1-800-Flowers.Com Inc (FLWS) 2003 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the 1-800-Flowers.com second quarter fiscal year 2003 financial results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a 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, January 22, 2003.

I would now like to turn the conference over to Mr. Joe [Petito] [phonetic], Vice President of Investor Relations. Please go ahead, sir.

Thank you, Tracy. Good morning and thank you for joining us today to discuss 1-800-Flowers.com's financial results for fiscal 2003 second quarter. My name is Joe Petito, and I am Vice President of Investor Relations. For those of you who have not received a copy of our press release issues earlier this morning, the release can be accessed at the Investor Relations section of our website at 1-800-flowers.com, or you can call [Patti Altadona] [phonetic] at (516) 237-6113 to receive a copy of the release by email or fax.

In terms of structure, the 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 with us today is Chris McCann, our President, who is joining us for the Q&A section.

Before we begin, I need to remind everyone that a number of the statements that we will make today may be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed description of these risks and uncertainties, please refer to our 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 recording of today's call, the press release issued earlier today, or any of its SEC filings except as may be otherwise stated by the company.

I will now turn the call over to Jim McCann.

Thank you, Joe, and good morning, everyone. As we stated in this morning's press release, we are pleased with our operating results for the fiscal 2003 second quarter, particularly in light of what has been widely reported by the media as a disappointing holiday shopping season for most of the retail sector. Despite this environment, we achieved a record quarter in terms of both top and bottom line. Our revenues of more than $197m and EPS of 15 cents, while slightly below expectations, represent a growth of 22 percent and 400 percent respectively, compared with the second quarter of last year. Highlighting these results was the 25 percent growth achieved in our online business.

Importantly, we grew our business profitably by avoiding the aggressive promotional discounting that characterized much of the retail sector during the holiday shopping season. In fact, we increased our gross profit margin 200 basis points to 45.6 percent during the quarter, compared with 43.6 percent in the same period last year. During quarter, we also achieved positive result on a number of important fronts.

First, we reduced operating expenses as a percent of total revenues by continuing to leverage our infrastructure. Second, we cost-efficiently attracted 1.2 million new customers through effective marketing programs and our expanding gift offerings. Third, we continued to increase order frequency. Of the 2.2 million customers who placed orders during the quarter, about half were repeat customers. This reflects our continued emphasis on deepening the relationship with our customers through targeted marketing and advertising programs. Fourth, our customers continue to embrace our expanded gift offerings. Approximately 67 percent of combined online and telephonic revenues came from our higher margin non-floral gifts, compared with approximately 62 percent in the second quarter last year.

Lastly, we finished the quarter with a strong balance sheet. Our inventory is in line with our business plan, and we have more than $80m in cash and short-term investments, which we expect to grow during the second half of the fiscal year.

Now, before I pass the call over to Bill, I'd like to expand on this last point. The strength of our balance sheet puts us in a favorable position to look for, and to take advantage of opportunities to accelerate our forecasted revenue and profitability growth. These opportunities may be a new marketing or merchandising relationship or an add-on acquisition. We are committed to maintaining a strong balance sheet and a liquidity position in order to allow us to act quickly on such opportunities as they may arise in the near or long-term.

I'll now turn the call over to Bill, so that he can take you through the details of our financial results and the key metrics for this second fiscal quarter.

Good morning. As Jim indicated, our results are strong, particularly in two targeted areas. Improvement in our gross profit margin and reduction in our operating expense ratio. Combined with our revenue growth, these factors enabled us to significantly improve our bottom line results.

Regarding specific financial results and key metrics for the second quarter, total net revenues reached $197.4m, an increase of 21.6 percent compared with $162.3m in the same period last year. Combined online and telephonic revenues grew 23.2 percent to $189.7m, compared with $154m in the same period a year ago. Online revenues grew 25.2 percent to $75.8m compared with $60.5m in the second quarter last year.

These online revenues equal 40 percent of combined online and telephonic net revenues for the second quarter of fiscal 2003, compared with 39.3 percent in the same period last year. Telephonic revenues increased 21.9 percent to $114m, compared with $93.5m in the prior year period. And reflecting our reduced store count, our retail fulfillment revenues were $7.7m, down 7.2 percent compared with the $8.3m reported in the year-ago period.

During the quarter, our combined online and telephonic orders totaled 3,159,000, compared with 2,292,000 orders in the year-ago period. Online orders increased to 1,348,000, representing 42.7 percent of combined online and telephonic orders, compared with 999,000, or 43.6 percent in the same period last year.

Average order size during the quarter was $60.27, compared with $67.23 in the prior year period. This reflects the lower average order size associated with The Popcorn Factory line of products, which we acquired in May of 2002. Excluding the effect of these sales, average order size was essentially flat compared with the prior year period at $67.03.

During the quarter, we added 1,197,000 new customers, with approximately 510,000, or 42.7 percent, coming to us online. Customers continue to embrace our expanded product offerings, as 67 percent of combined online and telephonic revenues came from non-floral gifts. This is up from 62.1 percent in the second quarter last year. The combination of product mix, along with operational efficiencies and effective customer service efforts, helped increase our gross profit margin by 200 basis points during the quarter, to 45.6 percent compared with 43.6 percent in the same period last year.

Total operating expenses for the quarter were $79.9m, or 40.5 percent of total net revenues, compared with $69.3m, or 42.7 percent of total net revenues in the second quarter last year.

As a result of our revenue growth, higher gross profit margin, and leveraging our infrastructure, we increased EBITDA by 176 percent to $14.2m, compared with $5.2m in the second quarter last year. And net income for the quarter increased 457 percent to $10.1m, or 15 cents per fully diluted share, compared with $1.8m, or 3 cents per fully diluted share in last year's second quarter.

Regarding our balance sheet, our cash and short-term investments position as of December 29, 2002, was approximately $82m. For the first six months of fiscal 2003, we generated free cash flow of $9.5m. We define free cash flow as net income, plus depreciation and amortization, plus or minus any changes in working capital, minus capital expenses. We expect to continue to generate free cash flow during the second half of fiscal 2003 and beyond.

Finally, our quarter-ended inventory of $20.4m is in line with management's expectations.

Regarding guidance, as we stated in our press release, we believe the overall economy will remain unsettled and consumers will continue to be cautious in their spending. Nonetheless, we expect to grow revenues during the second half of our fiscal year in a range of 7 to 9 percent, compared with the same period for fiscal 2002. This is consistent with the rate of growth achieved during our fiscal second quarter, when adjusted for the effect of The Popcorn Factory product line, which we acquired in May of 2002.

In summary, we believe we are well-positioned to profitably grow our business during the second half of fiscal 2003 and beyond, with a business model that features a focus on achieving solid, sustainable revenue growth and the leveraging of prior investments in our infrastructure which keeps capital requirements low. As a result, we believe we can grow our operating profits at a significantly higher rate compared with revenue growth, and thereby build long-term shareholder value.

I will now turn the call back to Jim.

To sum up, during our fiscal second quarter we achieved good top-line growth in what was a difficult period for the overall retail economy. We also saw a continuation of the favorable trends in our key metrics that I've described to you in the past calls. We increased our rate of repeat business; we accomplished this using a broad range of direct marketing programs aimed at more than 10 million existing customers. This reflects our stated goal of becoming one of our customers' preferred gift providers.

We continue to attract a significant number of new customers. We cost-efficiently acquired more than 1 million new customers who are attracted to our trusted brand and convenient multi-channel access. Our customers continue to embrace our expanded gift offering. This trend helps enhance our gross profit margin and increases the number of celebratory occasions that our customers can come to us to fulfill their gifting and connective needs.

This last point is particularly important as we head into the second half of our fiscal year. Unlike many retail companies that are dependent on the year-end holiday shopping period, we have two more good quarters ahead of us. Our current fiscal third quarter includes the busy Valentine's holiday, followed by our traditionally strong fourth fiscal quarter, expected to be our second largest this year in terms of revenue and earnings, which includes some of the important gift-giving occasions as Easter, Passover, Administrative Professionals Week, and of course, Mother's Day and Father's Day. Overall, we remain positive regarding our near-term prospects for profitable growth, and, as I stated earlier, we believe we are well-positioned to act decisively in terms of our marketing, merchandising, and other growth strategies as these opportunities arise.

Now, that concludes our formal remarks for today's call, and I'd now like to ask Tracy if she'd reinform us as to the procedures to enter your questions that we could handle for you now. So, Tracy, the Q&A procedures again are?

Thank you. Ladies and gentlemen, if you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If you question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. If you're using a speaker phone, please lift the handset before entering your request. One moment, please, for our first question.

Our first question comes from the line of Arvind Bhatia with SWS Securities. Please go ahead.

Good morning, guys, how are you? Good quarter. A couple of questions there, Jim. The 7 to 9 percent growth that you are guiding for the next two quarters, should we view that trend line continuing into '03? That's number one. And then the 7 to 9 percent for the next two quarters – what's the breakdown between telephonic and online? The reason I ask that is, you know, you had nice growth this quarter, 21 percent, and your telephonic grew 21 percent, which – a lot of that had to do with Popcorn. But online as well was pretty strong at 25 percent. I guess if you can maybe shed some light on what's happening there, with the online business, and why only 7 to 9? And then I have a couple of follow-up questions.

Okay, there's a bunch of little pieces there, and we'll each take different parts of it. On the first piece, on the 7 to 9 percent, if you look at our growth rate, that's been consistent with what we've been projecting as our growth rate, so there's no big change there. In terms of the mix split, Arvind, this quarter we did do a lot of marketing to launch the newly acquired brand, and to launch its marketing efforts across our other platforms.

So, yes, those marketing efforts drove customers to the telephone, which was an anomaly for this quarter, but it will still have some carry-forward, because we did unearth a whole lot of new telephonic customers in this quarter. We would expect our split, though, going forward, to return to our more traditional for these two quarters, with about a 45/55 split -- being online about 45 percent, Bill?

Yes, this past quarter would be a 45/55 split if not for the heavy telephonic business that we did with the launch of The Popcorn Factory. As we move into the second half of the year, which is more floral, which has a heavier online piece, it could be closer to more like 50/50.

With regard to a bunch of your questions – as you know, we haven't given guidance for fiscal '04 yet, and would be expecting to give more guidance with respect to '04 in the summer months. But as our guidance shows for the second half of this year, and what we've achieved this past year, or this past quarter, we think that is kind of in line with where people should be viewing us. We certainly would hope that there's upside to those numbers that we can stimulate either ourselves or through an uptick in the economy.

But we're not counting on the economy changing from what's been now, for a couple years, a pretty dismal retail environment. So our plans are built on the economy staying the way it is, and obviously there are things that we hope we can do to stimulate our growth even beyond our projections, but we're comfortable with the projections we've given, with what we know about the retail environment today.

Okay, and then as far as the gross margin improvement that you showed this quarter, 200 basis points – how much of that was because of popcorn that we will not see going forward? I'm just trying to get a sense of what sort of improvement we should model in our gross margin in the next two quarters.

Of the 200 basis points, maybe 50 to 60 basis points related to The Popcorn Factory, which is heavily weighted this quarter.

But keep in mind, Arvind, on that note – Bill, you can give the color on the rest of the improvement -- but even on The Popcorn Factory, that product line is spread throughout our other brands, too, so it's sold throughout our different buckets of relationships with our customers, so it had an impact of about 60 basis points of the 200, but it's across all our different branded lines.

Yes, that's what I meant to indicate; that, as a product line itself, added about 60 basis points. So obviously, the math work – the rest of the 140 basis points came from continuing operational efficiencies that we have; excellent customer service, which we think is best in class and appears to drive down our credits, our charge-backs, our return rates. And even within floral, as we continue to roll out the non-floral content, we continue to see better margins on the floral side of the business.

Yes, the other point that Arvind asked about there, in terms of what could he impugn from that on a going-forward basis about our operating margins?

Yes, I think what we're comfortable with, with the guidance that we gave at the beginning of the year, that we would be in the high end of that range.

Keep in mind, Arvind, now we switch back, in this quarter, to being – rather than 67 percent non-floral, like we were in the quarter we just finished, we'll be about 60 percent floral this quarter, so that has a margin impact as well.

Okay. The Easter shift this year – can you provide some more color on how that might have an impact overall on the numbers? Again, you haven't provided guidance beyond Q4, but I guess Easter would fall within this year, so if you can provide some more color?

Yes, if everyone remembers, Easter last year was on March 31st, which was the last day of our fiscal third quarter; it now shifts into the fourth quarter by being in late April this year. So Easter which, when it's in Q3, has less of an impact, but last year we would say probably $2.5m to $3m of revenue were pushed into Q3 last year, as a result of that shift into Q3. That actually gets back into Q4 this year, so the model should reflect that.

Great. Thank you.

Our next question comes from the line of Anthony Noto. Please go ahead.

Thank you very much and good morning. Jim and Bill, I was wondering if you guys could elaborate a little bit, as we go into the new calendar year, the lessons learned 2002 on the marketing front, in terms of continuing to drive channels in both channel, and of cross-channeling against customers that have purchased in one category before. And what lessons you have in terms of improving that, and of the effectiveness of that cross-merchandising and cross-marketing, and tapping into this asset you have in a large customer base, and what we may see differently in the marketing plan in 2003? Thank you.

Thank you, Anthony. I think you could say that we came away from this holiday sober, in terms of our learning experiences. We think there was quite a bit of learning for us. We said at the beginning of this fiscal year that we were seeing our emphasis shift in terms of our marketing efforts to much more of a relationship-building effort, much more of a direct marketing effort, through all of its different iterations, to take advantage of that 10 million customer data base of customers that we have. And I think that will continue.

I think Chris might be better able to put some more specific colors, in terms of the rest of Anthony's question, in terms of the online world, what we're seeing there, and our increasing emphasis on building relationships with our existing customer base.

Yes, Anthony, I think as we looked at – certainly coming out of the last quarter and the environment that we're in – what we continue to find performing well is our direct marketing efforts. Everything aimed at developing and deepening the relationship with our existing customer base continues to perform well.

Where we struggle a little bit, I think, because of the environment, is on the acquisitions side, whether that be in the offline media or in the online media. So we continue to tweak our efforts in that area. We obviously take the learning – we take the learning from Christmas and it will apply, obviously, to our Valentine's Day campaign, and I think you'll see some differences there.

As we look at the online world, certainly, we continue to see [indiscernible] [and affiliate networks] [phonetic] being the best performers in the online world. So, again, until we really see the return come back to where it should be, from an acquisitions front, our efforts will continue to be focused on deepening the relationship – the retention and frequency numbers of our existing customer base -- and when the opportunity arises, being in a position to go step on the gas pedal a little bit more on the acquisition front.

Great. Thank you very much.

Our next question comes from the line of Kristine Koerber with W.R. Hambrecht. Please go ahead.

A couple questions related to Popcorn Factory. Can you tell me what the average order size is for Popcorn Factory?

For The Popcorn Factory product, I assume you mean.

Product, right.

The average order size is in the mid thirties.

This is Joe Petito. Kristine, do you remember when we purchased Popcorn, one of the things that we said that attracted us, was that it would give us a product line in a price range that we didn't participate, that could help us expand both the corporate side of gifting and the non-floral gifting areas to customers for everyday occasions like birthdays for children and so forth.

And remember, Kristine, it's a lower price point, but it's a very strong gross margin. These are high-40-percent gross margins.

And then you still have attractive gross margins, even in that nineteen-dollar price points that we wanted to get into, that we're now into. Which help us on the corporate side, although corporate was a big, big struggle for everyone. The corporate gifting environment this holiday season, Kristine, I mean, has been well-documented. Although we were disappointed in our results, we still had good growth there – not nearly what we had anticipated, because frankly, having a big financial service community that we had, in our corporate side, was really a challenge this year.

But frankly, it was the lower price point Popcorn Factory that we were able to sell to those same or new relationships in the corporate sales environment that helped us to achieve what we did. But even though it's a lower price point, there's a lot of units in the corporate side, and yes, you still have attractive margins.

Okay, and then following up on that, can you comment on the inventory level of that Popcorn Factory? Is there any risk? What is the typical shelf life of popcorn?

Kristine, we kind of popped the border there. We don't have --

Popped the border? [General laughter.]

As Jim mentioned, we don't have any inventory issues going forward. As you know, that's one of the features of our business model, and popcorn certainly hasn't changed that.

But in terms of a net increase in underlying inventory between hard goods, etc., would you guess, guys, it's about a $2m to $3m increase in our base inventory for the popcorn product line that we carry on a year-round basis?

It's probably about half that, Jim. Really, the increase that we see, from year end or from a year ago, was just the continued growth of all our non-floral products. We mentioned the 67 percent non-floral in Q2, and in the second half of the year, we will still continue to see growth in our floral. And that's where we've increased the inventory, is the preparation for Q3 and Q4.

So a couple million dollars worth of steady state popcorn inventory, and no exposures there, because as Joe says, we buy that pretty close in time. We made big inventory commitments leading into the Christmas holiday, for the right kinds of popcorn that we want, which is a very specially grown type of popcorn that we buy only from a few suppliers, but on a year-round basis now going forward, we are on pretty tight inventory timelines there.

Okay, and then one last question. Can you comment on where you saw the strength of the business during the quarter, in terms of categories? Which categories were strongest in the non-floral side of the business?

Kristine, what we would say is that as we look across the different product lines, it was pretty consistent growth across floral and non-floral gift lines. The drill-down areas that had some pleasant surprises in it, or pleasant performance numbers in it, for us, were things like our gift basket and gourmet gifts category; our successful launch of our branded bakery gift line called [Mama Moore's] [phonetic], which had a very, very strong quarter.

We were really pleasantly surprised by that. Frankly, we sold through our hard good inventory there, so we actually could have done even more in that product line. And we don't think we lost customers as a result, but we went beyond our forecast for our Mama Moore's launch of our branded bakery products.

We're continually seeing good results, although very, very early, in our continuity and Gift Club offers. We saw about 150 percent increase in those orders, off a very small base but great indications, great directional growth for us there; we're very happy with that. The results pleased us there.

And of course, The Popcorn Factory product line – popcorn, yes, and of course those other [towers] [phonetic] and gift tins of the candy product, the chocolate-covered pretzels, things like that, that we do in The Popcorn Factory, enabling us to – you saw the good increase in order count, and you saw the impact on the average ticket. But we did see some people trading down, and we were so pleased that we had product line that could address the need of the customer to trade down; to send more gifts at a better average price line.

And of course, our children's gifts lines that we introduced this year, first time; we [sourced] [phonetic] those products after we bought some assets a year ago, in that category, and we saw that do very well. Remember, we had to integrate that and move those people, and that seemed to come across awfully good for us, and we were real pleased with how the children's gifts went as well.

Great. Thank you.

Our next question comes from the line of [Heath Perry] [phonetic] with C.S. First Boston. Go ahead.

I was wondering if you could maybe just talk about cap ex plans for the year, if they've changed at all, as well as if you could just talk about the competitive environment in the core flowers business; what's going on with FTD and the efforts that Hallmark's making, and how that impacts you.

First, with regard to cap ex, Heath. The good news with cap ex is, our big spend in building our infrastructure is behind us. But we still have investments we continue to make each year, primarily in the technology area, just to do things better than we've done them in the past. We've given guidance in the beginning of this year that cap ex would be in the $12m range; first half of the year, we spent significantly less than half of that number. We still plan on executing a lot of those initiatives in the second half of this year, so we're not lowering the original guidance; it's really just kind of a timing shift right now.

Thanks.

In terms of the competitive environment, Heath, it hasn't changed a lot. FTD is out there; they don't advertise as much. We'd like to see all of our competitors advertise more because we believe it helps us, particularly as we get into the Valentine's holiday. But there's always a handful of competitors on the floral side that we concern ourselves with, as well as the thousands of floral vendors that are out there running florist's shops. So that environment hasn't changed.

Great, thanks.

Our next question comes from the line of Peter Benedict with CIBC Worldmarkets. Please go ahead with your question.

Hey, guys, I'm glad to know my popcorn is popped to order. [General laughter.] Three questions. First, kind of a follow-up on what Anthony was getting at. Can you talk a little bit about the holiday promotional environment? Your mix of competitors, I think, changes a little bit in your fiscal second quarter as you go up against a lot of non-floral competitors. If you could just maybe talk about that; how you saw the very promotional environment impacting you business and if you might respond to that in the future.

Second, could you talk about some future acquisitions or [JV] [phonetic] plans, given the very strong balance sheet? And then last, the LSC rollout – can you let us know where you are with that? And what impact you think that might have on your business over the next 12 months.

I'll start – this is Jim, Peter. In terms of the competitive landscape, it might strike you as peculiar, but what we're seeing is that Christmas is actually a more competitive holiday for us than are the traditional floral holidays. None of them are without competition, obviously, and we have very good, strong competitors in each camp. But at Christmas time, everybody is our competitor. Everybody is fighting for the same consumer dollar, and in the 26 years that I've been in this business, I've never seen a more competitive environment than the holiday season we just went through.

Chris can talk to you about the fact that we test all the different promotional environments all the time, to make sure that we're correct in our assumptions, that we don't need to enter aggressively the promotional arena. We keep our powder dry to do that, and from time to time, we do, but Chris, would you speak a little bit about the results of our testing efforts through this holiday?

That's right, and as we look at the holiday season, obviously, as we know in the retail world, it was very aggressive just from a promotional point of view in attracting customers. As Jim said, we continue to test many different promotional varieties to do the same. But yet we do so, as evidenced by our gross margin -- we make sure we do so in a very controlled effort, and as you can see from our gross margin, we did not rely on promotional efforts to generate the revenue that we did.

So while it was competitive, we focused on what our core businesses were, and what our customers wanted, so we didn't go chasing that top-line dollar. As we look forward now, the competitive environment does change, and it narrows. Again, we don't think that a promotional angle is necessary. We are seeing, on the competitive front, some early signs that maybe some of the price competitors who have been very aggressive in the past are not able to do so again this year.

So while we have plans – and we always make sure we're addressing the price competitive flank – early signs for Valentine's Day are that it will not be as aggressive as it has been in previous years, so that gives us some hope. But of course, every Valentine's there's new price competitors that pop up on the market.

They pop up, but they oftentimes go away almost as quickly. But we are seeing that those models that are dependent on the Fed Ex model are continuing to have challenges. Fed Ex has just put through some rather significant price increases that will disproportionately effect that competitive class that relies on that distribution model. Capacities are just not going to be there for them. Which makes us feel good, our sticking to our knitting about having this multi-channel commitment.

And I'll skip ahead to the third of your questions there, because that speaks to the investment that we've made over the last couple of years, in building these very wonderful relationships that we describe as LSC's. And Joe, maybe you could bring Peter up to speed on some of the metrics on that program.

And that was a good [indiscernible] segue from Jim regarding capacity issues with the LSC rollout. We have up and running, by the way, Peter, now, 50 LSC's. We're well ahead of our original plan for how many we have up. We still are rolling them in selected markets, where we get a very nice benefit from them on the capacity side. One of the things the LSC's do very well for us is increase our throughput in those markets where we can pick up more business. That's a benefit for us; it's also a win/win for our fulfilling partners, and this has strengthened our relationship with those partners.

So the LSC program continues to work very well, and as Bill mentioned before, because of the added volumes of the LSC and the efficiency of the model, we're able to share a better operating margin with our partners there, so we've seen better floral.

And Joe, two other key points on the LSC besides capacity is, as Bill referenced before, through the increases in that distribution network, we continue to drive our metrics on customer satisfaction, ultimately driving down credits, charge-backs, etc. And continue to drive increased branding exposure to the recipient database.

And then, last but not least, ultimately we expect to be able to introduce selected non-floral gift items into that same-day delivery capacity, which is something unique that we can do, that others can't. And we can do it without taking significant risks on inventory [indiscernible] and more.

And finally, on your question about acquisition opportunities – the things that come our way, or that we're now beginning to look at on a proactive basis, are things that are complimentary to the things that we already do. That is, inventory items, service areas, where we already have infrastructure in place that can benefit a vendor relationship and grow a vendor relationship in a different direction; like we did this year with The Popcorn Factory.

I think the number of opportunities there is inversely related to the capital markets. As the capital markets remain challenged and the opportunities for financing and exit strategies become fewer and fewer for the investors and other businesses, we're beginning to have increased frequency of dialogue. We have a pretty crucial filter that we put those considerations through, but we do think there are interesting asset opportunities, interesting smaller business appendage opportunities there, that can help us to achieve our growth results in a very capital-safe way that we'll continue to pursue.

And as they present themselves and we find those that fit nicely, we have the opportunity to pull the trigger.

And that's why we talk about our strong balance sheet, because that gives us the ability to move quickly if an opportunity does arise.

All right, guys, one quick follow-up on the LSC issue. Is there any example you can give us as to new non-floral gifts that might be able to put into this LSC network over the next couple of quarters that could move the needle?

Peter, we probably don't see anything immediate that's going to make an impact beyond the guidance that we've given. We continue to roll out things and test items, but -- you know, The Popcorn Factory product line is something that we think we can begin to offer some selective items. And we've already done some things with plush, with Lennox and Waterford, that have been well-accepted by the customers. What we try and do is first build a demand base, so that we have the knowledge base to introduce products, and then we bring that data to our fulfilling partners and work through what we think will work for holidays.

So we'll gradually roll some things out in the second half of this year. There's some candy product that I think would work well, so we'll keep you informed of the things that we do.

But otherwise, we'd have to be guessing ahead of what our test results would be, and that would be a little imprudent.

All right, great. Good luck during the next quarter, guys.

Thank you.

Our next question comes from the line of Anthony [Ledbezinski] with [Sidoti] [phonetic]. Please go ahead.

Good morning, guys. Just a follow-up on the LSC's. Just wondering, now that you have the 50 LSC's up and running, what percentage of your products can now be delivered on a same-day basis and how does that compare to a year ago?

Well, there's a couple aspects to that question. Let me answer it a little differently than you phrased it, perhaps. That is, with the 50 LSC's there, how much of our deliverable product can go through those, versus how much do we intentionally push through those? And we haven't given a specific breakout there in the past. But what I'll tell you is that we can push geographically a lot more volume through those LSC's than we do.

And the reason for that is, we respect and want to maintain those really good, strong relationships we have with the Bloom.net network. So we purposely under-utilize the LSC's, in terms of their overall buying capacities, to keep that balance and that accordion ability we need to satisfy our customers for major holidays. And this Valentine's Day will be a perfect example of the benefit of that strategy, as other people are much more challenged and choke, frankly, on the throughput issues than we will be.

In terms of other products that we can push through, Joe did mention the candy, the plush, the Waterford and other gift items that used to be only in the third-party delivery model that's now in the same-day delivery capability, and those will be increased on a gradual but definitive basis, all throughout this calendar year – the number of products we push through our program.

The example Joe used of The Popcorn Factory product -- this product that we already did test this past holiday -- moving significant numbers of product in a small SKU count, to our LSC's – taking a product that had traditionally been a four or five-day delivery window, and pushing it to the same-day delivery window. And with that, we had a great deal of success. Selling those products under the 1-800-Flowers brand was a good successful test run. So you'll see us be more aggressive with those products and specific SKU sets as we get into the next set of giftable occasions.

And remember, too, Anthony, that [indiscernible] is customer-driven. What they require, what customers expect and desire to be delivered on a same-day basis. There's quite a lot of the product where people come in, thank goodness, that they order for delivery a few days later.

Okay. In terms of for Valentine's Day, which is your next major holiday, I saw that you mailed out a Popcorn Factory catalogue which is specifically geared towards Valentine's Day. Just wanted to get an update on that, and also any new product offerings that you have for this Valentine's Day.

[Indiscernible] on the Popcorn Factory catalogue, it's fairly new, so we don't have any results on that yet. But you know, it's a small holiday for The Popcorn Factory and we continue introducing floral products into that catalogue to take advantage of that holiday. Also, just hitting in the mail now is the Winter/Spring catalogue under the 1-800-Flowers brand. From the new product point of view, it continues along our product lines, our existing categories, and there are constantly new variations on that. So no new categories, just new variations of the products within those categories.

The marketing that we're doing is built into the guidance that we've given. But what The Popcorn Factory mailing does is, we're now bringing new products into what are traditionally floral holidays; we're bringing some non-floral products into those holidays to see how well they do.

And the popcorn product line, which is not just popcorn, obviously; it's all the different candy and novelty items that we have there, are perfect Valentine product extensions for an existing customer who might be coming to us for a special relationship – a husband, a wife, a girlfriend, boyfriend – and then having other product that we can offer to them for the children in their lives, too, that they might want to express themselves to for Valentine's Day. So that gives us the opportunity to expand our relationship -- on a telephone contact, for example, with a customer, to suggest, "By the way, if you have children in your life – nieces, nephews, younger brothers, younger sisters – we have a clever collection there." So that's what you'll see us do as an extension of the relationship.

Okay. And then finally, on the gross margin – a big driver of your gross margin expansion has been the increased sales of your non-floral gifts. Just wondering what do you think is going to be the percentage of sales that will come from non-floral gifts by the end of fiscal '03 and how does that impact gross margins?

Again, we have that baked into the guidance that we've given for the year, but within the second half of the year, we go back to a mix that's higher floral than non-floral because of all the floral holidays that hit the calendar during Q3 and Q4, particularly Q4. So I think we're back to a 60/40 mix floral and non-floral in the second half of the year.

All right, thank you.

Ladies and gentlemen, as a reminder, to register for our questions, please press the 1, followed by the 4, on your telephone. Our next question comes from the line of Ken Heller, with [Cannell] [phonetic] Capital. Please go ahead.

Jim, you had mentioned that you have certain filters regarding acquisition opportunities. Can you give us kind of a sense of what those may be? Obviously, there would need to be a certain fit with the products, but on an economic basis, what kind of filters do you have on there that you could discuss?

I think we can all contribute on that, Ken. First and foremost is, most of the relationships that we're approached on, or that we seek out, really don't require us to put them on our balance sheet. They're better run in a contractual relationship than a vendor relationship. So the majority – that's the first filter line: Is it really appropriate, is there really leverage in having that asset class be part of our company?

The second thing is, of course – and not in that order – is the appropriateness of the product or service that we might consider integrating into what we do, and what our customer has told us in the research that we do with them on a regular basis, about their appreciation for the product, or their willingness to buy that product, or what direction that product line might go.

And then from a financial point of view, Bill, would you comment on some of the criteria you use?

Sure. From a financial profile, what we've used as a measurement, is: Does that product line have the ability to grow at a 15 percent rate? It doesn't have to have historically grown at that rate, but when combined with our assets, can we grow it in the future on a 15 percent or above growth rate? And then secondly, we're not looking to fund [soft] [phonetic] operations or fund loss operations, so can we either pull costs out during our due diligence process, or is it already at a level that we feel will be accretive to our earnings?

It would be good if, from a financial point of view, that it were accretive right away. If not, we always have to make the evaluation: do we buy it or do we build it? And then finally, with financial performance, if it's a company or a product line that has not been profitable on its own but we are reasonably certain that with the mixture of our assets - our fulfillment capabilities, our technology platform, our sales capabilities, that we can take their product line and more cost effectively acquire it and therefore expand its capabilities versus build it.

At this point, even though we're still a small company, we think we have a mature enough platform that it does pay for us to go buy someone else's R&D efforts, rather than go through that process ourselves. So if it's a company that's been built to a point that we're comfortable that we can integrate it quickly, that it's something our customers would be comfortable with, that we could make accretive right away, and then we would even consider acquiring things that are not accretive prima fascia, on their own standalone model.

Okay, thank you. What is the comfort level that you have the free cash flow positive on a go-forward basis?

We're very comfortable with that.

If you look at our model, Ken, one of the things that we've really hit on, and which Bill mentioned in his comments and formal remarks, and Jim mentioned again – when you look at us, we have made the investments already in our infrastructure. Those investments, to our mind, are a significant barrier to entry for our competitors. But we have already made them, and now we are leveraging them, such that we have a much lower requirement for capital deployed in the model, and therefore we have the ability, as we go forward, to continue to generate more and more free cash flow.

Okay. Final question. What other things are you doing, from an advertising standpoint, to ensure that the customers that you're targeting are aware that there's a lot of other products that they can buy for gifting purposes out there outside of flowers? I think you had mentioned The Popcorn Factory catalogue going out. I was curious if there were other things that we should be on the lookout to help expand the customer base and the product sales that you want.

I don't want to leave you with the impression, Ken, that we want every one of our customers to know every one of our product lines. That would be not an appropriate expectation to give you. But where it is appropriate, we cross-market our brands. And you'll see, as Chris mentioned before, and maybe I'll ask him to touch on some of those issues again – we will do those things that we determine, from a marketing standpoint, are appropriate for us to do to cross-expose our branded customers to other branded products.

For example, The Popcorn Factory line – we sold a great deal of that product line, not under The Popcorn Factory brand, but under the 1-800-Flowers brand. So they came to our site and used our search functionality; used our reminder services, or used our gift suggestion program, or spoke to our gift advisors on the telephone through [Reach Out or through Re-Dialogue] [phonetic] – we were able to populate offers using that product line, which was very effective for us. So we'll do that.

But we are a collection of brands, and that's one of our strengths. Just like The Gap, or just like Limited, or Williams Sonoma, we are a collection of brands, and we admire and respect those companies in terms of how they've managed the brand integration, and to the best that we can, mimic them in terms of how we cross-expose our products.

Chris, maybe you could talk a little bit about how we're doing on the teletagging program and on the cross-product population?

I'll come back in just a minute on the cross-product population, but from a 1-800-Flowers brand point of view, which has its own expanded gift product category, the two primary vehicles for us in communicating that to our customers is through catalogue and through our website. Everything else is geared on acquisition and I think you have to be very, very focused when you're focusing on - I mean, what can you acquisition? Once we get them in our direct marketing efforts, we'll educate on the expanded product line.

And, as Jim says, we are a collection of brands, so then we focus on our cross-brand marketing. So whether it's buying in through [indiscernible] in our catalogues, whether it's teletagging -- when someone calls up for The Popcorn Factory, at the end of that transaction, asking if they'd be interested in ordering a product with 1-800-Flowers or our products from Plow & Hearth at the time; we'll do teletagging like that. So it's focusing on all the cross-brand marketing opportunities as well as focusing on just, through our ongoing dialogue with our existing customers, letting them be aware of the expanding product line underneath each brand.

And it's no secret, frankly, that during this last holiday season, we had so many good results to our test efforts in that area, that I think it actually already contributed to our being able to do better than most in the holiday quarter last, and it gives us great hope and expectation about our being able to step up those cross-brand and cross-product marketing efforts as we go forward. It gives us, frankly, a little bit more confidence as we look through that filter of what opportunities exist for us out there in terms of other product introduces, or other companies that we might come together with.

Great. Thank you very much.

Ladies and gentlemen, if there are any additional questions or comments, please press the 1, followed by the 4. I am showing no further questions. Please continue with your presentation, or any closing remarks.

Thank you, Tracy, and thank you all for your questions and your interest today. And if you have any additional questions, please give us a holler.

In closing, as has been our custom on these calls, I'd like to offer a public service announcement. That is, the Valentine's holiday week begins Monday, February 10th. So I encourage all of you to place your orders early and often, to express your love and connect with all of those important people in your lives. Just calling 1-800-FLOWERS.com makes it easy. You can visit us online; call us on the telephone, order through our catalogues, or even visit one of our stores to see all of the great ways that we can help you show just how much you care.

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