1-800-Flowers.Com Inc (FLWS) 2006 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2006 1-800-FLOWERS.COM earnings conference call. (OPERATOR INSTRUCTIONS). 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 call, Mr. Joseph Pititto, Vice President of Investor Relations. Please proceed.

Good morning and thank you all for joining us today to discuss 1-800-FLOWERS.COM's financial results for our fiscal 2006 fourth quarter and full year. My name is Joe Pititto and I'm 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 1-800-FLOWERS.COM, or you can call [Patty Alphadonna] 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. 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 today's press release and to our SEC filings, including the Company's Annual Report on Form 10-K and Quarterly Reports on Form 10-Q. The Company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today's call or any recordings of today's call, the press release issued earlier today or any of its SEC filings, except as may be otherwise stated by the Company.

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

Thank you, Joe, and good morning, everyone. As we noted in this morning's press release, during the fourth quarter, we achieved several important strategic objectives -- notably, the acquisition of Fannie May Confections and the continued strong development of our Bloomnet business. However, our financial results for the period were below our expectations, which we attribute to several factors.

While we achieved good revenue growth of more than 13% for the quarter, this was below the level that we had targeted with our increased marketing spend. Additionally, our flat gross margin year over year was well below our targets and insufficient to offset the increase in our marketing costs. Lastly, as expected, and previously announced, the quarter's results were also impacted by costs related to the seasonality of Fannie May.

The good news here is that we expect to see significant contribution, both top and bottom line, from Fannie May during our current fiscal year, particularly in our fiscal second quarter, the holiday period.

Before I turn the call over to Bill, who will take you through the details of our financial results and metrics for the quarter and the year, I'd like to make a few additional points.

Over the past several years, through a combination of organic effort and strategic acquisitions, we have demonstrated a proven ability to grow revenues at very attractive rates. Having established a solid base of business, fast approaching $1 billion, our management team is now laser-focused on improving our bottom-line performance. Toward this end, we have put in place a number of initiatives specifically designed to reduce operating costs and enhance gross profit margins. I will provide a little more detail on some of these efforts after Bill reviews our metrics.

In addition to these programs, we've made several changes in our management structure. We have added new management talent at the senior level whose sole job is to extract cost savings and achieve operating process improvements. And we have revised our compensation programs throughout the Company to reflect this intensified focus on bottom-line results.

We also expect significant bottom-line contributions from our new business efforts. In our Food, Wine and Gift Basket category, the Fannie May acquisition significantly expands our offering in an area where we are rapidly becoming a market leader. By building on its tremendous base of customer loyalty, Fannie May offers an excellent growth potential, particularly through the leveraging of our assets and capabilities in the online and direct marketing space. Combined with its strong operating margins, we expect Fannie May to contribute significantly to our operating results this year and beyond.

In our Bloomnet operations, with our rollout investment phase now completed, we expect to see significant contribution this year. Bloomnet's superior value proposition for florists has been very well-received. This is illustrated by our latest directory, our fourth and by far largest, which includes thousands of pages of listings and advertisements.

Bloomnet membership has increased threefold since we launched this initiative and now includes more than 9000 florist members. As we've stated in the past, in growing Bloomnet, we are committed to maintaining our industry highest quality standards while providing our florists with products and services that they need to grow their businesses and enhance their profitability. As we continue to grow both the network and the products and services we offer, we expect to see a growing contribution from this high-margin business.

I'll now turn the call over to Bill.

Thank you, Jim. During the fourth quarter, we achieved total revenue growth of 13.4% or $25 million. This growth reflects several factors, including the results of our strategy to increase spending on expanded marketing and selling programs, particularly in the floral category; revenues associated with the acquisitions we made during the year; and the inclusion in the quarter of Easter, which was in the third quarter last year. However, this was essentially offset by one less week of sales in this year's fourth quarter compared with fiscal 2005, in accordance with our retail calendar.

Regarding metrics for the fourth quarter, total net revenues for the quarter reached $211.1 million, an increase of 13.4% or $25 million compared with $186.1 million in the year-ago period. Online revenues grew 14.6% or 15.9 million for 124.4 million compared with 108.5 million in the fourth quarter last year. These online revenues equal 67.2% of combined online and telephonic revenues for the fourth quarter of fiscal 2006 compared with 64.3% in the same period last year. Telephonic revenues were 60.7 million compared with 60.3 million in the prior-year period.

Our retail fulfillment revenues increased 51% to 26.1 million compared with 17.3 million in the fourth quarter last year. This increase primarily reflects continued growth in our Bloomnet business and revenues from the Fannie May Confections Brands business. During the quarter, our combined online and telephonic orders totaled 2,883,000 compared with 2,704,000 orders in the year-ago period. Average order value during the quarter was $64.19, up 2.8% compared with $62.44 in the prior-year period.

During the quarter, we attracted 887,000 new customers compared with 835,000 in the year-ago period. 624,000 or 70.3% came to us online compared with 563,000 or 67.4% last year. Existing customers represented 58% of combined online and telephonic revenues compared with 59% in the prior-year period.

In terms of product mix, the breakdown between floral and non-floral gifts was 61% floral and 39% non-floral, compared with 62% and 38% in the prior-year period.

Gross margin for the quarter was 40%, flat compared with last year's fourth quarter. A combination of promotional pricing and higher shipping costs due to fuel price increases offset other initiatives designed to improve margins.

During the fourth quarter, our operating expense ratio increased to 38.7% of total revenues compared with 36.7% in the prior-year period. This increase primarily reflects several factors, including higher marketing and selling spending as a percent of revenues, with lower than planned revenue growth; the impact of stock-based compensation expense; and costs related to our acquisition of Fannie May, including operating losses associated with the seasonality of that business.

As a result of these factors, adjusting to exclude the effect of stock-based compensation, pro forma net income for the quarter was $2 million or $0.03 per diluted share compared with 3.9 million or $0.06 per share in the prior-year period. The Company believes pro forma earnings provides a meaningful measure of year-to-year period comparative performance, while reducing corresponding per share results do not lessen the importance of comparable GAAP results.

Including the net effect of stock-based compensation, the Company's GAAP net income for the quarter was $1 million or $0.02 per share. Importantly, earnings per share for the quarter on a comparable basis would be essentially flat with last year's fiscal fourth quarter when we add back the seasonal operating losses, financing costs and intangible amortization related to our recent acquisitions.

Regarding full-year metrics, total net revenues reached 781.7 million, an increase of 16.6% or 111.1 million compared with 670.7 million in fiscal 2005. Online revenues grew at 19.2% or 69.4 million to 430.3 million compared with 360.9 million last year and represented 61% of combined online telephonic revenues, up from 58.1% in fiscal 2005.

Telephonic revenues were 275.7 million, up 6.1% compared with 260 million last year. Our retail fulfillment revenues increased 51.9% or 25.9 million to 75.7 million compared with 49.8 million last year. Combined online and telephonic orders totaled 11,315,000 compared with 10,213,000 orders in fiscal 2005. Average order size was $62.39, up 2.6% compared with $60.79 last year.

During the year, we attracted 3.6 million new customers compared with 3.3 million last year. Repeat customers accounted for approximately 46% of combined online and telephonic sales, unchanged compared with fiscal 2005.

Gross margin for the year increased 60 basis points to 41.7% compared with 41.1% for fiscal 2005. Operating expense ratio, including the impact of stock-based compensation, was 40.8% of total revenues, up 150 basis points compared with 39.3% last year. This increase was related primarily to the aforementioned stock-based compensation, as well as increased marketing and selling spending, investments made in the Company's fast-growing Bloomnet operations and the operating losses associated with the seasonality of the Fannie May acquisition.

As a result of these factors, adjusting to exclude the effects of stock-based compensation, pro forma net income for the year was 6.4 million or $0.10 per diluted share compared with 7.8 or $0.12 per share in the prior year. Including stock-based compensation, the Company's GAAP net income for fiscal year 2006 was 3.2 million or $0.05 per share.

Again, on a comparable basis, EPS for the year was essentially flat with the prior year at $0.12 if we add back stock-based compensation and the impact of the Fannie May acquisition, including the seasonal operating losses, financing costs and intangible amortization.

Regarding our balance sheet, our cash and investments position at the end of the year was approximately 25 million. This reflects several factors. Total net cash provided by operations was 14.4 million after the net working capital investment of $9 million, primarily related to the growth of inventory. This was offset by investments in several areas, including approximately $13 million used for our acquisitions, approximately $20 million for capital expenditures and approximately 3.5 million for other items, including scheduled repayment of debt and treasury stock repurchases.

Debt at the end of the quarter was 88.8 million, primarily reflecting our bank borrowing of 85 million related to the financing of the Fannie May acquisition. Inventory at year end was in line with management's expectations at 53 million and largely reflects additional inventory of approximately $15 million associated with our acquisitions, as well as our expanded fresh-from-the-grower product line and several product sourcing initiatives in our specialty brand businesses.

In terms of guidance, as was noted in this morning's press release, to reflect the evolution of our business, we will be changing the way we report results and the way we will provide guidance. Beginning with the release of our current fiscal 2007 first-quarter results in October, we will provide results for our four business categories -- Consumer Floral, Bloomnet, and our specialty gift brand categories, including the Home & Children's Gifts, and Food, Wine and Gift Basket.

For each of these categories, we will provide revenues, gross profit margin and a contribution margin, excluding corporate allocations. This new reporting format will enable us to provide more visibility for the specific growth and provide characteristics of each category and thereby a better understanding of how we will reach our overall Company goals.

To provide you with a baseline for these business categories, in our Consumer Floral business, we are by far the largest florist in the world. Importantly, we are expanding our market-leading position by growing in the range of 7 to 10% annually on the largest base of business in the industry. Fiscal 2006 revenues in this category were approximately 415 million.

Our Bloomnet business has emerged from its investment rollout phase and will now begin to generate increasing profitability. Bloomnet revenues in fiscal 2006 were nearly $30 million and we expect compound revenue growth in the next three years will be in excess of 50%.

Our Home & Children's Gifts category achieved revenues in excess of 190 million in fiscal 2006. Going forward, we are managing this category to achieve sustainable mid-single-digit growth.

Food, Wine and Gift Basket category includes Cheryl&Co., The Popcorn Factory, 1-800-BASKETS and Fannie May Confections. In fiscal 2006, these businesses provide more than 100 million in revenues. Pro forma, including the Fannie May operation for the full fiscal year, revenues would have been more than 175 million. We expect growth in this category to be in the teens going forward.

On a consolidated basis, these four categories will leverage the assets and infrastructure of our enterprise services platform. Our goal is to improve this leverage throughout the Company and enhance not only revenue growth, but also profitability for the enterprise.

In terms of overall guidance going forward, as indicated in our press release, we are also changing the format of the guidance we plan to provide to place an emphasis on long-term growth objectives for both revenue and profitability. However, because the current fiscal year will include the first significant contributions from both Bloomnet operations and the Fannie May acquisition, we are providing the following guidance for fiscal 2007.

For the year, we anticipate achieving revenue growth, including the incremental contributions from our recent acquisitions, in the range of 17 to 20%, and EBITDA an EPS growth of more than 100%. Quarterly revenues will be in the following ranges -- Q1, 12 to 14% of total revenues; Q2, 36 to 39% of total revenues; Q3, 20 to 22% of total revenues; and Q4, 25 to 27% of total revenues.

Longer term, for fiscal years 2008 and 2009, we anticipate achieving annual growth rates for revenue in the range of 7 to 10% before acquisitions, and EBITDA and EPS in the range of 20 to 25%.

I will now turn the call back to Jim.

In conclusion, as we begin fiscal 2007, we are very focused on improving our bottom-line performance. As I mentioned earlier, we have put in place a number of initiatives designed specifically to enhance gross margins and reduce costs across all of our businesses.

For example, in terms of gross margin improvement, we are expanding our product sourcing efforts in Asia while concurrently consolidating our sourcing agents. This will enable us to concentrate larger order volumes and thereby improve pricing. We also consolidating raw material vendors across all of our brands to similarly improve pricing, as well as enhance quality. And we have underway a number of pricing initiatives, including development of new, higher-margin signatures products, such as our Happy Hour collection, programs to increase order add-on rates and an aggressive SKU rationalization effort to eliminate low-margin products throughout the Company.

Among the programs we have put in place to achieve operating expense reductions, as I mentioned earlier, we've hired new management talent who are tasked solely with extracting cost savings throughout the organization by designing and implementing process improvements and streamlining our operations. We have consolidated our catalog printing across all brands, enabling us to negotiate more favorable long-term rates. We've also consolidated our noncatalog printing, utilizing a specialty sourcing agent whose compensation is tied directly to the level of cost savings they can achieve for us.

With email an important element of our marketing efforts, we are consolidating all of our email programs onto a uniform platform, which we expect will yield significant cost savings. And we continue to optimize our service center operations, most recently expanding our home agent program to provide maximum coverage, flexibility and reduction of recruiting and training expenses.

In addition to these efforts, as I stated earlier, we are also expecting significant bottom-line contributions from our newest business development efforts. The Fannie May acquisition, combined with our great gourmet gifts, positions us as a leading player in the fast-growing food, wine and gift basket category. This is an area where we see significant multichannel growth opportunities, as well as strong operating margins.

Our Bloomnet membership has grown dramatically, tripling in size, evidencing the strong demand in the marketplace as the florist community embraces our compelling value proposition.

Overall, we believe we are well-positioned to achieve our goals for solid top-line and significant enhanced bottom-line growth in fiscal 2007 and beyond, and thereby build long-term shareholder value.

That concludes our formal remarks. We will now open the call for your questions. Please restate the instructions for the Q&A.

(OPERATOR INSTRUCTIONS). Jeff Stein, KeyBanc Capital Markets.

Jim, first question -- wondering if you might expand on why you think you missed your revenue forecast in the floral category in the fourth quarter, and what measures you are taking to get back on track there?

Jeff, a couple of things. The miss in the fourth quarter on revenue was primarily in floral and was primarily right around the Mother's Day period, the last few days of the Mother's Day period. And frankly, it was an aggressive marketing time by everyone in the category. There are lots of well-funded competitors who are very aggressive.

And the mix of advertising vehicles we use, particularly in the online world, left us in a position where we had continuing bets on categories that were underperforming, like the portal world, and we were insufficiently betting on the categories that have emerged as the new leadership categories -- our affiliate programs, the search categories.

And so, from our point of view, a combination of aggressive competition, deep discounting on pricing that we did not participate in to the extent, perhaps, we should have, and misplaced resources in terms of underperforming online vehicles versus the newer, more recently emerged venues like search and affiliate programs.

It seemed that last year, you were backing away from search because of the high cost. And I'm wondering, given the fact that those vehicles continue to seem to produce customers, are you prepared to move back into those? And how is that going to weigh against the cost reduction efforts that you are intending to initiate? In other words, net-net, are you really going to be reducing your expenses if you have to invest more in search and affiliate advertising?

Jeff, this is Chris. As we look at all of our advertising efforts, and specifically search, search continues to be a very expensive proposition. As we mentioned in the past, it always spikes at holidays. There has been some more rational pricing on search -- most of the holiday seasons this year. Of course, it was aggressive in the Mother's Day period.

We do find it, however, to be effective. We do still find it to be effective in new customer acquisition as well. So the overall answer I would say is, yes, we probably will step up our aggressiveness more than we were in Q4, anyway. Prior quarters, it was still working very well for us. So we'll step up our aggressiveness there.

I am not concerned with that limiting our ability to reduce our operating costs, however, as the focus on operating cost reduction is mainly in the nonmarketing areas. That's why Jim gave the examples that he did. And again, utilizing the collection of assets that we have acquired across our businesses, we will be able to drive those operating cost reductions. At the same time, we will always stay focused on improving marketing efficiencies.

The last couple of years, 1-800-FLOWERS has underestimated the impact that an increased promotional environment, specifically over the holiday season, has had on its business. And I'm wondering, in light of the fact that we are facing a very challenging consumer spending environment moving ahead here, are you guys building enough conservativism into your plan on the consumer side of your business to take these factors into consideration?

It's a good question, Jeff, and I think one that we have asked ourselves many times in the last few weeks. And the answer to the question is yes, I think we have. I think the portfolio of products, brands, services that we have accumulated give us a little bit of protection there in terms of being able to properly balance our business, have the right margins, have a variety of areas that consumers are turning to for gift products. So I think the portfolio helps us a little bit there.

I think some of these areas that we have invested in in new marketing arenas -- not new, but increased emphasis marketing areas -- have shown such promise for us that we feel confident that we can reduce our marketing costs at the same time, which obviously has an impact when you look at the promotional efforts.

For example, the introduction of our chocolate gift lines gives us an opportunity for add-on sales on our floral purchases. It also gives us the opportunity for existing stand-alone sales of a higher-margin product than is our floral business. It also gives us an opportunity for search and for leveraging across our basket business and our Bloomnet businesses -- that same higher-margin product capability, which will actually bring a benefit to our Bloomnet partners as well.

So from a portfolio point of view, we think we've done it, and from a marketing perspective, I would also add that if you look at our emphasis on new marketing techniques, our introduction of the CBS Out of Home Happy Hour collection introduction -- a terrific benefit for us. Relatively speaking, a small effort in its first introductory stages, but one that you will see us step on the gas pedal on based on results we saw in the last five months of this fiscal year with our test introduction.

In addition, our loyalty efforts -- we've had a loyalty program for about 20 years, but it's been only focused on our retail activities, which we've essentially sold off to our franchise operators. But the learning from that program and what it does to your customer relationship is such that it caused us to, over the last year, spend heavily to develop an online -- a non-place-based loyalty program. It is called Fresh Rewards; that's been its name for a long time.

And we're so excited about the early results of our rolling out that loyalty program to the whole of our customer base that we feel confident that we will have that protection and that conservatism built in, because that is a non-competitive arena. When you have 70% -- more than 70% of your florist customers coming direct to your URL, you look to build a relationship with them, have signatures products -- that protects you because customers are coming specifically for those products -- and then having the loyalty means to have them not get poached off by all the other online competitors -- gives us -- collectively, those things give us the assurance that we are forecasting properly.

Jim, final question -- any concern -- given the fact that you've got this loyalty program, you have acquired additional non-floral brands, it seems that your repeat rate with your existing customers seems to be leveling off and even declining a bit. Any thoughts on that in terms of what might be causing that?

Jeff, this is Chris. No, we are not concerned there. Again, if you look at the repeat leveling off this past quarter, that's with an increased step-up in customer acquisition, or even over the year. We've said as we increase our customer acquisition efforts, that would affect the repeat rate.

As we dig down deeper into our customer metrics, we're very encouraged that all the metrics regarding retention, frequency, loyalty, etc., are still moving in the right direction. And as Jim mentioned, with the early results of our loyalty program, we're very comfortable.

Heath Terry, Credit Suisse.

In terms of the increasing marketing spend, can you give us an idea of what the breakdown of that was between higher cost per unit of marketing done, and then the higher volume that you were spending?

This is Bill Shea. Heath, our overall new acquisition costs with respect to -- or customer acquisition costs were up this year. And that drove some of the higher marketing and selling expenses as a percent of revenues, because we did not achieve, as we've stated, the revenue that we hoped to achieve.

As we look forward, what we have to look at is the various business categories that we have. And some categories where we have spent for higher growth, we are going to take a look at, such as our Popcorn Factory products or our children's gift products that did not achieve what we had hoped them to during this fiscal year. And we are going to take that growth down and invest less marketing dollars in those areas, and put those marketing dollars in the areas where we think are high-growth areas.

I guess what I am trying to get at is, of the increase in marketing that we saw this quarter, how much of that came from buying more advertising? So where you were buying 50 keywords before, now you are buying 100, or where you were buying 1000 radio spots, now you are buying 2000, versus an increase in the cost of those individual units of advertising?

I would say a couple of things there. Bill will give you more detail on it, but just as a preference, one of the things that he touched on there in his remarks, Heath, is that those companies that are primarily catalog -- those brands that primarily grow through catalog distribution, the yield is not there as compared to the online world, both in those products and in the floral category.

So you will see us divert dollars from catalog prospecting to those brands that have traditionally relied on that to more of an online search. The unit cost of advertising, I would say, in the online world is probably still more attractive, although up, than the traditional broadcast advertising. Costs in the traditional broadcast advertising world were about the same, but their effectiveness is obviously declining as the online world becomes more effective.

Anthony Noto, Goldman Sachs.

I was wondering if you could elaborate a little bit on the revenue and EBITDA growth on an organic basis? And then, as we think about 2007, if we go into the year and profitability turns out to be lower than you have anticipated, what would be the one or two things that, as you look out today and you worry about contingency planning, what would those one or two things be?

From an organic growth standpoint, we had the Fannie May acquisition during the quarter, and it did approximately $5 million of revenue during the quarter. So for the quarter and for the fiscal year, organic growth was in the range of around 10%.

With respect to profitability, what we alluded to, I guess, in the script was that because of the seasonality of the Fannie May, really, of our acquisition this year of Fannie May, and the financing costs associated with that, if we were to do it on kind of a comp basis, so bring it back to kind of the organic business, year over year, EBITDA and profitability would be basically flat year over year. So the $0.12 of EPS that we had last year on a pro forma basis to add back, this year's acquisitions would be about $0.12 this year as well.

I'll open it to anyone here to answer the second part of Anthony's question in terms of what kinds of things -- I think our prejudice overall going forward would be at this point -- it could change, but our prejudice overall would be to maintain profitability, accelerate profitability as our first course of action this year.

The kinds of things that concern us, of course, are things like that are in the news today and what impact they have on overall business. Trying to get some of the programs that we've introduced in terms of streamlining our operations are all about trying to give us flexible operating costs, so that if business on the top line were impacted, that we have flexibility in controlling our costs to maintain profitability. That would overall be our prejudice.

But Chris is indicating he would like to respond as well.

And that is what I was going to add, kind of just going back to Jeff's question or comment as well regarding our forecasting going forward -- I think as we look at the plans going forward, we're attempting to be much less reliant on improved revenue and improved gross margin and taking some of the risk out of the plan [month] with the focus on the operating costs. So we are achieving that.

Specific contingencies, I think, go to, as Jim just mentioned, focused on streamlining operations in every area possible that allow us to react when and if needed. And then there are other areas as well, and I would say for competitive reasons I don't want to go into too much -- flexibility in the marketing spend also.

So again, looking at the plan that we put in place, for example, in the Home & Children's Gifts business -- we're not looking to be aggressive there in the growth. We're keeping that in the mid-single-digit numbers. And we can adjust that as long as we have the operating cost in place that does not affect the profitability.

And Anthony, if you are looking at fiscal '07, when we are giving guidance for 17 to 20% growth, probably about half of that growth relates to the acquisitions that we made and half of it is organic. And when we press-released the Fannie May acquisition, we gave some details that they generated $12.5 million worth of EBITDA for the year ended April 30, '05. We hope to improve that under our ownership. And we think going forward in '07 that Bloomnet will be a significant contributor. So if you start looking at where we are taking the numbers next year, those are two big components of our improved profitability next year.

And finally, even with those two faster-growing newer components, Bloomnet and Fannie May, you still see in our guidance that we are forecasting a lower than historical organic growth rate.

Robert Labick, CJS Securities.

This is Casey Flavin. Your nearest competitor recently announced the acquisition of a European provider. And I'd like to know if you had looked at this opportunity, and if not, why?

Our business is an amazingly consistent, similar business globally. Clearly, we had mentioned in previous conversations like this that we fully intend at some point to have global capabilities. We said that it would be modest to begin with, because it wasn't the best use of our investment dollar to do anything large externally.

Clearly, you could assume that this is a small industry. When things are available, we tend to look at them, if for no other reason to make sure we understand what is going on in the broader marketplace. So rather than commenting specifically on it, I think you can rest assured that we are pretty aware of everything that is going on in the marketplace.

About 5% of our business now is international. Clearly, we intend to be an international player and will do so at terms that don't bet the ranch, so to speak, from our point of view. We don't think we need to. Our growth is pretty good here. The 17 to of 20% growth we are forecasting for next year is something that we are comfortable with and will have a good impact.

Bloomnet is already international in the sense that we have correspondent relationships in about 40 different countries and sub-relationships. But as Bloomnet matures, you can bet that it will have an international component beyond what it already has. We don't count that in our numbers today because they are correspondent relationships, but clearly Bloomnet has the potential to be global and in all likelihood will be.

Can you give us an update on the rollout schedule of Bloomnet products?

Well, Joe, if you would touch on what we are doing with Bloomnet products and services?

Sure. We talked about this before. Currently, the primary revenue streams from Bloomnet are membership fees, fees associated with our Bloomnet technology, more transaction fees on the product sales, the purchase net that Bill mentioned a little earlier, and of course, the directory that Jim mentioned before, which is doing very well for us.

All of these streams will grow as we grow both the membership and the total volume of orders that go through our system. In addition, as we have stated in the past, we will offer many of the same products and services that are currently offered to the florist industry such as Web hosting, 24/7 telephone answering, point-of-sale systems, things like that, all of which are under development. They will be rolled out over the next 12 to 24 months. We are not going to put a specific timetable on any one of those items, but we are excited about the acceptance of the products that we have rolled out thus far.

I think you can see that with acquiring so many new florists as part of the Bloomnet network so rapidly, that the primary emphasis was to get the coverage we need. We've hit critical mass, we have the coverage we need, you'll see increased emphasis now on introducing new products and services. Frankly, we are amazed at the receptivity in the marketplace for those products and services. So we are certainly encouraged to bring them to the market in a quick and orderly fashion.

Anthony Lebiedzinski, Sidoti & Co.

A few questions. I heard some comments earlier that you guys are doing a revised compensation program. I was wondering if that means any salary reductions or what does that entail specifically?

I would say everything about the compensation program has gone through some adjustments. The primary emphasis of the compensation program is that any incentive compensation, short- and long-term incentive compensation, is tied primarily to people achieving their profitability goals for the quarter.

Clearly, to do that, they have to achieve their modest growth goals across each of the brands. But the primary focus is to get everybody focused on delivering the profitability numbers -- the growth and profitability, but underlying the profitability numbers for this quarter. So it is all about their incentive and compensation.

Now as concerns the other programs that we've mentioned in terms of the new management team members that we have included in the last several months and their efforts, it is all about optimizing the organization. We are very fortunate that we have accumulated over the last several years a company quickly approaching $1 billion in sales. That is primarily organic efforts, but there has also been some, obviously, reported and discussed tuck-in strategic acquisitions along the way.

We have a wonderful portfolio of products and services. And now we have the mass and the size enough to really justify having brought these people in without increasing our budget lines, so obviously there has been reallocation of resources to bring in these very specialized management team members, who are primarily and almost exclusively focused on streamlining the organization.

Our buying capabilities -- we spend $400-plus million just on product. Clearly, there are efficiencies that can be achieve there. We have this wonderful enterprise-wide service platform. We have shifted over the last six months, expanded our at-home agent program. So every aspect of our business is under review and there are plans already outlined that will achieve great efficiencies. And everyone's compensation is tied toward meeting those goals. No one will make a nickel if we don't make our goals.

And then as far as direct sourcing from Asia, how much do you do that currently? And what is the goal going forward?

It varies by brand.

In the aggregate?

In aggregate, yes.

A lot of the -- from Asia -- probably only about 15% in the aggregate right now.

10 to 15.

From Asia. And we're looking to take that up significantly. Again, a lot of the floral side of the business this does not affect. So there's a big piece of our business that this does not impact, although the component parts like vases and things of that nature would be influenced by that. But the main emphasis on this is on the home and garden fronts of our business and other components like that.

So overall, 25, 30%?

About that.

And during your comments, you mentioned that -- you actually gave a breakdown of how much your consumer floral did, Bloomnet, by revenue. I was wondering if you will include this information plus anything else in your 10-K when you file it later?

That 10-K is looking retrospectively. Prospectively, certainly, we will.

And as far as the guidance, the revenue guidance, I think in your comments, Bill, the numbers by quarter were slightly different than the press release. I just wanted to clarify whether we should go with what's in the press release or whether to go by what you said in your commentary.

No, I think if I misspoke, I apologize, but I don't think I did. And the numbers mirror each other.

What is in the press release is the percentage breakdown by quarter.

And as far as -- it seems like you are shying away from providing bottom-line items by quarter, but directionally speaking, because of the acquisitions, should we expect a larger loss in the September quarter than last year? Any color you can provide would be very helpful.

Bill will give you the specifics on that, but we have never provided, that I can recall, at least, specific bottom-line guidance by the quarter. What we are trying to do is give our investors the visibility they need to be able to really take apart our business and see the profitability characteristics and the growth characteristics and the contribution characteristics of each of the three components of our business, with the third having the breakout of the two consumer pieces -- the floral and the specialty brands business, including the Food, Wine and Gift Basket, and the Home & Children's Gifts category.

So you have four specific breakouts of revenue, profitability, contribution and gross margin to help our investors really have the visibility that they have been requesting. Last year, we just started the Bloomnet effort, so we were reluctant to do that, but clearly you have full visibility going into this fiscal year of exactly how our business builds up.

And as concerns the questions about the --

We don't give specific guidance by quarter on profitability, but what has to be factored in is the seasonality of the acquisitions that we have made of late and the fact that we have financing costs, so that the July to September timeframe for our Fannie May business is a slow period. The October to December period for Fannie May is a significant contributor. And that is what we alluded to with a significant amount of their profitability being in the fourth quarter. So it does -- the calendar fourth quarter -- so the seasonality -- you do have to take into account the seasonality of that business.

I think you have two other factors that you'll need to factor in as you go forward. When you are only doing 12% of your business in a quarter, at the same time, each of the brands we've acquired and built -- baskets, our chocolate business, our bakery business -- all are build quarters in the summer. All are preparing for that holiday quarter, the fourth calendar, our second fiscal quarter. All of those have an impact on the seasonality of our business, making the second fiscal and the fourth fiscal our biggest quarters, obviously.

In addition, though, as Bloomnet becomes a bigger component, as we do more things in those arenas, it tends to have a stabilizing influence on our revenue, not this year, because it is so new, but in the years ahead, I think you could expect that that will begin to balance out a little bit some of that seasonality, because it's not as seasonality-affected, as you can see as you look at other people in our category who have large B2B efforts.

And my last question is in regards to the tax rate that was up a little more than I expected in the quarter. What is the right assumption for fiscal '07 as far as the tax rate?

Again, the tax rate for the quarter, if you back out that stock compensation, our tax rate is pretty -- [it's actually] down year over year slightly at about 40.2%. Again, it gets influenced by stock-based compensation because that's not taxed at the same rate. And stock-based compensation -- 123R influenced it about $0.01 a quarter. But that does influence the overall effective tax rate.

$0.01 a share a quarter.

And the tax rate for next year?

About the same as this year.

Eric Beder, Brean Murray.

Could you talk a little bit about -- you have 9000 florists in Bloomnet. What is kind of the ideal number that you're looking for in terms of where what you like to have -- your competitor has about 18,000, 19,000 and sinking, in terms of florists. Where do you want to be in terms of the amount of florists?

You have to be careful not to compare apples and oranges here. In terms of florists in our network, we are delighted to have achieved what we have so quickly. I am not certain, Eric, what the optimum number is. Clearly, there has been demand. Clearly, there is still a demand in the pipeline of florists who have approached us and expressed an interest, that we'll qualify and let into the system.

But we don't need any more, from a coverage point of view, from a quality point of view. So we'll always examine two things going on in the marketplace -- the demand that is coming to us which says these florists are struggling, really need business, looking for ways to grow their business, looking for the right people to partner with. So that is all positive.

The negatives for the category are that there's still erosion in the category in terms of the number of shops. If you look at the competitive set, there are two big competitors out there in the B2B space providing what we -- let's call it generically wire service business. Their numbers are all down. Both of them are down considerably over the last several years.

We see the number of flower shops continuing to grow both domestically and internationally. Just visiting with some of our international partners and relationships in the last 30, 60 days, each of the countries that we have had conversation with around the global are experiencing the same phenomenon. And I don't think that is peculiar to the floral industry, but that is the one, frankly, that we are most concerned about.

So our number will continue to grow. Is it necessary for it to grow? I think our focus is more on building relationships. Some of those members have recently come into the network, so you're not seeing the revenue from them that you'll see now in calendar -- excuse me, in fiscal '07.

So yes, we will continue to grow it. We're not likely to triple it in size this year because there aren't that many florists in the country. But clearly, there are other opportunities beyond the country. So it will continue to grow. The emphasis is on building the relationship with those shops, with the right products and services, building the revenue and profitability of each of those memberships.

I said you've got to be careful not to compare apples and oranges, because the other competitors have supermarkets and other mass kind of relationships in their number. We do not, at this point, have that. But clearly, it is another avenue. Clearly, it is a place we have been involved. But we haven't anything that we care to announce on this call about our involvement in those other categories.

And in terms of margins, you have, I believe, in your presentations, given where you think longer-term margins should be. Where should they, considering the breakout business you have, what is the long-term, I guess, either operating or EBITDA margin that you believe this Company should be able to achieve?

Eric, I am sorry, we didn't hear the whole question, but if you're talking about long-term operating and EBITDA margin?

You have talked before, I think, in presentations and such about what the long-term operating margin of this business could be. I'm curious, what do you believe it can be now, and with the base business about you have right now?

Eric, what we have done is changed the way we've given guidance going forward and I think have provided now a three-year picture. What we have said is that we've kind of gone back to providing a little bit more information in terms of talking about EBITDA. So we've given guidance on top-line growth, on EBITDA and EPS essentially for the next three years, take you out '07, '08, '09. We see significant growth there. That is the guidance points that we are going to work with.

And so in terms of guidance, what we said there is without any acquisitions, we are going to grow organically at 7 to 10%. That will give us in the first year of this three years we're trying to give this look at now, 100% growth on EBITDA and EPS line. And we are anticipating on sub-components, there are things like Bloomnet, for example, with a top-line growth of over 50%, compounded each of the next three years. At our bottom-line growth rates we anticipate to be 20 to 25% overall in years two and three of this three-year look that we are providing.

Kristine Koerber, JMP Securities.

Just a follow-up on Eric's question on the operating margin, because I know you have given guidance out there -- achieve an operating margin, 7 to 8% over the long term. And that was several years ago that you've thrown that number out, and I think you were talking three- to five-year range. And here we are, we are still looking at low-single-digit op margin. And it just seems kind of hard to hit that mid-high-single-digit operating margin on the goals you put out today and the longer-term goal. I guess I'm just trying to figure out -- is it doable? Can we see operating margin get to that level at some point?

Kristine, this is Bill. We have moved away from having that targeted margin out there, and providing guidance this way, which obviously you've got to run through the math and run through your models to get to a number where you believe we will be and where we believe we are going to be in fiscal '09. But we are not setting a specific target out there.

And then as far as streamlining the expense side of the business, can you ballpark how much cost-saving potential there is down the road?

That would be additional guidance, but I would ask Chris to give you some color in terms of what we're looking at.

I think just the example Jim gave is the way we are approaching this effort. I would say at this point in time, we have not yet identified even the overall opportunities. We have identified some opportunities. We're going after them. We've given examples of how we're going after them. But again, I would also go back to, as Bill was pointing out, at this point in time, I think that is reflected in the guidance, in the bottom-line performance improvements that we have provided guidance for.

And then, Jim, maybe you can talk about the competitive environment and who you see gaining share out there, especially in recent quarter and the recent -- past quarter. What is going on competitively, any significant changes?

I think it depends on the categories you're looking at, Kristine. But if you look at the floral category and the emerging floral gift category, of course, all of our floral competitors are offering the same range of products, perhaps not with the depth or perhaps not with the success of introducing other products and brands, but if you look over the past year, we grew $111 million in revenue. That was probably four times the growth of our nearest competitor.

So I think our share, our leadership position is increasing. Clearly, we are not the leader in the B2B space. We are the third disrupter entrant into that marketplace. But clearly, we are very, very pleased with having only a year invested $10 million or so and already have a business that, even with its stutter start, that is having front-end-loaded expenses and trailing revenue possibilities to achieve $3 million in revenue right out of the gate with that, and are projecting 50% top-line growth in that.

So even though we're not the leader in the category, and from a shop count, not likely to be, although that could happen because their shop counts are coming down, I think we are positioned pretty well to have a good, solid core business in Bloomnet and are continuing to increase our lead in our other consumer categories.

We are not the leader, of course, in the food gift categories. There, we're a couple hundred million dollar business this year. But clearly, that is growing in the mid-teens. And we are emerging as a serious player in that business. And I think that's a business that has, or offers, rather, more growth potential on a percentage basis than even does flowers.

And then as far as the marketing spend, I know you've been investing aggressively over the past year or so in marketing to drive the top line, but trying to be pretty rational about it. It was my understanding that you'd take your foot off the accelerator on that, and there wouldn't be a lasting effect. But it doesn't seem to be the case. It seems as though you need to continue to spend to get double-digit growth. Is that a fair assumption?

I don't think it is a fair assumption. I think it is fair to say, though, Kristine, that growing at 16% or $111 million is growth, but it was expected growth. And what we tried to cover before, particularly in Chris' answer to some earlier question, about where we are allocating marketing dollars going forward, why we still have confidence that our percentage of marketing spend will go down this year, even though we are going to spend more than we did last year, how we are reallocating those marketing dollars away from areas that we have learned have less of a yield than others. So we are obviously putting our money where the fish are, to fracture a metaphor.

And then just lastly, I don't know if you commented on inventory. Inventory is up over 80% -- seems pretty high. Can you give me a little more color on what's going on with the inventory levels?

Sure, I will ask Bill to cover inventory.

Kristine, the biggest component in the increase in inventory is the acquisitions we made during the year, both the product line in the Wind & Weather category, as well as the Fannie May acquisition. So that added -- that is the lion's share of the increase.

In addition, we've talked about our increased sourcing capabilities and buying more product from Asia to support both our home and garden category and our Bloomnet category, where we are buying [clients] for flowers, which stepped up our buying in that area. So those have contributed to the inventory growth.

Jeff Hershey, Awad Asset Management.

Following up on that, Bill, can you talk about what the expectations are for free cash flow for this year? The free cash flow of the Company has been rather poor over the past couple of years. So if you could go through that, that would be helpful.

And then also touch on the B2B initiative in terms of what that actually cost this past year and how that might swing in terms of its losses to profitability?

This is Jim. I will cover the second part first and Bill to come back. In terms of Bloomnet, what we'd said is we spent approximately $10 million on launching on that, during the last fiscal year, which we did. It turned to profitability during the fiscal year. So it will be profitable all of this year. And I'll ask Bill if he would cover the first part of your question.

Jeff, with respect to the guidance we have given, we're focused on EBITDA and earnings growth. If we start with EBITDA, we gave guidance towards that end. Our calculation or the calculation of free cash flow would be really EBITDA, change in working capital, less CapEx.

Would you touch on CapEx, too, while you're at it?

With respect to CapEx, where we've come this year and where we envision going forward, we've kind of reached a critical mass. We believe our CapEx total will be about 2% of our revenues on a go-forward basis, so up in that 19 to 20 million range. So if you take our EBITDA less our changes in working capital, less CapEx, that would be our free cash flow.

Can you help us out on the working capital swing this year?

There still would be, going into next year, a net investment in working capital, but probably in that 5 to $6 million range.

And I guess the underlying issue here is to what extent can you guys throttle back or adjust your marketing and advertising spend as you see changes in the marketplace -- more aggressive discounting, changes in the underlying environment? It seems like every quarter, there's issues with respect to not getting operating leverage. It seems like it is coming down to advertising and marketing. So maybe you can talk through what changes you are making, how you analyze your marketing, advertising, and your ability to kind of adjust things on the fly?

I think, again, as we look at the -- and we referenced some of the points earlier -- it is constantly looking at the results we get and optimizing the mix. So as we look at this year going forward, certainly on the prospecting of catalog and the results were not as strong last year as we would like, so we're pulling back on that. If we look at the overall in the online marketplace, again, looking to see where we are getting returns and making the adjustments.

Clearly, the portal game has changed, right? It is no longer much of a direct marketing model. It really is a network mass media value in how you would make those adjustments, and therefore where allocation of dollars come from. Did that come from television or radio, etc.?

So we are constantly looking at that mix and constantly making the adjustments based on where we are seeing the performance. And things do change throughout the fiscal year. So it is a constant adjustment, constant management on the ROI, just as it is in a microcosm point of view within search -- looking at which keywords are getting the right returns, which brands are getting the right rate returns on their searches.

And one other point that Jim alludes to in our script this morning, and looking in those categories, how can we get better pricing with respect to our marketing dollars, so really consolidating our catalog print across all our brands and negotiating better pricing with our print vendors, and the same thing with email, and consolidating all our email onto a common platform and get a better pricing on those. So it's efforts that we make, getting better pricing with respect to those marketing efforts.

So those are all marketing dollars spends, but that net-net frees up more capital to be spent on the areas that we think offer the most near-term productivity.

Last question -- just Fannie's contribution to pretax losses this quarter excluding financing?

It was about $6 million.

The question was Fannie May's contribution to the loss for the quarter -- what we basically said was that Fannie May was approximately $0.03 per share. The financing and the amortization of the intangibles is probably about two-thirds of that, the operating loss about probably about $0.01 of that.

Paul Keung, CIBC World Markets.

Jeff Stein, KeyBanc Capital Markets.

Jim, wondering if you could talk a little bit about the productivity in B2B. With $30 million in revenues in fiscal 2006, I would guess for most of the year, you probably had 5000 or 6000 florists. Would it be appropriate for us to just do simple math and say, okay, you generated $30 million across 5000 florists, on average, and therefore you were producing about $6000 per florist per year? And if it is or is not a reasonable way to look at it, I'm wondering, could you point us in the right direction and tell us approximately what kind of growth we should expect in productivity per florist?

Jeff, it is Bill. With the macro guidance that we have provided, without breaking down the membership growth by month or quarter, that's not an unreasonable way of looking at the business.

And if you look at FTD's performance in what would be their Bloomnet business, they earned almost a 31% operating margin on roughly 190 million of revenues last year. What kind of ramp do you guys believe that is possible in your Bloomnet business? And is their kind of margin approachable in your model?

I would say what we would characterize there, Jeff, is that we are expecting that at some near-term maturity, next year or two, that we are at 25% operating margin in that business. That is what we think is sustainable.

(OPERATOR INSTRUCTIONS). Eric Beder, Brean Murray.

Sorry, I forgot the last time -- acquisitions -- is the pipeline for acquisitions basically closed now in terms of focusing on profitability, and if it's not, where you're looking at, or if it is -- is it closed down short term?

We don't characterize our M&A efforts. We can't predict -- forecast them. Clearly, we are active in the environment. We have, in fact, Eric, accumulated a portfolio of products and brands. We don't need to do any others. We have only done -- this is the largest acquisition we ever did, with Fannie May. We are thrilled with it. We are happy with all of the components of it -- the management team, the brands, the ability for us to service our customers, bring them a high-quality product. It helps us in margin in terms of its general margin. It helps us in margin in terms of being able to add that product on. It helps us in our relationship with our Bloomnet florists, because now we have another good margin product that we can bring to them.

So in every way, although it was our largest acquisition, we are thrilled with it. Our Cheryl&Co. acquisition a little over a year ago has done terrific for us. And we experiment with other products all the time -- we don't necessarily have to own them. We do has a very, very strong balance sheet. And we would consider others that were strategic for us. I would say we don't need any others.

And just to reiterate your first part of the comment, you could see by Jim's comments, throughout the script, that it is clearly a focus on profitability and driving profitability in our Company.

I show no further questions at this time. I would now like to turn the call over to your host for any closing remarks.

I thank you all for your time and attention today and for your questions. We would be happy to follow up with anyone as you think of other questions or comments or thoughts you would like to explore. Feel free to contact us.

And as is in keeping with tradition, I mentioned in the course of my comments, we introduced a terrific new product in the second half of this last fiscal year. It is called our Happy Hour collection. And we did a very creative media launch and partnership with CBS Out of Home. And it is clearly going to be one of the best products introduced in the floral category. And I encourage you to do some more research on us by experimenting and buying one of these Happy Hour collections [today] and sending it to someone you care about, and see what kind of reaction you get. It's a terrific product, and we would be happy for you to sample it.

So we look forward to your thoughts, comments and questions as we go forward. Thanks for today.

Thank you for your attendance in today's conference. This concludes your presentation. You may now disconnect. Have a wonderful day.