1-800-Flowers.Com Inc (FLWS) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the 1-800-FLOWERS.COM, INC. Fiscal 2009 First Quarter Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the Company's Vice President of Investor Relations, Mr. Joseph Pititto. Mr. Pititto, please go ahead.

Thank you, [Connie]. Good morning, and thank you all for joining us today to discuss 1-800-FLOWERS.COM's results for our fiscal 2009 first quarter. 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 1800flowers.com, or you can call [Thaddie Apadatta] 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 opening remarks, and then we will open up the call to your questions. Presenting today will be Jim McCann, CEO, 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 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 the generally accepted accounting principles. Reconciliation 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 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, everyone. For our fiscal first quarter, we grew revenues more than 8% to $158 million and increased EBITDA and EPS at double-digit rates. These results highlight the benefits from our recent acquisitions, as well as our continued focus on enhancing our operating expense ratio and thereby driving improved bottom line results.

We achieved these results in what is traditionally our lowest quarter in terms of revenues due to the lack of gifting holidays during the summer months. Revenue growth for the period was driven by our recent acquisitions and continued strong market share growth in our BloomNet wire service business. DesignPac Gifts, which we acquired at the end of April, is performing very well.

During our fiscal first quarter, we began shipping the orders that they received back in the spring for this year's holiday period, and they are now in full swing for what looks to be a very good contribution for our fiscal fourth quarter and for the full year.

BloomNet's accelerated growth benefited from both the acquisitions we made in July as well as continued market share gains. BloomNet's superior value proposition combined with its industry-leading focus on quality and service is increasingly attractive to florists throughout the country, particularly in the current economic climate. As a result, BloomNet is achieving increased penetration for its expanded suite of products and services.

We improved our operating expense ratio by 300 basis points during this quarter. This combined with our revenue growth enabled us to improve EBITDA by 40%, or approximately $1.4 million, and EPS by 12%, or $0.01 per share

We expect to build on these results during the current fiscal second quarter, our largest in terms of revenue and profits. In particular, our Food Gift brands, Fannie May, Cheryl&Company, and The Popcorn Factory all generate the majority of their annual revenues and profits during the year-end holiday period. Adding to this will be the top and bottom line contributions from DesignPac Gifts.

As a result, we anticipate good top line and strong bottom line performance in our current fiscal second quarter, despite the very challenging economic environment, which I will comment further in a few minutes.

Before I turn the call over to Bill for his review of specific results and metrics for the quarter, I'd like to highlight a few additional areas. First, in terms of our balance sheet. We further strengthened our balance sheet and liquidity through an amended agreement with a syndicate of banks led by JPMorgan Chase. The new credit facility increases our borrowing capacity by $150 million to $293 million. We are very pleased to have completed this new agreement at favorable rates and terms particularly considering the uncertainty in the credit markets today. This combined with our increasing cash flow positions us well to continue our growth strategy.

On the customer front, we attracted more than 460,000 new customers. We also achieved the repeat order rate of 64%, illustrating the continued success of our efforts to deepen the relationships we have with our customers. These metrics illustrate the fact that even during difficult times, our customers still have a need to connect and express themselves to the important people in their lives. We believe we are uniquely well positioned to help them with an expanded range of gifts and services that provide excellent value and convenience.

I'd now like to turn the call over to Bill.

Thank you, Jim. During the fiscal first quarter, we achieved revenue growth of more than 8%, taking the contributions from our recent acquisitions, as well as the continued market share gains in our BloomNet wire business. Most important, we enhanced our operating expense ratio by 300 basis points. As a result, we improved our EBITDA for the period by 40%, or approximately $1.4 million to an EBITDA loss of $2 million, compared with a loss of $3.4 million in the prior year period.

Net loss improved 8.4% to $5.3 million, or $0.08 per share, compared with $5.8 million, or $0.09 per share in last year's first quarter. This was achieved despite the traditionally lower revenues associated with our fiscal first quarter, which lacks any gifting holidays.

Regarding specific financial results and key metrics for the first quarter, total net revenues reached $158 million, an increase of 8.4%, or $12.2 million, compared with $145.8 million in the same period last year. During the quarter, our e-commerce orders totaled 1,553,000, compared with 1,654,000 orders in the year-ago period.

Average order size during the quarter was slightly higher at $69.37, compared with $69.22 in the prior year period. During the quarter we added 461,000 new customers. This was achieved while concurrently stimulating repeat orders from existing customers who represented approximately 64% of total revenues, compared with 62% in the prior year period.

Gross margin for the quarter was 39.1%, down 200 basis points primarily reflecting the impact of the margins associated with our recent acquisitions. Excluding the impact of these acquisitions, gross profit margin would have increased 10 basis points. The lower gross profit margin was more than offset by the improvement of 300 basis points in our operating expense ratio which primarily reflects the lower operating expenses associated with our recent acquisitions.

Operating expense ratio for the quarter was 40.4%, compared with 43.4% in the prior year period. This includes non-cash stock-based compensation expense of $1.2 million pre-tax, compared with $1.5 million in the prior year period.

For the quarter, depreciation and amortization was $5.7 million, compared with $4.9 million in the prior year period. Increase in depreciation and amortization is primarily attributable to our recent acquisitions.

As a result of these factors, net loss for the quarter was $5.3 million, or $0.08 per share, compared with a loss of $5.8 million, or $0.09 per share in the prior year period.

In terms of category results, in our 1-800-FLOWERS.COM Consumer Floral business, during the first quarter, revenues were $83.5 million, compared with $87.6 million in the prior year period. The lower revenues reflect the soft consumer economy combined with the year-over-year reduction in the number of company-owned retail stores.

Gross profit margin for the quarter in this category was 38%, compared with 38.9% in the prior year period, primarily reflecting promotional pricing and higher fuel surcharges from our third-party shipping vendors on direct ship products.

The lower gross margin dollars were somewhat offset by enhanced operating leverage. As a result of these factors, category contribution margin was $10.7 million, compared with $11.9 million in the prior year period. We define category contribution margin as earnings before interest, taxes, deprecation and amortization, and before the allocation of corporate expenses.

In our BloomNet wire service business, revenues increased 58.9% to $15.7 million, compared with $9.9 million in the year-ago period. This accelerated growth reflects contributions from the acquisition we made in this category in July, combined with continued market share growth.

Gross profit margin was 53.1%, compared with 56.7% in the prior year period. This reflects product mix with BloomNet products business, representing a larger percentage of total revenues due to the contributions of the aforementioned acquisition.

The lower gross profit margin percentage was more than offset by strong revenue growth and significantly enhanced operating leverage resulting in the category contribution margin increase of 72.3% to $4.4 million, compared with $2.6 million in last year's first quarter.

In our Gift category, Home and Children's Gift segment revenues were $22.6 million, compared with $24.7 million in the prior year period. This reflects our previous guidance for reduced marketing investments in this segment and improved bottom line results.

Gross margin in this area improved 130 basis points to 42.6%, compared with 41.3% in the prior year period, reflecting continued enhancements in product sourcing and shipping initiatives. As a result of these factors, category contribution margin loss was $2.2 million, compared with $2.3 million in the prior year period.

In our Gourmet Food and Gift Baskets category, revenue increased 60.5% to $37.2 million, compared with $23.2 million in the prior year period. Gross margin was 32.3%, compared with 40.9% in the year-ago period. Category contribution margin improved 52%, or $964,000, to a loss of $891,000, compared with a loss of $1.9 million in the prior year period.

The results in this category reflect contributions from DesignPac Gifts, which currently sells its product exclusively in the wholesale channels. Adjusting for this, revenues in category contribution margin in this segment would have been slightly down compared with the prior year period, while gross margin would have improved slightly.

We anticipate that the DesignPac Gifts will provide a significantly larger contribution to revenues and category contribution margin compared with the first quarter during our current fiscal second quarter.

As I stated earlier, the category contribution margin results exclude costs associated with the Company's enterprise-shared services platform, which includes, among other services, IT, HR, finance, legal and executive. These functions are operated under a centralized management platform providing support services to the entire organization.

For the fiscal first quarter, corporate expense including stock-based compensation expense was $14.1 million, compared with $13.7 million in the prior year period. The increase reflects expenses in support of our recent acquisitions.

Turning to our balance sheet, as Jim mentioned in his earlier remarks, we have a strong balance sheet and excellent liquidity that we further enhanced during our fiscal first quarter through the expansion of our bank credit facility. Our new credit facility expands our borrowing capacity by $150 million to $293 million, as comprised of $165 million available under a revolving credit line, and $128 million in term loan debt.

At the end of our first quarter, our borrowing under the agreement of $125 million in term loan debt, and $20 million outstanding under our revolving credit line. The borrowings under the credit line reflect the seasonality of our business, specifically, the increased investments in inventory and deferred catalog costs in our Gifts business for the upcoming holiday periods. Our cash and investments position at the end of the quarter was approximately $3.5 million.

Inventory of approximately $120 million was in line with management's expectations and reflects the aforementioned buildup for the year-end holiday season including inventories associated with our recent acquisitions.

We anticipate that we will finish the current fiscal second quarter with significantly reduced inventories as well as no borrowings under our revolving credit line, and a cash balance of approximately $100 million.

Regarding guidance. As we stated in this morning's press release, we have reiterated our guidance for fiscal 2009 bottom line results, which calls for EBITDA growth of approximately 15%, and EPS and free cash flow growth of 20%. The Company defines free cash flow as net cash provided by operating activities minus capital expenditures.

Regarding revenue guidance for the fiscal year. We have good visibility regarding anticipated revenue contributions from our recent acquisitions, as well as from the continued market share growth in our BloomNet business. With that said, we believe that because of the uncertainty across the economic landscape, consumers are under significant pressure to be cautious in their spending as we head into the key holiday shopping period. As a result, we believe it is prudent to moderate our revenue growth guidance to a range of 5% to 7%.

In terms of our current fiscal second quarter, we expect the period to represent approximately 38% to 40% of our full year revenues.

In summary, as we enter our key fiscal second quarter, we are focused on achieving profitable revenue growth while continuing to manage our operating expenses and thereby drive strong bottom line growth.

I will now turn the call back to Jim.

To sum up, during this quarter revenues grew more than 8% to $158 million. This growth particularly in the current climate illustrates the effectiveness of our strategy to grow our business through a combination of organic initiatives, business development, and strategic acquisitions.

We remain focused on leveraging our business platform to reduce our operating expense ratio. This results in a 300 basis point improvement, and we anticipate further enhancements throughout the remainder of this year. Combined with the anticipated revenue growth, we believe this will enable us to achieve our guidance for a strong EBITDA, EPS, and free cash flow growth this year.

We further strengthened our balance sheet and liquidity with a new credit agreement, and we anticipate finishing the current fiscal second quarter with no borrowings under that revolver, and a cash balance of approximately $100 million. This provides us with significantly flexibility to be able to accelerate our revenue growth when the economy allows.

Looking ahead, we are keenly aware of the uncertainty facing customers and businesses alike in today's economic landscape. We know as we head into our key year-end holiday period that consumers are becoming increasingly cautious with their spending. As a result, we believe we are being appropriately prudent in moderating our revenue growth guidance for the year.

Nonetheless, we remain cautiously optimistic for the holiday period, because we know our customers still have a need to connect and express themselves with the important people in their lives, and we are well positioned to help them achieve that goal. It is important to note that we saw the consumer begin to pull back more than a year ago. We responded appropriately and our planning and execution delivered strong bottom line growth for fiscal 2008.

Looking ahead, we remain focused on growing our business while enhancing our operating expense ratio. We believe this will focus -- this focus will enable us to achieve our strong bottom line growth guidance for this fiscal 2009.

Now, that concludes our formal remarks. And, Connie, if you would, if you'd please restate the instructions so that we can begin the Q&A portion of the call?

Thank you. (Operator Instructions) And we'll take our first question from Jennifer Watson from Goldman Sachs.

Great. Thank you. Can you talk a little bit about where the bulk of OpEx leverage is coming from? Are you buys benefiting from adding on these acquisitions and then being able to take a lot of costs out of the acquisitions and essentially drive the revenue growth of these businesses once you combine them on the 1-800-FLOWERS platform, and how you think about that going forward?

Sure, Jen. The answer to that question is, with this acquisition, no. We really didn't achieve a great deal of leverage in their business because of being able to put them on a platform. There are incremental minor gains in that. What you're seeing from an OpEx point of view is continuing management of the acquisitions we've made in the past, the growth we've experienced in different businesses, the businesses we created. All of those continue to give us, frankly, increasing opportunities to improve our operating expenses.

But I would look to the -- in normal circumstances, we expect to get some operating leverage. Because of the nature of this business, we bought DesignPac Gifts to use as it as a platform to grow our direct to consumer business. So, there really wasn't a lot of synergistic savings in that acquisition.

(Inaudible), as we've been speaking about our OpEx ratio for a while now, the last couple of years, what we did is we went out and what we stated was we assembled a lot of the pieces we wanted for our business going forward into the future, and now we're trying to optimize that. And we've been continually doing that.

Now we're in the phase, really, where we start to tweak our operating model that drives more efficiency. So, as Jim mentioned, with that acquisition as an example, that adds to our operating capabilities, and all of other brands will be able to leverage going forward into the future.

Okay, great. Thank you. And just one more, if I may. Can you talk a little bit about the trend you've seen to date in October, and how, if at all, a shorter shopping period between the Thanksgiving holiday and the Christmas holiday? So, I guess fewer weekends for parties, etc. may affect your business and how you've taken that into consideration in your guidance?

We like fewer weekends because our customers shop during the week. So, our guidance fully reflects what we expect to happen in this quarter. Jen, we turn to people like you to tell us what's going to happen in the macro environment, and as we read the newspapers and the magazines and all the business publications of the last few days, it's pretty dire for the forecast for the consumer for this quarter. And, of course, we read all the things that you publish.

So, I think you can accept that our guidance moderated as we have is just trying to be prudent and reflective of what we're reading and anticipating from people who know the market even better than we do.

Okay, great. Thank you so much.

And we'll take our next question from Jeff Stein from Soleil Securities.

Good morning, guys. Question on your guidance. You took your revenue assumption down, but you did not take your earnings per share guidance down. So, I'm wondering, have you (inaudible) a cushion into your revenue forecast when the year started, or is there something that you've identified on the expense side to compensate for the revenue shortfalls that you now are anticipating?

Jeff, I think you can see that the way we've been operating the business for the last few years, as the consumer environment has gotten tougher, we've been able to continually manage those operating expenses, manage the way we do our business. And frankly we get more excited every day about the opportunities of increasing, that increasingly present themselves to us.

Chris just mentioned the leverage we anticipate with DesignPac Gifts that we'll incur this year, because that leverage is to growth of our direct to consumer business to really step on the gas pedal with 1-800-BASKETS, our product line that we just introduced coming up next month a year ago. So, that's a leverage opportunity to growth.

So, no, we're not -- in answer to your question, no, we're not sandbagging. We're telling you what we think is a good opportunity. We think that there is more opportunity and we have more leverage at our disposal to manage the expense side of our business. We'll continue to do that. You've seen us do that continually now for three or four years. Last year was a tough year for consumer growth. We still had outsize performance on the bottom line.

And, by the way, we're not salvaging our future to do that. This is all within normal operating procedures, building a better company every day, and we're still making investments that we think will serve us well in the future. Yes, DesignPac Gifts is one of those, but we also have -- we said we'd grow three ways -- organically, through business development efforts, and through strategic acquisitions. DesignPac gives us an example of a strategic acquisition for growth. But we're still making investments in business development areas that will serve us well in the future.

So, we think we'll have another good year from our bottom line performance, as we did last, and we think that our guidance properly reflects where we expect to be, and we think we are making really good investments that will help serve us well this year and, more especially, next year.

And, Jeff, as one point that we continue to hit home on. We've been talking a lot about an operating expense leverage, leveraging our platform, reducing our operating expenses for some time now. Fiscal '08 was a good demonstration of how we're able to make adjustments throughout the year. We came out of fiscal '07 with very strong top line growth. And we anticipate the ability to continue to grow the top line in fiscal '08, and all of a sudden, a little over a year ago, the environment changed and we had to call (inaudible) throughout fiscal '08 to be able to still deliver very strong bottom line results while not getting the top line growth that we had originally planned for. So, I think last year demonstrates how we're able to manage the business this year. So, we're going to continue to make adjustments just like we did last year, when we're not achieving the top line growth that we had originally hoped for.

And, Bill, your point there is, you're really speaking to the flexibility in our operating model on a short-term as well as long-term basis. We're able to adjust our standing throughout the year depending on where we're seeing growth or not seeing growth come.

I'm just wondering if you could give any specific examples of that? Is it -- and where are the pockets of, I guess variable costs are that you could either pull out or add to on a relatively short notice? Would it be marketing? Would it be -- is there a hero element to it? Where is it mainly coming from?

I think you see it across the Company, Jeff. I'll give you a couple of examples. We saw that this was a tough period, so you can see in others that we spent less on marketing this quarter. We'll spend that money this quarter because we'd rather push it closer to the actual holiday gifting occasions.

So, net-net for the year on marketing will be up. So, the expense savings are coming from our operating areas. We continue to add talent to the Company. We continue to invest in our operating infrastructure, our service platforms, our delivery capabilities, our logistics infrastructure, all of which we've been investing in for the last several years, and you're seeing the fruits of that. And the more we do, the more we think we can do. So, you will continue to see that leverage.

And Bill, a question for Bill. In the first quarter you did call out fuel surcharges as being an area of pressure on gross margin. And I'm wondering now that we're beginning to see fuel charges back up, could that potentially be a benefit in Q2 and Q3, and maybe perhaps you could quantify the impact that had on Q1?

Okay. Jeff, you saw gross margins were down 200 basis points in Q1. That really reflected the impact of the margins associated with our other acquisitions. Margins would have been up 10 basis points without those acquisitions.

But where you did see margin pressure was in the consumer floral piece of the business, that was down 90 basis points. That impacted more by the fuel surcharges because there are separate fuel surcharges on ground delivery versus overnight express delivery.

So, the components of the Consumer Floral business that had -- that we use third party carriers is clearly impacted by that. We saw that peak in August and September. Those surcharges actually were at 34%, an historically high level. We have started to see that moderate down as everybody sees kind of prices at the pump coming down dramatically.

There are two points to that -- one, overnight delivery surcharge is tied to jet fuel, not diesel fuel that everybody sees kind of at the pump. And there is a 60-day lag between the indexes that the surcharges are tied to and when they actually get reflected in our rates.

So, we are seeing those prices moderate, which is certainly a good thing. They're still, though, in excess of where they were a year ago.

So, we can still see clearly in Q2 and probably into Q3 year-over-year increases in fuel surcharges. However, we've also been working very hard with our third-party carrier rates to negotiate better terms on base rates, and that will help offset that this quarter.

Okay. All right, so we shouldn't expect to see a benefit in Q2 and Q3?

Nothing different than what we forecast, but we are hopeful that as fuel prices continue to climb and the indexes catch up, that in the second half of the fiscal year there would be a benefit.

Okay. And final question. The revenue shortfall that you're now anticipating, I presume that's coming mainly in your Consumer Floral business, or is there also an element that you're anticipating and expecting now in the Food Gift business as well?

I think what we're seeing here, Jeff, is that the margin prices are higher. So, what are we pushing to our customer? Well, what they want, and they're looking at different kinds of price points. And the fact that we're a flower shop with flowers and gifts, and over the last several years built up that gift portfolio quite nicely, gives us the flexibility to have the right price points for a more price-sensitive customer who still has that gifting and connective need. So, we're anticipating those price points which are frankly a better margin than those gift products being the products that will have accelerated growth versus what we anticipate in the flower group.

And, Jeff, just one other point. The Home and Children's group, too, within that sector, certainly we've seen pressure under that sector for some time now, but that has continued.

Thanks, guys.

(Operator Instructions) We'll go next to Kristine Koerber from JMP Securities.

Yeah, hi. A couple of questions. First, can you comment on the promotional activity that you are planning for, for the December quarter, in particular with Martha Stewart? And then, second, can you just talk about traffic to the website and conversion rates, in particular?

Sure, Kristine, this is Chris. As we look at promotional activities for the quarter, as Jim mentioned earlier, first off, our spending kind of goes later and later, closer to the holiday. And so we're making all the adjustments. Specifically to the Martha Stewart product line, we are excited about some upside opportunity there.

We introduced the Martha Stewart product line back in April-May time frame, really just getting introduced to our existing customer base. The marketing efforts behind that, which is in cooperation with the Martha Stewart media properties really begin now, beginning in November. We have a nice insert into the Martha Stewart Living magazine, integration into the television and radio programs, and other properties, Web properties. So, the marketing behind that program really picks up now primarily through the Martha Stewart media properties. So, we're excited about that as well.

And then as far as traffic through the Web, I think therefore what we're seeing right now is traffic is stable based on the fact that we're not promoting a lot currently. That will start to pick up now as we go closer to the holiday. And our conversion rates are remaining consistent with what we've been seeing.

We recently made some changes to the 1-800-FLOWERS website, which we think has some promise to actually increase conversion rate as we move closer to the holiday, but that's very new. We just launched some new home pages on it in the last two weeks, so we're monitoring that to see what that delivers.

Same thing on the Food Products. We have out there right now a new website for The Popcorn Factory, which is out in customer preview mode. It hasn't been launched to the general public yet. We're hopeful that that can deliver some positive results. Based on the customer feedback we get this week will determine when we launch that website. But we're hopeful that we can launch that into the holiday season, which will give us some upside in conversion as well.

This is part of a long, continuing process of building new technology platforms, giving all of the gift brands in our shop, the opportunity to have all the bells and whistles. So, this is a continually evolving plan that we introduced about a year and a half ago, and will take another year and a half, frankly, to drive it to completion.

Okay. Just a follow-up on the marketing. You indicated that you expect marketing to be up for the full year. What kind of increase should we anticipate for the December quarter?

Not significant, just how we move within the quarter, so that it's more proximate to the holiday, fishing where the fish are, so-to-speak.

Again, to my comment before, Kristine, with regard to the Home and Children's Group, we're taking some dollars and reducing some circ within that category and redeploying dollars elsewhere.

Another example of that, we do some circ in our prospecting efforts, because at this point, in this economic climate, we don't see the return on lifetime value of the customer versus the spend that we have to do to acquire that customer.

In the catalog businesses.

Right.

Thank you.

And we'll take our next question from Eric Beder from Brean Murray.

Good morning. Could you talk a little bit about the change in FTD in the current economic environment with the acquisition by United Online, how you're able to take advantage of those? I guess you have.

Well, I think what you see in BloomNet, with a very strong performance this quarter is that what goes on around us doesn't really concern is. We're focused on growing our business, deepening our relationship with our existing floral customers, improving the suite of products and services that we deliver to them all the time. So, that's why you see our products business growing this quarter, because we have the opportunity to leverage our platform. You heard Chris and Bill talk about that today. We're leveraging our platform, our buying capability, our sourcing capability, getting a better integration against the things we want to do.

So, we think we're taking market share in that area, we think we'll continue to do that. Any uncertainty created by the competitor's ownership just gives us more and more opportunity to accelerate the market share growth.

Okay. How should we think about margins in this business now that you've -- I remember you mentioned on the last conference call, you talked about the new acquisition, which was hard goods, and it was going to bring lower margins, but we didn't really see that that much in Q1. How should we think about margins for BloomNet going forward with this new acquisition being layered in?

Sure, Eric. I think you did see some moderation of our contribution margins in BloomNet from the low 30s to the high 20s. That's primarily a reflection of our increased emphasis during this selling period on the product side of our business. I think what we've said in terms of longer term guidance is that as we introduce new products and services, some are going to more compressed margins, some will have a more robust margin. And I would expect that you can plan for this year a slightly lower margin, contribution basis in BloomNet, but we would expect over the long term it will moderate based on an introductory timelines, could be around that 30% contribution market.

It really isn't the product of the mix, as Jim is alluding to. So, yes, a year ago we were in the high 20s, but (inaudible) year last year, we were in the lower 30s. With the guidance we gave for this year was that we would be in those high 20s.

We came in at 27 for the quarter, we'd expect that's about where it will be, 27%, 28% for the year. And next year, in all likelihood, although we're not giving next year's guidance yet, with our plans we'd expect on a longer term basis we're targeting a 30% contribution margin.

Okay. And could you talk a little bit, and I know you had this on the conference call at the DesignPac meeting. How is DesignPac -- I know DesignPac is a gift basket business, but they also use chocolates, and obviously they -- how are they -- how are you lining them up to sort of leveraging your production capabilities for chocolates, candies, cookies, popcorn? How is that leverage going to start to happen and when do you think we could see something like that, if it's possible?

Well, I think what I'd say there, Eric, is what we told you last about DesignPac Gifts is first and foremost, we're very excited about the team, the company, its customers, the acquisition in general. What you'll see is a collection of things happen. First, the team integrating with what we do.

We announced on the last call that even before the acquisition was consummated, the design team at DesignPac Gifts had started to work with some of our other gift food brands in helping them redesign and redo their gift basket line for this holiday quarter. That happened. So, that's a good impact, but I don't think one that you can jot down on a spreadsheet and measure this quarter. But it will clearly be a good contribution.

And, yes, they use lots of components in their gift food baskets that we can -- they can give a benefit lift -- excuse me, a brand benefit lift to our other gift brands. Our chocolate businesses in Fannie May, Fannie Farmer, Harry London. And our baked goods company, Cheryl&Company, and half a dozen other brand opportunities that we have for exposure of those wonderfully good branded products in the DesignPac gift baskets that are sold through the best retailers in the country . So, that's another opportunity.

But the biggest opportunity, frankly, for us is to sit over the top of their capability in terms of design, sourcing, constructing and delivering is for 1-800-BASKETS, and our other direct-to-consumer gift businesses. And that you'll start to see in this holiday period next year, because that's a 12- to 18-month planning, design, sourcing, constructing and distribution cycle. So, we're already well into that, where frankly a little giddy and excited about the look and feel on how things are coming together, and how well the teams have integrated.

So, the big benefit, yes, I think it will -- that that company, Design-Pac Gifts will do well this current fiscal year. I think our partnering has helped to accelerate their growth rate because of relationships and capabilities. But the real benefit comes next year and the year after and the year after that, when we build a very big gift basket business that helps us as company, helps us serve our customers better, and helps our BloomNet florist a great deal to be in a gift category that I think is essential to any of us who are florists.

That leads to my final question. Where are with Martha Stewart gift baskets, and you just talked about selling gift baskets to florists, and obviously that affects the gift basket business and the BloomNet business. When should we see something from that, too?

Well, I'll answer the second part first and then Chris will talk to you about what we're doing with Martha Stewart. We're in the design phases of those products now. We move into sourcing in the third fiscal quarter or the first calendar quarter of those products. So, I would say during the summer and fall of next year we'll have the product line available for our BloomNet florists, and we'll introduce it in this next spring, and that's when you'll start to see that benefit. And as concerns your question about Martha?

Yes, Eric, as you recall, our relationship with Martha Stewart is both in the Floral end and the Food/Gift Basket side. And we were able to kind of at last minute get DesignPac involved in the design and production of the Martha Stewart Gift Basket line, which launches on the 1-800-FLOWERS site in November.

It's a small set of SKUs, but one that we think each year will grow to be a bigger and bigger business. We're just introducing a few SKUs next month.

Great. Thank you.

(Operator Instructions) And we'll go next to Jim Leahy with Morgan Joseph.

Hey, gentlemen, a couple of questions for you. First, in terms of the guidance numbers, how much of the downside, or how much is the takedown on the top line number is tied beyond, say, fiscal second quarter and kind of bleeds into the fiscal third, fiscal fourth quarter? Or is most of this tied to the holiday season?

Bill Shea; Jim, this is Bill. No, I think it runs through the remainder of this fiscal year. Where we're seeing -- where you saw in the first quarter and you're seeing the effects of this soft economy, we're not anticipating in this guidance that that's going to turn around in the very near future. So, that's going to continue. So, what you saw in Q1, you saw a little softness in Consumer Floral, the Home and Children's line, those continue throughout this fiscal year.

With that, because of the flexibility of our business, it's because of the investments we're making in key strategic growth areas, like BloomNet and our Gourmet Food and Gift Basket category, and our leverage that we can put on an operating platform that we're able to still kind of bottom line growth that we left out there.

Let me illustrate one point about the operating platform that Chris just referenced for you, Jim. A few years ago we had a lot of retail flower shops that the Company owned. We've been exiting the ownership of those shops and reengineering our platform away from ownership of those flower shops to putting those flower shops in the hands of good individual operators, family operators, who can do a better job with them and give us as a company more flexibility, allowing 1-800-FLOWERS to focus on what we do well, and our franchise partners focus on what they do well.

So, we're down to only three, I think the number is about three Company-owned stores right now. And we'll continue to gracefully exit those stores, selling them to our franchisees. So, that takes away from our top line number, but it shows you how deliberately and consistently we've been engineering our platform to be an e-commerce company, vertically integrated where it gives us opportunity, gives us good return on investment, and gives us increased flexibility.

So, that's just one example of how we've been doing this. It's not something new to us. We've been tuning and tweaking and engineering our platform to give us the ultimate flexibility and give us the margin opportunities where appropriate.

Okay. Then on to just how would you guys look at this current environment that we're in right now, and have you approached this environment from an M&A perspective? Are you guys getting -- do you see yourself being more aggressive in this environment in terms of multiples coming down, or is it still some quarters off?

Jim, I think we're uniquely well positioned. We have a good operating platform, we have great efficiencies and improving efficiencies all the time. I think we have vertical integration where appropriate, and a good example of that is DesignPac Gifts. Look at all the different capabilities that gives us across the enterprise and to build what we think will be a pillar business for us and with our florist members of BloomNet.

And we've been not exactly aggressive in acquisitions. You know, up until this last acquisition was two years ago we made the last, and that was Fannie May, and that's turned out to be terrific for us and for our florists. Again, chocolate, a nice price point, good value, a great gift. Part of the assortment that every florist should carry. So, we're very deliberate about fleshing out the inventory mix.

But I will tell you that with the balance sheet that we have and finishing this quarter with over $100 million in cash, with a good capacity in it, yes, we -- I think the environment for M&A opportunities will be rich. Whether or not we'll find the right companies that would help us in the very deliberate and strategic way that we've been approaching these is an open question and we're certainly not going to forecast that.

I do think that there's still a line between expectations on price that a seller in a private environment would have, and a recognition of what's happened in a broader global and public marketplace. But I think the next time they go to the bank, their credit facility to fund their expansion plans for the spring, that they're starting to get a rude awakening.

But I'll tell you, too, that our criteria has changed. The kinds of things that we would even consider has changed, and what we would pay for them has changed to reflect the environment. So, near-term, I think that opportunities will be more aplenty, but we're very prudent about how we spend our assets and which kinds of things will help us today.

We're not likely to be making investment in something that has a five-year turn to profitability. We might have been interested in that in the years gone by, but in this environment, we have a balance sheet and we are hell-bent on protecting that and making sure that we only find things that are accretive and beneficial for us today. And especially so tomorrow.

Great. Thanks, Jim.

And with no further questions in the queue, I'd like to turn the conference back over to Mr. McCann for any additional or closing remarks.

Well, thank you, Connie. I think what you'll see is that we're greatly focused on making sure we manage our operating expenses, making sure we take advantage of opportunities to growth where they properly present themselves. We're not going to just chase top line for the heck of it. We're going to show the discipline and prudence that we've demonstrated over the last few years, focus on improving our bottom line results. We've done a good job of that, and I think these upcoming holidays give us further opportunities to do that.

And let me remind you that although we have a major, major holiday business in the Flower business, in the Candy and in our Chocolate, and our Gift Bakery business, Halloween is a very important holiday for us. And that's just around the corner.

So, I encourage you, if you have little darlings that you'd like to say Happy Halloween to, or maybe if you're lucky enough, like me, to have a brand-new granddaughter just arrive on the scene, we all have reasons to express ourselves in gift, and we have the right products at the right price points. And I encourage you to come on in or call or click today for those wonderful gifts for all those little goblins in our life at Halloween.

Thanks for your time today and your interest, and we look forward to chatting with you in the future.

And this concludes today's conference. We thank you for your participation. You may now disconnect.