1-800-Flowers.Com Inc (FLWS) 2003 Q1 法說會逐字稿

Welcome to the 1-800 Flowers.com financial results conference call. During the conference participants will be in a listen-only mode. This conference is being recorded Tuesday, October 22, 2002.I would like to turn the conference over to Mr. Joseph Pittillio, Vice President of Investor Relations.

Good morning. Thank you for joining us today to discuss Flowers.com financial results for the third quarter. For those of you who have not received a copy of our press release, it can be accessed on the investor relations section of our website at 1-800-flowers.com. In terms of structure we'll begin with brief formal remarks then we'll open the call to your questions. Presenting will be James McCann and Bill Shea. A number of the statements we'll make today may be forward looking. These statements involve risks and uncertainties that could cause results to differ materially from those contained in these statements. Please refer to our SEC filings. Including forms 10K and 10Q. recordings of today's call the press release earlier. I will turn the call over to James McCann.

Good morning. As discussed in this morning's press release we're pleased with our operating results for the fiscal 2003 first quarter. We are happy on a couple of important fronts. First, our fiscal first quarter is traditionally our lowest in terms of revenue due to the lack of any gifting callers during the summer months. Nonetheless we were able to achieve old revenue growth during the quarter even with the continued weakness in the overall retail marketplace. Secondly we were able to improve our gross profit margin increasing it by 150 basis points to more than 41 percent. This was achieved through a combination of increased sales, our higher margin nonflower gifts and continued focus on customer service .During the quarter our combination of convenient multi-multi-general customer access and expanded gift offer cans helped attract a half million new customers, approximately 55% of whom came to us online. For approximately 1.1 million customers placed quarters during the periods, 56 per were repeat customers. This through effective targeted marking and advertising programs. Continued customer acceptance of our expanded product offering resulted in 40% online revenues from our higher margin flow gifts. From the operational standpoint we continue to leverage our infrastructure there by reducing our loss for the quarter by 45% and our net loss by 0% compared with the first quarter last year. This was achieved despite the fact that as we focused in our August conference call we incurred an additional loss of approximately 1.5 million dollars associated with the popcorn factory which was acquired in may and which has low sales volumes during the summer months. Partly during the first quarter we were able to complete the key elements for the integration process for the popcorn factory including upgrading their website. We brought their customer service functions in house where we get the experience of our experienced gift advisers as well as significant cost savings. This positions us for this important Halloween holiday and for the start of what we believe will be the strongest holiday selling season for our great big gifts. Now I turn the call over to Bill so he can particular you through the details our financial results and the key metrics for the first quarter.

As Jim indicated we're pleased with the operating results for the fiscal 2003 first quarter. Particularly with the continued in the overall weakness of the economy and the first quarter is traditionally our lowest revenue period of year. Our results were strong in a number of key areas specifically the improvement in our gross profit margin and our ability to leverage our infrastructure thereby reducing our operating expense ratio. This despite the additional losses associated with the popcorn factory.

When combined with our revenue growth, these factors enabled us to improve our bottom line results.

Regarding specific financial results and key metrics for the first quarter: total revenues 82.2 million, an increase of 12.7 percent compared to 79.2 million in the same period last year. Combined online and telephonic revenues grew 13.7 percent to 83.3 million compared to 73.3 million in the same period a year ago.

Online revenues grew 26.2 percent to 40.8 million compared to 32.3 million in the first quarter last year and these online revenues equaled 49% of total net revenues of first quarter of fiscal 2003 compared with 44.1 percent in the same period last year. Telephonic revenues increased 3.8 percent to 42.5 million compared to 41 million in the prior year period and retail revenues 5.9 million. Essentially flat compared to last year's period.

During the quarter our combined online and telephonic orders a 1,309, 000 compared to 1,336,000 orders in the year ago period. Online orders increased 705,000 representing 53. 9 percent of combined online and telephonic orders compared to 562,000 or 49.5 percent in the same period last year.

Average order size for the quarter declined slightly $63.05 compared to $64.53 in the prior year period.

During the quarter we added 494,000 new customers with 270,000 or 54.7 percent coming to us online. Customers continue to embrace our expanded product offerings as 40% of our combined online and telephonic revenues came from nonflow gifts. This is up from 38 percent in the first quarter of last year. The combination of product mix along with operational efficiencies and customer service efforts helped increase our gross profit market during the quarter by 160 basis points during the quarter to 41.1 percent compared to 39.5 percent in the same period last year.

Total operating expenses for the quarter were 44 million or 49.3 percent of total net revenues compared with 40.8 million or 51.6 percent of total net revenues in the first quarter last year.

As a result of our revenue growth, higher gross profit margin, and leveraging our infrastructure, we were able to reduce our EBITDA loss for the quarter by 45.1 percent to 3.3 million compared with an EBITDA loss of 5.9 million in the first quarter last year.

Our net loss for the period was reduced by 18.5 percent or 1.7 million-7.3 million or 11 cents per share compared with a loss of approximately 9 million or 14 cents per share a year ago. again, this is after absorbing the additional loss associated with the popcorn factory.

Regarding our balance sheet, our cash and investments position as of September 29, 2002 was approximately 50 million It should be noted this reflects the investments we made in preparation for the upcoming holiday season. We anticipate having a cash and investments position of approximately 80 million at the end of the current second fiscal second quarter.

Inventory of 24.9 million is in line with management's expectations and reflects the buildup for the holiday shopping period.

Regarding guidance. As we stated in our press release this morning despite continued uncertainty in the overall economy we reiterated our guidance reflecting confidence in our ability to deliver solid top line gross and defer the leverage of our operating infrastructure, thus enhancing bottom line results. Our fiscal 2003 guidance calls for revenue growth in the range of 14 to 19 percent and EPS. of more than 20 cents per share and free cash flow in excess of 15 million for the full fiscal year. We anticipate our fiscal second quarter will represent approximately 35% to 37% of full year revenues and a substantial portion of our full year EBITDA, EPS and free cash flow will occur this quarter.

In summary we believe we're well positioned to execute against our plan to grow revenues cost effectively and improve our operating margins in fiscal 2003. I'll now turn the call back over to Jim.

We achieved solid top fine growth and continued to leverage our infrastructure to enhance our bottom line. We also saw the favorable trends I described in past calls including on the customer relationship front--we continued to deepen the relationship we have with our more than 10 million existing customers through a broad range of direct marketing programs and increased our rate of repeat business.

On the customer acquisition front, we continued to cost efficiently acquire new customers who are attracted to our brand, our convenient multi-channel access and our expanding gift offerings. On product mix the expansion of our non-fall gift categories help enhance our gross profit margins as well as increase the number of celebratory occasions our customers can come to us to fulfill their gifting needs.

On the corporate giving front, we added a resources and have continued to expand our product offering including such great corporate gifts as the colorful logo emblazed tins filled with premium popcorn from the popcorn factory.

We look forward to accelerating our growth in this area especially during this holiday season. As we enter this important holiday shopping season, our fiscal second quarter, we believe our expanded gift offering including gift baskets, plants, candy, the gourmet items, the plush, the collectibles, home and garden decor, the popcorn and our children's gifts, in addition to such great brand name gifts as Waterford, Lenox, Godiva- and these great new Nabisco gifts we have - position us well for what we believe will be our strongest quarter every in-terms of top and bottom line performance.

In conclusion, we continue to believe that our business model with its low capital investment requirements, focus on achieving solid sustainable revenue growth and the ability it gives us to leverage our infrastructure will enable us to deliver long term shareholder value. That concludes our brief formal remarks and I'd now like to ask Tracy if she would come back on the line.

Ladies and gentlemen, if you would like to register a question, please press the one followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and would you like to withdraw your registration, please press the one followed by the 3. Our first questions comes from the line of Catherine Watters of Credit Suisse First Boston.

Would one more quarter down in 2003 guidance unchanged does this suggest the retail environment and the consumer environment has remained pretty much status quo over the last quarter and how much of a positive change do you need to achieve the December quarter guidance?

I think our interpretation is the retail environment has deteriorated some around us. But we still feel comfortable affirming the year which implicitly confirms next quarter and although the quarter is not giving us the resounding positive consumer attitudinal kinds of things we look for in terms of signaling, we're still confident about this quarter. If there were an improvement in the consumer sector, we think we could outperform our guidance.

Terrific. And if you could tell us what drove order size down ever so slightly.

The average ticket it not a primarily primary focus of ours. Repeat rate is. It's typical fluctuation in the quarter. It doesn't represent anything particular.

With this quarter being heavy flow and online flow it based on product mix have it down slightly below our prior year but we expect for the next three quarters and for the year for it to be flatter up.

Thank you.

Next question comes from the line of Anthony Noto with Goldman Sachs.

Jim, your comments about the fourth quarter and anticipating your strongest top and bottom line quarters to you relate that to two factors from what you are seeing from October 21, October 22 in consumer trends with your business specifically and number two-- how would you compare your marketing programs both in terms of quantity and mix this year versus a year ago-- specifically as it relates to the top three or four things TV, catalogs, e-mail and online advertising.

In terms of our marketing mix as you know, our trend has been in the last 18 months to shift -- though we have held or marketing spend constant in dollars. Down last year in dollars. What we're doing and trying to increase our emphasis on retention and development of existing customer base. We do that with our marketing messages and the product mix we have available. Next week is Halloween we expect we're anticipating doubling our sales for Halloween over what it would have been a couple years ago. That's an emphasis on marketing dollars. So we can only do that pause we have the right mix of product. On a marketing dollar mix it's flat over last year, you are see a disproportionate spend in direct market categories. Our cataloging, he will messaging we're holding broadcast pretty flat. So when you have customers our emphasis will be on growing our relationship and that's why we're happy to report customer retention and acquisition.

With respect to the first three weeks of this quarter we're comfortable with the guidance that was given.

And then one other quick question. On the balance sheet you basically can sum up the cash and equivalents in short-term investments and the difference in the receivables. I was wondering if you can reconcile the change in your cash balance of $50 million. I get to slightly less that change by looking at the elements on the balance sheet. Was there capex in the quarter or some other elements?

There is the $50 million of cash we said would be added at this point in time. So it does like investments are made for the second quarter, the change in inventory you see in anticipation of you know of the second quarter. Also marketing investment that we made. It's classified at other assets and that's maybe why you are not picking up the full change.

Thank you.

The next question comes from the line of Anthony Libinski [inaudible].

Good morning. Just was wondering if you could allude to the operating efficiencies that you spoke about in terms of your gross margin expansion?

I think they have come up on several headings. One would Nebraska the spring of last year or the end of last fiscal year we completed the reengineering of our service center platform so the annualization of the hourly savings would be starting to be reflected now and the next couple few quarters. In addition at performance variables by use of the technologies we deployed the lost calm years are beginning to bear the appropriate fruit now in terms of the quality of the service which reflects itself in the improved charge fax.

With respect to gross margin in particular, gross margin improvement is a result of product mix is a result of us being operational and buying better? Certainly shipping costs have improved, our net shipping costs have improved and overall our customer service credits have come down. So all that contributes to the gross.

It's a whole bunch of little things.

My other question is about the American Greetings. Have you seen an impact from that yet?

Well the American Greetings relationship is one that helps us in that greetings area. In that area we consider it the entry level stage of our platform from a price point of view from customers who might be coming to buy a gift for a family member and say there's also somebody I would like to send a card to. So it's product enrichment for us in the greetings category. In addition we have the opportunity to cross-sell their products and services to our customers then sell our services to their customers. So we have seen a positive benefit from that. It's not going to amount to much in terms of dollars and cents. On an overall basis. But it does amount to a dollars and cents on a revenue basis this quarter and next quarter with Valentine's Day.

How much do you think the popcorn factory acquisition will contribute to your December quarter sales.

We stated that our guidance for popcorn factory should be $30 million in revenues with 75 to 80% of that coming in this quarter.

Now, with all the cash that you expect at the end of the second quarter, are there any plans to buy back stock?

Well we accumulate cash from our operations. We as a growth company look at the two different things we can use it for to grow our business. One would be to internally invest in marketing programs for growth areas for us so we would have that as an option. The second thing would be strategic acquisitions which we have done the last few years, if we ran out of those opportunities which we don't foresee then we review the capital options oh available to improve shareholder value which would include shareholder buy backs. We would have that sequence of possibilities in front of us.

Thank you very much.

The next question comes from the line of Kristine Koerber from W R Hambrecht.

Given the higher mix of nonfloral goods you have now, can you comments on where you expect gross margin to come in for the December quarter?

We don't have specific guidance on the margin by the quarter. We're comfortable with what we have seen in the consensus models for the margin which gets us to a full year margin close to 42%.

You can impute from that Kristine, that the heavy floral quarters like the spring quarter will be a lighter gross margin quarter and this second fiscal quarter will be a heavier gross margin quarter because of the mix of -- it will flip-flop to 60 percent nonfloral gifts this quarter.

This will be our strongest gross margin.

So we can see gross margin exceed 42% in Q2, then? Can you talk about just kind of update us on soft bank's ownership in

Soft Bank had a board position with us back in the spring. They no longer have a board position. They no longer have any direct contact with the company other than what think institutional investor would have. We have regular contact with them as we would any institutional shareholder and their request and our practice would to be treat them like any other institutional shareholder would be treated.

As far as your LFC program I believe you have 40 members, you were targeting 50 by year end, does that still hold?

Actually we were originally targeting to have all 50 ADIs, the fifty biggest markets in the country, covered by the end of calendar 2003.But we're ahead of schedule obviously and we intend to continue to develop that. But we have not set any specific numbers for the end of this calendar year.

So it's way ahead schedule and we'll revise our guidance at the end of this quarter because we'll be far ahead what we said originally our goal for the program would be.

You have how many members? How many LFCs out there?

Just our 40 LFCs were our goal was to have the universe of 50.It's gone so well we'll have to revise our guidance for the year expectations because obviously being a year -- almost a year ahead of schedule on our program we'll have to give you more.

As a reminder to regional sister for a question, please press the 1-4 at this time. Eric Beder from Ladenburg Thalmann, please go ahead.

Good morning. Can we talk about heart fund last year for Christmas. I know you did not get the inventory you wanted because of the time in acquisition. Are any of you are products affected --

We stayed close to that monitoring and we're expecting to receive in total as of a week ago we were about $2 million worth of inventory through our friends that number is down to buy three quarters today.

And we expect that the last half million in inventory we need is in transit so we're comfortable that the delay was a couple weeks for us in terms of a few products. But we'll be completely recovered within 10 days.

In terms of heart fund how much are we down in terms much Christmas and the depth of variety.

For heart solve for Christmas this year how much more can you offer than you had last year now that it's fully integrated into the system?

What enables us to do that we were able to do our own purchasing and inventorying. We couldn't offer very many selections of the heart solve products on our other properties.

When we bought heart solve we felt it had a product line that could contribute 15% to our growth, are you still comfortable with that.

The floral market has been in the doldrums in the last year or so. Have you seen any signs of that changing?

I have not seen any great evidence in the floral testified that we are seeing a great expansion of it. You saw in the third quarter even with no holidays we were able to grow the flower business in that single mid digit range panhandle the nor category is growing very little if at all and I think I don't think we're taking share as much as we're taking growth. The evidence we have of that is we survey our customers who are new to our list, two-thirds of those customers who are placing their first order with us have never placed an order for a gift with anyone before. Less than a third might be described as stealing from one of the 40,000 or so competitors we have and the rest two-thirds are our customers who have been brought to the category.

Our next question comes to the line of Arvind Bhatia of SWS Securities.

Good morning. Just a couple quick questions. On the acquisition front- I got on the call late- what are you seeing more acquisitions now than before and what kinds of things are you seeing and you know, the multiples that you will particular at this point of time?

Our strategy on acquisitions as not change the changed at all. We'll be opportunistic where we see things that are a good fit from a product standpoint or a service standpoint for our customers. However, we turn away a whole lot more than we spend time looking at. But there are opportunities out there and we will continue to investigate them.

I'd like to get a sense for revenue; you are probably seeing more people come forward to offer up compared to maybe six months ago given the economy.

I would say that what we're seeing is more discussions. That is, people realizing that in any challenging environment it's incumbent upon them to explore all the different ways they can go to market. We offer either in the partnership or in a promotional relationship or even less likely in an acquisition scenario we offer an opportunity to get 10 million well qualified, demographically attractive customers with a great technology platform, interesting marketing vehicles, and a very, very unique fulfillment center. So I would say the pace of dialogues about potential relationships of all different kinds is increasing especially as people look at their first quarter next year and second quarter next year.

Which, what are the different categories that you would like to be in, what are customers maybe asking for that they haven't asked before?

Well, I would say we described before what we call the edges of our fences. We don't think that anyone would be surprised by the categories we'll be introducing in terms of products-either in the form of partnership, a simple vendor offering or in products we offer on our own.. Everything running from that initial greetings product with our American Greetings Relationship, customer-created content or paper versions of those content areas, introducing the expressive gifts which are primarily our plush, our stuffed animal programs with things like our witch, bear and pumpkin bear for Halloween- those connect gifts in that $15 to $30 price point.

We now have an everyday program for our teddy bears the bumblebee bear, the Santa bear, the bunny bear at Easter, et cetera. So we have those wonderful price points in the greeting category. Then we have six core gifts you would expect 1-800-Flowers is the top florist to bring to market, including flowers, plants, candy, balloons, stuffed animals and candy. And then in that gift boutique you see us with things from fragrances to jewelry to the heavy emphasis on the gift baskets. The Godiva products, all the food gifts.

So as you look at that spectrum the wonderful thoughtful gift categories that we play in. There are few niches we can fill with providing product on our own or in partnership with other people. Then occasionally we find a company like we did with popcorn that was a wonderful vendor partner that could hit its stride if it was part of our company. We'll continue to explore those but I don't think you find anything that we would offer to be a surprise in terms of that continual and thoughtful gifts and expressed gift product.

Inventory obviously this quarter went up in preparation for the December quarter. But where would you see that number at the end of December?

At the end of December it would be down below 20 million and our average for the year would be in the high teens. Mid to high teens.

This has been high inventory high product quarter.

Just a housekeeping question. What do you expect the shares outstanding number to be for December?

A little under $5555 55 million.

With the profit quarter I imagine that number going up. You say it will be 65 million?

Yes.

Thanks.

Language if there are additional questions please press the 1-4 at this time. I'm showing no further questions. Please continue with your presentation or any closing remarks.

Thank you. Thank you all for your questions and interest today. If you have of any additional questions please contact us. It has been our custom on these calls, I would like to offer a public service announcement. Halloween is next week and we have plenty of those cuddly pumpkin bears and much to help you put a smile on the face of the little goblins you love. Visit us online, on the telephone, through catalogs or visit our stores. Thanks so much for you are interests today and please call early and often.

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