1-800-Flowers.Com Inc (FLWS) 2004 Q2 法說會逐字稿

Welcome to the 1-800-FLOWERS.COM fiscal 2004 second-quarter 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. Joseph Pititto. Please go ahead, sir.

Good morning and thank you all for joining us today to discuss 1-800-FLOWERS.COM's financial results for our fiscal 2004 second quarter. My name is Joe Pititto, and I'm Vice President Investor Relations. For those of 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 1800Flowers.com; or you can call Patty Altadonna (ph) at 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. Also joining us today for the Q&A section of our call is Chris McCann, our President.

Before we began 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.

Good morning, everyone. As we stated in this morning's press release, we're pleased with our operating results for the recent holiday quarter, our fiscal second. In the quarter we grew our business organically by 8 percent; and most important, this growth was driven by a 20 percent increase in our online revenue. Before I pass the call to Bill, who will take you through the metrics for the quarter, I would like to cover a few key points.

First, we achieved double-digit sales growth in the gift categories we've identified as our primary growth areas. These include our expanded food gift offerings, gift baskets, gift packs, our unique children's gifts, and our growing collection of premium gift brands including Lenox, Waterford, and Godiva, among others.

Secondly, we reduced our operating expense ratio by 220 basis points. This illustrates our ability to leverage our infrastructure and gain additional cost efficiencies. This leverage, combined with our sales growth, enabled us to achieve EPS growth of 33 percent despite a sales mix that produced a slightly lower gross profit margin.

Third, we cost effectively attracted 1.2 million new customers and increased our repeat order rate by almost 200 basis points. In fact 49 percent of the more than 2.3 million customers who placed orders were repeat customers, up from 47 percent in last year's second quarter.

We believe our proven ability to cost effectively attract new customers while deepening the relationship we have with our existing customers is a key ingredient to our future success. I will now turn the call over to Bill, so that he can take you through the details of our financial results and key metrics for the second quarter.

During the second quarter, we continued to see positive trends in our key operating metrics. Most important was the fact that our 8 percent revenue growth was driven by 20 percent growth in our online channel. Going forward we continue to expect double-digit growth online, while telephonic revenues will remain roughly flat, as more of our customers utilize our online channel.

Regarding specific financial results and key metrics for the second quarter. Total revenues reached 213.2 million, an increase of 8 percent compared with 197.4 million in the same period last year. Online revenues grew 20 percent to 90.9 million, compared with 75.8 million in the second quarter last year. These online revenues equaled 44.5 percent of combined online and telephonic revenues for the second quarter of fiscal 2004, compared with 39.9 percent in the same period last year. Telephonic revenues were 113.4 million, essentially flat compared with 114 million in the prior year period. This reflects the continued migration of our customers to the Internet.

Our retail fulfillment revenues were 8.9 million, compared with 7.7 million in the second quarter last year. This increase reflects continued enhancements in our BloomNet distribution network as well as our company-owned and franchise stores.

During the quarter our combined online and telephonic orders totaled 3,420,000, compared with 3,159,000 orders in the year ago period. Average order size during the quarter remained consistent with the prior year period at $59.72, compared with a $60.07 a year ago.

During the quarter we added 1,197,000 new customers, compared with 1,192,000 in the year ago period; 572,000 or 47.8 percent came to us online during the quarter, compared with 510,000 or 42.8 percent last year.

In terms of product mix, the nonfloral/floral gift breakdown was 66.2 percent nonfloral, and 33.8 percent floral; compared with a 67/33 percent split in the prior year period. This mix reflects the lower than anticipated sales in our home decor gift category, coupled with the continued strong performance of our floral gifts. As a result of this product mix, our gross profit margin for the quarter came in at 44.9 percent, down 70 basis points from 45.6 percent in last year's second quarter.

Demonstrating the leverage inherent in our business model, revenues grew 8 percent, while operating expenses for the quarter increased only 2.2 percent, to 81.6 million compared with 79.9 million last year. As a result our operating expense ratio for the quarter improved by 220 basis points to 38.3 percent of total revenues, compared with 40.5 percent last year. Year-to-date improvement is 240 basis points.

You'll notice on our statement of income that we have provided for income taxes for the first time of 292,000. This was related primarily to the federal alternative minimum tax, which only allows utilization of 90 percent of our NOLs to offset our profits. As a result of this, our effective income tax rate for the remainder of fiscal 2004 will be approximately 3 percent.

Due to our solid revenue growth and increased operating leverage, we grew fully diluted earnings per share by 33 percent to 20 cents per diluted share, compared with 15 cents in the second quarter of fiscal 2003. One added comment on EPS relates to our share count. As a result of appreciation in our share price during the fiscal second quarter, our share count under the Treasury method rose to approximately 69 million shares, compared with 67.8 million shares in the second quarter last year.

Free cash flow for the six months ended December 28, 2003, was 21.7 million, compared with 9.5 million in the same period last year.

Regarding our balance sheet, our cash and investments position at the end of the quarter was 103 million. Inventory at the end of the fiscal second quarter of 18.4 million was down significantly from the preholiday high of slightly more than 29 million. This reflects effective inventory management and sell-through on our key product areas.

Providing guidance. As stated in our press release this morning, we reaffirmed our revenue and earnings guidance of fiscal 2004 which calls for full-year revenue growth of between 7 and 10 percent and EPS growth of more than 75 percent.

In terms of gross profit margin, the first half of our fiscal year is typically our highest, with the largest percentage of nonfloral product sales in our fiscal second quarter, the holiday shopping period. Conversely, the second half of our fiscal year is historically more heavily weighted toward floral gifts, which carry a lower gross profit margin. As a result of the anticipated higher growth in floral gifts and recent trends in our product mix, for the second half of the year we anticipate gross profit margins will be in line with the year ago period. With that said, growth in our floral gift category requires less marketing expense compared with nonfloral gifts, and therefore results in a lower operating expense ratio. Because of this leverage and the low capital deployment requirement inherent in our business model, we expect free cash flow for the year will grow by 150 percent to approximately 30 million. I will now turn the call back to Jim.

To sum up, during our fiscal second quarter we achieved organic top-line growth of 8 percent driven by a strong online growth rate of 20 percent. This is especially important because when our customers come to us online we have lower order processing cost. We can introduce them to our expanded range of gifts, which helps increase the number of celebratory and connected occasions that they come to us for. They get the opportunity to use our rich service offerings such as occasion reminder, gift search, address book features, all of which make shopping more convenient and thereby increase customer loyalty and frequency. And we have the opportunity to engage them in an electronic dialog via cost-effective e-marketing programs.

I would like to cover a couple of key customer metrics as well. We cost effectively acquired 1.2 million new customers who were attracted to our strong brands that enjoy a reputation for quality and reliability. Our repeat order rate improved 200 basis points during the quarter to 49 percent of total customer orders. We achieved this by deepening the relationships we have with our more than 10 million customers through effective marketing and selling programs, as well as our expanded gift offering.

On the corporate gifting front, as you know, this is an area where we believe we have not focused efficiently on in the past. During the second quarter we began to rectify that, and we have seen the extra effort and resources devoted to this area already paying dividends. During the quarter our corporate sales team grew revenues by more than 35 percent. Corporate customers are increasingly attracted to our broad gift offering, as well as our unique fulfillment capabilities. While corporate gifting is a small portion of our total revenues, we believe it offers excellent growth potential going forward.

As a result of all of these efforts, as well as the low capital requirements of our business model, during the second quarter we further strengthened our balance sheet. We ended the period with more than $100 million in cash and investments and very little debt. This positions us well to continue our focus on growing our business through a combination of internal new business development and leverageable acquisition opportunities.

Now as we enter the second half of our fiscal year, we have two strong quarters ahead of us. While many other specialty retailers have to wait until the next holiday season, our current fiscal third quarter includes the Valentines holiday, followed in turn by the spring quarter which includes such gift-giving occasions as Easter, Passover, Secretaries Week, Mother's Day, and Father's Day. Not to mention the traditionally strong wedding and graduation seasons.

You will note that most of these occasions have a decided floral nature to them, which certainly helps keep 1-800-FLOWERS.COM very much top of mind with customers throughout the second half of our fiscal year. In summary, we believe we're well positioned to grow our business profitably and thereby enhance shareholder value. That concludes our formal remarks. We well now open the call for our questions.

(OPERATOR INSTRUCTIONS) Kathleen Heaney of Maxim Group.

I dialed in a little bit late. So I don't know if Jim talked about this; but Bill made a quick comment that there was lower than expected I guess I would call it the Plow & Hearth business. Can you talk a little bit more about, then, what you might be doing to fix it up?

I think what we can say is that across the range of gifts that we bring to market, the area that was performing least well, it would be our home decor gifts, which would heavily be in the Plow & Hearth area; but of course across other brands as well. What we saw is a mix in focus on our consumers' part, in terms of the acceptance of our offerings, to be less in that area and stronger than we anticipated in our food, gift basket, and other areas.

So what you'll see us going forward is, A, making sure we understand why that is; making our determination as best we can into the future prospects of those gift offerings; and all of the drill down things you do in terms of price points and offerings and range of products and position of products; and how you take them to market, in terms of which different marketing vehicle.

But net-net I think you expect to see that we will conduct focus on the area that we said in the past are our focus areas; and did indeed during this holiday quarter show us the most upside growth potential.

If you recall, going into this fiscal year we did start seeing some trends in the home decor area; and we did scale back in Q1 some of our circulation specifically of the Plow & Hearth brand. And saw that going into Q2, modified our circulation plans from prior year. But with that said, we had some very strong growth categories, as Jim mentioned. Those are kind of the key gift areas that we have identified. The home decor is one that we're watching very closely.

I shopped twice.

If you had shopped five times, we would have been fine. But, now we know where to blame it on.

Okay, thanks.

Eric Beder, Northeast Securities.

Just a housekeeping question. The amount of orders; you split that up into online and telephonic, please?

It breaks out at 1.1 million telephonically, 1.6 million online.

Okay. In terms of the holiday season, you introduced a number of new vendors. How did the Yankee Candle and Orrefors and some of the other ones do with your customer base?

I think our experience with the new products were all very, very positive. But the numbers are not big enough to make a significant difference in our overall performance rate. But I think we were encouraged by the new products we introduced. I don't think we had any new product introductions that we weren't happy with.

How are you going to handle -- you guys are better situated to handle this than anyone else, the fact that Valentine's Day is on Saturday?

Anyone else can jump in here, but I think that certainly built into our plan, an anticipation it will be a more challenging quarter than if it were a weekday, particularly if it was late in the week like it has been the last couple of years.

Saturday is more challenging for us in the floral and gift business for a couple of reasons. One is our customers sometimes don't think of the holiday. They think of it as being on the weekend, so they don't plan ahead of time accordingly. Second, you have two delivery options; because a lot of people like to have their deliveries just before the holiday, in the day or two preceding. That would indicate oftentimes an office or a workplace delivery versus a home delivery on a weekend. So it is a second address.

Third, third-party carriers, FedEx, UPS, are not well positioned or interested, frankly, in doing a lot of home deliveries on a Saturday; and then they have no backup alternative should that delivery not get made on Saturday to do on Sunday, because they don't deliver on Sunday. So for those who don't have the benefit of our multichannel delivery capability, with our LFCs, our BloomNet shops, the technologies we put forward into the field to maximize our in-market delivery capabilities, will be much more challenged. It will be challenging for us all, but it will be much more challenging for people who are more dependent on a less efficient floral delivery model or on a third-party delivery model like FedEx.

To answer that, as we mange that, what we have done obviously is looked at it from a FedEx-UPS delivery capability; making sure that we have the right ramp projections around the country for our products. And then we will manage the inventory appropriately to match those projections, and then keep capacity open, in our flowers-fulfill network.

That is where the strength of our model comes into play. So that we will have that late capacity available in our flowers-fulfill network. And we will manage the inventory, the marketing and merchandising of those products accordingly.

Then in our marketing messages, I think also because of the strength of our growth in repeat business, it gives us the extra ability or effectiveness of our marketing message to move deliveries up earlier into the week for us. So, again, our customers more and more want their deliveries made to the office, even though Valentines Day is a Saturday. With our marketing efforts and the trend, we will have much more business going during the week.

What are you doing with the LFCs to take advantage of that during this (indiscernible) holiday season?

The whole purpose of the LFC was to, first and foremost, it was to increase not only the quantity throughput in a market but the quality of the throughput in the market. So they have much more of a technology platform by using our technology platform in the market. So our forecasting ability.

The ability for them to manage their delivery operations in a locality. Their ability to ramp up is magnified because of the concentration of effort in those LFCs. So they have a branded packaging; a lot better forecast; a lot better access to product and materials in the marketplace.

So it is all about leveraging the things that we do everyday with them to give them the maximum opportunity to have the broadest and deepest delivery capability in the market that Friday and Saturday. But as Chris just said, so our efforts before that will be to leave that channel available as best we can for that last-minute surge.

Great, thank you.

Anthony Noto of Goldman Sachs.

I was wondering if you could comment a little bit about the competitive environment. Specifically potential competition from new private companies, not necessarily new but merging private companies; such as the shopping search sites like Shopping.com and BizRate and Pricegrabbers. I think Shopping.com put out a press release that showed a fair amount of strength in a nonconsumer electronics category; specifically a category that would overlap with your home decor category. What are you seeing from these companies in terms of competition as they focus on categories like thoughtful gifting away from nonfloral categories? Thanks.

A couple of things we have seen. If you look at the broader competitive landscape, two primary categories separate from just the online world. In the floral marketplace, clearly it is extremely competitive, very aggressive competitive companies. As we look at the results of this last quarter we see that we are the largest; and the margin between us and our competitors has actually grown this quarter. So we are effective there without having to resort to very steep discounting or very steep promotional offers or very expensive marketing capture opportunities in the online world.

The second thing is if you look at the broader thoughtful gift category, you saw good growth from us there. And you see that together we are making it awfully tough on new companies to compete with us. With the capital expenditures we have been able to make; the efficiency of our delivery network; our warehouse management systems; we don't have to go out and try to invent that on the fly. We have those things. So it is not going to be easy to compete with us in that category.

To the last part to your question, Chris will talk to you on this more, but what we are seeing is -- because for example on rose prices this year, we have the best range of rose prices; from the most competitive price to the most extravagant price, with appropriate values at all price points. We are making it very hard to compete with us on all fronts. And we are seeing very, very good success in the shopping categories that you have mentioned this past holiday season. Chris, would you put some more color on?

If you look at the emergence, or reemergence as you say, of other companies like Shopping.com or any other marketing vehicle really online, whether it be the emergence last year of search and the continuation of that; or comparison sites, as you're referring to. I think it just continues to expand the competitive landscape for us.

But I think you see us continue to be very active in looking at what the new marketing opportunities are; and doing so in a very cost-efficient manner. As you continue to see from us, we don't go chasing top dollar at a loss, as you do see in some of the online environments. So again it is just an expansion of the competitive landscape; and I think we're well-positioned to market into that appropriately.

Great, thank you.

Kristine Koerber of WR Hambrecht.

First of all just a follow-up on Eric's question regarding Valentine's Day falling on a Saturday. I believe the last time it fell on a Saturday was back in 1998. What kind of impact do you expect to see on top-line with it falling on a Saturday, if any?

We have built into the guidance that we gave in our forecast lower growth this Valentine's Day than we had last year, because of the positioning on a Saturday. As Jim mentioned before, we think we are well positioned to handle some of the logistical issues that it following on a Saturday presents. But with it falling on a Saturday, there is that opportunity for the consumer that waits till the last minute to seek alternatives to us. But we have built that into the guidance that we have provided.

So you see a lower growth rate this year in the Valentine quarter because of the day placement. But as Bill said, that is already into our plan. We think we're pretty well positioned to still grow our business, even at a slower rate, because we have the multidelivery model. We are not dependent just on a FedEx.

If we were just dependent on a FedEx, for example, those kinds of companies, all of them, now say, oh, we are going to also have floral network delivery; and they are making deals with our florists over the wire service, to try and get access to that. But they're not going to replicate 20 years of a BloomNet network. They are not going to replicate three years of an LFC network.

So that is why we feel confident that we can still grow our business; do it with the same quality that we have been doing it all along with; and with an improving quality all the time. Just that we are projecting a lower growth rate.

Can you quantify how much lower growth rate you're projecting?

We only have it for the quarter overall at about 7 percent or thereabouts. That is impacted with a little higher growth on the non-Valentine's Day period and a little lower growth in that for Valentine's week.

Okay. Also can you give us a little more color? You talked about some of the categories posting double-digit growth. Are we talking 10 percent growth or 20 percent growth? Can you give us a little more color on which categories are doing exceptionally well for you?

We don't break out by the various categories what the growth rates were. Some of them are fairly small still, as Jim mentioned; some of the newer names that we brought in. So those would have grown at much higher rates. But within the category, we saw some of the categories, even some of the bigger nonfloral categories, growing in the low 20s. We saw quite a few of them growing in the high teens. All very healthy growth for us (multiple speakers).

As a collection of those, when I say double-digit growth that would be in excess of 10 percent. In that mass of a category, that would be food gifts, the popcorn and novelty food products, snack products, the gift basket, gift sets, and the children's gifts; all, if you put them together as a group, over 10 percent growth.

Thank you.

Anthony Lebiedzinski, Sidoti & Company.

Looking at the gross margin, I think, Bill, you had mentioned that it is going to be flat in the second half of fiscal '04. Any opportunities perhaps in fiscal '05 to again get back on track with expanding the gross margin?

Yes, I think there is opportunity to get it back. What we see and what we are reacting to is the recent trend. As we have stated, the floral category, which we are showing double-digit growth in the floral category, being at that lower margin; and the home decor, which is a high gross margin area for us, not hitting the numbers that we had hoped for, we're just continuing that trend as we go into the second half of the year. And that is why we are guiding to relatively flat margins for the second half of this year.

We still do believe that the nonfloral gift areas, many of the nonfloral gift areas as they start taking traction, which do have higher gross margins, will exceed floral as we go into future years. And we will be able to, between the combination of that mix change as well as the operating efficiencies and stuff that we have continued to drive, and help us drive margins higher in the past, that we will continue to grow margins in the future.

Okay. With respect to the tax rate you had mentioned for this year you expect it to be around 3 percent. How about any indications about fiscal '05?

We hope to keep it at 3 percent forever.

Wouldn't that be nice?

Fiscal '05 right now is a little up in the air. We will finish this year, we will still have about a $60 million NOL. The accounting rules here are a little grey as to when are you able to really recognize that deferred tax asset. And you need to show a track record of profitable earnings. So we were basically breakeven; made a little bit of money in fiscal '02; fiscal '03 made more money; fiscal '04 making more money than that.

The question in fiscal '05, most likely we will be recognizing that NOL and then offsetting that against the actual income that we make during that year. Which if that were the case, let's say throwing out a number, $40 million worth of pretax income, that would normally be tax affected at let's say 40 percent. But you would get a benefit of the 60 million NOL at 40 percent. So you would have a net-net tax benefit potentially in fiscal '06, which could be a 10 or 12 cent EPS benefit in fiscal '05. If that is the way it plays out.

It could be -- this is where the grey area is, at the end of '05 as we run through, as we work this through with our outside auditors, that they don't say recognize the remaining NOL; and then you're basically treating it like a cash basis. And that would run into fiscal '06. And therefore what that would result in would be a 3 percent tax rate, basically being a T. tax that I spoke about for fiscal '05. Then in fiscal '06 we have the remaining 20 million that rolls in and offsets our tax rate, which would reduce our tax rate in '06. And then we would be fully taxed in '07.

If you get that. So it is either going to be 3 percent next year --

There's basically two scenarios. One would be that we fully recognize the NOL. And therefore it would result in a net tax benefit in fiscal '05 that we would spread amongst the quarters in '05. Or two, we would be kind of the same way we are this year, at a 3 percent rate; and we would roll the remaining component of our NOL into fiscal '06. That is what we have got to work out with our auditors right now.

What is the more likely scenario, in your opinion?

I think right now it is probably fiscal '05 we would be recognizing the (multiple speakers) assets.

Okay. Moving on to a simpler question. Your corporate sales, what was that as a percent of sales in the December quarter?

It is still a low number, about 5 percent.

About 5 percent. Lastly, with respect to your capital expenditures, do you still expect that to be around 11 million for the whole year?

Yes, we do. As you see from the release this morning and the statements that are attached, that capital expenditures (indiscernible) under 5 million; but we still expect -- some of the projects just got deferred into the second half of the year.

All right, thank you.

Peter Benedict, CIBC.

A quick question on the customer additions. New customer additions looked like they were kind of flat with a year ago; about 1.2 million customers. Is this traditional? Or it is your largest quarter of adding new customers. Can you talk about how that has been growing in the past? It has kind of flattened out here. How does that play into your 7 to 10 percent revenue growth forecast for this year and I think longer-term? Secondly, with all of the cash on the balance sheet, I guess the traditional quarterly question, any update on the uses of cash?

On the customer side, yes, there was only a 5 or 10,000 -- I guess about 5,000 more new customers acquired this quarter. Which showed an emphasis in our marketing mix, which frankly resulted in a 220 basis point improvement in our operating expenses. That has been a trend now for a few quarters; well actually, for a couple of years.

If we can pull the levers in such a way that we're able to acquire 3 million new customers a year, at the same time continue to see an increase in our repeat rate, that is nirvana for us. Because our costs are going down to acquire new customers; yet the customers we acquire are actually more effective customers, because we are figuring out the best formulas for how to develop frequency and repeat business from them.

So we are very comfortable with that, very pleased with that. That gave us the ability to improve our operating performance in spite of the fact we didn't move gross margin the way we wanted, because of the mix shift this quarter. I think you will continue to see that trend. And it shows the benefit of us as a company, with the assets that we're fortunate enough to have accumulated here, which is the leverage we have in that 10-plus million customer base. And we will conduct to mine that, especially actually because of the aforementioned very competitive landscape.

When we can do both things, still acquire 3 million customers a year, which we did last year and we are on target to do again this year; at the same time we will have a 200 basis point improvement in our repeat rate intra-quarter; then we think we are going the right things from a marketing and prospecting point of view.

I was going to add, too, on the acquisition mode, looking at acquiring the same number and doing so more efficiently, more effectively, as you mentioned. That is with, as Bill mentioned earlier, some of our (indiscernible) pulling back on circulation; of course pulling back on prospecting there as well. So other brands at a more cost-effective rate, still acquiring the larger number of customers.

I think the bottom-line is 1.2 million was on plan with what we expected and puts us on pace to do 3 million new customers.

And could you do the second question, Joe?

Cash. Peter, you asked about cash uses. Jim did touch on that a little bit at the end of his formal remarks. We continue to build our cash position. We think that is a very good comfortable position for us to have. It enables us to focus on really two ways to grow out our business. One is through internal business development, both in the areas that we have already targeted as fast growth areas, and some new business opportunities that we are continuing to develop internally. New business ideas that we're looking at. Secondly we are very proactively looking at what is available and what makes sense for us to do in the M&A world; and we will continue to do that.

Thank you. Good luck in the next quarter.

(OPERATOR INSTRUCTIONS) Bob Labick, CJS Securities.

Kind of a follow-up question on the marketing piece. I continue to be impressed with your leverage on the marketing expense. Is there an opportunity to increase marketing to boost the top-line? Or what will it take to get your top-line closer to the higher end of your guidance? How do you decide how much to spend in terms of how far you want to push revenue growth?

I think Marshall Field gave some poignant comments about the effectiveness of marketing. He knew half was wasted; he just didn't know which half. For us, we look at the tea leaves pretty closely all the time. Coming out of this last quarter, I think the lessons learned from it, sort of a very general sense without giving away too fine a read of our leaves, is that we had some very, very good success in the off-line world.

The online world continues to be fluid for us. It is still a very strong and important ingredient for us. But if you go back to Anthony Noto's comments earlier, you see a changing of the power in the landscape. The portals still are very, very, very expensive, and delivering less and less if you look at the performance. BizRate had the shopping portals, Yahoo!, MSN, down over 15 percent leading up to the holiday week in the fourth quarter in terms of traffic. You saw search engines up. You saw comparative shopping sites increase traffic.

So we are continuing to move with the traffic in the online world, and we're happy we're not tied down to anyone bet in the online. We have seen the improvement with 20 percent growth in the online world. The good news is we had to spend less to do it, because our customers increasingly have us bookmarked as their primary source of flowers and/or appropriate gifts.

This quarter we had some very, very promising results that offer great future promise. So I would say if the second half of this year included Valentine's Day being on a Thursday or Friday like they were last year, you would see us spend more on the things we saw great results from in this last fiscal quarter. But we have to deal with the realities of the calendar. I think you will see us be much more aggressive in the second half of this second half of the fiscal year, in the fourth quarter, with lessons learned from this first half.

So we think there are ways to juice the top-line based on the learnings we had in the most recent quarter. We continue to learn, in turn, the biggest and most promising marketing opportunity for us is the thing that is showing some good results already, but we think can really, really juice the top-line in the future. And that is the continued leverage of the relationship we have, the growing relationship we have with our database. You see us putting more money there and more resources in terms of personnel, key personnel hires we have done because we are just starting to peel back the layers of the onion of that opportunity.

Thank you very much.

Kathy Lieberman (ph) of Fidelity Investments.

In the Valentine's Day quarter, how much of the business roughly goes through a BloomNet partner or local fulfillment, versus FedEx or other delivery services? Thanks.

Our FedEx business is less than 10 percent for the quarter. When I say FedEx that is FedEx, UPS, and other third-party carriers we use. It would be less than 10 percent.

Great, thanks.

Sue Young Lee (ph), Credit Suisse First Boston.

You mentioned some new business opportunities that you might be investing in. Could you (technical difficulty) some of these opportunities? And given where Valentine's Day will fall this year, how do expect number of orders to move directionally year-over-year in the third quarter?

In terms of the new businesses, they are not surprising to you. They are the categories that are adjacent to the areas we are in now, that our customers, as a result of the research that we're doing with them all the time, tell us that they would like more gifts.

We launched a year ago our Mama Moore's Bakeshop line of products, which had a very, very strong holiday this year. We're now expanding that to include the Mama Moore's candy shop product, which would be a mid price point product; which complements nicely our high line product, which is our Godiva product at the top end; and our lower end or more novelty product, which comes from our Popcorn Factory. So we're introducing a nice midpoint price range with our candy. So it is food gifts. The candy, the popcorn, the novelty gift products, the novelty food baskets are a big growth area for us.

In addition, we're having some good experience, especially on the consumer ordering from the office, in our research with them, of different party supply opportunities there. Plush. So you will see us do buildouts. Because there are no companies that we have identified that are appropriate for us to buy that would satisfy all of our needs, in terms of how we want to be in a particular category or line.

So you will probably see us do organic buildouts, or organic wraparounds on a couple of assets that we might y purchase to help us flesh out a category that we think is important, that our customers have told us is important.

Including our personalization efforts, which really took hold this quarter. With our unique fulfillment capability, we were able to maximize that personalization demand and had plenty of capacity left, although the demand was a little bit more than we anticipated. The novelty of our model, that we were able to maximize that; and we think we can really ramp that up going forward.

As to the order count, we are not anticipating an increase or really much of a change in average order size. So we reaffirm guidance at 7 to 10 percent for the year. We know consensus is out there at about 7 percent for this quarter. We're comfortable with that. So order count should be in that same range.

At this time there are no other questions in the queue. Mr. McCann, I will turn the conference back to you for any additional remarks.

Thanks for all of your questions and for your interest. If you have any additional questions, please get in touch with us. As a reminder, too, I would like to tell all of the folks on the call that the Valentine holiday, which we spoke so much about, is just around the quarter. It starts on Monday, February 9, and runs through Saturday, February 14. at 1-800-FLOWERS.COM our unique same day, next day, any day delivery capability can help you show all of the special valentines in your life, friends and family alike, just how much you care, by guaranteeing delivery to their office all week long, or to their home for the weekend.

We have something for every valentine on your list, including the broadest rose offering at prices that range from affectionate to extravagant. Our wonderful Lotsa Love arrangement that's got it all, flowers, candy, and a cuddly stuffed teddy bear, covering all the basic food groups. And a great selection of 1-800-Flowers exclusives, such as our own Mama Moore's Bakeshop branded delectable cookies and cakes, and the elegant Jane Carroll lacquer flower gift box. And even our Bloom of the Month Club that says I love you all 12 months of the year. So visit us online, call us, or come into one our stores. Have a great quarter and don't forget us for Valentines week.

That concludes today's conference call. We thank you for your participation. You may disconnect at this time.