1-800-Flowers.Com Inc (FLWS) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the 1-800-FLOWERS.COM fiscal 2008 second-quarter results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to the Company's Vice President of Investor Relations, Mr. Joseph Pititto. Please go ahead, sir.

Thank you, Justin. Good morning and thank you all for joining us today to discuss the 1-800-FLOWERS.COM financial results for our fiscal 2008 second quarter. My name is Joseph Pititto, and I'm Vice President of Investor Relations. For those of you that 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 Altadana] 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'll 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 prepared 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 this morning. The Company expressly disclaims any intent or obligation to update any of the forward-looking statements made on 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'll now turn the call over to Jim McCann.

Good morning. For our fiscal second quarter, we achieved strong growth of 14% in both EBITDA, which increased to $38.6 million and in net income, which grew to $19.3 million. This performance on revenues of $334 million illustrates our continued focus on leveraging our business to enhance our operating margins. We achieved these results during our year-end holiday period that was characterized by very cautious consumer spending and aggressive promotional activities by our competitors.

Revenue growth for the quarter in part reflects our conscious decision not to chase top-line at the expense of bottom-line results. During the quarter, we maintained our gross profit margin of approximately 46% by proactively adjusting our marketing programs during the quarter to reduce spending in reaction to the slower consumer demand.

We were judicious in our promotional activities and limited the use of free shipping coupons to higher margin items and larger order sizes, thereby minimizing the impact on gross profit margin. This strategy combined with an improvement of 160 basis points in our operating expense ratio resulted in continued strong contribution margins in our Consumer Floral and Gourmet Food categories. It also enabled us to significantly improve the contribution margin in our Home & Children's Gifts category, which more than doubled compared with the prior year period.

Most important, throughout the holiday period, we continued to deliver what our customers have come to expect from us, a superior shopping experience that includes a great selection of products and services as well as great quality and value across all of our brands.

Before I turn the call over to Bill for his review of the specific results and metrics of the quarter, I would like to highlight a few additional areas. First, during the quarter, BloomNet achieved strong growth, increasing its revenue 32% to approximately $13 million. BloomNet continues to gain market share through a combination of increased penetration of our expanded suite of products and services as well as increasing the volume of orders sent between our BloomNet florists. These factors resulted in an increase of approximately 37% in category contributions to $4.5 million.

Second, on the customer front, during the period, we attracted approximately 1.3 million new customers with more than 67% of them coming to us online. We also achieved a repeat order rate of more than 54%, illustrating the continued success of our efforts to deepen the relationships we have with our customers. Importantly, during the quarter, we were able to further develop our ECV or enterprise customer value programs by cost effectively attracting a significant number of new customers, primarily through the strength of our flagship 1-800-FLOWERS.COM brand. As a result, we saw enhanced results in such areas as our cross-brand marketing programs, increased average order value, and improved response rates from our integrated online and off-line marketing programs.

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

Thank you, Jim. During the fiscal second quarter, we achieved strong growth of approximately 14% in both EBITDA and net income to $38.6 million and $19.3 million, respectively. This was driven by our continued focus on leveraging our business platform, which resulted in an operating expense ratio improvement of 160 basis points. The strong bottom-line results were achieved on revenue growth of 1.3% or $4.3 million to $334.2 million.

Throughout the quarter, we focused on profitable revenue growth. We were able to minimize the effect on our gross margin by selectively offering free shipping and other promotional offers. Combined with our increased operating leverage, this strategy enabled us to maintain the strong contribution margins in our Consumer Floral and Gourmet Gifts categories as well as more than double the contribution margin in our Home & Children's Gifts category.

Providing specific financial results in key metrics for the second quarter, total net revenues reached $334.2 million, an increase of 1.3% or $4.3 million compared with $329.9 million in the same period last year. The majority of the growth achieved during the quarter can be attributable to BloomNet, which grew 32.1% or $3.1 million to $12.7 million compared with 9.6 million in the year-ago period. During the quarter, our e-commerce orders totaled 4,204,000 compared with 4,375,000 orders in the year-ago period. Average order size during the quarter was $62.25, up slightly compared with $61.75 in the prior-year period.

During the quarter, we added 1,259,000 new customers. This was achieved while concurrently stimulating repeat orders from existing customers, who represented approximately 54% of total revenues compared with approximately 53% in the prior-year period. Gross profit margin for the quarter was 45.8% compared with 46.1% in the same period last year, reflecting the promotional nature of the holiday season.

Operating expenses as a percent of revenue, excluding depreciation and amortization, improved 150 basis points to 34.2% compared with 35.8% in the prior-year period. This includes non-cash, stock-based compensation expense of $800,000 compared with about $1 million in the year-ago period. The operating expense improvement reflects the enhanced operating leverage we achieved during the quarter. As we 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 $5 million compared to $3.8 million in the prior-year period. Just a note here, the prior-year period benefited from a true-up of estimated amortizable intangible assets associated with the Fannie Mae acquisition. Aside from this, the year-over-year depreciation and amortization charge will be more comparable. As a result of these factors, net income for the second quarter increased 13.8% or $2.3 million to $19.3 million or $0.29 per diluted share compared with $0.26 per diluted share in the prior-year period.

In terms of category results, in our 1-800-FLOWERS.COM Consumer Floral business during the second quarter, revenues were $114.1 million compared with $114.7 million in the prior-year period. Gross profit margin for the quarter in this category was 39.4% compared with 39.7% in last year's second quarter. The slightly lower gross margin was offset by enhanced operating leverage, resulting in category contribution margin of $13.6 million, up slightly compared with $13.5 million in the prior-year period. We define category contribution margin as earnings before interest, taxes, depreciation and amortization and before the allocation of corporate overhead expenses.

In BloomNet, revenues increased 32.1% to $12.7 million compared with $9.6 million in the prior-year period. Gross profit margin was 57.1% compared with 59.9% in the prior-year period. It is worth noting that gross profit margin in this category will fluctuate somewhat on a quarter-to-quarter basis due to the nature of the products and services and their penetration rates provided to (technical difficulty) flowers. As such, gross profit margin is a less meaningful metric in this category compared with revenue and category contribution margin growth.

Category contribution margin for BloomNet increased 36.9% to $4.5 million compared with $3.3 million in the prior-year period.

In our specialty brands businesses, in our Gourmet Food & Gift Baskets category, revenue grew 1.6% to $110.6 million compared with $108.9 million in the prior-year period. Gross margin increased 70 basis points to 49.1% compared with 48.4% in the year-ago period. The increase in gross margin was offset by an increase in operating expenses in this category, specifically marketing and selling, resulting in category contribution of $24.9 million compared with $25.3 million in the prior-year period.

In our Home & Children's Gifts category, consistent with management's plan, revenue in this category were essentially flat compared with the prior-year period at $98 million. Gross margin was 47.5% compared with 48.8% in the prior-year period. The low gross margin, reflecting the promotional nature of the holiday period, was more than offset by a significant improvement in operating expenses, specifically a reduction in marketing and selling.

As a result, category contribution margin increased to $8.7 million, representing an improvement of 124.5% or $4.9 million compared with $3.9 million in the prior-year period. As I stated earlier, category contribution margin excludes costs associated with the Company's enterprise shared 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 second quarter, corporate expenses were $13.1 million compared with $12.1 million in the prior-year period. This increase primarily reflects investments we've made in our enterprise service initiatives, including IT, the benefits of which can be seen in our category results.

Turning to our balance sheet, our cash position at the end of the quarter was $65.4 million, and we had no outstanding borrowings under our revolving credit facility. Inventory of approximately $63 million was in line with management's plan. And based upon our positive outlook for the second half of the fiscal year, we continue to anticipate generating in excess of $30 million in free cash flow for the full year.

Regarding guidance, as we stated in this morning's press release, we have reiterated our EBITDA and EPS guidance for fiscal 2008, which calls for EBITDA growth in the range of 20 to 25% and EPS growth of 30 to 35% compared with fiscal 2007. Based on our first-half revenue growth of 2.8% and the outlook for a challenging consumer economy, we are revising our forecast for revenue growth to a range of 2 to 4% for the full fiscal year. Regarding our current fiscal third quarter, which includes the Valentine and Easter holidays, we expect the period to represent approximately 23 to 25% of full-year revenues.

In summary, as we enter the second half of our fiscal year, we are focused on driving profitable revenue growth by improving both operating leverage and gross profit margin, and thereby increasing our bottom-line results. I will now turn the call back to Jim.

So to sum up, we achieved strong EBITDA and net income growth of approximately 14% on total revenues of $334 million. Our strong bottom-line results reflect our ability to leverage our business and reduce our operating expense ratio, which more than offset the impact of revenue growth related to the challenging economic climate. Highlighting the quarter was the performance of BloomNet, which grew both its top and bottom line by more than 30%. BloomNet continues to gain market share with a superior value proposition for florists. Having built a highest quality network of professional florists in the industry, we're now focused on increasing total order volume within the network and achieving further penetration for our expanded suite of products and services. As a result, BloomNet florists are uniquely positioned to benefit from our industry-leading growth.

Also important to note, it is a significantly improved performance of our Home & Children's Gifts category. Consistent with our plan, we've maintained revenues in this category at the prior-year level while significantly reducing operating expenses, specifically in marketing and selling. As a result, contribution margin in the category more than doubled compared with last year's second quarter.

Looking ahead, our outlook for the second half of this fiscal 2008 is positive. Unlike many other specialty retailers, in addition to our profitable second quarter, we anticipate two profitable quarters ahead of us, the current fiscal third quarter, which includes Valentine holiday in this year, Easter, followed by our fiscal fourth quarter with the key Mother's Day holiday. In addition, we're very excited about the planned April launch of our partnership with Martha Stewart, in which we are creating an exclusive co-branded floral plant and gift basket program called Martha Stewart for 1-800-FLOWERS.COM. This partnership will leverage the best of both brands, lifestyle icon Martha Stewart's unparalleled design talent with our Company's market leadership position, our relationship with millions of customers and our unique same-day, any-day distribution capabilities.

In addition to the Martha program, we have a broad range of new marketing initiatives, including our recently launched partnership with Google and the YouTube network, featuring our Will You Marry Me? contest to find the season's most intriguing marriage proposals. This program includes uploaded videos from contestants, and is already garnering significant buzz online as well as in the printed broadcast media.

Also soon to launch is an exciting new (technical difficulty) initiative with AT&T, featuring extensive exposure on their wireless network and kicking off with a special Valentine's sweepstakes.

Compared with our very successful Fresh Rewards -- combine these with our very successful Fresh Rewards loyalty program, we believe these initiatives along with a broad range of new signature product development efforts will enable us to further extend our market leadership in the Consumer Floral category as well as build market share in the Gourmet Gifts business. Overall, we believe these factors combined with our continued focus on improving our operating leverage will enable us to enhance our results in the second half of fiscal 2008 and beyond.

As we announced in this morning's press release, we finished the fiscal second quarter with a strong balance sheet including $65 million in cash. Based on our positive outlook and continued strong bottom-line performance, we believe our current share price offers a compelling return on capital. With this in mind, we have obtained authorization from our Board of Directors for an increase in our stock to repurchase plan, which provides us a total of $15 million to utilize during open trading windows.

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

(OPERATOR INSTRUCTIONS). Jennifer Watson, Goldman Sachs.

Good morning. New customer acquisition costs look to decline significantly year-over-year. You've touched a little bit about the marketing programs that you have in place that are helping to improve customer acquisition costs. But can you talk a little bit more about that? And what are you doing differently now that is enabling you to react to the top-line trends intra-quarter?

Want to start with the customer acquisition costs?

As we've stated in prior calls, we don't give out of customer acquisition costs on a quarter-by-quarter basis, but we do give it on an annual staff. But you are right, you're noticing the sales and marketing line is down year over year, and certainly part of that is lower customer acquisition costs. What we really did going into this quarter and I've been stating it for a while, is within the Home & Children's Gifts area, we scaled back the marketing in that area and the prospecting in that area. We needed to really shore up that operation and return that to profitability. And I think we demonstrated that.

And then, just, Bill, as we look at that category specifically, that does carry a higher customer acquisition rate as it's mainly catalog driven compared to 1-800-FLOWERS, which is primarily an online customer acquisition vehicle.

Right. And then additionally, as we started to see the trends during the quarter across a number of our categories with the very high promotional nature of this holiday season, we pulled back. I think we judiciously used some promotional offers like free shipping, but we used it to promote kind of our customer reaction by doing -- having those programs on average tickets over $100 and kind of drive a specific customer performance within that area.

So Jennifer, I think then as we look forward really into the second half of the year, and what we've demonstrated so far is our ability to really focus on our operating expenses and manage those appropriately, and we will continue to do so. Certainly part of that operating expense is the marketing spend. And as we move into the second half of the year, which is carried more so by the floral brand, there's even more flexibility to manage that appropriately as opposed to a catalog campaign.

Okay great. Thank you so much.

Jeff Stein, Stein Research.

Nice quarter given very tough environment. A couple questions here. It looks like you leveraged your cost structure successfully across all of the businesses except the Food & Gift business, where I think you called out the fact that your marketing and selling expenses were higher. And I'm wondering, was the selling expense and marketing expense ratio higher because you just did not meet your revenue target? Or was it higher because search costs and media costs were higher or both?

This is Chris again, and I would say it's really a combination kind of what we were just speaking about with Jennifer. In that category, in a couple of the brands specifically, we rely heavily on a catalog marketing campaign, and that's more baked in ahead of time. Whereas in other areas, specifically in the flower brand, as we see response rates not necessarily be where we want them to, we're able to pull back on some marketing spend. So we can manage our search spend better and other online marketing efforts and off-line marketing efforts in a tighter parameter, tighter timeframe. On the food brands, we do a lot of catalog marketing, and when the response rates aren't coming in where we thought they were, so therefore though the sales are not coming in where we expected them to, we don't have as much ability to pull back in the quarter.

I would add, Jeff, that in those categories, it's the only place where we really have significant retail exposure to, so the areas that struggled for top-line growth were retail and the catalog, as Chris just mentioned.

Offsetting that though was a very strong e-commerce business that we've been able to create both in Cheryl&Co., Popcorn, and now most recently in Fannie May, where the e-commerce business did exceptionally well, where you have cost of capturing a customer was significantly less than it is with the catalog. So the places where we thought we had to leverage in the e-commerce arena, we saw it and we benefited from it and we had a very attractive cost of customer capture there.

And one final point, Jeff is, if you look at the category contribution in this category, you still see an extremely healthy 22, 23% category contribution margin in the business category.

I'm wondering if we could talk a little bit about your corporate gifting business and how that segment of the business performed within your Food & Gift business relative to either self consumption or general consumer gifting.

Overall the BGS business, we call it business gift services, BGS business for us performed pretty well in the food category. We saw a lot of change over this year in some of our customers. Some of our traditional customers from last year, retailers specifically, pulled back on spending; some of our financial services customers pulled back on spending, but we were able to replace them with other sectors. So the Cheryl&Co. business did very well on BGS growth. And I think what's one of the nice things looking forward is we really added some nice -- we increased our customer file size in the BGS area, which bodes well for the future quarters.

Okay. And final question, guys. As you look at the Food & Gift business, was the performance from a top-line standpoint fairly uniform across the platform? Or did one or more of the businesses stand out on the upside or downside? And I'm referring to Fannie Mae, Cheryl&Co., and Popcorn.

I would say fairly uniform, except while still small, we were very happy with our e-commerce growth on the Fannie Mae business. As we stated in the past, it's one of the key areas that we're looking for, for growth. Still a small percentage of the category sales, but we had very strong results there.

Thank you.

Melinda Davies, Oppenheimer.

I have three or four questions. First was -- does the increased buyback signify a change in your priorities for use of cash? I was thinking that you were more focused on potential tuck-in acquisitions. And then the second, how are you doing with the migration of your brands to the new Web site platform and how might that affect the business over the next year? The third question would be, do you have any update on the strategy or the alternative for home and children? And then lastly, how does the promotional environment look for Valentine's Day at this point? Thanks.

The answer is yes. Thanks for those questions, Melinda. First, in terms of the use of cash, consistently, what we've stated is that now that we're in a position where we are generating good free cash flow, quite predictably, good, strong free cash flow, we have two primary uses of that cash. First, overall strategy is how do we get -- return that cash or create value with that cash for our shareholders. And because of the wild nature of the markets in the last 60, 90 days in particular, we thought it was prudent to increase our ability to act to protect our stock when we think it's put upon for reasons beyond our performance. So that's why we went with that increase.

But yes, we're very focused on using that cash in many different ways, in both ways, rather, in terms of improving shareholder value. So yes, we will still be active in the arena of looking for those right tuck-in acquisitions that help us to fulfill our goals in terms of growing our businesses across the different areas that we're already involved in.

I would say that this -- the recent retail quarter, the holiday quarter, has probably sobered up some people in terms of what valuations are and may, at the end, even increase our opportunities there. So the fact that we're generating good cash flow, that we have a very strong balance sheet, that we -- I think we can do both very effectively -- both protect our stock with our buyback and still be active in a market where there might even be more opportunities.

This is Chris. I'll take your question on the e-commerce migration, moving around our brands onto our first digital, as we call it, our first digital e-commerce platform. That continues to move forward. In Q3, sometime in the month of March, we will move one of our food brands on there and then probably in April, another one of our food brands.

We expect certainly that to help each of those business units. However, those business units don't contribute a lot during that time period, so we wouldn't expect it to have a large impact overall on our performance. It really is setting up the continued migration then after April, after Mother's Day, of other brands on the first digital platform, really setting up for an improvement in Q2 of next year.

Jim again. I'll take the strategy in terms of our home and children's gift businesses. Last year, we asked Tim Hopkins to focus his energy and his efforts with the home and children's gift businesses. He and the team that he works with have done a terrific job there. We asked them to get control of their expenses and reduce those expenses. We gave them a target of just performing at last year's sales level, but we asked them to invest heavily in the merchandising and marketing talent so that the profitability would improve there. And I think they have delivered mightily on that agenda.

That is, their expense ratio has been colored and put into good shape. They've done some really great things while they have been running the business in terms of investing in talent, and the results that have been a good performance this quarter. And that buoys our spirits in terms of how this asset can perform in the future.

I just on the last item on the promotional nature of Valentine's, you know, one key point with our business versus maybe many other retailers out there is that we have strong -- we have three strong quarters. We have three profitable quarters while many retailers focus solely on the Christmas holiday quarter. With the Valentine's Day holiday and Easter in Q3 this year and with Mother's Day in Q4, these are significant quarters for us. But we're competing also in those quarters against a much smaller subset. While in Q2, all of our brands and the 1-800-FLOWERS brands competes against many retailers out there. As we get to the more floral nature of the holidays coming up, it's a much smaller subset. So we expect the promotional nature of these holidays to be less than they have been that we saw in Q2.

Is there anything else that you (multiple speakers)?

Thank you so much.

Kristine Koerber, JMP Securities.

A couple of questions. First of all, Jim, I was wondering if you can comment on how your consumers typically react during economic slowdown. Do they typically not buy or is it basically trading down?

And then, second, I was wondering, aside from marketing expense reductions that we've seen recently, are there other areas where you can cut expenses further should the environment continue to stay weak for sometime? And then lastly, can you remind me with the Easter shifts, the impact is on the third quarter? Thanks.

Sure. In that order, Kristine, we will tell you that in terms of the macro environment, we have been at this for a long time, the 32 years, and every seven or eight years or so, there's some kind of a recession or some kind of a market downturn or crisis of some kind. And as we look back, as we've done in the last 60 days, as we've seen this coming, our history is that we've been able to grow through pretty much any kind of economic circumstances.

Now I'll tell you that in the wild and crazy days when markets are jumping as they have in the past, we're not going to jump quite as high as they are. But on the other hand, when some people go backwards, we've never had that circumstance. So we're fairly confident that we can continue to grow and that's why we've given you the guidance we have for the second half of the fiscal year. And in particular, we're very confident that we can control our expenses. So that turns into an answer into your second question.

But when you think of our primary businesses, gifting and helping our customers express and connect, the occasions that we have in addition to the holidays of Valentine's Day, Easter, Passover, Secretary's Week, Mother's Day, Father's Day all coming up this quarter and next, we also have the everyday occasions that we're very strong in, and getting stronger, frankly in -- sympathy, new babies, birthdays, get well, the wedding season, graduations; those are events that come no matter what.

So I think part of your question, hence, and an answer that we have for you, which is I think sometimes we benefit by people trading down to our low average ticket price point category relative to jewelry and other more expensive items, so I think we benefit. The good news is that employment has held up.

And we're not going to be as impacted as others might be by the real bottom of the market falling out in the sub-prime kind of crisis because our average household income is over $80,000. These are people who are at the higher end of the spectrum, so they are less impacted. So we feel confident with our history, with our control on our expenses and with our range of products and services and the price points they serve and the occasions that we serve our customers, that not only will be weather a downturn, we will still grow, and I really think it's going to create other opportunities. Because in environments like this, the strong get stronger and we think we are well-positioned to get even stronger in our category.

Bill, do you want to speak to the Easter impact?

Yes, the Easter impact, what we have this year is between Q3 and Q4. They almost become much closer and equalized with our shift of revenues associated with a number of our brands in the Gourmet Food & Gift basket and certainly with the 1-800-FLOWERS brand. So revenues in Q3 and Q4 are very comfortable. And with the revenues moving up into Q3, there's certainly an impact on bottom line of that shift. There's probably every bit of $0.01 plus on EPS shifts from Q4 to Q3.

One last question. Did you buy back any shares during the quarter?

No, we just got the authorization and, of course, the authorization was issued during our closed window.

Okay, thank you.

Eric Beder, Brian Murray.

Good morning, guys. Just a quick question to follow up on the buyback. What was it before you raised it to over $15 million?

I think we had about $7 million left on our old program and we raised it by 8 to round it to 15.

Okay. Martha Stewart. You talk about how that roll-out, what you doing for Mother's Day, specifically the start of it, and how will that affect BloomNet in terms of your ability to go to other florists or expand (multiple speakers)?

I'm sorry, Eric.

Eric, you're breaking up.

Sorry?

(multiple speakers) the questions on Martha Stewart and the roll-out. Chris, do you want to --?

Yes, the Martha Stewart roll-out and how -- talk a little bit about that. And then how is that, because it is going to be florist-driven, going to affect or how is it already affecting your ability to get more florists or more product through BloomNet?

The Martha Stewart program is one that's very exciting for us, Eric because our focus on the category, as you can see with what we've done with BloomNet, is to do everything we can. We're the only significant non online advertiser in our category. That is we're the only ones who are spending significantly at this point in time-- and I hope that changes -- to promote the category, to promote the product line, the broadcast and print media. So I hope that that changes. But right now we are clearly the leader. But as the leader, what we're focused on now is our BloomNet flower shops that's helping them to not just survive, but in fact, to thrive. So you will see our attention as we talk about the suite of services, talking about leveraging the knowledge that exists within that BloomNet network, to harness the program and blueprint activities that our florists can be involved in that drives sales. Nothing is more emblematic of that than our relationship that we're developing with Martha.

Martha Stewart Omnimedia came looking for the company that was best positioned in terms of quality, value, and service to help her brand aspirations for the floral category come true. She selected us. We're proud and pleased about that. And we've been investing heavily so that we can offer the Martha Stewart product in our category for same day, next day delivery. That means our BloomNet florists are going to benefit directly from that.

Martha has a big light on her. So the talent they have at design, the ability we have to complement that design, to source the product all over the world, both the floral product and the hard good product, get it into our BloomNet flower shops, so that we can fulfill against that, is just terribly, terribly exciting for our category. We need stimulation and our category. I think this is going to be a big shot in the arm, a B12 shot for us all in the floral category. But yes, it takes that orchestration.

Chris will give you some detail in terms of what we're doing to make that work within BloomNet.

I just think this is really -- we believe this is going to be a game changer for our industry. We've gotten great reception from the BloomNet florists, because this is something new. They are looking for new stimulus into our industry. So they are really jumping on board with this as far as our product offerings. Jim mentioned the different container and vase wear collection that we are offering into the florists. The assistance we'll be providing them on the soft goods side as well. So florists are embracing this program and it's really because, again, they are looking to 1-800-FLOWERS as the innovator in this industry to bring new programs like this to them to help their business grow. And it really just helps us deepen the relationship they have with BloomNet.

It's sort of the cherry on the sundae of what we started five or six years ago with our celebrity designer and expert designer program. I think it's one of the reasons Martha's company was attracted to working with us, and I think it's a great exclamation point so to speak on that program and it's frankly attracting others.

Great. I think one of the problems that we have is that you guys are the first kind of florist person to go out and talk about what's going on in the market. Do you guys think that you took share even with kind of the low single-digit growth you had in the floral category that you guys believe you took share from the floral market?

Yes, we do.

Okay. Well congratulations and we'll see what happens next quarter.

Anthony Lebiedzinski, Sidoti & Company.

Good morning. A couple of questions. Aside from Martha Stewart, is there anything else that you think will improve the BloomNet segment?

I would say there are two things. One, the things that we do in our macro promotional environment, like our very innovative YouTube network program that we just launched, the Google relationship, which is a much bigger relationship, which involves media beyond the online world, which includes print, radio and TV, it's a big partnership with Google. I think that's (technical difficulty) leadership and innovation that will bring more people to the category.

The second part of that is the programs that we are introducing within BloomNet. We have none that we want to announce publicly today, but we've been spending a lot of time and a lot of energy and a lot of our, let's call it, R&D dollars on programs that we think will benefit our partner florists.

Clearly, the trend lines in the floral category continue. Wholesalers are struggling. Retailers are struggling and closing, and that's why we're so pleased that we launched BloomNet when we did so that we got the quality florists that we wanted in our program, that we got the people who have the same sense of our customer service and value proposition for the customers, have that same set of values that we do. Now, that we're focusing -- now we're turning our attention to what programs that exist within those flower shops can we make universal; what new programs, what new products can we bring to them? Martha is the most obvious example of that, but there are probably eight to 10 others specific product programs that we will be introducing over the next year within BloomNet to help our florists to lever their capabilities as we have and universally make those products available to our customers, which our customers are telling us in our research they want.

Jim, just a little -- one specific or two specifics on BloomNet, things we've already announced that are getting great traction, is our Web hosting capabilities. So [on] the technology services, technology products we're offering to our BloomNet florists, they are embracing our hosting service and they are embracing the digital directory, which is, again, another game changer, innovation in this industry that our florists are adopting.

And of course, chocolate with our Fannie May and Harry London lines continuing their penetration within the BloomNet network. So a combination of products and services to help our BloomNet florists to survive, because we're joined at the hip with them. It's our job to help us all for them to be successful. That's the platform we're building on.

And once you roll out the Martha Stewart collection then, do you expect that this would possibly cannibalize sales of other products within the category?

If you don't mind, I'll take that one. Clearly, the Martha Stewart brand is going to help us attract new customers as well as existing customers to purchase that product line. There will always be some cannibalization. But interesting thing about Martha's demographics and ours, we are very, very strong in the urban and suburban markets that follow the population patterns. Martha's biggest strength is what they call the second cities out there, so we think there's a whole new group of customers that will be attracted to our brand that didn't shop it before, but will be attracted by the Martha brand.

And I would point out as a follow-up, to that, Joe, that not only do I think it's a very big net gain, our Martha relationship in terms of products sales, the buzz and the attention that working with Martha Stewart Omnimedia gives us an opportunity to create -- I think will bring a lot more sunshine to our category.

Plus, there are two other product areas in that agreement that I think are really going to grow the category. That is plants and the second is our gift basket category. You see the emphasis we're putting on our gift basket business and our relationship with Martha extends to both plants and the gift basket.

And my last question is in regards to the marketing sales expenses, just wondering if you were to exclude the reduction that you guys did in the marketing, sales expenses for the Home & Children's Gifts segment, would you still have shown a reduction in the overall company marketing and sales expenses?

Anthony, you've got to remember within marketing and selling, it's not just all marketing dollars. There's other operating expenses that sit within that category. The majority of the reduction came within the Home & Children's Gifts category, but you can see within the -- even within the floral category, that even with gross margin dollars down, contribution margin was up, so there was a net reduction in overall operating expenses within that category as well.

Okay, thanks.

(OPERATOR INSTRUCTIONS). Heath Terry, Credit Suisse.

You were talking about focusing more on the efficiencies of your marketing. One of the areas of focus obviously is getting the most out of your key-word buying and your online performance-based advertising. Can you talk to us about what you are seeing in pricing for those key-words and total activity around your online advertising and whether or not the volatility that we are seeing in consumer spending right now has started to have any impact on that?

I would say just really on the last point, if we look at search, to start with, search marketing as part of our overall online marketing efforts and overall marketing efforts, in general, I would say we've not yet necessarily seen an impact on our search costs based on consumer spending. We are anticipating that as we go into the second half of the year and get into the balance on holiday, but I would say we have not yet seen that.

If we look at search, it's certainly not an [inexpensive] marketing tool, but it's proven to be an effective one for us, particularly as we utilize for the broader range of our brands. And again, during Q2, our food brands played a key role for us in our search marketing efforts. As we look at floral specifically, we think we have a very effective and very efficient search marketing effort based on the value of our brand and then popularity of our brand, the strength of our brand. We get high click-throughs and high conversions, which enable us not to necessarily have to compete at the higher cost per click that some of our competitors compete at. So we are very comfortable there.

But beyond search, really we look at the online marketplace and constantly looking for innovative ways to extend the popularity of our brand and the recognition of our brand, such as the Google YouTube initiative that we have right now, which is off to a great start. We think that's just a great advertising vehicle for us. Certainly one of the properties that is getting the most usage on the Web. And again, it just strengthens our brand, as evidenced in the fact that we continue to report, especially for the flowers brand, that 70% of our traffic comes direct to our URL based on the brand.

Great. I appreciate that. Thank you.

Jonathan Berlin, RLR Capital.

How sustainable are the cost reductions you've implemented so far? And how much more room is there to come beyond marketing from other areas like centralized procurement, sourcing, shipping, etc.?

All items that are on the future list to be addressing, we continue to believe there is operating expense leverage in our model, our guidance this year. [Went for] an excess of 50 basis points reduction in operating expense as a percent of revenue and for that to continue for the foreseeable future. Obviously this quarter we demonstrated a far greater amount of that as we pulled back on certain operating expenses.

But we continue to believe there's a -- the list that you mentioned and others that we continue to address in reducing operating expenses and taking cost of the business.

I think that the performance this quarter is evidence that the program we started to implement about a year and a half ago has really borne fruit in that we continue to see our costs come down. Frankly, we are delighted with the progress of that program and that's why we have the confidence that we can continue that 50 basis point improvement for the foreseeable future.

Okay, and one follow-up. You generated about $50 million of free cash flow through the first six months or not quite $0.80 to share. What are your expectations for the back half of the year? Is there any reason why you can't at least be breakeven on a free cash flow basis for the back half of the year or close to?

Our guidance for this year, as we enter this year and as we reiterated today was an excess of $30 million of free cash flow for this year. There are components of that. If you look at the change in working capital, the way the components of our business operate, we built up quite a payable at the end of December because of the Christmas, holiday; that obviously all gets paid out in the latter part of January.

You have to pay that?

We do. And where both of Valentine's Day and Mother's Day holiday fall earlier in the quarters, those are paid before the end of the year. So the guidance we have is that we can generate in excess of $30 million. We are very comfortable with that guidance.

Okay, thank you.

Jeff Stein, Stein Research.

Could you talk a little bit about your success at cross-brand marketing during the holiday selling season? Did the penetration grow compared to the prior year?

What is this Stein Research? I've never heard of this name before.

Brand new. Brand new, brand.

Jeff, as far as cross-brand marketing, we look at that under the umbrella we consider ECV, enterprise customer value. And that is clearly a long-term strategy of ours. So we are very happy with the results that we saw during this past quarter. I don't yet have all of the metrics to know necessarily what the penetration was, how many cross-brand customers we got. We don't get -- that will come more at the end of this month. Next week we will know more about that. But based on different results of different programs, e-mail exchange, things like that, we are happy with the continued progress under our ECV umbrella.

I think the key ingredient there, we were just reviewing some of our efforts for this second half of the fiscal year in the ECV environment and the fact that we've brought in a couple of new professionals who come with great expertise in this area has really given us the confidence that the early [spade] work we've done here has now got some even more heavy willpower behind it. And in particular, our Fresh Rewards program, which is now over a year old, is really starting to bear some fruit for us and will be the primary driver of that ECV -- I think most the visible driver of the ECV improvement in penetration.

Great. And one final question. Given the fact that it's a pretty tough environment for large companies, you wonder about the impact on smaller businesses. And any thoughts in terms of the financial health of your florist network coming out of Christmas?

Certainly. The Christmas holiday seems to have been among the BloomNet florists, a pretty good holiday in that they didn't go backwards. Margins were improved. They were very happy with the price points that we were able to deliver to them. So yes, we are very conscious and very sensitive to that. That's why we decided to introduce the new set of programs that we have. That's why we are excited about the Martha Stewart impact on those florists. Again, we created things last year like the Happy Hour program, the [florists are field] program -- an everyday item with holiday specials. Broadly embraced by our BloomNet florists because it helps them to be successful.

And we will continue to do things like that because, yes, we are focused on the health. We think there will be continued retraction of the number of retail florists in this country. We see it all the time. We see it frankly around the world, certainly in Europe it's the case and we think it will continue to be the case and that's why we're putting so much time and attention against our efforts to make sure we provide them with programs like the directory, like the incentives we put in place now for them to send their orders within the BloomNet network because our orders per shop is going up within our network. Our volume is going up. And so I don't think every florist is going to survive, but I think the BloomNet florists will disproportionately do well.

Great. Thanks.

Gentlemen, there appear to be no further questions. I would like to turn the call back to Mr. McCann for any additional or closing comments.

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

In closing, I would like to remind you the Valentine's Day holiday is fast approaching. It's never too early to call, click, or come in to 1-800-FLOWERS.COM and our unique collection of gift brands, including Fannie May confections, The Popcorn Factory, Cheryl&Co., Great Food, and 1-800-BASKETS are all there with some great holiday Valentine ideas. And don't forget to visit 1-800-FLOWERS.COM website to upload your valentine video so that you and your sweetheart can be part of the Google YouTube contest. Thanks for your time today.

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