition, and the reason we are comfortable with that is the answer to the second part of your question, which is one of things that I am proud of our management team is developed a core competency around, is being integration of the small acquisitions we have done each of one a year for the last three or four years and most recently of course Popcorn Factory. The acquisition is going, the integration of that acquisition is going very well. Good solid management team there in the Popcorn Factory, thrilled to have them, it's an accretive part of overall management team and the different aspects over the warehousing, the marketing, the service center applications, and the web applications, all on schedule or ahead of schedule. So we are very comfortable as we enter this fall and holiday selling season that were in great shape in terms of having properly integrated the Popcorn Factory due to the efforts of those two management teams.

Great, thanks.

Kristine Koerber with W.R. Hanbrecht. Please go ahead.

Hi, just to the followup on the Popcorn Factory, are you seeing greater benefits than initially expected and you know, I think you talked about top line adding about 30 million top line, do you think that could come in ahead of that and then I have a couple of other questions.

Kristine we have given guidance on 30 million, so we are not going to achieve that today, clearly we think it is a reality check, but clearly we think there is an opportunity for us to do some really good things with Popcorn Factory website [indiscernible] which Jim indicated, but our guidance on that is that in fiscal 2003 it will be about $30 million in revenue, I think we said 2.4 million in EBITDA and most of that will come in Q4.

And Kristine you have to remember when we bought the Popcorn Factory, it is a company that you know that had declining sales and also lost you know $7 million last year. So you know that Jim's point before with the integration efforts that we have made really had reversed you know, the operating results, well that [indiscernible] you know going forward.

Okay, can you tell me what it is?

Sure Kristine, we will try to be [backed up].

That's good to know. Can you tell me what you are estimating for D and A for the year to get to that you know 30 million in EBITDA.

Yes, that's $17 million.

You break that out between the depreciation.

Sure. Yeah, its that, you know, its primarily, you know, depreciation because of the, you know, we are changing the accounting rules with regards to amortization, its fairly, - you know, [indiscernible] not amortize so the amount of amortizable intangible is relatively minor probably in the million to 2 million range most of it is fixed asset depreciation.

[indiscernible] numbers are 17 [indiscernible].

Okay, great and then as you continue to expand into the non-floral business, you know, we continue to see gross margins move higher. What do you think the long-term gross margin could go at this point?

When you take long-term, what you-

For next, you know, say three to five years?

Well, we have been committed to a 60 basis point improvement in our gross margins each of last years, fortunately, we have been able to achieve that only because our customers, our existing customer base has embraced the additional gift categories in addition to the their regular floral purchases. So, I would expect, I am not sure what the high end of that is, but clearly we are targeting in the mid 40s in near term as a, I say, a gross margin opportunities of the company's are.

Yeah, and the other contributing factor to the improvement in gross margins are, you know, continuing to make operational improvement in that area as well as our focus on customer service and we would see nice changes in those and we envision continuing to improve those areas. Partly as those numbers come lower at a declining rate provided, rate will compliment with a 50 basis points improvement in gross margins.

Okay, and that-

We have all three things to gross margin [indiscernible] all three things contributing to improvement if those margins not just the mix.

Okay, great, and then just one final question. Can you update us on some of the marketing program is in what your testing, what is working, what is not working, I guess, I was surprised, I received something in the mail from Amazon and you were running a promotion with Amazon, I didn't think you had a partnership with Amazon any longer or it maybe a just kind of one time thing, but can you update us on what you are doing, with some of your partnerships are?

No. Yes, the answer to the question is that we want all the [indiscernible] tests all the time in fact, we are increasing the number of tests that we do particularly in a direct arena because we find that the more robust is smaller but the more robust number tests that we can do to deal the [indiscernible] results so dramatic for us that we contracted in the last week, we have been spending of lot time on just that home nature of testing. So we are not going to disclose what they are and what the results are, you will see that early on in the efforts that we do that except to say that we have been increasing last year and very much this year. The shift in our mix from new customer acquisition to customer development and retention and we are finding, within the programs we initiated in the last fiscal year, include interaction [indiscernible]. So, you can anticipate from our broader perspective that you know is continuing where [indiscernible] because we already have 10 million terrific customers and the more that we can introduce new products and service to them to deepen our relationship. It's a much better year gone on marketing [indiscernible]. At the same time, we have the last [indiscernible] flexibilities do that [Christine] because our call to acquiring customers has actually been declining over the last three or four years now back to that sub $20 range. So, we have experienced in the years gone by and we think we can continue to try that at that cost lower by good, sensible acquisition efforts and ever robust in increasing retention effort.

Great, thank you.

Eric Beder with Ladenburg Thalmann, please go ahead.

Good morning.

Good morning Eric.

A look at the numbers quickly, it seems that floral has kind of been [indiscernible] kind of flat year to year, what is happening in the floral market, when you see it for things that market was start to grow once again?

I think for the year, you know, the floral growth is - it should be good, growing, you know, mid-single digits, you know, 5 percent. If you look at the fourth quarter, you know, it did get influenced by the Easter Holiday which is obviously a floral holiday, so you don't see the floral growth in the fourth quarter.

[Indiscernible] question of a steady state, what would you say are the expectations in floral growth?

We are expecting floral growth of, you know, in the 7 to 8 percent - 5 to 8 percent. So we continue to see floral sales growth, it frankly comes increasingly from our existing customer base, because the more they buy non-floral gifts from us, we tend to see an increase in their floral spending as well, which is we think they just see us as a good solution for some of those connective deeds that they have in their everyday life. So we would expect to see that growth now. We understand that the industry received flat or basically no growth last year and we typically grow at about three times the industry growth rate. We can't do that multiplication this year, because we can't put a multiplier on a flat growth rate, but still able to grow that in the mid-single digits and where we expect to continue to see floral growth.

[Indiscernible] HearthSong is now fully integrated that in - as for Christmas and beyond, how much more do you think that can be as a growth driver, now as you kind of fully put it into your system?

[Indiscernible], but we did say last year when you go back to what is that we are really looking forward to having the HearthSong business under our belt for a full year. We got the opportunity now for our own merchandizing and marketing people to integrate and work with them and we think it will do very well for us going forward. We are excited about some of the things that it can do for us in the calendar fourth quarter. Now, at this point in time, they have been annualized, so clearly we do not breakout separately what their businesses are.

And it is hard to break it out too, because the products that we sell at HearthSong are sold in a number of different ways. They are sold through the HearthSong catalog product, our multi-catalog efforts and through all the different web possibilities. So it is hard for us to separate it down because it has been so integrated as a product offering appropriate for those recipients across our different channels.

Thank you.

Peter Benedict with CIBC Worldmarket, please go ahead.

Hey, guys couple of questions, I might have missed this. Did you say, William, what exactly your custom acquisition cost was for the year, I think in the past you have given the annual number?

I don't think we did say it, but it's about 1650 and last year it was somewhere around the [1688].

Okay. Good. Next question, you guys have done a real good job obviously focusing on margin over sales, but I want to kind of drill down a little bit more into the slow down and what we saw on the online sales growth. I think online sales were up probably around 9 percent in the fourth quarter. Are there any competitive issues out there that you think can account for that or is your company strategy - how you guys are going to address that, because that seems to be somewhere more the numbers, at least are coming in slower than what I had anticipated. Can you comment on that a little bit?

Well, I think there are two factors there, I don't want to put too much on the Easter, because it's just a $4 million number, but that did contribute. I think there are competitive issues always in all of the businesses that we are in, we have strong competitive issues. I think we are well positioned to take advantage, frankly, of the competitive issues because we are the company that has the full service relationship with our customers and I tend to think in the long-term we will benefit from other people's mining or stimulation of it, frankly we wish they were more in the market place, but in the long-term we are still comfortable with a solid double digit growth in the online - in our overall business growth, that will be [indiscernible] in the online arena where we are seeing, last year, 19 and change percent growth in the online business and a small single digit growth in our telephone business.

Okay, one followup. Can you give us an update on the [LFC] rollout where you guys stand with that?

Well we certainly we will do with the LFC program. It is our intention to have about 50 out of 50 [ADIs] covered by the end of calendar '03 and clearly the program has gone better than we would have expected both in terms of the quality of the relations we have with these partners who are most [indiscernible] ten years with us and with the number that we have been enable to integrate to get online or even quicker than we thought. So we said 50 by the end of the calendar '03 well ahead of our schedule - I think we are around 35 today and we have good dialogues going [over for the] candidates who applied for those other spots so we are well ahead of schedule.

The LFC concept is the key element [indiscernible] sort of matters, our ability will be ultimately to bring more [indiscernible] into that same day [indiscernible] an extra delivery mode.

So that is why we have been there, aggressive in that pursuit in [indiscernible] results.

Thanks a lot guys, good luck on the next quarter.

Thanks.

Ladies and gentleman as reminder to register for a question please press the 1 and followed by the 4. Anthony Noto with Goldman Sachs, please go ahead.

Thank you. I guess the first question is related to the quarter. Could you tell us what operating cash flow was for the quarter and CapEx for the quarter and then secondly as you talk about gross margin improvement in to the next shift [non floral] and to online. You have also talked about productivity savings. What is the opportunity over the next two years in productivity savings in percentages? Is it a double-digit productivity savings over the next two years, is it over the next year and then have a followup on growth? Thanks.

[indiscernible] CapEx results, we don't break out by quarter, but it was $15 million for the year with respect to operating income for the fourth quarter, we have mentioned that was 5.2 million of operating income for the quarter, 9.1 of EBITDA and therefore, you know, cash flow would be, you know, since our CapEx and our EBIT, you know, and depreciation amortization consistent fairly consistent numbers that may be down to a cash flow in that same range of $5 to 6 million for the quarter.

On the second preoperating efficiency productivity savings?

Yeah. Its fine, we continue to drive operating you know, efficiencies out of the business as they, you know, applying a double digit factor, you know to [indiscernible] year. I am trying to understand - why are you trying to get rid of that -.

I think that overall -

I guess that is why we think about that is if we have an expense base of lets call it $25 million in the quarter. Can we take 10 percent to 15 percent of that out on annual basis and let's say whatever that number is making up obviously is that something you think you can do over the next couple of years. What is your productivity savings plan over the next couple of years as an opportunity as opposed to something that is in the current estimates.

I would say that overall our expectation of our sales is that we can reduce our operating cost on a ratio basis you know in small single digit range. That's [indiscernible] turning to our goal, it's going to vary [indiscernible].

Yeah, I think there are specific [indiscernible] you know some of our larger operating expenses such as service center, labor, communication we had fully driving down at accelerated rates what are the unit economics and what those operating efficiencies are they will shed to some degree by volume and going up in relation to that volume.

Put on unit basis.

If we put on unit basis that they are currently double-digit reductions.

Then as you think about growth and you led them for faster growth in the next fiscal year than you have in this current fiscal year. Could you break down that growth rate while what will be the contribution from acquisitions and from your current customer base and then new customers?

I am certain that the first part of that which is nothing is built to our numbers based on any acquisitions, so our all of the growth rate were anticipating is organic growth rate what we will call a core growth rate. In terms of the breakdown by customers, we already said that we would expect to acquire over two million new customers this fiscal year, so obviously the lion's share of our growth requiring customers at a consistent pace would be from our existing customer base which is what we have been striving for last year and especially so this fiscal year we just began.

You know anything with respect to the Popcorn event we have given guidance on what we expect the Popcorn contribution to [indiscernible] without debate.

Quite absolutely, and in terms of the existing customer base and the growth rate, could you give us a sense of what was good growth in annual spend the last year and you obviously must expect that to accelerate and what will be the key strategy to do that will be increasing their frequency of purchase where will be by increasing the amount they spend per purchase? Thanks.

[indiscernible] I agree that will be of our focus and our emphasis there is not on increasing their average ticket the focus is on increasing frequency and that's why the breath of different products offering in each special gift area as a plush area and the new products and services you will see introduced over the next few months, overall focus until you suspect or an increasing frequency. We have had no retail price increases, so our average ticket increase while we reported on it has not been a goal, it has been a consequence of the mix and the breath of product both were introduction and that will continue to be our focus, not on a price increase, but on a frequency and loyalty increase.

Great, thank you very much.

Ladies and gentleman, if you would like to register your question please press the 1 followed by the 4 at this time. Gentlemen, for further questions, please continue.

Thank you [Li] and thank you all for your questions and if you do have any additional questions please just give us a call and closing, I would like to also remind that while this is a summer vacation season, there is still lots of reasons that you can connect with all the important people in your lives, everyday celebratory occasions including birthdays and anniversaries, new babies, back to school and many others, and a great way for you to do that is to consider trying our new personalized teddy bear product to be called bobby bear. We recently launched this adorable bear made by a good friend at [Boyz] which comes wearing a very stylish turtle-neck sweater. The sweater can be personalized with whatever message you want to deliver to your loved one. Its happy birthday Billy or congratulations Kathy or to Diana, World's greatest ballerina or whatever statement you wish to express, these huggable bears, make a perfect gift for anyone of any age and would got some really good feedback from the first customers who tried this out on soft launch here, so please visit this online by telephone, shopping with our catalogs or coming to our stores and see the great ways that we can help you, connect the important peoples in your lives. Thanks and have a great day.

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and he may please disconnect your line.