1-800-Flowers.Com Inc (FLWS) 2011 Q3 法說會逐字稿

Good day everyone. Welcome to the 1-800-FLOWERS.COM fiscal 2011 third-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, Joseph Pititto. Mr. Pititto, you may begin.

Good morning and thank you all for joining us today to discuss 1-800-FLOWERS.COM's financial results for our fiscal 2011 third quarter.

For those of you who have not yet received a copy of the press release issued earlier this morning, (inaudible) access the Investor Relations section on our website at 1800FLOWERS.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 the statements that we will make today may be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed description of these risks and uncertainties please refer to our press release issued earlier this morning as well as our SEC filings, including the Company's annual report on Form 10-K and quarterly reports on Form 10-Q.

In addition, this morning, we will discuss certain supplemental financial measures that are not prepared in accordance with Generally Accepted Accounting Principles. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables accompanying the Company's press release issued this morning.

The Company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today's call and in accordance with 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 back to Jim McCann.

Good morning. During our fiscal third quarter, we saw an acceleration of the positive trends in our business that we discussed back in our January call. As we noted then, we began fiscal 2011 with specific areas of focus for improvement, particularly in our core Consumer Floral business. I'm pleased to report that we are making significant progress in this area in terms of upgrading our merchandising programs, refocusing our marketing message, and enhancing the efficiency of our advertising efforts. This has resulted in improvements in revenues, gross margin, and operating expenses.

During the quarter, we grew Consumer Floral revenues by more than 5% to $100 million. This was driven by strong Valentine holiday sales in spite of the holiday -- the Monday holiday placement. We increased category contribution in our Consumer Floral business to $8 million, compared with a loss of $241,000 in the year-ago period.

I'll ask Chris to provide more details on our Consumer Floral initiatives later in the call, but before I turn the call over, I'd like to note some of the other highlights in the third quarter. In our BloomNet business, we grew revenues more than 17% to approximately $21 million. This growth primarily reflected benefits from the investments we had made to increase our shop-to-shop order volume. These orders originate at independent florists and are conveyed via BloomNet for fulfillment. As we capture a larger share of these orders and combine them with the millions of orders generated by 1-800-FLOWERS.COM, we are uniquely able to provide our BloomNet florists with an increasing flow of orders to help them grow their businesses.

In addition, during the third quarter, BloomNet continued to increase its penetration of our expanded suite of products and services such as our balloon and [plush] programs, as well as our exclusive Yankee Candle product line.

We also expanded our [Floreaology] Institute training programs. This is BloomNet's unique industry accredited training platform that provides professional training in advanced floral design and new business development skills. Floreaology Institute features instruction from some of the leading names in the floral and gifting industry and is helping us deepen the sense of community among our BloomNet florists.

In our Gourmet Food and Gift Baskets business, revenues were down slightly due to the shift of the Easter holiday to later in the fourth quarter of this year. Adjusting for this shift, revenues for the quarter increased driven by growth in our e-commerce channels.

We're particularly pleased with our 1-800-BASKETS.COM business where we achieved solid double-digit revenue growth as well as a continuation of the positive trends in gross margin and average order value. As we've noted in past calls, the growth of 1-800-BASKETS.COM is driven by our strategy to cost-efficiently effectively leverage our flagship 1-800-FLOWERS.COM brand, including a significant online traffic and customer database. With that said, it's important to note that we are sending a growing number of customers -- we are seeing a growing number of customers coming directly to the 1-800-BASKETS.COM site to shop for gifts, illustrating increasing brand awareness. We remain excited about the opportunity to grow 1-800-BASKETS.COM into a leading brand in the $16 billion gourmet food and gift basket category.

I'll now turn the call over to Bill for a review of the financial and operating metrics for the quarter. Bill?

This year's fiscal third quarter showed significantly improved results compared to last year's third quarter. We grew revenues with more efficient marketing spending, we increased gross margins with disciplined promotions and increased average order value. We kept our operating expenses in line despite some non-comparable items that I'll discuss in a moment. As a result, we achieved significant improvement in our bottom-line performance. This year-over-year improvement was largely driven by the acceleration of positive trends in our 1-800-FLOWERS.COM Consumer Floral business. In this area, we were particularly pleased to achieve revenue growth of 5.2% for the quarter driven by strong Valentine sales.

Now, regarding specific financial results, some key metrics for the third quarter -- total net revenues grew 4.7% to $162.8 million, compared with $155.5 million in the prior-year period. During the quarter, our e-commerce orders totaled $1.853 million compared with $2.004 million in the year-ago period.

Average order size during the quarter was $63.40, up 12.4%, compared with $56.43 in the prior-year period. During the quarter, we added 629,500 new customers. This was achieved while concurrently stimulating repeat orders from existing customers who represented 57.8% of total revenues compared with 59.5% in the prior-year period.

Gross margin for the quarter increased 60 basis points to 38.8% compared with 38.2% in the prior-year period. This primarily reflects a combination of improved merchandising programs, (inaudible) promotional activities in our Consumer Floral categoric which more than offset increases in commodity prices and fuel surcharges and primarily affected our Gourmet Food and Gift Baskets segment.

Operating expenses before appreciation and amortization improved to $61.9 million compared with $62.2 million in the prior-year period. Operating expense ratio for the period improved by 200 basis points to 38% compared with 40% in the prior-year period. Operating expenses also included non-cash compensation expenses of approximate $1.1 million compared with approximately $700,000 in the prior-year period. The improvement in operating expenses was achieved despite the fact that year-over-year incentive compensation expense increased more than $4 million (inaudible) the improved results this year compared with the prior-year period which had a negative incentive compensation expense related to the reversal of previously accrued incentive compensation.

For the quarter, depreciation and amortization expense was $5.2 million compared with $5.5 million in the prior-year period. As a result of these factors, EBITDA for the quarter increased $4.1 million to $1.3 million compared with an EBITDA loss of $2.8 million in the prior-year period.

Net loss for the quarter improved $3.3 million, or $0.05 per share, to a loss of $2.7 million or $0.04 per share compared with a net loss from continuing operations of $5.9 million or $0.09 per share in the prior-year period. Total net loss for the prior-year period was $7.3 million or $0.11 per share.

In terms of category results, in our 1-800-FLOWERS.COM Consumer Floral business, during the third quarter, revenues in this category increased 5.2% to $100.3 million compared with $95.3 million in the prior-year period.

Gross profit margin for the quarter improved 380 basis points to 37% compared with 33.3% in last year's fiscal third quarter. This was (technical difficulty) a combination of reduced promotional pricing and improved merchandising programs.

Category contribution margin increased $8.2 million to $8 million compared with a loss of $241,000 in the prior-year period. Significant improvement affected the aforementioned growth in revenue and gross margin as well as enhanced marketing efficiencies. The Company defines category contribution margin as earnings before interest, taxes, depreciation and amortization, and before the allocation of corporate overhead expenses.

In our BloomNet Wire Service businesses, revenues increased 17.3% to $20.8 million compared with $17.7 million in the prior-year period. This was primarily driven by significant growth in shop-to-shop order volume.

It should be noted that investments associated with capturing the increased shop-to-shop order volume essentially offset any margin contribution. As a result, gross margin for the quarter declined to 47.3% compared to 53% in the prior-year period. Looking ahead, we expect to monetize the increase in shop-to-shop order volume in this channel and thereby improve gross margin. As a result of these factors, category contribution margin increased approximate $100,000 to $5.3 million compared with $5.2 million in the prior-year period.

In the Gourmet Food Gift Basket business, the shift of the Easter holiday from the beginning of the fourth quarter last year to later in the fourth quarter this year has an outside impact on our fiscal third-quarter results in this category. Revenues were down slightly to $41.9 million, compared with $42.6 million in the prior-year period.

Gross profit margin was 38.4% compared with 42.6% in the prior-year period as the Easter shift affected product mix with a larger percentage sales during the quarter coming from lower margin wholesale business as well as rising commodity and fuel prices. As a result of these factors, category contribution margin was $129,000 compared with $1.2 million in the year-ago period. We anticipate recouping the revenues and contribution margin associated with the Easter shift during the current fiscal fourth quarter.

In terms of corporate expense, 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 second quarter, corporate expense, including stock-based compensation and the aforementioned increase in incentive compensation tied to the improved year-over-year results in the quarter, was $11.1 million compared with $8.3 million in the prior-year period.

Turning to our balance sheet, at the end of the third quarter, our cash and investments position was approximately $16.8 million. Inventory of $52.5 million was in line with management's expectations and reflects the build-up for the Easter and Mother's Day holidays.

Borrowings under our credit facility were $50.1 million in term loan debt and we had no borrowings outstanding under our revolving credit line.

Regarding guidance, as we have previously stated, we do not provide specific guidance for revenues, EPS, EBITDA and free cash flow. Regarding our current fiscal fourth quarter, due to Easter, Mother's Day and other spring holidays, our business is largely floral in nature. With this in mind, we will look to build on the positive trends we have seen in our Consumer Floral business during the first three quarters of fiscal 2011 in terms of proving revenue, gross profit margin and contribution margin.

Overall, while we are seeing improvements in consumer demand, we believe the current economic recovery is still in its early stages. As such, we will continue to focus on increasing our gross profit margin and managing our operating expenses while concurrently seeking to build on the sales momentum we've seen in our key business areas.

I'll now turn the call over to our President, Chris McCann.

Thanks Bill. As we discussed in our previous calls, there are several specific areas we are focusing on to improve our overall performance, particularly in our Consumer Floral businesses. Among these are our initiatives to improve gross profit margin and to stimulate consumer demand through a combination of enhanced merchandising and product design and more efficient marketing programs.

During the third quarter, we made excellent progress in these areas. We grew revenue by more than 5%, accelerating the improving trend that we'd seen in each quarter since the beginning of fiscal year. This was achieved despite the Monday placement of the Valentine holiday and we believe reflects the benefits of our merchandising and marketing initiatives.

During the quarter, we increased gross margin by almost 400 basis points through a combination of more efficient use of promotions and repositioning our marketing message to emphasize our Better and Best gift offerings. By encouraging our customers to wow their gift recipients and not settle for less, we were able to grow our average order value by more than 12% during the quarter.

We also saw the early benefits of our new product development initiatives focusing on truly original product designs such as our new Adogable floral basket. This arrangement features an incredibly cute puppy of beautiful flowers, made up of beautiful flowers and it's fast becoming one of our top-selling signature products. We are working closely with our BloomNet Flowers Design Council to expand the Adogable line and to develop additional new arrangements that really embrace our flattishness and help clearly differentiate 1-800-FLOWERS.COM.

In addition to developing truly original new products, we also significantly improved the efficiency of our marketing programs during the third quarter. We did this by focusing on our Delivering Smiles marketing message in the channels that we use to reach our customers. In this area, our industry-leading positions in mobile and social commerce, particularly our efforts on Facebook and Twitter, are enabling us to reach our customers at the right time with the right products that help them with their gifting needs. We see significant growth opportunities in mobile and social commerce where we continue to benefit from the investments we've made over the past several years.

On the subject of growth, we believe it's important to look at the combined performance of 1-800-FLOWERS.COM and 1-800-BASKETS.COM together. As we've noted in the past, the successful launch and consistently strong growth of 1-800-BASKETS has been driven by our strategy of leveraging our flagship 1-800-FLOWERS.COM brand through our multi-branded website. So in the third quarter, we achieved solid revenue growth for the combined brands. Importantly, a growing number of customers are now coming directly to the 1-800-BASKETS.COM website. We believe this increasing customer traffic positions 1-800-BASKETS uniquely in the gourmet gift space as an everyday gifting destination with the ability to grow its business year-round. As such, we remain very excited about the long-term growth potential for this business.

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

Throughout fiscal 2011, we have been improving -- we've seen improving trends in our business in terms of our revenues, gross margins, and operating expenses. We believe these trends, including the positive results achieved in our fiscal third quarter, illustrate the fact that we are emerging from what has been a challenging two-plus year period as a leader and stronger company, one that is well-positioned for profitable growth. Throughout this period, we've focused our efforts on managing these aspects of our business that we control. Despite an economic climate that impacted topline growth, particularly in our Consumer Floral business, we have consistently generated positive EBITDA and solid free cash flow by leveraging our business platform to reduce operating costs. Having taken tens of millions of dollars out of our expense structure, we are now positioned to drive increased profitability on future revenue growth.

In addition to cost reductions, we've also identified what we believe are significant revenue growth synergies across our business platform. This is most notably illustrated by the successful launch of 1-800-BASKETS.COM. We believe that we are in the early stages of executing against many of the [cross] platform marketing and merchandising opportunities that we see, which will help us deepen our relationship with our customers as their destination for delivering smiles.

We also significantly strengthened our balance sheet, paying down more than $80 million on our term debt and increasing the financial flexibility we have with our banks. We have continued to innovate and invest for the future. This key strategic priority is illustrated by the successful investments we've made in mobile and social commerce, which have positioned us as an industry leader in these key customer interaction channels. As we look ahead, we believe we are well positioned to build on the positive momentum we are seeing in our business so that we can drive profitable growth and enhance shareholder value over the long term.

That concludes our formal remarks. I'll ask Mary if she can please restate the instructions for the Q&A portion.

(Operator Instructions). Ingrid Chung, Goldman Sachs.

Good morning. So two questions. First, you mentioned the investment in shop-to-shop order volumes in driving revenue growth for BloomNet. I was wondering if this investment was one-time in nature, or is it ongoing?

Then in terms of the second question, I was wondering if you could speak about where you think levels of profitability could go for Consumer Floral. Do you think you can get back to your old levels of profitability pre-recession? Do you see the competitive environment as being more benign now than pre-recession? That's it. Thanks.

In terms of the last part of your question, I'll cover it in order. In BloomNet, as we ratchet up our involvement with our BloomNet florists, there will from time to time be expenses at the beginning of keeping a relationship with some of our key BloomNet members. So yes, it's a one-time expense, but it will happen episodically. So yes, to bring on that business is a one-time expense, and now we begin to monetize those relationships as they grow. So yes I think, generally speaking, you can call that a one-time expense. Now we have good monetization capability not only from those orders themselves but from the deepening relationship we have. As one of the smaller networks out there, when you look at our orders, and I think we're probably one of the -- probably the leading order center now to flower shops. Then if you look at the smaller number, on a shop-by-shop basis, that makes us even more important to those shops, which gives us an opportunity to leverage the other programs we're putting in place, the services we're putting in place, to help those BloomNet florists be more and more profitable. So we are seeing the evidence of that recognition from BloomNet. You see it in the form of our growing revenue and profitability.

In terms of the Consumer Floral business, yes indeed we think we can return over time to the same level of profitability. In fact, we hope and expect to exceed that. I think it's a focus of the things that Chris mentioned -- our merchandising mix, embracing our [florist] (inaudible) our deepening relationship with our BloomNet and franchise florists. It's just all of those factors lead us to have the confidence of not only can we return to those levels of profitability but in fact exceed those.

Do you feel like the recession has weakened your competition in any way? Did you get a positive impact from Harry & David's financial problems?

Well, on the Harry & David piece, I think everyone got, in the floral business got punched in the nose over the last 2.5 years. I think clearly I can speak for ourselves. I see we are emerging from that world. Clearly, the consumers are back to where they were. We do have the concerns that every retailer has, as you see gasoline prices impacting the consumers' buying power, so that's why we are so focused on gross margins, so that we can withstand those kinds of hits, but we are so focused on our cost structure so that we can withstand those kind of hits, still grow and still improve our profitability.

In terms of the Harry & David question, we know them pretty well. They've been a competitor for a long time. Their heavy promotional activities as they got more desperate through their last two quarters clearly impacted large (technical difficulty) in all of our categories that we compete in. I think what Chris and the rest of the team were able to do in terms of gross margin to withstand that is quite good. Frankly, as we look at this, why we decided to launch 1-800-BASKETS 1.5 years ago is because we saw great growth opportunity there, especially in the everyday business. So we're pleased that that's been successful, and we're pleased that even though the whole category is impacted by their very heavy promotional activity, we were able to withstand that and continue to grow very nicely the 1-800-BASKETS business.

Perfect. Thank you.

(Operator Instructions). Eric Beder, Brean Murray.

Can you talk a little bit about -- I notice you put 1-800-BASKETS on your website. Now you have the Popcorn Factory. How has putting them all -- how does that improve your business with the Popcorn Factory in terms of that? (inaudible) plan of putting other of your brands -- I know websites such as [Fannie Mae] -- combined (inaudible) websites (inaudible).

Eric, we've put the Popcorn Factory (inaudible) on the site. Obviously, sales of the Popcorn Factory product have increased. It's like it's an additional channel for the Popcorn Factory at this point in time. I think (inaudible) also generally helping to see. There is just an overall increase of sales and mind share of our expanded product line with our customer base, which is exactly what we are looking for.

So the other brands are all represented on the 1-800-FLOWERS website with the [proto] links we have at the bottom, but at this point, we've only positioned those two brands in tabs. I think, as we continue to develop the technology platform, you'll see this experiment in other areas as well, looking to figure out and constantly learn and evolve the best way to figure out to help our customers achieve all their gifting needs with all of our brands and product lines.

In terms of DesignPac and the wholesale business, what kind of reads are you getting in terms of orders for the holiday season? for the DesignPac business? I know that was a bit of a drag last year.

This is Jim. You're right. It was a big drag last year and a big drag through this year, frankly, in terms of year-over-year comps. When we purchased DesignPac, which became the Wholesale division of 1-800-BASKETS, we did it to launch the 1-800-BASKETS direct to the consumer program. While we didn't plan on growing the wholesale portion of our business, we didn't anticipate the recession that we've experienced in the last 2.5, 3 years, and the impact it had on the wholesale piece of that business. But what I'd tell you is that based on early reads the and just reads, our expectation is that we will see significant growth in our Wholesale business in the coming fiscal year as we look at our book of business and how it fills the next (inaudible). I don't think we will get all the way back, but we are expecting improvement.

Great. My apologies if I missed this question. But when you looked at the gift and the baskets in the gifting segment, how should we think about that? Someone asked a question about getting back to the floral margins. What should we see as the goal or the opportunity for margins in the gifting business? Should that be a higher-margin business than the floral business? How should we look at the gifting and the baskets area?

From a strategic point of view, what we determined over the last five or six years is that we needed to broaden what a floral and gift shop would be to our consumers in terms of their mind share and their impression. So you've seen us with our growth of organic businesses and a few acquisitions that we have done really broaden our portfolio of giftable food brands, our bakery gift brands, our candy and chocolate gift brands, our popcorn and novelty products, now 1-800-BASKETS, all intended to have a mix of products in our flower and gift shop that are brand appropriate, product appropriate, that help our customers deliver the smiles that they want to all those celebratory and gifting and connected (technical difficulty) that they have throughout their calendar.

So you can expect us to continue to grow that. It turns out to have been a pretty good decision on our part strategically five or six years ago to move in this direction. Our competition has recognized that and has begun aggressively mimicking what we have done because of our success. That's appropriate and as expected. So we'll continue to evolve that.

From a margin point of view, I think you can expect that, in the product categories we are currently in, because we are vertically integrated and have made those decisions over a 10 to 12-year testing period and then making the decisions as to which categories are appropriate, [then] we become vertically integrated, so therefore those margins are actually better than the (inaudible) business and we'd expect that to continue in the lines we are in now.

I guess could you give us an update on how you have been integrating the non-floral products into BloomNet with Fannie Mae and some of the cookies and some of the other pieces and how that has gone, how the response has been from the florists for that and what you plan to do with that going forward?

That's the integration of our other giftable brands and our flower shops, BloomNet (inaudible) franchisees has been a slower process. The candy piece has gone quite well there. We have a good amount of chocolates in there. You've seen us introduced the balloon program, the Yankee Candle program. But in terms of our perishable food gifts, you'll see that as a part of an overall integration opportunity because we want our BloomNet florist to have the same opportunities we have to service their local customers the way we service our customers. Our customers want these products, they have a demand for them, and you will see us as -- in fact you all can ask us about the rollout of our suite of products and services. That's very much on that list of products and services to roll into our BloomNet shops over the next few years. Continually looking at areas where we can help them to serve our customers and growth the depth of their relationship with their customers. So you can expect to see a constant drumbeat of innovation and product introductions in that channel.

Great, thank you.

(Operator Instructions). Jeff Stein, Soleil Securities.

Good morning. I am wondering if you could just talk a little bit about your success and your expectations in terms of cross-selling the brand. So what percent of your customers today are multiple buyers, for example buying a Popcorn Factory and 1-800-FLOWERS or a Cheryl & Co. and 1-800-FLOWERS brands compared to a couple of years ago? Kind of how do you expect to scale that up? Because that would seem to me to be one of your largest incremental revenue opportunities.

This is Chris. I'll take that. You're right. That's one of the things, as Jim mentioned earlier, that is really part of (inaudible) as we expand our floral and gift shop and have all these different brands and products available to our customers for all of their gifting needs. As we said previously, there really has not been a major focus of ours, especially over the last couple of years as we went into the recessionary times that we did and the focus is really on the operational cost structure of the Company. As we start to emerge from that, we are now paying more attention to that.

So we've done some things on the back end, right, some list exchange and things like that, that have been beneficial to the different brands. But I think the real step forward in that really is the manifestation of 1-800-BASKETS on our 1-800-FLOWERS.

We don't have metrics to break out yet on really the kind of multi-branded customers, what percent of the customer base. We don't get into that. But as we stated in our formal remarks, we are very pleased, in addition to that, with the direct to the URL, direct to the 1-800-BASKETS.COM website traffic, how that's growing. That we believe is a reflection of the visibility of that brand on the flower site, people becoming more familiar with it, plus then the marketing efforts of being included in the e-mail marketing of the 1-800-FLOWERS, again to that same customer base as well as search marketing and (inaudible) marketing. So mainly everything focused on that same expanded customer base, but what we're seeing now is that customer is not only coming to 1-800-FLOWERS and clicking over the baskets, but coming directly to BASKETS for a different gifting need than they might not normally have come to the 1-800-FLOWERS site for. So early stages, but you're right, that is part of our -- a key part of our overall strategic plan going forward.

I know the revenue stream is still rather low, but since you've mentioned it several times, can you tell us roughly what percent of your 1-800-BASKETS customers are going direct to the site today compared with maybe a quarter ago and a year ago?

It still is a very small -- it's a small number that we don't breakout. But what we are very happy with is consecutive month-over-month growth in that number.

Yes, a year ago, Jeff -- this is Jim -- would've been zero. So the reason we point that out as we are pleased with how significant it is. It shows the benefit of using the platform for a brand building opportunity in the appropriate gifting categories. The 1-800-BASKETS just launched with little or no marketing budget because it's just trading on the traffic on 1-800-FLOWERS to begin with. Now we start to do some kinds of small incremental discrete marketing efforts specifically against that brand. That [would be seen in its] traction, that will be seen (inaudible) a foothold as a result of the 1-800-FLOWERS traffic, and clearly it will be cannibalistic, but we also think it has improved the close percentage on the 1-800-FLOWERS and 1-800-BASKETS combined sites because we now have a broader range of products. So you'll continually see us testing (inaudible) merchandise different brands and products. We've made progress and we think we can make a lot more.

Just a few follow-up questions real quickly for Bill. Just taking a look at the fourth quarter, I'm wondering if you could just kind of run through some of the puts and takes, because seems to me like it could be an opportunity quarter, albeit it is a small quarter. But if I recall, last year, you had a special charge that you took in association with terminating the Martha Stewart agreement. Now you've got the holiday shift which should be a plus. I'm wondering how that might net out against bonus accruals this year versus last and any other kind of one-time or items that might shift between quarters.

It sounds to me like you just summed it all up.

Yes, Jeff, I was going to say you really did sum kind of the three items, two going one way and one offsetting that.

In addition, Bill, I think you already mentioned that we are anticipating fuel surcharge costs and commodity increase costs, but we do have an increasing trend in gross margin offsetting all of that.

With respect to commodity costs, can you kind of talk a little bit about what's going on in the cocoa market, and how far out you are bought and how you're kind of set from a cost standpoint relative to the prior year?

We are seeing commodity increases across a lot of the different component parts of our -- on the food side of our business, but cocoa being the largest one because of the issues on the IV post where a lot of the cocoa in the world is -- all comes from. We are covered through the early parts of next year. We are continuing to monitor that closely, but cocoa prices have increased dramatically. So --.

They've come back from their highs, but we're probably bought through the early part of next calendar year.

Through Q2 of next year.

Is the plan to protect your margin? Are you going to try to pass the price increases through, or how are you thinking about that at this point?

At this point in time, we are continuing to look at other ways to drive margin offsets to these price increases. I think we've done a pretty good job this past year. We are seeing commodity price increases again across a number of the different components as well as fuel price increases, yet we've still been able to drive in Q3 a 50 basis point -- 60 basis point improvement in margins, then for the year a 50 base improvement in margin. So we're looking at other ways without having to pass that along to the consumer at this point.

It would be our first choice not to have any product price increases and to find more creative ways to keep our margins improving.

Got it. Thanks a lot guys.

(Operator Instructions). [David Canon], [Williams] Financial.

Good morning. Congratulations guys. The first question is can you quantify or give me a little better sense as to the Easter shift, how much Easter business there is, both on the basket as well as the floral side, that we should hopefully pick up in Q4?

I think what we put in the release and in our formal comments was that the contribution margin shortfall in Q3 would be made up in Q4 on the GFGB side of the business. That really has very little impact on the floral side of the business since Easter was the first week of Q4 last year and on the floral side of the business, the buying is so late and so close to the holiday. But it had little impact on Consumer Floral, but it did have a big impact on the GFGB, so we should be able to regroup that (multiple speakers)

On the gift food side, it's a longer holiday from a buying -- from a customer point of view. So as Bill has mentioned in the past, it's almost better to look at the GFGB business combining the two quarters to get a good year-over-year read. As Bill expressed, we fully expect to make up the shortfall and for the margins to right themselves when you look at the Easter business as part of the GFGB business as a two-quarter business because of that constant shift of Easter.

Okay. Then can you also clarify for me, I had a bit of a mental lapse when you were talking about the gross margin decline in BloomNet. What were the drivers there? Is that something that should snap back going forward?

Yes, I think, over the longer term, we'll be able to get margins back up in BloomNet, but it's going to be -- what we've done is we've made investments into increasing the shop-to-shop order count. So that comes at a cost with the rebate structure that we provide to the florist. Offsetting that is we will modify those. We'll modify those orders through kind of the model that we have, with our tiered pricing model that we have.

Okay. On the GFGB side, excluding the Easter shift, was there organic growth and was it consistent with what you've been seeing for the earlier part of the year?

This is Jim. I think Bill already stated that if you combine those two quarters, our expectation is for good continued growth on an organic basis in the gift food businesses.

Okay. Thanks guys. Good luck.

If there are no other questions at this time, I would like to turn this conference back over to the speakers for any additional remarks.

Thank you all for your questions and for your interest. If you have any additional questions, of course please conduct us.

Just a quick reminder that this is -- we celebrated this week Passover and Easter this weekend. Next week is Administrative Professionals Week and certainly there are administrative professionals in your lives that you need to recognize and say thanks to in a very appropriate way. I like to invite you for Mother's Day to visit our website, which is only a couple of weeks away now, and tell us, share a story about an unforgettable mom in your life. Your story may appear in our upcoming "Celebrating Mom" book, and you could win a fabulous seven-day cruise on Norwegian Cruise Lines or one of many other prizes offered as part of our Moms Deserve the Best Contest. So thank you. Enjoy your holidays this week and help us enjoy ours in the next couple of weeks by coming in and picking out a nice gift to help us deliver a smile for you.

Ladies and gentlemen, this does conclude today's program. You may now disconnect, and have a wonderful day.