1-800-Flowers.Com Inc (FLWS) 2007 Q4 法說會逐字稿

Good day, everyone, and welcome to the 1-800-FLOWERS.COM fiscal 2007 fourth-quarter and full-year results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr. Joseph Pititto. Please go ahead, sir.

Thank you, Justin. Good morning and thank you everyone for joining us today to discuss 1-800-FLOWERS.COM financial results for our fiscal 2007 fourth quarter and full year. My name is Joseph Pititto and I'm Vice President of Investor Relations. Those of you who did not receive the copy of the 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 [Kathy Grabkowski] 516-237-4860 to receive a copy of the release by e-mail or fax.

In term 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 are not prepared in accordance with General 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 press release issued this morning. The company expressly disclaims any intent or obligation to update any of the forward-looking statements made to this call, any recording of today's call, the press release issued earlier today or any of the SEC filings except as they may be otherwise stated by the company. I'll now turn the call over to Jim McCann.

Good morning, everyone. As we announced in this morning's press release, we finished fiscal 2007 with a strong fourth quarter. In fact, we had four consecutive quarters of solid revenue growth and even stronger bottom line performance. These results were driven by our key business categories, consumer floral, BloomNet wire service, and gourmet food and gift baskets. As we have said in the past, these businesses effectively leverage our operating platform and our unique collection of assets. Combined with the benefits from our ongoing business process improvement initiatives, results in these categories more than offset the weak performance in our home and children's gift category. In this area as I've mentioned in past calls, we've made a number of changes and continue to take steps to improve overall performance while also evaluating our strategic alternatives. I will cover this in more detail later in the call.

In terms of highlights for the quarter, the revenues reached $232 million, representing growth of approximately 10% or $21 million. Gross profit margin increased to 42.7%, up 270 basis points, and operating expense ratio was 35.3%, an improvement of 130 basis points compared with last year's fourth quarter. Based on these improvements, EBITDA was $17 million, up 138%, and net income increased to $6.6 million or $0.10 per share, up more than 500% compared with the $0.02 per share in the same period last year. For the year, revenue grew to $913 million, up approximately 17%, or $131 million. Gross margin was 43%, representing an increase of 130 basis points, and operating expense ratio was 37.2%, an improvement of 160 basis points. As a result, EBITDA for the year was $53 million, representing an increase of more than 137% or approximately $31 million compared with last year.

Net income was $17 million or $0.26 per share, up 437% compared with $0.05 per share in fiscal 2006. These very strong results illustrate the substantial leverage we are driving in our operating platform as well as the strength of our brands and marketing programs that are attracting a significant number of new customers each year while concurrently deepening the relationships we have with our more than 25 million existing customers. In terms of customer metrics, we attracted more than 800,000 new customers during the fourth quarter and approximately 3.5 million new customers for the year. More than two million e-commerce customers placed orders with us during the fourth quarter, with repeat customers representing 60% of that total, up from 58% from the prior year period. For the year, approximately seven million e-commerce customers placed orders with us, with repeat customers representing 48% of the total, up from 46% last year.

A key initiative during fiscal 2007 was the development of what we call ECV, or Enterprise Customer Value. Which promotes cross brand marketing and merchandising efforts across our entire platform. As a result, we continue to see improvements in all our customer metrics, including repeat rate, average order value, response and conversion rates.

Before I turn the call over to Bill for his review of the financial results and metrics, I would like to highlight a few additional points. First, our core 1-800-FLOWERS.COM consumer floral business continues to grow from a solid base. We believe this growth on the largest base in the category further extends our market leadership position. In addition, we continue to enhance our gross profit margin and operating expense ratio through a combination of improved sourcing, product (add-ons)and mix as well as pricing initiatives. Second, our BloomNet wire service business continues to gain market share. The permanent team has created what we believe is the very best quality network in the industry. And this is ahead of our original plan. As such, we are no longer focusing on growing the network.

We are now shifting our focus to deepening our relationship with our existing members, helping them not just survive in this contracting marketplace, but to thrive. Toward this end, BloomNet has begun to capture a growing share of the order volume sent between florists, when combined with the 1-800-FLOWERS.COM order volume, BloomNet florists are now uniquely positioned to benefit from our industry-leading growth in order volume. Also, BloomNet continues to increase penetration for its suite of products and services that are designed to help florists grow their business profitably. These include our recently introduced floral selection guide, web hosting service, and technology platform for retail store management.

In gourmet food and gift baskets, Fannie May, which we acquired more than a year ago, is performing very well. Combined with Cheryl and Company, the Popcorn Factory, and 1-800-Baskets.com, we're now on a run rate to exceed $200 million in revenues in fiscal 2008. This is the category with high growth and attractive margins which we continue to see opportunities to gain market share through both organic efforts and strategic acquisitions.

In our home and children's gift businesses, we have noted in our past two quarterly calls that we've taken aggressive steps to address the weak performance in this category. Beginning back in January, we changed senior management and initiated a comprehensive review of the business. Since that time, we have made good progress in implementing changes that are beginning to provide benefits in the form of improved customer response rates and lower operating costs. Among these efforts, we've strengthened our management team, particularly in the areas of creative and merchandising.

We've revived our catalog circulation and marketing programs, and we stepped up our product development and sourcing efforts with a focus on unique and proprietary products as well as adjusting our promotional pricing strategies to enhance gross margins. We believe that these changes and others that we will make will enable our home and children's gift business to operate profitably going forward. With that said, we continue to work with the consultant that we hired last quarter to help us with our analysis and planning efforts, as well as reviewing strategic options for the business.

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

Thank you, Jim. During the fiscal fourth quarter and the year, we achieved solid revenue growth and importantly, we grew EBITDA and EPS at a significantly faster rate. We accomplished this in an enhancement in two key focus areas that we identified going into fiscal 2007.

First, we increased gross profit margins in our key business categories. And second, we significantly improved leverage across our operating platform. Now, regarding specific financial results and key metrics for the fourth quarter and full year. Total net revenues for the quarter increased 9.8% or $23.7 million to $231.8 million. For the year, revenues reached $912.6 million, an increase of 16.7% or $130.9 million compared with fiscal 2006. During the quarter, e-commerce orders totaled $2.940 million compared with $2.890 million in the year-ago period. For the year, e-commerce orders totaled $11.630 million compared to $11.300 million in fiscal 2006. Average order value during the quarter increased $66.90 compared to $63.98 in the prior-year period. For the year, average order value increased to $64.37, compared with $62.37 in fiscal 2006. This increase primarily reflected a combination of product mix, increased add-on sales, and pricing initiatives.

During the quarter, we added 853,002 customers while stimulating repeat orders from existing customers who represented approximately 59.8% of total customers. For the year, we added 3.5 million new customers to repeat orders representing approximately 47.7% of total customers. Gross profit margin for the quarter increased 270 basis points to 42.7% compared with the same period last year. For the year, gross profit margin improved 130 basis points to 43%. Primarily reflecting enhanced sourcing, pricing initiatives, and profit mix. Operating expenses as a percent of revenue, excluding depreciation and amortization improved 130 basis points to 35.3% during the quarter. For the year, operating expense ratio improved 160 basis points to 37.2%.

As we 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 $4.8 million compared with $4.6 million in the same period last year. For the year, D&A was $17.8 million compared with $15.8 million in 2006. The increase primarily reflects the amortization of intangible assets associated with Fannie May brands. Net income for the fourth quarter increased 545% or $5.6 million to $6.6 million or $0.10 per basic and diluted share compared with $1 million or $0.02 per basic and diluted share in the prior-year period. For the year, net income improved 437% or $13.9 million to $17.1 million or $0.26 per diluted share and $0.27 per basic share compared with $3.2 million or $0.05 for basic and diluted share for the prior year.

During the quarter, pro forma net income, which excludes the effect of stock-based compensation, was $7.4 million or $0.11 for basic and diluted share, compared with $2 million or $0.03 per basic and diluted share in the year-ago period. For the year, pro forma net income was $20.4 million or $0.31 per diluted share and $0.32 per basic share compared with $6.4 million or $0.10 for basic and diluted share last year. For the quarter, stock-based compensation expense was $1.2 million pretax or $870,000 net of tax or approximately $0.01 per share. For the year, stock-based compensation expense was approximately $4.6 million pretax and $3.2 million net of tax, or approximately $0.05 per share, consistent with the prior year.

In terms of category results, in our consumer floral business during the fourth quarter and full year, revenues were $154 million, representing an increase of 7.2%, or $10.3 million. E-commerce component of this category grew 8%, thereby offsetting lower retail revenues associated with the planned transition of company-owned stores to franchise ownership. For the year, total net revenues were $491 million, representing an increase of 8.7% or $39.2 million. E-commerce revenues increased 9.4% for the year. Gross profit margin for the quarter was [40.2%] up 290 basis points. For the year, gross profit margin was 39.3%, up 160 basis points. These improvements, combined with the enhanced operating leverage filled the category EBITDA for the quarter of $24.6 million, representing growth of 45.2%, or $7.7 million, category EBITDA for the year was $64.6 million, up 38.8% or $18.1 million. The company defines category EBITDA as earnings before interest, taxes, depreciation or amortization and before the allocation of corporate overhead expenses.

In our BloomNet wire service business, revenues for the quarter were $14.8 million, representing an increase of 55% or $5.3 million. For the year, revenues were $44.4 million, up 48.5% or $14.5 million. Gross profit margin for the quarter was 56.3%, up 100 basis points. For the year, gross profit margin was 56%, up 250 basis points. Category EBITDA was $5.4 million, up 102% or $2.7 million for the quarter. For the year, category EBITDA was $14.2 million, up 99.4% or $7.1 million. In our gourmet food and gift basket business, revenue for the quarter, $25.9 million, representing an increase of 31% or $6.1 million.

For the year, revenues were $192.7 million, representing an increase of 83.5% or $87.7 million. This growth affects the contribution from the Fannie May confections brand business which was acquired in May of last year. Excluding the Fannie May preacquisition revenues, total revenues in this category increased approximately 18% for the year. Gross margin for the quarter was 44.7%, up 420 basis points. For the year, gross profit margin was 45.8%, up 60 basis points. Category EBITDA for the fourth quarter was $800,000, representing an improvement of $1.5 million compared with a loss in the period last year. For the year, category EBITDA was $26.4 million, up 286.4%, affecting both the contribution from Fannie May as well as the continued strong performance in the Cheryl & Company and Popcorn Factory brands.

In our home and children's gift category, revenues for the quarter were $37.4 million, representing a 3.3% decline compared with the prior-year period. This reflects management's planned reduction in marketing as we focus on improving bottom line performance in this category. For the year, revenues were $187 million, down 5.1% or $10 million. Gross margin for the quarter was 45.5%, up 40 basis points. For the year, gross profit margin was 45.9%, down 60 basis points, primarily reflecting promotional pricing with aid to the slower sales in the first half of the fiscal year.

Category EBITDA for the quarter was a loss of $100,000, essentially flat with the prior-year period. For the year, category EBITDA was a loss of $1.2 million, reflecting a decline of 117% or $8.4 million compared with the prior year. 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 executive. These functions are operated under a centralized management platform providing support services to the entire organization. For the fiscal fourth quarter, corporate expense was $13.6 million, compared with $11.5 million in the same period last year. For the year, corporate expense was $51.1 million, compared with $45.3 million in fiscal 2006.

Turning to our balance sheet. At the end of the year, we had no outstanding balance in the outstanding on our revolving credit facility. Our cash position was approximately $16.1 million compared with $24.6 million at the end of 2006. The change in our cash position reflects the following items: cash provided by operations was $32.3 million, representing an increase of $18 million compared with the prior year. This was offset by several factors, including the repayment of debt of $10 million. Capital expenditures of $18 million to support our business growth. And $16 million used to repurchase shares during our fiscal second quarter. Regarding long-term debt, we finished the year with approximately $78 million in long-term debt, down from approximately $88 million at the end of fiscal 2006. Inventory of approximately $62 million was up approximately $9 million compared with the prior year. This increase primarily reflects the growth of our homemade food and gift basket category, increased product sales, increased products for sale into the BloomNet network, and the slower sales in our home and children's gift category.

Regarding guidance, as we stated in this morning's press release, for fiscal 2008, we anticipate continued strong revenue growth in our key business categories. Consumer floral, BloomNet wire service, and gourmet food and gift baskets. This is somewhat offset by the anticipated flat growth in our home and children's gift category. As a result, we anticipate organic growth for the year in the range of 7% to 9%. During fiscal 2008, we expect to achieve further improvements in gross profit margins and operating expense ratio, through a combination of sourcing, product mix, and ongoing business process improvement initiatives. Combined with the anticipated revenue growth, we expect this to result in EBITDA growth in the range of 20% to 25%, and EPS growth of 30% to 35%, in fiscal 2008, compared with fiscal 2007. Longer term, we anticipate similar top and bottom line growth rates.

In terms of seasonality for fiscal 2008, we anticipate quarterly revenues will be in the following ranges: Q1, 14% to 16% of total revenues. Q2, 35% to 37% of total revenues. And Q3 and Q4, at 24% to 26% of total revenues. It is important to note here that the Easter holiday will shift to our third quarter this fiscal year compared with last year when the holiday occurred during our fiscal fourth quarter. This will primarily affect the year-over-year quarterly comparisons of our consumer floral and gourmet food and gift basket businesses.

In summary, as we enter fiscal 2008, we continue to focus on driving solid revenue growth and by leveraging our operating platform, significantly enhanced EBITDA and EPS performance. I will now turn the call back to Jim.

As you've just heard, we had a strong finish to a very strong fiscal year. We are very pleased to have delivered on the guidance that we provided you a year ago, which called for solid top line growth and increases in EBITDA and EPS of more than 100%. Most importantly, these results were driven by the very strong performance in our key business categories, consumer floral, BloomNet wire service, and gourmet foods and gifts.

To recap, for the year, we had revenue growth of approximately 17%, or $131 million. Or gross profit margin increased 130 basis points. Our operating expense ratio improved 160 points. As a result, EBITDA increased more than 135% to $53 million, and EPS grew more than 500% to $0.26 per share. During fiscal 2008, we expect to see continued strong revenue growth, and increased profit contributions in our key business categories. In our home and children's gift business, we -- we expect significantly improved bottom line performance. As we execute our business plan, we are confident that we will deliver strong results for fiscal 2008 and beyond, and thereby continue to build shareholder value.

That concludes our formal remarks. We'll now open the call to your questions. Dustin, please restate the instructions for the Q&A.

Thank you, sir. Today's question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). We'll go first to Anthony Noto with Goldman Sachs.

Hi, this is Jen Watson in for Anthony. In terms of your long-term guidance with highlights profit growth in the range of 30% to 35%, can you discuss the expectation for COGS leverage versus the OpEx lines. More specifically, do you see gross margin improvement more a matter of a mix shift in the business with BloomNet becoming a contributor or is there room for improvement across each of the segments?

This is Bill. I think there is improvement across each of the segments, that we have. I think each of those categories can improve. As we stated, the home and children's group category, we feel strongly that will return to profitability this year. With respect to the breakdown, we believe both categories can, will show improvement. But giving specific guidance on those categories.

Okay. And then is there anything that we should think about that made fiscal year '07 different in terms of driving a 20%-plus incremental operating margin, or is that something that you think you can continue to do going forward?

Well, with reference to the guidance we've already given, I think that what we began to see was the benefit of the margin enhancement programs we introduced in the gross margin area and the operating expense ratio improvement we were able to achieve by our systemwide pep initiatives that we described to you in previous calls. I think they're both contributing and will continue to contribute.

Okay, great. Thank you.

We'll go next to Jeff Stein with KeyBanc Capital Markets.

Hi, guys. Question with regard to your process improvement programs. If this were a baseball game, what inning would you guys be in with respect to capturing the savings that you kind of targeted initially?

I think the best way to answer that is, this is the first year of the program. We described three buckets of initiatives that were underway. The first year, this -- the fiscal 2007, we did the low hanging fruit kind of things. Contract negotiations, vendor rationalization, SKU rationalization. The things that you could effectively get at right away. In addition, we began to do the analysis and some of the planning for the deeper, more meaningful cuts. So I would say in a three-year plan we're three innings into the game. And that -- but you shouldn't assume that we'll score the same number of runs in each inning.

Terrific. Okay. Well, you guys are -- you guys pitched a shutout during the -- the fiscal 2007 year. With respect to -- you mentioned you increased your penetration of shop-to-shop orders in BloomNet. Wondering if there might be any statistics, Jim, that you'd be willing to share on that.

Well, as you know, Jeff, the introduction of BloomNet is a phased-in approach. First we had to make sure that we had all of the programs and services that a florist would find necessary to profitably operate their business so that we were a one-stop shop. We've introduced those. Now you see it's continuing to enhance that offering with things like our web hosting program and our selection guide program that we've introduced in the most recent couple of quarters. Now we're putting an emphasis on giving our senders a reason to look to us to be that one-stop shop for them because clearly there is a -- a lot of issues going on in the retail floral community. So it's important for us to have the best value proposition for our florists. One of those necessary ingredients is that they have the confidence and the ability to use the best quality network, perhaps the smallest, therefore, best quality network in the industry for the fulfillment of their orders. So it's just in the last -- this fiscal year, particularly in the last half of this fiscal year that we began to put an emphasis on attracting our florists order sending, so that they could use the same network because many of them are looking at it saying "I can't afford to belong to three," "I can't afford to even belong to two," and we have to make sure that we give them the best value proposition. Not only in term of services that we provide but in terms of helping them get orders fulfilled, as well.

Okay. Final question -- with regard to the children and home business, with the measures that you have put into effect, can you guys potentially get back to the same EBITDA numbers that you earned in fiscal 2006? In the current year?

Jeff, I think longer term, we believe if we hold this asset that we'll get the margins back up to -- to 2006 levels and beyond. But this year we're not giving specific guidance to get it back to that level. But we've stated that we're comfortable, that we will return it back to profitability.

Thanks.

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

Good morning. Great quarter, guys.

Thank you.

Could you talk a little bit about Fannie May and pieces here. Where are you in terms of getting it to the florist as part of the BloomNet piece, and whether weather do you think you'll be able to maybe offer nationwide delivery of chocolate and chocolate box on the same-day basis?

Sure, Eric, this is Chris. I think, as we stated with BloomNet, overall we're very happy with where BloomNet is in general and to begin to really deepen our relationship with those florists. Florists is one of those components that Jim just spoke to, selling other products and services into those florists, another key component of that. We introduced the Fannie May and Harry London product into the BloomNet community this past year, and it was very well received.

We're very happy with the results there. And more importantly, I think, the repeat orders that we are getting on that product line from our BloomNet florist is working very well. As a component of that, we are -- we have begun testing in a couple of different markets. The -- the delivery capabilities the same day as those products. That's in its early stages. Really our focus this past year has been really providing that product for sale to our BloomNet florists-owned retail customers as well as to add-ons capabilities to the products being sold through the 1-800-Flowers channels.

Okay, in terms of the -- how are the Fannie May stores doing, and what's the longer term thoughts for the Fannie May stores?

This is Jim, Eric. The Fannie May stores are doing quite well. As you recall, the management team that still runs the company acquired Fannie May out of bankruptcy a few years ago. And the bandwidth that they had afforded them the opportunity to open up of the 325 stores that had existed, only about 50 of those stores, they chose to do that appropriately -- all in the Chicago area. They had been spread out obviously across a big swath of the country. The 50 stores that they originally opened are doing well, and since that time they've added about five other stores.

So the stores have a great economic model and that management team now is charged with looking at what's the best use of a company's capital. What's the best way to spread the brand, now that we have the e-commerce component plugged in and starting to catch some traction, how does those stores obviously contribute to the benefit of that e-commerce capability. And then what's the best way for us to expand that footprint. Should we and -- if so, how should we and what best capital model? They're reviewing all of those alternatives now. And I'd expect that we'll be making some decisions in the near -- next quarter or two about how best to let that expand from a capital point of view, and from a brand penetration point of view.

And final question, you've done a lot of expansion in the food line and gifting area. What are your customers telling you that they want to have that you don't carry now?

Well, I think there's a -- a plethora of opportunities within the gourmet category. And -- but particularly, the gift baskets, gift collections. Here's an opportunity, frankly, Eric, for us to lever our relationships with our florist. We -- clearly we have to have two capabilities to bring really interesting and exciting gourmet gift products to our customers. But our customers are saying, give me -- give me gift solutions. And that would be a basket.

That would be a gift set, a gift pack, and here we hope on a voluntary basis, we hope on a voluntary basis we hope to invite a cheer of our BloomNet membership to participate and leverage their end market capability without basket net capability so that we can enhance the products. So the underlying answer that we hear from our customers, give me a gift solution, a combination of a box of chocolates and a floral arrangement and some balloons. Give me a gift basket appropriate for Father's Day, for everyday gifting occasions, and give me an assortment of other branded product in that gift pack, and let me have the ability to customize it a little bit.

Great. Great quarter, guys, thank you.

Thank you, Eric.

We'll go next to Malindi Davies with CIBC World Markets.

Hi, good morning. I just had a couple of quick questions. First of all, how are the payments via Paypal going, and do you see this as an advantage? Second, do you have a goal for ASP growth longer term? And third, are there any details that you can give on the management change at Popcorn Factory and what initiatives the new management may have put in place or has plans to put in place? Thanks.

Bill, would you handle the Paypal question?

Paypal, because of its acceptance in the marketplace with something north of now 100 million users, we felt it was -- it was important to offer that to our customer base. We're seeing very nice growth in that -- still a very small component of all -- of our overall, payment processing. It's still heavily weighted towards credit cards.

This illustrates the best strategy of making sure we off all convenience to our customers. So it's just a convenience component.

I'll jump to your third question in terms of the management changes that you have. I did not hear your second question. I'll ask you to repeat that in a second. But in terms of management changes, clearly we changed the Tim Hopkins, who had been in charge of the specialty brands, who knew that business well and has a great background in merchandising and in general management, went in as President of Plow and Hearth in the children's group and has done a great job of re-energizing the team there, bringing in some specialists in merchandising now in logistics and sourcing. As we stated, it's important that we have unique, differentiated products there. It requires a product cycle and sourcing capability frankly we didn't have a great enough depth in. So he's buttressed that capability in the financial arena, in the merchandising area, in the creative arena, and finally in the logistics and procurement arena. Those are the management changes that Chris made in that unit with Tim going in and Tim has those people very energized, doing a really good job. And already we're starting to see the fruits of their efforts in the first half of this calendar year. Then you had a second question in between there --

The second question had to do with ASP growth. And do you have a goal for ASP growth longer term? I mean, does -- something north of $70 make any sense as you do cross selling?

No, we do not have a goal to grow average ticket. Is that your question, average ticket?

Yes.

No, we don't. The -- the growth that's occurred is a function of the breadth of the product offerings we're bringing to the table. Our focus is not on growing it, our focus is on growing our share of customer. So being able to service them against more occasions, so we're going to introduce lower price points and higher price points. So that average order will vary in size, and the increase issue is just a function of a larger breadth of offerings, particularly in that gift basket area, which tend to have larger tickets.

But one successful initiative that we had is we really did want to step up the amount of add-on sales to our products where someone buys a base product but then upgrades on the floral side to a nicer vase or adds on a chocolate that we have. That's been very successful and has contributed to the average ticket increase.

Thank you.

You bet.

We'll go next to Heath Terry with Credit Suisse .

Great. Thank you. Looking at the decline that we saw in sales and marketing on a year-over-year basis, can you talk to us about what's driving that? Are you getting more efficient about the way that you're spending -- is there a mix shift there, either towards or away more on line, and at some point, do you -- do you worry or is there a certain level that you're targeting for sales and marketing as relative to revenue?

I think as we look at -- Heath, as we look at the sales and marketing line, I think one of the benefits we've achieved this year is some efficiencies in certain elements of our marketing efforts. I think also we had some challenges certainly earlier in the year in Q2. And some of our catalog marketing, especially in the home and children's group didn't perform to the extent that we wanted it to. And then -- plus in the second half of the year as we pulled back on some of that prospecting, that helps the sales and marketing line decline. You see that show up there.

I think from an overall perspective, the way we manage and mix -- the way we manage our online marketing from a search point of view, the positive results that we're getting in search which I think especially in the floral category which is reflective of the strength and reputation of the 1-800-FLOWERS brands, really helps us to get good results in the search category. And I think that also is attributable as we look at the online, for example our portal spending is really a reflection and a component of our overall media campaign planning. It's a matter of whether it's a TV spot, maybe two weeks prior to a holiday coming up with a prime portal spot one week prior to the holiday, or looking at that mix and being able to spend appropriate where we're getting the best return, helping the efficiencies in sales and marketing.

And a few other points, Heath, with that is, what our goal was this year in a lot of areas was not to reduce marketing. We weren't reducing marketing. In fact, we were increasing marketing, marketing dollars. But we were trying to do it at a better spend. So, a lot of the pricing initiatives that we had, whether it was lower e-mail costs, lower paper and postage, costs that we have -- we were able to negotiate in, additionally within that category of sales and marketing, it's not just marketing. There are other operating components on the sales side of the business. So whether it's our customer service platform, whether it's our telecom rates, all these things we're looking to drive leverage and drive better pricing which helps to reduce that category.

Great. Can you talk then specifically about what you're seeing in the sponsored search space? I know that's an important channel for you. Is there a trend that you're seeing in pricing and ROI there, is there a -- anything that you can talk to us about in terms of the relative importance of that channel for you as we go into this new fiscal year?

So search is an important component of our marketing mix. And I think what we've demonstrated this past year, again, as I mentioned, is the strength of the Flowers brand really helps us to maximize efficiencies. As we look during the key floral holidays, you're able to see the 1-800-FLOWERS.COM brand position itself very well within the search arena, and again, maximize our return on investment. And I think that's because of the strength of the brand. And I think that trend will continue. We also get strong benefit from our other brands and appropriately managing that search spending, whether it be for the Fanny May brand or popcorn factory, Cheryl & Company brand, that key gift component, again helping us provide maximum leverage across our search capabilities.

The only thing I would add is that -- It's Jim -- it's tempting, it's tempting to cut your -- eliminate your spend in the broadcast arena because you might as well go to the river's mouth and fish where the fish are. And we've resisted that temptation and kept our budget aligned there against our broadcast because that builds your brand. I think we're starting to see more evidence that that has been a good strategy because it's our impression that our cost for capture in the search environment is less than others because we have the brand benefit which is driven by the broadcast spend.

Great. Thanks a lot.

We'll go next to Anthony Lebiedzinski with Sidoti and Company.

Good morning. You mentioned before that you're done with the low hanging fruit in terms of the business process improvement initiatives. What other steps are on the -- on your plan to do as far as, these process improvement initiatives for this year?

Well, Anthony, this is Chris. I think as we look and we discuss process improvement programs, and Jim mentioned the low hanging fruit, I like his and Jeff's baseball analogies back and forth there, it does take -- it is a little bit more time consuming as we restructure the company to gain efficiencies across platforms. So whether that be distribution, management about distribution platform across our brands, management of -- gaining manufacturing efficiencies across the brands, looking at our service component, again, across the brands and how we restructure our service platform, so we believe there's good efficiencies to be gained over the next couple of years. But I think Jim said it well, can't expect the same number of runs per inning as we go forward.

But the opportunities on the -- on the more structural things that we're looking at, Anthony, like the things Chris mentioned, our distribution capability, our service platform, are actually bigger in dollar terms. So they take more to get at them. But the opportunities are actually larger for us in the years ahead than the things we're able to implement in the first year.

Yes. And also curious as far the sales growth that you saw in fiscal '07, how much was that because of price increases?

Very little in terms of price increases. It was primarily a lack of discounting in some areas, but the improvements were all on the other side of the line, not on the price increase line.

Yes. And also, looking at home and children's gifts, can you give us some specific examples as to what kind of, merchandising changes, what -- what new products are sort of in the pipeline to get this segment moving in a positive direction.

I don't know that I can go into any specific new products other than as Jim mentioned before some of the talent additions that we've added to the team and people on the team really rising and being able to focus on the categories where their strength is. I think we're seeing some early results of that based on the increased response rates during the second half of the year. And helping out in this quarter. Also helping out with the margin improvements in that category that you saw this past quarter. Our focus on sourcing initiatives within that -- within the merchandising product line for that -- for that business category, as well. It's starting to pay off for us.

Yes, and I think also there was an emphasis, as we were -- remember, we introduced, kind of two new titles last year, or one new title and expanded another title in problem solvers. So, the merchandising teams and creative teams had to spread their -- their time and focus, you know, over a broader category. And now they're really focused back to kind of the core products, as well.

Yes. And when you talk about the product sourcing, are you just -- are you doing more direct imports? I mean, what specifically are you doing when -- when you mention that you're looking to improve your sourcing?

We're designing our own products, we're working with the manufacturers on securing those manufacturing times, and products, and then we have a whole new logistics regimen in terms of how we get that product to us, into our distribution centers at that optimum cost. So it starts from designer products working with the manufacturers to get the best quality products at the best price and getting it to our facilities in the most efficient way.

Okay, thanks.

(OPERATOR INSTRUCTIONS). And we have a followup from Jeff Stein with KeyBanc Capital Markets.

Yes, on the question, on the subject of enterprise customer value, I'm wondering if you could possibly share with us any metrics you have on the percent of customers that buy across multiple brands.

Yes. I'm not going to -- going to give you specific numbers on that, Jeff. I'll give you the color that will help you there. And that is we have just a few points at the beginning of this year of customers who -- who were cross brand shoppers. The introduction of the Fresh Rewards program in the 1-800-FLOWERS brand gives us an opportunity to expose those customers to the other branding categories and rewards scenario. The introduction of the Cheryl & Company, the Fanny May product as the chocolate brands and the -- and the gift bakery brand into the 1-800-FLOWERS category has seen that more than double this year. But it's still a very small number. So the opportunities there are fairly dramatic for us as we find the most efficient ways to expose the different customers to the different brands-- to the different products and brands.

Thank you.

We'll go next to Kristine Koerber with JMP Securities.

Hi. A couple of questions. First of all, looking at your revenue growth, the 17% growth for FY '07 versus the guidance for next year, was the -- most of '07's revenue growth, was that due to Fannie May acquisition?

No. I think Bill gave you the breakout on that earlier. Bill --

Yes, no. It's a 17% growth rate. It's basically split between organic growth and the Fannie May acquisition. But that gourmet food and gift basket category, we back out the Fannie May piece of that, the prior year revenues of that, that category is still about 18%.

Okay. So -- so why is the revenue growth decelerating then to 7% to 9%?

I think it -- there's two pieces to that. One is we have a unit that we planned for lower growth that is the home and children's category. Very low growth but very profitable growth relative to last year. But if you look at the other three categories, their -- their growth is still over 10%. But when you blend it in with a category we're planning on like growth, it brings it down to the seven dash nine.

Okay. Yes. But the -- the home and children's group has -- you've been struggling with that over the past year or so. Correct?

Yes.

And we've seen lower revenue growth there.

Well, last year we saw it go backwards by $10 million. And this year we're planning on growth, but not big growth because we didn't want to spend against a prospecting and all those kinds of things that prove to be less than beneficial last year. So what we'll plan for is modest growth in that category, but with a much improved bottom line performance.

Okay. CapEx guidance for '08. Did you give that number?

CapEx -- we did not, but CapEx, , we stated in the past to be around 2% of revenues. And if you look at this year, we came in at about $18 million, spot on with that guidance.

Right. Okay. And then conversion rates, what do you see in terms of conversion rates, and then I just wanted to verify the new customer number. Number of new customers for Q4, is it --

800,000 customers for the quarter --

853 and 3.5 million for the year.

Okay. And -- so the new customer growth is down year over year? Can you explain why.

Relatively flat.

And I think part of that is our reduction in prospecting and some of our catalog brands that we mentioned. Remember we said with the performance issues in our home and children's category that we were going to scale back their marketing spend. So obviously they didn't accumulate as many customers. That made the number flat on an enterprise basis for the - for the quarter.

Okay. And then conversion rates. Can you give us an idea what you're seeing as far as conversion rates, thank you.

I think conversion rates obviously vary across the board for us. Again, vary by channel, as well. Telefonica, online channel, they vary by brand. One of the thing that we're very happy is we moved the 1-800-FLOWERS business, the 1-800-FLOWERS brand onto our fresh digital commerce platform this past year. We've seen an increasing conversion rate, and this next year we begin to move our gourmet food brand on to that platform we would expect similar -- onto that platform we would expect similar results.

Thank you.

Thank you, Kristine.

And there appear to be no further questions. At this time, I would like to turn the call back over to management for any additional oh closing comments.

Thank you, Dustin. Thank you, all, for your questions and your interest. If you have any additional questions, please contact us. In closing, I'd like to offer our traditional public service reminder. I encourage you both as investors and customers to sign up today for Fresh Rewards. the industry's premiere customer loyalty program. As a member you will enjoy a unique suite of services including valuable petal points for each and every purchase you make, as well as special discounts and exclusive product offerings available only to Fresh Reward members. Give it a try today. You can think of it as research. Thanks again, and have a good day.

That does conclude today's conference call. Thank you for your participation. You may disconnect at this time.