1-800-Flowers.Com Inc (FLWS) 2004 Q4 法說會逐字稿

Good day and welcome, everyone, to the 1-800-Flowers.com Fiscal 2004 Fourth Quarter and Full Year Results conference call. This call is being recorded. At this time for opening remarks and introductions, I’d like to turn the call over to the Vice President of Investor Relations, Mr. Joe Pititto. Please go ahead, sir.

Thank you. Good morning and thank you all for joining us today to discuss 1-800-Flowers.com’s financial results for our fiscal 2004 fourth quarter and full year. My name is Joe Pititto and I’m Vice President of 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 1-800-Flowers.com, or you can call Patty Alfadona [sp] at 516-237-6113 to receive a copy of the release by email or fax.

In terms of structure, our call today will begin with brief formal remarks and then we’ll open up the call for your questions. Presenting today will be James McCann, CEO, and Bill Shea, CFO. Also joining us today for the Q and 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 our SEC filings, including the Company’s annual report on Form 10K and quarterly reports on Form 10Q. 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’ll now turn the call over to James McCann.

Thank you, Joe, and good morning, everyone. As we stated in this morning’s press release, we believe that the results of our fiscal fourth quarter and full year further demonstrate our ability to enhance our operating margin and grow our profitability at a faster rate than top line growth. It’s important to note that we achieved this despite the lower sales in our Home and Garden gift category, which I will discuss further.

The improvement in our operating margin illustrates the significant leverage we have in our operating infrastructure, as well as the success of our marketing and merchandising efforts aimed at driving enhanced revenue growth in our Floral gift category, and those complementary gift categories that we have indicated offer the highest potential for future growth. These categories include Gourmet Food gifts, gift baskets, candy and children’s gifts. Importantly, during fiscal 2004 we achieved double-digit growth rates in all of these areas.

With that said, we also believe the results could have and should have been stronger in fiscal 2004. As we have noted throughout the year, customer demand in our Home and Garden category has remained below our expectations. We believe that this can be attributed to internal merchandising and marketing issues, as well as from increasingly competitive market conditions within the home and garden retail sector.

During the past several months, we have completed a thorough review of our home and garden business and have already begun to implement plans that we believe will enhance its product offering, its greater look and feel and its marketing strategy. We expect to begin to see the fruits of these efforts during our fiscal second quarter, which includes the year-end holiday period and is the largest in terms of sales for the category. We are confident that we can reinvigorate this segment of our business and achieve sustainable revenue growth during fiscal 2005 and beyond.

In a moment, I’ll turn the call over to Bill for a review of the metrics and explanation of a tax benefit that we recorded in the quarter. Before I do that, however, I’d like to highlight a few financial results and the customer trends that we believe illustrate the strength of our business model and positions us for profitable growth in fiscal 2005 and beyond.

In terms of financial results, for the full fiscal year we grew total revenues approximately 7 percent or $40 million to more than 600 million. While this was at the lower end of our expectations for the year, it still represents solid, organic or same-store growth in what continues to be a challenging retail environment.

[Inaudible] revenue in our online channel increased by approximately 16 percent to more than $300 million, representing 54 percent of combined telephonic and online revenues. As I've stated in the past, this is important because our customers increasingly migrate to online channels. We have lower order-processing costs. We can introduce them to our expanded range of gifts, which help increase the number of celebratory connected occasions that they come to us for.

They get the opportunity to use our rich service offerings, such as occasion reminder, gift search and our 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 electronic dialogue via cost effective online marketing programs.

Also for the year, we continued to reduce our operating expense ratio, improving this key metric by 220 basis points compared with last year. We maintained a strong gross profit margin despite the impact of lower sales in our higher margin Home and Garden gift categories.

Together, these factors enabled us to significantly increase our profitability and along with our low working capital and capital expenditure needs, to generate more than $30 million of free cash flow.

Now, regarding some customer trends, during the year, we cost effectively attracted more than 3 million new customer, of which 58 percent came to us online, up from 55 percent last year. Importantly, our customer acquisition costs remained below our $20 target at a level we believe is among the best in the specialty retailing sector.

We believe these customer metrics illustrate the success and leveraging of our marketing investments in broadcast advertising, direct marketing and online programs to both attract significant numbers of new customers to our brand, as well as deepening the relationships we have with our existing customers. We plan to build on these efforts and thereby profitably grow our business in fiscal 2005.

I’ll now turn the call over to Bill.

Good morning. Before I get into the specific metrics for the quarter and the year, I’d like to briefly discuss the $19 million income tax benefit that was included in our earnings release this morning.

First, this represents a one-time non-recurring item resulting from a reversal of the Company’s deferred tax valuation allowance related to its NOLs, or net operating loss carry forwards, which were principally generated during the Company’s investment years of 1999 to 2002.

Second, we’re recognizing the tax benefit at this point because we have demonstrated strong earnings growth for the past several years and have forecasted enhanced profitability in fiscal 2005 and beyond.

Third, going forward, for those of you who are modeling our performance, this will now allow you to do so on a fully taxed basis.

Keep in mind that this will primarily be a noncash during fiscal 2005 due to the utilization of net operating loss carry-forwards. So in other words, where our earnings will be tax affected, our free cash flow will not be. If anyone would like more detail, I’ll be happy to speak with you on this subject offline after the conclusion of this call.

As to the various metrics, I will now review -- where applicable, I have provided the actual GAAP net income and EPS amounts, as well as the pretax numbers for comparability purposes. Now, regarding specific financial results and key metrics for the fourth quarter. Total revenues reached 161.4 million, an increase of 4.3 percent compared with 154.8 million in the same period last year.

Online revenues grew 10.7 percent to 93.1 million compared with 84.1 million in the fourth quarter last year. These online revenues equaled 61.4 percent of combined online and telephonic revenues for the fourth quarter of fiscal 2004, compared with 57.5 percent in the same period last year.

Telephonic revenues declined 6.1 percent to 58.4 million compared with 62.3 million in the prior year period. This reflects the continuing migration of customers to our online channel, as well as the impact of the aforementioned lower sales in the Home and Garden gift category.

Retail fulfillment revenues grew 18.1 percent to 10 million compared with 8.5 million in the year ago period. This primarily reflects enhancements we have made to our Blue.net [sp] network of fulfilling florists and to our Blue.link extranet communications system.

During the quarter, our combined online and telephonic orders totaled 2,470,000, an increase of 5.6 percent compared with 2,340,000 in the year ago period. Online orders increased to 1,625,000, representing 65.8 percent of combined online and telephonic orders, compared with 1,455,000 or 62.2 percent in the same period last year.

Average order size during the quarter was $61.36, down 1.9 percent compared with $62.57 recorded in the fourth quarter last year due to product mix.

During the quarter, we added 780,000 new customers, with 505,000 or 65 percent coming to us online. 51.4 percent of combined online and telephone revenues came from floral gifts, up 230 basis points from the fourth quarter last year.

Gross profit margin was 39.3 percent during the quarter, compared to 40.9 percent in the same period last year. This was primarily caused by the impact of the lower sales in the home and garden category, which carries a higher gross profit margin compared with our floral gifts.

Total operating expenses for the quarter declined 270 basis points to 53.1 million, or 32.9 percent of revenues, compared with 55.1 million or 35.6 percent of revenues in the fourth quarter last year.

Net income for the fiscal fourth quarter was 30.4 million or 45 cents per diluted share, including the aforementioned $19.5 million net tax benefit. For purposes of comparison, pretax income for the fiscal fourth quarter was 10.9 million or 16 cents per diluted share representing an increase of 31.9 percent, compared with 8.3 million or 12 cents per diluted share in the prior year period.

Regarding metrics for the full fiscal year, total revenues increased 6.8 percent to 604 million, compared with 565.6 million in fiscal 2003. The total revenue increase was driven by a 15.9 percent increase in online revenues to 307.5 million, representing 53.9 percent of combined online and telephonic revenues, compared with 265.3 million or 49.5 percent last year. Telephonic revenues declined 3 percent to 263 million, compared with 271.1 million in fiscal 2003.

Gross profit margin for fiscal 2004 was 41.9 million, compared with 42.6 percent -- 41.9 percent compared with 42.6 percent in fiscal 2003, again, primarily due to product mix.

Net income for the year was 40.9 million or 60 cents per diluted share, including the net tax benefit we recorded. Comparative pretax income was 21.7 million or 32 cents per diluted share, representing an increase of 77.6 percent compared with 12.2 million or 18 cents per diluted share in fiscal 2003.

For the year, free cash flow was 31 million. We define free cash flow as net income plus noncash items, such as depreciation and amortization, plus or minus changes in working capital minus capital expenditures.

Regarding our balance sheet, our cash and investment position as of June 27, 2004, was 111.6 million, in line with management’s expectations. Our year-end inventory of 19.6 million was also in line with management’s expectation and about $700,000 below prior year.

As a result of the reversal of the Company’s deferred tax valuation allowance, we now have on our balance sheet deferred tax income taxes.

Regarding guidance, for full year fiscal 2005, we plan to focus our marketing and merchandising investments and efforts on achieving continued double-digit growth in our floral gift business, as well as those complementary gift categories that we have identified as having the highest potential for the future -- highest growth potential for the future.

Furthermore, we expect the changes we’re implementing in marketing and merchandising for our home and garden gift category will result in a returned sustainable revenue growth for that business.

Based on these expectations, we anticipate achieving organic revenue growth in the range of 8 to 10 percent during fiscal 2005 versus fiscal 2004.

In terms of channels, we expect online sales to grow at a solid double-digit rate during fiscal 2005, while telephonic sales are expected to remain relatively flat.

During fiscal 2005, we also expect to achieve further reductions in our operating expense ratio by leveraging prior investments in our brand, technology platforms, unique fulfillment systems and growing customer database. Combined with anticipated revenue growth and our expectations for gross profit margin to remain stable at approximately 42 percent, we anticipate growing pretax income by approximately 40 percent in fiscal 2005.

As a result of the reversal of deferred tax valuation allowance, during fiscal 2005, the Company anticipates having an effective tax rate of approximately 41 percent. As I noted earlier, this will be primarily noncash and will have no impact on our forecasted free cash flow.

Regarding capital spending plans, as mentioned earlier, our technology and customer service platforms are robust and highly scalable and we do not require significant capital deployed in bricks-and-mortar facilities. As such, we expect capital expenditures to remain in the range of 10 to 12 million during fiscal 2005.

Based on the anticipated net income growth, combined with our business model’s low working capital and capital expenditure requirements during fiscal 2005, we expect to grow free cash flow by more than 30 percent.

Quarterly guidance, we anticipate that our largest quarters in terms of revenue and profitability will again be our fiscal second quarter, the calendar year end period which includes the holiday shopping season and our fiscal fourth quarter which includes the traditional spring holiday period.

Based on this seasonality, we anticipate fiscal 2005 quarterly revenues will be in the following ranges: Q1, 14 to 16 percent of total revenues; Q2, 34 to 37 percent of total revenues; Q3, 20 to 23 percent of total revenues; Q4, 26 to 29 percent of total revenues.

The fiscal first quarter which ends this year on September 26, 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. We expect to reduce that loss again this year to 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 2005 and beyond, based on a business model that features solid, organic revenue growth, strong gross profit margins, a declining operating expense ratio and low capital deployment requirements.

I will now turn the call back to Jim.

Fiscal 2004 was a solid year for 1-800-Flowers.com, albeit a year with some challenges. We achieved double-digit growth in our floral gifts, as well as our complementary gift categories, including gourmet food gifts, gift baskets, candy and children’s gifts. However, slower demand in our Home and Garden gift category impacted total revenue growth and gross profit margin.

As I mentioned earlier, we had completed a thorough review of this business unit and have implemented changes that we believe will return it to sustainable growth this year. During fiscal 2004, we were able to achieve -- further demonstrate the leverage inherent in our business model. We achieved significant reductions in our operating expense ratio, while cost effectively attracting millions of new customers and keeping the relationships we have with our existing customers.

As a result, we were able to grow profitably and generate free cash flow at rates even faster than top line. In addition during the year, we made significant progress in several of our key business initiatives. We enhanced our performance operations; we completed the rollout of our local fulfillment center concept through our Blue.net network of professional florists. We now have these mini distribution centers covering all the top 50 markets in the country. Other than any that we built, all of the Yellow Seeds [phonetic] are owned and operated by our Blue.net florists. We believe the Yellow Seeds and our enhanced Blue.net network give us a significant competitive advantage in that they enable us to increase our same day and next day delivery capabilities of both floral and nonfloral gifts, and make us far less reliant on third party carriers.

In the merchandising area, we further broadened our nonfloral gift offerings with our UCD initiative. These are unique, creative and differentiated products, including an expanded range of gourmet, spa and sports related gift baskets that have quickly become some of our best sellers in the category.

We expanded our relationships with our premium gift partners, Lenox, Waterford, Godiva, as well as adding such new partners as Yankee Candle and Swarovski [sp], among others.

We saw continued strong customer acceptance of our own MamaMore’s [sp] brand of baked shop gifts, which is fast becoming one of our best selling gourmet food gift lines.

We also successfully launched our first designer gift collections, including the unique creations of floral artisan, Jane Carroll [sp], and most recently, gifts and gift sets designed to make every day a celebration from our expert on entertaining, Denata Marciapinto [sp]. Customers’ responses to these new offerings have been very positive and we expect to expand this program even further.

We also continued to enhance our corporate gifting effort, which we now call our business gift services division, where we have expanded our sales team and added more than 1000 new corporate accounts. We believe that this area offers excellent growth potential.

Looking ahead, we believe we are well positioned to enhance our topline growth in delivering increasingly strong profitability. We have a very solid balance sheet with more than $100 million in cash and investments and we are generating increasing amounts of free cash flow. This positions us well to pursue our strategy of growing our business through a combination of organic and acquisitions growth.

It will also allow us to add to our shareholder value through stock repurchases under the $10 million authorization that we have from our Board of Directors. On the acquisition front, we continue to look for companies that can help us expand and deepen our relationship with our customers, as their resource [inaudible] all of their celebratory and connected occasions.

We believe we have demonstrated in the past our ability to efficiently integrate acquisitions and leverage our asset base, including our technology, customer service platforms, our large and growing customer database and our unique fulfillment capabilities to achieve both accelerated revenue growth and synergistic cost savings.

In conclusion, we remain committed in all of our efforts, from strategic planning to execution to growing our business profitably and thereby building shareholder value.

And that concludes our formal remarks and we’ll now turn the call over to you for your questions. Moderator, could you please restate the instructions for the Q and A portion?

[Call instructions]. We'll take our first question from Arvind Bhatia from Southwest Securities.

First question is on the topline growth for next year, 8 to 10 percent, which is an acceleration from this year. Can you talk about the assumptions that go into the topline growth? Are you assuming maybe a slightly better environment or is a lot of this coming from Plow and Hearth doing better than it did in ’04? And if that’s the case, what kind of reversal are you assuming in P&H next year? That’s my first question.

I think in a general sense, Arvind, what we’re seeing is a projection based off of an environment not substantially different than we’re in today, so we’re not counting on any macro changes to impact it. We’re looking at a continuation, even if it’s not at the same robust level that we’re experiencing in those categories that have experienced that double-digit growth. So we’re covering our estimations there. So just a continuance of the trend lines we’ve seen elsewhere and in our Home and Garden gift categories, what we’re projecting there is that the rest results that we’ve seen from the marketing, merchandising and look at field changes that we’ve made this spring and summer that we’ve already tested in very small test cells, we’re expecting that those test results will carry forward, not at the same level, but at a reduced level. And if those trend levels just project out at about a 60 to 70 percent rate of what we already see, then we’ll comfortably meet those sales targets for the year.

And does that trend suggest at least flat versus a 4 for P&H?

Well, a slight improvement year-over-year.

Yeah.

Slight improvement, got it. The second question is, on the LSC program, could you provide a quick update of how many LSCs that are out there and you know, is there growth that we should expect in that program?

Yes, Arvind, this is Chris. Covering up more than 60 LSCs in the market and again, our objective was to cover the top 50 markets to give us the distribution capabilities that we wanted. So we’re not looking to grow those anymore. We’ve achieved what we wanted to. Now we’re looking to optimize them further. So we’ve achieved the capacity increases; we’re achieving the quality increases that we were looking for and then, you know, we’ll start to continue to implement the same day, [inaudible] of gifting component of that strategy as well.

So is there a way to think in terms of what sort of geographic reach those 60 LSCs provide? Obviously, you're satisfied with the 60 LSCs, so is it fair to say, you know, that it meets, you know, a fair amount -- and it provides a fair amount of geographic coverage?

All the geographic coverage we could reach through the 50 market target that we had has been reached not. On a deliverable address basis, it’s in excess of 75 percent of the addresses that we go to.

And then one follow-up on the gross margin question. I believe you're modeling that to improve next year again. Could you go into the drivers of the improvement in gross margins next year?

Arvind, it’s Bill. Arvind, what we said in the release and what we’re indicating is basically stable gross margins, you know, that are this year. We’re going to see improvements in margins in product categories, but we’re still going to have floral and some other categories outpacing the growth of the home and garden category, which is a high margin category for us. So product mix works against us here, but improvements in operating areas will make up for that.

More than make up for that.

Yes, which will result in, you know, a stable gross margin.

And last question for you, Jim. Are there any new categories, products, anything along those lines that have been surprises to you, you know, in the last quarter or so?

I think two that I would put a light on for you, Arvind. One is the food gift category. We continue to be delighted on the gift baskets that are food oriented. Our candy products and our other gift food products, like our MamaMore’s bakeshop are providing a great stimulus for us. Of course, part of that is our popcorn product offering, our popcorn factory product, which includes the novelty candy products. So those categories surprised us with how much potential they have.

The other one I put a light on would be the plush gift category. We’ve introduced about two quarters ago, quietly, just on our site, a personalized bear product that’s really attractive that people are really lighting to. We’re introducing seasonal variations in that, holiday specific variations, so that if you wanted to send a nephew a stuffed animal and personalize it for him for his fourth birthday, you could do that. And we ship it overnight and it’s really a good value. It’s a 34.99 product, personalized, shipped the next day. It’s a really clever product. That one is gaining a lot more traction than I would have expected with no marketing push behind it and clearly now, you’ll start to see us put the marketing push there as well.

We'll take our next question from Eric Vetter with JPNR.

A few questions, first of all, what is driving the retail? Could you please spend a little more on that? I mean, that is the --

We can barely hear you, Eric.

Eric, you know, what’s driving the retail portion of the business? Bill, you want to talk a little bit about retail?

Yes. Well, our store count is actually, you know, down slightly. You know, year-over-year our store comps are up, but what’s really driving that is the enhancements, you know, we have made within the Blue.net network that we have and the additional services that we’re providing to Blue.net and that’s what’s driving the growth, Eric.

And the store count is down as a result of selling company owned stores to franchisees.

Right. How many stores do you now have?

Twenty-three.

Twenty-two.

I didn’t check the (inaudible) this morning. It’s 22.

Your Q1 -- hello?

Yes, Eric.

In terms of Plow and Hearth, how much importance is that to Q1? You talked about Q2 where the turn’s going to be. How important is Plow and Hearth to Q1?

It’s only important to -- it’s not important from a macro gross sales point of view, but it is important from a trends analysis point of view. So while we’ve done test-marketing tests, look and feel tests, with about 3 percent of our books that we’ve put in the mail to our customers, that’s what’s important to us, looking at those trend lines from those changes and the impact from that. But from a gross sales point of view, it’s not critical.

Yes. I mean, our big season is obviously in the November-December timeframe is the biggest season and then --

April, May.

-- the April, May, June, is the second season, the outdoor season.

And then finally, have you done any managerial structural changes in how you guys, whether it’s centralizing or decentralizing Plow and Hearth to kind of help them along to get them to where they need to be?

Chris?

Yes. I’ll take that, Eric. Yes, we have made some changes there especially on the operating side, continuing, you know, alternative leveraging on operating infrastructure. So IT has been centralized, which also enabled us to gain some efficiencies there. Call center operations centralized enabled us to gain some efficiencies there. Looking at leverage of some interactive marketing capabilities and centralizing that, looking to increase the online marketing of that brand, you know, which carries a lower marketing cost than traditional catalogue marketing, as well as other area of the company looking to gain efficiencies through centralization in merchandising, marketing, components of those; full integration in IT call center.

We’ll go next to Anthony Noto with Goldman Sachs.

A couple of questions. How do you think the seasonality of your business is going to change because when I look at the online forecast for double-digit growth for fiscal year 2005 and just play out the sequential changes in revenue that you’ve had in 2004 against where you just ended the year, I actually can't get to double-digit growth? So I was wondering what quarters throughout 2005 will increase more on a sequential basis that it had in this most recent year? And then I have a follow-up.

The two big sales quarters for us would be those that we are targeting our marketing efforts, in other words, keeping our powder dry in quarters like 1 and 3 and overspending or disproportionately spending in quarters 2 and 4 because that’s where we’ve seen the yield of those marketing dollars have the best effect. So those would be the two quarters that we see as having the best impact.

But Jim, do you think those two quarters will grow faster sequentially than they did this year, so last year in December, you grew 86 percent sequentially from September. Do you think that will grow faster than 86 percent sequentially?

Bill?

Yes. We don’t look at it that way because, you know, Q1 is our lowest quarter and Q2 is our highest quarter, but I guess, thinking that through, I would say yes.

And then Jim, the other question is more strategic. I know that you’ve struck to the brand of 1-800-Flowers and your strategy of diversifying beyond floral. You have the merchandise; you have obviously the technology implementation, and there’s been some consumer purchases in those other categories. Do you think it would benefit you from a growth standpoint relative to industry by potentially building either Greenfield or through acquisition a more broadly -- bigger brand outside of the floral category?

I think the answer to that question is more one of timing, Anthony. I think 1-800-Flowers in the near term will remain our lead brand and that’s primarily because of the nature of the relationship we’re looking to build with our customers, and you can see the emphasis on the type of growth product categories is appropriate under that brand. So it’s cost effective to our prior customers; it’s a broad enough brand for the categories that we’ve had success with and we’ve identified as our key growth areas that that’s appropriate.

In addition, we will always look for the opportunity to do things, Anthony. One is to (inaudible) other sub, smaller product category brands like Popcorn Factory, like Mama More’s Bakeshop, so we’ll grow other branding -- other categories that we hope become brands. In addition, we’re preparing ourselves for the future with our customer engagement schemes and all of our marketing efforts to birth other bigger, broader brand capabilities for the future, not ones that we’ll invest a great deal of capital in, but ones that we’ll use our internal capital, if you will, to birth new product areas that we have even bigger -- that we hope will be even bigger potential areas in the future, like our Celebrations.com efforts.

So Celebrations.com, we’ve been investing in for a year or two now and we’ve seen nice pickup in terms of customer engagement, relationship development and moving our customers from just those gift celebratory events to all of the celebratory events from a gift and services point of view.

One of the by-products that we produce in our relationship with our customers under the 1-800-Flowers brand is a great deal of local knowledge of their behaviors, their expenditures, and with their permission, using the exhaust (phonetic) byproduct of that effort, we can do some interesting things in terms of serving up a new range of services under Celebrations.com. And it’s management’s job to look at those things and finding cost effective ways to begin those efforts, so that a year or two from now, we’re all pleasantly surprised by new revenue opportunities, new customer engagement opportunities and new net profit opportunities from the birthing of those additional branded relationships.

Our next question comes from Peter Benedict with CIBC World Markets.

A quick question on Plow and Hearth. Can you talk a little bit about the structural overlap that the assets you have at Plow and Hearth and how they overlap with the rest of your businesses, whether from a distibution standpoint or otherwise?

Well, I think everyone will want to take a piece of that. This is Jim and I’ll start. What we have is from a service platform point of view, is that we have a completely integrated service platform. That is, four fixed placed service centers and our fifth virtual service center are all now engineered and designed to handle all of the service requirements for all of the brands we have today and those we anticipate in the future.

From a technology point of view, Chris just mentioned that we’ve already integrated the back end technology service organization and all the new development efforts are now centralized. And third, from a warehousing point of view, its warehouse has long ago been knit into our warehouse system that we have three big warehouses and now our in-market fulfillment centers that are all completely integrated. So those three big pieces have been integrated. And Chris, if you’d speak a little bit more to the marketing, the online leveraging of our marketing capabilities, viewing our corporate services across the brand.

And just first picking up on the warehouse management capabilities that the division has brought to the rest of the organization, which was again, one of the reasons for us going into that business in the first place many years ago. So those operating capabilities, best practices, et cetera, managing our warehouse, fulfillment network, as well as merchandising into our international sourcing capabilities, leveraging that expertise, et cetera, into our other divisions, as well as leveraging the catalogue marketing capabilities into our other divisions, whether it be into Hearth, Popcorn or whether it be into 1-800-Flowers; again, utilization of best practices across brand.

Moving further and then integrating now going the other way, taking best practices and e-commerce from 1-800-Flowers and applying that to Plow and Hearth and we hope to see --

And Popcorn.

-- and Popcorn, as well, but specifically the Plow and Hearth right now and certainly looking for some improvement in that category this year, again, as well as other. We’ll certainly be looking to gain synergies (inaudible) production across all of the brands and things like that.

And then of course merchandising efforts in each brand are twofold, one for the brand specific and second, across other categories. So there’s a great deal of the Popcorn Factory product, the novelty candy product that are sold in the other brands. There are food products that are sold across all brands in the different labels. So there’s a merchandising effort, which is bifurcated, brand specific and then across the platform.

That’s great. Thanks, guys. One more follow-up, if I could. On the online channel, can you talk to two things, number one, the floral competition, what that market looks like right now, as well as the cost of online marketing?

Pete, it’s Chris. I’ll handle that again. All the categories we’re in, I think, are very competitive, especially the floral category and especially online. We continue to see people spend aggressively to buy business online in the floral category and then as we get into certain areas like search, where you see small players pop up, especially around the holidays and maybe spend extremely aggressively, and not necessarily, we believe, understanding all the cost ramifications.

That said, we are very happy that we demonstrated very good results and accelerated the growth of floral category last year. So while there’s an aggressive marketplace, while there’s an expensive on online, the benefit of our brand is showing up in the results.

And Peter, you know, we’ve stated this number in the past, but we continue to see in excess of 70 percent of our online business come directly to our URLs. So that we think is certainly an impressive metric, so that we’re not reliant on the (inaudible), although, you know, that other high 20, 30 percent of our business is obviously a very significant piece of our business.

And a general answer to Peter’s question, I think we’re seeing specifically the portal environment becoming more expensive and less effective.

Our next question comes from Anthony Lebiedzinski with Sidoti and Company.

Just a few questions here. Looking at your operating expenses in this quarter, I mean, they were actually all down -- all, you know, marketing, technology, G&A. They were all down in dollar terms relative to last year. Is this something going forward that we should expect or how should we model the expense side of the equation?

Anthony, as a percent of revenue, we’ll continue to drive down, you know, our operating expenses. I think that, you know, what you saw in the fourth quarter for the year, our operating expenses are still up, but certainly at a much lower percent than our overall, you know, revenue growth. As we go into the future, we will continue to see increases in our operating expenses, but we’ll continue to drive down that operating expense ratio.

Okay. Was there anything unusual that happened in this quarter relative to last year why the operating expenses in dollar terms were lower?

No. I think, you know, the topic we’ve been talking about with, you know, the home and garden category, some of the search, planning in the home and garden category as we -- you know, as we saw some of the trends in that area, we were able to pull back on some of the marketing dollars there, so that we weren't going to spend behind a, you know, downward trend.

And I think you saw the evidence of that too, just being able to see forward in that business which is one of the reasons why we ended the year at less than $20 million in inventory, which was actually -- with $40 million in increased sales, we actually finished with less inventory than we did last year. So seeing that trend, we knew not to spend behind it. Clearly, we saw an acceleration of our growth in our flower and other complimentary business lines, so you put the spending there. The net effect was reduction in the expense lines you mentioned.

Um-hum. I also just wanted to review the repeat business. You mentioned here in the press release that repeat customers were 45.3 percent. If I recall, I think earlier in the fiscal year, it was somewhere in the 50s. Maybe could you possibly review quarter-by-quarter a breakdown of repeat business?

Sure. I’ll ask Joe to review that for you, Anthony. The quarterly number is always going to be higher than the annual number. The annual number impacts everybody. Joe, could you give a little color on that?

Anthony, as we explained in the past, if you come to us in the first quarter for the first time, you're counted and we report you as a new customer. If you come to us again in the second or third quarter, you're counted as an existing customer. So the new customers in a given quarter are always going to be higher. When we queue the number up at the end of the year, we only count you once and we count you as a new customer. So on a quarterly basis, we have been consistently in ’04, over 55 percent existing customers and --

And this quarter as well.

And this past quarter, 58 percent as a matter of fact.

45 for the year is up from --

42.

-- 42 last year.

Right. (Inaudible) both the quarterly and the annual trends and those numbers continue to show their correct trend direction in both quarterly and annual numbers.

That’s an important point that Jim just made. You’ve got to look directionally, quarter-to-quarter, year-over-year, you know, what was the improvement, you know, where does that move?

Um-hum, okay. Regarding the NOLs that you have for the outstanding -- what is the amount of those?

The amount of NOLs that we actually have is about, you know, pretax, before tax basis, is close to like $70 million. That’s the $29 million of deferred tax assets, tax affected, that’s sitting on our balance sheet. So before we -- you know, we’ll utilize that before we start paying taxes.

Um-hum. And with respect to your stock purchase program, when are you actually allowed to start buying stocks?

We’ll be in the market from time to time. We would be allowed to start today obviously, but when our window is open, we’ll be in from time to time, as we’ve said, and based on market conditions.

And when does your window open?

It opens up the middle of next week.

Our next question comes from Arnold Versano (sp) with CJS Securities.

First, a question for Bill. I just want to clarify something. I think I heard you say -- if I heard you right, you indicated you think you can grow your free cash flow next year by 30 percent. Is that correct?

That is correct.

So your free cash flow next year should be in excess of 40 million?

That is correct.

Okay. Second question I have, can you give us your marketing and advertising spend for ’04 and what you expect it to be in ’05?

The overall marketing and advertising spend is, you know, for this year is probably ballpark in the neighborhood of $100 million and we expect to increase that as we go, you know, into next year. We’ve seen positive trends in a lot of these, you know, product categories that we mentioned and we’re looking to, you know, spend behind that. So while overall operating expenses as a percent of revenues is going to come down, we think a greater shift would be in the marketing area.

A couple of other questions if I can. On your LSCs, it looks like you’ve obviously built this up quite successfully. Can you give us a sense of the percent of sales you sell through your LSCs and where you think that can go?

Well, I think there’s a couple of ways we can answer that, Arnold. There’s the -- in the absolute, as I mentioned earlier, probably about 75 percent of the addresses we go to could theoretically be fulfilled by our LSCs. That’s not our intention, however, because LSCs are a subcomponent of our Blue.net network and it’s our best interest to keep that very tight, very controlled size network, well filled and well populated. So obviously, we can deliver a substantially lesser number, a lesser percentage than that 75 through the network, probably less than 15 percent now would be my guess. Bill’s confirming that for me with a head shake, so -- and we could hear it at this end, but you might not be able to hear it.

So we would expect that that would continue to increase as a percentage it also would have other variables. One of the things that we like about the LSC network is that it gives us enhanced fulfillment capabilities, so it gives us more throughput at critical holiday periods where otherwise, your network might fill up. These people have higher capacities. We work very closely with them on planning, on SKU counts, by day, by date, by zip code, so the planning and the forecasting and their ability to ramp up because of the nature of their facilities gives us enhanced fulfillment capabilities.

In addition, we’re putting in those nonfloral gift items, the plush, the Lenox, the Waterford products, in those facilities, increasing, again, automatically, the percentage of gift items that they would fulfill for us from the Blue.net network that doesn’t carry that full range of the other products.

We have a slightly improved margin benefit on products we put through those facilities, although frankly, it’s not a great motivator for us. It’s just one of the components in our consideration. The quality of our delivery capability through the LSC network has demonstrably been demonstrated through the metrics that we use to track all of our quality and service performance metrics.

And then the marketing and branding benefit that comes from those facilities, all push towards -- so you’ll see a continual increase in the number -- the percentage of orders that we put through that. So the 75 is the maximum capable right now; the 15 which is the real, so you’ll see it grow several percentage points through that network, absorbing a good part of the growth in our order volume.

Okay. Another question, if I can, on Plow and Hearth which obviously, is a key part of the, quote, “turnaround,” if you will. You spoke before about a lot of operational improvements you intend to make on Plow and Hearth, but it seems unclear to me what steps you're taking to accelerate the demand. Could you comment on that?

Why don’t we all take a chunk of that? I just -- Chris will talk on some of the creative things and Bill on some of the drivers, but when we say that we anticipate -- many of the changes we said we are making, many of the changes we’ve already made.

Yes.

And when you look at the key selling period for us in the home and garden category, particularly with the Plow and Hearth brand, that would be the fourth quarter, the fourth calendar quarter, our second fiscal quarter this year. So obviously, those changes we’ve already made because you know, we’ve already done the photograph; we’ve already done the merchandising, the inventory selection and, you know, we’re about to go to market in those things. (Inaudible) the call center, the IT operational changes have already been implemented.

On the -- specifically though to address the demand factors, really, we dug in and did the diagnostics on the trends that we saw following last holiday, Christmas holiday season. So it was really through January and into February when we really dug in and did the diagnostics because we saw the trend continuing. So at that point, we were able to implement some of the changes into the test cells that Jim referenced earlier for the summer season, which we’re seeing positive results on and anticipate those trends continuing into rollout, as we hit the fall and holiday season, specifically --

But (inaudible) there though is I think is that we’re not projecting --

At the same level, right.

-- at the same level because we’ve seen very positive trend rates in those test cells. It would be imprudent for us to project that very positive trend rate holding at that high percentage through a rollout. So it’s a modified version of that trend.

And when we jumped in and really looked at what was taking place, to summarize it, I would say we think we maybe let the business get a little bit stale and stale in its product merchandising mix, its creative look and feel. So those were really the things we were able to start to implement tests of. So from the creative point of view, how we do catalog layout, how we position the brand, those changes -- again, some of those we were able to make for the holidays -- for the summer season and we’re implementing a rollout of those into the fall and holiday seasons.

On the merchandise mix, it’s somewhat of a longer-term strategy except one of the key factors that we found we were able to implement short term, which is a higher percentage of new products. You know, we were carrying over the perennial favorites, but maybe a little bit too long and not having enough percentage of new products introduced in each book. And we’ll see significant increases in that as we hit the fall holidays.

In other words, not allowing the accountants to drive the merchandising.

I’ll leave that for you to say, Jim.

(Inaudible).

And then, as well as driving, looking at circulation changes, so making sure that we’re driving the circulation and maybe doing a little bit less on the prospecting. Prospecting is still the key component of any catalog business, but pulling back on it a little bit and relying on our customer base to drive the enhanced demand from these changes.

Which is less risky.

Yes. As we see the benefits of that then in the prospecting because of the ability to then, you know, step on the gas pedal maybe into the second half of the year on the prospecting, if we see those benefits turn out in those test cells as well.

My last question if I can. I know you give a lot of thought to almost any action you take, period. You obviously have begun a share repurchase or are a little more aggressive on the share repurchase --

Well, we haven’t done any (inaudible).

Got it. We’ve done an analysis that would indicate that if you were to consider a Dutch tender at a reasonable price, it would be at least 20 percent accretive to results. Given your balance sheet, free cash flow characteristics and business model characteristics, have you considered a Dutch tender? And give us your rationale if you have not.

Well, I think what we would say there is your research that we’ve been privy to over the last several weeks, and given a great deal of thought to internally, clearly we were sharing that with our Board because I think it’s quite thought provoking.

And we’ll go next to Heath Terry with Credit Suisse First Boston.

I’m just wondering if you can talk a little bit more in detail about the trends that you're seeing in your cost of customer acquisition? You know, we’ve been hearing a lot from other companies about the particular companies that consume a lot of online adverting, about the cost of that advertising, whether it’s through sponsored search or through the more impression based advertising going up. And I wondered if you could tell us whether you're seeing the same thing, whether you're expecting that to continue into the --over the next year and maybe to what degree you're seeing it? And then if you could just talk a little bit about with Plow and Hearth and the other acquisitions what you’ve made, what, if any, kind of changes in your acquisition philosophy, have occurred?

First, just with cost of acquisition, I’ll start with that. We targeted, you know, a $20 threshold to keep up our customer acquisition costs below -- you know, below that. What we achieved, you know, this year was slightly under $18. It was pretty consistent with where we were last year. We were about 18.60 last year and -- I mean 17.60 last year and 17.80, you know, this year. We continue to, you know, play in all of the, you know, kind of the marketing arenas from the online world to the media world to the circulation world, and have to allocate our resources accordingly.

And I think one of the key factors there is the benefit of being a true multichannel retailer, which allows us the ability and the flexibility with our marketing spend to move depending on where we’re seeing the best results. So if online is getting expensive and as I mentioned earlier, it’s a very competitive marketplace for us, while we’re still doing very well online -- growth is 16 percent online. Customer acquisition is still strong and we’re still able to maintain -- to be cost effective. At different times of the year, you’ll see us rely more heavily on offline advertising, such as TV, when the 1-800-Flowers brand specifically has very good customer acquisition capabilities from offline media like that.

From jumping in and looking at some of the acquisitions we’ve done over the years, which has been heavily catalog marketing entities, we continue to use the catalog marketing efforts for acquisition, but then use best practices and leverage other acquisition efforts into those brands. So for example, the Popcorn Factory does very well in customer acquisition through alternative media forms, not reliant on prospecting of catalogs. As I mentioned earlier, with all of the brands, we’re looking to increase their efforts on customer acquisition online, which is certainly -- while moving to be more expensive for some of your online only or traditional e-commerce companies, for a catalog company moving online, those customer acquisition costs are very attractive.

And Heath, we mentioned before -- this is Joe -- broadcast advertising, we shift the dollars around to where we get the best bang for the buck, and last year, we saw in our plans for his year around the holiday period, as Chris mentioned, 1-800-Flowers on TV, it’s one of the few direct marketing models, if you will, that can very effectively use television and we think part of that is because there’s an increase in broadband in people’s homes, so people can respond easier. It’s a lot easier to shop on broadband from home than dial-up. So we’ll continue to look at the kind of response we get from television advertising next -- during this fiscal year.

And one other question about acquisitions that you asked, Peter (sic), and I think what we would say is that during the -- I’m sorry, what did I say, Peter -- during the past six months or so, we’ve increased the amount of effort we’ve put toward looking at the acquisition environment. We’re looking both at those service enhancement kinds of acquisitions that would help us deepen our relationship with our customers, as well as specific products that area showing good promise and good opportunity for use, to mix into that an already defined mix of products. So I would say that we’ve become more -- we’ve put more effort toward it and I would tell you that we’re fairly optimistic that that new effort will yield results that are attractive to us to consider companies that can help us in our mix.

(Call instructions). And we’ll go next to Kristine Koerber with W.R. Hambrecht.

A couple of questions. First of all, can you talk about -- just be a little bit more specific on Plow and Hearst catalog circ that you have planned for ’05? It sounds like catalog circulation is down. How many catalogs are you going to plan to mail versus ’04?

I think the strategy with the Plow and Hearth circ is that we are actually going to, you know, reduce catalog circ within that -- within the category, but we’re expanding the page counts within the catalog. That’s one of the marketing strategies that we’re employing so --

(Inaudible) test results for spring and summer.

So that productivity per book, you know, will be up. You know, it’s still a substantial -- you know, catalog circ is a substantial marketing vehicle for, you know, for that brand and it will be in excess of 50 million catalogs in that brand.

And how many did you mail in ’04?

I think overall for the company, the number would be flat from last year across all the different brands. The different ways you use catalogues, it would probably be net flat for all the brands.

Okay. And you talked about, you know, kind of position, repositioning the brand. Can you just elaborate on that and kind of how you view Plow and Hearth in the marketplace and who the competition is?

Well, there’s just a wealth of competition in the category. Anything related to just for the home and just for the garden is a very, very competitive category, both in the catalog sector and in the store-based arena and I think you're seeing that from some of the store-based people having a difficult time to -- when we say repositioning the brand, I wouldn’t want to make it as dramatic a sound as that. Chris indicated before that when we did our test results, when we did our focus groups, when we did our empirical research and analysis all through December, January, February, well into March, while we saw that it was a great brand -- customers loved it, appreciated it, enjoyed it, but it had grown stale.

While they liked the relationship, they were looking for more and different products, whether it’s color, its feel. The mix of products, the timeliness of the catalogs, how they wanted to interact with the online world, which gives you an opportunity in the perfect environment to get a better yield from customers with fewer catalogs and more e-incentives. So that’s why you can grow your business if you do it effectively without really increasing your catalog count in a catalog environment and that’s what we strive for. So you’re seeing a dust-up, repolishing, reenergizing, remerchandising of the product line, the brand and its relationship with its customers.

And can you talk about markdowns associated with Plow and Hearth and what inventory levels look like?

Well, as you can see at the end of the year, our inventory -- the majority of our inventory that we do carry is related to our home and gift product line. You saw it actually down this year, so the fact that we saw a trend line, were able to act on it quickly, prevented us from being in a markdown situation, and in fact, ended the year with several hundred thousand dollars less inventory than we did last year. So the good news, it wasn’t an issue for us.

Okay, good. And then you talked about the food and gift category doing quite well for you. What percentage is food and gift of your net sales?

Right now, it would be less than 5 percent.

No, no, (inaudible).

No, I’m sorry. (Inaudible).

Yes, it’s probably about 10, 12 percent.

And then corporate sales continues to grow. You’ve added more accounts. How big is corporate gifts now?

Business gifts services still accounts for less than 5 percent, but it is an area we think that is going through some good growth now, and that is an area that is different than Jim’s comment earlier on the overall, and it is an area where we do think it can benefit from a change in the climate.

But there are two aspects of sales, Kristine, that I’d point out. Chris talked about the actual sales to businesses, you know, we recorded the actual corporate sales. In addition, there is a much larger benefit that is recorded in our regular consumer business for the growth in our corporate sales area. That is, we book the corporate sale -- that is, a huge company like W.R. Hambrecht might have a corporate account with us. In addition, talented folks who work there, like Kristine Koerber, might be able to go to that internet site and make purchases from us. That business, the employee-related business, those corporate relationships we have, is actually several times larger than the corporate business itself. So while our corporate business is good and growing, we made it this whole effort this year. We’re seeing these great results. The benefit is twofold. One, the actual corporate sales that are recorded and second, the employee relationships that are recorded through our regular retail business.

And it appears there are no further questions at this time. I’d like to turn the conference back over to you, Mr. McCann, for any additional closing remarks, sir.

Thank you, and folks, we appreciate your time and your questions today, your interest. In closing, I’d like to offer a reminder that as you celebrate the summer season, 1-800-Flowers.com has everything you need to connect with all of the people that are important to you in your life, from beautiful long stemmed roses shipped fresh from our growers to professional designed bouquets delivered the very same day you order them by a Blue.net florist. And don’t forget our delicious bakery gifts from MamaMore’s Bakeshop collection or the unique of Jean Carroll and Denata Margiopinto, all of which you can find at 1-800-Flowers.com. So call, click or visit one of our stores today. Have a great rest of the summer.

Thank you. Once again, everyone, that does conclude today’s teleconference. We do appreciate your participation and you may disconnect at this time.

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