1-800-Flowers.Com Inc (FLWS) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to the 1-800-FLOWERS.COM Fiscal 2010 Second Quarter Results Conference Call. This call is being recorded. At this time, for opening remarks and introduction, I would like to turn the call over to the Company's Vice President of Investor Relations, Joseph Pititto. Please go ahead, sir.

Thank you. Good morning and thank you all for joining us today to discuss 1-800-FLOWERS.COM's financial results for our fiscal 2010 second 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 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 will open the call 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 will make today may be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed description of these risks and uncertainties, please refer to our press release issued this morning, as well as our SEC filings, including the Company's annual report on Form 10-K and quarterly reports on Form 10-Q.

In addition, this morning we will discuss certain supplemental financial measures that are not prepared in accordance with 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 in 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 fiscal second quarter results, including the year-end holiday period were in line with guidance we provided going into the quarter and with our expectations. While our revenue for the period was somewhat softer than we would have liked, this reflected lower wholesale orders in the mass market channel by as well as continued cautious spending by consumers. As we told you in our conference call back in October, we went into the fiscal second quarter with a focus on improving our gross profit margins and leveraging our business platform to reduce operating expenses. Bill will provide you with details, but I can tell you that we are pleased with our results both in terms of our increased gross profit margin in each of our business categories, and we reduced our consolidated operating expenses significantly.

In addition, we generated free cash flow of $29 million for the first six months of our fiscal year. This reflected the combination of our improved operating efficiencies, strong inventory management, and our strategy reduced capital expenditures. Combined with the cash proceeds we received from the sale of our Home and Children's gift business, which we completed earlier this week, we further strengthened our balance sheet.

In a moment, Bill will take you through the metrics of the quarter, and Chris will provide some additional details regarding our operational initiatives. But before I turn the call over to them, I'd like to point out a few of the things we can -- that we believe position our Company for future growth.

We continue to focus on the three key strategic priorities -- know and take care of our customer, maintain and enhance our financial strength and flexibility, and continue to innovate and invest for the future. In terms of knowing and taking care of our customers, we are pleased with the results of our customer engagement programs. Our customers are interacting with us with our social networking initiatives on Facebook, Twitter, in the blogosphere, and through our mobile applications.

They are sharing their personal stories about connecting and expressing themselves with the important people in their lives. They are rating our products and services, making product suggestions, and offering their opinions. All of which is a robust dialog that is helping us shape our marketing and merchandising programs.

Our cross brand merchandising and marketing efforts are gaining traction with the launch of our new 1-800-BASKET.COM business. This is illustrated by the increase in 1-800-FLOWERS.COM customers who are choosing gift baskets and gifts from our gourmet food offerings. These great gifts include Fannie May chocolates, Cheryl & Company baked goods, fun treats from The Popcorn Factory, wine from Ambrosia, our Wine-Tasting Network and Geerling & Wade wines and beautifully designed gift baskets and towers from 1-800-BASKETS are all clearly resonating with our customers.

This illustrates the benefits of our investments over the past several years in our gourmet food and gift basket businesses, which are proving to be an excellent platform to further growth and a perfect complement for our merchandising mix in our flower and gift shops.

In terms of enhancing our financial strength and flexibility, we continue to improve our operating efficiency, to help the Company generating increased cash flow and strengthening our balance sheet.

Lastly, despite the environment, we have continued to innovate and invest for the future. Best illustrating this commitment is our most recent launch of 1-800-BASKETS.com. Chris will provide you with more details on the launch in his remarks, but I can tell you that we are very pleased with the early results and, in particular, with the accolades we received from our customers who told us they loved both the great product designs and the new website.

As we told you, this first holiday season was a true learning opportunity for us with 1-800-BASKETS. And what we learned, in particular, in terms of how much our customers loved the product designs and the broad range of price points, makes us even more excited about the growth potential of this new business.

We plan to use all of our learnings from the holiday period and apply them to grow 1-800-BASKETS.COM into a leading destination as part of our goal to be a leading player in this category.

So as you can see, while we are operating in a time in which top-line growth has been challenged, we continue to focus on managing the key aspects of our business [mostly under our control] including our operating platform, our relationship with our customers, our innovations, and our financial strength.

I'll now turn the call over to Bill.

Thank you, Jim. As our press release indicates, Q2 unfolded very much along the lines we expected going into the quarter. Lower wholesale orders from mass market retailers and continued soft demand in the consumer floral business combined to impact overall revenue. However, our focus on improving operations combined with product mix and more strategic use of multiple pricing enabled us to improve gross profit margins in each of our business categories in our consolidated radius.

In addition, our successful efforts to reduce nventories coupled with reduced capital expenditures, enabled us to drive strong cash flow. Free cash flow for the six months, up substantially at $29 million compared with $1 million in the year-ago period. Providing specific financial results and key metrics for the second quarter.

Total net revenues from continuing operations were $238.5 million, down 5.2% compared with $251.6 million in the prior-year period. During the quarter, our e-commerce orders totaled $2,960,000 compared with $2,950,000 orders in the year-ago period.

Average order value was $51.23, down 3.8% compared with $53.26 in the prior-year period primarily reflecting the increased transactions in our lower price point gourmet food and gift basket category.

During the quarter, we added 656,000 new customers. This was achieved while concurrently stimulating the pre-orders from existing customers who represented 60.4% of total revenues compared with 59.7% in the prior-year period.

Gross margin increased 180 basis points to 41.8% compared with 40% in the prior-year period. This reflected a combination of pricing initiatives, product mix, reflecting lower wholesale gift basket orders in the mass market channel, and operating efficiencies in manufacturing and supply chain.

Operating expenses from continuing operations before depreciation and amortization, increased approximately $900,000 to $71.2 million compared with $70.3 million in the prior-year period. For the basket operating expenses, I'd like to take a moment to provide a little more detail.

The fiscal second quarter this year included several non-comparable charges. First, a $6 million year-over-year increase in incentive compensation expense. This includes an accrual of $3 million for incentive compensation in the 2010 second quarter compared with a reversal of a $3 million accrual in the second quarter last year.

Second, during the quarter, we incurred a charge of approximately $1 million related to the proposed settlement of a legal action in which we admitted no wrongdoing but chose to settle to avoid potential lengthy litigation. Adjusting for these items, all other operating expenses from continuing operations for the fiscal second quarter declined approximately $6 million, reflecting the benefit of our ongoing operating cost reduction programs.

Additionally, during the quarter, we achieved more than $11 million on operating cost savings in our Home and Children's gift business. As a result, consolidating operating expenses adjusted to the non-comparable items, was down more than $17 million for the quarter.

For the quarter, depreciation and amortization was $5.3 million compared with $5.1 million in the prior-year period. As a result of these factors, EBITDA from continuing operations for the quarter was $28.5 million compared with $30.4 million in the prior-year period.

Net income from continuing operations was $12.7 million, or $0.20 per share compared with net income from continuing operations of $14 million, or $0.22 per share in the prior-year period. Consolidated net income as $15.3 million, or $0.24 per share compared with a net loss of $5.1 million, or $0.08 per share in the prior-year period.

Included in consolidated net income was $2.6 million of net income, net of a $3.3 million transaction loss from discontinued operations compared with a net loss of $19.1 million from discontinued operations, which included a $20 million charge for goodwill and intangible impairment in the prior-year period.

Adjusting for the one-time charges related to the completed sale of our Home and Children's gift business, consolidated EPS for the second quarter on an apples-to-apples basis would be up $0.03 per share to $0.27 per share this year compared to $0.23 per share in the prior-year period. In terms of category, it would be a lot more like $0.04 -- and a lot more like $0.04.

In terms of category results -- 1-800-FLOWERS.COM consumer floral business -- during the second quarter, revenues were $85.9 million, down 4.7% compared with $90.1 million in the prior-year period reflecting continued weakness in consumer discretionary spending. Importantly, the sales trend in this category improved significantly during the fiscal second quarter compared with the past several quarters in which we saw double-digit sales declines. We believe the improved trend is a result of our expanded value-priced merchandising strategy as well as increased engagement with our customers.

As a result, we are cautiously optimistic for improvements in the consumer floral category during the second half of our fiscal year, which includes the key Valentine and Mother's Day holidays as well as the spring floral gifting season.

Gross margin in this category was up 120 basis points at 38.3% compared with 37.1% in last year's second quarter. This primarily reflected improved operations, pricing mix, and the most strategic use of promotions. As a result of these factors, category contribution margin was $7.6 million compared with $8 million in the prior-year period. The Company defines category contribution margin as earnings before interest, taxes, depreciation, and amortization and before allocation of cost overhead expenses.

In our BloomNet wire service business, revenues were $14.8 million compared with $15.1 million in the prior-year period. This primarily reflects lower sales of wholesale products to florists. Gross margin in this category increased 20 basis points to 58.1% compared with 57.9% in the prior-year period, and category contribution margin was essentially flat at $4.7 million.

In our food and gift basket segment revenues were $138.2 million compared with $147.8 million reflecting the lower wholesale gift basket or volume in the mass market channel. Adjusted for this, revenues in this category were essentially flat compared with prior year.

Gross margin increased 230 basis points to 42.1% compared with 39.8% primarily reflecting the reduction in lower margin wholesale orders as well as manufacturing efficiencies.

Category contribution margin was $28.6 million compared with $26.7 million in the prior-year period. It is worth noting that the increase in category contribution margin for the quarter was achieved despite the revenue in contribution shortfall related to the wholesale basket orders. This reflects both the margin improvement as well as the operating efficiencies.

Results in this category include improvements in our direct-to-consumer channel as well as our recently launched 1-800-BASKET.COM business. Gift basket sales and contribution have been reclassified from our consumer floral category in past years to the gourmet food and gift basket category, with both categories' prior-year results adjusted accordingly.

And while we are not breaking out results for the new 1-800-BASKETS.COM business separately, it is worth noting that during the fiscal second quarter the new 1-800-BASKETS brand performed well with revenues and total customer transactions within our expectations. Chris will provide more color in his remarks in just a moment.

In terms of corporate expenses -- as I stated earlier, 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 for the entire organization.

For the fiscal second quarter, corporate expenses from continuing operations, including the majority of the aforementioned non-comparable items, was $12.4 million compared with $9 million in the prior-year period.

Results from discontinued operations -- revenues for the Home and Children's segment was $64.3 million compared with $77.8 million in the prior-year period. Gross margin was 48.4% compared with 48.3% a year ago. Category contribution margin was $7.9 million compared with $2.2 million in the prior-year period.

As I noted earlier, these results reflect the benefits of our operating cost reduction initiatives. Also, as we announced earlier this week, we completed the sale of our Home and Children's gift business. Sales price was $17 million with adjustments (inaudible) inventory and working capital. As a result of the closing, we booked a transaction loss of approximately $3.3 million. Proceeds from the sale coupled with the significant cash flow generated during the first half of our fiscal year has enabled us to further strengthen our balance sheet.

In terms of our balance sheet, at the end of the second quarter, our cash and investments position was $46.4 million compared with $51 million a year ago. This includes our paydown of $37 million in long-term debt over that same period. As a result, long-term debt at the end of the quarter was $82 million compared with $119 million a year ago, and we had no outstanding balance on our revolving credit line.

Inventory from continuing operations was $43.6 million, down $7.3 million compared with the end of the second quarter last year. This reduction was achieved despite inventory required for the launch of 1-800-BASKETS.COM. This reflects our successful efforts to reduce inventory throughout the Company.

Finally, before I turn to our guidance, I would like to discuss free cash flow. We are internally focused on managing those elements of the business that can help us drive strong cash generation including our operating costs, our capital deployment, and our working capital management. The results of this focus can be seen in the significant increase in free cash flow for the first six months of this year. We anticipate generating positive free cash flow during the second half of fiscal 2010, and expect to finish the year with a strong cash position.

Now regarding guidance -- as we stated in this morning's press release, based on our results for the first six months of fiscal 2010, and our expectation for continued cautious spending by consumers, we've adjusted our guidance for the full year.

In terms of top line, we now anticipate total revenues from continuing operations to be down approximately 5% to 10% compared with the prior year. This includes the 10.4% decline in the first half of the fiscal year combined with our expectation for flat to slightly down revenues during the second half of fiscal 2010.

In terms of bottom line metrics, we expect EBITDA and EPS for the second half of fiscal 2010 to increase compared with the second half of fiscal 2009. However, when combined with the results of our first half of this year, we anticipate full-year EBITDA and EPS will be essentially flat with the prior year.

In addition to the first-half results, this expectation also reflects the impact of several factors including our anticipation for continued challenging top line related to the weak consumer environment, the loss of approximately $2.5 million related to previously announced decision we made to end the third-party marketing program, and the aforementioned $1 million of cost associated with the settlement of a legal issue.

Importantly, as I noted earlier, we have increased our expectation for free cash flow to more than $30 million for the full year.

In summary, as we enter the second half of fiscal 2010, we are focused on continuing to enhance our operating efficiencies, further strengthening our balance sheet, and initiating programs to identify and pursue growth opportunities.

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

Thanks, Bill. During the quarter, we accomplished several of the key initiatives that we discussed with you back during the (inaudible) conference call. We continued to (inaudible) for this platform (inaudible) our operating costs. This has been a key focus area of ours over the past several years, during which time we moved tens of millions of dollars from our operating cost structure. Our success in this area has positioned us to drive stronger profitability over the long term as we identify and pursue new revenue growth opportunities.

Also during the quarter, we implemented successful programs to improve our gross profit margins through all of our businesses. This was accomplished through a combination of improved operating efficiencies, product mix, and sourcing initiatives. In our consumer floral business, we are encouraged by the improvement we saw in Q2 compared with churns of the past several quarters. We believe our merchandising and marketing programs are beginning to resonate with our customers and thereby enable us to maintain and even enhance our market share.

We have also found to have received external recognition for our efforts to improve the customer experience throughout our Company. According to (inaudible) a leading service consulting company, and the University of Michigan, which publishes the American Customer Satisfaction Index, 1-800-FLOWERS.COM is cited as one of the top 40 e-tailers for customer experience. According to the 2009 Holiday E-retail Satisfaction Index, we are (inaudible) 3% increase in our online customer satisfaction representing one of the largest year-to-year increases among the 40 top websites included in the index.

As a result of these churns, we are cautiously optimistic that the second half of our fiscal year, which included the key Valentine and Mother's Day holidays, as well as the spring floral gifting season. In terms of Valentine's Day, as I'm sure you are aware, this year the holiday falls on a Sunday, posing some particular challenges. Nonetheless, we have a number of great marketing programs including exciting tie-ins with the millionaire matchmaker cable television show on which we will be featured in a special Valentine's segment.

A hot new movie from Warner Brothers titled, appropriately enough, "Valentine's Day," which features a who's who of the top names in Hollywood has 1-800-FLOWERS.COM as its official florist. And we have a great tie-in from Justin Bieber, the teen sensation, which is already generating tremendous (inaudible) on Twitter, Facebook, and the blogosphere. Most important, though, is the second quarter we've launched our new 1-800-BASKETS.COM business.

As we told you going into the quarter, we launched this business by leveraging a tremendous brand equity in online traffic of 1-800-FLOWERS.COM combined with the great design, sourcing, and confecting capabilities of our DesignPac gift position. In fact, let me (inaudible) represent the manifestation of our strategy behind inquiries at DesignPac business 20 months ago. It's important to note that this launch involved rolling out a whole new dual-branded website and features of functionality not something that many retail companies could do during the peak holiday shopping period. However, it is something that we are uniquely capable of doing because of our online experience, and the effective investments we have made in our IT platform.

Among the key learnings from the launch -- first, our Company has (inaudible) the beautifully designed gift basket and gift sets created by DesignPac contains our gourmet gift brands. As a result, we sold through our inventory faster than we expected, and we exceeded our plan for the distinctive gifts designed and [confected] for turnover. In fact, close to 80% of the gifts that customers chose on 1-800-FLOWERS and 1-800-BASKETS sites during December were created internal.

Second, from a partner sources point of view, we learned that our customers are willing to step up to higher price points for some of our top-selling gifts at $49.99, $69.99, $75.00 and higher. We also saw that an expanded offering of value-priced gifts generated increased transactions amongst our customers, which boded well for our plans to build an everyday gifting component to this business.

Third, we saw that our third change of policy in affiliate programs generated excellent returns, and our affiliate partners are telling us that they are very excited about the growth potential for this plan.

And we take all the learning from our (inaudible) we are very excited about the long-term growth prospects for 1-800-BASKETS.COM. We believe we are deeply positioned because of the strength of our flagship, 1-800-FLOWERS.COM brand and our relationships (inaudible) make 1-800-BASKETS.COM a brand and a business that does not yet exist. The year-round everyday gifting destination that features a broad range of wonderfully designed and crafted gift baskets, talent, gourmet food collections that are perfect for birthdays, anniversaries, thank you, get well, sympathy, and more.

Combined with our market-leading floral business we believe this will enable us to deepen our relationship with our customers and attract new customers who will come into our virtual shop, our virtual floral gift shopm to use our standard range of products and services for all of their celebratory and special occasions.

I'll now turn the call back to Jim for a wrapup.

As Chris and Bill just described, we continue to do the things that we said we would to manage our business during this challenging time. We are reducing our operating expenses, we are enhancing our gross profit margins, we are reducing our debt and strengthening our balance sheet, we are lowering our working capital needs by reducing inventory and thereby generating decreased cash and free cash flow, and we are continuing to innovate and invest for the future in our key business categories, in our human capital, and in new social networking and mobile for our commerce applications that are most relevant to our customers. We believe these efforts will enable us to drive long-term growth and profitability and enhance shareholder value.

That concludes our formal remarks, and I'll ask Jerome now if he would repeat the instructions for the Q&A portion of this call.

(Operator Instructions) Ingrid Chung, Goldman Sachs.

Good morning, thanks. Just a couple of questions. First, you've talked about weak consumer demand. I was wondering what kind of trends you've seen in terms of corporate gifting around the holiday season. And then, secondly, I was wondering if you could dive a little more deeply into the DesignPac trends. Do you foresee healthier trends, going forward? Did the mass market channel sell out of their inventory, and does that imply that their orders are going to be a little healthier, going forward?

Sure, Ingrid. This is Chris. I'll take the first part of that question on the consumer corporate sales demand, and I think Jim will take the piece DesignPac.

One of the things that we saw in the consumer business, especially in the food category, came back nicely this holiday season, and we're very encouraged by that. Corporate business across both food and floral categories for us continued to remain under pressure. Some people kind of expect, as did overall economy starts to come back, we think the consumer will come back before corporate gifting will come back.

With that said, we are encouraged by different pockets that we saw in corporate gifting. Last year, Popcorn Factory, I think was hit very hard in that corporate gifting, rebounded nicely. So there are different areas in the business, and I think according to the price points and the product. [So, for example, popcorn is the right price point for corporate gifting, and is a gift that is easily shared. So I think that's why we saw some latent (inaudible) in our corporate gifting but, overall, I think continue to remain under pressure, and what made up for it, I think, to some extent, was the consumer businesses in the food category].

And in terms of DesignPac, Ingrid, what we saw happen was at this time last year, when we started to book the heavy wholesale ordering business, DesignPac had traditionally been involved in with our club customers and our other mass merchants. At this time last year, people were afraid that the world was coming to an end, so they dramatically pulled back on their orders, and that continued through the year to spring quarter.

I think they all recognized that they made a mistake, because we sold just about everything we put in those stores. They tried to re-approach us to help boost their ability to place supplemental orders in the fall, but we don't have that capability to do that. We make-to-order. So that $10 million mix was a function of our customers at that time. The big box retailers being very cautious and, in fact, it turned out way overly cautious. But that's how they were feeling late last year.

So in answer to your second part of the second part of the question, we are in the middle of that process now, early in the process, actually, and we feel that it could be a positive contributor to next year's performance because we think that the good sales that we had to positively receipts we had to all our gift (inaudible) from the wholesale channel will serve us well this year.

But -- keep in mind, our purchase of DesignPac was to use as a platform and a set of capabilities to launch our consumer business, 1-800-BASKETS.COM. So we (inaudible) our attention to grow that business from a wholesale point of view, but we will take the learnings from that and the capabilities we have to launch our consumer business. So while I expect the wholesale business to be up this year, we are not going to invest a great deal to try and grow that business. We want to keep it about the size it was, and I expect it will come close to returning to that level this year.

Jeff Stein, Soleil Securities.

Just a couple of questions. First of all, wondering how, in this environment, you intend to invest behind the 1-800-BASKETS brand? And I'm wondering, first of all, if you're going to really begin to grow this business, you've got to put people behind it, I presume, to assemble the product and, number two, inventory as well. So in light of the current environment, how do you intend to kind of plan that business looking ahead over the next 12 months? Then I have a follow-up question.

It is a 12-month line even just to get it launched. The good experience and exposure we had during the holiday period buoyed our enthusiasm (inaudible) businesses can be for us. The customers loved the products, we have rave reviews, I am very, very proud of the products we were able to create and and confect, and the (inaudible) from our customers just is very encouraging.

But, as Chris mentioned, we want to build this into a year-round business so we'd always have a strong fourth quarter, but our efforts will be to build the food and non-foods part of that gift business on a year-round basis. So our merchants are working now on the items that we'll introduce this month next year and each of the months throughout the year. So there will be Valentine offerings; there will be birthday offerings, all different segments of the birthday, whether it's children's, three to five-year old boys, three- to five-year-old girls, the over-the-hill baskets for people 30, 40, 50, 60, 70 years old -- all those different kinds of creative baskets for calendar occasions and non-calendar occasions alike. So there will be an inventory consequence, but it will be modest as we grow it throughout the year. And I expect will take limited judgment ventures to how big that business will be as we judgment bets as to how big that will be in terms of inventory.

We do have several plans in place to leverage our capability and our unique infrastructure for delivery, especially in the mile, to share that inventory burden with our partners. And, in fact, the more details about all mergers we go through, but we're very happy about the results we saw, and we're confident that we'll be able to build that business throughout the year.

You know, Jeff, I would just say that I -- especially in this initial growth stages, it's all focused on (inaudible) the 1-800-FLOWERS brand, and the customer base of 1-800-FLOWERS brand. So a lot of it is the use of internal media direct market, and (inaudible) returns as we (inaudible) returns of affiliate (inaudible) step on the gas pedal there but most of our (inaudible) by utilizing internal resources first.

We think we can grow through a pretty substantial size before we have what I call "external media" responsibilities or capabilities there. We have so much leverageable media exposure with the 1-800-FLOWERS plan, the customer based what we call our "house media," but we can grow a substantial sized company before we have any risk of traditional media spend.

Got it. A follow-up question, guys -- just wondering, from kind of a higher level, looking at the total enterprise over the next 12 months, let's say, hypothetically, we remain in this challenged top-line environment, and your revenues hypothetically were to trend flat or even down a little bit. How do you tend to manage your expense structure under that environment if, in fact, it were to play out that way? Would expenses -- could you hold expenses flat? Would you continue to cut expenses? Do you have a contingency plan if that scenario unfolds?

I'll chime in on this, Jeff. The answer is yes, if the growth environment of our core businesses, our organic growth rates continue to be challenged, we have every confidence that we can manage our expenses flat and, in fact, down. The process of Chris and team and Bill (inaudible) over the last (inaudible) or so has left us in good shape in terms of those processes have in stock. The continuing identified savings opportunities in our operating core structure. So I have every confidence that we can, in fact, manage our costs down even further, and we will do that. Bill?

Yes, more specific, Jeff, we continue to look for savings in our hosting environment for -- plus all our platforms from computer maintenance in our service [inner] platform from sourcing, certainly in logistics. We've continued to make investments in manufacturing and, as a result of that, where you're seeing some of the benefits of that in the gross margins on the gourmet food and gift basket channel as it continues to drive -- improve margins. So we still have some (inaudible) to execute and still drive up operation efficiencies.

Ron Bookbinder, Global Hunter.

Good afternoon. Continuing on with the expenses, you stated that adjusting for the one-time items, they were actually down about $6 million in the quarter. Should we expect any one-time items in the back half of the year, or can we now expect them to be -- expenses to be down, year-over-year, for the back half.

Bill?

Yes, we are going to hold $50 million plan to cut expenses. We had a bunch of that in fiscal 2009, first half of this year, we grabbed a lot more of that, probably over $25 million of operating expenses down between maybe $15 million to our discontinued ops, the Madison brand and about $11 million adjusted for some of these non-comparable items.

What we have in that $6 million is, again, last year, at the start of the year, we were accruing for our [no-incentive] compensation as one of the items that we highlighted, and then we reversed that. So in fiscal second quarter, we really had negative compensation, incentive compensation expense, and that's why the comparability with this year shows it relatively flat on a continuing operations basis, but we had about a $6 million swing in that incentive comp as well as the legal settlement that we mentioned.

So, you back that out, it really is a $6 million year-over-year for continuing operations savings in the quarter, and we continue to look to drive operating costs down.

And in answer to the second part of the question, do we have any anticipation of one-time charges in the second half?

No, we do not.

Yes. So everything in the second half we'd expect, Ron, would be in very clean, clear (inaudible).

Okay. And follow-up on inventory -- you've done a great job of driving that inventory down despite the investments in the 1-800-BASKETS. How should we look at year-end inventory?

Year-end inventory will continue to be down. We're looking to continue to drive inventory down, so the spread between year-over-year inventory will even increase as we get towards year-end.

Eric Beder, Brean Murray and Carrett.

This is Jennifer Sung actually filling in for Eric today. But, first, can you just remind us how the Sunday day placement for Valentine's affects your sales this year? How to think about that? And then, also, just -- I'm wondering if you have any plans to use that cash that you have on hand now. Are you looking for deals at this point in time, or how are you thinking about that, in terms of spend, going forward?

Jen, we caught the second question, and Jim will address that, but the first piece, I'm not sure we heard clearly. Could you repeat the first part of your question?

The first was just if you could just remind me how the Sunday day placement for Valentine's would affect your sales?

I think (inaudible) of Valentine's this year is a Sunday, it poses a both a challenge. (audio break). Generally speaking, we fell rather flat last year. It was on Saturday, and so we have a lot prepared for it. It does have an impact on sales year-over-year, but it (inaudible) comparison last year (inaudible) Sunday (inaudible). It's already baked into our volumes.

And as we said earlier, lots of great marketing programs, logistical programs in place (inaudible) maximize and optimize the Sunday day placements from a competitive point of view.

And in terms of the second part of your question, in terms of what are we going to do with our cash -- as we mentioned, we are happy to have closed the transaction just this week for the sale of our Madison business. It did well, it's been strong. I think we sold a good business, but I think that it's appropriate that we sold a good business because it's less like the rest of our business in terms of financial characteristics, inventory at all.

So here we sit with a very respectable cash position (inaudible) quarter. It's only improved since then with the receipt of those funds. I would note that in the last 12 months, we've paid down $37 million in long-term debt from $119 million at this time last year, to $82 million. So we're pleased to do that. So I think our behavior is evidence that the options that we have in front of us would include continued debt paydown, our buybacks, and other investments that will helps us in growing profit, and so I think you can see from our behavior what our intentions are.

Anthony Lebiedzinski, Sidoti & Company.

I have a couple of questions. First, on BloomNet, your revenue was down. I think you had said that because of lower wholesale product sales. Is there anything you can do in terms of BloomNet to try to drive higher revenue, perhaps, from other sources? Essentially, how should we look at the BloomNet for the rest of the year?

Thank you, Anthony. This is Jim. In terms of the (inaudible), I think what we saw in the first half of the year is that, not unlike our mass merchant friends who impacted our wholesale basket sales, our florists were hurting coming out of December and were very cautious, too. So they didn't purchased hardly the inventory from us like they had in the past. So that impacted the quarter a little bit.

I would tell you, anecdotally, though, that the beginning of the year has shown a renewed enthusiasm in our (inaudible) community. Not only that, we have delivered products at really great value pricing to help them to do better in their businesses. So, anecdotally, the beginning of this calendar year, or the beginning of our second half of the fiscal year, they've shown us that we see that trend reversing and actually turning positive. So our original guidance for the year in BloomNet will hold up because I think we're recovering all of that.

Okay, and then just to clarify as far as that legal settlement of $1 million. Was that entirely in G&A expenses in the quarter?

Yes, it was.

Okay, and also what's your CapEx expectation for the year?

I think the guidance that we provided is under $15 million.

Under 15? Okay. And also how much do you have left on your share buyback plan?

We have original authorization of $15 million. We've used maybe a couple million back. So not to be (inaudible) on red tape, $12 million to $13 million.

(Operator Instructions) [Akosh Guyer], Pine Cobble Capital.

A quick question -- now that you guys have fully divested Home and Children's gift business, have you guys identified potential other savings that you can extract? I realize you guys are classified as discontinued ops two quarters ago, but it still accounted for about 20% of revenues, and I can only imagine extracted mine shares as well as other resources back office? So I was wondering if you've been able to identify other levers or savings coming out of the business?

Yes, we have. We'd expect that having gone through that process, there was a great deal of attention and distraction at several levels -- not the day-to-day running of the business, as much as the deal process. So I think that I could say comfortably that the lessons learned through that process and where we are in our regular process with Chris and Bill and other managers, in terms of reducing our costs, we have identified other cost savings that we'll be acting on.

A large majority of the back office (inaudible) we have pushed out as part of the transaction. So we have been proactively going after those costs throughout this process.

Got it. So you're not necessarily expecting additional savings?

Additional what?

So I guess in terms of your guidance, you're not baking in additional cost savings?

Not significant corporate overhead expenses.

There is nothing significant based on the transaction (inaudible).

Hosting costs -- we'll be able to reduce our hosting costs more as we move the IT infrastructure around, which is still to come. But, again, a lot of it's already been dealt through our overall cost (inaudible) program in anticipation of the sale.

(Operator Instructions) Ron Bookbinder, Global Hunter.

The 1-800-BASKETS -- was business mainly existing customers from 1-800-FLOWERS?

Yes, it was. The way we introduced 1-800-BASKETS was only really marketed to be 1-800-FLOWERS customer database. The exception being we did some affiliate marketing from other online marketing, but it was primarily marketed to the 1-800-FLOWERS database. We are blessed with a very rich database from over 35 million customers. And, frankly, we haven't really introduced (inaudible). But you will see us increasingly lever the 1-800-FLOWERS media, so to speak.

There are three things we'll be doing would be promotion and public relations to expose the brand. The second will be increasingly marrying the past assortment as we introduce the new merchandise to the 1-800-FLOWERS customer as a gifting alternative for the occasions in their life when they would have thought of flowers but, more importantly, for the occasions in their gifting life when flowers were not the appropriate gift, depending on who the recipient might be, for example.

And then the third thing we'll do is aggressive online marketing as we get a more robust product offering using the tools and techniques that we used to market our other brands in a third-party kind of exposure but primarily in an online mode.

What sort of timeframe are you thinking to sort of go externally with 1-800-BASKETS outside of the 1-800-FLOWERS community?

Well, to the extent that we've already done that on the third party marketing, that will just continue to grow throughout the year and become most intense as we reach the fourth quarter of this calendar year, or essentially a second fiscal quarter.

The public relations and promotional things will tap into the regular calendar promotion that we do on enterprise (inaudible) and, again, crescendo for the fourth quarter next year. In terms of third-party marketing, we'll probably save most of our (inaudible) until the summer and the fall periods.

Do you feel that the 1-800-BASKETS cannibalized, at all, any of the 1-800-FLOWERS revenue? They're marketed on the same -- ?

No, I would think it didn't, you know, still in the holiday season, and that's okay. That's what we want. We want our flowers customers to enjoy the wonderful product. The feedback we're getting is fantastic, and then that positions us (inaudible) product line is available to them for many other occasions throughout the year when they might not send flowers. And our objective here is to make sure increasing our frequency of purchase with our existing flowers customers, first and foremost, and then, over time, continue to attract new customers in 1-800-BASKETS brand itself. So we get dual benefits within those customers who will start purchasing flowers. That will take longer. The primary short-term focus is the flowers customer base.

Okay, and one last question -- there was an $8 million shift in DesignPac revenues from Q1 into Q2 -- was there another shift at the end of the quarter, such that the commercial customer is just buying closer and closer to need similar to the end consumer?

No, as I mentioned, if you look at it over the two quarters, there was about a $10 million reduction -- pardon? A $20 million reduction in the wholesale sale of the business. So even with that, the (inaudible) quarter share. So what happened was they asked the delivery later so that move became a first quarter into second quarter. But they don't have the ability -- we don't have the ability -- to respond to their request saying, "Hey, we didn't order enough, can you now chop a couple of the (inaudible) for us." We don't have that ability. So while there was demand there, we don't have the ability to respond. So we can't order later in the quarter. This is a -- the wholesale side of this business is a long-term sales profit. So they're buying for holiday (inaudible) this and next quarter.

So do you think that the commercial customer trying to push the inventory risk on you guys -- is there a solution that you can work out with them that they can buy or be more flexible in the future? Or do they -- ?

We are interested in doing that, Ron, because we really don't have an inventory risk there. We are taking -- will take over, now, this quarter and into next quarter, we'll sort all the ingredients and manufacture to those audits so we don't have any inventory exposure. That's why we don't want to grow the whole -- we could -- or let's manufacture another 50% and hope we get orders for it from the wholesale channel, later in the year for (inaudible). Because we're not interested in growing the wholesale business, we like the model the way it works now because we don't have inventory exposure. Only inventory exposure we'll take is for our direct-to-the-consumer business.

(inaudible) final sale kind of orders. So describing it, it will be order profit that's happening the first half of the calendar year. The actual shipping for that inventory then happens. So we plan for it, and we do source it, we do (inaudible) some inventory. But the inventory build is really late summer into the fall and then, ultimately, shipping out in the September to December timeframe.

The only ship last year was, as I said, because (inaudible) the last two weeks of September, deliver it the first two weeks of October, so we got a number of weeks that shipped, and that's all. But still no exposure on the inventory, just on the booking of it over the quarter end date, but it's already committed.

At this time, I'd like to turn the call back to our presenters for a follow-up.

Well, thank you all for your questions and your interest. If you have any additional questions, please contact us. I'd like to remind you, as we pointed out, that Valentine's Day is on a Sunday, and it's only a couple of weeks away. So if you have any (inaudible) to all those people you love and have feelings for, a gift Valentine's week, please call 1-800-FLOWERS.COM as soon as possible and check out the wonderful gifts. We'll help you make all those very special connections. Thank you for your time today.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.