1-800-Flowers.Com Inc (FLWS) 2005 Q4 法說會逐字稿

Good day, and welcome, everyone, to the 1-800-FLOWERS.COM fiscal 2005 fourth quarter and full-year financial results conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Joe Pititto. Please go ahead, sir.

Thank you, Tom.

Good morning and thank you all for joining us today to discuss 1-800-FLOWERS.COM's financial results for our fiscal 2005 fourth quarter and full year. My name is Joseph Pititto and I am Vice President Investor Relations. For those of you who have not received a copy of our press release issued earlier this morning, the release can be accessed at the Investor Relations section of our website, at 1800flowers.com or you can call Patty Altadonna at 516-237-6113 to receive a copy of the release by e-mail or fax.

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

Before we begin, I need 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 today's press release and to our SEC filings, including the Company's annual report on Form 10-K and quarterly reports on Form 10-Q. The Company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today's call, any recordings of today's call, the press release issued earlier today, or any of its SEC filings, except as may be otherwise stated by the Company.

I will now turn the call over to Jim McCann.

Thanks, Joe, and good morning, everyone.

As we noted in this morning's press release, during our fiscal '05 fourth quarter we continued to accelerate revenue growth and -- that we previously told you was our goal for the second half of the fiscal year. During the -- for the quarter we grew total revenues more than 15% to $186 million. In dollar terms this growth represented approximately $25 million. In our floral consumer business, we grew revenues approximately 12% during the quarter. It's worth noting that this growth came on top of the largest base of business in the floral sector, thereby enabling us to extend our market leadership. During the quarter we also achieved double-digit revenue growth in our specialty brands businesses.

In home and garden, we accelerated that strong sales rebound, which began in the fiscal second quarter and achieved revenue growth of almost 13%. We are pleased with this turnaround and anticipate continued improvements this year. In food, wine and gift baskets, we completed the acquisition of Cheryl & Co., combined with our existing businesses, including The Popcorn Factory, the Wine Tasting Network and 1-800-BASKETS and others, we anticipate growing -- generating more than $100 million this year in revenue in this category. This is a very exciting growth area for us and we are fast becoming a significant player in this category.

Before I turn the call over to Bill, who will take you through the details of our financial results and metrics for the quarter and the year, I would like to make four additional points. First, on gross margin. Back in April on our fiscal third quarter conference call, we said gross margin for the quarter had been impacted by the anomaly of the Valentine's holiday day-placement. We also said that we expected it to bounce back and grow year-over-year. In fact for the quarter, gross margin increased 70 basis points to 40%, and was up 220 basis points compared with the fiscal third quarter. And we anticipate further increases this year.

Second, in terms of marketing. We are very pleased with the results of our stepped-up marketing and selling efforts. These efforts made us more aggressive in terms of new customer acquisition, leveraging what we believe is the lowest cost to acquire a new customer. As a result we cost-effectively attracted more than 1.6 million new customers during the second half of fiscal '05 while keeping customer acquisition costs below our targeted $20. Most important, we more than doubled our revenue growth rate to 16% in the second half compared with 16 -- compared with 6% in the first half of the year.

Third, the acquisitions of Cheryl & Co. and the WineTasting Network demonstrate the strength of our balance sheet, as well as our ability to identify strategic opportunities and add great businesses that enable us to expand the range of gifts and services we provide to our customers for all of their celebratory occasions.

Fourth, BloomNet. This initiative, launched in the second half of fiscal '05, leverages our market leadership in the floral industry to build market share in the profitable florist B2B business. We believe our investments in this area specifically building on the systems and the hiring of the people to grow our florist relationships, will generate growing returns beginning the second half of fiscal 206 (ph), and accelerating thereafter.

I'll now turn the call over to Bill Shea.

Thank you, Jim.

During the fourth quarter, we achieved total revenue growth of 15.2%, or 24.6 million. This growth reflects several factors, including -- the result of our strategy to increase our spending on expanded marketing and selling programs, particularly in the floral category; revenues associated with the acquisition of the WineTasting Network completed in the fiscal second quarter and Cheryl & Co. completed during the fiscal fourth quarter; and the inclusion in the quarter of an additional week of sales compared with the fourth quarter last year, which, however, was essentially offset by the shift of the Easter holiday into the fiscal third quarter.

Reflected in the following financial results key metrics for the fourth quarter are the results of the expanded marketing efforts designed to drive both near and longer-term double-digit revenue growth. As well as our ongoing investments we are making to expand our BloomNet B2B floral operations, also to enhance the technology platform marketing programs and personnel for our wine business and the seasonal nature of our recent acquisitions.

Regarding metrics for the fourth quarter, total net revenues for the quarter reached $186.1 million, an increase of 15.2% or $24.6 million compared with $161.6 million in the year-ago period. Online revenues grew 16.5% or $15.4 million to $108.5 million compared with $93.1 million in the fourth quarter last year. These online revenues equalled 64.3% of combined online and telephonic revenues for the fourth quarter of fiscal 2005 compared with 61.4% in the same period last year. Telephonic revenues were at $60.3 million, up 3.3% or $1.9 million compared with $58.4 million in the prior year period. Our retail fulfillment revenues were up 73% to $17.3 million compared with $10 million in the fourth quarter last year. This increase reflects revenues from the WineTasting Network's winery services operations, the Company's expanded BloomNet B2B florist operations and revenues from Company-owned stores.

During the quarter, our combined online and telephonic orders totaled 2.704 million, compared with 2.470 million orders in the year-ago period. Average order size during the quarter was up slightly to $62.44, compared with $61.36 in the prior year period. During the quarter we attracted 835,000 new customers compared with 780,000 in the year-ago period. 563,000, or 67.4%, came to us online, compared with 505,000 or 64.7% last year. Existing customers represented 59% of combined online and telephonic revenues in the quarter compared with 58% in the prior year period.

In terms of product mix, the breakdown between floral and non-floral gifts was 62% floral and 38% non-floral, consistent with the prior year period. Gross margin for the quarter was 40% compared with 39.3% in last year's fourth quarter. In addition to the year-over-year increase of 70 basis points, this also represents a strong rebound from the 37.8% margin reported in our fiscal third quarter. It is important to note that we were able to grow our gross margin, despite a continued highly competitive marketplace, particularly around the Mother's Day holiday. We believe our success during the quarter in growing both revenues and gross margin illustrates the strength of our brands and our leadership position.

During the fourth quarter, operating expense ratio increased to 36.7% of total revenues compared with 32.9% 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 the near and longer term; to add infrastructure, primarily personnel to expand our BloomNet B2B floral operations; and to invest in the technology platform, marketing programs and personnel for our recent acquisitions. Additionally, the seasonality of our acquisitions contributed to the higher operating expense ratio during this period. GAAP net income --

Ladies and gentlemen, you're experiencing a slight delay in our conference call. We should have our speakers back on momentarily. We ask that you please stand by. Please go ahead, gentlemen.

Sorry about the interruption. Bill?

Okay.

GAAP net income for the fourth quarter was $3.9 million, or $0.06 per diluted share compared with prior year GAAP net income, which included add $19.5 million net tax benefit, primarily related to the reversal of the Company's deferred tax valuation allowance of $30.4 million, or $0.45 per share. Because of the one-time nature of the prior year tax benefit impact, we believe pre-tax income is a more meaningful comparison. As a result of the increased operating expense ratio, somewhat offset by the higher gross margin, pre-tax net income for the quarter was $6.6 million, or $0.10 per share compared with $10.9 million, or $0.16 per diluted share in the prior year period.

Regarding full-year metrics, total net revenues reached $670.7 million, an increase of 11% or $66.7 million compared with $604 million in fiscal 2004. Online revenues grew 17.4%, or $53.5 million to $361 million compared with $307.5 million last year, and represented 53.8% of combined online and telephonic revenues, consistent with fiscal 2004.

Telephonic revenues were $260 million, down 1.2% compared with $263 million last year. Our retail fulfillment revenues were up 48.9% or $16.3 million to $49.8 million compared with $33.5 million last year. Combined online and telephonic orders totaled 10.213 million compared with 9.322 million orders in fiscal 2004. Average order size was $60.79, essentially consistent with $61.20 last year.

During the year we attracted 3.3 million new customers compared with 3.1 million last year. Repeat customers accounted for 47% of combined online and telephonic sales, up from 45% in 2004. Gross margin for the year was 41.1% compared with 41.9% in fiscal 2004, primarily reflecting the Valentine's Day anomaly.

Operating expense ratio was 39.3% of total revenues compared with 38.3% last year, reflecting the aforementioned strategies initiated in the second half of the year, as well as the seasonal nature of our acquisitions. GAAP net income for the year -- for the full year was $7.8 million, or $0.12 per share compared with $40.9 million, or $0.60 per diluted share, which included the $19.2 million net tax benefit, primarily related to the reversal of the Company's deferred tax allowance in fiscal 2004. Again, we believe pre-tax income provides a better comparison, pre-tax income was $13.2 million, or $0.20 per share compared with 21.9 -- $21.7 million, or $0.32 per diluted share in fiscal 2004.

Regarding our balance sheet, our cash and investments position at the end of the year was approximately $47 million. This reflects several factors. We used approximately $15 million during the year to acquire the WineTasting Network and Cheryl & Co.. We used approximately $9.8 million or our ongoing stock repurchase program under which at year-end, we had purchased approximately 1.3 million shares. Also, the shift in our fiscal year end to July 3 resulted in a significant reduction in our accounts payable balance, related to the scheduled payments on the first of the month. Inventory at the end of the year was in line with management's expectations of 28.7 million and reflects additional inventory associated with our acquisitions of BloomNet B2B florist operations, our expanded Fresh From the Glower -- Grower operations, and several product sourcing initiatives in our specialty brands businesses.

In terms of guidance, for fiscal 2006, we plan to continue the strategic initiatives launched in the second half of fiscal 2005 and expect to drive revenue growth in the range of 14 to 16%. We anticipate the majority of this growth will come through our online channels. Expect telephonic sales to grow at a single-digit pace and our retail and fulfillment segment, which includes our expanding BloomNet operation, our widening service business, and our Company-owned and franchise stores to grow more than 50%.

Regarding specific business areas, in our floral consumer business, we expect to drive double-digit revenue growth, thereby extending our market leadership. Within our specialty brands category in home and garden, we plan to build on the successful turnaround achieved during fiscal 2005 and expect revenue growth in the mid single-digit range. And in food, wine and gift baskets, we expect revenues to grow to more than $100 million through a combination of organic growth and the full-year contributions of Cheryl & Co.and the WineTasting Network.

During the year, we expect to expand our gross margin by approximately 150 basis points, primarily through a combination of product mix, pricing initiatives, improved product sourcing and fulfillment and customer service enhancements.

Regarding operating expenses during fiscal 2006, we plan to continue the investment in the three key areas we identified earlier. As a result we expect our operating expense ratio will be in line with fiscal 2005. As a result of these factors, during fiscal 2006 we expect to achieve pro forma earnings growth of more than 75% compared with fiscal 2005. As we stated in our press release we define pro forma earnings as GAAP net income excluding stock-based compensation as calculated under FASB 123R. We expect the non-cash impact of stock-based compensation expense during fiscal 2006 to be in the range of 3 to 4 million.

In addition to the strong earnings growth, and as a result of our relatively low working capital requirements we expect cash provided by operations to be more than $40 million during fiscal 2006 and we expect capital expenditures to be in the range of $14 to $16 million for the year.

Quarterly guidance. In terms of our quarterly guidance for fiscal 2006 it is important to note that we anticipate an increase in our seasonality of our business, primarily associated with our specialty brands, in particular the acquisitions we've made in the food, wine and gift basket area. As such in fiscal 2006 we anticipate a significantly larger concentration of both revenues and profits will occur in our fiscal second quarter, the calendar year-end period, which includes the holiday shopping season.

Conversely, we expect that our fiscal first quarter, traditionally our lowest in terms of revenue, due to the lack of any major gifting holidays during the summer months ,will record a larger loss compared to the prior year. This loss reflects the carrying costs associated with our recently acquired businesses, which achieve the majority of their revenues in the fiscal second quarter, as well as our continued investments in marketing programs and our BloomNet B2B operation.

On a quarterly basis, we expect revenues to be divided as follows -- Q1, 13 to 15% of total revenues; Q2, 35 to 37% of total revenues; Q3, 21 to 23% of total revenues; and Q4, 26 to 28% of total revenues.

I will now turn the call back to Jim.

So, as you've heard, we're seeing an increasing number of new and existing customers embracing 1-800-FLOWERS.COM as their florist of choice. As evidenced by our internal metrics that we track on retention, frequency, range of products purchased by customers, and the mix between local and long distance deliveries. Our growth rate is accelerating and that's in contrast to the rest of the floral category, where we are -- and we are doing it on what is by far the largest base. In dollar terms, our fourth quarter growth was almost $25 million and $67 million for the whole year. And for the fiscal year, we're projecting growth of approximately $100 million.

Our marketing efforts and message are resonating. During the first half of fiscal '05, we grew 6%. During the second half, almost 16%. We attracted 3.3 million new customers at a cost below our historical target of sub-$20. Our repeat rate increased again this year, evidencing the deepening relationship with our customers. Our message conveys our unique ability to provide our customers with choices, including our Fresh From Our Growers products, an innovation we pioneered more than 20 years ago; our florist designed gifts, hand-delivered same day anywhere in the country; our expanding gift collection, including our food, wine and gift baskets; and of course all of our gifts come with a 100% satisfaction guarantee, another innovation we originated more than a dozen years ago.

In home and garden, the turnaround continued and gained momentum. During the fourth quarter, revenue grew approximately 13% compared with the prior year period. For the full year, home and garden grew 6%. We are pleased with the progress here and anticipate driving solid mid-digit growth this year.

In food, wine and gift baskets, we achieved double-digit revenue growth. In addition during the fourth quarter, we acquired Cheryl & Co., bringing us not only a great line of delicious cookies and baked items, with our -- which are customers have already enthusiastically embraced, but also a very deep and talented management team. Cheryl & Co. has a history of strong sales growth and profitability that we believe can be enhanced by leveraging our operating platform, including our eCommerce technology, customer service and fulfillment capabilities, as well as our expanded corporate sales force and database of more than 15 million customers. Importantly, combined with our existing businesses, we expect to generate more than $100 million in sales in our food, wine and gift baskets this year.

Gross margin improved during the fourth quarter. We told you back in April that we would see a rebound in gross margins and we did. Gross margins increased 70 basis points to 40% compared with the prior year period and up 220 basis points, up from the fiscal third quarter. We expect gross margins to continue to grow. In conclusion, we are well positioned to achieve our stated goals of continued double-digit revenue growth and significantly faster bottom line growth. In terms of earnings and cash generation, and building long-term shareholder value. And that concludes our formal remarks.

So Tom, I would ask you if you will now open the call for questions, and Tom, if you could restate the instructions for the Q&A.

Thank you, sir. [OPERATOR INSTRUCTIONS)

We'll take our first question from Jeff Stein with KeyBanc Capital Markets.

Guys --

Jeff, we can't hear you.

We'll check his line real quickly. We'll go next to Paul Keung with KB -- I'm sorry, KIBC.

That's CIBC. Morning.

Good morning, Paul.

Good morning, Paul.

Good to see some traction in some of these, the B2B and the Cheryl & Co. and the wines. I was curious how the acquisition environment is out there, as you think about other pieces of your business going out the next year or two.

Well, this is Jim, Paul.

We don't need any acquisitions to continue on the path we've laid out for you. We will be opportunistic and proactive towards finding the right opportunities that can only enhance what we've already laid out for you as our growth objectives. And in terms of how we're finding the environment, the environment we're finding to be quite attractive. Mostly because people are reaching out to us now who have seen the benefits of what we've done with the WineTasting Network and most recently with Cheryl & Co. and of course in the past with Popcorn Factory and a few others that we've done.

That is when we can say to a management team, and we look for companies that already have good management teams that can only be enhanced by what we bring to the table, when we say to those managements, "How would you like to spend the majority of your time on the things that you know how to do well -- , sell, market, merchandise, and be alieved (ph) of the responsibilities on distribution and software selection and buying the copy machines and all the back end stuff that we already do pretty well?" And when management teams view that, like they have with Cheryl & Co. Or they interact with the people from Cheryl & Co. at the different trade shows that they will be at. And they hear from the WineTasting Network people or the Cheryl & Co. people how well it's gone for them and how their sales are really taking off and how they have the time to focus on the things that are important now, all of a sudden it's generating a lot of contact to us.

So we find A) we don't need it to execute this plan, but when we have good opportunities or products that we want to flesh out, like we did with the bakery product line that we had already started ourselves, and I think you'll see us be aggressive and smart.

Okay. And Jim, that makes total sense. I guess what I'm trying to balance here is as an investor, you hear a lot of interesting opportunities out there. But what sort of parameters will you put around accretion/dilution, discipline from an investor standpoint so you know what to expect given that sometimes opportunities may come up that might put another ball in the air, as you already have today?

Well, I think what we try and balance out is, what is our bandwidth? Obviously there's a financial bandwidth, but there's also a management bandwidth. Is it a product or service that would really enhance our ability to be our customers' florist of choice and from a dilution or accretion point of view , obviously we'd to buy -- the only things we would like to buy would be things that offer accretion, but that accretion might not be on a stand-alone basis. We have to view an accretion as it would be viewed as part of our enterprise.

And every now and then as in the case of the WineTasting Network, where we think there's an opportunity for longer -- on a longer-term basis for growth and has a product -- it's a product category that works out at about and our customers have asked us for, we would make it, we would make an investment.

Okay. Thanks a lot.

And we are going to go back to Jeff Stein with KeyBanc Capital Markets.

Hi, guys. I apologize. We had a fire alarm.

We're not the only ones with a telecom problem!

Yes. Well, I had to abandon ship. We had a fire alarm in our building.

So I may be repeating something you already discussed. But wondering if you could talk about the 300-basis point increase in marketing. Was any of the B2B initiative showing up on that line? And it seems like it was the biggest increase year-over-year of any of the quarters, and wondering if you may talk about how, as we roll into the new fiscal year, how that marketing and sales line is going to look?

Yes, Jeff.

The investments that we are making in B2B would sit on that line because, a lot of the investments there are personnel into the selling and advancing of the -- of a number of BloomNet shops that we have. And then ultimately services that we provide to them. So that sits -- so that personnel cost sits on that line.

The other -- the components of that is what we outlined back in January, which was the increasing and being more aggressive on the marketing front to accelerate our growth and as you saw the 6% growth rate in the first half of the year versus the 16% growth rate the second half of the year, we think that that worked out very well for us.

As we move forward to next year, as we've outlined in the press release, we think our operating expense ratio will be in line with this year. As we continue to make investments in those areas that we outlined last year, what we start to see some traction on that and then certainly in fiscal '07 and beyond we start seeing more significant leverage.

Okay.

Two additional questions real quickly, guys. One is on the retail and fulfillment line, you were up 73% in the fourth quarter. I presume there's a little bit of Cheryl & Co. on that line because I know they do have some retail stores, but can you tell us how much of that dollar increase represented your B2B initiative?

It's still a relatively small component of that is the -- is the B2B initiative. A lot of it, as we outlined in January, we feel -- we're really bringing on the personnel and starting to take traction now. And that's why we see -- as we continue to move out, that will contribute more revenue to that, but it's still a relatively minor component of that.

I think we said that you would see the revenue benefit from those efforts begin fairly strongly in the third fiscal quarter of '06, so starting that January quarter.

Okay. Thank you.

And final question. Bill, I'm wondering if you might just discuss in general terms how you see your path to an 8% operating margin by fiscal '08? It's pretty clear that you guys have a lot of things going on, and a lot of very positive things going on, but your operating margin for FY '05 was 1.8%. So you really need to really ramp it up and begin to kind of go into a harvest mode here if you're going to get to 8%. Where does that 8% come from? Is it a combination of B2B and B2C? Is one going to contribute more significantly than the other? And in what kind of increments should we expect to see your gross margins ramp up?

Okay. Yes, to a lot of what you said.

And the 1.8% that we achieved this past year again, was lower than normal because of the investments that we're making this year, that we knew we were investment spending during the latter part of this year -- during the latter part of fiscal 2005. Now, as we move into the future, we can continue to see double-digit revenue growth from 2006 through 2008. Gross margin improvement, we've given guidance for 2006 as to 150 basis points improvement in gross margin and that will -- and those margins will continue to increase as we move to 2007, 2008.

Certainly the BloomNet B2B initiative, which is an investment spend at this point, will be a major contributor as we get through to 2008. It is a very lucrative component of the whole floral -- the florist industry and heretofore, we have not participated in that -- in that part of the cash flow that's generated within this industry.

And then after -- beyond fiscal 2006 where we see operating expenses in line with 2005, we start showing the leverage that we were showing from 2002 to 2004. Where we were driving down our operating expenses as a percent of revenue. And continuing to become and be accepted as our customer's florist of choice by having a better lifetime value, getting frequency, retention, by offering the range of products that we have and therefore being more efficient on our marketing.

To add to Bill's comments, Jeff, that there is -- there are models out there in the floral industry than we have been different than. That is the big companies, some of our larger competitors out there have had a model that has had a blend of the B2B and the consumer. And heretofore, we've been 99% consumer business. But you'll see our model become more and more like theirs, not the same. We'll never have the same -- I don't anticipate that we'll ever have the same mix that they do because our consumer business is large -- larger and continuing to grow. But that we will start to look more similar in the years ahead and those models have shown you 8 and 10% operating margin opportunities.

And I think as we all evolve and adjust -- you already see evidence that this model works in the 8 to 10% operating margin range and that's why we feel with the five points that Bill made that we'll grow comfortably to that 8% operating margin and beyond.

Jim, do you think -- if you look at FTD's model they earn about a 25% operating margin in B2B. Is that an achievable goal for your model, or do you not need to operate at that level of profitability to get to 8%?

Well, I think that we envision that we won't -- we don't envision being at their level of members or anything. That's not our goal.

They do -- Teleflora, which is a non-public company and FTD, which is a public company, have wonderful business models, different than ours. But we think that we can achieve the 25% operating margin comfortably. In fact, in excess of that, but we won't be -- we don't have it as a goal to grow to their size in the B2B space. We think we can have the same or better margins on a smaller basis.

Thank you.

Our next question comes from Lob -- Bob Labick with CJS Securities.

Good morning, gentlemen. This is actually Joe on the call for Bob.

The 70 basis points in gross margin improvement, is this mix-related, or is this the result of some internal changes you made?

It's a combination.

It's not really a mix at all because our mix is consistent with the quarter. So the 70 basis point improvement this quarter over last quarter is on a very consistent mix as last year, so the mix didn't change very much.

Quarter-over-quarter, including the improved performance in Plow and Hearth and then just improved operating efficiencies.

Got it.

Just a follow-up on a couple questions that were asked already. You've ramped the marketing expense sort of at the -- you've ramped the marketing spend, rather, at the expense of your near-term operating margin. Can you just sort of give us an explanation of what you perceive the longer-term incremental return to be?

As we look at the increase, this is Chris.

As we look add the increased marketing spend, and I think we clearly have demonstrated the benefits of that so far in the last two quarters as you have seen us improve our position in the competitive landscape, extending our leadership position and increasing the number of new customers. That marketing spend was targeted at customer acquisition and we're seeing the results of that. And with the lifetime value that we have in our customers, we see the benefits returning to us starting in fiscal '06, especially in the second half of fiscal '06 as that spend is anniversaried.

Got it. Thank you.

We'll take our next question from Eric Beder with Brean Murray.

Good morning.

Good morning, Eric.

Could you talk a little bit about where the franchising effort is with your florists?

This is Jim.

I'll touch on that. Our franchising effort is something that we view as -- our network of florists that exclusive network of florists, is called BloomNet and we view our franchising as super BloomNet.

In other words it's a gradation of the relationship that we have with those few thousand florists in our network, giving them the option ,when it's attractive to them, to work under our branded umbrella or in a few cases in a co-branded environment. So franchising for us is an option that we make available on a limited basis to a limited number of shops, which takes a different kind of expense in staffing model to ramp up and we're not sure that that model is for everybody. So we view it as a gradation, as a super BloomNet opportunity.

How many people are now -- how many of your florists are now doing the franchising?

I would --

We have 83 franchises right now.

Wow. Okay.

Okay. And in terms of the BloomNet initiative, what -- where are you in terms of how many florists and where do you see as where you want to go in terms of how many florists make sense for you in terms of running a model to the efficiency you want to do it?

Sure Eric, for competitive reasons, especially in the early stages of our growth in BloomNet, we don't report on the numbers of shops. We are pleased to say that the growth is nice for us, as we're continuing to extend our relationship with our florists. But, again, as Jim mentioned earlier, our targets for BloomNet is not what our competition is at the 18, 19,000 member range. That is not our targets.

BloomNet has always been viewed in the industry as kind of the cream of the crop, the premier florist. And that's what it will continue to be. At the same time, as it grows, I think we're already beginning to see the effect it has on the marketplace.

Okay, and finally, in terms of growth this year, how much did Cheryl & Co. and the WineTasting Network add incrementally add to Q3 -- excuse me to Q4, to the quarter we just finished?

Yes, I [inaudible] for the year is very small, probably about the same thing. In Q4, it was certainly more than that, a couple of points, 3, 4 points.

And the bottom line?

And on the bottom line, because the seasonality of that business, they both lost, lost dollars, so that's what contributed to the higher operating ratio and the lower bottom line performance in Q4 this year versus a year ago.

Okay. And as you anniversary the marketing spend in the second half of fiscal '06, where is the -- where do you really see the focus going to be? You ramped it up this first half -- excuse me, the second half of fiscal '05 and you'll start anniversarying it. Where do you think that incremental spend going to go as you kind of reach that level where you already had started ramping up here?

We've already given our guidance on the overall performance this fiscal -- this current fiscal '06. I think what we realized throughout this year is that we have a cost advantage in terms of acquiring new customers and especially in floral, actually only in floral, and we have a better lifetime value. Positioned as our customer's florists, who give them choices, whether they want fresh from the farm grower product or they want designed -- florist designed product, they want our gift baskets, they want our candy, our bakery products.

By having those range of choices that we can have a better share of wallet from our customers and increasingly be seen -- even though the customers only view us as a long-distance provider now, increasingly by them being seen as their florist, giving us many more opportunities for interactivity and business with them. I think we realize hard that we have a lifetime value advantage and a cost advantage and we'll continue to press those.

So we won't give guidance beyond what we've already done it from a macro point of view on that spending, but we'll continue to press those advantages.

Okay. Thank you.

We'll take our next question from Anthony Noto with Goldman Sachs.

Hi. This is actually Jen Connelly in for Anthony.

Anthony, your voice sounds so different today.

Doesn't it?

Quick question, just on average order value. I think you guys had mentioned that it increased year-over-year, which I think --

I'm sorry, Jen, it increased in the fourth quarter, but it was basically flat or in line with prior year.

Right, but what drove the increase this quarter? I would think with the push to -- for Direct From Grower and the competitive environment, logically you would think that it would be decreasing. I think FTD also mentioned they had an increased order value. What do you think is driving that?

Well, again, think the main thing is we always stated on our average order value we expect it to remain consistent where it is. It will go up a little bit, it'll go down a little bit.

As we look at our increased efforts in our Fresh From the Grower category, I think it's evidence that we're able to continue to grow that category without pressure on the average order value. And as well as our broad range of product offerings. So similarly I think it's the broad range and our ability to manage our customers' expectations if they are really looking for a good quality gift, not necessarily-- we are not getting into a price competition issue.

I think the example there, Jen, is as we introduced our Popcorn Factory product in the last couple of years, which is a lower average ticket, people were concerned their average ticket would go down. As we introduced the Cheryl & Co. product, people thought, well maybe that'll drive your average ticket down. But it hasn't because the Cheryl & Co. product, for example, is a product that people buy several units of and The Popcorn Factory, similar.

And over the last year, particularly over the last two years, I would say, we've introduced in the floral category much higher price point products, our designer product. That's our Jane Carroll product, our Julie Mulligan product and our Jane Packer product. Those have higher average price points, so as Chris said, it's the range of products. Yes we're introducing lower price points, at the same time we're always introducing more enhanced products and our designer collection frankly, is one that will be mimicked by others because it's clearly a product that the customers embraced.

Okay.

And also you had mentioned that the operating expenses grew faster this quarter than last quarter. And part of that was the seasonality of the acquired businesses. If you could just explain that a little bit more.

Well, just -- Cheryl & Co., which we acquired basically the first day of this fiscal quarter, their big revenue and where they make their big bottom line contribution is in the holiday fourth quarter, our fiscal second quarter. So we're buying -- we bought them in this fourth quarter where they have to absorb the overhead because they their volume is low.

Right.

The wine business as well, the volume is low during this quarter, so you're absorbing that much more of the overhead, that those companies have and so they drive up their operating expenses as a percent of revenue.

Okay, and so would you expect to see operating expenses grow faster than revenue in the early quarters of '06?

Yes, I think what you -- for the year, we said it's in line, but, yes, there is some seasonality to that as well.

So first quarter, yes. Second quarter, no.

Okay. Great. Thank you.

And we'll take our next question from Rebecca Kujawa with Stanford Group.

Hi, thank you.

I wanted to talk about -- actually I had a couple questions about BloomNet but I think most of those have been answered.

Now about the WineTasting Network. Now obviously this is a marathon as opposed to a spring going into the holiday season this year, but could you give us an update on the technology investments that you've made, the operations, logistics, where you see that business going over the next 12 months?

Well, what we've stated about the wine business is that the WineTasting Network and Ambrosia, the two pieces that we acclected (ph), are very small pieces. And they are not the be all and end all of what we'll need to provide our customers with the wine gifts that they will need. It's a good piece, but not everything.

Our investment that -- as we explained in our last quarterly conference call, was in a couple of few million dollar range to help buttress their infrastructure to help them to be able to handle the new volumes we expect they will do over the next couple of years.

Okay. And from a legal regulatory standpoint, obviously the supreme court decision came through in your favor -- in the WineTasting Network's favor. How have you seen the state react to that and do you see it being favorable?

Rebecca, the trend has been favorable.

The New York state reacted very quickly after the supreme court ruling and they passed legislation just recently that opened up the market for direct shipment from wineries. The next step, as the industry keeps moving forward, is to open up direct shipment from wine retailers and we are hopeful we're all moving in the right direction that way.

Keep in mind, they have not -- they said they've signed a law, but it will be another 60 days before they build the administrative processes that we can apply and be licensed to ship into New York state. The other states that have come across are Ohio, Texas, Florida has some legislation pending -- will have some legislation soon because the state supreme court in Florida has just called their restrictions unconstitutional, so the legislature is charged with going back and fixing the laws.

So in general, the trend is good. It's not going to have an atomic impact on us in the near term, but each of these steps is incrementally very positive for us.

Okay. And then one question about BloomNet that I'll get in there.

I don't know if you're going to be able to answer it or not. But what do you see as your competitive advantage for BloomNet versus Teleflora or FTD's network? Is it going to be a cheaper price, is it better technology that you're supplying to them, is it just another alternative, what do you see?

Excellent summary. We embrace your summary, but in general, we're not -- we're really trying not -- we're not trying to be competitive with Teleflora and FTD in the B2B area. What we -- our B2B effort is to enhance the service and the capabilities that we have available to be our customers' florist of choice.

Now, there are some revenue opportunities out because we're leveraging off things we already do for our Company-owned stores and for our franchisees. And letting a few more florists into our network to help us with our volume growth, with our capacity interest and increase the range of products and services that we bring to our customer, so our competitive advantage is that's what our intention is. The overriding thing is that, as the leader in the category, we have what those florists most want, which is a lot of orders to help them to make their businesses profitable.

It's not a secret that the retail florists are under some severe pressure and have been for a number of years. If you have a big network and you're trying to keep everyone in the industry in your network, that's a tough challenge and I respect the hard work that both Teleflora and FTD and others who are trying to be in that business have to do to try and maintain that in the face of a declining base. Our is a very different proposition. All we're trying to do is enhance our ability to deliver products and services to our customers and increase the depth of our relationship with the florists we already and have a few others we'll take in.

But they are under increased pressure, so we're hearing more and more from them that they are looking for help. That just plays to our advantage. And having the lion's share of the orders in the category gives us a decided advantage in pursuing that path.

Great. Thank you very much.

Our next question comes Kristine Koerber with JMP Securities.

Yes, hi. A couple of questions.

One, I think in the past you've talked about increasing your monthly fee to be in the BloomNet network. Has that occurred?

I don't think we've discussed that and I don't think it's occurred.

Okay. Fair enough.

As far as the food, wine and gift business, you talk about having that business be in excess of $100 million for '06. What is the base that we're working off of?

Base --

What it is this year?

Yes, what did you do for '05 as far as those categories?

Yes, I think between The Popcorn Factory, 800-BASKETS, including the Mama Moore's, which we sold baked goods under --

There's probably in the $60 million range, projecting a mid-teens growth rate in our food, wine and gift basket category.

Plus the addition of Cheryl & Co. on a full-year basis.

We expect organic growth to be -- certainly be in the mid-teen range and then we add on the acquisition that we made.

Okay, and then lastly, can you just give us a little more color on the direct from the grower business? I mean how fast is that business growing and how big of a piece of your overall business is it? Thanks.

Yes, again, while we track that category, Kristine, again, we look at -- the main thing is our floral business, as we stated we're very closed with our growth in the floral category, supported by both the florist designed category as well as the Fresh From the Grower.

Clearly since we've stepped up our efforts, the focus on the choices we give to our customers this past year, our Fresh From the Grower category is growing at a significantly -- growing at a higher rate and growing very nicely to the point where we think we're very competitive in the marketplace.

Frankly, we think we have some margin improvements that we can build into that Fresh From the Grower program. Although we've been at it for 20 years, it's not an area that we've made a concerted effort in terms of margin on, but frankly we see there's an opportunity to improve our margins there by several points.

Thank you.

And our next question comes from Anthony Lebiedzinski with Sidoti & Co.

Good morning. A couple questions.

With respect to the wine business, how many states are you currently allowed to ship directly to consumers and where do you see that being by end of this calendar year?

We began this quarter at about 23 states that we legally ship to and I think that number is, will grow to about 30 by the end of this calendar year would be our guess.

So the additional seven states, that includes New York and then some of the other states that you mentioned, right?

New York and Texas and Ohio, Michigan doesn't look like it's going to go the way we would like to see it go, but that's one out of six so far.

Okay. And looking at your capital spending plans, 14 to 16 million for the year, that's somewhat higher than you guys had spent in the past. I was wondering what the reason is for the increased CapEx.

Yes, some of it has to do with the acquisitions that we have made. Some of it with regard to enhancing some of the fulfillment capabilities that we have, as well as we continue to invest in the technology side of our business.

Okay. And lastly, with the local fulfillment center, the LFCs, where are you with you that and is there any plan to expand those, or are you happy with where you are right now?

There's no plan to expand that. What we have is, we have a BloomNet category and a subparts of BloomNet are franchising efforts and our design centers. And the design centers, as we go forward, are increasingly becoming our franchisees, so that's why you'll see that number come down and the franchisee number go up.

Okay. Got you. Okay, thanks.

Our next question comes from Rachel Kenstenbaum (ph) with Glenhill.

My question's been answered. Thank you.

Thank you, Rachel.

Our next question comes from Oz Tangun with Southwest Securities.

Good morning.

Good morning.

Good morning, Oz.

I wasn't sure if I was on the line or not. Anyway, couple follow-up questions. Can you guys talk a little bit about the trends in the all-line (ph) advertising costs and overall responses you get from different channels.

Sure, Oz. This is Chris.

I think the trend in online advertising continues -- costs, continues to increase in different areas and as you point out, you get different effectiveness in different areas. Clearly as we look at Q4, we're very pleased with our results to grow the top line as we did. And as we look at one of the areas that had grown significantly in costs, online search advertising, and we discussed that about -- at Valentine's Day being very irrational in cost. We think we turn it to somewhat of a rational level during the Mother's Day holiday. So, as Bill likes to points out, that's irrational. So that's encouraging.

I think as we look -- we continue to face the challenges of the large advertisers in the world moving online and buying up ad space and things like that, so that's also why you have seen our mix in trend change as well between online and offline. What we're very pleased -- I think the best way to point out the results that have us very excited and looking forward and thus our guidance for the next year, is our ability to manage our marketing costs overall and produce the kind of customer acquisition that we did at the cost that we did. And, again, as Jim pointed out earlier, taking our growth rate up from 6% in the first half of the year to 16% in the second half of the year.

So I guess on an ongoing basis, should we assume that there will be some pressure there. But if you get the response rates, then the percentages, you feel comfortable with and the longer-term plan, the plan that suggests you will get to 8%-plus operating margin. So you will have higher advertising spend as a percentage of total revenues, but you will get more productivity and still achieve 8%-plus on an ongoing -- longer-term basis.

That is exactly our plan, Oz, and again I think, our ability to demonstrate the results of that so far.

And, Jim, can you talk a little bit about are you seeing any competitive reaction? It's early on with your B2B initiative, but are you seeing any competitive reaction? And are there any potential issues, like contracts and things like that, that some of these florists may have in terms if that will, maybe slow down your ramp up or be a problem down the road?

I, I haven't, Oz, and I don't anticipate it, frankly. This is a category that has -- the B2B side is a category that has two very big players in it that have had good-long-term businesses and we have no intention of trying become anywhere near their size. It's not our intention.

As I say, our goals are to fulfill the business as best we can, deepen the relationships with the florists we have, develop a few more relationships because of the growth in our retail business, so we don't plan on competing with them. We haven't seen a competitive reaction. This is a marketplace that frankly, with a duopoly of sorts at the top really isn't looking to react to it because we're not a threat to them. Our success is not at their expense.

Sure. And can you guys talk about what the stock-based compensation was in '05? Was it similar to what you're expecting in '06?

What we had -- we did not have to record stock-based compensation in '05. It runs through kind of the footnotes. You always had to disclose the impact. It was actually higher in '05 through the footnotes because we accelerated some old out of the money options that -- that it still was higher in '05, but it ran basically just through our footnote disclosure, didn't run through the P&L.

Great.

Finally, how do you guys see the overall environment? Do you feel, especially on the floral side, feel that the percentage of customers -- the frequency overall, percentage of people that are buying flowers either for self-consumption or gifts, is that expanding? Do you have any comments about the general macro trends?

I do. This is Jim.

Oz, I think it looks awfully good. I know the historical lookback metrics that we get from the Department of Commerce or from the Society of American Florists paints a 3% kind of growth, 2-4% growth range. But frankly we're seeing a lot better than that and we think that it can actually accelerate.

I think as marketers spend less in online advertising, which doesn't do a lot to generate new customers, and are forced by the macro issues that Chris talked about to spend their money in offline advertising will be very beneficial for the category. Because if you're just advertising to people who say they want to buy flowers, it's like yellow page advertising. You're just trying to grab a bigger and bigger share of the people who have already made that purchase decision, where if you're doing broadcast and print and TV and radio advertising, then you're generating customers as well.

And I think that will be very good for the category. As it becomes more expensive for our competitors online, for them to look to offline means and I think that we'll get at least our fair share of the benefit of their change in marketing. So we're feeling very good about the floral category and as the only real florist in the category, we get the opportunity to get a much deeper relationship with the customers we have.

Keep in mind, Oz, that we estimate now that a small -- low 20% number of our existing 15 million customers view us us their florist. As we get that number to move up from 20, low 20s and higher, then their purchase frequency goes from that one time a year to three, four and five times a year and that's the magic for us.

Sounds great. Thank you very much.

[OPERATOR INSTRUCTIONS]

We'll go next to Ryan Randall (ph) with Pinell (ph) Capital.

Hi, thanks for taking my question.

Are you calling from Tahiti?

No, I'm not calling from Tahiti, but thanks for asking.

The question regards -- you guys spoke a little bit about how you expect to see your operating expenses trend through the year. Now, previously you talked about you were going to see leverage starting in the calendar one quarter of 2006. Do you -- as that happens, do you expect to see that continue across the year, across 2006 calendar year?

Yes, yes, we do.

Okay.

And--

And beyond.

Into fiscal '06.

With ever greater leverage.

Okay, okay. So that's when we should start to see that. Now, you spoke about the increase in gross profit margin. Now, you're talking about, I assume, to clarify, 150-point basis -- 150 basis point increase year-over-year?

That's correct.

That's right.

Okay, and should we expect to see that kind of trend across all four quarters as well, or how would you expect that to begin to show traction?

I think it's slightly heavier in the, in Q2, which is the fourth calendar quarter because, especially because of the mix of business. That's when we have the Cheryl & Co. product line kicking into full steam, Popcorn Factory of course, WineTasting[inaudible] largest quarter then and those products enjoy a better profit margin.

So, yes, steady throughout the year, but with a heavier emphasis in that second fiscal quarter.

Okay.

So possibly even year-over-year, definitely year-over-year increase accentuating throughout.

Yes.

Yes.

Okay, and then you talked about some recent progress with home and garden, mid-teen growth this year.

No, mid-teen growth in the quarter.

Front quarter.

Sorry. In the quarter, year-over-year?

-- mid-teen growth year-over-year, which compared to last year's 6% decline year-over-year.

Right. And then going forward, you said it's going to be a mid to single-digit growth year-over-year.

That's right.

Can you talk a little bit about why that is mid-single-digit?

Well, because the fourth calendar quarter, our second fiscal quarter, is by far that product line's heaviest quarter. The second heaviest would be the spring where we saw the 13% increase. But when you factor in your -- the -- the distribution costs, your -- your prospecting efforts, which are heaviest during the fourth quarter, that will modify the growth rate for the year.

If you -- what we saw this past year, was that the home and garden category was down in the first quarter it was up 2% for the second quarter, 7% in the third quarter, 13% in the fourth quarter. Now we're looking at that, looking at the business as we go into this year and during, as Jim mentioned the holiday fourth, our our fiscal second we're at comp plus-2%. And what is the most efficient way to spend against that to drive top line growth, but also bottom line performance at that brand?

As you look across where you put your capital, Ryan, a company like Plow and Hearth, which is the cornerstone of our home and garden products, is a category that is driven primarily by the marketing through catalog. And that's a more expensive model frankly, to drive your business on relative to the other categories that we have. So driving flowers growth is much less expensive than it is driving growth of a Plow and Hearth, which is primarily driven through a catalog.

So where we choose to allocate our capital will determine the anticipated growth rates in each brand.

Okay. All right. Thanks very much.

You bet.

And there appear to be no further questions in our queue. At this time, I would like to turn the call back over to Mr. McCann for any closing comments.

Thank you, Tom, and thank you all for your interest today.

As reminder here at 1-800-FLOWERS.COM, your florist of choice, even in these dog days of summer, we're sure that you have friends and family who are celebrating birthdays. And we invite you to try our beautiful signature birthday flower cake, a gift that is guaranteed to put a smile on the face of someone you care about. And don't forget our delicious collection of gourmet gift baskets and delectable bakery gifts from Cheryl & Co., perfect for any summer celebration. So, simply call, click or come in today. Thanks for your time.

This does conclude today's conference call. We appreciate your participation. You may disconnect at this time.