1-800-Flowers.Com Inc (FLWS) 2008 Q4 法說會逐字稿

Good day, everyone. Welcome to the 1-800-FLOWERS.COM Incorporated fiscal 2008 fourth quarter conference call. This call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to the Company's Vice President of Investor Relations, Joseph Pititto. Mr. Pititto, please go ahead, sir.

Thank you, Jim. Good morning, and thank you all for joining us today to discuss 1-800-FLOWERS.COM financial results for our fiscal 2008 fourth quarter and full-year. My name is Joseph Pititto and I am Vice President of Investor Relations. For those of you who have not received a copy of our press release issued earlier this morning, the release can be accessed at the Investor Relations section of our website at www.1800flowers.com or you can call Patty at 516-237-6113 to receive a copy of the release by e-mail or fax. In terms of structure, our call today will begin with brief formal remarks and then, we will open the call to your questions. Presenting today will be Jim McCann, CEO and Bill Shea, CFO. Also joining us today for the Q&A section of our call is Chris McCann, our President.

Before we begin, I need to remind everyone that a number of the statements that we will make today may be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in applicable statements. For a detailed description of these risks or 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 or 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 in today's call, any recordings of today's call, the press release issued earlier today, or any of its SEC filings, except as may be otherwise stated by the Company.

I will now turn the call over to Jim McCann.

Good morning. As we announced in this morning's press release, during fiscal 2008, we increased our net income in the EPS by more than 20% and generated approximately $38 million in free cash flow, despite the challenge economic environment that impacted consumer demand throughout the year. We accomplished this by continuing to focus on the key strategic priorities that we have outlined for you in the past, including leveraging the strength of our brand to deepen our relationship with our millions of customers as a preferred florist and gift shop.

We achieved profitable growth by by target targeting our marketing and merchandising programs, and focusing on our key business categories. And we enhanced our operating expense ratio by leveraging our platform. On this last point, during the year, we improved our operating expense ratio by 70 basis points through a broad range of ongoing programs designed to improve the operating efficiencies and reduce costs.

As a result of these efforts, we increased our income by 23% to $21 million or $0.32 per share. We grew EBITDA approximately 10% to $58 million. And we generated free cash flow of more than $38 million. 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 in our core 1-800-FLOWERS.COM brand. We enhanced our market leadership position through innovative marketing and merchandising programs, including the expansion of our Fresh Rewards loyalty program, the industry's first and still only loyalty program. Fresh Rewards has attracted millions of customers, many of them new to our brand that when they sign up, these customers tend to purchase more frequently and at a higher average order value.

Fresh Rewards enables us to deepen our relationship with our customers and introduce them to the broad range of products in our shop. This year, we plan to roll the Fresh Rewards program out across all of our brands to enhance our ECV or enterprise customer value, which we have told you in the past -- told you more about in previous calls.

Starting in April, we introduced our exclusive partnership with Martha Stewart. We're very excited about our plans to expand this program during fiscal 2009, beginning with a stepped up media program this fall. This will include the addition of Martha Stewart gift baskets to our offering as well as significantly increased joint marketing and advertising efforts, leveraging both our own marketing programs as well as the powerful Martha Stewart media properties. We believe this innovative relationship leveraging the best of both brands, lifestyle icon Martha Stewart's unparalleled design talent with 1-800-FLOWERS' market leadership position, gives us differentiation and a competitive advantage which will enable us to grow revenues even in this current economy.

Second, during fiscal 2008, our BloomNet wire service business continued to gain market share by establishing itself as the industry's leading innovator. The introduction our digital directory, the industry's first and only online flower resource, has been very successful with thousands of florists adopting the new technology as they join the digital age. In addition many of these florists are also opting into BloomNet's industry leading green effort, by joining the Florists To Forests program which allows florists to benefit the environment by eliminating the need of a paper-based directory and in return, have BloomNet plant trees on their behalf.

During the year, BloomNet saw increased market penetration for it suite of technology services, including website hosting and retail store management systems, as more as more florists are choosing BloomNet as their preferred wire service.

On the product front, we recently enhanced BloomNet growth's outlook to a small asset acquisition in July. These assets complement BloomNet's existing product offerings, and enable us to expand and deepen our relationships with our florists toward the goal of helping them not just survive, but to thrive even in this environment.

In our gourmet food and gift baskets category, throughout fiscal 28 we expanded our offerings with new product launches and increased customization capabilities in our Cheryl&Company and the Popcorn Factory brands, as well as continued strong e-commerce growth for Fannie Mae Confections. During the fourth quarter, we announced the acquisition of DesignPac Gifts, a leading designer and assembler of gourmet gift baskets, gourmet food gift towers, and gift sets including a broad range of branded and private label components.

DesignPac Gifts brings excellent capability and experience in the design, sourcing, production and distribution of gift baskets and gift sets, as well as strong relationships with many of the leading retailers throughout the country. We expect to leverage these capability and relationships to significantly boost our 1-800-BASKETS business, as well as enhance the growth and profitability of our gourmet gift brands during fiscal 2009 and in the years ahead.

As we announced in late April, when we closed this acquisition DesignPac Gifts, does the majority of its sales in the calendar fourth quarter holiday period, our second fiscal quarter. As a result, it was dilutive for our EPS in fiscal 2008 fourth quarter when we made the acquisition. However, we expect it to be nicely accretive during this fiscal 2009.

In our home and children's gift business, as we have guided at the beginning of the year, we continue to focus on reducing costs and approving the bottom line performance of this business. During the year, we discontinued two underperforming titles. We have further strengthened the management team, particularly in the areas of the software logistics. We revised catalog circulation and marketing programs. And we stepped up new product developments and software efforts with a focus on unique proprietary gifts.

As a result, category contribution improved almost $5 million to a profit of $3.5 million, compared with a loss of a little over $1million dollars in fiscal 2007. While the home decor category has been hit particularly hard by the macro economy, we believe the changes that we have made in this business will enable us to continue to improve profitability this year and going forward.

In terms of customer metrics, we attracted more than $3.4 million new customers in fiscal 2008. Approximately 7 million e-commerce customers placed orders during the year with nearly 50% of them repeat customers. We believe these metrics illustrate our ability to leverage the strength of our brand to attract millions of new customers, while deepening our relationships with our existing customers by helping them connect and express themselves to the important people in their lives.

This will serve us well going forward as the consumer rebounds. 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 the quarter.

Thank you, Jim. During fiscal 2008, we achieved solid bottom line growth despite a week consumer economy that impacted top line growth. We accomplished this through continued focus on the programs that we described to you in the past to leverage our business platform and reduce costs throughout the enterprise. This focus which we believe will allow us to further reduce our operating expense ratio into 2009 and beyond, positions us well to drive stronger profitability from the incremental sales growth that we expect to generate organically and through our acquisitions.

Now regarding specific financial results and key metrics for the fourth quarter and full year. Total net revenues for the fourth quarter were $219.8 million, compared with $231.8 million in the prior year period. Gross profit margin was 41.5%, compared with 42.7% in the prior year period. This primarily reflects the promotional environment and increase in fuel surcharges from our third party shipping providers, which was somewhat offset by product cost improvement that we achieved through our sourcing initiatives.

Operating expense ratio, excluding depreciation and amortization, was 36%, compared with 35.3% reflecting the operating costs associated with our DesignPac Gifts acquisition in April. As a result, EBITDA was $12.2 million compared with $17.1 million in the prior year period. And income for the quarter was $4.3 million or $0.07 per diluted share, compared with $6.6 million or $0.10 per diluted shared in the prior year period.

It is important to note that the fiscal 2008 fourth quarter results reflect the impact of several factors that the Company considers non comparable, including the shift of the Easter holiday to the Company's fiscal third quarter, the operating costs associated with the acquisition during the period of DesignPac Gifts which due to the seasonality of that business has minimal revenues during the period to offset overhead expenses, the inclusion in the prior year period of revenues and profits associated with BloomNet's floral design guide which is sold once every three years.

Adjusting for these factors among others, the Company believes that revenues, gross margin, operating expense ratio, EBITDA, and EPS, for the fiscal 2008 fourth quarter would have been essentially unchanged compared with the prior year period. In terms of fiscal 2008 full-year results, revenues were $919.4 million, compared with $912.6 million in fiscal 2007. Gross profit margin was 42.8%, compared with 43% in the prior year period, again primarily reflecting the increase in fuel surcharges as well as the increased promotional activity somewhat offset by improvements in our product loss from outsourcing initiatives.

Operating expense ratio, excluding depreciation and amortization improved 70 basis points to 36.5% compared with fiscal 2007. As a result, EBITDA for the year grew 9.3% to $57.7 million, compared with $52.8 million in the prior year. Net income for the year increased 23% to $21.1 million or $0.32 per diluted share, compared with $17.1 million or $0.26 per diluted share in the prior year. During the year, the Company implemented certain tax savings strategies that reduced our effective tax rate to approximately 37% for fiscal 2008. Going forward, we anticipate our tax rate will be approximately 38.5% to 39%.

Regarding stock-based compensation for the fiscal fourth quarter, stock-based compensation expense was approximately $200,000. For the full year, it was approximately $3.5 million. In terms of customer metrics, during the fourth quarter, e-commerce orders totaled $2.7 million, compared with $2.94 million orders in the prior year period. For the year, e-commerce orders totaled $11.5 million, compared with $11.6 million in the fiscal 2007.

Average order value during the quarter increased to $67.98, compared with $67.10 in the prior year period. For the year, average order value increased to $65.21, compared to $64.40 in fiscal 2007. This increase primarily reflected a combination of product mix, increased add-on-sales and some pricing initiatives.

During the fourth quarter, we added 810,000 new customers while concurrently stimulating repeat orders from existing customers who represented 60.8% of total customers. For the year, we added 3.4 million new customers with repeat orders representing 49.4% of total customers.

Regarding category results, in our consumer floral business during the fourth quarter and full year, revenues for the quarter were $149 million, compared with $154 million in the prior year period, primarily reflecting the shift of Easter into the Company's fiscal third quarter to its earliest date placement in the Company's history. As we have noted in the past, the early date placement for Easter significantly diminishes the size of the holiday, due to weather issues and the lack of consumer focus.

For the year, total net revenues were $491.7 million, up slightly compared with $491.4 million in the prior year. Gross profit margin for both the fourth quarter and the year was 38.7%, compared with 40.2% and 39.3% respectively in the corresponding prior year periods. This reflects the aforementioned impact of rising fuel, surcharges, as well as the increased promotional activity. As a result of these factors, category contribution margin for the fourth quarter was $20.3 million, compared with $24.7 million in the prior year period while category contribution margin for the year was $63.1 million, compared with $65.2 million in the prior year. The Company defines category EBITDA as earnings before interest, taxes, depreciation and amortization, and before the allocation of overhead expenses.

In our BloomNet wire service business, revenue for the fourth quarter increased 4.2% to $15.5 million, compared with $14.8 million in the prior year period. Adjusted for the prior year periods inclusion of approximately $2 million with aid to the floral selection guide, sales of which only occur every third year, revenue growth would have been comparable to the full-year growth rate.

For the year, revenues increased 20.5% to $53.5 million, compared with $44.4 million in the prior year period. Gross profit margin for the fourth quarter was 56.8%, compared to 56.3% in the prior year period. Gross profit margin for the year was 56.2%, compared with 56% in the prior year. Category contribution margin for the fourth quarter increased 10.4%, to $5.9 million, compared with $5.4 million in the prior year period. Category contribution margin for the year increased 30.7% to $18.5 million, compared with $14.2 million in the prior year.

As Jim mentioned in his remarks earlier, in July, we made a small asset acquisition, that will enhance BloomNet's product offering and deepen our relationship with our florist members. As a result, BloomNet's revenue growth will accelerate during fiscal 2009 while gross margin and gross -- and contribution margin percent will moderate, based upon the wholesale nature of the product offering. However, we expect gross margin dollars and contribution margin dollars will increase during the year as a result of the anticipated strong revenue growth.

In our gourmet food and gift baskets business, revenue for the fourth quarter declined 11.9% to $22.9 million, compared with $25.9 million in the prior year period, primarily reflecting the shift of the Easter holiday into the Company's third quarter. For the year, revenues increased 1.9% to $196.3 million, compared with $192.7 million in the prior year. Gross profit margin for the fourth quarter was 42.5%, compared with 44.7% in the prior year period, again primarily reflecting the shift of the Easter holiday and product mix. For the year, gross profit margin increased 90 basis points to 46.7%, compared with 45.8% in the prior year.

Category contribution margin for the fourth quarter was a loss of $1.7 million, compared with a profit $793,000 in the prior year period. reflecting both the operating losses associated with the DesignPac Gifts acquisition and the shift of the Easter holiday into the Company's third quarter during the current fiscal year. Category contribution margin for the year was $24.6 million, compared with $26.4 million in the prior year, primarily reflecting the operating costs associated with the DesignPac Gifts acquisition. Adjusted for this, category contribution margin for the year would have been comparable with the prior year.

In our home and children's gift category, for the fourth quarter, revenues were $32.9 million, compared with $37.4 million in the prior year period. Revenues for the fiscal year were $180.2 million, down 3.6%, compared with $187 million in the prior year, reflecting the elimination of the Madison Place and Problem Solvers titles. Revenue during the fiscal year for the categories core business brands, including Plow & Hearth, Wind &weather, Hearthsong, Magic Cabin, were comparable with the prior year.

Gross profit margin in the fiscal fourth quarter was 46%, compared with 45.5% in the prior year period. For the fiscal year, gross margin was 45.2%, compared with 45.9% in the prior year. Category contribution margin for the fourth quarter was a profit of $226,000, compared with a loss of $111,000 in the prior year period. For the year, category contribution margin was $3.4 million, representing improvement of $4.7 million, compared with a loss of $1.2 million in the prior year. This reflects significant improvements achieved in the category's operating expenses, including reduced marketing expenses related to discontinued titles.

Category EBITDA results exclude 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 essentialized management platform, providing support services to the entire organization. For the fiscal fourth quarter, corporate expenses were $12.4 million, compared with $13.7 million in the same period last year. For the full fiscal year, corporate expenses were $51.8 million, compared with $51.7 million in the prior year.

Turning to our balance sheet. At year-end, our cash position was $12.1 million, compared with $16.1 million at the end of fiscal 2007. During fiscal 2008, the Company generated $38 million in free cash flow which we defined as net cash provided by operating activities less capital expenditures. This figure includes the cash tax benefit of approximately $8.5 million, primarily related to the utilization of our NOL.

In addition to the $20 million of capital expenditures already included in our free cash flow calculation, cash uses during fiscal 2008 were repayment of debt of $10 million, and approximately $38 million used in our DesignPac Gifts acquisition. Regarding long-term debt, we finished the year with approximately $68 million in long-term debt, down from approximately $78 million at the end of fiscal 2007. Inventory of $67.3 million was up approximately $5 million, compared with the prior year. This increase primarily reflects the acquisition of DesignPac Gifts.

Regarding guidance, as we stated in this morning's press release, while we do not anticipate any significant improvement in the current economic environment, we do expect to achieve revenue growth in excess of 10% compared with fiscal 2008. We expect this enhanced revenue growth to come from a combination of organic initiatives and contributions from our recent acquisitions.

Among the organic initiatives that we believe will drive profitable growth are; the first year, benefit from the exclusive relationship with Martha Stewart, the 1-800-FLOWERS brand and BloomNet, BloomNet's expanded products and services offerings designed to deepen our relationship with florists and increase market share gains, continued strong e-commerce channel growth of Fanny Mae Confections, accelerated growth of 1-800-BASKETS.COM as it begins to leverage the DesignPac Gifts platform, new website and products launches along with expanded customization capabilities from Cheryl&Company and the Popcorn Factory, and the expansion of our cross marketing and merchandising efforts across all our brands.

In addition, we expect to improve gross profit margin in most of our businesses despite the economic climate through a combination of sourcing, product mix, and pricing initiatives. However, we expect consolidated gross profit margin will decline slightly in fiscal 2007, reflecting the lower wholesale gross profit percentage associated with our recent acquisitions.

It is important to note that these businesses have relatively low operating expenses. And as a result, we expect them to be accreted to our EBITDA and EPS for the year. During fiscal 2009, we expect to further enhance our operating expense ratio by approximately 50 to 100 basis points. Combined with the anticipated revenue growth, the Company expects these efforts will enable us to grow EBITDA by approximately 15% and EPA by approximately 20% for fiscal 2009.

In terms of seasonality for fiscal 2009 and reflecting the continued growth in our gourmet food and gift basket category, which does the majority of its business in our fiscal second quarter, we anticipate quarterly revenues will be in the following ranges. Q1, 14% to 16% of total revenues. Q2, 38% to 40% of total revenues. Q3, 21% to 23% of total revenues. And Q4, 23% to 25% of total revenues.

In summary, as we enter fiscal 2009, we will continue to focus on driving profitable revenue growth and further leveraging our operating platform, thereby significantly enhancing EBITDA, EPS, and free cash flow. I will now turn the call back to Jim.

As you ever just heard, we achieved strong bottom line growth for fiscal 2008 despite the environment. To recap for the year, we improved our operating expense ratio by 70 basis points. We increased EBITDA by approximately 10%. We increased EPS by 23%. And we generated $38 million in free cash flow.

In terms of our floral and gift categories, we enhanced our market leadership position for 1-800-FLOWERS.COM with the introduction of our exclusive relationship with Martha Stewart Living Omni Media. We believe this relationship offers us excellent growth potential in fiscal 2009 and beyond. Bloomnet continued to build its market share as the industry's leading innovator in this key category.

In gourmet food and gift baskets, we expanded our e-commerce capabilities for Fannie Mae and we added DesignPac Gifts. This is an excellent platform that we believe will boost our 1-800-BASKETS business, and enhance top line and bottom line growth across this category. In this area, we are now at a revenue run rate of more than $250 million, making us a leading provider of gourmet food gifts. We continue to see excellent growth opportunities in this business, through both our our organic initiatives as well as acquisitions. In our home and children's business, despite the economic headwinds in this category, we have improved the bottom line results significantly and we anticipate further improvements this year.

During fiscal 2009, we expect to see enhanced revenue growth and increased profit contributions across all of our businesses. We will achieve these targets by continuing to leverage our platform to drive improvements in our operating expense ratio while working to deepen our relationship with our customers as their preferred florist and gift shop, helping them connect and express themselves with the important people in their lives.

To wrap up, we clearly realize that we're in a tough economic environment. With that said, we believe we are well-positioned to continue to make investments in our business that drive both mid-term and long-term growth and profitability. Our $20 million in capital expenditures enables us to upgrade and expand our technology platform toward our goal of enhancing our customers' experience. Our strong cash generation capabilities enable us to make smart accretive acquisitions that enhance our revenue growth opportunities as well as our profitability, providing a very attractive return.

Our new product development efforts expand our offerings for our customers and thereby, deepen those relationships. And our targeted marketing programs enable us to cost effectively attract millions of new customers, while deepening our relationships with our existing customer base. We believe that these efforts will enable us to continue to grow our business profitably, and build long-term shareholder value. That concludes our formal remarks. Jeff, our operator, will you now open the call for the questions?

Certainly, gentlemen. Our question-and-answer session today will be conducted electronically. (OPERATOR INSTRUCTIONS.) And our first question today will come from Miss Jennifer Watson with Goldman Sachs.

Can you discuss a little about the attraction Martha Stewart to-date? What trends and traffic and conversion you've seen that gives you confidence that will help to accelerate growth for fiscal year '09?

Sure, Jen. I will start -- this is Jim, then I will ask Chris to follow on. We just began the introduction of the Martha Stewart relationship and the product line in April. It had a very recent start. We put our first real media records behind it in the fall. We think this will grow for year after year after year, as we introduce more products, get a lot more focused. But anecdotally, it has been very well-received by both our customers and our BloomNet florists. Chris what would you add to that? Apparently Chris would not like to add anything to that but -- so Jen, we're happy with how it has begun, the initial phase. the BloomNet sales crew has been terrific in terms of florists being really excited about the luster we brought to the retail florist category with our Martha Stewart collection.

Do you expect to push marketing behind that in the December quarter or do you think you will wait until early October?

We will start in October as we get ready for the Thanksgiving and Christmas pushes. We have things around Grandparent's Day that will stock it. When I say in the fall, I mean the October, November, December quarter.

I got it. If I could ask one more on fuel surcharges. I know they are impacting the gross margin line, but if you could just talk a little more about what is going on with the shipping rates you're being charged? Because your volumes are increasing or staying flat year-to-year. Are you seeing a benefit in terms of per unit shipping rates?

Bill will give you the specific, Jen. But I tell you what I am very proud of is -- clearly any of us who use a common carrier have fuel surcharges passed on to us and they have been particularly tough this year. You can see from our performance that we have been able to primarily offset those by the operating efficiencies we bring to the existing businesses we have. It gives us more confidence as we develop or acquire other businesses that we can further leverage our operating expense ratio to mitigate the affect of that. Bill, would you give specificity there?

Jen, as our published rates -- fuel surcharges on express products or overnight deliveries are at 32%. All of a sudden, you have a shipping charge of $15. All of a sudden that base rate turns to $20 very quickly. It is significant.

On ground, the fuel surcharge is about 12%. Whereas on an $8 delivery, it goes up to about $9 so it is not as impactful. But certainly on the express products -- and when we have perishable product, we have to send express. It is dramatic.

We were -- part of our -- the Company's DNA is to continue to work to reduce our our operating expenses, continue to go back to work our vendors, including our shipping vendors to continue to get relief where we can. We continue to work with our our carriers to control that. In other areas, whether it be sourcing initiatives or logistic areas, to transfer express delivery into ground delivery, because we can get the product closer to the home, that is a way of us controlling those expenses.

I think on Bill's last point there -- I think although those fuel surcharges are considerable, Jen, as Bill just highlighted. I think the response we have gotten from our primary common carrier and carriers has been very good, in terms of helping us to really knit themselves into our logistics operations and our strategic planning effort so that we're doing things that will further mitigate those impacts in the future.

And should there be any let-up in those fuel surcharges, we're particularly well-positioned to drop those benefits to the bottom line. Because of all the ways we're knitting ourselves into their organizations and leveraging the vast knowledge that they have about sourcing and logistics, and knitting ourselves right up alongside them, in terms of being able to learn from those organizations to change our Company so that we're well-positioned to handle those increases should they come in the future as well.

Okay. Great. Thank you.

And moving on, our next question today will come from Brean Murray's Eric Beder for our next question. Please go ahead.

Eric, thank you for taking time out from one of your many TV appearances to be with us this morning.

Okay. I will keep that in mind next time I have an appearance. Could we talk a little bit about BloomNet. I want to talk about -- one of your major competitors is obviously just about to be acquired. I would assume that offers you an opportunity to get a little more aggressive with some of your florists in terms of BloomNet. How have you responded to the impending FTD merger.

I'll talk to Eric on that. What we have seen with BloomNet is that we have had terrific success. In the three years that the Company now exists, we have seen it warmly and wildly embraced in the market place. Clearly, that has had an impact on our competitors, although not our intention nor was it frankly, necessary for us to be successful (inaudible).

The acquisition clearly, it was not secret in the market place that that company was available for sale or actively for sale for quite some time. We're not concerned that this acquirer has particular leverage. That they can avoid or be concerned. Frankly, we wish them well. We hope everything goes smoothly for them. We don't frankly, think it impacts our life very much at all. Eric, this is Chris. I'll add by saying, we're really happy with the way BloomNet has been accepted in the market place. We have the membership numbers to where we want them. Our focus has always been on getting the best quality flowers as part of the network.

Our focus now has really been adjusting to make sure that we're delivering value to them. We're delivering increasing number of orders into each and every one of our BloomNet members -- products and services into each of our BloomNet members. Our florists are really responding very positively by supporting BloomNet. As the change in the market place happens, we think we're very well-positioned, because of the value that we're delivering to our florists.

In terms of BloomNet and Martha Stewart, I know you're ramping up the percentage of product that is offered same day. When do you think you will be at the percent you want to be? What has been the response now that it has been out for about four months in the florists that have taken on the program?

The florists who are participating in the Martha Stewart program have been very happy with the results to-date. Again, it has been early. It was an introduction during the spring holidays to make sure that we started the program in and now we're gearing our efforts up for the fall push. We see throughout our relationship with Martha Stewart, an ever-increasing percentage of same-day.

I can't necessarily project what that percentage will be Q1, Q2, 3, 4, et cetera this year. But what were a finding is this customers are really looking for that product from us. And through the various delivery mechanisms that we have, whether it be overnight or more importantly, on an ever-increasing basis as you point out through our BloomNet flowers. Eric, that will change a little bit with each SKU introduction. Lots of times we will introduce a product and it will be available primarily, almost exclusively in an express modality. Until we show the buy-in, we can make good projections and the supply chain and florist chain can catch up with that, and then have a good foundation from that introductory knowledge to project inventory needs and number of BloomNet florists participating who need to cover those particular SKUs.

It will change overall and it will change by SKU. It is similar to how we have introduced other products. Some of our chocolate products and all, we stock them express, improve the model, make a forecastable projectable assumption in terms of inventory needs and BloomNet participation, and then move it to the BloomNet distribution channel.

Okay. Let me ask -- that's it. Thank you. Oh actually, one quick one on Martha Stewart. Could you tell us a little about the economics of the Martha Stewart in terms of licensing? I know you -- is it -- are you still finding that because of the higher ticket, it is still more of a higher margin product than a base delivery by the florist or some other people?

Yes, Eric. With regard to Martha. Martha is a three-year deal. It's a license deal with us. We pay her a license fee on a per order basis.

It is a higher average ticket. It is a higher margin. What we have done during the introductory phase is where we're trying to -- as we were promoting that offering. We didn't get the margin benefit in Q4, but we will get that going forward.

Great. Congratulations, thank you.

Thank you.

Moving on, we will now hear from Mr. Jeff Stein with Soleil Securities. Please go ahead.

Couple of questions. First of all, the NOL benefit. Will that continue into fiscal 2009? If so, roughly by how much?

Unfortunately, we didn't have enough losses from the past years, Jeff. Bill will give you color on exactly what happens now.

We basically have used that up, Jeff. We were able to free up some state NOLs this year through some tax planning that lowered our effective tax rate to the 37%. We expect our effective tax rate going forward to be in that 38.5% to 39%. We have certain strategies in place to get it below statutory rates, but the NOL is for the most part used up.

Okay. Bill, perhaps you can give us a little bit more color on DesignPac and the impact that had on your fourth quarter, both from a revenue and an EBITDA standpoint?

I can tell that you it had no impact on the revenue side. But Bill will tell you the bottom line side.

Yes, Jeff. DesignPac is a very seasonal business so for the months of May through August, it really has no revenue to speak of. It is all a starts in September, but it really is a second quarter business. As we highlighted in our release, DesignPac was a big part of the year-over-year lower income this quarter. We had DesignPac, we had the shift in Easter and we had the BloomNet fall selection guide. Those items combined --if we added them back, would have made all our metrics in the fourth quarter this year very comparable, in some cases some better than a year ago. DesignPac was a big piece of that.

But was it a couple pennies, 2 pennies, 3 pennies, would that be fair?

It was in that range, absolutely.

Okay. The acquisition that you made at BloomNet, could you tell us a little bit about that and what the nature of the product is?

Well, as we have mentioned in the past, BloomNet will grow. We think become a fairly large company. It is going to grow in different steps. Right now, the steps that we're pursuing right now to enhance our revenue growth in BloomNet, deepen our relationship with our BloomNet florists, is on the product side. We had an opportunity as we built our virtual product business to acquire in this case some assets, some knowledge as well, that came with it, to enhance our product sales. As a consequence there, you will see revved revenues. Last year, we grew -- we had more than 20% -- bottom line grew, Bill?

30%

30% and we're forecasting better than that or accelerated growth this year. One of the contributing factors is we acquired these assets just this month. Very small acquisition, in terms of physical assets. What came with that were a few people who we've worked with for ten years. We have known who can enhance our logistics sourcing and distribution capabilities, also some of our design capabilities for those products that we know our florists need just to fulfill our orders. Not to mention their own business, so we have an accelerated growth.

A consequence I'll remind you about there, that we mentioned in our remarks and Bill touched on specifically. We have been producing a margin in BloomNet, in spite of its fast growth rate, of 30%. Now, that is a heavy mix of service offerings there. Now, we're going to step a little harder on the gas pedal on the product offerings, so you will see the gross margin dollars go up, but this percentage will come down 3 or 4 points. Let's call it 26% because we're accelerating that part of our growth.

Now, it could be next year that we accelerate more of the service components and that that changes that gross profit margin percentage. We're focused on deepening our relationship, acquiring assets that we can now lever and make a part of what we do. Take costs out of what we do and better position us to serve the BloomNet florists.

It sound to me like this particular acquisition while small, it wasn't necessarily a new product for the portfolio. It is more people and perhaps expertise, rather than a product you're going to be selling into the florists.

Well, it is a product -- it is a collection of products. Products that we have already been in, but not deep enough to properly service the customer. Yes, you're right in terms of it just enhances our ability to do what we do now and gives us more depth and capability. But nothing beyond the product line parameters that we already established that we want to make available to our BloomNet florists.

And final question for you, could you talk a little bit about how you expect to get the word out on 1-800-BASKETS? How is that going to be marketed to your customers?

I will ask Chris to give you some more specifics here. But just from a top line point of view, 1-800-FLOWERS, 1-800-BASKETS are clearly -- we want them to be seen as sister brands. That is when you walk into our shop, be it physically which is hard to do or in an e-commerce environment, we have a range of products as your florist and gift shop that we want to merchandise in front of you. That merchandising mix will shift and change by holiday, by season, and with different emphasis.

We have our flowers and our plants, our giftware, our lifestyle giftware products, our confectionary products, balloons and such, our gourmet gift food products, and the other anchor, our 1-800-BASKETS product which is our custom gift baskets and gift baskets for all those key giftable occasions as well. That's what we want to do from a macro picture.

DesignPac Gifts was -- has us so excited about this. This is a kernal of capability that frankly, would have taken us 5 to 10 years, certainly 5-plus years to build on a one-person-ad basis. We already launched 1-800-BASKETS. It is a very successful launch. It is a good solid business.

Now, we get to put a infrastructure beneath that that is fairly dramatic. But what we caution you on, Jeff, and what Chris will touch on now, is because of their planning cycle, that is, everything was designed and sold and sourced last year for this year. It will take -- they will have a benefit and a contribution to 1-800-BASKETS this year. But when -- as that management team gets their arms around 1-800-BASKETS, the real impact will come in the next fiscal year. Chris, what would add on the impact of DesignPac Gifts? That's right. This year because of the planning cycle, really the impact will come from some improvements that we can make in the product offering through the design capabilities of DesignPac. But they are somewhat limited due to the planning cycle.

Again as far as getting the word out as Jim mentioned, we really will focus on the 1-800-FLOWERS customer base, because it is such a natural sister brand to the 1-800-FLOWERS brand. And really, the benefits -- the ability to do that will come as we make continued enhancements into our fresh digital commerce platform. We will be be launching two of our food brands in September and October, Cheryl&Company and Popcorn Factory up on that platform.

We will continue to make regular version enhancements to our capabilities. And then 1-800-BASKETS really will launch onto that platform in the spring, Q3, Q3/Q4 timeframe next year. Really positioning it for the holiday -- for next holiday season. Utilizing those cross-marketing capabilities is the primary vehicle that will get the word out on 1-800-BASKETS. One of the early hints, Jeff, on the benefits of our new increased capabilities with 1-800-BASKETS is that that merchandising and design team have been able in near term, frankly even before we officially closed, to impact the design, look, and feel of our gift basket offerings that were already in the pipeline, as well as for our specialty brands like Fannie Mae, Cheryl&Co, and even our Martha Stewart collection. Because DesignPac Gifts has already had a relationship with Martha Stewart, so this married up very nicely.

Got it. Thank you.

And our next question today will come from Mr. Jim Leahy from Morgan Joseph.

This is Jim Moran for Jim Leahy.

As long as everybody around here is Jim, we're fine with that.

Seems to be the trend. Can you give me a little more color on how you plan to target your marketing spending, given the weak consumer environment?

Chris? Yes. I will jump in on that one. Really what we're doing, each of our brands has been really focused on utilizing the capabilities we have been investing in for the past several years on really understanding our customers and the data warehouses that we have been building. Utilizing that capability, each brand has a design target, a persona of the design target. We're utilizing that information to determine where to spend our marketing dollars. Which new customers are most profitable for us to acquire.

We're very happy with the new customer rates that we're able to achieve this last year in excess of 3 million new customers. If we can continue that rate -- at the targeted more efficient capabilities that we're bringing to the table, we believe that will help drive that ECV, that enterprise customer value for us. Utilizing those capabilities to make sure where online, we're positioning our advertising. And very critically, where off-line, we're positioning our advertising. And the same thing in our direct-mail capability. Just getting more and more efficient through our modeling and targeting capabilities is helping us to A, maintain that customer acquisition cost below $20 as we have said is our threshold; and then also, just continue to drive more efficiency.

In this economy, this type of environment, we have to do that. I think we have proven that we're able to maintain our efficiencies and marketing spend this past year. You will see us continue to do that going forward next year.

Great. This is George. I just wanted to add to that. One of the things we will be able to to do here our Fresh Start, our rewards loyalty program has been tremendously successful to our consumer floral arranged flowers brand. And we will be able to roll that out across the other brands, beginning this year. We think that will be an extremely effective way for us to grow regardless of the economic climate.

Okay, great. Following on that one, do you expect marketing spending to be down year-over-year or where do you see that going for fiscal 2009?

Bill?

Yes. This is bill. We plan, in absolute dollars, to continue to invest behind our brands and our businesses. As Chris was alluding to before though, the allocation of those dollars will be where we can get our best return. We're very focused on driving down our operating costs. For the most part, they have been in the non marketing area. But we expect to have growth this year, both through organic as well as our acquisitions. And we expect to invest behind that.

What we're proud of is we have been able to have this great bottom line performance without salvaging our future by cutting our marketing spend.

Right. Okay. Makes sense. And then finally for me, is there any way you could quantify the size of the Martha Stewart related business this past quarter?

It was very small. It was just introduced. Other than what the building blocks for the future, it was inconsequential.

But Jim, one point. While we go forward, we think Martha Stewart will drive incremental revenue for us. As this was an introductory phase, it really was people coming to the 1-800-FLOWERS site for the most part. And then us promoting on the 1-800-FLOWERS site for people to try the Martha product line which we are all very happy with.

We think it will ultimately drive repeat business. But it really was cannibalizing the overall. It wasn't driving increment growth this quarter. We think as we move forward, it will be driving incremental growth for the Company.

As you use general media and not just use the existing traffic flow, you get to get that benefit. Of course with the Martha Stewart Omni Media relationship as we get to gift baskets in the fourth quarter and as we get to the holiday SKUs, you have a BloomNet benefit from a product sales point of view as well.

Okay. Great. Good luck going forward.

And our next question will come from Sidoti and Company's Anthony Lebiedzinski. Please go ahead.

Yes, good morning. I think you guys have done a good job with reducing your expenses. Question is, how much more can you do? Would you say that most of the expense cuts are behind you at this point?

On the contrary, Anthony, as Bill mentioned earlier, we have now made this a part of our DNA. As we grow, both organically and through acquisitions, these capabilities are not one-time hits. We just continue to find more and more ways that we can improve our processes. Sometimes that involves capital.

You can see, we have not cut our capital expenditures; we have increased them. We have not cut our marketing expenditures; we have increased them. We have been able to do that while we have been dramatically improving our bottom line, which is evidence that we're investing for the future. In fact, we think that there are more process improvements available to us this year and next than we even imagined.

Right. And Anthony, that is why we gave guidance that we would be able to drive down our operating costs as a percent of revenue another 50 to 100 basis points going forward.

Can you give us some examples as to what you plan to do for achieving these expense savings?

Yes. A couple of areas would be on the labor front with our service center organization. We announced about six weeks ago the closing of one of our larger call center operations as we transition more of our calls to a home agent program which is driving efficiencies. We have --

This is driving both efficiencies and quality improvements. As we invested in that technology to allow us to run our own home agent network over the last two years. Now we're beginning to see fruits of that because we have a better work force, more highly motivated, more highly educated. We stay longer. We can invest more in training. All at the same time, we're reducing our cost of servicing the ever-increasing number of customers we have.

And as Jim alluded to, it is part of our DNA. What we've internalized a couple years ago was a process for continual process improvement. We continue to look at our business processes. We continue to go back to our vendors from a sourcing perspective to drive down our costs. That will be continual and continue to take costs out of our organizations.

And the June quarter, it seems like after you take into account the calendar shifts that your organic sales were about flat. Is that a correct assumption?

Yes.

Okay. Now, my question is what gives you the confidence that you can improve sales organically in fiscal '09 in this tough retail environment?

Anthony, this is Joseph Pititto. We actually -- Bill mentioned earlier in his formal remarks and we very specifically put those pieces of information in our press release today. A number of things, Jim -- a number of things that we talked about of course was the -- getting a 20-year benefit from the Martha Stewart relationship we think is going to help us both on the consumer floral side and BloomNet. BloomNet's expanded products and services which Jim discussed at length here, is going to significantly increase the growth rate that you saw in the top line for BloomNet this past year. That number will go up quite a bit this year.

Fannie Mae's e-commerce channel by the way, continues to grow at a very nice double-digit pace. We expect that to grow further in fiscal '09. Cheryl&Co., Popcorn Factory, are both going to be launched, as Chris mentioned earlier, on our Fresh digital platform. They have new product introductions and new customization capabilities that we'll market aggressively. We've talked about it in the past, our ECV efforts -- increased focus on cross merchandising, as Jim pointed out. Our floral shop, that is going to be an important part of the business and Fresh Rewards is growing.

What I would underline there in terms of Joe's revisiting the things we talked about, in terms of -- it's the confidence for this year, is BloomNet. And BloomNet is a real leverage point for us. We've tied ourselves at the hip with our retail florists members of BloomNet, that their success is important to us. You see us retailing programs -- frankly, we get more excited -- even though we're projecting more than 20% growth this year, more than 30% bottom-line growth this year, which I think is pretty remarkable.

We're saying it's only going to accelerate. We're getting more excited every day about the programs -- how Mark [Nance] and his team. And BloomNet are retooling our efforts, making sure that we do the things. That we use our human capital as well as our dollar resources to make sure we're doing those things that both offer a marketing opportunity to us. But at the same time, are doing things that genuinely benefit and help those retail florists.. If you look at the Company, yes, our consumer business continues to grow. And Joe just iterated why in each category, we have great confidence. Because we have 1-800-BASKETS which I think will become a very, very big part of our business.

You have two or three businesses within our shop, in terms of back room our shop. Be it BloomNet. Be it our confectionary business and also our basket business. Each of which can become several hundred million dollar companies. In the case of BloomNet, not operating with a normal retail margins of an e-commerce company in the 10% range that the others will -- or do. But in fact, operating in something in excess of 25% operating margin.

That gives us great confidence, not only for this year that we will be able to achieve the results we said to you and hopefully exceed them, but obviously even greater in years ahead as 1-800-BASKETS comes online, and as our confection area efforts start to yield. We have acquired companies, small companies that fit nicely in our shop mix offering. Then we accelerate their growth from 1% or 2% -- we have green each of those companies in the last three years more than $20 million in sales. We have the history to say, why we're confident about that growth.

Okay. My last yes question is also, can you comment on the current promotional environment? And what are you seeing from your competitors? If you could just give us some color about that, that would be great. Thanks.

Chris, would you answer that for him? Certainly coming out of the fourth quarter, we saw a lot of promotional activities in the current period. Summertime is a rather slow time. What we are seeing though is several companies gearing up their promotional activities for the upcoming holiday season in the gourmet food category as well as the floral category. With that said, we think we're very comfortable, very confident with our capabilities and our plans that we have in place that -- the results that we have guided to so far this year. Just an anecdotal note. One of the retailers we work with and most admire is Cosco. We were concerned about their forecast going forward. As you drill down on that our relationship with them is growing above the anticipated levels. We think there is so much more we can do with them and learn from them.

Because they think the gifting segment in their shops will not experience the same malaise they are seeing in other product categories. In fact, they think the gifting segment will actually accelerate in the fourth quarter. That is just anecdotal in terms of their view, but it makes us good that smart good partners like that see the gifting business growing.

Okay. Thank you.

And Mr. Pititto, it appears there are no further questions at this time. I would like to turn the call back to you for any additional or closing remarks.

This is Jim. I would like to thank you all for your questions and for your interest. If you have any additional questions please contact us. In closing, I would like to offer a traditional reminder, as we head back to the last weeks of summer, don't forget that back-to-school season is fast approaching.

At 1-800-FLOWERS.COM, we have a collection of the perfect gifts including gift baskets, Fannie Mae chocolates, delicious cookies and bakery gifts from Cheryl&Co., tins of gourmet popcorn from the Popcorn Factory, and much more to help you send your back-to-schooler off with a smile. So call, click, or come in today. Thanks and we look in order to chatting with you next quarter.

Thank you for your participation. That does conclude today's conference. Everyone have a great day.