1-800-Flowers.Com Inc (FLWS) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the 1-800-FLOWERS.COM, Incorporated Fiscal 2010 First Quarter Results 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 and Corporate Communications, Joseph Pititto. Mr. Pititto, please go ahead, sir.

Thank you, Corrine. Good morning and thank you all for joining us today to discuss 1-800-FLOWERS.COM Inc.'s financial results for our fiscal 2010 first quarter. For those of you who have not received a copy of the press release issued earlier this morning, the release can be accessed at the Investor Relations section of our website at 1-800-FLOWERS.COM, or you can call Patty Altadonna at 516-237-6113 to receive a copy of the release by e-mail or fax.

In terms of structure, our call today will begin with brief formal remarks, and then we'll welcome your questions. Presenting today will be Jim McCann, CEO; Chris McCann, President; and Bill Shea, CFO.

Before we begin, I need to remind everyone that a number of the statements that we'll make today may be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed description of these risks and uncertainties, please refer to our press release issued this morning, as well as our SEC filings, including the Company's annual report on Form 10-K and quarterly reports on Form 10-Q.

In addition, this morning we'll discuss certain supplemental financial measures that are not prepared in accordance with Generally Accepted Accounting Principles. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables accompanying the Company's press release issued this morning. The Company's 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 the SEC filings except as may be otherwise stated by the Company. I'll now turn the call over to Jim McCann.

Good morning, everyone. Our first quarter results, we're in line with our guidance and internal expectations. As you know, our fiscal first quarter is our lowest in terms of revenues due to lack of holidays during the summer months. However, I can assure you that it is not a slow period in terms of our business activities.

Bill will take you through the details of the quarter in a moment, and I'd ask Chris to provide some additional color regarding the various programs and initiatives that we have underway that, quite frankly, makes us very excited for the future.

But before I turn the call over to Bill and Chris, I would like to mention some of the things that we have done and continue to do to position our Company for growth, both top and bottom line.

First, we have worked through the dramatic economic downturn that began at this time last year, and as we continue to work through its impact on consumer demand today, we intensified our focus on the three key strategic priorities that drive our business. These are, first, know we take care of our customer; second, maintain and enhance our financial strength and flexibility; and, third, continue to innovate and invest in the future.

Under the first priority concerning our customer, last year we launched an intense effort to develop detailed personas for the different segments of our customers -- good, better, and best -- and we are applying increasingly sophisticated business analytics to the tremendous volume of data that we have about the gifting preferences of our 35 million customers.

This is enabling us to develop highly targeted marketing and merchandising programs to help grow our better and best customer segments while also going after the right new customers -- those that provide the best return on our marketing investments.

We have intensified our efforts to engage our customers in a direct dialog, inviting them behind the curtain to online forms, e-mails, blogs, and panels where they can help us design the products and services that enable us to better serve all of their celebratory occasions.

And we have expanded our initiatives in the new communication channels of social networking including Facebook, Twitter, and the bloggers there where our pioneering efforts have gone into considerable positive media attention.

Regarding our financial strength and flexibility -- during the second half of fiscal 2009, we accelerated the initiatives under our process improvement program, or PIP. These efforts enabled us to achieve our target of $50 million in operating cost savings. This was on top of the more than $25 million in operating expenses that we had previously removed from our platform.

We accomplished this by leveraging our unique business model, which features lower capital requirements compared with most other retailers. This focus on operating cost efficiencies is now ingrained as part of our corporate DNA.

We also continue to strengthen our balance sheet, successfully amending our bank credit facility last spring to provide ample access to capital at very attractive rates and with added flexibility in our covenants.

Third, even though in this difficult economy period, we have continued to innovate and invest for the future. In the area of new technology, we continue to be a pioneer in our space with new applications in mobile commerce on the iPhone and the Blackberry device and, most recently, on Google's Android platform. We are investing in the exciting new areas of cloud computing and virtualization, which will enable us to reduce operating costs in our IT infrastructure.

(inaudible) our award-winning websites, we continue to migrate our gourmet food and gift basket brands onto our fresh digital platform. This provides them with significantly improved e-commerce capabilities as well as cross-brand marketing and merchandising opportunities.

Further illustrating this point is our recent launch of 1-800-BASKETS.COM, just in time for the year-end holiday shopping season. Chris will provide you with more details on the initiative in his remarks later in the call. But I can tell you that we are very excited about the opportunity we see in gift baskets. It is a category of confected gifts that falls right in our sweet spot.

While we have offered some gift basket products on the 1-800-FLOWERS.COM site in the past, and in our other brands, 1-800 BASKETS gives us the opportunity to leverage the tremendous design, sourcing, and confection capabilities of design-type gifts, precisely the reason we acquired this business as a platform for 1-800-BASKETS some 18 months ago.

In launching 1-800-BASKETS, we are leveraging the great brand equity and online traffic of our flagship, 1-800-FLOWERS.COM business with a new, dual-brand website with new features and functionality that will greatly enhance our customer shopping experience for flowers and gift baskets.

Also under the area of investments, we continue to invest in our human capital. Over the past several months, we have added significant new talent in those areas of our business where we see the best growth opportunities, going forward, and we will continue to invest here as we enhance the talent level of our people across the Company.

So, as you can see, while we cannot manage the economy, we can and are managing the key aspects of our business including our operating costs, our relationships with our customers, our technology innovations, our financial structure, and our human capital. As a result, I believe we are well positioned to take advantage of the very exciting opportunities for growth that we see ahead of us, both top and bottom line, as we move forward and execute on our plans over the next several years.

Now I'll ask Bill to take you through the details of this first fiscal quarter. Bill?

Thank you, Jim. As our press release indicates, Q1 was characterized by continued softness in consumer demand, particularly in our consumer floral segment -- in fact that we anticipated as we established our plans for fiscal 2010.

As such, we were and remain keenly aware of the need to drive enhanced gross margin and further reductions in operating costs. Along these lines, during the first quarter we continued to execute on these programs that have enabled us to significantly reduce our operating expenses over the past several years.

As a result, in Q1, we reduced operating costs from continuing operations by $4.7 million and on an aggregate basis, including our discontinued operations, by $7.6 million. We also made significant progress in our initiatives to improve gross profit margin. These initiatives, including our value priced merchandising as well as enhancements to our supply chain and various manufacturing efficiencies, are enabling us to move away from our reliance on promotional pricing as a means of attracting customers.

We began to see the early benefits of these initiatives in our second half of Q1, and we anticipate gross margin will grow in our consumer floral segment and on a company-wide basis during the fiscal second quarter and throughout the second half of our fiscal year.

Now regarding specific financial results and key metrics for the first quarter. Total net revenues for continuing operations were $108.3 million, down 20% compared with $135.4 million in the prior-year period. This relates primarily to consumer floral and the timing of certain wholesale shipments within our gourmet food and gift basket segments.

During the quarter, our e-commerce orders totaled $1,232,000 compared with $1,377,000 orders in the year-ago period. Average order size during the quarter was $60.74, down 4.8% compared with $63.82 in the prior-year period.

During the quarter, we added 392,000 new customers. This was achieved while concurrently stimulating repeat orders from existing customers who represented approximately 61.5% of total revenues compared with 63% in the prior period.

Gross margin for the quarter increased 190 basis points to 40.4% compared with 38.5% in the prior-year period. This primarily reflected product mix with lower wholesale revenues in DesignPac gifts. Operating expenses before depreciation and amortization declined $4.6 million to $46.6 million compared with $51.2 million in the prior-year period. However, due to the lower revenues in the quarter, operating expense ratio for the period increased 520 basis points to 43% compared with 37.8% in the prior-year period. This also includes noncash compensation expense of [$1.1 million] compared to $1.2 million pretax in the prior-year period.

As previously indicated, including our Home and Children's Gift segment, which we classified as discontinued operation, operating expenses were reduced by $7.6 million compared with the prior-year period.

For the quarter, depreciation and amortization was $5 million compared with $5.1 million in the prior-year period.

As a result of these factors, EBITDA loss from continuing operations for the quarter was $2.8 million compared with a positive EBITDA of $1 million in the prior-year period.

Net loss from continuing operations was $5.7 million, or $0.09 per share compared with a net loss of $3.1 million, or $0.05 per share in the prior-year period. Including the loss from discontinued operations of $1.6 million, compared with a loss of $2.2 million in the prior-year period, total net loss for the quarter was $7.3 million, or $0.11 per share compared with total net loss of $5.3 million, or $0.08 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 $70 million, down 16% compared with $83.5 million in the prior-year period reflecting continued weakness in consumer discretionary spending during the period as well as the more difficult year-over-year comparison, as we did not see the effects of last year's dramatic economic decline until late in our fiscal second quarter.

Gross margin for the quarter was 36.9% compared with 38% in last year's first quarter, primarily reflecting the stronger consumer economy in the first quarter last year, which did not require as much promotional pricing to drive customer traffic.

As a result of these factors, category contribution margin was $7.7 million compared with $10.6 million in the prior-year period. The Company defines category contribution margin as earnings before interest, taxes, depreciation, and amortization and before the allocation of corporate overhead expenses.

In our BloomNet wire service business, revenues were $13.8 million compared with $15.4 million in the prior-year period. This primarily reflects reduced wholesale product orders from florists. Gross margin in this category increased 400 basis points to 58.2% compared with 54.2% in the prior-year period reflecting the aforementioned product mix.

Category contribution margin was $4.1 million compared with $4.3 million in the prior-year period. In our Gourmet Food and Gift Basket segment, revenues were $24.7 million compared with $36.7 million primarily reflecting the shift in the timing of some DesignPac wholesale orders from the first quarter last year to the second quarter this year. Adjusted for DesignPac gifts, revenue in this category increased approximately 2% compared with the prior year.

Gross margin increased 690 basis points to 39.6% compared with 32.7% affecting the shift out of the quarter of the lower-margin wholesale orders as well as certain manufacturing efficiencies.

Category contribution margin with a loss of $3.2 million compared with a loss of $940,000 in the prior-year period.

Turning to corporate expenses -- as I stated earlier, our 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 operating under a centralized management platform providing support services to the entire organization.

For the fiscal first quarter, corporate expenses from continuing operations, including stock-based compensation, was $11.4 million compared with $13 million in the prior-year period.

Results from discontinued operations -- revenues for our Home and Children's Gift segment was $17.4 million compared with $22.6 million in the prior-year period. Gross margin was 43.5% compared with 42.6% a year ago, and category contribution margin was a loss of $2.1 million compared with a loss of $3 million in the prior-year period.

Turning to our balance sheet -- at the end of the first quarter, our cash and investment position was approximately $3 million. Our borrowings include $87 million in term debt and $29 million under our revolving credit line. The borrowings under the credit line was like the seasonality of our business -- specifically, the investments in inventory and deferred catalog for the upcoming holiday seasons.

Inventory from continuing operations of approximately $74.5 million was in line with management's expectations and reflects the aforementioned buildup for the year-end holiday season. It is worth noting that this inventory is down approximately $10 million compared with the same period last year.

Further, when combined with our discontinued operations, inventory is down approximately $20 million year-over-year. This reflects our successful efforts to reduce inventory throughout the Company.

So, in summary, our inventory reduction initiatives are going extremely well. We anticipate that we will finish our current fiscal second quarter with significantly reduced inventories, no borrowings under our revolving credit line, and a very strong cash position.

Regarding guidance -- as we stated in this morning's press release, we have reiterated our guidance for fiscal 2010, which calls for revenues from continuing operations to be flat to down approximately 5% compared with the prior year. Our bottom line results are expected to improve significantly including increases of more than 30% and 20% in EPS and EBITDA, respectively, compared with the prior-year period and expected growth and free cash flow to triple to a range of $25 million to $30 million for fiscal 2010 compared with approximately $8 million in the prior year.

In summary, as we enter our key fiscal second quarter, we remain focused on leveraging our business platform to reduce operating expenses while improving our gross profit margin to a combination of value-priced merchandising -- through our value-priced merchandising strategy, reduced promotional pricing, and improved operating efficiencies.

While the consumer economy is beginning to show some signs of improvement, we believe consumers will remain cautious in their discretionary spending during the upcoming holiday period. Looking ahead, we expect improved revenue comparisons beginning in December and on a quarterly basis as we move into the second half of our fiscal year.

I will now turn the call to our president, Chris McCann.

Thanks, Bill. During this quarter, we continue to execute on our programs to reduce operating expenses. This has been they key area of focus of ours for the past several years during which time we have removed tens of millions of dollars from our operating cost structure. We will remain focused in this area and see additional opportunities for best-in-class operating efficiencies. Most important, our success in this area has positioned us to increase our EBITDA and operating margins, going forward, particularly as we move ahead on a number of key revenue growth initiatives.

Foremost among these initiatives is our 1-800-BASKETS.COM that Jim referenced. We are very excited about this launch because 1-800-BASKETS.COM really represents the first manifestation of our strategy to bring together all of the assets, brands, products and services that we have built and/or assembled during the past years so that we can serve our customers for all of their celebratory occasions.

To launch 1-800-BASKETS.COM, we are leveraging a tremendous brand equity and online traffic of 1-800-FLOWERS.COM by creating a new dual-branded website. 1-800-BASKETS.COM will also be featured in our online and offline marketing programs for 1-800-FLOWERS.COM, going forward. This combination of dual-branded website and marketing programs will enable us to introduce millions of our customers to the new 1-800-BASKETS.COM brand without spending substantial additional marketing dollars to try and birth a new brand.

Our dual-branded website with shared shopping cart, fresh rewards, loyalty program, gift reminder service, address book, order history, and much more, will also enhance the experience that customers enjoy today while shopping at 1-800-FLOWERS.COM. In addition, we believe that 1-800-BASKETS beautifully designed products and broad price range will enable us to attract a new customer base; one made up of people who primarily sent gourmet food gifts to the important people in their lives.

We will be able to bring these new customers into our virtual gift shop and introduce them to all of our products and brands and thereby expand a range of celebratory occasions for which they will come to us. As a result, we believe 1-800-BASKETS will enhance our progress toward becoming a leading player in the highly fragmented [multi-billion] dollar gourmet food gifts category while concurrently deepening the relationships with our customers across all of our brands as their preferred shopping destination for all of their gifting needs.

Well, as Chris and Bill have just described, we continue to execute on our plans to achieve enhanced growth and profitability. Our fiscal first quarter, which is historically our lowest in terms of revenues, was in line with our guidance and internal plans -- this, despite the difficult year-over-year comparison and continued weakness in the consumer economy.

Most important, we are doing what we said we would do. We are reducing our operating expenses, we have initiatives in place to improve our gross profit margins, we are reducing our debt and enhancing our balance sheet, we are lowering our working capital needs by reducing inventory, and we are continuing to invest in our key business categories -- in our human capital and in the innovations that we believe will drive long-term growth and profitability and enhance shareholder value.

That concludes our formal remarks, and we'll now open the call for your questions. Corrine, could you give the instructions on the Q&A for our audience, please?

Certainly. (Operator Instructions) Ingrid Chung, Goldman Sachs.

So a couple of questions -- first, we took a look at the baskets Web re-design, and it does look pretty good. It looks much better than it did before. Related to that, it looks like technology and development spend was down on an absolute level this past quarter. I was wondering if the baskets Web re-design was in -- whether that spend was in this past quarter or in a previous quarter, and whether this is a new normalized level of spending.

And then, secondly, I was wondering if you could talk about BloomNet trends -- why is down year-over-year and do you expect it to return to growth anytime soon?

Well, for you saying that 1-800-BASKETS looks pretty good, we accept that rave review from you with great gratitude. But there are several aspects to your questions, and we'll parse it out among us here. In terms of the spend, Bill will give you the specifics on that but, in general, Ingrid, what we have adopted is basically a new attitude about CapEx. We see that the world is being divided into pretty much two different camps of companies -- one is those with a big balance sheet and the inexpensive borrowing capabilities that have, as part of their business, the need and the ability to carry large CapEx capabilities.

We have an attitude here that we can achieve the things we need to do on a development basis, on a growth basis, without the same attitude about CapEx that we might have had a year or two ago. So we think we can achieve the same things on a lower CapEx.

Bill will give you more detail on the expensing of 1-800-BASKETS development, but you can see in this first quarter, we went from $6.5 million of CapEx last year to 2.5 this year. So our focus is on a permanent reduction in our CapEx expense. Bill, in terms of 1-800-BASKETS specifically?

Yes, the development of 1-800-BASKETS really crossed over both fiscal years, so this did start last year. And there is both a CapEx spend -- there is a piece of that. But there is also operating costs associated with the launch of that. But it really started, and we saw it at the latter part of Q3 last year into Q4 and into Q1 of this year. But the point is we are absorbing those costs both within a much lower CapEx environment as well as a lower operating cost environment.

And, Chris, would you touch on the BloomNet question?

So as we look at BloomNet, I think, is clearly one of the factors affecting BloomNet's revenue this past quarter, really was in its products -- in the BloomNet products division was a major contributor to that.

And what we saw was the retail florist under pressure like all retailers are pulling back on their inventory positions as well. So while there's a pullback this quarter, especially in BloomNet products, we have good pipeline, going forward. We see the florists, especially, moving to the second half of the year, past the holiday season moving to the second half of the year. We see some recovery there.

That, coupled with a lot of programs that we have within BloomNet, really -- we're still very bullish on the opportunity to grab market share within BloomNet. We continue to introduce point-of-purchase marketing programs, technology, products that we introduce in BloomNet are continuing to gain acceptance. We have a new point-of-sale program coming out into the market this quarter; a new quality program that we'll be enhancing that our BloomNet florists are really asking for -- a publishing division.

So there are a lot of good things going on where we're really making sure that we position BloomNet to really be the partner for the retail florist to help them grow in their local market. And I'm thrilled with resonance of that that's taking place in the market with our customers within BloomNet. They're really looking to BloomNet to help them succeed.

Jeff Stein, Soleil Securities.

I want to try to understand a little bit better how you are intending to reengineer the product cost on the consumer floral side of your business in order to get your gross margin up year-over-year beginning in the second quarter? In other words, what's changing between Q1 and Q2 that will be the enabler to improve margins?

Jeff, this is Chris, and I'll give you a couple of points there. Especially as we look in the consumer flowers brand, 1-800-FLOWERS, as we went through the end of last year, we mentioned this, and we had to kind of react to real declines in consumer sentiment. We needed to reduce our pricing, but we haven't had the time to necessarily reengineer the product to match our pricing initiative. Now we've had the time.

Now, if you look at the consumer floral business, we've been able to improve it a little bit towards the end of first quarter, a little bit more in second quarter, but, really, we'll see the benefits of that for the FLOWERS brand come into benefit in Q3 and Q4, which is where the floral season is, anyway, in the second half of the year.

But other things, as well, going on, for example, the launch of 1-800-BASKETS.COM. We made sure, right from the very start, recognizing where the consumer was changing, where the consumer would be for a while, to make sure we had the right price points and make sure that those products were reengineered with the right profit margin in mind so that we're not reliant on discounting. They are value-priced, at the right price point, and engineered appropriately.

And I think that's the key point, is that a lower level of promotional pricing, which really kind of hurt margins last year. That will improve as we head into Q2. And also we have a supply chain initiative, Jeff, that is going to drive margins by lowering our cost to our third-party carrier rates.

Okay, so I presume that mix will, to some degree, determine your average order value in the second quarter. But the way you've reengineered it and the way you are planning it, would you expect order value in the consumer floral business to hold or possibly improve in the second quarter?

I would say that what we've seen, so far -- this is Jim, Jeff -- what we've seen, so far, what we've engineered, so far, is that average order value will be no less and is likely to increase in this quarter.

Okay, great. And I'm wondering, can you talk a little bit about the DesignPac business and how much revenue was shifted from Q1 into Q2 so that for the whole season how does your DesignPac business look like it's going to shape up compared to the prior year?

Well, you'll recall, Jeff, that our reason for investing in this wholesale business called DesignPac was to use it as the kernel to build around it the 1-800-BASKETS direct-to-the-consumer business. So it was not our intention to grow the wholesale part of that business, but it is an important piece for us because it gives us the platform to do all the other direct-to-the-consumer kinds of things you want to do.

It's no secret that this holiday season is one where those wholesale customers of DesignPac were more cautious going into the holiday season, and that manifested itself in two ways -- one is lower order tickets from those big box retailers, much preferring to sell their inventory early rather than run the risk of having any excess inventory.

And the second thing is they asked us to manage our deliveries, which traditionally have been done in September, and move those deliveries back into October. So the impact of that was about $8 million shifting from first quarter to the second quarter.

Wholesale will be down. Obviously, we don't break it out into those specifics, but wholesale buying will be down more than made up for by the increase in our direct-to-the-consumer business.

And, Jim, just to add, as he mentioned, wholesale is an important part of our business, and we look at this, and we also feel that the opportunity that DesignPac has brought to the table and really helping to introduce other wholesale opportunities for us from Cheryl & Company and the Popcorn Factory -- very early stage but, again, programs like this and working with these wholesale customers help us with operating leverage, they help us with brand exposure. So there's a lot of benefits that we get and, again, those programs are just being introduced into the marketplace now, and we're very excited about those long-term prospects there as well.

So wholesale is a small part of our business but important for those aspects that Chris just mentioned. The brand exposure opportunities and the capacity utilization plus the learning and partnering that you get to do with those big box retailers.

Got it. And how about the effect on overall gross margin and the category gross margin from the shift?

Bill, would you cover that question?

Well, Jeff, as we move gift baskets that were traditionally sold under the 1-800-FLOWERS brand and were filled through third-party carriers, we were getting margins in the mid-30s. As we are moving that over and are confecting those internally at DesignPac, those products that we're able to do internally, we're going to get probably closer to 50% gross margins on. Now, it's not all going to shift over there. We're still retaining some of the high-selling product lines that we've filled through third party drop-shippers, but we anticipate probably, for this fiscal year, probably 600 basis points, 700 basis-points improvement in that category. And that will grow as we move forward.

And, roughly, what kind of volume are we talking about here? And are you assuming that you are just going to replace the volume on your more generic gift baskets with the 1-800-BASKETS volume?

Jeff, what we've stated in the past and our intention has been with the launch of 1-800-BASKETS is, first and foremost, to make sure we're protecting business that was there. But we firmly believe that by exposing this to our customers, exposing this brand and this great product line to our customers, both on the dual-branded side and further marketing -- the joint marketing efforts -- we clearly expect significant growth of 1-800-BASKETS in the long term. We did not necessarily bake growth into our plans this year.

So, for this holiday quarter, Jeff, you'll see that 1-800-BASKETS is not revolutionary. It's beautifully designed gift food baskets that are appropriate for the holiday season. But what really excites us about the introduction of 1-800-BASKETS -- it really takes -- if you look at the flower and gift shop that we are, one anchor on one side of our -- on pillar of our merchandising mix, on one side of our shop is flowers. And the in between we have our plants and our gifts and our confectionary products plus our greetings and expensive gift product, and then our gourmet foods and gift baskets on the other side of our shop.

We expect that will grow as ever more a pillar, obviously, for the holiday season in this fourth calendar quarter. But throughout the year, it gets us into, as a confector of wonderfully designed and thoughtful gifts, gets us into consideration among those 35 million customers we have and, hopefully, some new ones as well, into their consideration set for other occasions where we would not have played as simply a flower shop before. Now as a flower and gift shop with 1-800-BASKETS an important ingredient, we'd expect it can be more thoroughly around Eastertime, around Father's Day, graduation occasions, so we can confect some really creative baskets.

Anthony Lebiedzinski, Sidoti & Company.

Good morning, I was wondering if you expect to add more SKUs to the 1-800-BASKETS when you get close to Christmas? And also just wondering if there is any way you could do more same-day delivery of gift baskets? Right now it's only a handful of products. So maybe we could start with that, please?

Sure, Anthony. What you see on 1-800-BASKETS right now is the introductory launch of the product line. And as we continue to ramp up the website, we also will continue to ramp up the SKU count. Again, the focus right now is Halloween. But, clearly, once we move past Halloween, you'll really see that SKU count start to increase and really reflect much more gift baskets opposed to some of the novelty products that you see for Halloween. And you'll see a very robust product offering for the full holiday season.

And from a delivery point of view on BASKETS in terms of same day -- this is the launch of a multi-year effort with 1-800-BASKETS. So it's just a toe in the water. We are very excited about it. It's going to be very impactful for us, but this will be a very big effort. And our distribution, like in our other product areas, will be multi-channel distribution as well. This is a great opportunity for us to partner with all the BloomNet florists to really design and engineer a wonderful collection of gifts that they can fully participate in in both next-day and same-day delivery capabilities -- so BloomNet will be leveraged.

Our infrastructure, our distribution system infrastructure that exists, now footprinted across the country, will be leveraged to that gift basket business as well. And, as Bill referenced, yes, we have a big facility in Chicago that we're leveraging, and we have third party. So we'll use all of those three components of our distribution channel to leverage, and we are very excited about what this can do working in partnership with our BloomNet florists to bring them into a product line that, heretofore, as far as we've not particularly benefited from or participated in.

Okay, and also could you discuss your plans for any further operating expense reductions?

I'll ask Bill to give anymore color, but as Bill mentioned in his remarks, (inaudible) we achieved our plan, and you'll see it reflecting throughout this year our cost reduction efforts of reducing our operating expenses by $50 million over the '08 fiscal year. That's been done. And you've seen in this first quarter, Bill, I think the overall operating expense reduction was $7.6 million on a combined basis?

That's right, Jim. You know, as we disclosed in the press release, our continuing operations was almost $5 million of operating cost savings in our smallest quarter, and $7.6 million overall as a company.

Obviously, this is -- I think we like to say this is part of our DNA. We've been doing this for a number of years; we had to accelerate the program last year because of the economic environment, we identified the $50 million, and we will continue to -- as we move forward, we'll continue to look to drive down our operating costs.

And, lastly, what are your CapEx plans for fiscal '10 and also I did notice that you slightly trimmed your free cash flow guidance back in August. You were talking about more than $30 million -- now at $25 million to $30 million. So could you just discuss that, please, as well?

That was a Joe Pititto screw-up. We haven't changed our -- since we are still saying we'll triple our free cash flow from $8 million to $25-plus.

Our CapEx guidance that we gave at the beginning of the year was -- overall CapEx would be less than $15 million, this is down from the last number of years where it was $20 million or plus $20 million over the last couple of years. You could see from the first quarter, Jim mentioned before, that our CapEx spending in the first quarter was a little under $2.5 million versus $6.5 million a year ago. So we're very focused on driving our CapEx down, driving our inventory and working capital needs down, driving operating improvements, and overall thus increasing significantly our free cash flow.

Eric Beder, Brean, Murray, & Carret.

Could you talk a little bit about the loyalty program and expanding that? I know one of the goals has been to expand that beyond just the floral business. Where are you with that and are you expanding -- trying to do other pieces between the different entities online and do things like gift cards and such?

Sure, Eric. First of all, on our First Rewards program, we are very -- still very bullish on the benefits of that as bringing to our customer base and will continue to do so. Regarding -- moving into the other brands, the first real effort is now with 1-800-BASKETS, and that will provide great benefit. And, again, the beauty of that is we'll bring benefits of the existing 1-800-FLOWERS customers and then utilize earn and burn their rewards points with 1-800-BASKETS, but also for the new customers we expect to attract to the category with that great product offering.

The other thing, as we move the other food brands now and continue to move them onto the fresh digital platform, that's in the next release. The rewards program, I believe, is in the next release, which is Q3 for us. So the other food brands will start participating in the rewards program this fiscal year, and the same thing with the gift cards. Gift cards now, is across, I think, all of our brands, and we're getting great distribution on the gift cards both utilized by our existing customer base but also into other distribution points through our wholesale relationships as well. So we're pretty encouraged by the progress we're making there.

So our rewards program and our loyalty program are both to retain and develop our existing customer relationships and now we're just moving into the first usage of those capabilities to use them as prospecting tools to attract new customers to our brands.

Okay, and in terms of BloomNet, do you believe that -- I know that sales were down, but do you believe you took an additional market share during the quarter?

I think all the evidence is there that it's a declining market for our primary competitors there, and the fact that we are -- even though we have the seasonality adjustment, I think we're continuing to take market share. It's not necessary for us to do so to be successful, but indications would be, yeah, a little bit -- we're still improving our market share.

Okay, and finally how should we view the BASKETS business in terms of seasonality and as it becomes prominent, how does it compare to the other businesses in terms of margins and return on investment?

I'll start there on the first, as far as we view BASKETS seasonality. I think Bill could comment more on the margin aspects of it. But one of the things we're really excited about, the seasonality aspect -- the gift basket category is predominantly a fourth quarter holiday season category for all of our gift basket competitors. One of the great things about leveraging in a dual-branded site, really piggybacking on the brand equity and customer relationships and the Internet traffic at 1-800-FLOWERS.COM is that we're really exposed to a much more year-round customer.

So we look at different things -- we look at the amount of Web traffic we get in our holiday season to FLOWERS, again, the holiday season is not a primary season to FLOWERS, but that traffic is as much or not more than the leading players in the food categories. And then the basket product will be there, being exposed through all of our marketing programs very cost efficiently all year long, to our FLOWERS customer base -- for birthdays, for anniversaries, and then certainly as we move into the other holidays that Jim mentioned earlier.

We move out of Mother's Day, and we move into Father's Day and graduation where baskets will play a prominent role. We think we have the best marketing vehicle to expand the seasonality of the gift basket category far and above any of our competitors.

With regard to margin, as I mentioned before, significant gross margin improvement by fulfilling these in-house through DesignPac. We have estimated, in year one, that we'll do about 60% of the fulfillment through DesignPac and 40% would retain the third-party drop-shippers that we have today.

(inaudible).

So that 40%, those margins, you know, that margin won't change much. But the margin on the 60% is dramatically different. That's why we're anticipating probably, net, a blended -- probably about a 600, 700 basis-point improvement in margin on that product line issue.

So, Eric, I would say the thing that we're trying to do with our customers and with the public, in general, is take a concept that they are familiar with -- gift baskets at the holiday time, particularly wonderful, beautifully designed food gift baskets -- that's, frankly, a Trojan horse. I mean, yes, we want to capture as much of that business as we can, but what we're really in here and what we're really trying to size this brand to be is a terrific, confected gift package business.

So the vessel isn't always a basket. In fact, increasingly, on those other occasions, it's not a basket, but it's a handle that gets a very familiar place for the consumer to think about our capability, it leverages our confecting capability where we source wonderful products just like we do on the FLOWERS side of our shop, wonderful products from all over the world, we take care of them, we condition them, we design them into beautiful gifts, we wrap them, we hand-deliver them anywhere in the country, anywhere in the world.

That's exactly what we're doing on this BASKETS side of our shop. So it starts off by getting the lion's share of the existing gift business, the existing gift basket business, and suddenly and deliberately changes over the course of the rest of the year to get us into businesses that we haven't (inaudible).

(Operator Instructions) Jeff Stein.

It doesn't look like you're using too many of your own in-house brands in designing some of the new gift baskets, and I'm wondering if you could just make a comment on that, because it would seem like a logical way to take some of the smaller regional brands and give them broader exposure and, hopefully, eventually, grow them to national brands.

Jeff, actually, we are using our products as much as possible, especially as you see the SKU count increase over the holiday season, I think you'll see more of that but, clearly, using the Cheryl & Company product, the popcorn product, the Harry London chocolate brand in there as well -- so you'll see that increasing our SKU count as you see the increased product offering for the holiday season. But then, on a go-forward basis, you can expect to see those brands more commonly positioned within the 1-800-FLOWERS, 1-800-BASKETS website.

And that's a wonderful way, to your point, Jeff, of taking a region over, and like a Cheryl & Company, and introducing them through the wholesale channels, which we have just done, for example, with Costco. We are doing it with our gift cards in those other channels of distribution.

So your point is -- yes -- in answer to your question, the point is that's exactly one of the wonderful benefits of 1-800-BASKETS is the introduction of those other brands that we already have other brands that DesignPac had that we'll continue to develop. So you'll see that happen more and more not only through 1-800-BASKETS but through the other channel exposures the DesignPac acquisition gave us.

Okay, and one additional follow-up -- can you just update everyone on the progress of disposition of the Home and Children gift business? And is the timing of the holiday -- is that kind of a headwind in terms of getting a deal done sooner rather than later?

Well, Jeff, as we've stated in our previous press releases, we are in a sales process. We continue to have a number of interested parties in that, and we are proceeding along the divestiture path.

But the holiday doesn't offer any headwind here. In fact, it probably spurs us to bring the process to the appropriate close sooner rather than later.

Okay, are there any questions? Well, thank you all for your questions and your interest, and if you have any additional questions, please don't hesitate to contact us. Now, Halloween is just around the corner. It's not too late to send some delicious treats from Fannie Mae, Harry London, Cheryl & Company, the Popcorn Factory, not to mention some great gift baskets and other Halloween products from 1-800-BASKETS.COM. So don't wait -- call, click or come in today. Thank you for your time.

Once again, this does conclude today's conference. We do thank you for joining us.