1-800-Flowers.Com Inc (FLWS) 2007 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 1-800-FLOWERS.COM fiscal 2007 third-quarter financial results conference call. My name is Annie, and I will be your coordinator for today. (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. Joe Pititto, Vice President of Investor Relations. Please proceed, sir.

Thank you, Annie. Good morning and thank you all for joining us today to discuss 1-800-FLOWERS.COM's financial results for our fiscal 2007 third quarter. My name is Joe Pititto, and I am Vice President of Investor Relations. For those of you 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 Web site at 1-800-FLOWERS.COM. Or, you can call Patty Altodama at 516-237-6113 to receive a copy of the release by e-mail or fax.

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

Before we begin, I need 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 10-K and quarterly reports on Form 10-Q.

In addition, this morning, we will discuss certain supplemental financial measures that were not repaired in accordance with Generally Accepted Accounting Principles. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables accompanying the Company's press release issued earlier this morning. The Company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today's call, any recordings of today's call, the press release issued earlier today or any of its SEC filings, except as maybe otherwise stated by the Company. I will now turn the call over to Jim McCann.

Thank you, Joe, and good morning, everyone. As we announced in this morning's press release, we are very pleased with our results for the fiscal third quarter. During the period, we achieve revenue growth of approximately 19% or $34 million to $214 million. We increased our gross profit margin 150 basis points to 40.5% through a combination of product mix, pricing initiatives and enhanced sourcing efforts. And we improved our operating expense ratio by 180 basis points to 36.8%, reflecting our focus on leveraging our operating platform. As a result of these factors, we achieved very strong bottom-line results.

EBITDA grew $8 million from less than $1 million in the third quarter last year. Net income increased 168% to $1.1 million or $0.02 per share compared with a loss of $1.5 million or $0.02 last year.

These results were driven by strong revenue growth and increased profit contributions from our key business categories -- consumer floral, the Bloomnet wire service and the gourmet food and gift basket business. These businesses most effectively leverage our operating platform and our unique collection of assets. As a result, these contributions more than offset the weaker performance of our home and children's group. In our last conference call, I told you that we're taking aggressive steps to improve the performance of this business and I will touch on this in more detail later in the call.

Before I turn the call over to Bill for his review of the metrics, I would like to highlight a few additional points. First, in the floral category, our core 1-800-FLOWERS.COM e-commerce business grew approximately 10% to $137 million. We believe this growth on the largest base in the category further extends our market leadership position. We also enhanced our gross margin and operating leverage, resulting in a 34% improvement in category EBITDA to more than $19 million.

It is worth noting that we achieved this growth and improved profitability despite the impact of inclement weather experienced throughout much of the country during the important Valentine holiday.

In our Bloomnet wire service business, we achieved revenue growth of almost 40% to $12.7 million. Here, too, we improved operating leverage and gross margin, reflecting in a 70% increase in category EBITDA of $3.8 million. These results illustrate the successful growth of our membership base and enthusiastic response from our florists to Bloomnet's products and services, such as the new Web hosting and point-of-sale store management systems introduced during the quarter.

Second, in our specialty brands businesses, the revenue in our gourmet food and gift basket category grew more than 150% to $35.6 million and gross margin increased 70 basis points to 43.2%. As a result, category EBITDA increased to $1.8 million, representing an improvement of more than $3 million compared to a loss of $1.6 million in the last year's third quarter. These results include the contribution from our Fannie May Confections business, which we acquired in May of last year, as well as continued double-digit growth from our Cheryl&Co. and The Popcorn Factory brands.

Third, on the customer front. During the quarter, we cost effectively -- or cost efficiently attracted more than 830,000 new customers. We achieved a repeat order rate of 59%, illustrating the continued success of our efforts to deepen the relationships we have with our customers, as well as the effectiveness of our expanded cross-brand marketing and merchandising programs. As I mentioned in our last call, these efforts are enabling us to drive what we call our enterprise customer value or ECV. This is illustrated by the results just mentioned as well as the increase in our average order value and improved customer response rates from all marketing programs.

Looking forward, we believe we are well positioned to deliver our guidance for fiscal 2007, which calls for significantly enhanced bottom-line results through a combination of solid revenue growth, increased gross profit margin and improvements in our operating expense ratio.

I will now turn the call over to Bill so he can take you through the details of our financial results and the key metrics for the quarter.

Thank you, Jim. During the fiscal third quarter, we achieved strong EBITDA and EPS growth, driven by continued strong revenue growth and improvements in the two key focus areas that we identified going into the year. First, increased gross profit margin and second, improved leverage across our operating platform.

(Technical difficulty) the specific financial results and key metrics for the third quarter. Total net revenues reached $213.8 million, an increase of 18.8% or $33.8 million compared with $180 million in the same period last year. During the quarter, our e-commerce orders totaled 2,684,000 compared with 2,549,000 orders in the year-ago period.

Average order value during the quarter increased to $65.41 compared with $63.51 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 834,000 new customers while concurrently stimulating repeat orders from existing customers who represented approximately 59% of total customers compared with the 58% in the prior-year period.

Gross profit margin for the quarter increased 150 basis points to 40.5% compared with the same period last year, primarily reflecting enhanced sourcing, pricing and product mix.

Operating expenses as a percent of revenue excluding depreciation and amortization improved 180 basis points to 36.8% compared with 38.6% in the prior-year period. As previously stated, this is a key area of focus and we expect to continue to drive year-over-year improvements in operating leverage.

For the quarter, depreciation and amortization was $4.4 million compared with $3.9 million in the same period last year. This primarily reflects the amortization of intangible assets associated with the Fannie May brands.

Net income for the second quarter increased 168.4%, $1.1 million or $0.02 per share compared with a loss of $1.5 million or a $0.02 loss per share in the prior-year period.

Pro forma net income, which excludes the effect of stock-based compensation, was $2 million or $0.03 per share compared with a loss of 821,000 or a loss of $0.01 per share in the year ago -- or $0.01 per share in the year-ago period.

For the quarter, stock-based compensation expense was approximately $1.4 million pretax and $965,000 net of tax or approximately $0.01 per share, consistent with the prior-year period.

In terms of category results, in the 1-800-FLOWERS.COM consumer floral business, during the third quarter, revenues grew 8.9% to $139.9 million compared with $128.6 million in the prior-year period. The e-commerce component of this category grew 9.6%, offsetting lower retail revenues associated with the planned transition of Company-owned stores to franchise ownership.

Gross profit margin for the quarter increased 120 basis points to 38.5% compared with 37.3% in last year's third quarter.

[Respecting] the revenue growth as well as the improved gross margin and increased operating leverage, category EBITDA grew 34% or $4.8 million to $19.1 million compared with $14.3 million in the prior-year period.

In our Bloomnet wire service business, revenue grew 38.9% to $12.7 million compared with $9.2 million in the year-ago period. Gross profit margin increased 190 basis points to 51.9% compared with 50% in the prior-year period. Category EBITDA increased 70.2% to $3.8 million compared with $2.3 million in last year's third quarter. This reflects growth in florist membership and product and service offerings compared with the prior year.

In our specialty brand businesses, gourmet food and gift basket revenues increased 151% or $21.4 million, to $35.6 million compared with $14.2 million in the prior-year period. Gross margin increased 70 basis points to 43.2% compared with 42.5% in the year-ago period. Category EBITDA grew 213% or $3.4 million to $1.8 million compared with a loss of $1.6 million in the prior-year period. Results in this category reflect continued double-digit growth in our Cheryl&Co. and Popcorn Factory brands as well as the revenue contribution of $17.3 million from the Fannie May business, which was acquired in May of last year. Excluding the Fannie May contribution, the category grew more than 25% during the quarter.

In our home and children's gift category, revenue declined 7.1% to $26.3 million compared with $28.4 million in the prior-year period. This reflects management's planned reduction in marketing as we focus on improving bottom-line performance.

Gross margin was 39.9%, essentially flat with the 40% in the same period last year. Category EBITDA was a loss of $3.2 million compared with a loss of $2.7 million in the prior-year period. Category EBITDA results exclude costs associated with the Company's enterprise share services platform, which includes, among other services IT, human resources, finance, legal, and executives. These functions are operated under a centralized management platform, providing support services to the entire organization. For the fiscal third quarter, corporate expense was $13.5 million compared with $11.5 million in the same period last year.

Turning to our balance sheet, our cash and investment position at the end of the quarter was approximately $10.2 million and we had an outstanding balance of $10 million on our revolving credit facility, reflecting the seasonality of our working capital initiatives.

Inventory of approximately $66.3 million was in line with management's expectations and reflects the buildup for the spring gifting season, including approximately $18 million from Fannie May. Similarly, the increase in accounts receivable primarily reflects the seasonality of Fannie May's business.

Regarding guidance, as we stated in this morning's press release, in terms of bottom-line results, we have reiterated our guidance for growth more than 100% in EBITDA and EPS. This reflects our stated focus on achieving continued improvement in gross margin and operating leverage.

In terms of top line, reflecting the lower sales in our home and children's gift categories, we anticipate total revenue growth for the year will be at the low end of our original guidance range of approximately 17% to 20%. Regarding the current fiscal fourth quarter, which includes the spring holiday season featuring Easter and Mother's Day, the Company expects the period will represent approximately 25% to 27% of full-year revenues.

In summary, as we enter our fiscal fourth quarter, we're focused on driving solid revenue growth and continuing to enhance our bottom-line performance. I will now turn the call back to Jim.

Thanks, Bill. In summary, we had a strong third quarter. We achieved revenue growth of approximately 19% or $34 million. We increased gross profit margin 150 basis points. We improved our operating expense ratio by 180 basis points. As a result, we increased EBITDA to $8 million compared with less than $1 million last year. We improved our earnings per share to $0.02 compared with a loss of $0.02 a share last year. Our top-line and bottom-line performance was driven by strong revenue growth and increased profit contributions from our key business categories, consumer floral, Bloomnet wire service and the gourmet food and gift basket businesses.

In terms of our home and children's gift category, in our last conference call, we told you that we were taking aggressive steps to address the weaker performance in this category, including changing our senior management and initiating a comprehensive review of the business. Since that time, we have begun to make good progress in implementing changes that we believe will improve overall performance.

We have strengthened the management team in specific areas where an infusion of new talent and energy was needed. So we are aggressively revising all of our marketing programs to enhance customer response rates and reduce costs. These efforts are already beginning to yield positive results.

To augment our analysis and planning efforts, we have hired a consulting firm that has specific expertise in the direct to the consumer space. We've worked with these consultants in the past with good results. This firm also has investment banking capabilities, which will assist us in evaluating all of our strategic options for this business.

Looking ahead, our outlook for the current fiscal fourth quarter including the important spring holiday season is positive. In consumer floral, the strength of 1-800-FLOWERS.COM brand enables us to cost effectively attract millions of new customers, thereby building on the largest customer base in the category. The successful introduction of our Fresh Rewards loyalty program along with our expanded range of innovative signature products and cross brand marketing programs is helping us deepen our customer relationships and increase enterprise customer value.

In the Bloomnet wire service, florists continue to embrace our value proposition, including our expanding range of new products and services designed to help them grow their businesses profitably. In gourmet food and gift baskets, we continue to see exciting growth opportunities in this area. as our customers are introduced to great gift ideas from Fannie May, Cheryl&Co. and The Popcorn Factory. We plan to build on our position as a leading player in a fast-growing category.

Enterprise-wide, we expect to deliver on the guidance that we have provided, by achieving strong top top-line revenue growth, to drive higher gross profit margins and to improve our operating expense ratio. As we execute on these initiatives, we believe that we will deliver strong results for fiscal 2007 and beyond and continue to build shareholder value.

Now, that concludes our formal remarks and we will now open the call to your questions. Annie, would you please restate the instructions for the Q&A portion?

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

Good morning, guys. I was wondering if you could just kind of address the issue of cost savings and kind of what inning are we in in the cost savings program? And can you kind of perhaps tell us how much cost savings are embedded in results on a year-to-date basis?

This is Chris. I will take that. As we look at our cost savings, I mean what we said at the beginning of this last year is we are really looking to embed this as part of the DNA or the culture of the Company. So it's hard to say what inning we're in. But clearly, we continue to embed this as a part of a continuous process improvement program. And the people we've brought in to lead this -- that is exactly their role is kind of continuous enterprise process improvement.

So, yes, this is our first year really of focus and renewed focus in this area but it's hard for me to say whether we're in the third inning or the fourth inning. It is part of a continuous effort for us.

As we look forward, I think these process improvements will also look to change how our Company looks, and, therefore, what other cost savings we can get from synergies in our different business platforms, whether it be in the floral platform or in the gourmet food and gift basket platform, again, as were assembling good pieces there as we have done in the floral industry.

Chris, you mentioned that the food and gift business did show double-digit growth in the quarter, excluding Fannie May. I'm wondering if you could perhaps be a little more specific? And can you tell us what kind of growth rate those businesses did realize year-over-year?

I think the way we provide the results is on a category-specific basis. So, we don't really break it out business by business but I think it's giving good visibility to what -- how the business is performing and how the seasonality of those businesses are going for us as well.

Anthony Noto, Goldman Sachs.

This is actually Megan in for Anthony. Just a couple of questions on margins. First for the home and children category, as you guys are evaluating your alternatives in this category, should we expect to see continued year-over-year margin decline for the coming quarters? And then secondly, for Bloomnet, the segment has shown pretty solid year-over-year leverage in the contribution margin. Can you just talk about what's driving this and how much additional leverage you see in that segment? Thanks.

Well there's two parts to your question, Megan. First, on the home and children's gift product areas, we said we were going to take some steps in the second half of this fiscal year, after the poor performance during the holiday period to mitigate the impact. The impact is still negative but we have mitigated it. It's still hurting us but the good news is, the other three categories are over performing, allowing us to do as well as we have.

I would expect that in the future, our plan would be that in the future it would be a strong contributor, whether it's an asset that we have or there's some other determination made.

In terms of your second question with regard to Bloomnet, we think there's a tremendous upside in terms of what we can do on Bloomnet. The categories of the wire service categories is feeling some challenges. That's why we feel particularly good about our decision to birth an organic capability there to differentiate it from the other offerings in terms of its great value proposition. Clearly, florists have voted with their efforts to join Bloomnet and be qualified to be part of Bloomnet and enabled us to triple the size of that network in just the first couple of years that we've launched that effort. So we see nothing but upside there.

I wouldn't put a focus on the upside there in terms of ever wanting to be a universal wire service. That is to have every flower shop as a member. That is not our goal. It's all about exclusivity. It's all about depth of relationship. And in that, we see wonderful and large upside opportunities.

Eric Beder, Brean Murray.

Let's talk a little bit about this corporate intercompany EBITDA. Is it -- I know you guys are working on changing the whole culture of the Company. Is there -- should we be looking forward to see that number or growth in that line start to slow down or even decline as we go forward in terms of kind of the things you are doing internally?

Eric, I think you are referring to the corporate expenses that are not included in the category. EBITDA.

Yes.

The increase that you saw this year year-over-year is kind of threefold. One is, we did acquire a business that had $74 million worth of revenues at the time that we acquired it. And what's included in the number is we pull out finance, HR, legal and we handle that on an enterprise-wide basis. So that's included in that year-over-year because that didn't exist a year ago.

Additionally, we have made some investments this year into kind of our corporate or enterprise level to help drive overall gross margin and operating performance within the brand. So whether that's bringing the kind of a sourcing initiative on an enterprise-wide basis and using some consultants to do that. So that's where you see some of that expenses.

And then overall, our performance last year was not where we wanted it to be, so any sort of incentive pay that we would give to our employees was not there last year. It is there this year because of the performance that was done.

I would add, Eric, separate acquisitions. We've only done one acquisition in the last year and that was just a year ago -- coming up on a year ago -- separate acquisitions. I would say that the onetime expenses of increasing the corporate staff to handle the restructurings, the cost efficiency goals and achievements that we have set for ourselves, you wouldn't expect to see the corporate overhead increase other than this acquisition.

In terms of Fannie May, you integrated that business, you had the Valentine's Day. How has that been accepted by the Bloomnet florists? And is that something that is kind of a weapon for you guys in going after Bloomnet florists with kind of Fannie May and all the other products that you sell?

I think what we would say there -- and I will ask Chris if he has anything he would like to add -- but our mission with Bloomnet is to help the number of florists that we think are qualified, who have the right attitude, the right capabilities, to service customers, to have the right product mix to address our customers' interests and needs going forward. So we think we will be able to expand the product line a little bit. Appropriate for florists to be into, but an expansion to make it universal, that all of our network members are carrying the kinds of products and services that we want to market to our customers, that our customers are telling us that they would like to have available, so there are opportunities to express and connect to the important people in their lives.

Chocolate was an important category there. That's why we went looking for this category for these brands. And I would tell you that we're just at the very earliest stages of making our product available to our Bloomnet florists. It's been well-received and as more and more florists in Bloomnet carry their product, it gives us more and more opportunity at 1-800-FLOWERS to sell that product to our customers and make our customers aware that it is universally available, the same-day delivery around the country. We're in the earliest stages of that program.

I guess somewhat of a follow-up to this and kind of the other question -- if I'm listening to what you're saying, if I listen to what you're saying, in some respects, what is going forward with Bloomnet is, it's not going to be growth in florists, it's really going to be kind of becoming more in -- more services and more products flowing through the florists as opposed to kind of just raw numbers here for the network. Does that make sense? Is that kind of what you're trying to do here with this?

Eric, I think that -- this is Chris. I think that makes sense. As we said from the beginning, our focus on Bloomnet is really to build a very selective network with the best quality florists in the industry. From a numbers point of view, we have to get to a certain scale, and as we said, we're in that range. But our focus is really on deepening the relationship with our customer.

So, as Jim just spoke about, our early successes and the acceptance by our flowers of our Fannie May and Harry London chocolate product lines, the other products and services we have introduced into the community over the last quarter, the Web hosting services, the point-of-sale store management system that we introduced, both of which have been very well-received. And another great innovation that we always offered to this industry, just this quarter, we introduced the industry's first online directory, which complements the paper version, which brings all the capabilities of the Internet marketplace surged through digital advertising capabilities through our industry for the first time. So, it's products and services like that that really deepen our relationship with our Bloomnet florists, which help them to grow their business more profitably, which only strengthens the Bloomnet community.

What new services are there that your competitors have that you guys need to kind of add to the service network?

We really don't believe we are at any disadvantage at this point from the products and services that we don't have versus our competitors. It's all a matter of timing now as we get to turn those into the network and build the relationship with our florists.

(OPERATOR INSTRUCTIONS). Jeff Stein.

I'm wondering if you can just go back to the issue of the home and children's gift area. Hypothetically, if you have to operate that business next year either because you decide you don't want to sell it or you can't get your price, can you guys operate that business profitably in fiscal 2008? And what needs to be done to get it to that position?

Our attitude, Jeff, about our home and children's group business is what we have said before, which is one, we know we needed to make some management changes. We've made them and continue to fortify that management team with the right expertise. We have centralized its management infrastructure so that I brought some more efficiencies, some more clarity, and allowed us to deepen the talent, particularly in the merchandising and marketing areas, where it was of particular need.

The other thing we've done is, we said we had already started a deep dive analytics. What went wrong? We're well into that process. Tim Hopkins, who is leading that effort for us there in Virginia, has just met with us this past week with his first report on all of the analytics. And frankly it was quite impressive and very detailed and gave us a nice blueprint for the kinds of things -- to affirm the things we've done and give us a blueprint for the other things we needed to do.

We own this asset today and our attitude is, we have to have the right analytics, plug in the right plan alongside that with the idea that this Company is going to return to the profitability it has demonstrated in the past and in fact, have outsized profitability in the future. Having hired the firm that we did because we knew them, because they have already done work for us, deepens our ability on the analytic side, deepen our ability in terms of the planning for the go-forward time-frame and gives us some bench strength from an investment banking point of view to consider all of our options.

So, we think we're on the right path and the short answer to your question was, our attitude is that we would have to have a plan in place to make this Company as profitable as it can be.

Can the business operate profitably in your opinion next year?

Certainly.

Yes.

[Jason Glass], [Infinum] Funds.

A quick question for you. I don't want to be backwards looking here but given the adverse weather during Valentine's, how much of a revenue opportunity do you think you missed out on?

We don't like to look backwards either, Jason, because it is painful.

Well, I just want to see how much better it could have -- it would've been (multiple speakers)

It would be -- the storm impacted the Midwest and then the storm moved and hit the whole Northeast. That's a very important part of our business. It not only impacted us from a [retardant] to sales but it also impacted us on a fulfillment basis in terms of number of deliveries you could get out, your flexibility in doing that. So it had an impact.

The short answer is, we're not going to quantify it for you. But we will tell you that it could have -- while we're still pleased with how it came out it could have even been better.

Right. Got you. And as far as this consulting firm that you've hired, who is it specifically?

It's Tucker Alexander.

And have they done transactions in this space before?

They are very well-known in this space for both their consulting services and in particular the team that we're using on the consulting side is a side -- is a team that we've used before with great success and they are very well-known in terms of their services in the whole banking arena as well.

Okay, so they've done some other banking transactions in this space before -- in the past?

I think they are among the leaders.

Yes, okay. Lastly, my last question is, as far as EBITDA margins go, what's your longer-term goal of where you think these margins can go?

I will leave that to Bill because I let him get in trouble with giving forward guidance where we haven't before because he looks much better in stripes than I do!

In our August call, we will be giving specific guidance with regard to fiscal '08. What we've continue to say is we believe that there's opportunity both on the gross margin line and on the operating expense line to continue to drive up our gross margin percentages and to drive down our operating expense leverage, which is going to obviously enhance our EBITDA and operating margins.

If we look at our business, Bill, sans the home and children's business, which has a characteristically different operating margin, what would be our near-term forecast for this year for EBITDA margins for the three primary business units?

It would probably -- it would increase about 200 basis points over what they had. So if our EBITDA margins are more in the 6% range this year, it would jump to about 8% this year.

And we think, obviously, Jason, that we can do better than that.

Right. So we're looking two, three years out you probably see low double-digit EBITDA margins, assuming Bloomnet continues to grow and you move into some of these other higher margin businesses as well?

While we haven't given that as a forecast we would hope you're right.

At this time, there are no further questions in queue. I would like to turn the call over to Jim McCann for closing remarks.

Thank you, all, for your questions and your interest. If you have any additional questions, please contact us.

In closing, as is my custom, I would like to offer you a public service reminder. There are only two days left in Administrative Professionals Week or Secretary's Week. Fortunately, with our same-day and next day delivery capability, it's not too late to recognize that special professional in your office who keeps your business life in order. And Mother's Day is only a few weeks away on May 13 and now is the time to visit your florist of choice -- 1-800-FLOWERS for a wonderful selection of gifts guaranteed to make your mom and all the moms in your life make you their favorite this year. Thanks for time and we look forward to talking to you again soon.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.