1-800-Flowers.Com Inc (FLWS) 2011 Q4 法說會逐字稿

Good day, everyone, and welcome to the 1-800-Flowers.com Inc. fiscal 2011 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, Javon. Good morning and thank you all for joining us today to discuss the 1-800-Flowers.com financial results for our fiscal 2011 fourth quarter and full year.

For those of you who have not received a copy of our press release issued earlier this morning, the release can be accessed at the investor relations section of our website at 1-800-Flowers.com or you can call Patty Altadonna at 516-237-6113 to receive a copy of the release by e-mail or fax.

In terms of structure today, our call 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 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 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 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.

During our fiscal fourth quarter, we saw a continuation of the positive trends that we discussed with you in our previous quarterly calls this year. In particular, our core consumer floral business continued its rebound, with revenues increasing 5.5% for the period. Combined with our positive third-quarter results, the category returned to full-year revenue growth.

Gross margin also improved significantly, up 450 basis points in the quarter and 270 basis points for the full year. We were able to significantly improve average order value and gross margin throughout the year as consumers responded positively to our merchandising efforts focused on truly original products, our revamped marketing messaging emphasizing our customer engagement and the importance of the gifting experience, and advertising programs that leveraged our industry-leading efforts in the social marketing arenas. As a result, category contribution margin increased 50% for the quarter to more than $11 million and 48% for the year, or more than $10 million, to nearly $33 million.

The significant year-over-year improvement in our consumer floral business reflects the effective implementation of the strategic initiatives we discussed with you at the start of fiscal 2011, rather than any improvement in the overall consumer economy. I will ask Chris to provide more details of our consumer floral initiatives later in the call, but first I would like to note some of the other highlights in the quarter and the year.

Our BloomNet business showed strong revenue growth for the quarter and the year as it has throughout the recent recessionary period. Its contribution margin also continued to grow nicely, reaching more than $20 million in fiscal 2011. BloomNet's consistently strong growth and profitability, despite the economy, is truly exceptional and reflects the investments we've made in our expanded suite of products and services, such as our point-of-sale business management system, our unique digital directory with its new enhanced search and advertising capabilities, and our exclusive product programs including Yankee Candle, our signature Lots of Love plush, balloons, glassware, and more.

We've also continued to invest in developing educational and community building programs with our Floriology Institute training center in Jacksonville, Florida, and the Floriology magazine, thereby filling a void in the floral industry. As a result of these efforts, BloomNet has consistently increased its market penetration as a leader in the wired service industry, as evidenced by the substantial increases achieved this past year in shop-to-shop order volume.

As we continue to capture a growing share of these orders and combined 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.

Now, our gourmet food and gift basket business, we continue to see strong returns on the investments we've made over the past several years, both in the brands that we have acquired and those that we have launched internally. Specifically, our focus on multichannel retailing with an emphasis on e-commerce, coupled with our decision to be vertically integrated where appropriate, is enabling us to become a leading player in the $16 billion gifting category.

Growth was particularly strong in our 1-800-BASKETS.COM and Cheryl's bakery gift businesses. As we have noted in past calls, the growth of 1-800-BASKETS.COM is driven by our strategy to cost-efficiently leverage our flagship 1-800-Flowers.com brand, including its significant online traffic and customer database. Importantly, we are seeing a growing number of customers come directly to the 1-800-BASKETS.COM site to shop as they increasingly embrace the brand for its unique gifting capabilities.

During fiscal 2011, we also achieved solid e-commerce and retail growth in our Fannie May chocolates business, and we have made strides in -- [throughout] our franchise program, an area I expect to tell you more about very soon.

Category contribution also improved nicely in this area, reaching nearly $29 million for the year. This was achieved despite continued soft demand in the wholesale baskets area and having to absorb higher commodity costs and shipping fuel surcharges throughout the year. Looking ahead, we continue to see exciting growth opportunities in the gourmet food and gift basket space, and we believe we are well positioned to become the leader in this important gifting category.

I will now turn the call over to Bill for a review of the financials and operating metrics for the quarter.

Thank you, Jim.

As Jim noted, our fiscal 2011 fourth-quarter and full-year results reflect the positive trends that we have been seeing in our business and the benefits of the initiatives that we put in place at the start of the year.

During the year, we grew revenues with more efficient marketing spending. We increased average order value with effective merchandising programs. We increased gross margins with higher margin offerings and disciplined promotions, and we reduced our operating expense ratio by continuing to leverage our business platform. As a result, we achieved significant improvement in our bottom-line performance.

Worth noting is the significant year-over-year improvements we achieved in terms of both topline and bottom-line metrics in our core 1-800-Flowers.com consumer floral business. In this area, we are particularly pleased to return to year-over-year revenue growth and drive strong improvements in gross margin and contribution margin. We plan to build on these trends in fiscal 2012 and beyond.

Now regarding specific financial results and key metrics from continuing operations. Because we follow a retail calendar, our fiscal year varies in length from 52 to 53 weeks every four to five years. Results for fiscal 2011 include 53 weeks, compared with 52 weeks in fiscal 2010. Also, results from our fiscal 2011 fourth quarter include 14 weeks, compared to 13 weeks in the prior-year period.

For the fiscal fourth quarter, total net revenues increased 13.1% to $187.1 million, compared with $165.4 million in the prior-year period. This increase reflected several factors, including the shift of Easter to later in the quarter, which benefited our gourmet food and gift basket segment; one extra week in the quarter compared with the prior year; and solid (technical difficulty) consumer floral and BloomNet businesses, primarily driven by the Mother's Day holiday.

Gross profit margin increased 170 basis points to 39.8%, compared with 38.1% in the prior-year period. This primarily reflects strong improvements in gross margin in our consumer floral category, which more than offset lower gross margin in BloomNet. I'll cover this in more detail as part of the category results in a few minutes.

Operating expense ratio remained essentially flat at 36.8%, compared with 36.9% in the prior-year period. Operating expenses in terms of dollars, excluding depreciation and amortization, increased $7.8 million during the quarter. The increase primarily reflected the extra week of operation in fiscal 2011, as well as the shift of Easter to later in the quarter and the year-over-year increase in incentive compensation.

As a result of these factors, EBITDA from continuing operations increased $3.7 million to $5.6 million, compared with $1.9 million in the prior-year period. EBITDA increased $700,000, compared to adjusted EBITDA of $4.8 million in the prior-year period. Net income from continuing operations for the quarter improved to breakeven, or $0.00 per fully diluted share, compared with a net loss of $3.2 million, or a loss of $0.05 per fully diluted share, in the prior-year period.

In terms of full-year results from continuing operations, revenues increased 3.3% to $689.8 million, compared with $667.7 million in fiscal 2010. Gross profit margin improved to 80 basis points to 40.6%, compared with 39.8% in the prior-year period, primarily reflecting product mix; higher average order value; enhanced marketing programs, particularly in our consumer floral business; and manufacturing efficiencies in our gourmet food and gift basket categories. These factors more than offset the lower gross margin in BloomNet, as well as the higher commodity costs and shipping fuel charges in our gourmet food and gift basket segment.

Operating expense ratio improved 40 basis points to 35.7%, compared with 36.1% in the prior-year period. And operating expenses, in terms of dollars for the full year, increased $4.9 million. This includes the extra week, as well as incentive compensation, which was minimal last year and increased by approximately $7.5 million in fiscal 2011. As a result, EBITDA from continuing operations for the year grew $9.3 million to $34.1 million, compared with $24.8 million in the prior-year period, and EBITDA increased $5.5 million, compared with adjusted EBITDA of $28.6 million in the prior-year period.

Net income from continuing operations improved $7.8 million to $5.7 million, or $0.09 per fully diluted share, compared with a net loss of $2.1 million, or a loss of $0.03 per fully diluted share, in fiscal 2010.

In terms of customer metrics from continuing operations, during the fourth quarter e-commerce orders totaled $2,268,000, compared with $2,281,000 in the year-ago period. For the year, e-commerce orders totaled $8,147,000, compared with $8,437,000 in fiscal 2010. Average order value during the quarter increased 9.3% to $62.64, compared with $57.17 in the prior-year period, and for the year, average order value increased 5.3% to $59.58, compared with $55.71 in fiscal 2010.

During the fourth quarter, we added 664,000 new customers, while concurrently stimulating repeat orders from existing customers who represented 60.8% of total customers. And for the year, we added 2.3 million new customers, with repeat orders representing 52% of total customers.

In terms of category results, in our 1-800-Flowers.com consumer floral business, revenues for the fourth quarter increased 5.5% to $123.7 million, compared with $117.3 million in last year's fourth quarter. For the full year, revenues increased approximately 1% to $369.2 million, compared with $366.5 million in the prior year. It should be noted that revenues in this category improved each quarter during fiscal 2011, with the lower revenues in the first half of the year more than offset by the return of revenue growth in the second half of the year.

Gross profit margin for the quarter increased 450 basis points to 38.3%, compared with 33.8% in the prior-year period. For the full year, gross margin increased 270 basis points to 38%, compared with 35.3% in the prior year.

The significant improvement in gross profit margin for both the quarter and the year have been several factors, including higher average order value, product mix, enhanced marketing programs, sourcing efforts, and the termination of our marketing and merchandising agreement with Martha Stewart in last year's fourth quarter.

Reflecting the higher revenues in gross margin, category contribution margin increased 49.5% to $11.2 million for the quarter, compared with $7.5 million in the prior-year period. And for the year, contribution margin increased 47.6% to $32.7 million, compared with $22.1 million in the prior year.

The Company defines category contribution margin as earnings before interest, taxes, depreciation, and amortization, and before the allocation of corporate overhead expenses.

In our BloomNet wire service business, fourth-quarter revenues increased 36.4% to $21.3 million, compared with $15.6 million in the prior-year period, and full-year revenues increased 18.4% to $73.3 million, compared with $61.9 million in the prior-year period.

Gross profit margin for the quarter was 44.6%, compared with 57% in the prior-year period, and for the year, gross profit margin was 50.3%, compared with 56.4% in the prior year. Gross margin dollars increased 6.8% to $9.5 million for the quarter and 5.7% to $36.9 million for the full year, compared with $8.9 million and $34.9 million in their respective prior-year periods.

The changes in gross margin percentage and gross margin dollars primarily reflected revenue mix, including the increase in shop-to-shop order volume in the second half of the fiscal year and increased product sales. Category contribution margin increased 4.2% to $5.2 million for the fiscal fourth quarter, compared with $5 million in the prior-year period, and for the year, category contribution margin increased 6% to $20.2 million, compared with $19.1 million in the prior year.

In our gourmet food and gift basket category, revenues for the fourth quarter increased 30% to $42.1 million, compared with $32.4 million in the prior-year period. The increase in revenues for the fourth quarter primarily reflected the shift of the Easter holiday to later in the quarter, as well as continued solid growth in the category's e-commerce and retail store channels.

Full-year revenues increased 3.2% to $247.6 million, compared with $240 million in the prior year. This growth was driven primarily by the 1-800-BASKETS.COM and Cheryl's e-commerce channels, as well as the increased retail sales from Fannie May. These factors more than offset a weakness in the wholesale basket category.

Gross profit margin for the quarter was 41.5%, compared with 43.7% in the prior-year period. For the year, gross profit margin was 41.4%, compared with 42.1% in the prior year. The lower gross profit margin (technical difficulty) quarter and the year primarily reflected the impact of increased commodity costs and shipping fuel surcharges.

Category contribution margin increased $2.1 million for the fiscal fourth quarter, compared with $382,000 in the prior-year period, and for the full year, category contribution margin increased to $28.8 million, compared with $27.3 million in the prior-year period. The significant increase in category contribution margin in the fiscal fourth quarter reflects the aforementioned benefit of the Easter shift, while the full-year improvement primarily reflects the category's revenue growth, product mix, and enhanced manufacturing efficiencies, all of which more than offset the increased costs related to commodity prices and shipping fuel surcharges.

In terms of corporate expenses, as I stated earlier our category contribution margin excludes 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 fourth quarter, corporate expenses for continuing operations, including stock-based compensation, was $12.9 million, compared with $10.9 million in the prior-year period. For the full fiscal year, corporate expense was $47.6 million, compared with $43.7 million in the prior year. The increase in corporate expense throughout the quarter and the year primarily reflects the extra week of operations, as well as the swing in incentive compensation expense with full bonuses paid for fiscal 2011 compared with minimal bonuses paid in fiscal 2010.

Turning to our balance sheet, at year end our cash and investments position was $21.4 million, compared with $27.8 million at the end of fiscal 2010, and we had no borrowings under our revolving credit line. Inventory was $51.3 million (technical difficulty) $45.1 million in fiscal 2010.

Regarding long-term debt, we finished the year with approximately $46 million on our term loan. Net debt was approximately $25 million at year end. We expect to reduce our term debt by an additional $16 million during fiscal 2012.

During fiscal 2011, the Company generated approximately $14 million in free cash flow. The Company defines free cash flow as net cash provided by operations, less capital expenditures.

Now regarding guidance. Reflecting the continued uncertainty in the overall economy, our plans do not anticipate significant improvements in consumer demand for discretionary purchase during fiscal 2012.

We'll continue to focus on areas of our business where we believe we can exert control and achieve enhanced results. These include our operating cost structure; our merchandising and marketing initiatives, emphasizing truly original product designs and product line extensions; our marketing programs that provide improved return on investment by engaging directly with our customers to deepen our relationship with them; and our manufacturing and sourcing enhancements, designed to help mitigate commodity and shipping price increases and deliver increased gross profit margin; [so] our continuing investments in our future, particularly in our social and mobile initiatives; our fast-growing 1-800-BASKETS.COM business; and our initiatives to expand franchising opportunities.

We believe these efforts will enable us to achieve consolidated revenue growth for the full year in the low to mid-single digits, as well as year-over-year increases in EBITDA, EPS, and free cash flow.

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

Thanks, Bill. At the start of fiscal 2011, we told you we were targeting several specific areas for improvement, particularly in our consumer floral business.

We said we would improve revenues and gross profit margin through a combination of enhanced merchandising and marketing programs. We saw positive trends in this area throughout the year, and we returned to revenue growth in our third quarter, a quarter earlier than we had anticipated. Combined with our fourth-quarter results, we achieved positive year-over-year revenue growth for fiscal 2011. We improved gross margin significantly, up 450 basis points in our fourth quarter and 270 basis points for the full year.

We first embraced our florist heritage and the creative passion of our florists to re-energize our product line. We saw our customers embrace truly original products, such as our new line of ADogAble floral designs, a collection of irresistibly cute floral puppies that is already a major hit.

We also launched our new and improved Happy Hour collection to enthusiastic customer response. I will point out that the favorite of the summer season seems to be our sangria bouquet.

These great designs and others by our florists enabled us to grow average order value by more than 12% for the quarter and 10% for the year.

We significantly improved the effectiveness and efficiency of our marketing programs. We did this by focusing on our Delivering Smiles message and expanding on our industry-leading position in the social and mobile space. We launched innovative programs that partnered 1-800-Flowers brand with Facebook, Twitter, Google, and thousands of influential bloggers. As a result, we were able to significantly enhance the relevance of our marketing efforts and reach our customers at the right time with the right products to help them deliver smiles.

On the subject of growth, we believe it is important to look at the combined performance of 1-800-Flowers and 1-800-BASKETS brands together. As we have noted in the past, the successful launch and consistently strong growth of 1-800-BASKETS.COM has been driven by our strategy of leveraging our flagship 1-800-Flowers brand through our multi-branded website. Throughout fiscal 2011, we achieved solid revenue growth with the combined 1-800-BASKETS and 1-800-Flowers brands.

In addition, a growing number of customers are now coming directly to 1-800-BASKETS.COM website. 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.

I'll now turn the call back to Jim for his wrap-up.

At the start of fiscal 2011, we told you that we did not expect the consumer economy to show significant improvement. As such, we said we would focus on managing those aspects of our business that we could control, including our marketing programs, our merchandising plans, our operating processes, and our balance sheet.

As a result of the initiatives that we put in place throughout the year, we saw improving trends in our business in terms of revenue, gross margin, and our operating expense ratio, all culminating in our strong fourth-quarter and full-year results. We believe these trends illustrate the fact that we are -- have positioned our Company to perform well despite the economy and to emerge from a difficult period as a leaner and stronger Company, one that is well positioned for growth.

Over the past years, we have focused on a few key strategic priorities. In marketing, we have continued to embrace our floristness, for example in our areas of sympathy and weddings, where we have begun to build an authority position working closely with our incredibly creative franchisees and BloomNet florists. We've expanded our industry-leading position in social communication, thanks to our innovative programs with Facebook, Twitter, Google, and thousands of influential bloggers.

In merchandising, we have built our truly original signature product offerings, such as our birthday flower cake, our new ADogAble designs that Chris just mentioned, and our Happy Hour collection.

We have expanded our gourmet food and gift baskets offerings, adding the new Mrs. Beasley and Miss Grace cake lines to our fast-growing Cheryl's bakery gifts brand, an expanded line of confections, and the introduction of a good/better/best offering for Fannie May chocolates. We launched our exclusive Lotsa Love plush line, balloons, Yankee candles in an affordable hard-goods line for our BloomNet florists.

We're in the very early stages of an exciting new FRUITBOUQUETS.com line for our franchisees and select BloomNet florists, something I look forward to telling you more about in the quarters ahead.

In business development, we have continued to evolve the 1-800-BASKETS.COM business, recently launching an exciting basket program for BloomNet. We've expanded our Celebrations.com content and media business, including the recent addition of the FineStationery.com brand. We have grown our wine gift business, featuring the Winetasting.com, Wade Geerling & Wade, and our new [carum] brands. We have seen growing interest in our franchising programs for both 1-800-Flowers and Fannie May chocolates.

In terms of enhancing our financial strength and flexibility, we have consistently generated substantial EBITDA and free cash flow, enabling us to pay down more than $80 million in debt, and we have worked closely with our banks to build an even better and broader relationship.

In terms of investments for the future, we have utilized our capital budget to strategically evolve our technology platform. We have invested in our BloomNet (technical difficulty) where we have steadily increased our market penetration and have fast become the leading innovator in the space. We have made investments in social and mobile commerce that have positioned us as an industry leader is these key customer engagement channels. And we have invested in our people, building a talented team that has enabled us to weather the challenging environment and position us for growth.

While we are cognizant of the continued challenges in the economy, we feel good about the programs and initiatives that we described today and several more that we'll share with you in the months and quarters ahead; the strong financial position our Company is in today, particularly our ability to invest strategically for our future growth; and our operating plan for fiscal 2012 and beyond.

That concludes our formal remarks, and we'll now open the call to your questions. Javon, if you can restate the procedure for the Q&A?

(Operator Instructions). Ingrid Chung, Goldman Sachs.

You mentioned in your guidance that you're expecting low single-digit to mid single-digit growth for revenue, and you're looking for EBITDA to grow on an absolute basis. I was wondering why you weren't more specific about whether there would be margin expansion or not, and what are the factors or drivers that would or would not drive margin expansion for fiscal 2012?

Thank you, Ingrid. I think that you could expect that we are planning on margin expansion for fiscal 2012.

I think you've seen the leverage in our ability, along the lines of what we've talked about today, in terms of controlling our expenses, introducing new margins, exerting discipline in our marketing promotional efforts, that you've seen good evidence of margin expansion. So any topline growth we get, whatever it becomes, I think you can expect outsized performance on our bottom-line metrics of EPS, EBITDA, and free cash flow.

Okay, perfect, and then I was wondering, so you've been investing in shop-to-shop orders for BloomNet for a couple quarters now, and driving higher gross profit dollars but lower gross profit margin. Is this the new normal, or would you anticipate the margin to improve at some point?

I'll ask Bill to expand on it, but I think from a general point of view what we've said consistently is you have to look at our margins and our contribution dollars on an annual basis. It really doesn't have very much to do with shop-to-shop orders in terms of its impact on margins in the near term.

What I think you'll see is that year to year, it will vary depending on which programs we've emphasized and introduced, and in this case we've introduced more products than we had services, and they are going to carry a lower margin.

But Bill, would we expect that we continue to have very healthy margins in BloomNet and that you might see a change in that next year, depending on what programs we introduce?

Yes. I think the focus for BloomNet is we're going to continue to drive strong contribution margins in BloomNet. We've always kind of steered people away from focusing on the gross margin line. It's really the contribution line within BloomNet and driving improved contribution within BloomNet. That's what we plan to do.

Okay. And just one last question. So you've mentioned a couple of times that there are more and more people going to 1-800-BASKETS.COM directly. I was just wondering what percentage of your traffic on Baskets is now direct versus coming from Flowers?

Yes, we continue to see that grow. What we've managed there is a combination of the introduction of the 1-800-BASKETS.COM brand. We watched the traffic grow. We don't break out that number specifically.

In addition, we watch what customers -- how customers' behavior changes. So customers who purchased both flowers and baskets, how we increase both retention and frequency. Those are metrics that we manage internally. We don't report on those -- you know, that level of details. But we do want to -- we are encouraged by the trends we are seeing in all of those metrics.

Jeff Stein, Ticonderoga.

Good morning, Jim. A couple of questions for you. First of all, you did see very strong growth in the fourth quarter in your gourmet food and gift basket business, but if you kind of normalize it and combine Q3 and Q4, that line item is still up about 12%, which is pretty good in this economy. So I'm wondering what are really kind of the underlying key drivers to the growth in your gourmet food and gift business, and do you see that continuing into the new fiscal year?

Bill will give you some more color on that, but just as an opening comment, Jeff, I think, yes, we're very happy with the growth that we're seeing our gourmet food businesses, and I think it's attributable to a few things, and it's even a little bit better than it looks.

Because in all candor, the wholesale side of the business on the baskets business has struggled over the last couple of years, but the consumer side has grown nicely. We have better product margins -- gross margins and you have better control over your customers and their long-term business. So it's actually a little bit better than it looks, but I think, in particular, Bill, would you say it was our e-commerce business both in Fannie May, Cheryl's --

And 1-800-BASKETS.COM.

And 1-800-BASKETS.COM. What else?

And Fannie May retail.

Fannie May retail. We just increased product lines, increased product line expansion. Increasing the price points that we offer to our customers has been received well in increasing foot traffic at the stores.

Yes, I think we saw a trend in Fannie May over the last couple of years where it was stagnant in terms of same-store sales growth.

The management team there has done a terrific job of energizing the people in our stores, trying new programs. Frankly, they have a whole slate of programs they'll be trying in fiscal 2012. But even in fiscal 2011 with them really energizing the store performance.

As Chris just mentioned, they brought in the price points. We went with lower price points, and we have two or three really exciting introductions in Fannie May that you will see before the holiday time now to take us into a whole new price point category in that better and best line.

And I'm really excited about the things they've done. These things have been in the works for more than a year in terms of development, so I think, overall, good performance, even better than it looks when you factor in the wholesale business. It's all on the e-commerce side, as Bill just mentioned, across the three brands, and good execution at the retail point of purchase, which has an e-commerce benefit as well, and I think you're going to see even more of that in the quarter or two ahead.

Jim, it sounds to me like you're building a more attractive template at Fannie May that might be more appealing to franchisees, and I know you mentioned that several times in prepared comments today that Fannie May franchising is a growth opportunity. Wondering if you could talk a little bit about what you have accomplished so far with regard to franchising, and what you see in the way of opportunities for the next 12 months in terms of adding new franchisees?

I think we started to -- we told you first, about two quarters ago, that we were going to begin an effort in the franchising area. That took development in terms of hiring people, developing our programs, and going to market.

What I think you'll hear from us in the next quarter or two is that we'll report on the results of that first nine-months effort and what it's yielded and what we think it can become for us in the future.

Remember, we've been expanding our store count through our CapEx budget by six to 10 stores a year for the last four or five years. And what we decided was in this environment, A, with the success of the Fannie May brand at retail and its acceptance by consumer, and the whole line-up of new products and services that we've been testing and slowly introducing and have big introduction plans in the next quarter, we said this is a wonderful opportunity for our franchisee to participate with us.

And it's a good opportunity for 1-800-Flowers.com and the Fannie May brand to leverage not only the physical capabilities of our franchisees, but their management and [banquet] capabilities. So we pulled back on the Company-owned store expansion, in spite of the fact that it's a great return on capital, because it's a more prudent thing for us to do in this environment to go a little faster because the model is so good, the product line is so strong, and it's really starting to hit on all cylinders to make it go even faster with a franchising model.

So, Jeff, in the next quarter or two, we'll begin to report on that first six to 12 months of effort there and what that's begun to yield, and I think you'll be quite pleased with how prudent we are about how we're going to market, making sure we're protecting the brand, only partnering with people who can really enhance the brand, and achieve the desired result, which is to go a little faster and lever the wonderful brand, products, and manufacturing abilities we have there to grow our business together with a select group of franchisees.

Can you tell us at fiscal year-end how many Company-owned stores you had at Fannie May? And then, Bill, can you just tell me what your CapEx budget and estimated depreciation will be for the current fiscal year?

Bill?

Jeff, there were 85 Fannie May Company-owned stores at the end of the year. For next year, we anticipate that our CapEx would be similar to what we saw this year, so in that $16 million to $17 million range, and depreciation will be down a little bit over this year, so in that $20 million, $21 million range.

And I'd point out, Jeff, there that one of the things I'm proud of, in spite of the fact that it's been -- had been a difficult couple of years, starting with the fun activities in 2008, we continue to spend a significant amount of money in the CapEx area.

And three-quarters of that, or the vast majority of that, is on technology, and that technology spend we told you two years ago would be a three- to four-year spend, so we are substantially through that and we think as we finish that up next year, we will have built a very sophisticated, very pliable, very scalable technology platform that allows us to do the kinds of things we are doing now with 1-800-BASKETS.COM and do more of that in the future.

It allows us to be creative on the development side, so when we do little kinds of things where we bolt on other pieces of businesses, buy select assets, just be creative on the development side, we're doing that with the eye that we've been able, in spite of the recessionary environment that we had been, to spend substantial amounts of money on technology each of the last two or three years so that we could have a platform that leverages those new assets we're able to build or acquire.

Anthony Lebiedzinski, Sidoti & Company.

In the press release, you talked about an expanded suite of products for BloomNet, and I think you said that you launched the basket business for BloomNet. So, could you expand on that, please, as to what other potential additions can we see in BloomNet?

There's two we just mentioned that I'd put some light on for you, Anthony. One is the one you just mentioned, which is the basket business.

We're having this great success with 1-800-BASKETS, and as we traditionally have done, we test a product direct to the consumer with us shipping the product first. When we see that we have a winner, we have it in our plan to say, okay, how can we next execute this even better, bringing in those members of our franchise and BloomNet community that would like to participate with us so they get the benefit of our national marketing dollar spend, they get the benefit of our database and our relationship with our customers, and they can participate both to fulfill orders for 1-800-BASKETS.COM and 1-800-Flowers.com and to create a local business for that gifting segment that's so important to us retail florists. That is the gift basket business.

We see the gift basket business as being one of the key pillars in a flower shop's success. So what we're doing now is we've created -- so, to make that come true for our retail floral franchisees and select BloomNet florists who choose to participate with us, but they will have as much business in the basket category as we do, and we think over time that's as big a business as the floral business because it gives us an everyday basket capability and it gives us real creative license in terms of the kinds of products we can bring for the right recipients and the right occasions.

So we've invested -- you heard me mention about BloomNet, but we've invested in training facilities, in our Floriology Institute, and those are around the country. We have three or four locations now.

But florists are coming in for training in basket design and basket merchandising. We are training them in our fruit bouquet program so that they can fill their FRUIT BOUQUETS, and that would be the second product category that I would put a light on for you. It should be another pillar category for those florists who are qualified, who are interested, and then who are properly trained to introduce that product line to our consumers, so we are broadening our footprint as a florist and gift company to have the right range of products and services.

And when we see a hit like we have with our basket program, like we have with our new creative retro designs, like our ADogAble program or our Happy Hour bouquets, or now our FRUIT BOUQUETS, we're going to seize those opportunities because we have a unique platform to deliver those products and services that customers want, that they are coming to us more specifically for those products, and leveraging their capabilities so our BloomNet florists can fully participate and benefit from that growth, and it's nice to have growth categories to bring to our BloomNet and franchise partners.

Okay. So that's helpful. And I was wondering if it would be possible for you guys to quantify the impact of higher commodity costs and fuel surcharges.

This past year, we've had to absorb those costs. You saw the impact on [GFTB] in the third -- in the fourth quarter and for the year. If you add it all up, it's certainly in the $7 million range.

I think we've done a good job of mitigating those increasing costs, particularly the management team, Dave Taiclet and team on the gift food side. It's something that we have to live with and will continue to live with, and I think they have a terrific plan to mitigate any increases that we anticipate in the commodity side of our business for fiscal 2012.

So I think we've -- pardon the pun -- baked that in, and I think we have a realistic idea of what that would be and how to offset that and even grow our margins in spite of that.

Okay, and as far as the revenue guidance that you provided here, could you give us your expectation by segment -- by each of the three segments as far as revenue increases, and whether or not you expect more of that to come from increased average order value or more from volume, or maybe a little bit of both?

Anthony, we don't want to break it out by segments, but I think I can say generally, based on the trends that you've seen, we expect all of our segments to grow and grow nicely. We expect that our gross margins will continue to expand across the product lines.

The one caveat I would -- one exception I would put there would be on BloomNet, and that depends on the product mix, but again extremely healthy margins and growing contribution on a gross dollar basis. So, across the board, we expect growth in every category and we expect margin improvement in every one of our product lines.

Yes, I think, too, especially if we look across the bar, but if we look at across what we've been doing in consumer floral category and (technical difficulty) better/best initiatives, embracing our flawlessness. We've seen the improvements in AOV.

I think these efforts, these products that we're bringing to the table, are really helping us deepen our relationships with our customers for all of their gift-giving occasions, and as a result we expect that these initiatives will, over time, stimulate order growth in addition to what we're seeing on AOV.

[David Cannon], Williams Financial Group.

Congratulations, guys. First question is related to incentive comp. Can you tell me how much it was up year over year in Q4?

Yes, I think Bill mentioned that earlier. We paid very little -- minimal bonuses last year, and for the year it was up $7.5 million, so if you broke it out, between the extra week, and it would be about a $2 million a quarter net effect.

Okay.

And by the way, we're very happy to pay those out.

What (multiple speakers) does the formula look like for next year? Is it based on improvements year over year, or is it -- or are we kind of starting with that same baseline, assuming revenues and EBITDA is similar?

What it's based on is goals that are higher than this year's. And clearly, we expect that if we have topline growth, which we are planning for, that that would have an outsized benefit to EPS, EBITDA, and to free cash flow, and the incentive targets are based on achieving a much better return in all those categories this coming fiscal -- this fiscal 2012 that we're in now versus last year.

Okay, and as far as commodity prices and fuel surcharges and the effect they had on gross profits this quarter, is it -- do you guys feel, based on what you've seen in the last quarter, that that has peaked and it will -- going forward, assuming oil prices remain at this level and the trend in cocoa, that there is the potential for a little bit of a gain there or it's flat? What's your take on that?

I think from the standpoint of fuel, we certainly have absorbed that over the last six months or so, that trend going up. So the first half of fiscal 2012, we are going to have to continue to absorb something on the fuel side, but once we anniversary that, assuming gas prices stay the way they are, the second half of the year we would be covered.

As Jim mentioned before, we have certain strategies in place. We're very focused on not only cocoa, but all the commodity price increases that we saw this past year.

Frankly, the commodity increases on our bakery side non-cocoa have actually been higher than our cocoa prices.

On a percentage basis (multiple speakers)

On a percentage basis, that's absolutely true.

So we're very focused on that. We have some strategies in place to help mitigate that. We've obviously been implementing some manufacturing efficiencies that have already helped mitigate those already, and we'll continue to carry those forward.

So in general, we think we have a view -- we have our expectation of what commodity increases, fuel increases, will be for the year, and we think we have good plans in place to mitigate that, and I'd like to applaud the team in the food gift business side as they've done a good job of planning for it, managing it, and frankly we expect to improve our margins in spite of any increases that we anticipate.

Okay. And tech spending was up like $5 million year over year in the fourth quarter. And I think -- Jim, I kind of had a mental lapse there. You made reference to being through that. What should we expect going forward and why was it so high this quarter?

I think overall tech spending wasn't up as much as you just indicated. It was up several million dollars for the year. And it was up a little bit in the fourth quarter, but again, that's the investments that we're making in our future.

We've said it both on the balance-sheet side with CapEx, as well as from the operating inside. We lead with e-commerce. We're continuing to invest behind initiatives in e-commerce, and that's [in play].

And because of the extra week in that year, that's going to slightly distort the amount because you're just amortizing an extra week in the quarter.

I actually misspoke. I said $5 million, and it was less than $1 million year over year in the current quarter. Okay.

And then, as far as BloomNet, I remember last quarter you guys said that you had cracked a number of new accounts and that there is a certain amount of revenue essentially that almost a passthrough, and that over time you start to realize better gross margin from those accounts. Could you just take me through that again and give me sort of a timeline in fiscal 2012, how we should see better gross margins on BloomNet, if at all, and the timing of that? Thanks.

I think what I meant to say, David, is that BloomNet will always have good margins, and they've had, since the launch of BloomNet six years ago, very good margins.

But this year, we had a real introduction of new product categories. We mentioned Yankee Candle. We mentioned our plush line. We mentioned our new balloon line and, of course, now our basket product. Those are tighter margins. Those are going to be less than half of our traditional margins.

And what we're seeing is that we've had a very static number of florists who participate in BloomNet. Our application rate is going up -- that is people who want to become part of BloomNet. The number of our BloomNet members who want to deepen their relationship is increasing over time.

So what we're saying is our approach to the marketplace, which is having the best value proposition, having a good range of products and services, using 1-800-Flowers as the catalyst to drive our introduction on behalf of the 1-800-Flowers brand and on behalf of our BloomNet florists into new product categories like the balloons, like plush, like our candles and our gift baskets and now our FRUIT BOUQUETS, all will give us a deeper and better relationship, not with 100% of our BloomNet members, but we're always saying with those who choose to participate in our breadth of product offerings.

So that will both increase our dollar volume because of the new products that we bring to the market for them. It will impact our margins depending on which programs we are introducing more, so this year it was heavy on the product side, which compressed the margins.

What we're seeing is that the number of orders that 1-800-Flowers distributes through our BloomNet franchise network is increasing. The number of shop-to-shop orders that you mentioned is increasing because more and more florists are saying, do I need to belong to three wire services or should I belong to two? Or maybe should I belong to one? Who gives me the best value proposition?

And as that occurs, our relationship is deepening, our products -- our revenues per shop is increasing, and our margins will increase on the services side and decrease on the product side. But overall, they continue to be strong, and frankly, we are very, very pleased with how BloomNet is doing, the depth of relationship, and the general interest we see from our retail floral partners recognizing our leadership and recognizing the things that we're doing that can help them, if they choose to grow their businesses, to grow it.

And I think the FRUIT BOUQUETS and the baskets are the two biggest initiatives to will deepen that relationship we have with our florists.

Chris, our bill is ramping (multiple speakers)

(Multiple speakers) the other point, the real focus, and I've said this before, is really on gross margin dollars and contribution margin dollars, and growing those line items. We're not as concerned with the percentage. It's really on growing the gross margin dollars.

Right, I understand but (multiple speakers)

So we won't not introduce a product line because it will impact our margins, as long as it contributes to the health and welfare of our florists and contributes some margin dollars to us.

That makes sense. That being said, should -- is it safe to say that gross margin as a percent probably troughed, and sequentially we should see some improvements? Or that's not valid and just look at it in terms of overall dollars?

I think it's better, again, just to focus on the gross margin dollars and ultimately the contribution (multiple speakers)

Growth to the top line and the growth of the gross margin dollar contribution.

Okay, and then, as far as the wholesale GF/GB business, do you have a glance into the order book for the balance of calendar 2011, how it looks? Should we expect it to be up year over year?

I would say that we would anticipate that the wholesale side of our business, except for BloomNet -- BloomNet, the wholesale side will increase, but except for BloomNet, will stay about where it is. All of our growth now is on the higher-margin direct-to-consumer business where we own the customer relationship, and it's all of our focus right now.

Okay. Last question is on capital allocation. It seems to me like you guys have a great opportunity in the last 1.5 years, and looking ahead, it seems like EBITDA is growing at a nice rate. I think from, what, mid-20s to this year we should see improvements over the $34 million level.

It seems like you have an opportunity to drive results by buying back stock. What is your view on potentially -- like a Dutch tender? I, for one, as a shareholder, would like to see that. If you could buy back 10 million shares at $3.00, that would increase EPS by 16%. It might be difficult to find acquisitions that would give you such a result, so please tell me your view.

I'd say we're looking at all of the options, and we'd appreciate any suggestions or thoughts that you would like us to consider, or depth of consideration that you'd recommend.

So, this isn't the forum to delve into it in any great depth, but I would tell you that I think we are privileged that we have a lot of options in front of us. The fact that we focused on paying down debt over the last couple of years in a tough environment gives us an increased sense of flexibility. The fact that we have such good relationships with our banks gives us more flexibility. The fact that we've been good stewards of our balance sheet and our investment profile over the last couple of years.

We didn't savage our development efforts to launch new brands. We didn't savage our CapEx when things got tough. We didn't have to.

So, I think all of those things taken in the aggregate give us options. The options are all of the obvious ones, in terms of continuing to pay down debt, and we mentioned we plan on doing some more of that this year, and the options that you're mentioning now.

But I will point out to you that I think what we've developed a pretty good capability at over the last year or two is in the development arena. We picked up some assets this year very inexpensively that lever things we already do. So, if we had taken the $5 million or so we spent on development and bought back stock, I don't know what impact that would've had, if you just look at it apples to apples, that $5 million versus picking up a couple of new brands that lever our existing manufacturing and marketing capability and leverage our existing relationship with our customers. I think that was very prudent.

So I think you'll see a balanced approach. We're open to ideas and suggestions. We are looking at them all the time. Clearly, we are not expert on all, but we are always open to expertise where we have a view of the different options in front of us.

But I think you'll see us continue to be aggressive at guarding that balance sheet. I think you'll see us continue to be aggressive in the development area to do safe, good growth things to position us for outsized margin improvement and for topline growth in areas where we already have strength, and we'll look at any other options that are appropriate as we continue down this path of creating increased cash flow, increased EPS, and increased EBITDA every year.

(Operator Instructions). Danielle Melito, Brean Murray.

I was actually just wondering, at this time do you guys have any acquisitions in mind that make sense?

Yes, let me tell you about the 15 or 20 that we're looking about.

I think it's best to look at what we've done and expect that we'll be prudent. I think there's some interesting opportunities, but we're going to be very prudent in how we look at them. We have a very small team that do development for us.

I purposely call it development, Danielle, because it's not an M&A capability. Clearly, the things we've done, while small, are safe, relatively speaking, complement things where we already have built or are developing asset capabilities.

So for example, picking up a couple of bakery gift product lines. There we leverage a terrific bakery capability we already have. We lever a database that we have, we lever customer relationships and our marketing machine in that area.

Picking up stationery assets that allow us to provide great stationery gifting and supplies to our Celebrations.com. We thought it was a smart thing to do, and yes, we have lots of other things we're looking at, but nothing that will rock the world. We look both big and we look small in terms of development efforts, but clearly, when we have something to report you'll be among the first to know, Danielle.

That sounds great. I actually think a lot of my questions are answered, but one more. Do you think it's becoming even more crucial to be a lifeline to the florists?

I would say that it's a two-way street there.

We have, as Chris mentioned several times, really made it a point to embrace our floristness, but we're available seven days a week to our customers, that we have delivery capability same day, that we have a broadening product line of gifts and services to help them put smiles on the faces of their customers and their friends and their family, and by doing that not only are we putting our arms around a select group of florists who want to partner with us and they around us.

So we are tying ourselves -- joining ourselves at the hip with a very talented group of people who give us a leverage capability, and frankly what we're trying to do is do what we do best and allow them to do what they do best, and I think that formula is a real winner.

And that's all the time we have for any questions today. And I'd like to turn it over to our speakers for any closing remarks.

Thank you all for your questions and your interest, and if you have any additional questions, please get in touch with us.

And as a reminder, it's back-to-school time, and we invite you to visit us online, in our retail stores, on the phone, on your mobile device, or online to help your favorite student off to school with a smile on their face and a wonderful gift that will help them to remember you and not call you for money too early in the school year. Thanks for your time and attention today.

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.