1-800-Flowers.Com Inc (FLWS) 2005 Q3 法說會逐字稿

Good morning, everyone, to the 1-800-Flowers.com fiscal 2005 third quarter results conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to 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 financial results for our fiscal 2005 third quarter. My name is Joe Pititto and I am Vice-President of Investor Relations. For those of you who have not yet received a copy of our press release issued earlier this morning, it can be accessed in the Investor Relation section of our website at 1-800-Flowers.com or you can call Patty at 516-237-6113 to receive a copy of the release by e-mail or fax.

In terms of structure, our call today will begin with brief formal remarks and then we’ll open up the call for questions. Presenting today will be Jim McCann, CEO and Bill Shea, our CFO. Also joining us today for the Q&A section is Chris McCann, our President.

Before we begin, I need to remind everyone that a number of the statements that we 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 and other risk factors, please refer to the Company's SEC filings, including the Company’s annual Form 10-K and Quarterly Reports on Form 10-Q. The Company expressly disclaims any intent or obligation to update any of the forward-looking statements made in the today’s call and any recordings of today’s call, the press release issued earlier today or any of it’s SEC filings except this may be otherwise stated by the Company.

I’ll now turn the call over to Jim McCann.

Thank you, Joe, and good morning everyone. As we reported in our press release this morning, during our fiscal 2005 third quarter we accelerated our revenue growth to 17 percent, almost tripling our growth rate of the first half of the fiscal year. In dollar terms, this growth represented approximately $23 million in increased revenues. Importantly, we grew almost 16 percent in our floral gift business, this despite the highly competitive nature of the category during this Valentine holiday.

Before I turn the call over to Bill so that he can take you through the details of our financial results and metrics for the quarter, I’d like to cover a few key points. First, as we stated in the guidance we provided back in January, during our fiscal third quarter we significantly stepped up our marketing and selling programs, both on and off line. We extended our efforts in search of affiliate marketing and a variety of broadcast advertising venues, including syndicated radio, cable and network TV. We did this primarily to become more aggressive in terms of new customer acquisitions, leveraging what we believe to be the lowest cost to acquire a new customer in the floral gift category, as well as the best customer retention in long term value.

As a result of these increased efforts, we were able to attract approximately 800,000 new customers during the quarter, nearly 80,000 more than we added last year. Equally important is that during the quarter we were able to deepen our relationships with our more than 15 million existing customers, which resulted in repeat orders that represented approximately 58 percent of total revenues.

Second, our accelerated revenue growth was driven by a strong on-line growth of 23 percent. We continue to see our customers across all of our brands migrating to the convenience of our on-line channels where we can leverage a range of cost and service benefits which I have mentioned many times in the past.

Third, as we stated as our goal back in January, we were able to extend our leadership position in the floral gift category through a combination of aggressive marketing and promotional programs. As our customer’s florist of choice, we provide unique range of products and services that we believe sets us apart from our competition. This includes everything you might expect to find in your high-end flower shop, including the finest selection of flowers, plants, gift baskets, plush gourmet foods and more. Uniquely, we offer our customers everything from value-priced roses and floral bouquets shipped fresh from our growers, something, by the way, that we have been doing for 20 years now, to same-day delivery of the freshest flowers by our florists to the unique floral artistry of our exclusive floral designs and all of our gifts come with a 100 percent satisfaction guarantee, something else we pioneered more than 15 years ago.

Lastly, in terms of our specialty brands business, during the quarter we saw continued double-digit record gains in our fast-growing food line and gift basket category. In this area, we announced the acquisition of Cheryl and Company, a leading retailer of exceptional fresh baked cookies and other desert gifts that we expect to be nicely accretive to our revenues and margins during fiscal 2006 and beyond.

Also during the quarter, our Plow and Hearth home and garden business achieved 7 percent revenue growth, this continued to strongly rebound, which we began to see in our fiscal second quarter.

Now, I’ll turn the call over to Bill.

Thank you, Jim. During the third quarter we were able to accelerate our revenue growth, particularly in our core floral business, driven by strong 23 percent growth on-line. This reflects the results of our previously announced strategy to increase our spending on expanded marketing and selling programs. During the period we were also more aggressive in our promotional programs, both to attract more new customers and in the response to the increasingly competitive floral gift marketplace, particularly during the Valentine holiday.

Reflected in the following financial results of key metrics for the third quarter are the results of these expanded marketing and promotional efforts designed to drive both near and longer term double-digit revenue growth as well as the investments that we previously announced that we’d be making to expand on BloomNet B to B floral operations and to enhance the technology platform, marketing programs and personnel for our recently acquired wine business, which represents longer term growth initiatives.

Also included in the quarter was the effect of the Easter holiday, which fell on the last day of the period and contributed approximately two to three percentage points to our overall 17 percent growth.

Total revenues for the quarter reached $157 million, an increase of 17.1 percent, compared with $134.1 million in same period last year.. On-line revenues grew 23 percent to $91.6 million, compared with $74.5 million in the third quarter last year. These on-line revenues equaled 63.9 percent of combined on-line and telephonic revenues for the third quarter of fiscal 2005, compared with 59.5 percent in the same period last year. Telephonic revenues of $52.4 million, up 3.1 percent, compared with $50.9 million in the prior year’s period.

Our retail fulfillment revenues were up 49.2 percent to $13 million, compared to $8.7 million in the third quarter last year. This reflects the combination of revenues from the Wine Tasting Network and increased sales of products and services to our BloomNet florists. During the quarter, our combined on-line and telephonic orders totaled 2,432,000, compared with 2,052,000 orders in the year ago period.

Average order size during the quarter was down slightly to $59.24, compared with $61.ll in the prior year’s period, primarily due to product and channel mix as well as the increased promotional nature of the Valentine holiday.

During the quarter we attracted 792,000 new customers, compared to 712,000 in the year ago period. 533,000, or 67.3 percent came to us on-line, compared to 450,000, or 63.2 percent last year.

We turn to product mix. The full amount of floral gift breakdown was 65 percent floral, 35 percent non-floral, up slightly compared to the prior year’s period.

Gross profit margin for the quarter was 37.6 percent, compared with 40.8 percent in last year’s third quarter. It is important to note that the fiscal third quarter is typically our lowest in terms of gross profit margins due to the higher percentage of lower margins floral gives and a higher promotional nature of the Valentine holiday. The defining gross profit margin in this year’s fiscal third quarter, however, is somewhat of an anomaly. It reflects a combination of factors including product mix with a larger percentage of lower margin flowers, plants and wine business revenues, increased promotions in discounting related to the highly competitive nature of the Valentine holiday and to incent early delivery because of the Monday day placement of the holiday, as well as higher shipment costs associated with the Monday placement as third-party carriers assess surcharges for Saturday and Monday deliveries and increased carrier fuel surcharges.

As we enter our fiscal fourth quarter, we expect that our gross profit margin to return to approximately 39 percent as we will not incur any additional costs associated with the issue related to the Valentine holiday day placement that I just described.

In addition, the fourth quarter product mix was a higher percentage of our fast-growing specialty brand gift products as well as the traditionally strong spring season for our higher margin Plow and Hearth business and the expected contributions of our latest addition, Cheryl and Company.

During the quarter our operating expense ratio increased 90 basis points to 40.2 percent of total revenues, compared with 39.3 percent in the prior year period. This increase primarily reflects our previously announced strategy to increase spending in three key areas: the expansion of our marketing and selling programs to accelerate top-line growth for both near and longer term; to add resources, primarily personnel, to expand our BloomNet B to B floral operations and to invest in the technology platform marketing programs and personnel of our recently acquired wine business, these latter two areas offering longer term revenue growth opportunities.

As a result of the increased operating expense ratio and low gross profit margin, the Company’s net loss for the quarter was $2 million, or 3 cents per share, compared with a net income of $1.9 million, or 3 cents per fully diluted share, in the prior year period.

Moving to our balance sheet, our cash and investments position at the end of the quarter was $97.8 million. As we previously announced, subsequent to the end of our third quarter, we closed on our acquisition of Cheryl and Company, an all-cash purchase valued at approximately $40 million. Including the effects of the acquisitions of Cheryl and Company and the Wine Tasting Network, which was closed in our fiscal second quarter, as well as our cash used in our stock repurchase program, we anticipate finishing our fiscal year with approximately $70 million in cash and investments.

Inventory at the end of the fiscal third quarter was in line with management’s expectations at $28.7 million and reflects preparations for our spring selling season.

In terms of guidance, the current fiscal third quarter, which includes such traditional gift-giving occasions as Passover, Administration Professionals Week, Mother’s Day and Father’s Day, is our second largest in terms of both revenue and earnings. As previously announced, we plan to continue to invest in three areas that we believe offer significant opportunities for revenue and profit growth both near and longer term, including marketing programs designed to increase customer acquisition and drive continued double-digit revenue growth during the fiscal fourth quarter and beyond, infrastructure investments, primarily personnel related in support of the BloomNet B to B operations to grow revenues and increase our market share in this area of the floral industry and three investments in the technology platform, marketing programs and personnel of our recently acquired wine business, the Wine Tasting Network.

As a result of these increased investments and including the absorption of an approximately $1 million seasonal operating loss associated with our recently acquired Cheryl and Company business, we anticipate fiscal 2005 fourth quarter revenue growth of more than 12 percent and EPS in the range of 5 to 7 cents per fully diluted share.

I’ll now turn the call back to Jim.

Thank you, Bill. To sum up, during our fiscal third quarter we accelerated our revenue growth to 17 percent, representing a $23 million revenue increase, compared with the prior year period. This is driven primarily by the strong on-line growth of 23 percent. Importantly, this also included growth of 16 percent in our floral gift category. We were able to extend our leadership position despite the competitive nature of the holiday.

We also saw a continuation of double-digit revenue growth for our food, wine and gift basket category. This is an area where we have stated in the past that we have excellent opportunity for growth and profitability.

It is worth noting that, when combined with our existing business, a recent acquisition of Cheryl and Company will put our revenues in the food, wine and gift basket category at more than $100 million during this next fiscal 2006. This puts us well on our way toward our stated goal of building a several hundred million dollar business and a leading position in this category through a combination of organic growth and a highly focused M&A effort.

Regarding some of our key customer metrics, as a result of the increased marketing efforts during the quarter, we attracted approximately 800,000 in customers with nearly 80,000 more than we had in the corresponding period last year. In addition, during the quarter we continued to deepen the relationships we have with our 15 million existing customers, which resulted in repeat orders that represented approximately 58 percent of total sales, an increase of more than 100 basis points, compared with last year’s third quarter.

Regarding our most recent acquisition, we are very excited to have added Cheryl and Company’s line of cookies and baked gifts, as well as a very talented management team led by its founder, Cheryl Krueger, to our company. Delicious cookies, cakes and other baked items are one of the fastest growing gifts and Cheryl and Company consistently stands out as a leader in this area with an excellent product quality, exceptional package design and innovative gift presentations. We believe we can accelerate Cheryl and Company’s already strong revenue growth and enhanced profitability by leveraging our operating platform, including our e-commerce technology, customer service, fulfillment capabilities as well as our corporate sales force and database of more than 15 million customers. Looking ahead, we expect the acquisition to be accretive to our earnings and cash flow in fiscal 2006 and thereafter.

Now, regarding our growth strategy, as we stated back in January, during our third quarter we launched a strategic effort to accelerated revenue growth to sustainable double-digit rates. This follows a several year period in which we were very focused on growing our bottom line results at a rate significantly faster than our revenue growth. That has enabled us to clearly demonstrate the leverage inherent in our business model and build a very strong balance sheet. Going forward, we plan to expand our business platform to help drive additional profitable growth opportunities, both near and long term.

Based on our results we achieved during our fiscal third quarter and our expectations for the current fiscal fourth quarter, we are very excited about the benefits we expect from the investments we are making. Investments we are making in our marketing programs to extend our leadership position in the floral category and our BloomNet B to B operations to increase our revenues in this highly profitable segment of the floral industry and in our new wine business, the Wine Tasting Network, where we can build a leadership position in a rapidly involving consumer and business gift segment. We believe these investments, combined with the anticipated revenue and margin contributions from our newest addition, Cheryl and Company, will enable us to achieve significant growth in both revenue and profitability in fiscal 2006 and beyond.

That concludes our formal remarks and we’ll now open our call for your questions. Operator, would you please restate the instructions for the Q&A.

Yes, sir. (Operator Instructions) Your first question is from Heath Terry from Credit Suisse First Boston. Please go ahead.

I was wondering if you could talk a little bit about your cost of customer acquisition or your order acquisition? Obviously, we’re hearing a lot about cost of Search charge going up. You guys have a couple of competitors out there who seem to be willing to spend pretty freely in bidding on those key words. Can you give us an idea of what you’re seeing there, what kind of effectiveness in return on investment you’re getting out of your Search advertising and if you could also kind of give us an idea of where it ranks against the other types of advertising you do, television and such?

I think, again, one of the main reasons for our strategic initiative for our acquisition is because we have the lowest customer acquisition cost, certainly in the floral competitive set, and a very effective customer acquisition cost overall across all of our friends. With that said, we knew we had the room to be aggressive. It takes some investments for a period of time to do that, but we have the room to do that so we’re very comfortable that we have the parameters to do so.

Regarding Search specifically, search is extremely expensive and it just continues to grow and especially at a key holiday period, like Valentine’s Day. Overall, we’re still comfortable with the overall effectiveness of Search. There are key words and there are key times, again, like Valentine’s Day, where some of the spending gets irrational. It is a marketplace where, as a leader in the market, we must maintain our position. So it does carry increased costs for us, but as we look at the cost and the investment that we make in Search balance with our overall investments in marketing and, again, I think as demonstrated by attracting 800,000 new customers, we’re very effective in marketing across the board, both on-line, which includes Search, as well as off-line and direct marketing efforts that we’re very pleased with.

That, coupled with the benefits that we see, which is fantastic retention rates, again, demonstrated by our repeat rate in this quarter, and our frequency rates per customer, which will mean the debt value, will continue to be demonstrated as we move into 2006 and that’s the reason for the strategy that we’ve embarked on.

Great. Thank you.

Our next question comes from Anthony Noto with Goldman Sachs. Please go ahead.

This is actually Jean for Anthony. You mentioned how you were aggressive around Valentine’s Day with promotional programs. Do you plan to continue to be aggressive with your promotional activity going forward around the upcoming holidays? Secondly, I wanted to ask if you could give some detail around the strategy to grow the BloomNet business?

Yes, we will continue to be aggressive in our acquisition of new customers and in our developing efforts. I think the Valentine period is a peculiar one and a little different than the other key important holidays we have, like the Thanksgiving and Christmas and the spring holidays, in that we had this strange situation that we were all concerned about, which was the Monday day placement of this particular Valentine’s Day, with Leap Year being last year. That had a couple of consequences. One is you wanted to move your regular customers up to an early order situation, so we were aggressive in getting them, from a price point of view and from a promotion point of view, in getting them to place early orders for early deliveries. The second proponent to that was while you were discounting at the very end, and its not just the big competitors that we see, particularly in the Search environment, a holiday like Valentine’s Day, it’s the other five or ten or 15,000 floral competitors that pop up during those holidays. It’s not unlike, in our retail days when we’d see peddlers pop up with an attractive trailer full of plants at Easter time that happens in the on-line world, too. In the off-line world, one guy goes out of business because it’s not a profitable proposition next year but there’s another nut to replace him the next year. It’s a similar scenario in the Search world today. There are a whole lot of people willing to spend nutty amounts around Search.

With the value of our brand, we’re able to – without having to go to those top and ridiculous numbers – still able to attract disproportionate share of the respondents because of the value of our brand. But that holiday is peculiar in terms of its promotional requirements. So, yes, we’ll continue to be aggressive, but, no, we don’t think it will have the same consequence in this next set of holidays because of the unique nature and the benefits of our brand and our fulfillment infrastructure that plays to our advantage during this holiday quarter. It’s tough to send your mom a do-it-yourself kind of gift, so that’s why our florist’s fulfilled product increases as a percentage of our sales during this holiday.

In terms of BloomNet, BloomNet is a very valuable asset of ours in that it gives us the best fulfillment in our industry by using a very select number of florists. What we’re seeing is some really interesting dynamics going on in the flower business. Shop counts are going down, retailers are struggling and so we’re receiving an ever increasing number of inquiries from retail flower shops who have not heretofore been a part of our network, asking to be allowed to become a part of our network, asking about some of our test franchising efforts and that’s given us an opportunity to expand our thoughts about BloomNet in terms of the services we can provide that will give those flower shops advantages, the marketing umbrella we can provide to them, the marketing infrastructure we can provide to them.

For example, we were happy that, last week, one of the largest florists in the country, certainly in my opinion, one of the best florists in the country, a company called Veldkamps with about nine locations and three dozen or more trucks in the Denver market, converted to become a 1-800-Flowers franchisee last Saturday. They are now Veldkamps 1-800-Flowers in the Denver market. So you have several dozen trucks rolling around in that co-branded environment and their stores being co-branded. We did a wonderful collection of marketing efforts in Denver last week. That’s an example of some of the things we’re experimenting with this year as we grow BloomNet from a super BloomNet point of view, which is our franchising program. We’ll allow some new members in to accommodate our revenue growth and our fulfillment need growth and we’re expanding the range of products and services we make available to the BloomNet florists to help them to be more successful, to grow their top lines and to do it profitably.

Thank you.

Our next question comes from Jeff Stein with Key Bank Capital Markets. Please go ahead.

Good morning. I’m wondering if you could possibly give us a breakdown in terms of how much of the gross margin shortfall was attributable to the heightened promotional activity, how much attributable to the fact that Valentine’s Day fell on Monday and how much due to the fuel surcharge? Then, I have a follow-up.

The breakdown is more heavily weighted toward the increased shipping charges with the Monday day placement. With so many of the deliveries being requested for delivery on that Monday and to a second degree, on that Saturday, those are the two days that the carriers do a surcharge, we made a decision not to pass along those costs to our customers. That’s a big component of it. The other items you mentioned were also contributory factors, but the bigger component of it was the day placement and the carrier surcharges that we accrued.

On that decision not to pass those surcharges along, I think that was a key component of our strategy, which is focused on increasing customer retention and increasing customer loyalty and frequency. It is not to pass on excessive charges at a key time, a key emotional holiday like Valentine’s Day. That was a specific decision we made. We knew that would affect margin, but we believe it was the right thing to do in building customer value.

Bill, was that half of the margin degradation or less than half?

It was probably close to half, but we really don’t break that down.

OKAY. As far as your growth in retail and fulfillment revenues, how much of that increase was due to your B to B initiative?

Most of it. It was a very small number.

OKAY. As far as the Wine Tasting Network, I’m wondering if you could update us in terms of your ability to upgrade the platform, are you on track to initiate a gifting program this holiday and any update at all in terms of where the Supreme Court stands on issuing a decision with regard to interstate wine shipments?

I’ll go in reverse order and Joe will jump in here. No update on the Supreme Court decision. They told us when they heard the case on December 7th that the opinion would be issued anywhere in the April and June window. No update on that yet.

In terms of the infrastructure, clearly, we’ve added some key personnel out there over the last 90 days. We’ve invested in the infrastructure from a software and hardware point of view in terms of through building capacity. That will continue, so both real capital expenses, which is a regular part of our capital expenditure plan, and the personnel increases, which are, frankly, the bigger part of it. On an ongoing basis, Joe will touch on some of the things that we’re looking at from a gift offering, especially around our baskets for this next holiday period.

When we acquired, I think we told everybody that what we purchased was a platform that would give us the ability to grow into that leading position in the wine and gift business, which would include gift baskets with wine. We proved that Christmas time with a small test how much our customers were excited by that. In addition to that, we’ll be able to sell club memberships and things like that and the corporate side of it. Our corporate sales force is very excited, particularly with the upcoming Christmas holiday at the end of this year and what they’ll be able to do with wine. We are very focused on growing out that side of the business. We did not buy this - - and don’t think that growing that business is predicated on all the states opening up at once. We will grow the consumer side of the business in those states that we can deliver to now and we will find partners to work with in those states that we can’t until such a time when the whole country opens up.

One final question. This would be for Bill. I’m wondering if you could just give us a little insight as to which quarter you would expect to anniversary the ramp in marketing spending and we should expect to begin to see a leveling off in your marketing spend as a percent of revenues?

As the initiative was announced and we stepped up the marketing spend in the third quarter, the anniversary would obviously be the third quarter that yields the third quarter of next year. What we’ve kind of been embarking on was a program for customer acquisition as well customer retention efforts that started in Q3 of this year and we carried through kind of the holiday season of next year and, then, we would be anniversarying that starting in January of next year.

OKAY. Thank you.

Our next question is from Bob Labick with CJS Securities. Please go ahead.

This is Mike Goldberg calling for Bob Labick. I wanted to find out - - you stated that your revenue in Plow and Hearth was up 7 percent year-on-year and I was curious about the main drivers of that?

I think the main drivers of that were things that we started to change in our first fiscal quarter, the summer quarter of last year. We said that the key ingredients there were that we had to freshen the look of our book, that we had to get more aggressive at introducing new products and not staying with the same hand of products that we had become use to over the last several years and that those products had to be beneficial to our gross margin. We accelerated the percentage of new products in the second fiscal quarter, the fourth calendar quarter, and have seen that base increase. Just off the top of my head I would guess we were about 12 or 14 percent new products in the summer books. They’re probably ramped up into the low 20’s during the second fiscal quarter, fourth calendar, and I would expect that our goal is to get that to about a 35 to 40 percent new product mix by our holiday book next year. So, it’s the execution of fresher products, it’s the increased margin of products that our fresher and soft in more competitive markets, like the Asia markets, and it’s the new look and feel backed up by a more determined distribution circulation strategy that emphasizes customer development.

When we spoke about this, we said this was going to take some time to burn in. What we’re seeing is, this fiscal year where the first quarter, comp was negative six and some of that had to do with kind of circulation strategy. Second quarter, comp plus two, with a very strong December, with 11 percent growth in December, and now a 7 percent growth in Q3, so it really is following the ramp that it would track.

Some would say “pray we would” and others say “thought”.

Just building on that note, just remember when the points were made in the formal remarks, our fiscal fourth quarter is the second largest quarter for the Plow and Hearth division and looking forward to a good spring season for them.

OKAY. Just separately, you mentioned that you would have approximately $70 million in cash at the end of the year following the great acquisition of Cheryl, and we were curious if you have any planned uses for that cash and timing of any such - - ?

We do, but, clearly, what we said we would do, in response to your question last quarter, we said that we thought that there were two uses for our cash. One is to find a good beneficial acquisition that flashed out our product offering, improved our margins and gave us an increased platform for growth. We said if we weren’t able to find those opportunities that we would look to say “what’s the best way to return shareholder value”. In discussions with you and your shop and several others, we said that our guess was, if we didn’t have good uses for the cash, that stock buybacks would be the best way to do that. We have an approved plan now that we discuss with our Board on a regular basis but, clearly, we’ve demonstrated between the Ambrosia Wine Tasting Network acquisition in December and the Cheryl and Company acquisition this quarter that we have found two very good growth platforms that fit nicely on our existing core platform that give us outside growth. Those are growths that we expect to be three or four, and at maturity, five times our internal cash generation on assets that we have as an enterprise today. These will be accretive to a multiple effect of those cash returns. We think we have demonstrated that we have a pretty successful effort at finding good M&A opportunities, which is the most beneficial use of that cash.

Thank you very much.

As a reminder, if you would like to ask a question or if you have a follow-up question, please press *1. Our next question is from Ryan Randall with Canal Capital. Please go ahead.

Thanks for taking my question. I have two quick questions for you. One, first on the Wine Network, did I hear you say that some of the margin pressure was related to issues with the Wine Network or did I miss understand something?

A small component of it, but the wine is a low-margin product and the wine services business, as we absorb the facility and stuff out there that’s prepared for it, in this quarter with a low amount of volume had a lower margin.

The wine business is very close to the gift basket business. The gift basket business is a four quarter business so we’re doing all our spending against building that platform in these three quarters. We won’t see the revenue benefit on that until the fourth calendar quarter, second fiscal quarter, because its heavily - - and the wine sales are going to be disproportionately, as a component of our gift basket offerings, and that’s a very much fourth quarter business.

Okay. So, if you look at it on an annual basis, the margin discrepancy isn’t as large?

If you look at it on an annual basis, it should, overall, have a margin benefit.

Okay. Can you talk a little bit about total amounts spent on the Wine Network to date and kind of what you’re finding as you spend this money?

No, I don’t want to get into specifically on exactly what we’re spending it on. Our personnel, our warehouse systems and warehouse infrastructure to be able to confect and develop the gift products, the club businesses and to give baskets that we talked about, for the fourth quarter. It’s not a material number that we want to disclose and, in terms of measuring it’s progress, we’ve had this company in our hold now for a little over four months and we think we’re right on target in terms of our infrastructure spend to get ourselves ready for this big quarter, calendar quarter, second fiscal quarter.

Okay. I can appreciate that you don’t want to disclose the numbers. I only made mention of the fact that it was noted and one of the reasons your EPS is going to be a little lower. So, you’re saying that, qualitatively, progress is as planned?

Again, when we announced back in January what our plans were and the three initiatives, we announced that we would be investing in the Wine Tasting Network and the wine business during the upcoming quarters along with the other initiatives, the BloomNet B to B initiative and the 1-800-Flowers marketing expense.

I would say, if you’re looking for quantification, its a few million dollars, not 10’s of millions of dollars.

Then, my second question is really a recommendation. I’d like to recommend to you guys a fourth investment, an investment that you’re familiar with and many of us on this call are familiar with. It’s your stock. I would just highly recommend you consider looking at the cash you have on your balance sheet in repurchasing some shares.

Thank you.

Thank you.

Our next question comes from Anthony Lebiedzins with Sidoti & Company. Please go ahead.

Good morning. A couple of questions. Is it safe to say that the marketing and sales expenses, as a percent of sales, will continue to go up for the next three fiscal quarters and, then, you should see some leverage beginning in the March quarter of next year?

Yes, I think, not in sequential quarters, but in year-over-year. We are taking up our sales and marketing dollars over what we spent in prior years as a percent of revenues, yes.

As far as the seasonality of the Wine Tasting Network and Cheryl and Company, could you just go over what that is?

Both businesses are heavily fourth quarter businesses. Wine Tasting Network from a retail point of view, is almost, I would guess, in the 65 percent range in the fourth quarter, from a retail point of view, and the consumer business on the Cheryl and Company is similar, maybe even a little more, 75 percent. They have their second best quarter is this current spring quarter, but it is a 75 percent fourth quarter business heavily driven by corporate sales, which is one of the reasons we were attracted to it because we were able to take their very talented seven internal sales people and multi-task their efforts by allowing them now to sell some of the floral, popcorn and other food, wine and gift businesses that we have. In addition, the few dozen corporate salespeople that 1-800-Flowers already had in our corporate sales group now have the Cheryl and Company product to sell as well. You get the leverage both ways.

You mean the fourth fiscal quarter or the fourth calendar quarter?

The fourth calendar, second fiscal.

In terms of your product mix, what percent of products can you now deliver on a same-day basis and how does that compare to last year?

I can’t answer that question as far as the percent of products on same-day. We’ve increased our same-day product offerings, non-floral same-day product offerings. I think we currently have 30, 36 product offerings in the pipeline, actually in the marketplace, that were offered same-day delivery on and that’s going nicely. That’s probably about double what we had last year.

I think the answer to the question in terms of percentage, I think we deliver about 40 percent of our orders that are requested for and delivered the same day.

40 percent now and is that sort of consistent with last year?

I would say it’s up a couple of points from last year. Just to give you a little color on that question, one of the nice things about leverage of assets we have would be an example from Cheryl and Company. Cheryl Krueger, who is the heart and sole of the merchandising efforts, with a very talented team at Cheryl and Company, had a terrific package we saw in product presentation. It is a wonderful product line, for example, for Halloween. In a model that they previously had, which was purely a UPS delivery model, they’d be out of business five or six days before Halloween with their product. Halloween is a last minute holiday.

Our hope and plan for this year, and something we’ve already begun working on, even, frankly, before the acquisition closed, is selecting the top three, four, five, even as many as six skews of product for Halloween and fully deploying that product into our 70 design centers around the country so that Cheryl and Company, both represented on the 1-800-Flowers site and on the standalone Cheryl and Company Website, can stay in the business of marketing two - - their customer base and new customers and through a variety of other on-line marketing mechanisms - - two customers that can be delivered right up through Halloween. People, conceivably, this year can come and find those wonderful pumpkin-shaped orange-iced cookies in a beautiful tin and gift container that they can see on Halloween morning and still have delivered that day to any addresses in the United States. There are kinds of leverage things that attracted us to approach this vendor of ours and say that there might be ways that we could work together that would help both of our companies grow faster by putting ourselves together. It’s an example of how we’ll leverage that same-day delivery capability.

I just wanted to clarify about the gross margin for the fourth fiscal quarter. Do you expect that to improve sequentially from the third fiscal quarter or do you expect it to improve from last year’s fourth quarter?

Sequentially from the third fiscal quarter where we reported 37.6 percent gross margins. We indicated that we would grow to around 39 percent. It’ll kind of go up. Last year was in the low 39 percent, so relatively consistent with last year, maybe slightly down from last year, but certainly up in the third quarter of this year.

With respect to the BloomNet, you are adding personnel. Can you just tell me how many people have you hired so far and do you still plan on continuing to increase your personnel to support BloomNet?

In terms of fourth quarter, I guess we added - - in terms of key management people - - there’s a handful and then there was a much higher number of line working kinds of folks. We haven’t disclosed a number. I’d expect we would continue to add in this fourth quarter, but the key personnel have already been hired.

Okay. Thank you.

Just as a reminder, if you would like to ask a question, it’s #1. We’ll take a follow-up question from Jeff Stein with Key Bank Capital Markets. Please go ahead.

I’m wondering if you could talk a little bit about the expansion of your franchising activities because that would seem to be, potentially, a big leverage point if you can grow the number of flower shops that you sell products to and, therefore, collect royalties and leverage your B to B initiative that you have going on? How many franchised flower shops do you have at the end of the third quarter and where do you see yourselves a year from now?

We haven’t set a target for a year from now that we’ve disclosed publicly. I think at the end of this third quarter we have about 75 franchisees. That would represent more than that in terms of number of shops because some of them have two, three and four shops, but the number of individual franchisees - - that doesn’t include the Veldkamp which just came on in this quarter, so that would not be counted in the last number. That would increase that by another eight or nine shops. We have not developed a target. We will talk about that more when we give our yearly guidance. What we said we were going to do is we were going to experiment this year by converting some of our design centers to a franchise model and I think we’ve done that with about six of those. They will each have an opportunity to open up some retail shops to hang off that design center. We said that we’d allow a few conversions, like the Veldkamps we just announced, so we have a couple of those in the works. We said we’d allow a couple, when I say a couple, literally less than 10, newly developed franchise situations. All in all, I would say it’s a number of less than three dozen during this calendar year and when we give our yearly guidance we’ll give some more color and results from those experiments and give what our target will be for the next fiscal year.

Okay. Second question, with your floral offering up, roughly, 16 percent during the third quarter, I’m kind of curious as to what kind of growth rate you saw in your fresh from the growers products because I noticed it was displayed prominently on your Web site over the Valentine’s Day holiday?

I think one of the ways that we - - you’re seeing a situation now where, in a business in many ways we created this National Floral Company retail concept, that success attracted a great deal of capital and competition. The internet enabled a lot of that competition. Hopefully, all of that capital and competition will cause category growth. It has not heretofore shown the category growth that we, frankly, hoped for. I think the reason for that is that so many of the new entrants to the marketplace are advertising in two big areas. One is the Yellow Pages and the other is on-line, particularly in the Search arena. Neither of those marketing efforts really generate new demand for the products in our category. If you go to the Yellow Pages or if you go to Search and look up the words “flowers”, you’ve already made a purchase decision or indicated an interest in a purchase. You’ve not stimulated any new demand. When that money gets - - if you look at the cycle there, when people get washed out from that category and realize it’s just way too expensive, it’s not a good proposition to spend $80 or $100 to acquire an order at $50 with all your other expenses, including the product. It’s just not a good economic proposition. When people come to that realization and look for other marketing alternatives, it’s our hope that they’ll find marketing alternatives in a more general media sense, either on-line or in a broadcast arena that stimulates additional demand for the category which will benefit us all. But, heretofore, the market we created that attracted the capital, that attracted the competition, the disproportionate percentage of those dollars spent are being spent on the B to B size, which have great yield, or on the already determined customer side, Yellow Pages and Search, which don’t drive anymore demand for the category.

I think that product category has done nicely for us as far as the strategic issues that we set for it, however, we don’t break out those categories. We don’t go to the market as two separate categories. We go to the market as our customer’s flowers of choice, so we’ve had a point of success of both categories in the 16 percent number and the customer acquisition and retention numbers that we reported.

The final point would be that it’s hard for us to actually distinguish because if someone orders a fresh from the grower product and its delivered by FedEx and another customer orders a fresh from the grower product and its delivered by one of our design centers because they can do that last minute delivery more efficiently and with a better maintained temperature of the product, how do you count that. It’s a tough number to put your arms around so that’s why we haven’t broken it out as a percentage.

Okay. Thank you.

Mr. Pititto, at this time we have no further questions. I would like to turn the conference back over to you for any additional or closing remarks.

I’d like to thank you all for your questions and your interest. As a reminder, next week is Administrative Professionals Week and it’s time to send a big thank you to the people who really make your business run. If you would like to avoid the middle seat assignment on your next transcontinental flight, we suggest you call, click or come into one of our stores today. At 1-800-Flowers.com you’ll find the finest selection of the freshest flowers, plants, gift baskets, delicious candy, scrumptious cookies and other bakery treats and so much more. The perfect gift for all the office professionals who help make you successful is here. Thanks so much. Don’t forget, right after Professional Secretaries Week, we have a little event called Mother’s Day, so why not satisfy both needs you have with one call, one click or one visit to our shops. Thanks for your time today.

That does conclude today’s presentation. We thank you for participating and you may disconnect at this time.