1-800-Flowers.Com Inc (FLWS) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to the 1-800-Flowers.com Inc. fiscal 2011 first quarter results conference call. This call is being recorded. At this time, for opening remarks and introductions I would like to turn the call over to the Company's Vice President of Investor Relations and Corporate Communications, Mr. Joseph Pititto. Mr. Pititto, please go ahead, sir.

Thank you, Melena. Good morning, and thank you, everyone, for joining us today to discuss 1-800-Flowers.com's financial results for our fiscal 2011 first quarter. For those of you who have not yet 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'll 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 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 appliable statements. For a detailed description of these risks and uncertainties, please refer to our press release issued this morning as well as our SEC filings including the Company's Annual Report on Form 10-K and quarterly reports on Form 10-Q.

In addition, this morning we will discuss certain supplemental financial measures that were not prepared in accordance with 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 this morning.

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

Good morning, everyone. Our first quarter results were in line with our expectations and with the trends that we've seen in our business segments. During the quarter, which is typically our lowest in terms of revenues, we saw continued soft demand in our Consumer Floral business. This was somewhat offset by stronger sales in our BloomNet Wire Service business and solid E-commerce growth in our Gourmet Food and Gift Basket segments.

A little later in the call, Chris will highlight some of the initiatives we are implementing to help stimulate demand in our Consumer Floral business including new product development efforts and a retooling of our marketing programs. In terms of gross profit margin, we've told you that we are keenly focused on driving stronger margins across the enterprise and particularly in our Consumer Floral business.

During the quarter, we increased gross margin in the Consumer Floral by 120 basis points and consolidated gross margin grew 130 basis points compared with the prior year period. This was achieved through a combination of initiatives including among others more efficient use of promotions, our strategy we discussed in our last conference call.

Combined with strong gross margins we are seeing our Gourmet Food and Gift Basket businesses, that we've seen in the businesses, we expect to see continued improvement in consolidated gross margins throughout the fiscal year. In terms of operating expenses, this is another key focus area for us where we have been successfully leveraging our business platform to reduce costs. During the first quarter, we were able to keep operating expenses flat compared with the prior year period.

We achieved this while continuing to innovate and invest for the future across a number of initiatives that we believe will help us drive growth in the years ahead. Among these initiatives are efforts in franchising, our technology investments in mobile and social commerce where we are a recognized leader in the space, our programs to enhance the floral industry supply chain, and in Celebrations.com our party planning, content and customer engagement site where we are currently attracting more then one million unique visitors a month and we are the number one search result for the keyword Halloween Party.

As I noted, we believe these efforts and others like them will have--that we have underway position us well for growth opportunities in the future. Regarding our investments, as we head into our key year end holiday season, we continue to see the benefits of the investments we have made and continue to make in our Gourmet Food and Gift Basket business. We are seeing solid E-commerce growth in this category, particularly in our Cheryl's and our 1-800-Baskets brands. This growth is largely offsetting the softer demand we have seen in wholesale baskets.

Importantly, gross margins and contribution margins in our Gourmet Food and Gift Basket category continue to increase through a combination of sales growth, product manufacturing efficiencies and reduced shipping costs. We expect these positive trends to continue throughout the fiscal year. I think it's important to note that we are -- that our newest brand in this category, 1-800-Baskets.com, is still very much in its infancy with significant growth opportunities in the years ahead.

Since we launched this business a year ago, we've learned a lot and, quite frankly, we're still learning. As we apply those learnings we refine and expand our product offering. We are seeing improvements in unit sales, average order value and gross margin. Most important, we have been able to cost efficiently introduce millions of customers to the 1-800-Baskets.com brand and our expanded range of gift baskets and gourmet food items by launching it on our dual-branded website.

By, in effect, piggybacking on our flagship 1-800-Flowers.com brand we're able to leverage its strong brand equity, our more than 30-million customer base, our technology platform, and our substantial site traffic. It is worth noting here that this strategy is part of an overall expansion of the products and services that we offer in our virtual flower and gift shop. Our flowers, our plants, balloons, stuffed animals, candles, chocolate, candy, bakery gifts and gift baskets help our customers with the products and services that they need to express themselves and to deliver smiles.

As you've seen, with a weaker economy affecting discretionary purchases of flowers our strategic expansion into Gourmet Foods and Gift Baskets has enabled us to actually deepen our relationships with our customers for an expanded range of their celebratory and gifting occasions. We plan to build on this solid base during the upcoming holiday season and we continue to see significant growth opportunities in gift baskets as well as our entire gourmet food gift category. I will now turn the call over to Bill for a review of the financial and operating metrics. Bill?

Thank you, Jim. As our press release indicates, Q1 was characterized by continued softness in demand in our Consumer Floral segment, which was somewhat offset by the stronger performance in BloomNet and E-commerce channels for our Gourmet Food and Gift Basket category.

During the quarter, we also saw early positive results from our efforts to improve gross profit margins in both our Consumer Floral and Gourmet Food and Gift Basket categories. On this topic, it is worth noting that the gross margin percentage increase in Consumer Floral was achieved despite having to absorb the loss of approximately a million dollars in high margin revenue associated with the third party marketing program that we ended back in December last year.

As a result of our efforts in this area, we anticipate continued improvement in gross profit margin on a consolidated basis throughout the fiscal year. Regarding specific financial results in key metrics from continuing operations for the first quarter. Total net revenues from continuing operations was $104.5 million, down 3.5% compared with $108.3 million in the prior year period. During the quarter, our E-commerce orders totaled $1.136 million compared with $1.249 million in the year ago period.

Average order value during the quarter was $62.67, up from and AOV of $59.93 in the prior year period. During the quarter, we added 340,000 new customers. This was achieved while concurrently stimulating repeat orders from existing customers, who represented 64% of total revenues compared with 63% in the prior year period. Gross margin for the quarter increased 130 basis points to 41.7% compared with 40.4% in the prior year period. This reflected a combination of factors including product mix, reduced royalties as a result of last year's termination of the Martha Stewart marketing agreement, reduced promotional pricing, manufacturing efficiencies and reduced shipping costs.

Operating expenses before depreciation and amortization were essentially flat year-over-year at $46.7 million compared with $46.6 million in the prior year period. Importantly, as Jim noted earlier, we were able to hold operating expenses flat while continuing to innovate and invest for the future in a number of key initiatives that offer growth opportunities.

We continue to be highly focused throughout the enterprise on leveraging our business platform to effectively manage our operating expenses and we will continue look for cost efficiencies throughout the enterprise to help offset our investments and enhance our bottom line performance. Reflecting the lower revenues in the quarter, operating expense ratio for the period excluding depreciation and amortization increased 170 basis points to 44.7% compared with 43% in the prior year period. This also includes non-cash compensation expense of $700,000 pre-tax compared with approximately a million dollars pre-tax in the prior year period.

For the quarter, depreciation and amortization was $5.1 million compared with $5 million in the prior year period. As a result of these factors, EBITDA loss from continuing operations for the quarter was $3.1 million compared with a loss of $2.8 million in the prior year period. The increased EBITDA loss includes the impact of the approximately $1 million in revenues associated with the discontinued third party marketing program I mentioned earlier.

Net loss from continuing operations improved to $5.1 million, or $0.08 per share, compared with a net loss of $5.7 million, or $0.09 per share in the prior year period. The lower net loss and lower EPS loss for the quarter reflects reduced interest expense compared to the prior year period due to reduced debt and a higher effective tax rate resulting in a larger tax benefit in the first quarter compared to the prior year period.

Net loss including discontinued operations was $5.1 million, or $0.08 per share, compared with a net loss of $7.3 million or $0.11 per share in the prior year period. In terms of category results, in our 1-800-Flowers.com Consumer Floral business during the first quarter revenues in the category were $62.6 million compared with $68 million in the prior year period. Gross margin for the quarter improved to 38.1% compared with 36.9% in last year's first quarter.

This improvement reflects the factors I mentioned earlier including the progress we're making in our initiatives to reduce promotional pricing. We expect to see benefits of these efforts in the aforementioned factors in the form of improved gross profit margin throughout the remainder of fiscal 2011. Category contribution margin was $5.4 million compared with $7.3 million in the prior year period. The reduction in category contribution margin was primarily related to lower revenues, including the loss of revenues associated with the discontinued third party marketing program mentioned earlier, and the increased investments in future growth initiatives that we've discussed.

The Company defines category contribution margins as earnings before interest, taxes, depreciation and amortization and before the allocation of corporate overhead expenses. In our BloomNet Wire Service business, revenue was $15 million compared with $13.8 million in the prior year period, primarily reflecting increased wholesale product orders from florists including the Company's new exclusive line of Yankee Candle products. Gross margin was 56.6% compared with 58.2% in the prior year period, primarily reflecting product mix. Category contribution margin was $4.3 million compared with $4.1 million in the prior year period.

In our Gourmet Food and Gift Basket segment, revenues were $26.9 million compared to $26.7 million, primarily reflecting increased E-commerce orders across the category, somewhat offset by lower wholesale orders and lower retail store sales due to the unseasonably hot weather that impacted Fannie May store traffic in July and August. Gross margin increased 220 basis points to 41.6% compared with 39.4% primarily reflecting a combination of product mix, manufacturing efficiencies and reduced shipping cost achieved through the Company's sourcing initiatives.

Category contribution margin improved to a loss of $2.1 million compared with a loss of $2.9 million in the prior year period. In terms of corporate expenses, as I stated earlier, our category contribution margin results exclude costs associated with the Company's enterprise shared services platform which includes among other services IT, HR, finance, legal and executive. These functions are operated under a centralized management platform providing support services to the entire organization.

For the fiscal first quarter, corporate expense from continuing operations including stock-based compensation was $10.7 million compared with $11.4 million in the prior year period. Turning to our balance sheet, at the end of the first quarter our cash and investment position was approximately $9.1 million. Our borrowing under our credit facilities were $57 million in term debt and $30 million outstanding under our revolving credit line.

The borrowings under our credit line reflect the seasonality of our business, specifically the increased investments in inventory and other working capital for the upcoming holiday period. Inventory from continuing operations was approximately $71 million, was in line with management's expectations and reflects the aforementioned buildup for the year end holiday season.

We anticipate that we will finish the current fiscal second quarter with significantly reduced inventories, zero borrowings under our revolving credit line and a strong cash position. Turning to our outlook for fiscal 2011. We expect continued challenges to top line growth, particularly in our Consumer Floral business which we anticipate will be somewhat offset by revenue growth in the E-commerce channels for our Gourmet Food and Gift Basket brands.

In summary, as we enter our key fiscal second quarter we remained focus on improving gross margins throughout the enterprise, managing our operating expenses by leveraging our business platform, and seeking cost-efficient ways to stimulate consumer demand across all of our brands and businesses. I'll now turn the call to our President, Chris McCann.

Thanks, Bill. As we entered fiscal 2011, we said that there were several specific areas where we would be focusing our efforts to improve our performance, particularly in our Consumer Floral business. Toward this goal, during the first quarter we launched several initiatives that are already providing good results. We made additional investments in our customer service platform significantly stepping up training for our network of sales and service specialists.

By raising the visibility and accountability of our sales and service specialists and providing them with the recognition they deserve we're building a culture that is obsessed with providing the very best service at every touch point. As part of this effort, Jim and I both communicate personally on a regular basis with our sales and service specialists to let them know just how important they are in terms of engaging with our customers and helping us deliver smiles every day.

The results of these efforts has been a steady improvement in our internal customer satisfaction metrics. Importantly, our efforts in this area have also been recognized externally within the E-commerce industry where 1-800-Flowers.com was recently rated number one among our competitors with a score of excellent for customer satisfaction by STELLAService, an independent rating agency.

On the product front, we have significantly upgraded our product development team adding an infusion of new talent as well as working more closely than ever with our BloomNet professional florist through our expanded design council. Historically, 1-800-Flowers.com has always been the leading product innovator in our industry with such unique products as our signature flower birthday cakes, our flower cupcake line and our Happy Hour arrangements. Our design team is focused on creating truly original products, flowers that help our customers express themselves perfectly to the important people in their lives.

And we're inviting our customers behind the curtain, engaging with them directly, asking them to help us rate and choose the best product designs. Some of the early results of these efforts can be seen on our site currently, and I invite you to take a look at what I believe is the best Halloween collection we have ever offered. Along with truly original product designs and our obsession with service, we are also retooling our marketing programs to stimulate demand and drive better effectiveness.

This includes reallocating some of our marketing investments into areas where, based on the testing we've done, we anticipate better returns both offline and online. For example, some of you may already have heard our new radio spots, part of the campaign we launched a few weeks ago that is already generating some nice buzz for our brand.

Overall we're confident that the initiatives in marketing, merchandising and customer service along with the efforts to improve gross profit margin, which Jim and Bill touched on earlier, will enable us to improve the performance of this business segment and position us for renewed growth in the years ahead. Now, I'll turn the call back to Jim now for a wrap-up.

We continue to focus our efforts on managing the key aspects of our business that we can control, our operating cost, our relationship with our customers, our technology innovations and our financial structure. We believe this focus combined with the initiatives we've outlined will create additional leverage within our business model and provide for long-term growth opportunities that will enable us to emerge from the current economy with an even stronger position as the world's leading flower and gift shop.

That concludes our formal remarks. I invite you now to ask any questions you may have. Melena, could you restate the instructions for the questions?

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

Thanks, good morning. So first of all, actually I have a few questions. First of all, I was wondering if you could talk about operating efficiencies in the backdrop of continued weak consumer demand? How much more is there in terms of what you can do in terms of improving efficiencies? If you could put it in terms of a baseball game which inning do you think you're in?

The second question I have is I was wondering if you can talk about the pull back in promotional activity? While I understand it doesn't make sense to over-promote in a soft economy, I was wondering if there's a time in the future where you see it does make sense to increase promotional activity again?

Then finally, on a longer-term basis, I was wondering if you could -- if you think the Consumer Floral business could return to it's former revenue levels in a better economic environment, and if not, do you think the baskets business can grow quickly enough to make up for that softness?

Ingrid, we're only allowing one question.

Okay. Sorry.

All right, we'll treat that as a three-parter. Bill, will you take the first part for Ingrid?

This is about the operating efficiencies and more in the broader term of leveraging our business, within our business model. I think what we we've already been demonstrating is within our Gourmet Food and Gift Basket channel, we've been generating better bottom line results despite the fact that we've had some top line issues because of the wholesale basket side of the business. We've been demonstrating it within BloomNet by continuing to have strong contribution margins despite the impact of the lower florist orders that we have.

We continue to demonstrate strong cash flow from continuing operations. And these are somewhat offset by the fact that over the last two years we've had weaker performance on floral. What we stated in the call this morning also is that we are going to continue to invest in certain areas to help drive future growth. So whether it be franchising efforts for both the Consumer Floral and our Food Group, investments in mobile and social commerce, floral supply chain in Celebrations.com.

So we're going to continue to invest and we're offsetting these things with some operating efficiencies. I think the real focus of taking cost out of the business has shifted to kind of the gross margin side of the business and taking, generating operating efficiencies within gross margin. That's why you hear us talk about manufacturing efficiencies, we've talked about lean manufacturing in that area. So there are still costs to be taken out of the business but more the focus is on the gross margin right now.

Okay.

Just to summarize there, I think a couple of points I'd add to Bill's. One is, if you took out the wholesale piece of Baskets, which way under-performed in the last couple of years, our consumer business, our direct-to-consumer business, which is obviously our primary focus, is growing and has grown nicely in our GFGB mix of all of those brands, so that business is growing. The miss, the growth is disguised by the miss in the wholesale basket side. Again, we'd rather it didn't happen. We'll take steps to improve that over the next couple of years. We don't want it to grow much larger than we had it, say, a couple of years ago because it distorts our business. But it gives us good energy and fuel in our overall platform. So growth in the GFGB ex- the wholesale basket piece. As you see, Ingrid, we have a mix of products and at different times there will be different growth opportunities for each of those products. Floral has seen some stress in the last couple of years but I think it can return, to answer your question specifically, I think it can return to its formal levels. And I think the things that Chris and the team are doing in product innovation are getting us more and more closely to our BloomNet network, all the different programs we have going on there, I think, can certainly restore it to where it was and grow it beyond.

And, Ingrid, regarding promotional activity specifically, we are a retailer, so there's always a role for promotional activities. However, you will continue to see us get more and more focused on managing our brands and the value proposition that those brands deliver to our customers. So while there will always be a place for promotional activities they will be used much more judiciously than in the past. Value really, for our customers, means they're getting value for their dollar. It's not about low price points, it's not about discounts. So you will continue to see that evolve in our brand messaging.

Then, again, to Jim's point, adding on to the Consumer Floral, yes, while we believe Consumer Floral can perform better than it has over the past year or two certainly, again, we look at our business from overall perspective, especially when you look at a dual-branded website between 1-800-Baskets and 1-800-Flowers. As long as the consumer is purchasing from either of those product categories and increasing their stickiness, their retention of frequency with us, that's our focus over the long term.

And in the long term we think the basket -- not only do we think the floral business can resume growth, but we think the basket business can become as big as floral business.

Okay. Yes, it makes sense. Thank you.

Thank you. Our next question comes from Eric Beder with Brean Murray.

Good morning.

Good morning, Eric.

Good morning. Got a few questions. Could you talk to us about going forward, what the impact from the marketing program that you cancelled is going to be?

The third party marketing program. I'll ask Bill to give you the negatives on that. But as you saw in this quarter we had a beneficial impact from canceling the Martha program which was a marketing program. That had a positive contribution. That was offset by the negative contribution which I'll ask Bill to quantify from our third party marketing, and that will anniversary in this next quarter. We'll finish that in the fourth calendar quarter, our second fiscal, and it'll be gone then. Bill?

That's right. So approximately $1 million in this quarter was the impact both top and bottom line of not comping against that third party marketing program and it's probably about $1.2 million, $1.3 million in the second quarter, Eric. And then after that, as Jim indicated we terminate it at the end of December .

Okay. You had -- the floral business was down and BloomNet was up, how did those two kind of work together and how should we think about that?

This is Jim. Eric, I think you can see that while there is some relationship between the amount of business that 1-800-Flowers generates and BloomNet, I think what you've seen is our efforts over the last couple of years have not made them totally parallel. What I mean by that is, what the 1-800-Flowers management team that Chris now directly leads with a very much flattened organization is knitting itself much closer together with BloomNet so that the things we do in the Flowers brand can specifically benefit BloomNet.

But independent of those activities, you have the programs that BloomNet's been introducing over the last couple of years, and the product category, where we've developed this terrific relationship with Yankee Candle benefiting all of our BloomNet floral partners, where we've introduced the Lotsa Love - Plush program, again, products that 1-800-Flowers will be featuring that our florists can now carry on a very good cost basis, and delivering good value to our customers helping them to deliver smiles in unique and different ways.

(Inaudible) program which we're just introducing now as another example in the product category of how BloomNet is growing independent of its relationship with Flowers yet growing more intertwined with it every day. In addition, services, the digital directory, the website hosting, the educational and training programs, the marketing programs, we just had a big introduction of our new floral university training center that we physically opened in our Jacksonville facility just a couple of days ago, that's called the Floriology Institute, wonderfully received by scores of florists who attended it, attended the first wedding training program there, other florists who came to view the center, participate.

The people from the Arrondi industry applaud it in terms of how even in a tough time we're investing our relationship with our BloomNet florists in training, in marketing, in promotion and in finding the right products like our new glass collection to help them compete, to help them serve our customers and to help them to better integrate the offerings they have so that 1-800-Flowers, as they step on the gas pedal, has its engine behind it for fulfillment, all embracing our floristness. So I think there's a relationship but no longer a direct correlation which has been evidenced by the performance you've seen over the last few quarters.

Okay. Can we get an update on the franchising for both, I guess, Fannie May and for the 1-800-Flowers, where are you looking for that? I know you've talked about the franchising for Fannie May before. Where are we in that stage and how is it looking for the other one?

Frankly, our only active franchise effort that's already on the dance floor, so to speak, is our Fannie May franchising effort. And that effort-- We introduced the idea in our last phone call -- in our last conference call -- that we'd be rolling out the first phase of that. We were completely certified or registered in all the necessary states come July. And I would say that we're right on plan in terms of seeking out the first handful of partners that will open a collection of stores in the geographies adjacent to our rollout area, our core concentration area radiating out from Chicago.

So I'd say we're right on track. We'll be opening a collection of franchise stores this fiscal year with good partners we can continue to build on. So that's right on track and that's the only program that we're really active on right now.

Okay. And then finally, your wholesale gift basket business, obviously it's had a lot of-- it's been affected by the economy. How do you look at that going forward in terms of trying to recapture some of that share? I mean, do you look at it that you've lost share just because of the economy on that or because of competitors and what's your thoughts on that business going forward?

On the basket business, remember, we purchased a company called DesignPac to give us a unique capability to launch 1-800-Baskets. We needed the design capability. We needed the confection capability. We needed a physical plant for our training of our BloomNet florists in the future. We needed the sourcing capability, the Asian reach -- the global reach including Asia of our different sourcing capabilities. We got all of that.

We didn't plan on growing the wholesale business. Frankly, it grew a little bit faster than we expected in the first year we had it. And in the next two years it went backwards. And it went backwards in a fairly dramatic fashion, and as we analyzed what happened it was the combination of things.

The macro environment with some of the key customers of that wholesale effort in the past went out of the business. The other thing is, I think we misexecuted. I think we've analyzed that. We've made significant management changes. I think the GFGB leadership now is firmly convinced that we can grow that wholesale business over the next few years back to the level we wanted it to be, which all it does then is continues to give us a good reach, good capabilities and a nucleus for building what is much more important to us which is 1-800-Baskets.

We didn't want it to go backwards, it did. We've analyzed what's within our control and what's without, and we're certain over the next couple of years that we can build it back to that, let's call it that $40 million to $55 million level that we've been achieving on a regular basis and get it back there and really not a great deal of intention to grow it bigger than that because our bandwidth is being sucked up by the growth of 1-800-Baskets.

Okay. Congratulations and good luck.

Thank you. (Operator Instructions) Our next question comes from David Kanen with First Midwest Securities.

Good morning.

Good morning, how are you doing?

Good. First question is on the wholesale basket business. What was the approximate decline year-over-year and what's the delta between that segment's gross margins and the overall blended gross margins of the Company?

Well, overall the Company is targeting something around a 40% gross margin. In the basket business it will be a little more generous than that. Approaching 40% the overall, the basket business has been traditionally on the consumer side a little bit better than that. But on the wholesale side we run high teens to low 20s in gross margin.

I'm sorry, the size of that last year was about $22 million. So it went from fiscal '09 to fiscal '10 it dropped about $22 million.

And I might point out there that since that time, David, so I said two things happened, some of our customers, we only had a few customers on wholesale side. Some of those customers just went out of the category. Others we lost market share in. We lost market share to a couple of competitors who, by the way, some of whom are really struggling, a couple have filed for bankruptcy. We wouldn't sell our product at a loss. Some of our competitors, I think, unknowingly did. And I think that will right itself in the next couple of years now as the market is rationalized because you can't sell product at a loss.

Right, so most of the drop in revenue came from the wholesale basket business which is a very low gross margin business relative to everything else, is that correct?

Last year, yes, last year, that was very much the case, David. But I would point out that even in the 20% margin it still has a decent contribution, so we wouldn't throw it out. But, yes we're focused on our growth and our energy is focused on growing the direct-to-consumer which has normal retail margins.

Okay. Now, in the press release you made the statement, we expect to see continued improvements in gross margins for the year. That sounds great going forward. I know in front of you you have -- it's a much, seasonally much stronger quarter, however, my question is on the OPEX line are you going to try to kind of hold things where they are and should we expect with these improved gross margins an expansion in the operating margin or do you think OPEX will chase the improvement in gross margin?

David, I think we ran into this in our August call that we're not giving specific guidance on this year. So --

Clearly we are focused on improving gross margin. Clearly we're focused on keeping our operating expenses flat even as we expect, working toward achieving growth again. If we're successful at expanding our gross margins, if we're successful at creating new growth this year and next, then you would -- then you would certainly see an improvement in our operating margins. We are predicting that, but that clearly would be the consequence.

Okay. And then how do you feel about inventory levels going into the strong holiday season?

Well, Bill will give you the specifics. But keep in mind that last year our inventory levels were going to be higher because we still had our children's division so that had a particularly disproportionate impact on the first quarter when we were accumulating inventory.

But we feel we're right on where we should be. As you look at a holiday, for example, like the Christmas holiday, the floral brand increasingly had a typical challenge because they didn't have the right products to appeal to customers in the earlier part of the selling cycle. That's why the Company and in particular why Chris has focused our efforts on growing our confectionary brands, our gift basket product, so that we have the right mix of products. So in our shop we're merchandised correctly so that when customers come to us for gifts that help them put smiles on their business customers' faces and on their families' faces in November and in October when we have Halloween and in December that we have the right products. Those products require an inventory investment and we feel very good at not only the product mix that we have now but the inventory levels.

Normal inventory at the end of the first quarter was about $71 million this year, up from $45 million at the end of last year. It will be back down to that level as we come out of this season. We're very comfortable with where inventory is. As Jim was mentioning, there are certain categories that we have to make more investments in. And there are other categories that we're managing our inventories down.

Okay. So in the December quarter, the Company should generate meaningful cash flow. Assuming that's the case, things go according to plan, do you feel that it's good use of your cash to buy back stock, to somehow return that to shareholders by buying back stock and hopefully increasing EPS, and so forth?

As we -- I think you're correct that the December ending quarter and I add the June ending quarter are the quarters that we generate the majority of our free cash flow. Obviously, the summer quarter is the one where we were investing for this holiday period.

What we said in the past, and I think what you can see from the evidence of our behavior over the last couple of years, that we're focused on preserving shareholder value and using our excess free cash flow, we're fortunate enough to be generating, to do one of two things, either invest back in the Company because we think we can get good growth from that, either on initiatives that we identify, or on perhaps an acquisition that might be identified, although, obviously, nothing there to report.

But the other side of that is what do we do with that excess cash flow that we don't use in one of those two areas? And the options available to us are that we focus on are either buying back our stock or reducing our debt. Those decisions would be made that based on the climate and our continued success.

Let me point to the fact that over the last two years and continuing this year, last year two years we've reduced our debt and improved the flexibility of our balance sheet and our financing arrangements, paid down debt to the tune of nearly $70 million. This year we planned to reduce our debt by at least another $15 million. So we'll be judicious about making sure we have the right capital reserves, the right cash on hand and the right banking relationships and make those determinations as we achieve the cash flow generation that we anticipate.

Okay. Well, nice job. And I wish you luck going forward. Thank you.

Thank you.

I'm showing no further questions at this time.

Thank you, Melena, and thank you all for your questions and your interest. We'd be happy to have any further dialog that you'd like. You know how to contact us. And as Chris already mentioned we really have a really great Halloween gift lineup. As a flower shop Halloween was never a big and important holiday for us. But over the last four or five years that we've expanded the merchandising mix in our shop to accommodate our customers, to help them with their gifting-connected needs, to help them put smiles on the faces of the important people in their lives, with our Fannie May chocolates, our Cheryl's product, our popcorn factory product. I think we have a great mix. I invite you to come to the site, the 1-800-Flowers site, see the 1-800-Baskets collection. And I think you should do your research and sample those products and put the smiles on the faces of your friends, your family, your loved ones. So until next time or until we chat, thanks so much for your interest today.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the conference and you may now disconnect.