1-800-Flowers.Com Inc (FLWS) 2005 Q2 法說會逐字稿

Please stand by. We?re about to begin. Good day, everyone, and welcome to this 1-800-FLOWERS.COM Fiscal 2005 Second Quarter Results Conference Call. Today?s call is being recorded, and at this time for opening remarks and introductions, I?d like to turn the conference over to the VP of Investor Relations, Mr. Joe Pititto. Please go ahead, sir.

Thank you, Millicent. Good morning and thank you all for joining us today to discuss 1-800-FLOWERS.COM?s financial results for our fiscal 2005 second quarter. My name is Joseph Pititto, and I?m VP Investor Relations.

Those of you who have not yet received a copy of four 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 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 three formal remarks, and then we will open the call to your questions. Presenting today will be Jim McCann, CEO and Bill Shea, CFO. Also joining us today for the q-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 recordings of today?s call with 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 Jim McCann.

Thanks, Joe, and good morning, everyone. As we stated in this morning's press release, we finished the recent holiday quarter -- our fiscal second -- with a strong December. As a result, for the quarter, we achieved revenue growth of 80 percent. Importantly, this growth was driven by a more than 18 percent increase in our online revenues. Before I pass the call over to Bill, who will take you through the metrics of the quarter, I?d like to cover a few key points.

First, during the quarter we succeeded in reversing the negative sales trend that we had experienced in our Home-and-Garden category. For the quarter, the category revenues grew 2 percent, driven by a strong 11 percent growth in December. This is an initial validation of the changes we?ve made and continue to make to enhance this category's product offering, its creative look-and-feel, and its marketing strategy. We?ve planned to build on these results during the second half of our fiscal year, in preparation for the category?s second-largest sales period -- our Spring Fiscal Fourth Quarter.

Second, we achieved double-digit sales growth in several of the gift categories we have identified as offering us the best growth opportunities for the future. These include our expanded food gift offerings, gift baskets and unique children?s gifts. Within the food and gift basket categories, during the quarter we were very pleased to see our customers -- both consumer and corporate -- embrace our introduction of wine gifts. We are very excited about the potential of wine gifts, going forward, and believe our recent acquisition of the wine-tasting network will provide an excellent platform to build a leading position in this growing gift category.

Third -- as we stated in this morning?s press release -- we are very focused on accelerating our revenue growth, and achieving double-digit pace for the second half of this fiscal year, and beyond. In both the first and second quarters this year, we began to increase our investments in those areas of marketing where we see encouraging results. Including Search -- our affiliate network -- direct marketing programs and broadcast advertising.

We plan to continue investing in these areas to become more aggressive in new-customer acquisitions, and to extend our leadership position in the competitive floral market place.

Over the short-term, these investments will impact our earnings growth. However, beginning in the second half of the fiscal year, we believe this strategy will enable us to accelerate revenue growth, and thereby extend our market leadership in the floral industry, and the thoughtful gift marketplace. Longer-term, we believe this strategy will enable us to achieve further leverage of our business model, and drive increased profitability.

I?ll now turn the call over to Bill, so that he can take you through the details of our financial results and the key metrics for this quarter.

Thank you, Jim. During the second quarter, with the slightly-increased investments in marketing that Jim mentioned, we were able to achieve pre-tax earned income of $14.9 million, or $0.22 per diluted share -- compared with $14 million or $0.20 per diluted share in the second quarter last year.

Now, regarding specific financial results and key metrics for the second quarter. Total net revenues reached $230 million -- an increase of 7.9 percent, compared with $213.2 million in the same period last year.

Online revenues grew 18.5 percent to $107.7 million -- compared with $90.9 million in the second quarter last year. These online revenues equal 49.5 percent of combined online and telephonic revenues for the second quarter of fiscal 2005, compared with 44.5 percent in the same period last year.

Telephonic revenues were $109.6 million -- down 3.4 percent -- compared with $113.4 million in the prior-year period. This reflects the continued migration of our customers to the internet across all of our brands. Our retail [inaudible] revenues were $12.8 million, compared with $8.9 million in the second quarter last year. This increase reflects growth in our Bloomnet Operations, as well as revenue from the [Winery] Service Component of our recently-acquired wine business.

During the quarter, our combined online and telephonic orders totaled 3.635 million, compared with 3,420 orders in the year-ago period. Average order size during the quarter of $59.77 remained consistent with the prior year. During the quarter, we added 1.225 million new customers, compared with 1.213 million in the year-ago period. Of these, 660,000 or 53.8 percent, came to us online during the quarter -- compared with 581,000 or 47.9 percent -- last year.

In terms of product mix, the non-floral / floral gift break down was 66.3 percent non-floral, and 33.7 percent floral -- consistent with the split in the prior-year period. As a result of the somewhat higher level of promotional discounts during the holiday period, as well as fuel surcharges from third-party carriers, our gross profit margin for the quarter came in at 44.6 percent -- compared with 44.9 percent in last year?s second quarter.

Operating expenses for the quarter increased 7.6 percent, to $87.9 million, compared with $81.7 million last year. This increase was primarily related to increased marketing spending to drive revenue growth.

Our operating expense ratio for the quarter improved by 10 basis points, to 38.2 percent. This was a result of the revenue growth, supported by the increased marketing spending, which was offset by effective cost-control and leverage associated with our technology and customer service platforms.

Income tax expense for the quarter was $6.2 million -- representing an effective tax rate of 41.4 percent. Our tax rate is comprised of a 35 percent federal tax rate plus approximately 6 percent net state tax rate.

[General] revenue growth and operating leverage. We grew fully-diluted earnings-per-share to $0.13 for the second quarter. In the prior-year period, we reported full-diluted earnings-per-share of $0.20. Importantly, in the prior-year period, we were not required to provide for income taxes, as it was prior to our recognition of our deferred-tax asset related to our [inaudible] which occurred in last year?s fiscal fourth quarter.

On a comparative basis, pre-tax net income for the quarter was $14.9 million, or $0.22 per full-diluted share -- compared with $14 million or $0.20 per full-diluted share in the second quarter of last year.

Free cash flow for the 6 months ended December 26th 2004, was $11.1 million, compared with $21.7 million in the same period last year. The primary reason for this difference is the timing related to certain working capital items, such as accounts receivable and inventory. Because of the timing of the Christmas holiday, one day prior to our quarter end, credit card receivables increased approximately $11 million from our June year-end, and approximately $4.5 million from our December period last year. These receivables were largely cash-realized in the week after Christmas.

Additionally, inventory is up year-over-year, and from our June year-end, due to the seasonality of our business -- some early buy-in of our spring-related merchandise from our Home-and-Garden category -- and to support our expanded Bloomnet initiatives.

One last item on our balance sheet. Our cash and investments position at the end of the quarter was approximately $110 million. This reflects the working capital adjustments I just mentioned, as well as our all-cash acquisition of the wine-tasting network in November, and activity under our stock-repurchase program. Year-to-date, we have purchased approximately 275,000 shares at a cost of approximately $2.2 million.

Regarding our guidance. As stated in our press release this morning, during the second half of fiscal 2005, we plan to increase our investments in three areas that we believe offer significant opportunities for revenue and profit growth. This includes 1 -- marketing programs including Search -- affiliate marketing and broadcast advertising -- to achieve increased customer acquisition. 2 -- infrastructure investments. Primarily, personnel-related, into part of our Bloomnet operations -- to grow revenues and market share in this area of the floral industry. And 3 -- investments in the technology platform, marketing programs and personnel, for our recently-acquired wine business, which is the newest component of our key food, wine and gift-basket category.

As a result of these increased investment, we anticipate accelerating our revenue growth during the second half of the fiscal year, to approximately 10 percent. From an earnings perspective, this accelerated revenue growth will be offset by increased spending. As such, we have targeted fiscal third quarter pre-taxed earnings to be approximately break-even, and fiscal fourth quarter pre-taxed earnings to be relatively flat, compared with the corresponding period last year. These targeted results, combined with the results for the first six months of this year, will result in fiscal 2005 pre-taxed earnings being relatively flat with fiscal 2004.

I will now turn the call back to Jim.

To sum up -- during our fiscal second quarter, we achieved top line growth of approximately 8 percent, driven by strong online revenue growth of more than 18 percent. Regarding some of our key customer metrics -- we cost-effectively acquired more than 1.2 million new customers who were attracted to our strong brands, that enjoy a reputation for quality and reliability. And we initiated a strategy that includes increased marketing investments that we believe will enable us to become more aggressive in customer acquisition, going forward.

Our repeat-order improved 260 basis points during the quarter to 51 percent of our total customer orders. We achieved this by keeping the relationships that we have with our more than 50 million customers through effective marketing and selling programs, as well as our expanded gift offerings.

On the corporate gifting front -- during the holiday period, we expanded our business gift services group, which strongly sells in terms of both new accounts and increased sales of our growing offerings in gourmet foods and gift baskets. As this group continues to grow and deepen its account relationships, leveraging our broad branded gift offerings, from floral gifts to gourmet foods, gift baskets and now even wine, we believe we can and will become a leading player in the corporate gift market. Regarding our newest product extension into wine gifts during this holiday period, we were very pleased to see our customers -- both corporate and consumer -- enthusiastically embrace what was frankly a limited number of test SKUs in the wine gift baskets. Based on this reception, we believe that our recent acquisition in this area of the wine-tasting network and the Ambrosia Wine Club brand will provide an excellent platform to build a leading position in this growing gift category.

Lastly, in regard to the guidance we are providing, it is important to note that over the last several years, we have been very focused on growing our bottom-line results at a rate significantly faster than our revenue growth. This effort is clearly demonstrating the leverage inherent in our business model, and has enabled us to build a very strong balance sheet.

During this last quarter and going forward, we are beginning a strategic effort that we believe will enable us to accelerate revenue growth to a double-digit rate for the second half of this year and beyond. And to expand our business backbone significantly -- which will drive additional future growth opportunities.

To achieve these goals, first, we are stepping up our marketing spending in specific areas, such as Search, affiliate marketing and broadcast advertising -- as we are seeing encouraging results, here. These investment reflect our strategy to become more aggressive in terms of customer acquisition as well as our response to an increasingly competitive marketplace. Particularly our core floral category -- where we believe we can and will extend our market leadership position.

Second, we are making infrastructure investments, primarily personnel-related, in support of our Bloomnet operations, where we believe we can grow substantial high-margin revenues, and build market share in this area of the floral industry where heretofore, we have not been aggressive at all.

Third, we are investing in the technology platform, marketing programs and personnel for our recently-acquired wine business. The newest component of our cheese, food and wine gift-basket category. Combined with the assets we have, our 50 million customer database, our online capabilities, and broad range of on- and offline marketing programs, we believe this acquisition provides an excellent platform to build a leading position in this fast-growing wine and gift business.

Lastly, as a result of the profitable growth and the low capital requirements of our business model, we expect to continue to generate significant free cash flow and further strengthen our balance sheet. This positions us well to grow our business both organically and through acquisitions, and thereby build long-term value for our shareholders.

That concludes our formal remarks. We will now open the call for your equations. Millicent, will you please read through the instructions for the q-and-a?

Thank you. The question-and-answer session will be conducted electronically. And if you do wish to signal for a question, you may do so by pressing the * key, followed by the digit 1 on your touchtone phone. Once again, that is *1 on your touchtone phone, to signal for any questions. If you are using a speakerphone today, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that is *1 for questions, and we?ll pause for a moment.

And our first question today will come from Bob Labick, CJS Securities.

Good morning, gentlemen.

Good morning, Bob.

One quick question regarding the balance sheet. Jim, you just mentioned that your strong free cash flow will lead to further strengthen your balance sheet. Could you give us maybe a timeframe for uses of this cash to enhance shareholder value. If, for example, by six months you can?t find any acquisitions, would you consider as we talked about before, a [Dutch] tender or maybe a special dividend? Or?? Could we maybe put a timeframe on the use of cash?

I would characterize it this way, Bob. We have increased our activity, looking at all kinds of companies. Might we look to acquire -- to build our capabilities against our customers, instead of interest in the gifting categories that are staked out as those that we think are important to us and to our customers. Those efforts that we stated -- we started to beef up our efforts last spring and summer, devoting some of our internal time and energy, and using some outside assistance in this area. We?ve been busier. That?s one of the things that resulted from that -- it was the acquisition of Ambrosia Wine-Tasting Network. Not the last thing we?re going to do in the wine space, certainly. But as we pointed out, a good platform for us to begin to do some things, there.

Several of our test categories will give you an indication of where we have interest. What do I mean by test categories? Categories that we get into in a test mechanism of where we don?t have a lot of capital committed. We?re testing the receptiveness of a product and our ability to fulfill against customers? expectations to those product areas. When we find homeruns and successes there, it?s been our history to go back and try to backfill on those, to broaden our offering, to deepen our capability and to strengthen our brand relationships -- and to give us better margin opportunities.

So that gives you an indication of where we?re looking. Without specifically giving you a timeline, I think that you can expect to see that we?ll be very busy in deploying that excess free cash flow that we have generated and will continue to generate toward acquisition opportunities that help us to broaden our product offerings. And expect that you?ll see that in the near-term.

Therefore, if we come to the conclusion that we don?t have good uses for that cash, clearly, we will seek out your counsel, Bob. Because you?ve been very helpful in terms of helping us to think about what our options are to return excess free cash flow that we cannot use in the course of our acquisition activities.

Great. Thanks very much. I?ll get back in queue.

Thank you.

And our next question comes from Anthony Noto with Goldman Sachs.

Jim, how are you? A couple of questions. First, you talk about increasing your spend in search marketing. I was just wondering if you could comment today on what type of customer-acquisition costs you?re seeing in search marketing. And how that compares to your other vehicles. So we could understand how the potential returns and opportunity to spend more there without deteriorating your overall returns.

Secondly, on the Bloomnet initiative, and increasing your market share in the B2B side of the business. Do you think that you can actually grow the members -- the floral members within the Bloomnet network? And if so, what are the key strategies behind that? Or are your comments in the press release more about driving revenue-per-member? Thanks.

Well, going in the order you put the questions, Bob? I?ll ask Chris to give you some color on the marketing costs. What we?ve seen over the last several quarters -- particularly in the last quarter -- is that the continued transition, frankly, that they?ve written so much about in terms of coverage of other sectors -- of the broader sector -- which is the power shift. So those of us who are direct marketers had early successes in portal relationships. Those portal relationships are not successful for us, now. They?re too expensive. The inventory isn?t available because the rest of the marketing world has found some percentage of their budgets moving to this world. It?s squeezed out a good portion of the direct-marketing population that we?re a part of. So we found the portals to be much less effective.

However, we have hangover -- contractual relationships that are frankly a burden to us, now. So as we?ve migrated so many of our free dollars to Search, to affiliate programs -- even to broadcast advertising -- and seen pockets of success that we don?t want to put a direct spotlight on for competitive reasons -- you?ve found us shifting more dollars to those areas.

In general, from a cross point of view -- and Chris will give you more color here -- we think that based on published information by all of our competitors in the floral and non-floral categories -- that we have clearly in the floral category, the best base cost for acquiring new customers. We want to exercise that leverage, now, in all of those marketing channels identified, to press that advantage. And to be more aggressive in capturing new customers.

Yes. On Search, specifically, what we continue to find -- I think Search for us -- again -- increase in Search marketing will kind of cross all brands. We will continue to be more aggressive in our Search efforts. I think in the last quarter, too, we?ve demonstrated our ability to be much more effective in our Search marketing efforts -- which include paid as well as natural search.

The customer-acquisition costs that we?re finding there do fluctuate during the time period. Certainly, at a holiday when it?s much more competitive than non-holiday, when the customer-acquisition costs within Search will rise. But it?s still is providing us with the overall blended rate that we?re comfortable with. Then because, as Jim mentioned, we believe we have a significant advantage of customer-acquisition of any of our floral competitors. We believe there is some room for us to work with to be more aggressive and still provide long-term profitability for the Company.

And I think even in a boring old area like direct-marketing, Anthony, what we?re seeing is with our name being 1-800-FLOWERS.COM, and we still have a very significant telephone business, and that speaks to our primary proposition with our customers. It?s that convenience and reliability.

On the convenience side, we?re seeing that we get a better yield from our? Not only is our cost up front cheaper -- an advantage we want to press -- but we get a better? Our repeat rates are rising pretty dramatically. And that?s a result of that convenience factor, where if we acquire a customer in the online world via Search, they then have the option from a convenience point of view, coming to us through the 800 number, if it?s not convenient for them to go online at that moment -- either through? Whatever electronic appliance they have.

And having that dual capability, I think you?re even seeing from our competitive set now, in the recent quarter, all of our competitors now are pushing the 800 numbers on the telephone, realizing that we have an advantage there, that we want to exploit practically.

On your question, Anthony, regarding Bloomnet. Clearly first and foremost is to assure quality to our retail customers. It has been since we?ve been? from the very beginning. That?s been our main focus. With that said, our revenue growth within Bloomnet comes from a couple of areas. It comes from services, products, et cetera, that we sell into our Bloomnet partners and franchisees, as well as we firmly believe that we can grow the number of Bloomnet partners without suffering the quality.

That segment of the industry is driven by the person who controls the audit. Directable audits. We clearly are the leader in the industry with the most-directable audits. We feel we can demonstrate that to drive more revenue growth as well as profits in Bloomnet.

Great. Thank you.

And we?ll move next to Heath Terry with CIBC.

Hi. This is [Eddy Thomas] for Heath. Can you quantify the change in dollar spend toward search-based advertising, as well as brand advertising?

No, obviously for competitive reasons, we?re saying in general that we want to increase our marketing spend. But we won?t break out what our specific increases are within those buckets.

Okay. Thanks.

We?ll move next to Eric Beder JB Hanauer.

Good morning. Just a quick question in terms of the split between the online and transactions for the quarter.

What was your question?

The 3.635 million transactions.

Yes.

Which were online and which were telephonic?

Well, we said it was 49.5 percent of our orders came by?

Right. [inaudible] 50/50.

Yes.

The revenue split and the order split is very, very close, Eric.

Yes.

For the year, I think our expectation was a 55/45 split. But in this quarter, with the heavier use of our catalogue brands during this fourth quarter, it goes to 50/50.

Yes. As you know, Eric, the FLOWERS brand, which is through our online brand, it?s upwards of 65-70 percent of our business that?s online, while many of our other brands which -- this is their big quarter -- more like 25-35 percent of their business comes online. So blended, it?s 50/50.

What new services and such are you going to exploit on the B2B side for the [Bloomlink] network?

Well, we won?t give a great deal of specificity here, other than to say that the things we do as a retail florist -- the things we do for our own -- the few shops that we own for our franchisees -- those products and services are of great value. Our franchisees have a sales average probably twice the industry average for retail flower shops for Company-owned stores. Probably well more than twice the industry average. That comes as a result of many of the marketing programs, the product [inaudible] we have in our stores. And now with our Bloomnet partners, what we?re looking to do is lever those marketing services, those marketing capabilities, the product services et al -- and then the technology services, quite frankly, as well, that we built for our own use, to our partners.

We can do that by levering things that we?ve already done, and the relationships we have with them at frankly, quite-attractive margins. That whole category of services to florist is one that?s been of interest to us for a long time. Clearly, there are two very large companies relative to our industry that provide a range of services to florists -- both FTD and Teleflora. There?re large companies. They each have substantial EBITDAs according to public numbers. I would guess between the two companies, well over $100 million in EBITDA for the two of them. I don?t know how much over that, because one is a private company -- the other reports publicly. But it?s very substantial EBITDA.

We have, obviously, a small, tight knit network that?s been small in size and only grown frankly based on our fulfillment needs. But these are florists that frankly are in a category that?s struggling. The retail floral category for the first time since I?ve been a florist -- 28 years -- we?ve seen decline in shop counts. We?ve had anecdotal conversations with a good many of the largest retail florists in this country, and we see that they?re suffering. They?re having a real hard time with top line growth, and we?re not.

In our retail category, we?re continuing to enjoy success. So we?re saying, ?How can we leverage the things that we do pretty well across a platform of a select group of florists, to our mutual benefit?? So that should give you some insights into where we?re going.

The thing that drives that category -- that service to the florist category -- is incoming order volume. Orders that those florists can fill. And frankly, out of all the people in this industry, we have the most orders. And by far, we have the most directable orders. And we plan on exercising a little leverage to make that increasingly beneficial to our partners, and to us.

Finally, on the wine. Upgrading the wine systems infrastructure. How much, when you look upon the growth of the wine -- are you looking at it in terms of the Supreme Court decision? Or is, really, what you?re trying to do right now just trying to get it to not really dependent upon that?

Eric, this is Jim. [inaudible] that we made this purchase and we?re building this business, believing that we can grow it quite significantly in the current markets that it can address, if and when the other markets open up, particularly, [inaudible] course. That would just get us there faster and bigger. But we?re not basing any of our investments or any of our potential that we see in this business on anything that the Supreme Court may or may not do in the next couple months.

But we are encouraged by the way it stands, right now.

And is this a business where, let?s say the Supreme Court decision does come in your favor that you can leverage this up? This is a business that?s high-leveragable as some of your other businesses are?

I think that?s a good way to think about it, Eric. The way we?ve had success in our primary business is through a combination of partnering, networking and building assets on top of smaller assets we?ve been able to acquire. I think that that blueprint is one that we?ll follow in the wine business. You?ll see us probably make other tuck-in acquisitions there. You?ll see us partner with other providers in that space, and you?ll see us use our technology and networking capability to address that market. So the same way we do in our floral business -- when it?s appropriate to partner, we partner. When it?s appropriate to build it, we build it. And in some cases, we purchase assets that help us to flesh out the offering to the customer. At the end of the day, you have to have the best way to reach the customer and serve their interest and needs.

Thank you.

And we?ll move on and take our next question from Peter Benedict, CIBC World Markets.

Hey, guys. Most of my questions were answered. Just one other. Should we expect any pricing changes as part of this more aggressive marketing stance that you?re embarking on? Thanks.

I think you?ll see a range of things, Peter. I?ll ask Chris to give you some more color on that. But I think you?ll see a range of prices. Some of our competitors have raised their service charges to the customer in their recent holiday period. I don?t know if that?ll maintain. We?re seeing some indications from some of our other competitors that they have incremental price surcharges for Valentine delivery and things like that. We will have the best competitive price all the time, and across the different categories. It?ll be in the form of price, and it?ll also be in the form of value.

Yes. See, from the pricing strategy point of view, I think you?ve seen us begin that already, really. As we?ve positioned our 1-800-FLOWERS specifically, as we?ve positioned 1-800 FLOWERS to the consumer really, AS the ?flowers of choice.? And ?Choice? coming from the fact that you can get? If you?re really looking for good, fresh-quality flowers, kind of value-priced, that?s our Fresh-From-The-Grower program. Those are the products that are shipped directly from the growers, overnight. That?s where we can lead with some good value pricing for those consumers who are looking at that. Clearly, the core of our business -- and again -- it provides the choice. It?s the Florist-Designed product line. Those products that come with the design element. Much more of a gift presentation, delivered same-day. Then of course you go into the higher-end spectrum on the floral products, from their artistically-designed products with some of our personality designs, our expert design, in that category. That?s kind of -- from a pricing strategy point of view -- coupled with all of our other gift products, again, following that good manifest strategy. So I wouldn?t say you?ll see necessarily pricing changes, because as we?ve implemented that for the last couple of quarters, you?ve also seen us able to maintain our average order. And again, that comes with our direct-marketing capabilities and increasing retention and frequency with our customers.

And the evidence of that -- further evidence of that -- to Chris? last point -- in the last quarter you saw our revenues up $17-18 million. And that came primarily as a result of an increase in sales to our existing customers. By offering choice, we think we have the best prospects of increasing our revenue.

Great. Sounds good. Thanks, guys.

Once again, as a reminder to our audience, that is *1 on your touchtone phone, to signal for questions. *1 to signal for any questions. And we?ll go next to Jeff Stein, KeyBanc Capital Markets.

Hi. Good morning, Jim. A question with regard to how you see the longer-term grown in earnings-per-share and cash flow. I think you guys have said that you?ve kind of aspired to an 8 percent operating margin. I?m wondering, with the increase in marketing spending, do you see the timeline in achieving your targeted return on sales changing at all?

In the short-term, Bill, I would guess that the answer is yes. But in the longer-term, no.

Yes. That is correct. The guidance that we?re giving here, with regard to the second half of this year, is obviously taking down the earnings expectations for the second half of this year. As we?re making investments in three areas that we spoke about -- marketing more aggressively -- especially from the standpoint of customer acquisition, investing in our Bloomnet -- kind of the B2B play on the floral side of the business -- and in the [inaudible] network.

We think that?s relatively short-term in nature, and that the [inaudible] we?re getting to an 8 percent operating [inaudible] change.

And Bill, you indicated that the fuel surcharge had negative impact on gross margins. Can you isolate that for us? How much was that?

Well, we saw fuel surcharges upwards of 12 percent during the holiday season. [inaudible] it?s disproportionate in this quarter for us, because of the third-party carriers we use this quarter, in support of our [inaudible] popcorn [inaudible]. It?s more kind of the brown box, where we?re shipping it in FedEx and UPS. When we start getting into the second half of the year, we?re more disproportionately floral, we have that to a lesser extent.

There, we?re much more dependent on our florist network and our design [LFC]s around the country for our last-mile delivery. So it'd be less of an impact.

Okay. And finally, your guidance for the back half of the year. What kind of marketing spending as a percent of sales does that guidance imply?

Well, we bring it down kind of by brand, on the floral side, which is where we?re planning on increasing the marketing spend. We?re looking to step that up

Yes. We?re looking to step that up, Jeff. I think one of the things we?re looking at down on the floral side, especially, is as a percentage of revenue. I can?t break that out for you right now, but as a percentage of revenue, what we?ve seen is our two primary competitors in our floral marketplace, spending a higher percentage of revenue. We?re looking to bring it closer, up to that again. Because we have the room in our customer-acquisition costs, compared to what the competition is doing. And still, with our overall blended rate, we have room to do that. So that will increase. I can?t break it out and quantify that. And unfortunately, I don?t know the map on the overall sales and marketing line of the blended company. I apologize for that.

Yes. That?s okay. Final question, guys. Capital spending for this year. With the investments that you?re making in infrastructure for wine-tasting network and the Bloomnet network overall, where do you see CapEx coming in for the full year, now?

Probably just still at the high end of the range that we had previously said, with the $10-12 million. So more at the $12 -- maybe more at the $12 million range.

Any further questions, sir?

Millicent, do we have any other questions?

We?ll go next to Edward Weller --ThinkEquity Partners.

Hi. I just wanted to get a clarification. You acquired 1.2 million customers during the quarter. Could you tell us how many of those came from [inaudible] network, please?

Zero.

Yes. Very low.

Literally -- almost literally -- zero. We only made that acquisition late in the quarter. And they had already been through their primary selling season.

How many customers does -- active customers or total customers -- does Wine Tasting Network have?

Well, the Wine Tasting Network and Ambrosia are two different businesses. They have a consumer business and they probably have a database and a consumer business of in the 10,000-customer range or total database. On the services side -- the marketing services side -- they probably have 100 key customers.

Which are the wineries.

Wineries. Yes.

Yes. The opportunity there is for us to introduce that product line to our 15 million customers. It?s one of the categories that they?ve told us in the past that they would like to buy from us. It fits perfectly with that key food, wine, gift basket business that Jim was talking about. So it?s? That was the acquisition.

And we were able to test, in the last couple of weeks of December, a gift basket for the first time that included wine, where it was legal and appropriate. We did that in partnership with other people, and it did not affect the Wine Tasting Network or Ambrosia. We did that in partnership.

As I said, anything we do in a wine business will be a combination of doing it ourselves and in partnership, or growing our components that don?t exist in the marketplace. In that case, it was something we did in partnership. It was a last-minute test. It was something we just put on our site. You had to go searching to find it. And we were tickled by the very small test and the results that came from that. So it just reinforced our enthusiasm for finding the right mix of ways to get into that business. Because there?s a customer demand on the consumer side. And on the B2B side, we?ve been certain of the demand for a long time, and not been able to sell against it or even introduce the product.

What prevents you from selling wine everywhere in the country in the same way you distribute flowers from local affiliates?

Frankly, I couldn?t answer that effectively. That?s a question that we have some points of view on. But we?re confirming that with the different? There?s such a tricky environment, from a legal perspective. We?re just now asking that same question ourselves of our different counsels around the country to make sure we have a clear answer for it. So to answer it now, I?d be incomplete in that input.

But we think it?s an interesting opportunity. As I say -- leveraging our knowledge. Partners. Network abilities and our own performing capabilities would be the way we go at that business. How we can answer that third piece of it in a network environment is a question we?ll answer more with some good input.

As well as what gives the best margin opportunity.

Yes.

Mr. Weller, any further questions, sir?

No, thank you.

We?ll go next to [Denise Seals], [Greenville] Capital Management.

Hi. I was just wondering if you could provide a little more clarity on where you?re hoping to gain the couple extra points of sales growth over the next few quarters. Would that be generally around the concentrated holiday selling periods? Or just broad-based throughout the quarter? And do you have?? I know you guys have been working on increasing this Search -- the advertising dollars through Search, more recently. And can you provide us with any maybe better hit metrics to give us some confidence that a couple extra points is readily achievable?

Yes, Denise -- it?s Chris. I think some of the overall point of view on your question there clearly is that the next couple of holidays have some dominant -- the next couple of quarters have some dominant floral holidays coming up. The Valentine holiday and the spring holidays. The spring season also is very important for us in our Home-and-Garden category, as well. It?s around those points and those events that we clearly can generate. We?d probably be more effective on the customer-acquisition front. Continually, in addition to that, our everyday business continues to drive. I think you see that demonstrated from the productivity, in the continued increase in productivity of our existing customer base. That?s around the everyday occasions -- whether it be birthdays, anniversaries, et cetera. They continue to drive our business.

Relative specific to search, I think again, there is opportunity to venture to a landmark. Certainly, we don?t break out any specific metrics, here. We continue to be encouraged by the click-through rates and the conversion rates that we are able to achieve in head-to-head comparisons -- whether it be in Search or other forms of online marketing. That?s why we continue to focus in those areas.

I think you?ve seen us, Denise, pressing our advantage as the florist of choice for our customers. What that implies is that we have the ability to service them against a pretty broad set of connective occasions, and the like.

For example, one that we?ve been paying attention to in our materials, as we point out to our customers, is that we have this long-standing direct-from-our-growers program. Our Flowers Fresh From Our Growers program -- as Chris mentioned, earlier. A value opportunity for our customers.

But on the other hand, as we highlight our ability for same-day gifting, using this very elite group of florists in our Bloomnet network, to fill other connective occasions, and making subtlety, that connection for our customers in our marketing and our other communications devices -- the fact that we can serve them as their florist. We?ve seen an increase, although it?s a very small business for us, we?ve seen an increase in our [subsidy] business. An everyday occasion where people need to express and connect. That?s been a growing force for us. In markets where people view us as their florist and they see our trucks and they see our stores, we?re seeing an increase in those businesses.

We?re also seeing an increase in the effectiveness of the marketing spend in those markets, because when we spend in those markets the same dollars, the dollar has a better yield. Because our customers -- all customers across the country -- send 3 or 4 times as many gifts in their own markets as they do long-distance.

So as that transition occurs gradually and subtlety in our customer database where they view us more and more as their florist, our sales-per-customer clearly goes up and it gives us a better opportunity for those everyday occasions. Sympathy. Get-well. New baby. Hospital. Congratulations. All those everyday occasions. Having the opportunity for the breadth of capabilities gives us, frankly, a distinct advantage.

Once again, as a final reminder to our audience, that is *1 on your touchtone phone to signal for any questions. *1 on your touchtone phone for any questions.

And at this time, gentlemen, we have no further questions standing by. I?d like to turn the conference back to you for any additional or closing comments.

Well, thanks so much for your time and your interest and your questions today. The last thing I?ll state is that as a reminder, the Valentine?s holiday -- which is very important to us, but frankly very important to you, as well -- we at 1-800-FLOWERS are standing ready as your florist of choice, to help you. In fact, we offer our customers the best choices for their thoughtful gifting needs.

From our Fresh-From-The-Grower program, for flowers delivered next-day at great values, to exquisite floral arrangements designed by a professional florist and delivered the same day, anywhere in the country. Also to the unique floral artistry of Jane Carroll and Julie McCann-Mulligan. Only available at 1-800-FLOWERS.COM.

And don?t forget all the great bakery gifts. Decadent Godiva Chocolates, our cuddly stuffed animals. And even our bountiful gift baskets. We have the perfect gifts for all your valentines. So order now and order early, and please order often. Thanks so much.

Thank you for your participation on today?s conference call. You may disconnect at this time.