1-800-Flowers.Com Inc (FLWS) 2004 Q3 法說會逐字稿

Good day and welcome everyone to the 1-800-Flowers.com fiscal 2004 third quarter results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Vice President of Investor Relations, Mr. Joe Pititto. Please go ahead sir.

Thank you Lawrence. Good morning and thank you all for joining us today to discuss 1-800-Flowers.com's financial results for our fiscal 2004 third quarter. My name is Joseph Pititto and I am Vice President, Investor Relations. To those of you who have not received a copy of our press release issued earlier this morning, the release can be accessed at the Investor Relations section of our Web site at 1-800-Flowers.com or you can call Patty Altadonna 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'll open the call for 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 begin, I need to remind everyone that a number of the statements that we will make today may be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed description of these risks and uncertainties, please refer to the 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 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'll now turn the call over to Jim McCann.

Thanks, good morning everyone. As we stated in this morning's press release, we achieved strong operating results for our fiscal third quarter. Before I turn the call over to Bill so that he can take you through the details of our financial results and metrics for the quarter, I'd like to cover a few key points. First, during the quarter, we grew our total revenues organically by 8% despite our logistical challenges associated with the Saturday day placement of the Valentine holiday. I should note that our organic revenues are essentially equivalent to same store sales metric reported by many specialty retailers since our same store is our electronic platform online in telephonic sales. Second, our online revenues continue to grow at a double-digit rate increasing more than 15% during the quarter compared with the same period last year. I saw customers increasingly migrate to the convenience of our online channels. We see a number of benefits that I have mentioned to you in the past, which includes a lower order processing cost, increased exposure to our expanded range of gifts, which increases the number of celebratories and vacations our customers can come to us for. Introduction to our rich service offerings such as occasion reminder, gift search, and our address book features, all of which make shopping more convenient and thereby increased customer loyalty and frequency. And through the Internet, we get the opportunity to engage our customers in electronic dialogue via cost effective e-marketing programs. Third, in terms of product categories during the quarter, we saw strong growth in our floral gift offering as well as those targeted non-floral gift categories that we have identified as having the highest growth potential for the future. These include gift baskets, gourmet food gifts, popcorn, candy, and children's gifts including plush stuffed animals. Each of these gift categories are large and highly fragmented offering a significant growth potential as we increasingly become our customer's preferred provider of gifts for all occasions. Fourth, we further reduced our operating expense ratio. As we told you in the past, improving this metric is a key element in achieving our stated goal or delivering bottom line growth, EPS, and free cash flow at rates well in excess of revenue growth. Lastly, we cost effectively attracted more than 700,000 new customers while simultaneously increasing our repeat order rate by a 150 basis points. Of the more than 1.6m customers active in the quarter, approximately 57% were repeat customers. We believe our proven ability to cost effectively attract new customers while deepening the relationship we have with our existing customers will enable us to continue to grow our business profitably going forward. I'd now like to turn the call over to Bill.

Thank you Jim. During the third quarter, we continue to see positive trends in our key operating metrics. Most important among these were the strong online revenue growth and further improvement in our operating expense ratio. Furthermore, we expect these trends to continue as we move forward into the current fiscal fourth quarter and beyond, according to specific financial results and key metrics for the third quarter. Total net revenues reached $134.1m, an increase of 8% compared with $124.1m in the same period last year. Online revenues grew 15.4% to $74.5m compared with $64.6m in the third quarter last year. These online revenues equaled 59.4% of combined online and telephonic revenues for the third quarter of fiscal 2004, compared with 55.3% in the same period last year. Telephonic revenues were $50.9m, down 2.7% compared with $52.3m in the prior year period. This reflects the continued migration of our customers to our online channels. Our retail fulfillment revenues were $8.7m compared with $7.2m in the third quarter last year. During the quarter, our combined online and telephonic orders totaled $2,052,000 compared with $1,871,000 orders in the year-ago period. Average order size during the quarter was down slightly to $61.11, compared with $62.46 in the prior year period, primarily due to product mix. During the quarter, we attracted 707,000 new customers compared with 680,000 in the year-ago period, 450,000 or 63.7% came to us online, compared with 415,000 or 60.9% last year. In terms of product mix, the floral, non-floral gift breakdown was 65% floral and 35% non-floral, compared with a 62%/38% split in the prior year period. Primarily as a result of this product mix, our gross profit margin for the quarter was 40.8%, down 30 basis points compared with 41.1% in last year's third quarter. This mix reflects the largely slow nature of the quarter including the Valentine's Day holiday as well as slower sales in our Home and Garden gift category.

Prior to the start of fiscal 2004, we told you that we plan to allocate our marketing efforts and investments based upon customer demand trends that we were seeing, including stronger growth in our floral gifts and a somewhat slower sales in our Home and Garden gift business. It is important to note that while our floral gifts have a lower gross profit margin at approximately 38% compared with our non-floral gifts, which generate an average of approximately 45% to 46%, costs associated with marketing floral gifts are lower. Therefore, during periods when floral gifts make up a larger percentage of our total revenues, our consolidated gross profit margin may be somewhat lower, which is more than offset by lower marketing expenses. As such, we have and will continue to direct our marketing efforts for the appropriate product categories where we believe we will get the best returns. During the third quarter, we continued to reduce our operating expense ratio achieving an improvement of 100 basis points to 39.3%. This reflects the aforementioned benefit of lower marketing expenses combined with our ability to leverage our existing infrastructure to reduce operating costs. Combined with revenue growth, these operating efficiencies enabled us to improve our operating margin. We expect to achieve continued improvements during the current fiscal fourth quarter. During the fiscal third quarter, we incurred income taxes of $66,000 putting our effective income tax rate at approximately 3%. This is related primarily to the federal alternative minimum tax, which only allows utilization of 90% of our NOLs to offset profits. This ratio continues in the current first quarter. Due to increased revenues and operating leverage, net income for the quarter grew 64.2% to $1.9m or $0.03 per fully diluted share, compared with net income of $1.2m or $0.02 per share in the third quarter last year. Largely as a result of appreciation in our share price, our fully diluted share count under a treasury method rose to approximately 69m shares compared with 67.1m in the third quarter last year.

Free cash flow for the nine months ended March 28, 2004 was $7.2m compared with negative free cash flow of $1.6m in the same period last year. Regarding our balance sheet, our cash and investments position at the end of the quarter was $87.4m. Inventory at the end of the fiscal third quarter was $23.1m, down from $24.4m at the end of the third quarter last year. This is in line with management's plans as we enter the fiscal fourth quarter. Turning to guidance. The current fiscal fourth quarter which includes such traditional gift-giving occasions as Easter, Passover, Administrative Professionals Week, Mother's day, and Father's day is our second largest in terms of both revenue and earnings. We believe the positive trends that we have seen in our business throughout fiscal 2004 will continue during this quarter. These trends include solid organic revenue growth driven by double-digit growth on our online channels and continued improvements in our operating expense ratio. These factors combined with our strong gross profit margin will enable us to grow our EPS for the full fiscal year by more than 75% compared with last year. In addition, because of the low capital requirement inherent in our business model, we anticipate free cash flow for the year to grow 150%, to approximately $30m and we expect to finish the fiscal year with cash and with a cash and investment position, of more than $100m. I'll now turn the call back to Jim.

To sum up, during our fiscal third quarter, we achieved solid organic topline growth of 8% driven by strong online revenue growth of more than 15%. It's worth noting that our same-store revenue growth unlike most specialty retailers does not require substantial investments in inventories or in bricks and mortar. Regarding operating expenses, we improved our operating expense ratio by leveraging the investments we've made in our brand, our technology platform, and our operating infrastructure. We'll continue to focus on identifying operating efficiencies that will generate additional cost savings and thereby enhance our operating profits. On the product front, we continue to see strong growth in our floral gift business as well as in those specific nonfloral gift categories that we have identified as having the highest growth potential for the future. In terms of customer metrics, we cost effectively attracted 700,000 new customers during the quarter while simultaneously increasing our repeat order rate. This illustrates the strength of our brand and the effectiveness of our marketing programs in both customer acquisitions and customer development. As we enter our fiscal fourth quarter, based on the positive trends we are seeing in our business and customer metrics as well as the financial results we've achieved through the first nine months of the fiscal year, we believe we are well positioned to achieve our stated goals of more than 75% growth in EPS and 150% growth in free cash flow. As Bill mentioned, we expect to finish the year with more than $100m in cash and investments on our balance sheet, our strong balance sheet enables us to continue our focus on growing our business through internal development methods while also pursuing leverageable acquisition opportunities. We'll also continue to review various ways of conveying to our shareholders the value of the cash we generate in excess of our growth, our capital needs. In summary, we believe we're well positioned to grow our business profitably and thereby enhance shareholder value. Now, that concludes our formal remarks. I'll ask Lawrence now if he would further clarify how we go about the question and answer session. Lawrence, would you restate those instructions for us, please.

Thank you sir. The question and answer session will be conducted electronically. If you'd like to ask a question, please do so by pressing the star key, followed by the digit one on your telephone keypad. For those of you joining us on speakerphone today, please release your mute function to allow the signal to reach our equipment. Once again, if you'd like to ask a question, please press star one. We'll pause for just one moment. And our first question comes from Anthony Noto from Goldman Sachs.

Thank you very much. Hi, Jim and Bill. I was wondering if you guys could talk a little bit about the competitive environment and specifically as it relates to marketing spend online as well as general cost of doing business as it relates to customer acquisition cost and then also what efforts do you have underway to go after, sort of natural search or are you going to search to improve this sort of free that you get? Thanks.

Probably there are number of pieces there. I'll ask Chris, and Bill, and Jo, all to contribute to the answer. To give you a general overview, I'll ask Chris to next touch on the online piece. I think what we saw in the last quarter in particular, it started frankly in the second fiscal quarter, Anthony, was that some of our offline methods of advertising began to show even more robust results than they had in the past and I think that's a factor of just the maturity of the customer base that has access, particularly broadband access to the Internet, that is, even things like television advertising are now starting to show very definite impact on our order flow and customer regeneration, even in the online world. So, we're buoyed in our enthusiasm to how those offline marketing efforts for having increased efficiencies. But in general, you saw that we're able to retract over 700,000 customers, we gave the qualification that was cost effective, which means it's comfortably below our target rate of $20 to get a customer place their first order with us across all our brands and categories. Chris, could you touch specifically on the search part of Anthony's question.

Just from an online perspective obviously continues to be competitive within our product categories, but also competitive from an advertising point overall, as more and more large brands, the consumer package goods brands continue to move into online advertising. So therefore, the competitive environment then becomes more focused, and, as direct market is we think we're well positioned to take advantage of the opportunities that present themselves, specifically in search, as we continue to expand in search, Anthony, we're constantly looking at new tools, new software developed to help us optimize our search capability, we've been doing extremely well with search engines and believe we are well positioned to continue

to do well with search engines especially with some of the new tools that we are experimenting with currently.

Specifically Chris, maybe on our affiliated programs in terms of our affiliate members

Yes --affiliate network continues to be robust, rather it continues to become much more targeted for us as well where we focus our efforts - similar to search where we continue to optimize while we grow our affiliate networks more and more attention is being paid obviously to those affiliates who are producing the revenue for us, and again it's all about optimization. For a while, this kind of blanket broadcast now it's really focused on optimization.

So affiliate network now has moved up in terms of - as new customer generation tool and frankly moved up ahead of almost all of the portal contractor relationships we have.

Anthony, one think to remember with our business is that year-to-date over 70% of our business comes direct to our URLs for the quarter, it's just that 70% which is up from 68% in the third quarter last year. So again large majority of our business still continues to come direct to our URLs.

That would be the Dutchman to the portals because they're coming as result of broadcast media as a result of targeted online search efforts in our affiliate programs.

Well, that would not include search.

Okay, thank you.

And our next question comes from Kristine Koerber with WR Hambrecht.

Hi. A couple of questions, first of all can you talk about your average ticket -- I know is down during the quarter and I would have thought that given the higher mix of floral during the quarter, we would have seen the ticket go up and then a couple of other questions. How much of your business is actually going through the LFC's right now and then can you kind of update us on Plow & Hearth, I know it's been an issue over the last couple of quarters. I know this quarter was relatively small for the business, but are you seeing trends improve over Plow & Hearth? Thanks.

Overall, on an average ticket Kristine, reduction in average ticket. Floral in general is lower than our overall

non-floral products. It's probably high 50s versus low 60s overall to when two-thirds of our business is floral and it's growing at a faster phase, that has a impact on the overall average ticket and including this year with Valentine's day with so much business

online and the competitive nature with some of that online, you know, we didn't have the increase in average ticket in floral that we've seen in the past.

Yes, well you find that Valentine's Day to consumer is not necessarily your average floral purchase. So, your average ticket actually does dip a little bit on Valentine's Day

Going forward, Kristine we would expect the average ticket, and we've told everybody remain in that $60 to $62 range.

All right, concerning Plow & Hearth Kristine this is Jim, what we have seem with that product category which is sold under the Plow & Hearth brand and across the components of it and to our other brands as well including especially 1-800-FLOWERS. This business that we acquired in 1998 and it was approximately a $35m company that first year of acquisition. It is grown to north of a $100m in sales now and what we've determined is that we think it will continue to grow, but we don't think it will grow at the same pace as the Flowers Brand or other product category opportunities, our Pop Corn, our Candy, our Balloons, our Plush, our gift baskets and food gifts, we think all will grow at a faster pace. So, when we look as like Bill referenced earlier our asset allocation across our marketing efforts, we see two things related to that product category of gift products to the home and the Garden and that is they require a heavy inventory commitment disproportionate relative to other product categories we are in, and it has a heavy marketing expense related to the catalogue marketing efforts of that brand in that product category. So, when we look at it, we've determined that it's best for us not to step as hard as we have been on the gas pedal to grow that business, because it won't have the operating leverage that the other categories have. So, you will see us de-emphasize it in the future, it will contribute nicely from a cash point of view. We've certainly integrated and used the access that came from that acquisition as a part of our integrated asset platform, but we think it's more prudent for us to put our marketing dollar increases in those categories that have the better growth profile both from a topline growth perspective, from a percentage of marketing cost and from an inventory risk exposure.

And Kristine this is Chris, from your question on the LFC's. LFC's will continue to be very pleased, with the progress we are making there, especially at a Valentine's Day when a Valentine's Day is on a Saturday, it gave us great, we believe competitive advantages and really helped to serve our customers well. On an overall basis, we're probably in the low-double digit percentage range of how much about throughput is got to being put through those LFCs at this point. That continues to grow or continues to give us the increased branding capabilities, and increased quality that we're looking for, and overall customer service capabilities.

Okay, and then just a follow-up on Valentines Day. Can you discuss with it falling on Saturday, can you talk about the order flow, I mean but to most of the orders, the deliveries were -- did most of those take place on Saturday? Or were customers -- did customers go out and respond earlier this year?

I think they did respond earlier this year. Overall the volume was going to be impacted because you're giving up almost two big selling days that it would be more advantageous to us. For example, if it were on a Friday or Thursday, we have big selling days and captive recipients often timed in a work place. So we were successful in moving a higher percentage of them up early of the deliveries during the workweek, where the delivery was to a residence, but then again we did benefit because people were accepting -- still placing orders and accepting delivery, this Sunday because this is a Valentine weekend. So it had that effect. Net-Net is going to suppress the sales opportunity, now it plays back to the question you've just asked at the LFCs, as you look foreword though, because next year Valentines Day leaps ahead because of leap year to Monday. So you have the impact of that, which leads to the benefit of the LFC network because, obviously, you can't ship FedEx product that would be shipped on Friday to delivery on Monday without a close pin to associate with the smelly product that would come from sitting dry and unrefrigerated in a box all the time. So the LFC network is starting to flex its muscle from a fulfillment point of view, because a product that we would put through the FedEx program that we've been conducting for the last 18 years now will increasingly be pushed through our LFC network to the benefit of our LFC partners, to the benefit our customers and to our three-way mutual benefit because it's less expensive and at same day not just next day. So you'll start to see their real leveragable benefit against a particular logistic challenge of a Valentines Day on a Monday next year, with the use of the LFC network to deliver a lot of product that would have otherwise gone through either express carrier.

Just one other point to add from a pure customer service point of view. With the LFC networking, -- our ability to have grown that I believe we were the only floral gift company taking orders on Saturday the 14th, taking orders on that morning for delivery that day. I don't believe there was anyone else in the industry that was capable of doing that.

Thank you.

And once again if you would like to ask a question, please press star one. Our next question comes from Ty Carmichael with Gothic Capital.

Yes, hi. I was hoping that you could provide updates on, big picture updates on two fronts. I guess one would be on the acquisition strategy of the company, you may employ over the next -- you know, just a guess the timing of that, now based on what you're seeing and kind of the asking price for some of the companies you may be looking at to acquire. If you have any updated thoughts on product areas that you'd like to move into, if you refine that a little bit and then I guess on a separate front, on the competitive landscape, is the -- this whole growth in the home and garden business, is that just a function of the overall market or is that competitive issues specific? You're just finding more difficult to compete in some of these -- some other businesses, and as part of that, if you could just update the competitive landscape in the flower industry, is the new ownership at FTD and then also to provide as well. Thanks.

The first part of the question was on?

I just answered.

The -- I obviously talk about, what we are looking at there is -- the kind of companies we're looking at would be the obvious. One, product companies that are complimentary to the product mix that we've described, which has it at the edges of expenses, our floral gift product and our food gift products and everything in between, which should be our balloon product or other sort of gifts like novelty products all of which are products that we are comfortable with that you'd expect to finding a high-end flower shop in town. So we'll continue to enrich our mix there, where it's appropriate to do, with an acquisition we'll certainly consider doing that. Our other service categories had helped us deepen our relationship with our customers, would also be on our radar screen. Things that help us to enhance the relationship with the customers, the dialogue with the customers. For us it's -- and we won't be specific in terms of who those companies are or specifically the types of services, but to generally say what we have is this online relationship with 13m or 14m customers, who are increasingly evidencing to us that they want to take advantage of what we're able to deliver now, which is a customer engagement relationship online, where our customers are engaged increasingly in a two-way dialogue with us. So services are going to enhance our relationship from an infotainment point of view, from our product -- service delivery point of view, are the kind of things we will be looking at the service arena. In addition, we are looking to use our capital to build out categories, where either they are not properly priced acquisition opportunities or not companies of -- in a position to provide the kind of services we want to -- that we will consider building out those categories and that will be our first approach in a product category where there isn't a single target that will help us get there as quickly as we would like. You will probably see us do couple of small acquisitions and built around it the kind of things that we want to do. I will tell you from a macro kind of picture point of view, we look at anything that is adjacent to our interested categories, whether large or small. The larger ones, I would tell you at this point in time seem to be gobbled up by the private equity shops because they are quite aggressive in price, because they have a lot of capital available and time limits before in terms of how long they have to put that money to use. So I say in the bigger categories, they get into auctions that you are going see the private equity shops be aggressive and we are not likely to do something that would be, upset the farm kind of things because we don't need to. In the smaller categories, I think we have seen two things. One is a good sober pricing environment that may be three months ago everyone thought you could take and idea of public again. I think that's coming -- that idea was coming out of the market now and we are being approached by companies who are attracted to our asset base and still have dream of building a company, and think it is a much more certain dream in terms of its fulfillment opportunity if they are tied to our assets, our technology platforms, our unique fulfillment infrastructure. Our 13m,14m active customers who own credit card carrying, gift buying, online access customers. So I think you are seeing potential relationships become a little bit more fertile an arena now because of people's attraction to those assets.

Try it from a floral competitive environment we believe that change does create opportunity and our floral gift business has been growing nicely at a rate in excess of 10%. We continue to be the category leader. In fact, we believe we are widening the gap since we were growing off a much larger base. We are of course well aware of our competitors. I should note that one of our products lines are fresh from the farm business is something we pioneered back in the eighties and the late eighties and it constitutes about 10% of our floral gift business. However, it is not offer the growth potential that a much larger business platform provides much larger gift platform provides that we offered our customers. It is a good way to supplement that market for us. We have a broad gift offering, professionally designed, available for delivery same day, any day without all the restrictions that are placed on that. So that kind of business really helps us round out our offerings to our customers. But clearly our customers as Jim was mentioning continue to come to us for all of their celebratory occasions and again whether will be same day, any day. So we believe with the changes taking place in the floral gift competitive environment we are well positioned.

I think we have demonstrated that as the thought leaders in our category, as the category leader and increasingly the category leader as you look the gap that is growing between us and all of our competitors. I think that the customers continues to vote that we have the right product offerings and I think all of our competitors will continue to mimic our model and more and more look to move into the product categories we have demonstrated. Our customer interest in and will attempt to try and built the infrastructures that we have that continue to provide that very high level of customer satisfaction and customer business growth.

Ty, then just one point on the overall home and garden market. It really is an industry, an industry issue and one of the things we have stated is that we do have the flexibility within our business model that allows us to kind of move the marketing efforts that we towards where -- you know the product categories were based on customers demands we see we can get the best returns and that's what we have done this FY.

Okay, if I can just have two quick follow ups, I know on the organic front you have looked at the corporate market as a nice opportunity and I was wondering if you could provide an update on how that business is developing and then again just on the big picture on the regulatory front have there been any changes or there any proposals that would allow the alcohol, strictly wine so that champagne as an online gifting business model to -- to become more viable and when that occurs is that something that fits into your overall strategy if that occurs?

Hi Ty, this is Chris again. I will just answer on the corporate and then will over to our resident wine expert Joe to answer that. On the corporate business we continue to be very pleased with the result we are -- we are making there or we are achieving there. It is an area that we have been investing in, as you know for -- especially heavily for the last year as far as ramping up the number of people that we have in that area. We are seeing the returns

Clearly we are not in the corporate gift sales cycle right now that we got to hit again in the fall. We had good results this past fall, what we consider our first refocused year on corporate sales and we are looking forward to next holiday season as well.

the next question.

It is regarding the wine business, we are launching the regulatory changes carefully. It is still a regulatory maze and so not an easy thing to do. As part of our efforts in the gift basket business, Jim pointed out as one the best categories for us in terms of our growth potential. It would be a nice addition, if we'll keep looking at opportunities to get in there, but we don't need to take any chances or do things that would be too difficult, so

It would it be safe to say that we don't anticipate that we would be ever very heavily into the commodity wine business. There's just not a lot of margin opportunity there. It is a pretty efficient delivery method.

As part of the gift basket steps, we don't sell anything that's a commodity on a one off basis, what we look to do is create gift sets that are a value added gift for our customers. And in that capacity we would look at wine ultimately.

So, I don't think Ty you would ever expect to see us in the single bottle or double two bottles of a specific cabarnet as an item that would frankly be even looking to get into.

Okay, thanks a lot.

Okay. Next we go to Heath Terry with Credit Suisse First Boston.

Hi, actually this is Daine in for Heath Terry. I was wondering if next quarter's floral, non-floral mix will be more heavily weighted towards floral again, as a result of all the holidays and what that mix could look like. Also I was wondering on the guidance on the top line. Is that still ranging between 7 to 10% year-over-year growth? Thank you.

Bill, would you handle it?

Yes, I think our fourth quarter is a traditionally high floral quarter anyway and the trends that we are seeing and where we have put our dollars, it is on the emphasis on the floral side because of all the floral holidays during the quarter. So the mix should be pretty similar to what we see this past quarter at about 65% floral plus. With respect to our guidance for the fourth quarter, what we did within the formal remarks that we had, is the trend lines that we've been seeing which have been about 8% organic growth, in that range was well within the 7% to 10% guidance that we gave at the beginning of the year because trend lines are what we are comfortable with, going into the fourth quarter.

We have not given specific guidance for the quarter and that's not what we are going to do if you take a look at the full year and look at the models out there as Bill pointed out, we have been growing at about 8% and on the full year basis I think most models have us growing at about 8% and we are comfortable there.

Okay and also I missed the spilt of the number of orders. Can you go through that again, online and telephonic?

I'm not sure if we did give the numbers, but the overall orders were a little over 2m orders, 2.50m orders with about 1.3m, just under 1.3m coming online, and telephonically, obviously 775,000 coming telephonically.

Great, thank you.

And once again if you would like to ask a question, please press star one. We'll take our next question from Arvind Bhatia from Southwest Securities.

Good morning guys

Hi Aravind.

Good morning

Jim, I have question on customer satisfaction. If you have been measuring it in some quantitative way, is there anyway to look at what that was for this particular Valentine season, especially given that it was on a Saturday and if you would compare that to last year, so we could kind of gauge, despite the difficulty that you had, what sort of customer satisfaction levels we saw and then if you could maybe make some comments on longer term, what sort of free cash flow growth we could see maybe over the next couple of years given all the initiatives you're putting in place?

I would say the general comment, 'It's all huge'

.

On the first part of your question Aravind, on customer satisfaction. I think what we have demonstrated through the 15 plus years of working and refining the distribution model we have, we are delivering a perishable product, we are hand delivering it, whether it's to hand delivering it to someone in a office, in a home, in a hospital when they had a new baby, in a sympathy environment when it's to a funeral and so in every imaginable environment, seven days a week, we are providing a fresh and perishable product through hand delivery. So a tough proposition to begin with. But one that I think our institutional knowledge or experience and in particular the efforts we put into our unique infrastructure give us a distinct advantage over any category, competitor, or even any competitor in any of any the gift scenarios. What we see from an empirical point of view and what we report on that would give you indication of some of the internal things that we track and are frankly so pleased with is that we've had for a long time the industry best customer service profile. Evidence of that is that a couple of years ago we had a 5% fall in credit and charge back in every imaginable way, whether it was on the purchase of one of our home decor gifts or it was a purchase of a piece of plush, you know, stuffed animal or a forward gift or a candy or fruit gift, all of which comes with our guarantee, frankly that we introduced about a dozen years ago. So, when you look at that, having a 5% all in customer charge back couple of years is pretty remarkable and the industry best by a lot. And now what I am pleased to tell you is that, that industry charge back graded down to around 3% and it gets lower every year and that's a function of our constant emphasis on customer service improvement. We have the best performing infrastructure, whether it's how we do our express, fresh from the farm product, how we use our BloomNet network, which is the best vehicle imaginable in our industry for that seven day a week delivery option of all of the kinds of products excluding non-floral gifts that you'd want to purchase on here at Flowers and we are increasing our customers or it's how we handle our service platform which we own, which is I think frankly the most sophisticated and we believe most cost efficient in any industry. So, when you look at all of those components, I think we have by far the best customer service performance, the metrics we use internally give us great granular detail on that, but the one that we report publicly which is the final evidence of that is that moving from an industry best five to weight best of 3% or lower, all in customer service and charge back.

One other key indicator to that, I believe Jim, is the -- even in a quarter like this when we've acquired more than 700,000 new customers, peak rate continues to rise.

And it has now from the mid 30s three years ago to now 56% this quarter, so we're very pleased with that. So, quarter-over-quarter, all of our internal are positive and of course the publicly disclosed indicacies are very positive.

Now that you've touched on direct from foreign matter just in your comments, wondering, you know, with provider out here is the awareness level higher such that more customers are asking for it, have you stepped it up? What are your comments on that business in general right now?

I think that that business is a nice supplemental business, it was the way we gained access to the industry, we then had the requirements to build all of those other infrastructures and processes to support a customer who has an increasing appetite for a full-Flower relationship. So, over the years, you have seen us build, in painstakingly and deliberate fashion, BloomNet ,the LSC component of that, the franchising elements that overlay that, the branding benefits that come from that, the technology infrastructure like Bloomlink and also you are not dependent on any Tom, Dick, or Harry in the world to facilitate orders. We have this -- it's like a group, that's taken us better part of the last 15 to 18 years to build that infrastructure and so I think the evidence is that having invested in that, you'll see us a) have supplemental benefit out fresh from the farm program. Joe and Bill mentioned earlier in the call that it's always going to range around 10% of our business. It may drop a little bit when you have Valentine's day on a Monday next year when will be it a little bit higher percentage to offer filming network, particularly our LSC and franchise components. So, I think it's a nice supplement to have, but it's clearly not the way to build a full floral relationship and I think you'll see -- we've seen scores of competitors born and introduced to the category who're coming on and -- but those who would have been successful have to mimic what we've done over the years and I think that the evidence will be whether or not all the new entrants that you see pop up every year can work their way through that very onerous and treacherous landscape.

And the second question was regarding free cash flow, your sense of how you can, you know, how quickly you can see it growing over the next few years?

Arvind, we've not given specific guidance beyond fiscal '04, although we have and we often do in our corporate presentations and others, tell people that based on what we see going forward, we believe we'll be able to grow on bottom line metrics, our EPS not free cash flow, compound annual growth rate of about 50%, significantly faster than our topline growth for the next several years and that's what we've done.

Adjusted for taxes.

So, post-taxes or pre-tax, pre-tax free cash flow, right?

You'll have to adjust the current numbers to a fully tax basis and then have that, you know, so you are comparing apples-to-apples.

Okay, got it. Thanks.

And we'll take our final question from Darlene with Trust Company of the West.

Hi, is there a stock authorization repurchase plan in place currently? And how do you feel about stock repurchase, being a growth company spending on infrastructure and possibly looking at acquisitions?

Darlene, we've said often times those positions you will see in our annual reports, we do have a stock repurchase authorization in place and we can use it.

How much is on that?

$10m, it's in our filings. In addition to that, we are generating cash and as we continue to generate more cash, we will look at ways to return the value of that cash to our shareholders, which could well include stock repurchases and/or dividends. We look at all of those things and we will continue to consider them and look at the appropriate time to initiate.

And Darlene, just two other points. Our capital, you know, was outlined where our capital needs have been, and it has been in the $10m to $11m range for the last couple of years and that's what we are foreseeing in the future. So, it's a low capital deployed model as well.

But a $10-12m capex anticipated rate in the next couple of years is not an insignificant amount of capital to be spent by a company our size. The majority of that, I would say, probably 70-75% of that Darlene is spent on technology infrastructure upgrades that would be on new programs. We are introducing new benefits and services to our customers. So, while it's a modest rate relative to our size, it is not an insignificant amount of capital to be spent, but on the other hand, we think our heavy capital expenditure years where we were in the mid $20m are well behind us.

And on the, I think it's the LFC key market program which I think ramps up more significantly in the second half of the calendar year, you said that that was on track, you anticipate the capital needs there to already be in place or do you expect your capital needs to go up?

In terms of the LFC program, one of the things that is most attractive about the program is that it's built on relationships, long-term solid relationships, 15-year relationships, in one case 20-year relationships. The other attractive feature there is that it requires no capital from us. It uses a -- from us it uses our technology platform, our merchandising capability, our marketing capabilities, all of which we've already bought and paid for. In addition, we think that there are revenue opportunities that can come to us in the future from that, that we are experimenting with now, but so just to manage our expectations. We've already built the LFC program, it doesn't have a second half of the year component to it. It's already to the scale we wanted it. Second, it doesn't require any capital going forward, it's now leveraging and harnessing the capital spent in the past.

So, where do we see the biggest impact on the LFC? Would it be on the operating expense line, going down?

I think that contributes Bill.

Yes, we are introducing other products through the LFC so it allows us to have same-day delivery of all the products, so it helps with throughput around the holidays, with all the quality metrics that we've talked about, you know, customer satisfaction.

Is it feasible that you could get a higher -- you could raise prices and basically advertising the same-day delivery or will that be difficult?

I think it's feasible, we've have not made the determination that we will do that Darlene. What I think -- one of the things we would add is that there is a slightly enhanced gross margin opportunity for products we deliver through our LFC network and there is the additional savings benefit that was newer to the benefit our customer, to our LFC partners, and to ourselves by delivering products that alternatively would go to an express channel, now through that LFC channel, because it's all around cheaper, and it's a better product and a better experience for the customer.

Okay, finally within your non-floral gift categories, which categories garner the highest margins?

I would say they are pretty close; food, candy, novelty gift products, and our bakery gift products, all in the food area probably have the highest gross margin in terms of their significance of -- when you associate, when you relate to the scale of the business and how big we think we can become.

Thank you.

And that does conclude our question and answer session. At this time I will turn the conference back to Jim McCann for closing remarks.

Thanks to all, and if you have any further questions please don't hesitate to get in contact with us. And as a reminder this is administrator professional's week, and we all have two days left to say thank you to the superstars in our offices for all of their contributions. So, assuming that you don't wish to be routed on your next trip through Antarctica, please visit us on 1-800-Flowers.com, call us or come to our web site or come to any of our stores. You'll find a huge selection of flowers, plants, candy, bakery treats, and so much more. So, that you can choose a perfect gift for all the office professionals who help make you so successful. And, one final reminder, next week begins the two week push toward Mother's Day, and I know that you all know a mom, love a mom, have someone in your life who has played a significant role as a mom, and if you do, we know an 800 number you can call, and we certainly know a web site that can service you to help you to connect and say the special things you want to all those mom's in your life.

Thank you. Good bye.

And that does conclude today's conference, we thank for your participation. You may now disconnect.