1-800-Flowers.Com Inc (FLWS) 2006 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to your second quarter 2006 1-800-FLOWERS.COM earnings conference call. My name is Liz and I will be your in coordinator for today. At this time, all participants are in a listen-only mode. We will, however, be facilitating a question and answer session towards the end of this conference. If at any time during the call you require assistance, you may key star followed by zero and a coordinator will be happy to assist you. I would now like to turn the call over to your host for today's presentation, Mr. Joseph Pititto, Vice President of Investor Relations. Please go ahead, sir.

Thank you, Liz. Good morning, everyone, and thank you for joining us today to discuss 1-800-FLOWERS.COM's financial results for our fiscal 2006 second quarter. My name is Joseph Pititto and I am Vice President of 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 Patti Altadona 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 up 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 to remind everyone that a number of the statements that we will make today may be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed description of these risks and uncertainties, please refer to our SEC filings, including the Company's annual report on Form 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. And a recording of the 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.

Good morning, everyone. As we announced in this morning's press release, during our fiscal second quarter we achieved record revenues of $278 million, representing growth of 21% or $48 million compared with the prior year period. This growth can be attributed primarily to a strong contribution from our recent acquisitions, particularly in our food, wine, and gift basket category, where our newest brand, Cheryl & Co, performed especially well. The growth we achieved during the second quarter illustrates the success of our strategy to expand our gift offerings through a combination of internal development and strategic acquisitions that leverage our collection of operating assets and the deepening relationships we have with our millions of customers. This strategy is particularly important during this year-end holiday shopping period, when we are increasingly competing with a broad range of gift retailers in our core floral gift category as well as in our specialty gifts, both online and store based. Before I turn the call over to Bill for his review of the specific results and metrics for the quarter, I'd like to highlight a few key achievements. First on the product front. In our food, wine, and gift basket category, we enhanced the growth of our Cheryl & Co brand by providing them with access to our extensive online marketing programs and expertise. As a result, more than a third of their revenue during the quarter came online, up significantly from last year. In our home and garden gifts category, we achieved double-digit revenue growth, reflecting the continued success of our efforts to improve the marketing and merchandising of our Plow & Hearth brand and the benefit of our product line extension and weather themed gifts, which we acquired during the quarter. Season and products fit well with a gifting profile of our existing and target customers. Second, on the customer front, during the quarter we attracted more than 1.3 million new customers with 57% of them coming to us online, up from approximately 1.2 million and 54% in the second quarter of last year. In addition, we continued to deepen the relationships we have with our existing customers, as evidenced by the 51% repeat order rates achieved during the second quarter, which was consistent with the prior year period. And, third, during the quarter, we achieved further growth in our Bloomnet business, where we continued to extend our florist network and began to introduce new products and services designed to help our florist members enhance the growth and profitability of their businesses. As we've noted in our past several calls, Bloomnet has been an area of investment spending for us over the last 12 months. During this time we've added personnel and begun to develop a suite of products and services for our florists, creating what we believe is the best value proposition available to them today. Based on our strict quality requirements, Bloomnet continues to be a highly selected and highly desirable network of florists that is continuing to grow. Going forward, we expect to see increasing leverage in this area and with a growing contribution that will accelerate throughout the second half of this fiscal year and into fiscal 2007. I'd now like to turn the call over to Bill so that he can take you through the details of our financial results and key metrics of the fiscal second quarter.

Thank you, Jim. Despite the increasingly competitive nature of the year-end holiday season, we achieved solid revenue and gross margin improvement over the prior year. Importantly, in the second half of fiscal 2006, we expect to achieve continued strong sales growth, particularly in our core floral operations, as well as enhance our year-over-year gross profit margin. Additionally, comparatively flat year-over-year operating expense ratio that we saw in the fiscal second quarter reflects the increased investments that we began in January of last year, particularly in our stepped-up marketing programs and our Bloomnet business initiative. On a comparative basis, in the second half of fiscal 2006, these investments will begin to anniversary developing an increasing operating leverage, particularly in our fiscal fourth quarter. Regarding specific financial results and key metrics for the second quarter, total net revenues reached 277.8 million, an increase of 20.8% or 47.8 million compared with 230 million in the same period last year. Online revenues grew 23.8% to 133.4 million, compared with 107.7 million in the second quarter last year. These online revenues equalled 51.6% of combined online and telephonic revenues for the second quarter of fiscal 2006, compared with 49.6% in the same period last year. Telephonic revenues were 125.1 million, up 14.2%, compared with the 109.6 million in the prior year period. This increase primarily reflects the revenue contributions from our new Cheryl & Co brand and the contribution from planet [INAUDIBLE] extension in weather themed gifts, added during the quarter in our home and garden division. Retail Fulfillment revenues were 19.3 million, compared with 12.8 million in the year ago period. This increase primarily reflects revenues from Bloomnet and contributions from our wine operations and the retail stores of Chery & Co and Plow & Hearth. During the quarter, our combined online and telephonic orders totaled 4.285 million, compared with 3.635 million orders in the year ago period. Average order size during the quarter remained consistent at $60.33, compared with $59.77 in the prior year period. During the quarter we added 1.3 million new customers with 745,000, or 57%, coming to us online. Gross profit margin for the fiscal second quarter was 45%, up 45 basis points compared with the same period last year, primarily reflecting product mix but offset in part by increased promotional pricing. Operating expenses as a percent of revenue, including 1.1 million of non-cash stock-based compensation, was essentially flat at 38.5%, compared with 38.2% in the prior year period. This reflects the revenue growth achieved during the quarter, largely offset by the investment areas that I mentioned earlier. As a result of these factors, our GAAP net income for the second quarter was 10.3 million or $0.16 per share, compared with 8.7 million or $0.13 per share in the year ago period. Pro forma net income for the quarter was 11.2 million or $0.17 per share. We define pro forma income as GAAP net income excluding stock based compensation expense and other related tax effects. We provide pro forma net income and EPS because we believe it offers a meaningful year-over-year comparison. However, their use do not lessen the importance of comparable GAAP amounts. Regarding our balance sheet. Our cash and investments position at the end of the quarter was approximately 61 million. We anticipate growing our cash position during the second half of this fiscal year. Inventory of 39 million was in line with management's expectations and reflects both the sell through of inventories during the holiday shopping period, particularly in our specialty gift categories, and conversely the buildup of inventories for our fiscal third quarter, particularly for the Valentine's holiday and the spring gifting season. Regarding guidance. As stated in our press release this morning, we have reaffirmed our guidance for fiscal 2006 full year revenue growth of 14 to 16% compared with the prior year. In terms of bottom-line results, adjusting for the actual results to the first six months of fiscal 2006, we expect to achieve pro forma earnings growth of approximately 40% compared with fiscal 2005. Regarding the current fiscal third quarter, which includes the Valentine holiday, we anticipate the period will represent approximately 21 to 23% of our full year revenues. In summary, as we enter the second half of fiscal 2006, we are focused on achieving continued double-digit revenue growth, including stronger growth in our floral operations. In addition, we believe we are well-positioned to enhance our gross profit margin and achieve improved operating leverage which, when combined, will enhance our bottom-line results. I will now turn the call back to Jim.

And to sum up, we're pleased with the better than 20% revenue growth we achieved during the second quarter, particularly in light of the increasingly competitive nature of the year-end holiday shopping season. Combined with our first quarter results, revenue growth for the first half of fiscal 2006 was approximately 19%, compared with 6% in the first half of fiscal 2005. This reflects our strategy to drive double-digit revenue growth through a combination of internal initiatives and strategic acquisitions. In our consumer floral gift business, we continue to extend our leadership position through our stepped up marketing efforts and the success of our your florist of choice message, which conveys our unique ability to provide our customers with choices including same day delivery of beautiful florist designed gifts, our fresh from our growers offerings, our exclusive Expert Designers Collection, plus all of the great gifts that customers expect to find at their favorite florist, candy, gift wear, towers of baked gifts and an expanding range of gift baskets and gift sets. In our Bloomnet business we continue to expand our florist membership and have begun to introduce products and services designed to help our Bloomnet members enhance their productivity and profitability. While this has been an investment area for us this past 12 months, we expect to see increasing leverage during the second half of fiscal 2006 with a growing contribution that will accelerate into fiscal 2007. In our food, wine, and gift basket category, we continue to see excellent growth opportunities We have already become a significant player in the category, with revenues expected to surpass $100 million this year. Our target here is to become the leading provider of gourmet food, wine, and gift baskets for all of our customers' personal and business gifting occasions. Looking ahead, as we enter our fiscal third quarter, which includes the important Valentine's holiday, we are confident that we can achieve both solid revenue growth and gross profit margin improvement compared with last year. Importantly, this year's Valentine's Day falls on a Tuesday, a better day placement from a logistics and fulfillment standpoint compared with last year when it fell on Monday. Beyond Valentine's Day, we're excited about several innovative new marketing and merchandising programs that we will begin launching this quarter and throughout the second half. These include a splashy rollout of our Happy Hour Collection, a new signature floral line that is perfect for every day gifting occassions, personal and business. You'll also see some great new names added to our Exclusive Expert Designer Collection. For example, our partnership with Preston Bailey, one of the world's foremost wedding designers, as well as additional brand name gift partners, expended programs that have become increasingly popular with our customers. We believe these factors, combined with our focus on driving double-digit revenue growth and improved operating leverage, will enable us to enhance our results in the second half of this year and beyond and thereby build long-term shareholder value. That concludes our formal remarks. We'll now open the call for your questions. Liz, please restate the instructions for the Q&A.

Ladies and gentlemen, at this time, if you have a question, please key star followed by one on your telephone. If your question has been answered and you wish to withdraw your registration, please key star followed by two Once again, ladies and gentlemen, star, one to ask a question. Now will you please hold a few minutes while we compile your list of questions? And your first question comes from the line of Anthony Noto with Goldman Sachs.

Thank you very much, Jim, I was wondering if you'd comment a little bit, I don't think you mentioned this on the call in your acquisition intra-quarter, your private line extension for Plow & Hearth, what did that contribute in the quarter in revenue and then profits? Second question, as you continue to build out the Bloomnet relationships, do you think there's a bottleneck or some barrier that you can break through that can really accelerate your growth there or is it just a certain sales cycle that's going to take a certain amount of time? If there is a bottleneck or a challenge to kind of break through to really bring on a much bigger network, how do you overcome that? Thanks.

Going back to the first part of your question regarding our weather-related gift products that we acquired intra-quarter. What we purchased there we spent about $5 million. We bought the inventory and the intellectual property related to that area. We already had a good experience with the weather-related gift items under the Plow & Hearth brand and this gave us the opportunity to extend and deepen our offerings within that category. So, it was an opportunistic thing that we were able to take advantage of in that quarter. Again, just the inventory and the intellectual properties that we acquired there. That $5 million expenditure last year, if you view those assets as a standalone enterprise, they probably did $11 million in sales with a full-blown marketing effort against it. They would do about 50% of their sales in a quarter. We bought them intra-quarter, so you can see it would be a few million dollar contribution. On the second part of your question with regard to Bloomnet. Anthony, I don't anticipate nor do we expect or frankly plan on any kind of a breakthrough effort. What we said when we began that effort just 12 months ago now is that we saw an opportunity to provide a range of products and services to help our florists, the network we had built and kept purposely small, to offer a better proposition for them in the marketplace. We've done that and we expect that it'll continue to go at the pace it's going. We don't intend to have any big sales push to bring on members. Our strategy there is to continue to deliberately and selectively expand our Bloomnet network as our volume demands call for and as our service requirements and our service offerings for those Bloomnet florists would dictate. So I think you can expect to see good steady sustained growth both in membership where appropriate but in particular in terms of depth of relationship with those florists.

Great. Thank you very much.

Liz, do we have another question?

Yes. Your next question comes from the line of Heath Terry of Credit Suisse First Boston.

I was wondering if you could talk just a little bit about what you're seeing in marketing and customer acquisition expenses. This is the first quarter in quite some time where we've actually seen sales marketing as a percentage of revenue decline. And I was wondering is that something that is being driven by the mix of advertising that you're using? Are you actually seeing kind of your unit advertising costs come down in certain channels or are you just seeing a better response rate from the advertising that you're doing?

Yes, Heath, this is Bill Shea. First, if you'll recall back in January, the third quarter of last year, after coming off about 6% growth the first half of last year, we were going to step up our marketing efforts and we were going to continue that stepped up marketing effort. So we haven't really anniversaried that higher spend at this point in time. That's why you see marketing and sales as a percent of revenues not come down. As we start anniversarying that in the second half of this year and going forward, we'll start seeing more operating leverage there.

I think you can expect, too, that during the holiday quarter, it's a bigger quarter for our specialty brands than are the second two quarters of the fiscal year, the one we're in now and spring quarter. And that marketing mix is a little different in that quarter in that much more of our marketing efforts are around the catalog distributions of those brands. We're still seeing net/net and we still expect to have a less than $20 acquisition cost for new customers. So we've been able to hold that consistently over the last couple of few years. But if you look at it intra-quarter, as we do internally, the December quarter would be a higher cost of acquisition in the blend of the year because of the disproportionate use of catalogs during that quarter for our specialty brands.

Great. And then obviously one of your competitors, FTD, has had some pretty public comments about the cost of search-based advertising relative to the return that they're getting from it. Can you talk about what you're seeing specifically within that channel?

I'll ask Chris to cover that. Sure, this is Chris. Certainly search is an expensive yet effective marketing vehicle for us, one of our overall marketing channels. We did not see any spike in costs this holiday season. Actually, this past holiday season, search costs were comparable to last year's holiday season.

Great. Thank you very much.

And your next question comes from the line of Rebecca Kujawa of Stanford group. Please go ahead.

I wanted to talk actually a little bit about Anthony's question about Bloomnet. Could you give us a sense for what types of things we can be looking for? I know that the big push on Bloomnet hasn't developed further the services and the depth of relationships with the Bloomnet members. I understand you're going to be putting out the directory, the next version of it, here in January and then perhaps you can talk about the schedule of that. And then perhaps any other services you'll start to market to those Bloomnet members over time.

I'll ask anyone else here to jump in on that, Rebecca. This is Jim. The kinds of products and services that you've started to see from us are, of course, the directory, which we first launched with a September mailing, the second mailing for the calendar quarter, second fiscal quarter was our first revenue generating book and now there is a book in the market now, which is our second revenue generating book. We're very happy with the progress of those directory efforts. In addition, you see us now increasingly introduce new products into the marketplace that help our florists to get involved in their customers' lives from an every day and holiday expression point of view, but with a particular emphasis on the every day piece, like our new Happy Hour Collection. And there some of the products we're introducing there combined with the services are sourcing that product directly for our florists so they can get it at a good price and have unique product that help them to differentiate their capabilities, our collective capabilities, with our customers. So you're seeing increase from Bloomnet there in our ability to sell through product to our florists to help them. Product sales, the catalog, advertising services, credit card clearing services, and, of course, we introduced about five months, six months ago now the Bloomnet exchange, which allows the florist members to send orders from one to another within that network. So they all have an opportunity for that same high quality fulfillment experience that we've had for the 1-800-FLOWERS.COM orders, now they can enjoy that and experience that for their own customers' orders as well.

Can you give us any update on your franchising efforts to the extent that you have them?

Our franchising efforts are simple and small. We have the same 100 to 150 franchisees, depending on how you classify our design center relationships, and those are expected to grow very modesty over the foreseeable future. It's super Bloomnet for us, but our primary focus is on delivering the right products and services to help our Bloomnet florists, who are increasingly challenged by the number of florists in general in the marketplace declining, their lack of top-line revenue growth, which has given us an opportunity in terms of Bloomnet being a much smaller, more selective organization to attract the very best florists who want what we have, which is sales and sales growth opportunities with a mix of products and services we bring to them.

On the gross profit margin, I think Bill mentioned in the prepared remarks the discussion that you may have seen a little bit more pricing pressure from competitors, although some of that was offset by lower product costs. On the pricing pressure from customers, are you seeing a more competitive environment across the board? Is it particular categories? What would you expect - obviously the December quarter is unique in some ways. You see that competition continuing in the other quarters as well.

I think we did basically see it across the board. Certainly, for the floral category in the holiday season, what we find is that where we used to have -- where the floral category used to have an advantage over many other -- the other gift categories, because it was always the last minute gift. That has become less and less over time. In the floral category, we're competing against many other categories, a broad range of categories and therefore that has put some pressure on the growth during this particular period. As we get into the second half of our fiscal year where 75% of our revenues are all in the floral category, we certainly have competition. We have competition within the floral category, but we're not competing as everybody else out there. So we think there will be less pressure on promotional pricing.

That's why, Rebecca, this is Jim, why we think what we saw this last quarter reinforces our decision a few years ago to put an emphasis on the specialty products category, because, as Bill mentioned, it could easily be interpreted and perhaps it is by us that when FedEx and UPS and the Internet were much less factors in the florist world, we had the luxury of being the thing you could do at the last minute. Now every product, every service is available right up to the last minute. So as Bill says, we're not just competing in the floral space, we're competing in the whole universe of the gifting space, which is why we've invested our capital and our efforts at making sure we had the right brands and the right products, so we had the products that customers want during that category, not just relying on the products that customers had no choice about for a last minute gift. Now, with our candy products, our fruit and gourmet products, all of our gift baskets, our bakery gift products, increasingly we have the range of products that allow us to do well in a quarter like this in spite of the fact that we seem to be a little bit more challenged on the floral growth side in the grand picture of things. And that's why you see such accelerated growth in our specialty brands.

One last question if I could and then I'll step out. You've talked a couple times in the last couple quarters about the corporate giving efforts. Obviously the December quarter would be an important benchmark. Could you give us an update on how that group performed in the second quarter?

Sure. Chris, can you handle the gift services group? We continue to make good progress in the business gift services and I would say especially this year with the additional product line from Cheryl & Co. Again, similarly as Jim was just referring to on the consumer segment, same thing on the corporate segment for us, having, though, that broad range of gifts and products really helps us deepen the relationship with our customers. One quick example, there was a customer last year who had placed a $45,000 floral order for the Christmas holidays. We would not have gotten that order again this year if we didn't have the baked goods product line. So they were looking for something different, so we were able to maintain that by providing them the baked goods. We're continuing to make good progress. And again, because of the extended product and brand capabilities, deepening the relationships with our corporate customers.

Thanks.

Thank you.

And your next question comes from the line of Kristine Koerber of JMP Securities.

Yes, hi. A couple brief questions. You talked about inventory being up and a lot of it, Bill, going into development today. We've seen inventory up quarter after quarter. How much of the inventory is considered core? Is there any reason to be concerned?

Kristine, inventory's within -- where management expected it to be. If you look at it compared to our year-end, June is obviously a seasonal shift for that. Even if you look at it year-over-year where it is up, what you have to take into consideration is that we did not have a year ago the Cheryl & Co. brand and the products associated Cheryl & Co brand. The weather-related product line that we acquired during the quarter. And as Bloomnet continues to grow and brings out additional services, they are buying especially pre the big flower holidays like Valentine's Day and Mother's Day, we're taking on inventory for that that will then sell through in January prior to the Valentine's Day holiday. There is no concern with regard to the level of the inventory that we have.

And then --

I think, Bill, Kristine also asked what our new expectation on steady state inventory is.

I think inventory for the remainder of this year would be about in the mid 30s.

Okay. Fair enough. And as far as wine and wine tasting, can you maybe talk about how that did this holiday season now that you've owned winetasting.com versus a year ago when you were just partnering and selling some gift baskets with wine? Has there been strong demand for wine products in general?

The wine category is one that we think over the next five years will become an important category for us, Kristine. The acquisition we made of those assets, just a year ago now, are very small. They're less than 1%-- around 1% of our sales. It's not a big contributor. So I'll tell you, in spite of that, that, yes, we're seeing the landscape change and be more favorable to our customers there. We're taking steps to increase our wine gift basket sales there and we saw good uptake on those gift baskets this holiday quarter. As we said, the whole food, wine, and gift basket category has done extremely well for us. I wouldn't want to isolate just the wine category. I don't want to give you a false lead there, it's just a very small business right now as a standalone business, but it's a nice contributor to our overall capabilities in the food, wine and gift basket area.

Okay, great. Thanks.

Your next question comes from the line of Mark Mahaney of Citigroup.

I want to get a little bit more clarification. You'd mentioned a couple of times the, I think your words were, the increasingly competitive nature of the holiday season. Just in the consumer floral part of the business, it doesn't sound like you saw that in terms of increased marketing costs, in terms of key word search pricing increasing. So was there something else about the consumer floral business that made you make those comments about a increasingly competitive nature or should those comments really meant to reflect other parts of the business? Thank you.

I think it's just an overall comment. I don't know anyone who thinks their category isn't getting more competitive, Mark. What we mean to say there, and I'll ask Chris to cover specifically the search part of that, but in general it used to be that our catalog brands were finished with business a week after Thanksgiving, no more than two weeks after Thanksgiving. And now they're busy right up until the last day because customers have come to expect that they can order in the last minute and get things the last minute. You saw all the kinds of discounting that would go on as different companies, whether they're department stores or they are direct marketers or food shippers, get nervous when business isn't coming as early and so they put on different competitive pricing scenarios and drop shipping costs and things like that. You see the shipping, the discounting and all in every one of the food, gift categories, frankly, all of the gift categories throughout this holiday season as people got more and more nervous as we got closer to the holiday itself. So logistically we've geared ourselves to have a later and later holiday every year and it has been the case. So our comments about the competitive nature isn't specific to floral, because you're right our costs did not go up there on a marketing basis, but overall we're just seeing a very competitive landscape. There are lots of people who are trying to get a share of the customers' wallets and we're one of them and we're fighting hard for it. And the only thing I will add to that, Jim, you already covered, again, from a floral category perspective, it's just fighting for share of mine in the cluttered competitive holiday season with all of the other categories. State marketing cost point of view, again we did not see anything. In the search field, no spikes, no increases.

Thank you very much.

Your next question comes from the line of Eric Beder of Brean Murray.

Eric Beder of Brean Murray, good morning.

Good morning.

What is the expected CapEx for the year now?

I expect the CapEx is in the 16 to $17 million range.

How much additional cost did you have for your move that you did this year?

Once for the P&L, probably $0.5 million to $1 million. And then there is CapEx associated with that leasehold from the way things get treated for accounting purposes. Even when you get a tenant allowance, you get your gross up to fixed assets and then you basically get the tenant allowance through reduced rent over the lease term, over long terms. That was a change in accounting a couple years ago.

500 to a million?

Yes.

What -- I saw you guys did not do very much in terms of the buyback. What is the thinking in terms of the buyback in terms of what you want to do and what is the thinking in terms of the buyback, I guess in.

The buyback is, this is Joe Pititto. As we've stated in the past, cash flow in excess of our business needs, we really have two uses for it. First and foremost is to grow the business. So the strategic acquisitions that we've been making. Second is stock repurchase. The fiscal second quarter is a quarter where, as you know, we go into the quarter at the low point on cash, as we build inventory, we finish the quarter, obviously, most of that turns back into cash. So, as Bill mentioned, we finished the quarter with 61 million in cash and we'll build cash over the next two quarters. So, while we weren't active in the fiscal second quarter, in second half of the year we do expect to be active in stock buyback again.

In terms of Bloomnet, you guys have opened up the directories, you've done some other pieces. When do you believe you'll have a similar set of services comparable to FTD and Teleflora in terms of that if a florist wanted to basically get rid of FTD entirely, or Rainbow Services, they could do it and use your entire base of services to run their business?

I would think in terms of the services we want to offer, I think we already offer a suite of services that satisfy a florist's need in terms of running their business today. We have a whole suite of services that we will be introducing each quarter for the foreseeable couple of years that will help and enhance that florist's ability to conduct business. But I don't think there's anything that a florist needs to operate now that we don't provide.

And finally, could you kind of give me a little more depth in terms of how the shift for Valentine's Day from Monday to Tuesday affects you guys in terms of positives for this year?

Well, there's two ways. I can't say they're both positive. From a positive point of view, though, the logistics associated with Valentine's Day, and I'll ask Chris and Bill to chime in as well, by the holiday moving to a Tuesday, you have FedEx shipping capability, UPS shipping capability and all of our overnight means available to us now for pick up on Monday and delivery on Tuesday. Where last year you didn't have the case. It was either picked up Friday or picked up Saturday, so product wasn't going to be its best and you had surcharges related with those Saturday pickups and you had products sitting in a box over two or three nights after they'd been sitting in a box in the coolers. So that's why we moved away from that. And the pieces that we did do had the surcharges for Saturday preparation and pickup. It had a gross margin hit to us last year because of that straddle of the Saturday Sunday period that you won't have this year. Logistically, we have more flexibility this year in terms of the means we use to deliver our products to customers. I think the florist delivery methodology is the best for the consumer, because it's properly hydrated, properly conditioned, properly handled and, by the way, professionally arranged and designed product that can be delivered to the consumer. You'll see us heavy emphasis on that, but we do have back-up capability with our overnight delivery. There is a consequence, though, for Valentines Day as you see it move to each of the different day placements. We'll be smiling bigger next year when it's on a Wednesday and the year after as it moves later in the week on Thursday, because we're benefited by our customers being in the office over the week where this year they'll be at home Saturday and Sunday the majority of them. That's why Thursday and Friday are the best placement days for us because all of the days leading up to Valentine's Days are workdays, which are better for us from a sales perspective.

Okay, thank you.

Your next question comes from the line of Jeff Stein of KeyBanc Capital Markets.

Good morning, Jim. A question getting back to gross margins. It looks like you guys fell pretty far short of the mark in terms of where you wanted to be from a gross margin standpoint and you have taken your guidance down considerably for the year. So my question would be twofold. Number one, can you talk a little bit more specifically about where you saw the greatest margin degradation in the second quarter relative to plan? And number two, if it is in fact due to a more competitive environment and this perhaps is now a structural issue going forward, do you guys still believe in 8% operating margin by fiscal 2008 is still a realistic target since gross margin enhancement is one of the key drivers here?

This is Jim. Jeff, on the first part, it's clear that we planned on doing a lot more business this quarter than we did. Therefore, we inventoried up, we planned up, we did all the things to handle more business. The bad news is we would have liked to have done more business than we did and we didn't. The good news is we still had a respectable quarter and we still had -- and we didn't tank our margins. In fact we still improved our gross margins. But clearly we thought that we'd have more sales opportunities and better traction than we did. So that's confessions of the soul there. That's what happened. And as I say, the saving grace on that is that we still are able to improve gross margins in spite of that. And we didn't have -- and we could move inventory before it became an issue for us.

Did the miss in gross margin, though, come from having too much merchandise that you didn't sell through and you had to mark it down? Or did it come from certain or just did it come from mix? I think it really, Jeff, this is Bill, is again, the consumer continues to buy later and later. As we were alluding to before with the competition and competing with all the advertisements out there for whatever it's for, for free shipping or markdowns and stuff like that, and with the consumer buying later and later, we were kind of forced into taking some markdowns and doing some promotional pricing and to kind of spur the top-line. So that's really where the margin impact came. When we get into the second half of the year, we were much more floral in nature. We don't have all those same, the same level of competition, because we're not competing in all those other categories, not really competing. That will ease up. An then as Jim mentioned, some of the logistical improvements with the day placement of Valentine's Day will help us to still get better -- improve our margins.

Looking longer term, Bill, your 8% targeted operating margin for fiscal 2008, do you still believe that's a realistic target? And if so, how do you get back there given the changing nature of kind of this later shopping environment?

Jeff, we have not changed our longer term outlook for an 8% operating margin in this Company. We still believe that there are margin enhancement opportunities for us. We got a look at it during the Christmas holiday quarter with the trend towards people buying later and later, and we still think there is significant operating leverage in our model. Now obviously, we spend a lot of time talking about Bloomnet. Bloomnet is a very high margin business. As that starts to mature, as we get into '07 and certainly '08 when we have a full suite of services and the size of Bloomnet is larger than it is today, that will be a significant contributor.

Bill, just a housekeeping item. The 40% growth in earnings on a pro forma basis, I presume that excludes FAS 123.

Yes.

If you include FAS 123, what kind of growth rate are we looking at and off of what base? Is it off the $0.12 base, first of all? And what would we be looking at?

The $0.12 base is what last year was. That did not include any stock option compensation charge. So that's why we provide the pro forma for comparative purposes. As you saw in the first quarter and in this quarter, it's about a penny a quarter impact on EPS. .

Right.

That would continue into Q3 and Q4. So for the full year, you could just add the four quarters up and it would be a $0.04 impact.

Okay, very good. Finally, the growth in floral orders, can you talk a little bit about that? Just isolate floral orders for the quarter?

If you looked at our organic growth rate, it would be 5% on the floral side, 6 - 8% on the other products, whether or not you include the growth that we achieved in Cheryl. So our specialty brands grew let's call it 6%. And if you include the outsized growth rate of Cheryl from its base that we bought, it would be 7 - 8%.

Thanks a lot.

Your next question comes from the line of Anthony Lebiedzinski of Sidoti & Co. Please go ahead.

Good morning. I joined the call late, so I apologize if I repeat the questions.

That's why we butchered your name.

That's okay. I'm used to it. Regarding the sales growth, top-line overall grew 21%. And I was wondering if you could just say how much of that was organic sales growth and how much was it from acquisitions.

I'll do it quickly because we just covered that, Anthony. 21% growth rate, the primarily contributor to our growth was the good performance of the acquisitions we made in the last year, all in the food, wine, and gift basket area. Our organic growth rates of flowers would be 5%, for our specialty brands would be 6%, and for the growth, if you included the growth piece we achieved with Cheryl with it's outsized growth above its base that we bought through the April year-end, it would be 7 - 8%.

That's helpful. It looks like your CapEx is actually somewhat more than what your previous guidance was. I believe your previous guidance was around 14 million and now it's around 17. What is the primary reason for the increase?

I think our guidance was always 16 plus million. I think what you saw in the first half is just a timing shift this year versus last year. Last year our CapEx was 13.5 and a lot of it came in the second half of the year. This year a lot more of it came in the first half of the year.

It's still consistent with what we'd forecast for the year. It's just that we did more in the first half of this year than we did last year because we had to move our office and all and that was CapEx expenses hit in this quarter versus being spread out over the year.

And just getting back to the gross margin, it was up 40 basis points year-over-year, and it was trying to -- maybe you could quantify this perhaps. Certainly there was some markdowns that you spoke about. I was wondering if you could just maybe give us a little bit more color as to how much of the gross margin improvement was because of Cheryl & Co. and how much was that offset by some of the markdowns that you had to take?

Yes. I think what we had kind of indicated was Cheryl and other non-floral products. It was product mix really contributed to the improvement -- the overall improvement in margin but it was offset. It was actually in excess of the 40 basis points and then it was curtailed by the promotional pricing, which didn't get us even stronger growth which is what we had targeted internally.

So you said it's more than 40 basis points in terms of the product mix. With you quantify how much that was?

I don't think we have that information readily available. Maybe it would have been double that, without the discounting, closer to 60 basis points more.

Okay. Finally, what is your bottom-line guidance for the third quarter of '06, the March period?

We've reaffirmed our guidance for the full year. And then, as we always do, Anthony, we give the percentage of revenue that we expect each quarter to contribute. So we don't give guidance on an EPS target each quarter.

It isn't clear. We reaffirmed the top-line guidance and we will be accounting for the impact of what happened to our first half of the year, we have earnings guidance for the year of now a growth of about 40%.

On a pro forma basis, right?

On a pro forma basis.

Okay, thank you.

Your next question comes from the line of Robert Labick from CJS Securities.

Good morning, Jim and Bill, this is Casey sitting in for Bob. You mentioned several new products and services that you're rolling out to Bloomnet. What investment are necessary for these rollouts and can you speak to your targeted ROI? Thank you.

Yes. Two quick questions. If you need more we will certainly drill down. In terms of our targeted ROI on that business as it matures is about 25%. Excuse me, a gross margin of -- operating margin of about 25%. We've invested over the past year through the P&L in that business over the last 12 months, and we don't see any capital expenditures to develop the different products or service offerings that we'd like to introduce each quarter that will have a capital consequence to them. They'll all primarily run through the P&L or through our ordinary CapEx budget, so there's nothing different than what's already been forecast that will enable us to offer those products and services.

Thank you.

Once again, ladies and gentlemen, if you have a question, key star, one at this time. Gentlemen, you have no further questions.

Thank you, Liz. And thank you all for your questions and your interest. And if you have any additional questions, please contact us. In closing, I'd like to offer a reminder. As you've heard in our call Valentine's Day is an important holiday for us and to you and it's just weeks away and it's never too early to visit your florist of choice, 1-800-FLOWERS.COM, where you'll find that the best selection of gifts all designed to help you say Be Mine, Valentine. We have everything from our True Love Bouquet, by expert designer Julie Mulligan, to our new Love Potion arrangement, the latest addition to our Happy Hour Collection. So don't wait, call, click or come in today to 1-800-FLOWERS.COM, your florist of choice. Thank you.

Ladies and gentlemen, this concludes your conference call for today. We thank you for your participation. You may now disconnect. Have a good day.