1-800-Flowers.Com Inc (FLWS) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing buy, welcome to the 1-800-flowers.com third quarter fiscal year 2003 financial results conference call. During the presentation all participates will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. At that time if you have a question, pleadings press the one followed by the 4 on your telephone. As a reminder this conference is being recorded Tuesday, April 22nd, 2003. I would like now to turn the conference call over to Joe Pititto, vice president of investor relations with 1-800-flowers.com. Please go ahead.

Thank you. Good morning and thank you for joining us today to discuss 1-800-flowers.com financial results for our fiscal 2003 third quarter. My name is Joe Pititto and I'm vice president with investor relations. For those of who you have not received a copy of our press release, accessed at the website at one 1-800-flowers.com or call patty 5162376113 to receive a copy of the release by email or fax. In terms of structure, our call today will begin with brief formal remarks.

Presenting today will be Jim McCann, CEO and Bill Shea, CFO. Also present today is Chris McCann our president who is joining us for the Q and A section of the call. Before we begin I need to remind everybody, that among the statements within the meaning of the private security litigation reform act of 1995. These statements involve risks and uncertainties that could cause actual result to differ materially from those expressed and applied in the applicable statements. For a detailed description of these risks and uncertainties please v including the companies annual form 10-K and company reports on form 10-Q. The company expressly disclaim, forward-looking statements made in today's call any recordings of today's call, the press released issued earlier today or any offices Securities and Exchange Commission filings accept as may be otherwise buy the company. I will now turn the company over the Jim McCann.

I, thank you and good afternoon. As we stated in this morning's press release, during our fiscal and, we received solid growth including an LTM 14%. Importantly we continued to improve our bottom line results with net income for the quarter up 16.17% to $1.2 million dollar or 2 cents per share compared with net income of one 65 thousand dollar or just about break even on a par share basis on a per share basis compared to last year.

We accomplish these as a result of our third quarter despite the challenging retail economy that was further impacted by severe were in much of the country an a war in Iraq. Additionally our results from the period were expected by the shift of the Easter holiday from the third quarter last year to the fourth quarter this year. During the quarter we further improved our strong gross profit margin which increased 238 points, third quarter last year. This improvement came from a combining of several factors, including continued customer acceptance of our higher margin nonfloral gifts enhanced operating efficiencies and our manufacturing processes and extra company service efforts. On a customer front during the quarter we continue to achieve positive results in 2 key areas. First, we cost efficiently or cost effectively attracted 680 thousand new customers through effective programs an our expanded.

Importantly more than 60% of these new customers came to us on line where we have lower order processing cost, a higher cross, via our nonfloral and an opportunity to engage our customers in electronic dialogue through a variety of service and marketing programs. Second, we continued to [inaudible] our relationships with our existing customers as evidenced by our increasing repeat order rate of 1.5 million companies who pleased orders through this quarter 55% were repeat customers. We believe these positive trends position us well for current profit, (inaudible) strong holidays as pass over, Easter, administrative assistant professional, mother's day and father's day. I will now turn the call over to Bill so he can take you through the details of our financial results and key metrics of this third quarter. Bill?

Before I get into the. Address. First, as Jim indicated we are pleased with our ability to generate solid revenue growth in a challenging retail climate, particularly in our on line channel. Second, the continued improvement in gross profit margin. As you know a key area of focus for us. And third, our operating expense ratio which increased slightly compared with the prior year. This increase, however, reflects three factors specific to this year's third quarter.

First, for loss of revenues associated with the date shift of the Easter holiday from the third quarter last year into our fiscal fourth quarter this year. Second, an increased in fixed operating expenses in this year's fiscal third quarter compared to the same period last year (inaudible) which we acquired in May of last year. The pop corn factory seasonally low revenue fully absorb this traditional overhead. And third a somewhat slower consumer demands in the last few weeks of the quarter associated with the severe weather in much of the country and the war in Iraq. Excluding these factors our operating expense ratio for the period would have been down year over year as it has been in recent quarters.

Furthermore, fiscal 2003 we expect operating expense ratio will be down compared with fiscal '03 there by enhances our overall bottom line results. Now regarding the specific financial results and key metrics for the third quarter. Revenues reached 120 power.1 million, an increase of 7.5% compared with 115.4 million in the same period last year. Combined on line telephonic revenues essentially store growth from 8.6% to 116.9 million dollar compared with 17.6 million in the same period a year ago. On line revenues through 13.6% to 64.6 million% to 164.9 million in the third quarter last year. These on line revenues equaled 55.3% of combined on line and telephonic net revenues for the third quarter of fiscal 2003 compared with 52.9% in the same period last year. Telephonic revenues increased throw .1% to 52.3 million compared to 50.7 million in the prior year period.

I'm reflecting our plan reduction and store count our retail facility revenues were 7.2 million down 7.6% compared with the 7.8 million reported in the year ago period. During the quarter a combined online and telephonic orders told 1 million 871 thousand compared with 1 million 72 thousand orders in the year ago period. On line orders increased to a million 95 thousand, representing 58.5% of combined on line and telephonic orders compared with 984 thousand or 57.1% in the same period last year.

An average order size during the quarter was see essentially unchanged at $62.42. During the quarter we added 682 thousand new first with 4 (inaudible) on line. Documents continue to amend base, offers during the period as 38.1% of combined on line telephonic revenues came from nonfloral gifts. This is up throw 80 basis points from 34.3 thers in the third quarter last year. The combination of product mix, lowered operational efficiencies and effective customer service efforts helped to increase our gross profit margin by 238 basis points during the quarter to 48.1% compared to 38.(inaudible) total operating expenses for the quarter were 49.9 million or 40.3% of total net revenues, compared with 45.4 million or 309.3% of total net revenues in the third quarter last year.

This slight increase reflects the factors particular to this year's third quarter that I mentioned earlier. EBITDA for the quarter increased 48.7% to 4.7 million compared with 3.1 million in the third quarter last year. The increase is attributable to our revenue growth and a hire gross margin during the period. Net for (inaudible) 1.2 million or 2 cents per fully diluted share compared with 165 thousand or slightly above on a per share basis last year. Adjusting for one time tax benefit net income of 706,000 included in the fiscal 2002 third quarter net income improved approximately 1.7 million or 3 cents per fully disputed they're had in career's third quarter. Regarding our balance sheet. Our cash and investments position as of March 30th, 2003 of approximately 65 million was in line with management's expectations.

We anticipate ending fiscal '03 on June 29th with approximately 80 million in cash and investments. Our quarter ended inventory of 24.4 million represents preparation for the current fiscal fourth quarter, our second largest in terms of sales and profits for the fiscal year. In regard to our inventory it's worth noting despite the new floral gift holidays in our fiscal fourth quarter the period is our second largest in terms of our higher margin nonfloral gifts both in dollars as well as percent of total revenues.

As we continue to expand on nonfloral gift offers our inventory levels will increase, however or mod not (inaudible) level of total sales. Our inventory turns are in excess of 15 times and the end result of this strategy is the significant increases in gross profit margin that we have been reporting. Regarding guidance. As we stated in our January 6, 2003 press release and reiterated in this morning's release, we expect our second half revenue growth to be in a range of 7 to 9% compared with the same period fiscal '02. This is consistent with the rate of growth while core business that was achieved during the first three-quarters of fiscal '03.

In summary, we believe we are well positioned to grow our business profitability during the current fiscal fourth quarter and beyond based upon our business model that features solid sustainable receive now growth and low capital requirements with a leveraging of prior investments in our infrastructure. As a result we believe we can grow EPS and free cash flow at a significantly higher rate compared with revenue growth and there by build long. I will now turn the (inaudible) call back to Jim.

Thank you (inaudible) core business despite the fact back in the period that we mentioned earlier in the call. We also favorable trend in our key metrics that are described in past calls. First we increased our rate of repeat business while the continue cost e-efficiently attract a significant number of new customers to our branch each customer (inaudible) of more than 10 million customers to make Mr. Repeat purchases. We accomplished this through a combination of our expanded gift and service (inaudible) second, our customers continue to embrace our expanded nonfloral gifts.

During the quarter nonfloral gifts accounted for 38% of 0 our total on line and telephonic sales of (inaudible) in addition to enhancing our gross profit margin this trend also helps increase the number of celebratory occasions that our customers can come to us. Third, an increased number of our customers came to us on line. This is important to all the reasons I have mentioned before, including the lower, increase purchases of our high margin nonfloral gifts and the opportunity to know dialogue with our customers to our many on line services such as gift surgery and our reminder services as well as our cost efficient marketing programs. As we move forward we expect our current fiscal fourth quarter will be our second largest in terms of both revenue and earnings this year, there by enable us to achieve significant EPS and significant cash flow growth.

Looking ahead to fiscal 2004 we are cautiously optimistic regarding the potential for improvement in what has been a very challenging retail economy over the past two years.

We believe we are well positioned with our strong and trusted brand name, our expanded gift offers, our deepening relationship with our more than 10 million customers and a unique fulfill nil (inaudible) requirements to accelerate our revenue growth and our operating results in an improved retail environment.

That concludes our formal remarks. We will now open for.

(Inaudible) ladies and gentlemen, if you would like to register a question, please press the one followed by the star on your telephone. If your question has been answered and you would like to withdraw your registration please press the one followed by the 3. If you are using a speaker phone please lift your hand set before your request. One moment please for the first question. Once again, ladies and gentlemen, to register for a question, press the one followed by the 4. Our first question comes if the line of Anthony Noto with Goldman Sachs. Please go ahead with your question.

Good morning. Just an observation on the on line revenue, year-over-year gross. Sort of looking back over the last couple of quarters you guys have experienced more than 20% year-over-year growth an on line revenue specifically, and that really benefited I think from the rest of the industry from the strong SEC all right [inaudible]. As we look (inaudible) at the marijuana quarter deceleration down to about 14%, and I think it's understandable what's going on with retail and telephonic business. But did you expect that level of dough sell rehabilitation and could you just talk to, if you (inaudible) could delineate between the differences and penetration growth of on line shopping specifically for your different businesses versus buying rate. How many new shoppers are you usually that growth rate with versus the existing shoppers shopping more frequently and whether or not there are any things that we could expect over the next 6 to 12 months that would drive greater penetration growth versus (inaudible) thank you.

You know the Easter holiday shift from the third quarter last year to the fourth quarter this year obviously impacted our overall growth rate for the quarter, an impact the floral side of our business which is, you know, the most mature on line component. That's really what impacted that growth rate. With respect to new customers we mentioned that -- 60% of our new customers came to us on line. So that is consistent with our overall growth rate. It's not [inaudible] rating at all.

We don't see a tough sell rehabilitation there, especially (inaudible) on the new customer acquisition continues to be. Is a various on lin channels, especially with the growth and (inaudible).

Thank you.

Next question comes if the line of Robert Laughet (ph) with DJF Security. Please go ahead with your question.

Good morning. I know you said obviously the shift from Easter (inaudible) quarter to quarter. Log at floral sales looks like they were (inaudible) nonfloral 21% year over year. Aside from Easter, what caused the modest growth in floral sales and just in generally what programs do you have in place now to accelerate that growth and keep it moving?

I'll take the first part of that. This is Jim. What we're seeing is what we have seen in the last year and a half or so, it seems to be consistent going forward is that we're going to have a mid to low single digit growth of our floral business at the same time we think that the industry is flat today. But at the same time we have seen mid teen to low 20% growth. We would expect when we give guidance for the next we're obviously we give guidance for the balance of this fiscal year, my guess is that we will see consistent patterns, more explicit as we fine tune our guidance. But there are a number of programs we think that the floral business is imminently growable, even beyond the rates that we have been experiences.

Particularly focused on existing customer base to grow the full category. So I think you'll see in certain terms our marketing efforts that we are finding a research we do with our customer base which is ongoing that our customers are indicating that there are opportunities that they be interested in to purchase more official gifts for more occasions so it's broadening our price ranges and the product introducing a whole lot of new products in the (inaudible)

With again the Easter shift which is a heavy flow, it's almost

Almost 80%, 80% floral holiday.

The floral growth that we’ve been achieving in floral which is in the 6 to 7% range.

Okay. Great. One other question if I may. Marketing, percent of revenues was up about 150 basis points. I was wondering if that's advertising or is that more backlog fulfillment expense and what do you expect going forward in that area?

The marketing this quarter as we mentioned because of the shift in Easter with the revenue being deferred to the fourth quarter, and because of the business slowdown in revenue towards the latter part of the quarter because of the weather and the war in Iraq, it really is on the marketing side as a percent of revenue. We think of these things correct themselves that will be back down in line with what we expect.

We are seeing unit economic improvement on the processing side of that sales an marking line, Robert, so we did see this drop off dramatically in the last two weeks of the quarter as the world became distracted and spent nor time obviously watching TV as we all did. So that would impact our percentage number put as Bill said we expect that to norm lies this quarter.

Thank you.

Next question comes if the line of Peter Benedict with CIBC World Markets.

A couple questions. First do you expect to leverage in the fourth quarter those marketing expenses given that Easter will be there? Secondly, Jim, you just mentioned a business off dramatically the last couple weeks of the quarter. Any insight into what's going on so far maybe in April is maybe what (inaudible) less severe and third point can you give me an update on the LFC program where you guys stand and how you expect that to maybe play into driving some better revenue numbers going forward? Snoo

This is categories. First off jump into the question of the impact we saw the last couple weeks. Clearly consistent with what we have seen in the past times, any time national or international event distracts a consumer from their normal course of business it has an impact or our sales, that coupled with some severe weather we had in the (inaudible) had a depression on the trend that we were experiencing up until that point. We have seen that now lift and are back on the trend that we were experiencing prior to that. So we're very comfortable in that for the most part behind us.

We system have the over all retail economy issue but those are behind us and we seem to be less impacted than our friends in either the catalog world or in the play station retail world because we seem to come back probably a couple, few weeks before they did. We saw a three, maybe three and a half week and came back to normal levels (inaudible) where.

And with respect to the first part which was leveraging the (inaudible) yes, we will see, you know, improvement there, you know, the shifting down to the middle to the end of April has that benefit on the fourth quarter. One of the things that we do see as a negative of that is because Easter being solely it runs right into admin professional week which we're in right now and a lot of people because kids are off school are off this week and when people are not at work that does impact the business as well so we certainly get the benefit of Easter moving into the fourth quarter but it probably hurts our admin professional weeks. All thins we took into account when we prepared our budget. (Inaudible)

We have 53 up an running right now. We still only own the original 7. The others are all owned and operated by the (inaudible) as you know. We anticipate ending the calendar year probably with about 60 to 65 covering the top 50 markets in the US, which will [inaudible] us significant blue book capacity. The concept is doing what we said would it do, it's giving us frequent same day capacity for (inaudible) we still have (inaudible) value [inaudible] holiday, which enabled us to do a lot more same day deliver and lots of our other competitors were constrained by the fed ex-delivery.

We also (inaudible) stock and market, the trucks, the signage helped us quite a bit. We see those reflect in our numbers in those markets. We have just begun now to introduce some of the nonfloral gifts into the delivery mode which we told you was sort of the last benefit that would come on. For instance mother's day we have the mother's embrace 11 objection floral arrangement in an exclusive 11 objection vast that we will be able to hand deliver on same day model exclusively and begin introducing some of the other products (inaudible) gourmet gift baskets and even godiva chocolates.

Good luck in the fourth quarter.

Our next question is from Kristine Koerber WR Hambrecht & Company.

Hi. A couple questions. First of all, can you quantify the Easter shift on top line and where do you expect on line revenue growth to come in Q4?

The Easter impact when we seen at the end of a third quarter we know it has a -- you know, somewhat of a less effect. It's probably about throw and a half million dollar threshold lag that was in last year's number, probably includes a little bit as we move into this year, maybe a 4 million dollars number shift. And on line in the fourth quarter would be you know in the 60% range.

Okay.

On lined --

Okay. And of the 230 basis points improvement gross margin in the quarter how much was relate to mix and how much due to operating enhancements?

Mix would probably be about 1 basis points of that, 80 to 100 basis points

Remember in this quarter, Kristine, it's heavily a floral gifting occasion so there's not going to be as much a factor from the mix. We only of a 4 hundred basis points change in mix so only up to a hundred basis points improvement so the rest this quarter is primarily due to the operating businesses.

Okay. With regards to inventory, can you just, you know, kinds of clarify the inventory build? You know, inventories are up 50%, you're expecting revenues in Q4 to be up 7 to 9%. I mean, why such a big build and you know, where is the build? What type of merchandise and where do you expect to inventory to be at year-end?

Bill will give you the details on it but just to clarify the last part, what we have projected for the last half of the year (inaudible) revenue growth we have projected that the substantial share of that revenue growth is going to come from our nonfloral gifts. So the majority of where we're looking at a mid single digits growth in floral products are looking at mid teen growth in nonfloral gift products so maybe high teen growth so this procedure portion share of the revenue growth will come from inventory items.

Some of the initiatives we have had to drive gross margins have been to sell some of our nonfloral products over assess. So there are longer lead times with some of the products certainly in the home and garden areas. (Inaudible) overseas. So the last (Inaudible) fourth quarter of either domestically or a drop ship model. This year we brought that on early.

Because we did have the infrastructure and a (inaudible) capacity and we did, what would you guess, Bill, we picked up in terms of margin improvement on items that we saw in Asia versus we saw domestically?

Probably five hundred basis points (inaudible). Additionally with the last year again Easter finished with March 31st which is the last day of the quarter, so you basically were out on any Easter related, you know, products, and we have the pop corn factory which doesn't have a lot of sales in the -- you know, this time of year, but any sales they have are related to Easter so we have some bills and pop corn. So a lot of this timing related items and by the end of the year inventory would be down in the 20 or maybe even 20 million dollar range.

Thank you.

Our next question comes the line of Anthony Lebiedzinski Sidoti & Company. Please go ahead with your question.

Good morning. I had a couple questions. First, what do you expect the mix of products to be between floral and nonfloral and the June quarter?

Probably close to 58 to 60% floral.

Okay. So pretty much in -- similar to the March quarter? Right?

Yes.

Okay. Looking at --

The March quarter was 6238.

All right. Just also looking at the balance sheet. Looking at the PP&E line it went down actually. I think you mentioned that you closed some stores. Is that right?

Sold.

Sold some stores. Okay.

As you recall we operated quite a few more stores over the last two years and we said that we would contract the store count over time as some of our Fran chie sees, some of our partners and some of our employees have all been expressing interest in big some of the stores we had. From a company point of view we have about attracted to that because it let's us have management exposure, it allows us a way to take capital off the table, yet we still keep the benefit of the branding market and we keep a revenue stream and those stores in our opinion have a potential to be better operated we those hands on owner operators so we have over the pass two years now contracted the store count probably 50% and we're at a level a little less than we projected we would be at this time but we're comfortable we're about at a base level, we have maybe one or two more stores one way or the other but wore about where we said we would be maybe about a year on the store count.

We are starting to see that spend in capital is behind us and so really at this point our depreciation outpaces our additions to capital, so you will see the net reduction in DT and E.

Okay. And so what's the store count currently?

26.

And where was that on June 30th, '02?

Was that a year ago? It was 35. June 30th it was -- might have been 33.

Okay. Also, where do you see a CAPEX at the end of this fiscal year?

I think we said the range would be 11 to 13 million dollars.

We lowered the range a little bit about 10 to 11.

I must have missed that. Also the cash flow, you had a negative 5 and a half for other assets. What is that for in?

Increase and other assets

Yes, the cash flow. What we had during this quarter was our final payment with a large interactive marketing agreement that we had and this is the final payment and it was like a whooper. It was a whopper.

Okay. Thank you

Ladies and gentlemen, as a reminder to register for a question press 1, 4. Please go ahead with your question.

Good morning. Maybe you could comment, you have been building a lot of cash this quarter but I guess you're projecting about 80 million the end of June. Could you maybe comment on your position and kwigsz and maybe what you're seeing potentially as the way of a pipeline?

Well, just in terms of our overall growth I'll answer in it that context and the acquisitions potentially are part of that growth. But do you see now what even in a tough environment we still have what we consider pretty respectful growth in that 8.6% range, even with all the things we mentioned in terms of the impact of this, the world's distraction, the conflict in Iraq, (inaudible) comfortable that we can produce within our own means reduce spending and improving cost posture about 8.6% sales growth.

We think we can (inaudible) jonld that with effective marketing programs that we have been unearthing throughout the past year or so and continue to put (inaudible) cost effective declining operating cost environment. In addition, as we have been able to accumulate cash now in our -- for our operations that we will now -- we now have the ability to do two other things, more aggressively (inaudible) don't require acquisitions and finely in a very constructive way build on the expertise that we developed over the last 2, 3, 4 years in terms of effectively integrating small, nonchange -- no major change element, kinds of acquisitions.

Would I say that the environment is becoming richer every day for companies that are attracted to the assets we have. If they are in a gifting or connected business in any way, we have assets that are attractive to them, whether it's our booklet and the cash that comes with that, whether it's our technology floerm which we built and paid for, whether it's our infrastructure and management capabilities, relationships that we have, on line marketing capabilities and certainly the 10 million (inaudible) gift buying customers that we have in a continuing to show effectively an ability to deepen and develop those relationships. A lot of companies are attracted to those assets. So we lock at those companies and say can we cost effectively inthe grit them.

What's the risk of though acquisitions in terms of our ability to integrate (inaudible) capital commit mgs have the impact some restrained point of view and then how can we bring to the table assets, what assets do we bring to put together can equal a better mathematical proposition. So I would say there's a pretty rich department, getting richer every day and we'll continue to pursue them. We like they can to be accretive before we can deal with them in the very near term and we will continue to try to maintain that discipline and I would say if we don't find a good attractive acquisition and we continue to accumulate cash then our emphasis would -- and I don't think this would be the case any time soon but if it were to occur either sooner or later we will (inaudible) cost effectively return that capital to our shareholders and those options include the logical things like share repurchasing and dividend opportunities.

Thank you.

Ladies and gentlemen, if you would like to register for a question, press the 1, 4. There are no further questions at this time.

Thank you for your questions and your interest today if you have any additional questions don't hesitate to contact us. In cleansing I would like to remind everybody in the form of a public service announcement that this week is administrative professionals week. As we all know how hard working our professionals are in keeping the business world running smoothly I encourage all of you to place your orders as is as possible to express your appreciation for all the administrative professionals in your office life, home life, 1-800-flowers.com obviously make it easy. We have a great (inaudible) floral arrangement and floering plants to (inaudible) and a seemingly bought emless multi fla*ifrd pap corn the the pop corn factory. Remember (inaudible) help you show just how much you care you can visit us on line or call us on the telephone or order threw one of our cat logs or even visit one of our stores. Thank you again for joining us today and let's look forward to a good quarter ahead.

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