1-800-Flowers.Com Inc (FLWS) 2006 Q3 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by and welcome to the 1-800-FLOWERS.COM third quarter of 2006 earnings conference call. My name is Carlo [ph] and I’ll be your coordinator for today’s presentation. At this time all participants are in listen-only mode and we’ll be facilitating a question-and-answer session towards the end of today’s prepared remarks at which time if you’d like to ask a question, please press star one on your TouchTone telephone. If at any time during this call you require audio assistance, feel free to press star zero and a conference coordinator will be happy to assist you. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s conference, Joseph Pititto, Vice President of Investor Relations. Please proceed.

Thank you, Carlo. Thank you, Carlo. Good morning and thank you for joining us today to discuss 1-800-FLOWERS.COM’s financial results for our fiscal 2006 third quarter. My name is Joseph Pititto and I’m vice president of investor relations. For those of you who have received a copy of our press release issued earlier this morning, the release can be accessed at the investor relations section of our web site at 1-800-FLOWERS.COM or you can call Patty Alpidonna [ph] at (516) 237-6113 to receive a copy of the release by email or fax. In terms of structure our call today will begin with brief formal remarks and then we will open up the call to your questions. Joining today will be Jim McCann, CEO, and Bill Shea, CFO; also joining us today for the Q-and-A section of our call is Chris McCann, our president.

Before we begin, I need to remind everyone that a number of the statements that we will make today may be forward looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed description of these risks and uncertainties, please refer to our press release issued this morning, as well as our SEC filings including the company’s annual report on Form 10K and quarterly reports on Form 10Q.

In addition, we will discuss this morning’s certain financial measures that were not prepared in accordance with generally-accepted accounting principles. Reconciliations of those non-GAAP financial measures to the most directly comparable GAAP measures can be found in the company’s press release issued this morning.

The company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today’s call, any recording of today’s call, press release issued earlier today or in any of its SEC filings except as may be otherwise stated by the company. I’ll now turn the call over to Jim McCann.

Thanks, Joe. Good morning, everyone. As we announced in this morning’s press release during our fiscal second quarter we achieved record revenues of $180 million representing growth of approximately 15% or $23 million compared with the prior year period. This was driven by more than 20% growth on our online revenues, and importantly was achieved despite the shift of the Easter holiday from the third quarter where it fell last year into the fourth quarter this year.

Before I turn the call over to Bill for his review of the specific results and metrics for the quarter, I would like to highlight a few key achievements. First on the product front. In our call fall gift category we achieved 12% revenue growth despite the highly competitive nature of the Valentine holiday. This growth on the largest space in the category further extended our market leadership position. In our food, wine and gift basket categories, we sold continued double-digit revenue growth driven largely by our share-owned company bakery gift business, this despite the largely floral nature of the Valentine holiday and the Easter shift out of the quarter.

During the quarter, we also significantly expanded our position in this key gifting category with the announcement of our pending acquisition of Fannie May Confections brands. The Fannie May, Harry London and Fannie Farmer names represent premium chocolate brands with a history of very strong customer loyalty. These brands offer a significant opportunity for growth particularly through the leveraging of our assets and capabilities in the online and direct marketing space. The acquisition also brings an experienced and focused management team that can help us achieve the leadership position that we have targeted in the food, wine and gift basket category.

Second, on the customer front during the quarter we attracted 824,000 new customers with 73% of them coming to us online. At the same time, we enhanced the relationship we have with our existing customers as evidenced by the 58% repeat order rate achieved during this quarter, which was consistent with the prior year period.

And third, during the quarter we achieved further growth in our Bloomnet business where we expanded our florist network and developed new products and services designed to help our florist members enhance their growth and profitability. We are already beginning to see contributions from the investments we’ve made in Bloomnet during the past 12 to 18 months, and we anticipate our ramp-up of those contributions in fiscal 2007 and beyond.

I’ll now 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 third quarter.

Thank you, Jim. Despite the highly competitive nature of the Valentine holiday, during our fiscal third quarter we continued to drive double-digit revenue growth and improved our gross profit margin compared with the prior year period.

Importantly, in our current fiscal fourth quarter, our second largest in terms of revenue and profitability, we expect to continue these trends, thereby extending our market leadership in the floral gift category while concurrently building a leading position in the food, wine, and gift basket business.

Regarding specific financial results and key metrics for the third quarter, our total net revenues reached $180 million, an increase of 14.6% or $23 million compared with $157 million in the same period last year. This included organic growth of approximately 10% and 12% growth in our core floral gift category despite the shift of the Easter holiday.

Online revenues grew 20.3% to $110.3 million compared with $91.6 million in the third quarter last year. These online revenues equaled 68.1% of combined online and telephonic revenues for the quarter compared with 63.8% in the same period last year illustrating the continued migration of our customers to our online channels across all of our brands.

Telephonic revenues declined 1.7% to $51.5 million compared with $52.4 million in the prior year period. Retail fulfillment revenues were $18.2 million compared with $13 million in the year-ago period. This increase primarily reflects growing revenues from our Bloomnet business, as well as revenue from our Cheryl & Co. retail stores.

During the quarter, our combined online and telephonic orders totalled 2,549,000 compared with 2,432,00 orders in the year-ago period. Average order size during the quarter increased to $63.51 compared with $59.24 in the prior year period. This increase primarily reflects a combination of product mix, increased add-on sales and pricing initiatives.

During the quarter we added 824,000 new customers with 602,000 or 73% coming to us online. This was achieved while concurrently stimulating repeat orders from existing customers who represented approximately 58% of total revenues consistent with the third quarter last year, plus profit margin for the fiscal third quarter increased 140 bases points to 39% compared with the same period last year primarily reflecting product mix and pricing initiatives.

While operating expenses as the percent of revenue was flat at 40.2% compared to the prior year period, when we exclude costs associated with nonanniversaried requisitions, this ratio actually improved the approximately 140 bases points during the third quarter. Going forward, this is a key area of focus, and we expect to begin demonstrating enhanced operating leverage in our fiscal fourth quarter and increasingly in fiscal year 2006 and beyond.

For the quarter, noncash stock-based compensation for the $1.1 million pretax and $700,000 net of tax for approximately $0.01 per share. As a result of these factors, our GAAP net loss for the third quarter was a $1,540,000 or $0.02 per share, an improvement of $506,000 or 24.7% compared with a net loss of $2,046,000 or $0.03 per share in the year-ago period.

Pro forma net loss for the quarter excluding stock-based compensation expense was $821,000 or $0.01 per share representing an improvement of 59.9% or $1,225,000 compared with the prior year.

Turning to our balance sheet. Reflecting the seasonality of our business, our cash and investments position at the end of the quarter was approximately $19 million. This includes both the $37 million reduction in accounts payable during the quarter, as well as an inventory build for the upcoming spring holiday season. Expect to generate cash during the current fiscal fourth quarter and anticipate finishing the fiscal year with a cash position of approximately $40 million excluding the impact of our pending acquisition of Fannie May Confections brands.

Inventory of approximately $43 million was in line with management’s expectations and reflects the build-up of inventories of our spring gifting season, particularly in products for our growing Bloomnet business and our Plow & Hearth garden products.

Regarding guidance. I stated in our press release this morning it reaffirmed our revenue growth guidance 14 to 16% for fiscal year 2006. In terms of bottom-line results, for the full fiscal year excluding the impact of the pending acquisition of Fannie May Confections brand, we expect to achieve pro forma earnings growth of approximately 40% compared with fiscal year 2005. We expect a combination of operating losses associated with the seasonality of the Fannie May business and interest expense from the debt financing that we use for the acquisition will reduce fourth quarter EPS by approximately $0.02 to $0.03 per share. As we stated in our earnings, our earlier press release, we expect the acquisition will be accreted to earnings in fiscal year 2007.

In summary, as we enter our fiscal fourth quarter, we are focused on driving double-digit revenue growth, growing our gross profit margin, and improving operating leverage. I will now turn the call back to Jim.

So in summary, we are pleased with the continued positive growth trends that we see in our business during the third quarter including double-digit revenue growth, 15% overall and more than 20% online driven by our expanded marketing programs both online and off and despite the impact of the Easter shift.

It is also important to note that our organic growth for the quarter was 10% including 12% growth in our core floral gift category. Additionally, we continue to grow our Bloomnet business further expanding our florist membership and developing new products and services to help them grow their businesses. We are very excited about Bloomnet and we anticipate growing contributions of this business in fiscal year 2007 and beyond.

In our food, wine, and gift basket categories, we continue to see excellent growth opportunities. We are rapidly becoming a leader in this key gift category through the success of our organic growth initiatives and key acquisitions. With the addition of our latest acquisition of Fannie May Confections brands, which we expect to close next week, we anticipate revenues in this category will exceed $200 million during the fiscal 2007.

Now looking ahead, as we enter our fiscal fourth quarter which includes the important spring holiday season, we have focused on achieving both solid revenue growth and gross profit margin improvement compared with last year. In our floral gift business, we’re excited about the initial success we’ve seen from the innovative outdoor marketing program that we launched with CBS Outdoor for our Happy Hour Collection, a new Signature floral gift line perfect for everyday gifting occasions. This has been the best new product launch in our company’s history and we plan to build on it with additional new Signature gift items and innovative marketing and merchandising programs have leveraged our successful Your Florist of Choice marketing message. We believe these factors combined with our focus on achieving increased operating leverage will enable us to enhance our results in the current fiscal fourth quarter and beyond and thereby build long-term shareholder value.

That concludes our formal remarks and will now ask Carlo to open the call for your questions. Carlo, please restate the instructions for the Q and A.

[OPERATOR INSTRUCTIONS] Sir, our first question is from the line of Anthony Noto with Goldman Sachs.

Thank you very much. Jim and Bill, I was wondering if you’d comment a little bit more on a telephone year-over-year revenue decline. Exactly what do you see undergoing that trend? Is it ASP, is it orders? And then separately could give us a sense of the organic growth for the overall company or specifically the online revenue, the organic growth excluding acquisitions on a year-over-year basis? Thanks.

Sure, Anthony. In terms of the first part of the question is?

Just on a telephonic.

Telephonic decline is consistent with what we’ve been saying. We expected to have a single-digit decline. It wasn’t as much as we thought it would be. But obviously, out pays by the online growth. I think we’d probably state that we are probably close to where we expect to be in our most mature brand on line, the 1-800-FLOWERS brand in terms of the mix between the telephonic and online. We expect that it’s going to stay in that 80/20 kind of range, so we’re within a couple points of that now and that’s frankly because pf our customers who come to us online sometimes also come to us telephonically. Certainly there’s a customer service occasion that they want to contact us that they order flowers for someone at the hospital, had a new baby, and they’ve already been discharged by the time they place the order and they need to contact us. That contact tends to be done on the telephone, so I’d expect that in our most mature brand, we’re about where we want to be, and in the less mature brands like Cheryl & Co. which a year ago had little or no business online, the first year of operating results will probably yield them close to 30% of their business online from essentially zero. So as the less mature brands as we build their online businesses, you’ll continue to see the trend line move up like it was this quarter, 68% of overall business being online and with our most mature brands being in the 80/20 range.

Anthony, just with about to organic growth, we stated in the release that the organic growth was approximately 10%.

And 12% of floral genre.

Thank you very much.

Yes.

And sir, our next question is from the line of Jeff Stein with KeyBanc Capital Markets.

Good morning, guys. A couple of questions for you. First of all, one for Bill. Wondering, Bill, if you can help us model Fannie May on kind of like a quarter-by-quarter basis. How should we think about dilution and accretion as we move into fiscal year 2007 by quarter?

Okay. Jeff, we provided in the press release regarding the Fannie May transaction and subsequent filing of an 8K that Fannie May was about $7 million or so and we anticipate them finishing the year ended April ’06 about $75 million a little over $12 million in EBITDA. We anticipate being able to grow both those numbers under our own initiative as we move forward.

It is a seasonal business with a large component of the profits being in the holiday period, the holiday fourth quarter period, and we have to realign their year-end quarters into our fiscal year.

They make a little bit of money in the quarter after the holiday quarter so in that kind of early late winter/early spring quarter they do lose money during the summer months, so the impact we indicated on our fourth quarter between the financing course and their operating loss they’ll be losing a little bit, $0.02 to $0.03.

Okay. I was wondering, Bill, if you can talk a little bit about the marketing as a percent of sales. You guys had indicated that you did not see the same customer acquisition costs that FTD did over the Valentine’s Day period, yet your marketing costs were up. Can you go into that a little bit?

I don’t think we did comment on the marketing costs of Valentine’s Day. I think you might be referring to our last quarterly call when we were asked questions about whether or not we saw the irrational pricing at Christmastime, but I’ll ask Chris to comment on what we’ve seen in terms of online spending costs during this current this last quarter.

Yes, specifically these competitives some of the competitives that’s come up in the past that’s really related specifically to Search, and we continue to see Search be somewhat rational in our category. As we mentioned, during the Christmas holiday season and again that continues through a Valentine’s Day. Of course, it spikes up at a holiday, but compared to prior year it’s comparable if not less. So we didn’t see any spike there.

And Jeff, just one of the comments you made in the formal remarks was that while we’re showing an operating expenses as the percent of revenue being flat year over year, we are absorbing Cheryl & Co. which we acquired in the early part of the fourth quarter last year, the third quarter this year, and then the Wind and Weather kind of product line brand where these are nonseasonal times for these businesses. So they’re impacting our leverage ratio in the year-over-year comp.

It would have been down.

And if we excluded them, we would have been our operating residual would have been 140 bases points better.

Got it. Got it. One last question, guys. Now that you’ve purchased or agreed to purchase Fannie May, wondering if you see any additional holds in your nonfloral gifting categories that you might still may be on the outlook for.

Well, I think the way we’d categorize that is we’ve been pretty successful and demonstrated a core capability here in integrating these different small acquisitions we’ve made. Now, granted, the Fannie May acquisition is the largest of those acquisitions and we expect to close that next week. But I think we’ve demonstrated a pretty good capability of integrating them where it’s appropriate to integrate them.

And in terms of other categories, clearly we’ve set out a range of products and services that we want to continue to provide to our customers and deepen our capabilities in each of those categories. In the floral business clearly we have a lot of assets and the leading position in the marketplace. Clearly, we’ve not been making acquisitions there.

But where it is appropriate in those adjacent food, wine and gift categories in particular where you can get assets that you can help to lever and grow more quickly will continue to be delivered, studied, and strategic and how we look to flesh out those categories.

Thank you.

And, sir, our next question is from the line of Bob Labick with CJS Securities.

Good morning. This is Casey Flavin [ph] sitting in for Bob. Can you give us an update on the number of new members in Bloomnet?

Well, as we look at Bloomnet again, Bloomnet is still being in its early stages and for competitive reasons, we’re stating that we’re not giving out specific metrics there. I think you’ll see the continued success of Bloomnet on our retail fulfillment line as that continues to grow driven primarily by the growth of Bloomnet.

Other than, in addition we continue to enhance the products and services we’ve introduced over the year, so directly with the first product and that continues to grow nicely for us. Credit card clearings have been introduced, selection guide, plus product sales through Bloomnet’s purchase net continues to grow. Next year you’ll see it’s continued to add other products and services to that base of Bloomnet. And again, Bloomnet is not targeted to grow anywhere near the existing numbers that are otherwise services, but is a much more selective group of florists.

Great. And can you give us an idea of what the competitor’s response to these products and services have been?

Well, this is Jim. I would say that it’s difficult for the other plays in that category to change. They already have a full breath of services. They already have wonderful cash flow businesses. They’re just mature in the cycle where a classic disrupter coming in with a unique set of assets, our successes, of course, are not dependent on any activity or actions by those two entrenched competitors, just we have a wonderful set of assets. We intend to continue to leverage them and build a very good, very significant business.

Okay. And can you give us an update on how the revenues for Bloomnet member have been versus your expectations? Are they higher, are they lower?

I think so. In fairness what we’d say is that we’re pretty much on plan with what we anticipated of Bloomnet. It’s still a very small contributor and when you look at the overall piece of the as a small piece of the overall business. And I think as we get to the year end at the end of this quarter when we get to our year end conference call, we’ll obviously get the more specifics in terms of Bloomnet, but this is the first operating year. We’re not going to break out the individual revenue per shop, other than to say that we’re very happy with its performance and it’s right on target.

Right. Okay. And how do you view the success of your new customer acquisition methods, such as Outdoor, and are they ahead or behind the expectations?

Well, this is an experiment for us, Casey. We launched this partnership with CBS Outdoor. Wally Kelly, the CEO of CBS Outdoor approached us back in the fall and we huddled with them around the holiday season when the holiday season is a good time for us to catch up, because we’re all busy at work and apparently all the people at CBS Outdoor are too. And we came up with a really neat campaign here where we were able to introduce with this being the only media. Now, of course, we had the Happy Hour Collection for months on our site, so we had a good sense of what we could do with our own internally generated interest among our own customer base. So we have a very, very clean test here where we tested in six months with CBS Outdoor: New York, Los Angeles, Atlanta, Miami, Denver, and Washington, D.C. So we’re on billboards, we’re on transit, bus shelters, phone kiosks, some mix of all of those in those six markets and it’s just a test. But the results have been frankly phenomenal. I think we had the most successful new product launch for us ever, probably for the category ever. And what’s unique about this is it’s something that speaks to our florist mix. This is a product that can only be made by florists. It’s not practical to ship it by an overnight carrier or anything. We have it available for same-day delivery. Florists are in love with the product because it’s a good price point. It’s got reasonable margins. It’s fun. It puts smiles on people’s faces. We have holiday versions of it, but it’s especially a nonholiday item, a neat way for men and women to express themselves and connect with the important people in their lives.

It’s gone so well in its first six-city launch that we’ll tell you now that we’re launching nine new markets beginning in May and that’s Chicago, San Francisco, Philadelphia, Detroit, Cleveland, St. Louis, Baltimore, San Diego and Seattle. So this is starting to pick up momentum and now we’re hanging lots of other stuff on it. And what’s nice about this, yes, we’re an online company, yes, we’ve spent a lot of money and have had a lot of successes with online marketing. But now that our brand is so strong, 1-800-FLOWERS.COM you tell people both ways they can come to you. Now we have this really disruptive kind of media out of home where anyone, especially with the population being so wide now and so many of them having high-speed access that if you’re on the street or in a car in any of the six cities that we’ve launched in, you know who 1-800-FLOWERS is and you know about this new Happy Hour Collection. And those market results have been phenomenal. We’re seeing something in the order of seven-time ratios of sales in those markets of just that product compared to the national audience.

So if that holds up with the other nine markets, we’re going to have a very fun time for us at 1-800-FLOWERS and for Bloomnet, because its florists are doing well and purchase them because we’re selling them the products, so it’s an example of what we hope will be a wave of new products that help our florists to help their customers to connect and express themselves and do well in the process.

That’s very, very helpful. Thank you.

And, sir, our next question is from the line of Eric Beder with Brean Murray.

Good morning.

Yes, sir.

Could you talk about in some respects the ramp-up from in terms of the new acquisitions in terms of how much presence they have on the Internet and how quickly do they ramp up to kind of the levels you’d like them to be in terms of the Internet, maybe like with Cheryl & Co. and some of the ones you bought last year kind of the ramp to them to move on more on the net.

I’ll ask Chris to speak to the second half of your question, Eric. This is Jim. I’ll tell you on the front end of it the management team there that we’re delighted to be partnering with who will be staying on to run these three brands for us, they have a very aggressive plan to go directly to the consumer.

In the first couple of years of operating this business, this management team had to be focused on stabilizing the business, reintroducing the brands, orchestrating their back end manufacturing and reintroducing the products in markets it had disappeared from. They’ve done a great job at that.

Now phase two for them is now that they have all these other directed and consumer assets to play with is to really focus on the business model they already have, but especially on the new part of the business model, which is directly a consumer business.

There’s a third aspect too, which is the second most important product for us is florists to be able to bring our customers uniformly across the country is candy. People expect that their florist would carry candy. They expect that it’s an add-on product that they can send with flowers or in gift baskets, but also a product that might be a stand-alone product. So we’re that’s why we went looking for this product line and for these brands. And we’re lucky enough to find them in the hands of the management team that we felt a very strong relationship with that can help us grow it now through our florist network, specifically through Bloomnet, where we’ll be able to have a really good midprice point nationally known brands of our candy in our stores that we can promote now for the first time ever in the floral category promote on a national basis.

So the three aspects are continue their core business, which they already have, which is a retail and some wholesale manufacturing, gives us the wholesale markets; (b) a direct with the consumer business and (c) the direct to the consumer business aided by the Bloomnet capability. In terms of directly to customer business I’ll ask Chris to speak to that, but it’s a nation business for them, just a few million dollars now, and we expect that we can help that management team grow that part of it with our addition of our assets.

Well, in the past and we’ve mentioned we’re very happy with the success we’ve had with the Popcorn Factory growing their online business from relatively basically zero to one-third of their business right now, 35% plus of their business coming online.

At the same time the business doubled, too.

Right. And approximately let’s say, three years on the Popcorn Factory Cheryl & Co. we went from a single-digit percent of their business coming online to again more of 35% and they’re probably within the first year of our owning that business, so we’ve been very happy with the success.

And as Jim pointed out with Fannie May and London brands, a little bit different there as our focus will be really on growing an overall direct marketing business, whether it be through the telephonic or the online channel. But of course, the focus will be on the online channel.

The one difference with Fannie May with this acquisition is the other brands we speak about were direct-to-consumer businesses and it was a matter of changing some of the access channels how they order from us, but it was direct marketing business. Here it really is a retail wholesale business with a small with a very small directed consumer business that we think we have a great opportunity with. But the ramp but the size of that and the ramp will take longer to do.

Okay. In terms of Bloomnet, when do you believe you’ll have the same suite what’s the target to have the same kind of suite of offerings that your competitors have which will enable someone to do kind of basically soup to nuts that they do with another competitor now?

Well, I think we have every service that a florist needs to interact with us. So if a florist chose to be to apply to Bloomnet for membership and was accepted in our membership program, they don’t need to belong to another wire service. The suite of services that we’ll continue to offer and introduce I would say that the bulk of them will take a couple the next couple of years to introduce, but we will always be introducing new products and services. Chris mentioned a half a dozen or so that we plan to introduce in the next 24 months. A different service each quarter. But right now, a florist who belongs to Bloomnet need not belong to another wire service.

Okay. Beyond things like candy, what other products do you want to sell through the Bloomnet network to the florists that are unique or different that other players aren’t offering?

Frozen pizzas. I think we’ve established that we have a

Mama Moore’s Frozen Pizzas?

There you go. I think we’ve set out a plan-a-gram, Eric, of the range of products and services that we want to have as your florist of choice, and we want to continue to flush out, and that’s all flowers and plants, all of the giftware related to those products, the greetings products, the balloons, the plush, stuffed animal product, candy, and we’ve always known that candy was the single most important next category. And then all of the food, wine and gift basket category. So I’d say in order of importance, candy is important in the next 24 months to make that just a great national multibranded, great position offering.

We already have the very high end of candy covered with our Godiva relationship. Now we have some midprice points as well. We’ve always had some novelty price points, but now we have midprice points with brands, so we have a really great suite of chocolate products to bring to our customers and to partner with Bloomnet on.

But I think the biggest growth opportunity is an organic effort which we just launched which is 1-800-BASKETS, launched our soft launch in Alaska a couple of quarters. I think that has the potential to be the biggest category and what’s good about that is, it’s clearly a gift product. Clearly it’s a gift product that leverages off other brands, the items that we include in those baskets. Gives us great opportunity to do interesting promotions and partnerships where we’ve built our brand by doing great partnerships and great promotions and finding unique marketing opportunities, like the marketing opportunity for CBS Outdoor.

So I think 1-800-BASKETS, an organic effort, leveraging brands, and I just happen to think that all of those gift baskets are going to have a lot of Fannie May candy products in them, just something tells me that. But there’s good opportunities there. And so I that’s the plan-a-gram we’ve laid out for you, and we just see ourselves deepening those opportunities.

Okay. The final question on Bloomnet. In terms of pure order flow to the Bloomnet florist, what can you come when you talk about competitors how many more orders they can get I mean, obviously the florist takes this product to have these innovative items and they also obviously take it to get orders. How much advantage do you see with competitors in matter of order flow you can give to a florist where they can’t get from the other networks?

Joe. I’ll take that. We’ve said in the past we have more than twice as many directable orders as our next closest competitor, so we have a significantly higher number of orders and we can help deliver to a much smaller network. So we can always be a more important part of our florist members of business than our competitors can.

Okay. And is there anything new going on in terms of how the franchising is doing in terms of that effort?

Oh, nothing new there. Franchising for us, as we’ve mentioned in a couple of prior calls, is super Bloomnet for us. We have a couple of experiments that we’ve talked about in the past. One’s a co-brand experiment in Denver with very good, well established, terrific family that runs Belcamp Flowers in Denver, Colorado. Belcamp is now 1-800-FLOWERS. We’re doing lots of fun and interesting experimental things. It’s not an accident that Denver was on the list of the first markets. We’ve tested with CBS Outdoor, our Happy Hour Collection. Doing it in Denver gave us an opportunity to really drive traffic into Belcamp’s 1-800-FLOWERS retail business into their retail brands locally. So franchising for us is not a growth opportunity for us right now. It grows because we’re selling off company-owned stores to some of our franchisees. And of course, our franchisees are doing well and they’re looking to expand the number of shops that they operate.

And the most recent thing is our design centers only called Local Fulfillment Centers are converting. Their contracts come up into franchises, so that’s the only growth in that network. Our primary emphasis is clearly on Bloomnet. How do we attract the right florist to apply for membership in our network, which we’ve already done, how do we ramp them up, how do we introduce the program to them to help them be successful, how do we make that exclusive, very elite network which has the most orders in the industry, over the fewest number of shops, so being disproportionately important to them. How do we help them be profitable and successful while there’s still some trouble in the overall floral category when you still can see in the information of all the industry that retail florists, other than those that are part of Bloomnet, are struggling.

Okay. Thank you.

You bet.

And, sir, our next question is from the line of Heath Terry with Credit Suisse.

Great, thank you. I was wondering if you could just talk a little bit more about what you’re seeing in marketing and customer costs, particularly on a unit basis. You guys obviously do a lot of sponsored search. Can you talk about the trends in pricing there, as well as the ROI that you’re seeing or have been able to realize?

This is Chris. From an overall point of view, I kind of touched on this earlier, we’re comfortable with the marketing spend and the return that we’re getting. From a pure customer metric, new customer acquisition cost point of view, we give that metric at the end of the year on an annual basis, simply because it fluctuates so much during the quarter.

You go to Search specifically, the Nothing Special continues to be very productive for us, especially as we are able to leverage our multiple brands throughout the seasons. So when one brand is getting extremely expensive, other brands are able to really cost effectively mine for customers, and that works very nicely for us.

The other great thing that as we look at our marketing mix is the ability to constantly manage that mix, and that’s one of the things that I think we’ve proven very adept at is keeping our costs in check to mine the best channels for the best ROI. So when Search gets too high, we’re able to pull back in that area and move more of our business to offline, whether it be new programs like Jim speaks about with the out-of-home program as an example. And that’s something from an overall point of view we’ve consciously and strategically majored our marketing plans, always had that flexibility so we were never held prisoner by rising costs in one specific channel.

Okay. Thanks.

[OPERATOR INSTRUCTIONS] And again, ladies and gentlemen, star one for any questions. And, sir, our next question is from the line of Paul Keung with CIBC.

Hey, good morning. Just a couple of questions, I didn’t hear yet. I might have missed it. One was on the free cash flow. Can you give us some parameters about how to determine free cash flow generation given some of the actions coming on line? And specifically, I’m just trying to figure out what your use of normalized inventory billed working capital is going to be as well as it looks like your capex also might be ticked up as well, given some of the different some of the necessary spendings on these acquisitions.

Yeah, I think with regard to maybe in the first quarter, but with capex we yeah, we anticipate capex somewhere on a normalized basis. Around 2% of revenue, so going up maybe with the growth that we have, but not necessarily any extraordinary pick-up on capex. With regard to free cash flow, we do have some fluctuations with seasonality and a working capital that we’re akin to it, but it is a traditional computation of in a working back from a kind of an EBITDA basis less capex. We will as we move into next year, we had some growth this year with some of the balance sheet items including inventory as we’re driving looking to drive greater margins so we’ve had some up tick on inventory. Some of that is seasonality with the shift in Easter as well as just as we’re preparing for the upcoming stream in the spring season. But we should be normalized more in the high 30s or so in revenues.

And we’ve been I think we stated earlier that we’ve been focusing on consciously eying it a little bit more forward, taking a little bit more in, because we’re doing some foreign sourcing that gives us credit gross margins. Obviously, one of our targets is driving gross margins and that enables us to do it.

So we shouldn’t see inventory builds and working capex grow fast in revenues next year, then, because that’s an organic

No, you won’t. In fact, Bill just gave you some a way to average it out. As we become a larger company he’s expecting capex to average out around 2%.

Okay. And then on this stock base on your stock com I notice you excel in your stock option plan this year, so now that you’ve done that, what sort of stock comp shall we expect going into next year?

I’m sorry, I didn’t hear the first part of that.

You excel I believe you excel your stock options this year to reduce the expect that it has on it on your earnings going to let’s say fiscal ’07. I was wondering what the use in guidance in what stock

What we did is we just did that on some out-of-the-money options.

But Paul, that was over a year ago.

Right, right.

That we did that. We do still have some options that are coming due. We have migrated our long-term comp plan from straight stock options of a few years ago to a combination of stock options and restricted stock. We should get stock credit on accounting treatment under FAS 123R. We’re showing this year at about a $3 million or penny $3 million on an annual basis or about a penny a quarter, 50 EPS. That will actually reduce over time.

So it will go down in fiscal ’07?

Yes.

Yes.

Okay.

So it’s been a penny a quarter this year, no more than that next year.

Got it. And then the last question is on can you share a bit on Plow & Hearth and would you consider selling any of the brands you have in the portfolio to the extent that they may not you may not see the cities that you thought you would see when you initially acquired these plans?

Well, the Plow & Hearth brand is doing what we fortunately, it’s doing what we forecasted it to do. We were finishing up a two-year term in that business. It’s growing at a good high-single digit, contributing nicely while leveraging its back end to assets in terms of its what we call our shed services platform of IT and service center, et cetera, et cetera, so it’s contributing as nicely as we said it would, and providing a good cash flow generation at the same time.

Okay. So where are you having challenges in among the brands, then? Because you kind of go across a lot of brands are doing very well, very decent numbers overall, but there’s got to be some of them that’s not it’s still not adding up, so there’s got to be some that are not doing well.

No. I consider they’re all doing about what we said they would, and as we give our guidance for the next year at the end of this quarter, I think that you’ll get a deeper appreciation for the performance of each of the brands. Some are very new to us. The last Fannie May not in our hold yet, but as you see the layout of our forecast for next year, I think you’ll see they’re all doing well.

Okay. Well, good.

And Paul, just again on that specifically on the third quarter when you’re looking at a year-over-year comp on the third quarter, there would have been 140 bases points including an operating leverage. Again, we have some a number of our businesses have seasonal periods and a very strong end in the calendar fourth quarter. But during this time frame, our weakest of the year-over-year comp were absorbing Cheryl & Co., which is a nonseasonal time for them, and our [unintelligible] which is an unseasonal time for them.

Yeah, great. All right. Thanks a lot.

Yeah.

And sir, we have a question from the line of Glen Crevlin with GlenHill Capital.

Yeah. Good morning. I was wondering if you could elaborate on your success of shifting some of these offline/online businesses, specifically with Cheryl & Co.. You talked about 35% online. Can you talk about what kind of sales growth you’ve seen in that business and why you’ve been able to get the 35% in one year versus and why it’s taking you a little bit longer? What are you doing there to accelerate the growth of online? And then in terms of Fannie May can you talk about what kind of growth you’re looking for in that asset in terms of top line?

In terms of the first question, the reason why we’ve been able to do so well at introducing Cheryl & Co. online business, I think you could say it took us three years to get there in terms of their Popcorn Factory, but they were a smaller company and had other issues that we had to address, like technology issues, build a web site. Cheryl & Co. already had a web site. It wasn’t doing a lot of business. It ran on a single PC. What we were able to do is come in and not change the web site, but now give the horsepower behind it so that it didn’t lock up when more than four people accessed it, so they put them on top of our server farm of hundreds of servers and allowed its existing web site to have the horsepower.

In addition, they were able to prospect in the 1-800-FLOWERS corporate database the names, increase their marketing in terms of catalogued efforts, which has a nice split between telephone and online respondents. In addition, probably most importantly, we have a very talented team here, Glen, that really know how to do online marketing. And when you take these smaller brands, these smaller giftable brands who’ve not had exposure to Search and other online marketing methodologies and now have a team of professionals who can now guide them, in fact, take over as an agency, sort of an internal agency, their efforts in the online marketing world, we become more sophisticated over those last three years. So when Cheryl & Co.. joined the hold almost a year ago now, we were able to immediately help them with the online world increase their prospecting capabilities very cost effectively through catalogs as a result of their access to our database. And what you’ll see is a fourth in addition to the robust back end on their existing web site.

And the fourth element you’ll see for them this summer and fall is that we’ll actually redo the whole front end of their web site, too, to give it all the whistles and bangs and customer functionality that the 1-800-FLOWERS customers and other brands enjoy, because now during their off season we can do that and put that on the front end of their web capability. So I think that growth has been good. We said that they were growing. Cheryl & Co. was growing at a single-digit rate when we acquired them, and we I think we’ve said in our last call that they were growing at more than a good solid double-digit rate now without the commensurate or, excuse me, proportionate increase in marketing. We’re showing the leverage of the assets we’ve brought to the table.

And in terms of Fannie May, Jim, what kind of growth are you looking for there?

I think we’ve just got Fannie May without giving specific numbers, I think we’ve stated that we believe it will be accreted both to our top-line growth rate as well as to certainly to our earnings, both

So we can’t give specific guidance on that beyond what we’ve done in the press release, but we did state to you the different areas that we expect to grow in without being able to quantify that till the end of this quarter, and that is that their primary business, which is a split of retail in a wholesale manufacturing operation will continue to grow. They’ve been growing at a nice single-digit rate on their own. We’d expect that we could jazz that.

If you will look at the retail piece, that’s not going to grow a lot, but if you look at the retail directed consumer piece on the catalog and especially on the web site, that’s where it’s only been a few million dollar visits and we were going to put the lion share of our focus in terms of their growth efforts.

Great. And in terms of Plow & Hearth, just to complete that one, in addition to the good revenue growth you cited, what have you seen on the margin, let’s say, sort of the operating margin.

Again, what we saw with finance with gross margins, we’re continuing to move efforts to bring in an import more of that product line to drive their gross margin dollars which lowers down to the bottom line. And we’re seeing improvement and we haven’t specified the margins by brand, but we’ve seen we’ve certainly seen improvement in the operating margin there.

I think the focus there clearly is we’ve set out some longer-range guides for the whole company and our expectations and emphasis of Plow & Hearth is a good solid single-digit growth rate on the top line and an out-size growth rate in terms of their operating margins as a result primarily in gross margin enhancement on pace with the whole company.

And any comments on their retail endeavors?

No, their retail efforts are minor. We have just the stores. We haven’t added any new stores in awhile there. They’ve we’re testing the waters there to find out what models work best. It’s primarily a direct-to-consumer business, not to a retail channel but through the virtual channels and that will continue to be the case.

So it’s fair to say that you’re pleased or comfortable with the progress the new team is making there?

Very much so.

Okay. Thank you very much. I’ll let someone else jump in.

[OPERATOR INSTRUCTIONS] And sir, we have a question from the line of Jeff Stein with KeyBanc Capital Markets.

Just wondering, guys, for the record did you make money at Bloomnet during the current quarter? And beyond that, would it be fair to say that the investment period is now behind you and that we should begin to kind of move into a harvest mode?

Jeff, I could say, certainly yes for the first question. We told you we’d turn profitable this quarter. It did. We expect it to be profitable on an ongoing basis. Harvest might imply that we’re going to just strip out profits from it and not grow it. It will do both. It will grow at a very good healthy pace outstripping the growth of the rest of the company, and it will disproportionately contribute to in terms of operating margins as we forecast, so I don’t want to when I say “harvest,” I don’t want you to think that we’re going to slow down the top-line growth. It’ll grow nicely on both lines.

Wondering if you you did indicate that on your retail and fulfillment line that it was, I guess, the strongest contributor to dollar growth. Can you be any more specific in terms of how much of that dollar increase was attributable to B to B?

We were to go beyond what we’ve already said. It’s the significant contributor on that line and I’m sure we’ll get into more specifics in the future.

One final question. By the end of this fiscal year, once the deal closes for Fannie May, you guys have historically been in a net cash position. It seems that now you’re going to be taking on a little bit of leverage. Longer term, is there any type of capital structure that you feel comfortable with? In other words, would you be willing to take on considerably more leverage if the right opportunity came along?

Well, I can only answer that by I’ll give you the top lines of what we look like. Without the Fannie May acquisition, Bill said that we would end this quarter with $40 million in cash. With the acquisition, we’ll end this quarter with about $30 million in cash. We’re taking on a very prudent amount of debt to do this acquisition, which we after our careful analysis is the best way to manage this very conservative balance sheet, this very strong balance sheet with a properly priced bank debt. We’ll still have $30 million in cash at the end of this, so obviously we’re spending cash on all the deal-related costs and the working capital adjustments that go through that, so you see prudence, and you see a very strong balance sheet, but you see that when the right opportunity comes that we think we can bring real asset benefit to, that we can have a great management team, great grands, and really grow it in the three almost four different ways that we described that we’re certainly willing to do that, because that gives the best opportunity in a very prudent environment for good shareholder appreciation.

Thank you.

And, sir, we have a question from the line of Peter Treadway with Trisha Capital.

Good morning, guys. How are you?

Hi.

How are you?

I had one question and it was again on the from the cash perspective. You guys, it looks like your you guys talked at the beginning of the year about generating about $25 million of free cash flow. It looks like you’re going to come in about neutral this year. And you’ve reiterated your long-term targets throughout the year. What’s changed a little bit, just from the free cash flow generation perspective? You’re in line with revenues, in line of the EPS, but free cash flow has been a little bit weaker. And then when can we expect that to turn around?

Fully expect to turn around next year. We certainly anticipate next year to be a strong period for us in terms of not only top-line growth but accelerated bottom-line growth. With regard to some of the numbers of the free cash flow that yeah, we’ve talked a little bit about capex being a little bit higher and some of the working capital that we had to kind of reset as we’re looking at enhanced gross margins, bringing on a little more inventory, but we’re getting to a level that we think we are that we’re comfortable with and going forward it will not grow at the same rate as our top-line growth. But for next year, we’ll be generating a significant free cash flow.

And are you guys comfortable with adding some you talked about adding debt to make acquisitions. Would you do that in order to buy back some of your own shares?

I’m sorry, you stated that would we do that what?

To buy some back of your stock. Would you take on debt in order to buy back some

So you’re not making any forecasts to doing that, but it’s certainly an option that’s available to any management team that has the strong balance sheet that we have.

Great. Thank you.

And, sir, we have no further questions at this time.

Thank you, Carlo, and thank you all. Thank you for your questions and your interest, and if you have any additional questions, please get in touch with us. In closing, I’d like to offer a public service announcement. There are only two days left in administrative professionals week, but with our same-day, any-day delivery capabilities, it’s not too late to recognize that special professional in your office that keeps your business and business life in order.

Also, Mother’s Day week begins next week and only a week more, and it’s never too early to visit your florist of choice, 1-800-FLOWERS.COM. So thanks for your time and attention today, and any further questions, please give us a holler. Thanks.

Ladies and gentlemen, we thank you for your participation in today’s conference. This concludes your presentation, and you may now disconnect.