1-800-Flowers.Com Inc (FLWS) 2003 Q4 法說會逐字稿

Welcome, everyone, to the 1-800-FLOWERS.COM fiscal 2003 fourth-order and full-year results conference call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Joe Pititto.

Good morning, and thank you all for joining us today to discuss 1-800-FLOWERS.COM's financial results for our fiscal 2003 fourth quarter and full year. My name is Joe Pititto, and I am Vice President of Investor Relations. For those if you who have not yet received a copy of our press release issued earlier this morning, the release can be accessed at the investor relations section of our Website at www.1800flowers.com, or you can call Patty Alfadonna (ph), 516-237-6113 to receive a copy of the release by e-mail or fax.

In terms of structure, our call today will begin with brief formal remarks, and then we will open the call to your questions. Presenting today will be Jim McCann, CEO, and Bill Shea, CFO.

Before we begin, I need to remind everyone that a number of the statements that we will make today may be forward-looking within the meeting of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed description of these risks and uncertainties, please refer to our SEC filings, including the Company's annual report on Form 10-K and quarterly reports on Form 10-K. The Company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today's call and the recordings of today's call, the press release issued earlier today or in 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 very pleased with the strength of our fourth-quarter and full-year results. During the fourth quarter in particular, we began to see early signs of improved consumer demand that, if continued, should bode well for fiscal 2004. With that said, we still see a challenging retail environment. Before I turn the call over to Bill, who will give you the metrics of both the quarter and the full year, I would like to highlight a few key financial results and positive customer trends that illustrate the strength of our business model and position us for profitable growth in fiscal 2004 and beyond. In terms of financial results, for the quarter, we achieved revenue growth of more than 10 percent, with online revenues up almost 23 percent. We also reduced our operating expense ratio by 150 basis points compared with last year's fourth quarter, and together, these factors enabled us to increase net income by more than 51 percent to 8.3 million or 12 cents per share for the period.

Now, for the full year, despite the challenging economic environment, we grew revenues nearly 14 percent to more than $565 million. This was driven by growth of almost 23 percent in our online channels, where revenues reached more than $265 million. Secondly, we improved our gross profit margin by 160 basis points to 42.6 percent. Most important, the combination of revenue growth, strong gross profit margin and continued reductions in our operating expense ratio resulted in our achieving net income of more than $12 million or 18 cents per share, compared with a net loss last year of $1.5 million or a loss of 2 cents per share.

Regarding some customer trends, now, during the quarter, we cost-effectively attracted more than 800,000 new customers, including 500,000 who came to us online, and we further deepened our relationship with our existing customers through our expanded offering of great gift products and services. As a result of the 1.8 million customers who placed orders during the quarter, existing customers accounted for 55 percent of combined online and telephonic revenues. For the full year, we attracted more than 3 million new customers, of which approximately 55 percent came to us online. As I have noted in past calls, the continuing migration of customers to our online channels provides us with several benefits, including our lower order processing costs and the opportunity to engage our customers in an ongoing electronic dialog through a variety of services and marketing programs. These results illustrate the continuing positive trends in our business. After Bill takes you through some some key metrics, I will address some of the significant operational accomplishments for the year.

Good morning. Before I get into the specific metrics for the quarter and the year, there are several areas I would like to highlight. First, we achieved growth of approximately 11 percent in our online telephonic revenues for the fiscal fourth quarter, this despite the challenging retail environment. Second, we continue to leverage prior investments in our infrastructure to drive down operating costs. As a result, during the quarter, we reduced our operating expense ratio by 150 basis points. We remain focused on driving down this ratio, and expect to achieve further reductions in fiscal 2004. And third, while our gross profit margin continued to improve during the fourth quarter, up 10 basis points to 40.9 percent, growth moderated from the rate seen earlier in fiscal 2003. This was the result of product mix and slower sales in our higher-margin home and garden decor product lines, which was disproportionately impacted by the inclement spring weather and weak economic conditions.

Now, regarding specific financial results and the key metrics for the fourth quarter. Total revenues reached 154.8 million, an increase of 10.4 percent compared with 140.3 million in the same period last year. Combined online and telephonic revenues increased 10.8 percent to 146.4 million, compared with 132.2 million in the same period a year ago. Online revenues grew 22.9 percent to 84.1 million, compared with 58.5 million in the fourth quarter last year. And these online revenues equaled 57.5 percent of combined online and telephonic revenues for our fourth quarter of fiscal 2003, compared with 51.8 percent in the same period last year. Telephonic revenues declined 2.3 percent to 62.3 million, compared with 63.7 million in the prior-year period. This reflects the continuing migration of customers to our online channel. Retail fulfillment revenues increased 4.1 percent to 8.5 million, compared with 8.1 million in the year-ago period.

During the quarter, our combined online and telephonic orders totaled 2,340,000, compared with 2,023,000 orders in the year-ago period. Online orders increased to 1,455,000, representing 62.2 percent of combined online and telephonic orders, compared with 1,168,000 or 57.7 percent in the same period last year. Average order size during the quarter was $62.57, down 4.2 percent, compared with $55.33 recorded in the fourth quarter last year. This decline is attributable in part to the effect of the lower-priced product offerings from The Popcorn Factory, which we acquired in May of 2002. During the quarter, we added 814,000 new customers, with 514,000 or 63 percent coming to us online. 40.6 percent of combined online and telephonic revenues came from non-floral gifts, up 20 basis points from the fourth quarter last year. Gross profit margin increased 10 basis points during the quarter to 40.9 percent, compared with 40.8 percent in the same period last year. Total operating expenses for the quarter declined 150 basis points to 55.1 million or 35.6 percent of revenues, compared with 52.1 million or 37.1 percent of revenues in the fourth quarter last year. Net income for the quarter increased 51.2 percent to 8.3 million, or 12 cents per diluted share, compared with 5.5 million or 8 cents per diluted share last year.

Regarding metrics for the full fiscal year, total revenues increased 13.8 percent to 555.6 million, compared with 497.2 million in fiscal 2002. This includes the contribution of The Popcorn Factory, which we acquired in May 2002. The total revenue increase was driven by a 21.6 percent increase in online revenues to 265.3 million, representing 49.5 percent of combined online and telephonic revenues, compared with 218 million or 46.7 percent last year. Telephonic revenues grew 8.9 percent to 271.1 million, compared with 248.9 million in fiscal 2002. This increase reflects the contribution of The Popcorn Factory. Gross profit margin for fiscal 2003 increased 160 basis points to 42.6 percent, compared with 41 percent in fiscal 2002. The margin improvement was the result of increased sales of higher-margin non-floral gifts, which accounted for 49.3 percent of total sales, compared with 45.8 percent in fiscal 2002, combined with the continuing focus on customer service and operational efficiencies.

For the year, free cash flow was approximately $12 million. We define free cash flow as net income, plus non-cash items such as depreciation and amortization, plus or minus changes in working capital, minus capital expenditures. Regarding our balance sheet, our cash and investments position as of June 29, 2003 of 80.7 million was in line with management's expectations. Our year-end inventory of 20.4 million was also in line with management's expectations, and represents a reduction of approximately $4 million compared with our inventory level at the end of our fiscal third quarter. We anticipate our inventory levels will grow slightly during fiscal 2004, as we continue to expand our non-floral gift offerings. However, our business model remains inventory-light, relative to our total revenues.

Regarding guidance, for full year fiscal 2004, we anticipate total revenue growth will be in the range of 7 to 10 percent. This is same-store organic growth, and demonstrates our ability to generate solid topline growth despite continued uncertainty in the overall economy. Gross profit margin for the year is expected to increase to approximately 43 percent. As we have said in past calls, we anticipate growing our gross profit margin by approximately 50 basis points per year for the next several years, plus an overall target of approximately 84 to -- 44 to 45 percent. This reflects the growth of our higher-margin non-floral gifts as a percent of total revenues, combined with enhanced operating efficiencies and the Company's focus on providing excellent customer service. During fiscal 2004, we expect to achieve further reductions in our operating expense ratio by leveraging prior investments in our brand, technology platform, unique fulfillment system and growing customer base. As a result, combined with anticipated revenue growth and increased gross profit margin, we expect to grow EPS for the year in excess of 75 percent. Our balance sheet will continue to strengthen in fiscal 2004, as we anticipate generating more than 30 million in free cash flow. This will be driven by three factors -- the anticipated increased earnings, our very low working capital needs and our low capital investment requirements. We expect capital expenditures for the next few years to be in the $10 to $12 million range. While we are able to leverage prior capital expenditures, we will continue to invest at a healthy rate to enhance our technology platform and overall infrastructure.

In terms of seasonality, we anticipate that the strong growth trends in our online sales and sales of non-floral gifts will continue, as more customers turn to 1-800-FLOWERS.COM for convenience, quality and selection of gift products and services. As non-floral gifts continue to increase as a percentage of total revenues, we expect our largest quarter in terms of revenues and gross margin will again be the calendar year-end period, our fiscal second quarter, which includes the holiday shopping season. Based on this trend, fiscal 2004 quarterly revenues will likely be in the following ranges. Q1, 13 to 16 percent of total revenues; Q2, 34 to 37 percent of total revenues; Q3, 20 to 23 percent of total revenues; and Q4, 26 to 29 percent of total revenues. Regarding guidance for the current fiscal first quarter, as we have noted in past fiscal year-end calls, the fiscal first quarter is traditionally our lowest in terms of revenue, due to the lack of any major gift-giving holidays during the summer months. As a result, we typically record a loss for the period. However, we expect to continue our trend of reducing this loss in the current fiscal 2004 first quarter ending September 28, 2003. We will do this through a combination of revenue growth and continued leveraging of our operating infrastructure.

In summary, we believe we are well-positioned to grow our business profitably during fiscal 2004 and beyond, based on a business model that features solid, sustainable revenue growth, an increasing gross profit margin, a declining operating expense ratio and low capital deployment requirements.

I will now turn the call back to Jim.

Thanks, Bill. Now, to sum up fiscal 2003, while challenging, it was a very successful year for our Company. During the year, we achieved solid revenue growth despite a difficult retail environment, while simultaneously driving down our operating expense ratio. We did this through cost-effective marketing programs designed to attract new customers and deepen our relationship with existing customers. As a result, we were able to grow our bottom-line results, both EPS and free cash flow, at rates substantially faster than our topline.

In addition, during the year, we made significant progress in several of our key business initiatives. We completed the integration of The Popcorn Factory, which we acquired in May 2002. In so doing, we achieved significant cost savings and reinvigorated their revenue growth by leveraging our existing infrastructure. During the year, we also expanded the rollout of our local fulfillment center or LFC strategy through our BloomNet (ph) network of independent florists. We now have 60 of these mini distribution centers up and running, covering many of the top 50 markets in the country. Other than the seven that we built years ago, all of the LFCs are owned and operated by our independent BloomNet florists. This further hybridization of our unique fulfillment system significantly increases our same-day and next-day delivery capabilities for both floral gifts and, increasingly, for non-floral gifts. We expanded our partnerships with leading premium gift brands, including Lenox, Waterford and Godiva. Customer response to these brands has been very positive. We will continue to look for similar partners where our customers perceive an enhanced gifting value.

We achieved growth in several product initiatives, include including plush toys and gourmet gift baskets, as well as our continuity gift programs. We also successfully launched our own Mama Moore's brand in our bakeshop gift line. We enhanced the size and focus of our corporate gifting sales team, including opening more than 500 new corporate accounts during what was a very difficult year for corporate gifting. Coupled with our expanded gift offering, we believe we are well-positioned to achieve strong growth in this area when the overall business economy improves.

Looking ahead, we believe we have reached an inflection point in our development from which we will be able to deliver solid, sustainable topline growth and increasingly strong bottom-line results. In fact, as Bill indicated, we expect our EPS and free cash flow to grow more than 75 percent during fiscal 2004, and have a compound annual rate of more than 50 percent for the next few years. In addition, we have a very strong balance sheet, with more than $80 million in cash and investments, and minimal long-term debt. This positions us well to pursue our strategy of growing our business through a combination of organic growth and acquisitions. And as we have told you in the past, we will continue to focus our efforts on cost-effectively attracting new customers while simultaneously deepening our relationship with our existing customers. Longer term, we believe we can become an increasingly important resource and guide for all of their celebratory occasions. In so doing, we believe we can expand our business, and drive increasingly profitable and thereby build shareholder value.

That concludes our formal remarks. We will now open the call to your questions.

(CALLER INSTRUCTIONS). Anthony Noto, Goldman Sachs.

You had mentioned 75 percent earnings growth in fiscal '04, and then a longer-term EPS growth potential of 50 percent. I was wondering if you could walk up the P&L a little bit and give a sense of what type of sort of secular revenue growth you think you would need to achieve over the next three years to get to 50 percent earnings growth? And then, along those same lines, you basically are doing about 10 percent year-over-year growth in the most recent quarter of this year. Do you think that growth rate is something that can be enhanced over the next, say, 12 to 18 months through different strategic efforts, whether it be moving to free shipping offers or adding new merchandising offerings in existing categories or through acquisitions? And if you could elaborate a little bit on that?

Bill is jotting down your 34 questions. No, good questions all. In terms of what we will need for revenue growth to achieve that compounded 50 percent annual growth rate in our bottom-line metrics, we would anticipate that the organic growth rate that we have been at, that 7 to 10 percent over the last few years, is what we would need to continue our growth. So we have not factored in, in terms of bottom-line growth, any additional growth. Now, are we looking for additional growth? Of course. And the two areas that we can anticipate additional growth spurts from would be enhanced activities of our own, internally, that have outsized performance relative to what we could reasonably expect to bake into our budgets. That could advance our revenue growth. And a second category, of course, would be the experience we have had with acquisitions. So if we can continue to maintain, which we feel comfortable we can, the organic growth rate we have, at the same time being more and more opportunistic with the assets that we have accumulated on the acquisition front, then we can enhance our revenue growth, which, of course, would also enhance our bottom-line growth.

I think you've covered it.

No, we also wanted to talk about -- well, have we covered your questions, or is there something else we can touch on?

No, you have basically hit on the topics. I guess, on the acquisition front, are there specific product categories that you could touch on that you think are underserved online? And then, away from that, are there specific lessons learned about inhibitors of why people have not bought from 1-800-FLOWERS but may have bought online?

Let me take the last part first. What we're starting to see, when you see the 10 percent growth rate this last quarter, one of the things that really buoyed our spirits about the kind of business that came to us was while the overall floral industry has, according to third-party reports, has either not grown or in fact contracted a little bit, our floral growth actually accelerated. Bill, what was --

Our floral growth really, in the fourth quarter, was low double digits, about 10 to 11 percent, and for for the year was 7 to 8 percent, while the overall industry has been flat to down.

So, while we're seeing the acceleration, Anthony, in the non-floral gifts categories, as has been the case, to see us be able to turn that. Now, I would guess, and I don't really have a metric to point to to tell you this, but just our feel would be the reason why we have been able to accelerate the floral growth, there's a shift of emphasis to our marketing efforts targeted against our existing customer base, which already knows the benefit and the emotional reward of using floral gifts to express their sentiments to people in their lives. So we're starting to see that traction build in, too, and that actually buoys our spirits. So that is something we would point to as something that we've seen in the most recent quarter, and of course for the year, but especially in the most recent quarter, that gives us hope for being able to accelerate floral growth in spite of what is going on in the economy around us. And that is because of the asset of the customer base we already have.

And maybe I need to touch on maybe one detail point that you mentioned in your question, which was free shipping. We continue to look at that. And if we offered free shipping, would that boost our top line? It certainly would, but we are concerned about, obviously, what that would due to the bottom line. And we did, over the years, some testing with free shipping, and we just couldn't find that it would produce the bottom-line results that we wanted.

Heath Terry, Credit Suisse First Boston. Can you talk about the competitive environment within floral a little bit, as FTD kind of struggles and Hallmark tries to get their business up and running? What are you seeing? You have already saying you are growing above the industry. How sustainable do you think that is, as you look out at the various competitors that you are dealing with within flowers?

I would say, Heath, that the whole gifting environment is extremely competitive. And the unique position and advantages that the floral industry had some years ago in terms of next-day and in some cases same-day delivery has wilted some, because of the introduction of third parties that enable everybody to be in the express gifting business. I think what our performance over the last couple of years and in particular this past year in going forward tell you that we feel good about the competitive landscape, although it becomes increasingly more price competitive if you are competing with companies that are in the sale process or trying to accelerate their growth, it's going to become a little bit more competitive. What I think we feel comfortable with is, in spite of that, our growth in the whole category is accelerating, our overall growth is staying very strong, our profitability is going very, very mightily, at the same time the distance between us and competitors is actually increasing, not decreasing.

And then, I guess maybe we have seen the percent of your revenue that is coming from telephone continue to decline. Is there a natural level that you are trying to get that down to? What is the optimal number for you, given the way you have built the cost side of the business right now?

The answer is that it's not continuing. This is the first that we have seen a decline in the business. We have forecasted each of the last two years -- before this year, so three in total -- that it would be down slightly. But that didn't happen; that was a phenomenon of customers coming to us online, placing a second order and then coming to us. So last year flat, this year a slight decline in the business. We don't have an optimum level there. One of the mitigating factors that is influencing that mix is broadband. That is, we're starting to see intracustomer (ph ), as they have broadband capabilities in their home, their shift to the Internet has accelerated. And it's just a practical consideration. You know yourself, if -- it doesn't happen to you very often, because you're obviously at the center of the tech world. But people who try to access us, anyone, online -- it's still a very frustrating experience. We're seeing hours of service and hours of access shift, as broadband takes place -- as they get broadband in their home. So, where they would have ordered at lunchtime from work because they enjoy the broadband experience they might have had at work, now that they have it at home, their frequency is going up and the hours of purchase is shifting more to the home than just from the workplace. So that are the two positive trends that we see, which will have an effect on the telephone. But we don't view it as a negative effect, for the two reasons we cited. It is more cost-effective for them to come to us online, and they buy a broader range of our products because they can see them in the online environment. It gives us an enhanced margin opportunity and a back-end opportunity for a continued e-dialogue with them.

I was just going to say, but you do see from season to season -- like in our fourth quarter, we were much more heavily online; we were 62 percent online, while for the year (multiple speakers).

I was going to ask, do you have an idea of what your breakdown, in terms of where your customers are coming from, whether they are coming over a narrow or a broadband line? Just a feel for that, where you are right now?

We really are seeing growth from both -- I don't know if it's broadband or not, but we see clearly growth from both the portal side of our business as well as from direct through our URLs. Now, whether that is (multiple speakers).

Has that been similar proportions?

Yes, in similar proportions, and that is why we have been steady at about 70 percent of our revenues coming direct through our URLs. As that -- we have seen a greater percent of our business online coming during the day, when people are probably at -- could be ordering from business. So it could be more broadband as a result of that.

But that shift is starting to come back to the evenings a little bit now.

Peter Benedict, CIBC World Markets.

I think, a question for Bill. On the balance sheet, Bill, looking toward next year, the free cash flow number, about 30 million -- can you kind of give us a sense of where you think the working capital accounts are going to go? Just based on my calculation, it seems like you have got to at least be flat on working capital and probably generate some cash from that next year to reach kind of 30 million of free cash flow. So maybe talking about inventory, payables, that type of thing --

Peter, are you are implying that I am incapable of answering that question?

No offense.

Let me answer that question. Inventory, we believe, will be up a little bit. But I think payables will go up. If you can see, payables actually dropped this year over last year, even though inventory was up 4 million. So we think there will be a positive impact on working capital. In addition, Peter, we have stated this on prior calls. We do actually get the benefit -- actually, a cash benefit -- on our AOL contract next year. We are fully paid; that contract is what, a five-year contract. It has been fully paid up now, yet we have two-plus years still remaining on that, and about a $4.5 million expense that runs through our P&L. So we have basically a $4.5 million cash benefit over the next two years, related to the AOL contract, as well.

It's almost like a prepaid advertising expense.

On the corporate gifting, I know that a year ago, that was expected to be a big initiative for you guys. Obviously, the corporate environment was tough last year. Do I recall -- didn't you guys make a hire in that area? Just talk a little bit more about what you think that could do for you over the next year or two.

I think there's a couple of ways to look at it. Yes, indeed, we've hired a couple of really good people into that area, put a new person back in charge of those who had started it some years ago, one of our core, very seasoned managers here. So yes, we put another light on that space, and it had good traction this year. I think what is difficult for us to report to you, in any kind of a traceable metric, is the real impact of their efforts, for this reason. When we talk about corporate business, we talk about the business that we bill companies directly for. The big component of their efforts is really seen in our consumer business; that is, if you are an employee of a big fancy company like CIBC, and we have a relationship with you, our company with your company, and a young lady has a baby in your company and the company sends her a congratulations gift on the new baby girl that she had, and we bill them for it, that's booked, and we view that as a corporate billing relationship. But if Peter Benedict places an order for flowers because he sees on the Intranet that they have a gifting and 1-800-FLOWERS is their preferred florist and gifting partner on their Intranet and places that order, that's counted as a consumer order. But it is a beneficial effect of the corporate relationship development of our corporate sales staff, of our corporate relationship development staff. So yes, we expect to continue to see growth in that area. We think we have outstripped growth if the environmental climate, particularly in financial services, improves for that gifting environment. And then, finally, we expect to see continued consumer benefit from the marketing efforts that grow out of those corporate relationships.

And Peter, if you recall, when we acquired The Popcorn Factory, we really believed that that -- one of the reasons we bought The Popcorn Factory is we thought that that was just a great corporate gift. And as you have seen from the press release, we opened up more than 500 corporate accounts last year. What we saw last year is that we have more corporate accounts, but each of the corporate accounts we are buying, we are buying less. So our existing corporate accounts, we are buying less. So as the business climate improves, we think we are well-positioned with both the products, with the personnel and now with the relationships to really grow that business.

Last question, and I'll let you go. Just on the NOL position, you guys currently are not paying tax. What's kind of the outlook there?

Well, eventually, we are going to make a lot of money and we're going to have to start paying taxes.

How many years would you (multiple speakers) that NOL?

It would probably be in fiscal 2006 that we would start paying taxes.

So we have a cash benefit of about $1.50 a share from taxes over the next couple of years?

It's a $95 million NOL with a benefit of about 40 million.

Robert Labick, CJS Securities.

A question on the LFCs. You mentioned the buildout this year to 60. Could you maybe tell us what the plans are with them? Is there an opportunity to get more gifts through them versus last year? Can you just talk about that, please?

The primary purpose of our LFCs has been to increase the depth of our capabilities with our existing customers with our existing product lines. They give us branding opportunities of market, they give us increased throughput, particularly at holiday times, and just a much more tethered relationship than with our traditional limited (ph) shops. But it's not a number that we want ever to be a very big number, because it's a very focused relationship in those key top 50 markets. We began testing the inclusion of other gift product in those centers as an accretive benefit in addition to the floral benefit last spring. Those results have been very, very good, so you will see us continue, this fiscal year, to step by step, put one foot in front of the other, increase the number of products that might be typified or characterized as non-floral gifts -- some are incorporated with floral products, some are stand-alone -- throughout the course of this year. So very steadily, very surely, you will see us increase the mix of floral and non-floral gifts, particularly through those LFCs, but with taking those learning's, also move those products into our BloomNet network, as well, this year and next.

Anthony Lebiedzinski, Sidoti & Co.

I just have a couple of questions. The first one, in regards to the gross margin -- if you could just elaborate a little bit more -- I know you talked about the product mix being a little different and also the effect of the weather. I was just wondering if you could just provide a little more details about that.

In particular, Anthony, about the fourth quarter?

Yes, in regards to the fourth quarter with the gross margin, because you did mention that you had the home decor being hurt. How big is that in the fourth quarter for you, normally? I just wanted to know how much of an effect the weather had on this, or was it more because some other products were impacted?

As we stated in past calls and stuff, our non-floral margins are in the 46 percent range, and our floral margins are more in the 38 percent range. During the March timeframe, when we have kind of our initial large circulation efforts with regard to some of our home decor gift products, that's when the weather was at its worst, and that's when the nation was preoccupied with the war. And that's when they started to hit home, and you had the -- at the end of March, early April, when people were starting to buy the wicker furniture. So that was certainly hurt, and really, the 10 basis points improvement in margin this quarter versus what we have seen in the past was really due to that mix.

And don't forget, the quarter overall, Anthony, is a floral quarter. So the opportunity for us to change the gross margin impact because of the mix product for that quarter is going to be a lot less, for example, than in the second fiscal quarter, the full calendar quarter, where it shifts back the other way, where a 65 percent non-floral that has that enhanced gross margin that Bill just described to you.

And then, as far as your inventories, they were up about 30 percent year over year. What does the increase in inventories primarily consist of?

Well, it's really the combination of the continued growth in our non-floral products and the way we buy some of those, plus some of the operational efficiencies that we mentioned and how we improved gross margins. We are we are sourcing more and more of our non-floral products overseas, so we do take that on a little earlier than we have in the past. We have been discussing that, actually, throughout this year. And we just highlight that our inventories are back down $4 million from their high point at the end of March.

And as far as your revenue guidance, looking for 7 to 10 percent improvement for fiscal '04. Do you see expect, sequentially, as you get into, let's say, the December quarter and so on, do you see expect revenue to pick up? Or do you see that being fairly flat on a quarter-by-quarter basis?

Well, we gave all kinds of overall guidance as to the breakdown by quarter. We do have growth opportunities, certainly in our fiscal second quarter and our fiscal fourth quarter. Our fiscal third quarter, with Valentine's Day falling on a Saturday this year, is a little more challenging. So there could be some shift from the low end of the range to the high end of the range between the quarters.

And with Valentine's Day, the floral industry as a whole benefits most when it's a weekday, particularly when it's a weekday and they have delivery opportunities to offices. Offices -- well, until these security issues -- were a lot easier to deliver to than homes. So it's always a challenge for the retail floral industry, so that's why Bill put a little light on that. And that's factored into our forecast for this year, both topline impact and quarter mix impact.

Eric Beder, Northeast Securities.

You have talked a lot before about how floral, in general, the gross margins are very much kind of fixed in a sense, in floral. Does the LFCs kind of change that mix, or is there some -- or the clubs change that mix, that you can get increased gross margin from -- for the floral products?

I think what we have said is that it's much harder to move the needle. Over the last -- I would say, if you look at it on a four- to five-year timeframe, you have seen our floral gross margins improve from about 33.5 percent to 37.5 percent. You have seen them move over last year's 37.5 to the 38 that Bill referenced, but you're not going to see big moves there. And one of the things that impacted gifts are the benefits of the operating efficiencies and the delivery efficiencies and the throughput capabilities that we get in key periods that the LFCs deliver, and by our overall customer service performance. But I think what we're saying is you can't expect -- we are not projecting that there will be big improvements like we have seen across the board as the result of our non-floral gifts gross margin improvements.

And the second thing is you saw, I hear sure, that Softbank sold a number of shares over the last -- it was about two months ago. What is the status of the rest of the shares, and how do you think about this?

We stay in close touch with all of our major shareholders. Softbank is one of them. They made those sales just recently, 650,000 shares, exactly as they had said and we had said that they would, in a non-disruptive fashion, away from the market, in large blocks. So we believe we have mitigated the issue of overhang to some degree. And going forward, they have said that they will continue to sell in a non-disruptive fashion, away from the market, at higher prices, sort of walking the price up (ph).

(CALLER INSTRUCTIONS). Arvind Bhatia, Southwest Securities.

Jim, my first question -- the 7 to 10 percent revenue growth for next year -- will you need to see some improvement in the economy to get to the 10 percent?

We have been pretty consistent with our forecasting over the last couple of years. And that has been consistent. That 7 to 10 percent is what we think is a reasonable expectation from our organic efforts only, and it doesn't anticipate any improvement in the economy.

And you talked about how you were seeing some positives toward the end of last quarter, and also toward the beginning of this quarter. Can you maybe quantify some of the things -- I know you have touched upon some of them, but can you maybe elaborate on, you know, here's specific examples where we are seeing more momentum? So we can kind of see those trends?

What Bill referenced was, at the beginning of the quarter we had some challenges. The challenges were macro. They were a lousy weather environment in all the markets, first the whole East Coast. If you recall, we had 10 or 11 weekends in a row of rain, and the mid weeks were not a lot better. And then we had the distraction at the beginning of the quarter from the whole country and maybe the whole world in terms of focus on what was going on in the Iraqi situation. So that obviously had a dampening effect, pardon the pun, on our business in the first half of the quarter. But with those macro effects clearing up, literally and figuratively, and with those important holidays coming a little later in the quarter -- early but later in the quarter, as well -- we started to see the customer open up their wallets. The increase in the floral business in this quarter is one of the metrics that we have been pointing to. The fact that we finished the quarter so strong with what was otherwise a lousy beginning are the things that we point to that give us a good, positive outlook for the future.

Okay. And you talked about the free cash flow generation and the growth there -- mid-30's next year, and then beyond that, you talked about 50 percent component growth. What are your thoughts on use of that cash? Obviously, you will have a lot of cash in the next 12 months and beyond that. If you were to prioritize the use of cash, maybe talk about acquisitions versus buybacks versus dividends and so on and so forth, where would you see yourselves spending money first, second and third, et cetera?

Obviously, we want to make good use of the cash; it's one of our precious and important assets that we have been very fortunate to accumulate, along with our technology platform, the management team, our fulfillment infrastructure. But from a cash usage point of view, we are a company that is poised for good growth -- both organic growth, self-developed growth and acquisition growth. So those would be the first areas that we would use that cash on. The environment, clearly, on the distribution of cash, has changed as a result of the tax laws and as a result of the general market performance of companies. So that's given us cause to have a different set of considerations beyond the growth uses of cash, to say, what do we do with the excess free cash flow that we're generating and clearly will generate in ever-greater amounts? And now we have a whole other set of considerations that we can look at from an efficient return of capital of our excess free cash flow, that would include all of the things you indicated there, in terms of stock buybacks and dividends. And the environment has changed on those things, so obviously we have to continue to examine that and review our options. But our first use of cash, growth.

I think, to sum it up, I think the cash position that we have allows us a lot of flexibility to go after opportunities if they come by.

And I would say that when you say go after opportunities as they come by, our attitude has changed from being pretty much opportunistic, seeing what comes, to feeling pretty good about the management team, the infrastructure and the assets we have to be aggressive in terms of looking at those assets that would help us to reach our customer relationship goals and growth goals. And so I think you will see us be less opportunistic and more proactive.

And the acquisitions that you are looking at and maybe will look at -- do you see the multiples and what people are asking for? Has that changed at all? In other words, are you having to pay more?

No, I don't think so. I think I would say there are still some people with what I would describe as a lack of sobriety. They still have hangovers, talking about BCs (ph ), needing to be whole from investments of four and five years ago. And so they still have some unrealistic demands. But on the other hand, companies that have developed a sense of sobriety are being much more realistic, and saying I can either sit here and wallow or I can tie my assets to a platform that gives me the opportunity to accelerate growth and achieve my financial goals not from wishing and hoping, but from performance.

And then, I guess -- you didn't touch on buybacks and dividends. Is that even a thought?

I think we have a responsibility as management to have it on our list of considerations, and we have been fairly explicit in the past, saying that, A, we have an approved buyback program; B, the environment has changed on cash dividends; and, C, we're generating excess free cash flow.

And a couple of questions for Bill -- not implying, Jim, that you can't answer those. But, one, I guess if you could talk about what The Popcorn Factory represented in terms of revenue for the quarter and maybe margins? Were they consistent with the last quarter, or did you see anything different there? And maybe the average order size, some of those metrics, and then what sort of peak level of inventory do you see in fiscal '04 versus fiscal '03?

Overall, with The Popcorn Factory, I think we stated when we acquired them that we thought we could bring them back to a $30 million run rate, and we are pleased that we were able to accomplish that. The Popcorn Factory has very strong gross margins -- high 40 percent gross margins -- and they have improved post-acquisition. Their average ticket does bring down our overall average ticket, because their average ticket is in more like the $34 range, while the overall company average ticket is about $62. And our peak inventory will be up probably $2 million over our peak for this year. Our peak inventory periods are always the September and March quarters, as we head into the holiday season for September and then some of the spring and fall selling that we do.

So that would be a less than 10 percent overall increase in (multiple speakers).

That's right.

And then for fiscal '04, do you have a target for what online versus telephonic might be? And floral versus non-floral?

Yes, and it pretty much goes step-in-step. This year, we finished basically 50/50 in both categories, and we would be going up probably maybe 54 percent online, 46 percent telephonic. If telephonic would remain flat and online would grow at the rate it's been growing, you would get to those levels.

And a final question on your -- you didn't provide EPS guidance, you did provide revenue guidance. As far as the patterns for EPS, should we assume similar kinds of breakdown by quarter as you have provided for revenue?

(indiscernible) provides revenue, but I think you would have to take a look at what the breakdown was this year, and they would be fairly proportional. The one that I caution a little bit about is Q3, because of the Valentine's Day --

It will be less profitable, but the summer will be less losing, so that's the (indiscernible) mix.

We're going to show improvement in all quarters.

Yes.

There will be, clearly, improvement in all quarters, but the big improvement quarters of Q2 and Q4, to a lesser degree Q1 and Q3.

I'm not sure if I understand that. Are you saying that Valentine's is going to make your March quarter a little bit more difficult? But you do not really recoup that, so I don't know how you are -- clarify that a little bit?

We expect all four quarters to be an improvement over the four quarters of 2003. The biggest improvement in EPS will come in Q2 and Q4. It's a simple as that.

Denise Steele (ph), Greenville Capital Management.

You just answered my main question about share repurchase, but I thought I would ask -- you provided us with the cost of customer acquisition this quarter. I just wondered if you could comment on the trend that you are seeing there, in terms of how much you're having to spend to acquire a customer?

Well, our trend has been over the last few years to see it come down to the sub-$20 level which we told you was our target, and we are comfortable that we will be able to keep it there. When you said we answered your other question, though, about share buyback, I'm not sure what you understood us to say.

I just wanted you to address whether you would consider it or not.

(CALLER INSTRUCTIONS). Stacey Sears (ph), Emerald Advisers.

I am noticing in the press release that you said about 42 percent of the customers in the fiscal year were repeat customers, and I was wondering if you could clarify a little bit more on the frequency of the purchase and how have your efforts been in driving that frequency?

The 42 percent is about, I guess, a 300 basis point improvement over prior year. In any given quarter, we could be in excess of 50 percent, but then those customers, and those new customers then become existing customers. And that's why, when you map it out for the year, the numbers for the year are different from the numbers for the individual quarters.

For example, for the fourth quarter, it would have been --

Like 52 percent.

-- 52.

With respect to where our marketing efforts have gone, we have a very large, attractive customer database. And we have focused a lot of our efforts this year at increasing the amount of orders and revenue that we get from that customer base, and I think we are starting to see the fruits of that work.

I think one of the examples would be The Popcorn Factory product. You have a company that was in distress, with declining sales, and we thought we could do a substantial improvement in their efforts. It took some marketing spend to re-energize their existing customer base through the catalog efforts that they traditionally reached out to them with. But in addition, we got almost 15 percent of their customers then to come to their online site to place orders, up from zero the year before. And a good part of that increase in the online spend on their site came from the flowers customers who were cross-pollinated. So that would be an increase in the frequency because they are buying from other other of our brands.

Your average customer is making about how many purchases per year?

Well, it depends on how you look at it. The way we would describe it is, if you look at our existing customer base, active within the year, we are up to about two orders per year, and that would give you some historical perspective. About two years ago, two to three years ago, that was 1 or 1.1.

So you have been making significant progress?

Yes.

That's the point that I was trying to bring out. The other question that I had begun in that regard -- as far as the average dollar transaction for the year, would you expect that to be fairly flat year over year? Is there anything else that we can expect that would move that one way or another?

I think we expect going forward that the average ticket will remain roughly flat.

So, then, most of the increase in sales is going to be really driven by increased number of transactions?

That's correct. That's what we would expect.

This concludes today's question-and-answer session. At this time, I would like to turn the conference back over to Mr. McCann for any additional or closing comments.

Thank you for all your questions and your interest today. In closing, I would like to offer a reminder that 1-800-FLOWERS.COM has everything you need for all your summer celebrations. We are excited about the collection of summer gifts that we have, so if you are lucky enough to be invited to, or maybe even hosting, a fun backyard barbecue or pool party or cookout, we have the right collection of gifts and party favors and some of the celebration products that will help your celebration sizzle, from our galvanized Margarita tub to our cuddly plush barbecue bear or our ice cream sundae kit, or our spicy hot sauce floral bouquet, We have it all. So remember, come visit us online, call us on the telephone, order through our catalog or even visit one of our stores. Enjoy the rest of your summer. I look forward to reporting on another good quarter in a few months.

This concludes today's conference call. We thank you for your participation. You may now disconnect.

(CONFERENCE CALL CONCLUDED)