1-800-Flowers.Com Inc (FLWS) 2010 Q4 法說會逐字稿

Good day everyone and welcome to the 1-800-Flowers.com. Inc., fiscal 2010 fourth quarter and full year 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, Joseph Pititto. Mr. Pititto please go ahead, sir.

Thank you Jaman. Good morning and thank you all for joining us today to discuss the 1-800--Flowers.com financial results for our fiscal 2010 fourth quarter and full year. My name is Joe Pititto and I am Vice President of Investor Relations. For those of you who have not received a copy of our press release issued early 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 to 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 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 adjusted results and supplemental financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables accompanying the Company's press release issued this morning.

The Company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today's call, any recording of today's call, the press release issued earlier today, or in any of its SEC filings, except as may be otherwise stated by the Company. I'll now turn the call over to Jim McCann.

Good morning. Throughout 2010, the consumer was impacted by the continued uncertainty in the macro economy, particularly high unemployment and slumping housing market, the persistence of those things have resulted in some of the lowest consumer confidence index numbers frankly on record.

Consumers are justifiably nervous and das a result, the discretionary gift purchasing has declined. This has clearly impacted us, particularly in our core consumer floral category. With this as a backdrop, I would like to point out a few things that we've achieved during fiscal 2010. Adjusted EBITDA of approximately $29 million, positive adjusted EPS, free cash flow of approximately $25 million and a reduction of more than $32 million in total outstanding debt.

I believe these results illustrate the strength of our business model and the deep relationships we have with our millions of customers, as their florist and gift shop. In addition, we continue to benefit from a number of initiatives we undertook over the past several years, including several directly in response to the weakening economy. While some efforts have clearly worked better than others, overall, we continue to position our Company for long-term growth and enhanced profitability. We have taken tens of millions of dollars of costs out of our operating platform during the past few years. This disciplined approach to managing our business has enabled us to generate solid cash flows, as we have used to pay down debt and strengthen our balance sheet.

It has also given us additional leverage in our business model, which we believe will allow us to drive stronger profitability on any incremental revenue growth when consumer demand improves. Importantly, this focus on driving operating efficiencies is now ingrained in our Company DNA and we expect further improvements from our operating programs. Our decision to invest in the expansion of our gourmet food and gift baskets category over the past several years has proven to be a good plan. We have built a great platform in this area through a combination of strategic acquisitions and internal development. As a result, we have quickly become a leading player in a category that our customers are increasingly turning to for their gifting and connected needs.

Indeed, this category has held up better in the current economy, as consumers appear more willing to purchase our great chocolates, cookies, brownies, popcorn, gift baskets, and both as gifts and for self consumption. Based on the strength of our brands, Fannie May, Cheryl's, The Popcorn Factory and our newest 1-800-Baskets.com business, we have been able to drive solid growth in our eCommerce channels and our vertical integration in this category enables us to implement manufacturing efficiencies that drive down our costs and increase our gross profit margins, as you have seen this past year. Concurrent with our successful growth in our gourmet food and gift category, we have made the decision last year to divest what we determined to be nonstrategic assets in our home and children's gift businesses.

This is not an easy decision, but the right one for the long-term, growth, and profitability of our business. We use the proceeds from this sale to further pay down our term debt and we also revised our bank credit facility extending terms and revising covenants to provide additional financial flexibility. I would also like to point out that over the past two years, we have used excess cash to pay down approximately $70 million of our term debt, strengthening our balance sheet, and adding to our flexibility. Looking ahead into fiscal 2011, we do not see any evidence that would indicate that the consumer economy will improve a great deal.

With that in mind, we believe that we have positioned our Company to perform well in the current environment through a number of key initiatives, some already launched and several just getting under way. Most importantly, we believe these initiatives will enable us to take advantage of any improvement in the economy over the long-term to drive improved growth and profitability. Our new 1-800-Baskets.com business has gotten off to a good start. While we have no doubt made some mistakes along the way, we've learned a lot since its launch back this past November. These learnings support our belief this can become a category leader over time.

Our launch strategy allowed us to cost effectively introduce the 1-800-Baskets brand to millions of customers by leveraging the strong brand recognition, site traffic, and large customer base of 1-800-Flowers.com. Our customers are discovering the great product designs featuring our neat collection of gourmet gift brands. As a result, they are beginning to book mark us as their destination site for a broad range of celebratory occasions, thus giving us the opportunity to capture a large share of their gifting purchases. We are looking forward to expanding the 1-800-Baskets.com product offering and building on its successful launch, particularly in our fiscal second quarter of the year end holiday period.

Another important initiative of our gourmet food category is our Fannie May franchising program. As we noted in the past, Fannie May is iconic brand with a rich history and tremendous customer loyalty in Chicago and throughout the Midwest. In fact, at one point in its history, Fannie May had more than 300 retail locations, stretching from Chicago down through the West Coast of Florida and west to Arizona. Since we acquired Fannie May, we have grown the retail store base to more than 80 company-owned stores, primarily located in and around Chicago and its suburbs. We see significant opportunity to accelerate that growth through our franchise program that does not require significant capital on our part.

These stores have excellent economics and we believe the franchise growth strategy represents a win-win-win for our customers who love our Fannie May brand back in their home towns, for franchisees who get the leverage of a loved brand and proven business model, and for our Company, which can build national brand recognition for Fannie May, create new franchise revenue streams, and increase throughput and manufacturing efficiencies in our factory, and help drive our Fannie May eCommerce business. We plan to ramp this program up gradually over the next several years, and we are excited about its long-term growth prospects.

We are also continuing to innovate and invest in the future in the fast growing areas of mobile and social networking. In these areas we have once again staked out our leadership position in our industry, by embracing the latest technologies that enhance our customer engagement and interaction. This is illustrated by our early adoption of mobile commerce technology, for which we receive the retail info systems 2010 mobile APP of the year award and the best shopping category for the 1-800-Flowers.com mobile site.

It's also reflected in our ground breaking applications on Facebook and our strong presence on Twitter, and in the Blogosphere where we increasingly invite our customers behind the curtain to work directly with us in everything from product design to development of our marketing and advertising programs. In terms of building customer engagement, we also continue to grow our Celebrations.com brand. On the Celebrations.com website, we have seen substantial increases in visitor traffic, page views, as people come to the site, not to conduct a transaction, but to take advantage of the great content there and contribute to it. This content is from both our celebrations experts and increasingly, it's customer generated, as people are eager to share their suggestions and experiences.

As a result, celebrations.com has quickly become a leading site on search engines for everything from Super Bowl to Halloween celebrations. As our business evolves, we are keenly aware of the need to invest in these areas to position our Company as a leader in the emerging social commerce space. Where customer engagement is an integral part of our business model and our future growth. I will now turn the call over to Bill for a review of our financials and customer metrics. After Bill's remarks, I will ask Chris to outline some of the initiatives we have under way in our core consumer fall category, which he is now heading up. But first, Bill.

Thank you, Jim. As Jim noted, fiscal 2010 was characterized by continued weakness in the consumer economy. As we have done throughout the recent economic downturn, during fiscal 2010, we continue to focus on leveraging our business platform to reduce operating expenses. During the year, we achieved operating cost reductions of $6.2 million. This focus positions us to drive improved bottom line results over the longer term. Also during the year, we completed the divestiture of home and children's gift segment using the proceeds to further pay down debt and strengthen our balance sheet. Currently, we worked closely with our bank syndicate to revise our credit agreement to provide additional flexibility in our loan covenants. Our results for the fiscal fourth quarter and for the full year were impacted by several one-time charges mentioned in our press release this morning.

These include $4.9 million for the early termination of our marketing and merchandising agreement with Martha Stewart Living Omnimedia. We made this decision based on the lower than anticipated customer demand for the premium priced product line, ending the program with one year remaining on the agreement contract. $1 million associated with the ending in December of a third party marketing program and $900,000 in costs related to the settlement of legal action. These nonrecurring charges are excluded from the adjusted results reported in our press release this morning and as follows.

Regarding specific financial results and key metrics for continuing operations, for the fiscal fourth quarter, total net revenues were $165.4 million, down 4.1%, compared with $172.5 million in the prior year period. Gross profit margin was 38.1%, down 50 basis points compared with 38.6% in the prior year period. This primarily reflects the weakness in the consumer economy and the resulting increase in promotional activities, as well as the impact of the one-time charges on the consumer fall business offset in part by significantly improved margin performance in our gourmet food and gift basket segment.

Operating expense ratio excluding depreciation and amortization and for the prior year goodwill and intangibles impairment, improved 100 basis points to 36.9% compared with 37.9% in the prior year period. As a result, adjusted EBITDA from continuing operations was $4.8 million compared with $2.7 million in the prior year period. Adjusted net loss from continuing operations for the quarter improved by $1.6 million to a loss of $1.2 million, or $0.02 per share compared with adjusted net loss of $2.8 million, or $0.04 per share in the prior year period. Results of discontinued operations were a loss of $1.7 million or $0.03 per share compared with a loss of $9.1 million, or $0.14 per share in the prior year period. Including discontinued operations net loss for the quarter was $5 million or $0.08 per share compared with a net loss of $22.2 million or $0.35 per share in the prior year period.

In terms of full year results from continuing operations, revenues were $667 million compared with $714 million in fiscal 2009. Gross profit margin improved 40 basis points to 39.8% compared with 39.4% in the prior year, reflecting product mix and manufacturing efficiencies in our home and gift basket category offset in part by the increased promotional activities and one-time charges in our consumer (inaudible) segment. During the year, operating expenses excluding depreciation and amortization again for the prior year goodwill and intangible impairment were reduced by $6.2 million. However, reflecting the lower revenues for the year, operating expense ratio increased 150 basis points to 36.1%.

As a result, adjusted EBITDA from continuing operations for the year was $28.6 million compared with $36.5 million in the prior year. Adjusted net income from continuing operations was $542,000, or $0.01 per diluted share, compared with $7.4 million, or $0.11 per diluted share from fiscal 2009. Results from discontinued operations for the year were a net loss of $2.1 million, or $0.03 per share, including the $5.2 million loss on disposal compared with a net loss of $31.9 million, or $0.50 per share in the prior year. Including discontinued operations, net loss for the year was $4.2 million, or $0.07 per share compared with a net loss of $98.4 million, or $1.55 per share in fiscal 2009. In terms of customer metrics from continuing operations, during the fourth quarter, eCommerce orders totaled 2.251 million compared with 2.393 million orders in the year-ago period.

For the year, eCommerce orders totaled 8.432 million compared with 8.641 million in fiscal 2009. Average order value during the quarter was $57.69, essentially flat compared with $57.71 in the prior year period. For the year, average order value was $55.73, down 3.3% compared with $57.65 in fiscal 2009. During the fourth quarter, we added 651,000 new customers, currently stimulating -- existing customers who have presented 60.8% of total customers. In the year, we added 2.3 million new customers with repeat orders representing 52% of total customers. In terms of category results (inaudible) launch of our new 1-800-Baskets.com brand during fiscal 2010, the comparative results of (inaudible) in forming gift baskets categories have been adjusted for the shift of our gift basket business from consumer flow into the gourmet food and gift basket category.

In our 1-800-Flowers.com consumer business, revenues for the fiscal fourth quarter were $117.3 million compared with $124.1 million in the prior year period. Gross profit margin was 33.8%, down 320 basis points compared with 37% in the prior year period. This primarily reflects the impact of the one-time charges described earlier, as well as the increased promotional activity during this period, and the loss of revenues associated with the ending of the third party marketing program. As a result of the lower revenues and gross margin, category contribution was $7.5 million compared with $13.3 million in the prior period. For the year, revenues in this category were $366.5 million compared with $394.8 million in the prior year period.

Gross profit margin was 35.3% down 170 basis points compared with 37% in fiscal 2009. Again, primarily reflecting the aforementioned one time items as well as the increased promotional activity during the year. As a result of these factors, category contribution margin for the fiscal year was $22.1 million compared with $38.8 million in the prior year. We defined category contribution margin as innings before interest, taxes, depreciation, amortization, goodwill and intangibles impairment and before the allocation of corporate overhead expenses. In our BloomNet Wire Service business. Revenue for the fiscal fourth quarter was $15.6 million compared with $16.1 million in the prior year period. Gross profit margin was 57% compared with 55.2% in the prior year period. Category contribution margin was $5 million compared with $4.2 million in the prior year period.

For the year, revenues were $61.9 million compared with $63.5 million in the prior year. Gross profit margin was 56.4% compared with 55.7% in the prior year. And category contribution margin was $19.1 million compared with $18.8 million in the prior year. In our gourmet food and gift basket category, revenues for the fiscal fourth quarter were $32.4 million compared with $32.8 million in the prior year. Gross profit margin increased 790 basis points to 43.7%, 35.8% in the prior year, primarily reflecting product mix, with increased eCommerce sales and lower wholesale revenues as a percent of total revenues, as well as significant improvement in manufacturing productivity, across all brands in this category.

As a result, category contribution margin for the fourth quarter improved approximately $3.1 million, to $382,000 compared with a loss of $2.7 million for the prior year period. For the full year, revenues in this category were $239.9 million, down 7.3%, compared with $258.7 million in the prior year. This reflected the substantial decline in wholesale orders as the Company design pack gifts division which was somewhat offset by solid growth in the category eCommerce channel. Gross profit margin for the year increased 340 basis points to 42.1% compared with 38.7% in the prior year, again, reflecting aforementioned product mix and significant manufacturing enhancements.

With the strong gross margins more than offsetting lower revenues, category contribution margin increased $2.7 million or 11% and $27.3 million compared with $24.6 million in the prior year. As I stated earlier, category contribution margin results exclude costs associated with the Company's enterprise share services platform which include among other services IT, human resources, finances, legal and executive. These functions are operated under a centralized management platform providing support services to the entire organization. For the fiscal fourth quarter corporate expenses for continuing operations including stop base compensation was $10.9 million compared with $13.5 million in the prior year period. For the full fiscal year, corporate expenses were $43.7 million compared with $48.3 million in the prior year.

Turning to our balance sheet. At the end of the year our cash and investments position was $27.8 million compared with $29.6 million at the end of fiscal 2009 and we have no borrowings under our revolving credit line. Inventory was at $45.1 million compared with $45.9 million in fiscal 2009. Regarding long term debt, we finished the year with approximately $60 million in outstanding debt and based on our new credit facility our closing debt payments are expected to be approximately $3.5 million going forward. During fiscal 2010 the Company generated approximately $25 million in free cash flow with approximately $17 million coming from continuing operations. The Company defines free cash flow as net cash provided by operations less capital expenditures.

Regarding guidance. As we stated in this morning's press release, we are modifying how we provide forward guidance reflecting the continued uncertainty in the consumer economy. We are eliminating specific guidance for revenues, EPS, EBITDA and free cash flow. In terms of our outlook for fiscal 2011, we do not anticipate significant improvement in consumer demand, for discretionary purchases and therefore we expect top line growth to continue to be challenged.

With this in mind, during fiscal 2011, we will continue to focus on our programs to enhance operating efficiencies by leveraging our business platform. We will implement several initiatives designed to significantly improve gross profit margin, particularly in our consumer floral category. We will continue to invest in areas that we believe position the Company for future growth opportunities, including our new 1-800-Baskets.com business, mobile commerce initiatives and new Fannie May franchise program, among others. Regarding capital expenditures, during fiscal 2011, we expect to maintain CapEx at approximately $15 million. I will now turn the call over to Chris McCann.

Thanks, Bill. As Jim and Bill have noted, we are operating our business in a difficult economic environment, one in which reduced discretionary spending has impacted the entire retail landscape. Our response to the changes in the consumer floral marketplace have focused on both near term and longer term initiatives. We have intensified our focus on enhancing our operating efficiencies to reduce costs and provide additional leverage for our business. We have made significant management changes, flattening our organization and adding talent in key areas, including merchandising and marketing. Also among these changes is my stepping in as President of our floral group and assuming direct day-to-day responsibility of the 1-800-Flowers.com brand.

We have revamped our service center platform and intensified our efforts to improve our customer's total shopping experience. In this area, we are already seeing excellent results, with significant increases in our internal customer satisfaction metrics. Importantly, these efforts are also being recognized externally, as illustrated by our recent number one rating in customer satisfaction versus our competitors by STELLAService, an independent rating agency. We have also increased our focus on new product development, working directly with the talented professional florists in our BloomNet network and soliciting input from our customers to create great product design that are compelling and relevant in today's marketplace.

In addition to being responsive to the changes in consumer behavior, we also recognize that the disruption in the floral industry caused by the economic downturn offers some potential opportunities. As a category leader, we believe 1-800-Flowers.com is uniquely positioned to lever our assets, including the strength of our brand, the deepening relationships we have with our customers at BloomNet florists, and our successful expansion into the gourmet food and gift basket businesses to enact changes that can provide long-term benefits. Toward this end, we're working to further integrate the 1-800-Flowers consumer business with our BloomNet Flowers network.

We are designing programs to offer our florists new services and product lines that we are uniquely positioned to provide, such as our growing line of beautifully designed gift baskets and gift sets, our exclusive chocolates and other gourmet food gifts, our new lines of balloons, from Anagram Balloons, plus stuffed animals and our exclusive line of Yankee Candle products being added to our BloomNet florists. We are also working to evolve the floral industry supply chain, where we see the opportunity to lever our assets to improve the service and cost structure by working directly with key players, including growers, wholesalers, managed market retailers, and our florists.

We are continuing to evolve the BloomNet network, working to deepen our relationships with our florists and leverage our respective assets and skill sets to enhance growth and profitability over the long-term.

We believe these initiatives, combined with our continued focus on our key strategic priorities, not only in taking care of our customers, maintaining and enhancing our financial flexibility, and our continuance to innovate and invest for the future will enable us to create additional leverage within our business model that can drive enhanced top line and bottom line performance over the long-term, and thereby enable us to emerge from the current challenging economy with an even stronger position as the world's leading florist and gift shop. Thanks, Chris. That concludes our formal remarks. We'll now open the call for questions. Jaman , would you please restate the instructions for the Q&A

Thank you. (Operator Instructions) Our first question comes from Ingrid Chung with Goldman Sachs

Thanks. Good morning. A few questions, if I may. I was wondering if you could speak to consumer demand on a month on month basis in the quarter and how July looked. Secondly, I was wondering if you could talk about your design pack business and how ordering is shaping up for the holidays. And then finally, this is actually a serious question, I was wondering if you could quantify the uplift from "Undercover Boss".

Well, bonjourno. I understand you're about to get on an airplane, I hope you have a great vacation.

Thank you.

Three questions. The last was on the impact of "Undercover Boss". The first was on what we're seeing trendwise in terms of consumer -- I'll ask Chris to handle that. And the middle question was --?

Design pack and the holidays.

Okay. I'll handle that. Chris, would you start with -- start at the end -- start with the last quarter.

Like I said, as we look at consumer demand even throughout the last year, again, it continues to be soft. More so in the floral category than in our food, gift business. That's something we stated previously, where any time we've seen an economic downturn like this, the consumer finds more value in their food gift, a gift set, a little bit less discretionary maybe than a floral product. Although all throughout the last year we've seen the trends get slightly better, and we know we continue to operate in that environment, where we see slight, but yet stable consumer demand in the last couple of months.

Ingrid, if you remember in our fiscal '09, we were down double digit within consumer floral, for each of the quarters Q1 of last fiscal year, we were down about 10%. We've been kind of more mid single-digit down in demand with consumer from Q2, 3 and 4.

And in terms of design pack, I'll give you a couple of points there, Ingrid. One is, you remember the reason why we purchased that business, was to use it as a kernel of our capabilities to build out our 1-800-Baskets and gift set business. That was our primary motivation. Clearly, what we said was that the wholesale business wasn't something we were looking to grow, but I will tell you, we were not looking for it to decline the way it did.

I think there were two reasons why it declined. We're disappointed in the decline. The decline had, I would say, two reasons. One is management failure to broaden the customer base. We've made management changes there. We've made pricing changes there. And we think we can improve that business. It will take a couple of selling cycles to fully recover.

So it's disappointing, but the business we bought and the capability we got from 1-800- Baskets are what we hoped for. What we've done, too, we've retooled the size of that business so that it can be profitable at a lower level and still have all the support infrastructure and the platform for us to build 1-800-Baskets. We launched 1-800-Baskets to the consumer November 1. It's been a good launch. Clearly we made some mistakes in that process, but mistakes, if I could characterize them as good mistakes. We sold out too quickly, we were too promotional when we didn't need to be. We'll learn from those lessons and we're very happy with the way the 1-800-Baskets piece of that will go.

So while we didn't buy the business to grow the wholesale business, we're disappointed in its decline. We think we have things in place to remedy that. It will take a couple of cycles to sell through, but the other reason why it declined is some of our biggest customers just pulled back dramatically in the gift basket, gift set category, fearing the consumer demand going more towards staples and less towards gifting product. We are starting to see a little recovery in that.

I think it's mostly where we're seeing the improvement is when we share data with those customers of where the gift basket products sell so well for us beyond Christmas at Valentine's Day, Father's Day, spring holidays, we are starting to see an uptick in interest in carrying those products throughout a broader set of gifting seasons, and that we think speaks well for the future of that business. In terms of "Undercover Boss", there are a number of things. One, I think Chris did a fantastic job on the call.

Yes, absolutely.

He was in the field for a couple of weeks there doing the hard work and I had the opportunity to do the easy work and to make fun of him in the process. Like we do every day. The impact has been nothing short of extraordinary. Clearly it impacts the consumer, but the impacts to us from our team members around the world has been just overwhelming. Consumers, we've heard from thousands and thousands of consumers. And yes, there have been several proposals of marriage for Chris and we are keeping score on that. But the really interesting response that we have gotten, Ingrid, is from our florists.

We've heard from thousands, literally of florists, most of whom are in BloomNet, but not all. What they are saying is how proud they were about how florists were positioned as these dedicated, caring community members and professionals, craftsmen excited about business, what business we actually do, how we impact people's lives, how we put smiles on faces every day. So the overwhelming sentiment of pride and enthusiasm from florists I think has been the biggest and most pleasant surprise, many of them asking how we can increase the depth of our relationship, and that's not coming from those already part of BloomNet, but from many who are a part of BloomNet seeking out information as to how they can become a part of BloomNet.

It's had a huge response for us, and of course it just reran this past Sunday night and that whole cycle has started again. . So to date, about 30 million people have seen it between the first airing, the second airing, and individual views that they have done on [hue lieu] and CBS.com in between. So from a brand point of view, it's been nothing short of

Great. Thank you.

Our next question comes from Eric Beder with Brean Murray.

I'm actually filling in for Eric today. I was hoping to get a little bit more color about what you were happy with during the quarter, especially in regards to the gourmet food and gift basket category, which was performing well. Where do you think the opportunity is looking ahead for the fall and holiday season, and where do you think you could have done a little bit better?

Well, I think we made -- I think we made a lot of (inaudible) over the year. The food category you asked about is one of the pluses on my list. When I say that, we've achieved operating efficiencies. We've (inaudible) manufacturing capabilities, we've overcome the loss of some of the wholesale business that occurred there. The direct to consumer retail business. We've -- so that business is running well and getting better all the time. Our franchising initiative that we just introduced in Fannie May will help us to grow that business in a capital efficient way going forward.

So as we look over the course of the year, the biggest impact in the food category is in the second fiscal quarter or the fourth calendar quarter, which is the holiday quarter. So we feel good about where we're positioned this holiday period, especially with consumer-- and we feel, frankly, that the decisions we've made over the last several years to emphasize that part of our merchandising mix and our flower and gift shops, that emphasizes the gourmet food and gift product category in our shop and in our brands has held us up well.

And the fact that we think we can grow those businesses even in this tough time and create a capital efficient kind of ways without being risk associated with them says decisions we've made over the last few years were good ones. So we think our business is good, stable, and doing well even in a tough time. It's gaining market share. They are increasing opportunities for us there. It makes good use of our customer relationships. Makes good use of the flexible balance sheet we have. And we feel that we're really well positioned to grow in a prudent and safe kind of way, existing brands, the new brands that we birthed in that category in the last-- Couple of other specific things, too, that we're happy with in the food business. We recently rebranded Cheryl and Company to be Cheryl, representing our focus and one of the great growth areas we've had in Cheryl's is putting a focus not just on cookies but now into brownies. Trying to stakeout a leadership in the brownie gifting sector and that's growing nicely. And the Cheryl's branding is being well received by our customer base. And it's early to say, but one of the things that we've done in Cheryl's is we have a few retail stores associated with our Cheryl's brand and our management team that we charged with coming up with the concept to make those stores even more attractive and more successful so that we could have a decision as to whether or not we roll them out either in a franchise model or some other way.

We relaunched our flagship store, which is in the Easton Town Center and it only reopened about five weeks ago. And frankly, those first five or six weeks now maybe, six weeks ago, the results are terrific. Too early to say, but it's an example of the spade work we're doing to build future opportunities to explore our growth initiatives. We think we're going to have good success and we know we have good success in growing the Fannie May retail side of the business.

We think it would be very successful to grow in a franchise model but I want you to know that we have other -- pardon the pun, things in the oven in terms of other growth opportunities in the gift food brands. And we now have two of those businesses on our (inaudible) platform, getting -- really enabling them now to grow their eCommerce business, which (inaudible)

Okay. In regards to the Fannie May retail store franchising program, how large are you thinking it's going to be for next year and just over the long-term, what are your thoughts on that?

Huge. Well, maybe not huge. The Fannie May business, as we said, we've grown it to about 80 stores now. Mostly in and around Chicago. The original footprint of -- when the Company was owned by a private equity firm in the past, had grown to over 300 stores. We have the information on where those 300 stores were, we know they were -- what markets they were in, what sales they had, so we have a blueprint of where we can very safely expand that footprint, leveraging our manufacturing capability, extending our brand and giving us the opportunity to grow our eCommerce business in this capital efficient way of using the franchise model.

It's something we are familiar with. So we've just, we've just got registered in the last couple of few weeks to do that. So we would expect in the first year to have very modest growth. We'll pick out a couple of few new markets. We want to make sure we have the right partners. We'll continue to expand a few Company owned stores in markets that we have strong, strong indications that they will do well at the same time. So, it will be modest growth this year, but this is the year to put the next layer of bricks on that foundation for what we expect to be a cautious, but even more robust growth next.

Okay. And just one last question. The consumer floral business has been heavily dependent on promotions. Can you highlight any specific promotions that consumers were responding well to? And how are you thinking about promotions going forward eventually? Do you plan on weaning them off of them, and how are you thinking about that?

Sure. As we look at the consumer floral business and we look at what's taken place in the competitive landscape, it's become a very promotional category. Therefore, we are making sure we're continuing to build -- deepen our relationships with our customers and with are renewed focus on our product development, really organization embracing our flowers and working with our BloomNet florists to bring product and value to the consumer, and value, by value, I do not necessarily mean cheap price.

I mean, good value for your money, good creative designs. We will be able to shift and be less reliant on discounts promotional, discount -- we'll always go into work with good promotional partners to extend our reach and extend our brand. Things we're doing currently is an example of that and other companies that we'll look to work with on a promotional basis going forward.

Okay. Are there any specific callout promotions that you thought were especially helpful in driving sales?

Yes. I think we learned that our spot them on program is successful. Any way that we reach out and engage our customers in a creative kind of way, whether there's a purchase or not, helps us to build our brand, extend our customer reach, and develop our potential future customers down the road. So I would say that the dramatic approach you've seen us use for each of our holiday periods and (inaudible) are examples of the promotional efforts you'll see, not necessarily price promotion, but engagement opportunities with our customers.

Okay, great. Thank you very much, and best of luck.

Thank you.

Our next question comes from the line of Anthony Lebiedzinski from Sidoti & Company.

Good morning. My first question is about 1-800-Baskets. You had mentioned that you learned a few things from the launch back in November. Can you tell us about what you've learned and what do you plan to do differently going forward?

I think on the marketing side, Anthony, some of the things we learned are, one, consumers love the product. The acceptance of the product. Rave reviews we got from customers have been really encouraging. The second thing on a marketing side is that we don't need to take big risks in marketing that brand, and that line of products, in that we have one of the most highly trafficked eCommerce websites in the world at 1-800-Flowers.com.

We've also learned by exposing our customer base that have already bought that gift product, usually elsewhere, now can see that we carry it on a brand that's clearly as a sister brand to 1-800-Baskets and it gives Chris particular confidence that the multi branded portal strategy that he's been steering us down is the right way to go, because we're able to build a new product category and a new brand without big marketing risk, we're just leveraging existing traffic.

The second thing on the operation side we learned is that it was much better received than we thought it would be and therefore we sold out way too quickly and so we didn't get a good read at what the demand was for holiday. And we were promotional in our net product, thinking you had to be promotional in that environment, when we learned we didn't really need to be that promotional. Good product and good value can drive consumer demand and you don't necessarily need promotional activity from a price point of view around it.

So those are the things we learned. What we're also seeing is that the customers are responding to good price points. Our average order values there are good and what we expected. But we can really increase the range of our average order values in the gift basket product line. And we can significantly improve our gross margin as long as we bring good, quality, creative product to our customer.

Okay, and then as far as your initiatives really for fiscal '11, obviously not giving any specific guidance, but you did mention that you are looking to enhance your operating efficiencies and also improve the gross margins. Can you just give us some details, some specific initiatives as to how you plan to go about this?

What we're saying here, Anthony, is it's a difficult marketplace out there. It's difficult for us to forecast. Frankly, I see that even the professionals, the professional forecasters have such a broad range of expectations about what will happen in the next year, that they seem to be befuddled. So we don't think that we're better than they are, so that's why we're reluctant. We know five or ten things positive that could really influence a year. We also know five or six things that are going to negatively impact us this year. A little example. If we do as well as we hope this year, we'll pay out good bonuses. That will have a negative influence on the bottom line, but we clearly have to overcome with performance.

So we have a list of negatives and list of positives. We also know that we can't know all the negatives that will come. Clearly that's something we know. We can't anticipate everything that could negatively impact our business in the macro environment. So we have, from initiatives, we'll continue to launch our new businesses, our celebrations business, 1-800-Baskets business. We have a handful of key initiatives that we are focused on, that Bill spoke about, that Chris spoke about a little bit earlier on, where we think we can really significantly take advantage of the challenges that exist in the environment, particularly in the floral side, but not just to really position us for future growth and for future profitability, and we are investing in those now because we can.

And finally, on the operating side, we make mistakes last year in gross margin. They are fixable. We did some good things on our operating expense line and you start to see the margins improve already, but we think they can improve significantly. And on the operating expense side, it's now part of what we do. We took out a lot of money in our operating expenses over the last two or three years. We'll continue to do that. And we think we can take more out. So we have a list of things that we say are pluses.

We have a list of things that could negatively influence us that we're preparing for. And there are some things that we don't know. But net-net, we'll continue to manage our expenses, continue to innovate in our product line. We'll work hard on improving our gross margins and we will see success there. And we'll continue to invest behind these half a dozen or so key initiatives that we think take advantage of the challenges in the marketplace and speak to the assets that we uniquely have to take advantage of.

During the year, you guys did a good job of generating free cash flow. I realize that you haven't given guidance for free cash flow, but what would your objective be for free cash flow usage during fiscal '11?

Well, I think you have to look historically first to get the best indication. And what you're seeing there is over the last two years, and I'll answer this because Bill is suffering terribly from a cold. He would like to, but he's suffering. What we have done with our free cash flow is, we said -- we used to say we had three uses for cash flow return it to our shareholders, make strategic investments, or improve our balance sheet and pay down debt. Frankly in, this environment, we're not looking to return it our shareholders, we're looking to maintain our flexibility, increase our flexibility.

This year we paid down $32 million in term debt and over the last two years, it's over $60 million that we've paid down on debt . So the evidence historically is, as we are fortunate enough to generate excess free cash flow, we're using that to strengthen our balance sheet. Going forward, we'll continue to strengthen our balance sheet.

We'll continue to be prudent in the use of that cash we generate and hopefully increase our cash generation overtime from operating side of the business and use that to grow our business, either by improving the flexibility in our balance sheet or perhaps there's something we find that would be a perfect fit with one of our platforms that we already have in place that offer us a broader product assortment and leverage in whatever new activities we get

Okay, thanks.

(Operator Instructions) And our next question comes from Jeff Stein from Soleil

Jim, I'm wondering on the franchising side with Fannie May, is now the right time to launch a franchise program? It's pretty tough for entrepreneurs to get financing these days and further, you certainly want them to be successful coming out of the gate. And there seems to be a very difficult environment to be opening up a store selling highly discretionary products like candy. So any thoughts on that?

Indeed, Jeff, and thanks for the question. What you say is exactly the case that we see as well. There is a lot of challenges and that's why we're seeing very, very reserved in our expectations and our -- what we're speaking about in terms of what successes we expect here. But let's look at the facts as we have them. Our chocolate business has held up very well during these past tough couple of years. The store economics for Fannie May are really good, really sound.

We've had great success in all of the stores we've opened up and all of the concepts that we've introduced in Fannie May, including broadening in a product line to include really good quality Fannie May dessert business and our ice cream business in particular, which carries our business through the summertime. So the business is good. It's, it's a growing business. The eCommerce business is growing particularly well. The stores help that go. And, yes, it's a difficult environment for people to get financing.

But what we're finding in our early discussions, Jeff, is that there's lots of interest, lots of people getting pushed out of corporate America, lot of them have buyout packages. Lot of them are realizing, hey, I have to provide for myself. There's not going to be any magical retirement program. I need to control my own destiny and that's usually when franchise businesses usually are (inaudible) grow, they pick up momentum during tough times because of that displacement of individuals. We're probably not focused on a lot of mom and pop people, those people during the early stages.

We've been having discussions with very well financed, experienced operators who would like to do a market in the areas that we would like to build our market in the areas that we want to go to, where we have great evidence of success in. So we have been counter cyclical, we're doing well historically, the potential franchisees come with financing in place and with a good track record in a variety of different concepts. So we think we're taking a prudent path here and why we think we're going to be particularly successful.

Got it. One final follow-up question. Thank you for that. Can you talk a little bit about the health of the florist network, because clearly with floral being the toughest area right now, one has to think that many of your florists are suffering. Have you been experiencing higher than normal contraction due to bankruptcies, shop closings, and are they -- are the vast majority of them current on their payments?

Jeff, I think it's fair to say, as we pointed out for a while now, that the floral industry is experiencing challenges in all of its quarters. That is growers are struggling, distributions become challenged, wire services have been challenged. Obviously we introduced ours only five years ago. But it's growing. It's continuing to take market share. We think by luck or maybe, maybe good foresight, our assets are particularly well suited to take advantage of this structure. And specific to the retail forest, we have the best value proposition. I'll let Chris speak to the specific BloomNet proposition and how it's holding up.

But what we're seeing is the number of florists are struggling and we heard that even with their contact to us around "Undercover Boss", continuing to struggle, and yes, we continue to see closures. But our network and size has held up pretty constant. Our receivables are well in check and we haven't seen the evidence there. I think it's because of the things Chris talked about.

We're offering the best value proposition and it gets better every day. So we think that the challenges that are impacting us and other people in the retail floral space actually give us some very interesting opportunities. And I will tell you that I think, we all think, hat the handful of key initiatives that we are hard focused on this year, BloomNet is at the top of my list.

(inaudible) one of the things that's benefited us has been our strategy into this business, our strategy different than our competitors, not really been around large numbers of florists in our network, but focusing on the quality aspect of the network (inaudible) smaller size so I think that clearly has benefited us. And I think, seeing the shop closings and stuff in our network, it still exists, but it's -- the pace has slowed down.

And that allows us to focus on really delivering value now to that network of customers, again, introducing our line of Yankee Candle products, exclusive provider into the whole retail floral landscape, introducing a lot of gift baskets obviously through 1-800-Baskets and how we can bring that to the table. Just recently introduced Anagram balloons and producing those products and, again, combining that, as I mentioned earlier, Jeff, how we're integrating them in deeper relationship with the consumer flower brand so that 1-800-Flowers will be selling Yankee Candle products and help that turn in the box, what we felt Anagram balloon products and help that turn in the box.

So really that integration and focus on good product development with our florists, to provide great value to our customers puts us in that unique position to lever those capabilities, as Jim mentioned.

Just a continuation, Jeff, of what we've been saying for the last few years, as a flower and gift shop we're responsible to merchandise that shop with our flowers and plants, giftware, our greetings product, our balloons, our plush stuffed animals, our confectionery products, our gourmet gift food products, and that anchor merchandising area for our shops, which is our 1-800-Baskets platform.

So what you see is a continuing execution against that vision and now working with our BloomNet florists to make sure that they can benefit from our success in the balloon category, our success in the chocolate business, and in fact, it's deeper and deeper into the florist, a little turbo charging going on because now we can go more aggressively to market, for example, as Chris just mentioned, with Yankee Candle products.

So if we introduce a Yankee Candle arrangement for the holidays and there's a good consumer take there and there is a whole embedded custom base that's Yankee Candle fans, our florists can now benefit from the things that we can do on a national basis on a partnership and distribution basis by bringing them product that heretofore very few florists were able to carry that product line. Now we have it for them, frankly we have it for them exclusively. So, as we get the product in the marketplace, as we achieve a certain penetration level, we can now put national marketing behind that product and turbo charge the sell-through for them and the pull-through for them.

Thank you.

(Operator Instructions) Sir, I'm showing no further questions in the queue.

Well. Thank you, as you can see, we're sober about what the situation is in the broader marketplace. We're focused on managing our expenses, broadening our product line, investing for the future, and our growth categories, and pursuing our key initiatives. So, despite the fact that there are challenges that we've enumerated and discussed here, we think frankly, we are pretty well positioned, maybe uniquely positioned to turn those challenges into opportunities for us and for our shareholders. And in closing, I would like to mention that I would encourage to you come to our site at 1-800-Flowers. com and other sites, other brands, to see our sweepstakes and campaigns for the summer that's running right now. It's been a lot of fun. It's something we're having good success with and I encourage you to put a smile on someone in your life's face with one of our Happy Day Bouquets. Enjoy the rest of your summer and I look forward to chatting with you soon.

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