1-800-Flowers.Com Inc (FLWS) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the 1-800-FLOWERS.COM, Inc. fiscal 2012 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, please go ahead, sir.

Thanks, John. And good morning, and thank you all joining us today to discuss 1-800-FLOWERS.COM's financial results for our fiscal 2012 first quarter. For those of you who have not received a copy of your press release issued earlier this morning, the release can be accessed at the Investor Relations section of 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'll open the call to your questions. Presenting today will be Jim McCann, CEO; Chris McCann, President; and Bill Shea, CFO.

Before we begin, I need to remind everyone that a number of the statements that we will make today may be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed description of these risks and uncertainties, please refer to our press release issued this morning, as well as our SEC filings, including the Company's Annual Report on Form 10-K and quarterly reports on Form 10-Q.

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

The Company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today's call, any recordings of today's call, the press release issued earlier today or in any of 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 the fiscal first quarter, we achieved solid double digit revenue growth across all of our businesses. This reflected a continuation of the positive trends that we've been seeing since the second half of last year. This growth resulted from the positive response from our customers through our initiatives rather than from any significant improvement in the overall consumer economy.

Our Consumer Floral business continues to benefit from our merchandising initiatives that focus on our truly original products such as our tremendously successful, Adogables line. These floral puppy arrangements have been a tremendous hit for every day gifting occasions, and we've recently expanded the line with a Halloween and Christmas collection.

We continue to embrace our [floresness] as demonstrated by our new store-within-a-store boutiques on our website featuring exclusive bonsai plant, orchids and sunflower collections. Customers are also responding to our enhanced marketing programs and messaging both online and off. Here our messaging encourages our customers to wow the recipients by sending "only the best" gifts (inaudible) crafted and delivered by our force, both BloomNet and 1-800-FLOWERS franchise. These efforts are helping drive further increases in average order value, customer counts and conversion rates.

BloomNet achieved strong revenue growth for this first quarter, this was fueled by a significant increase they had in Shop-to-Shop order volume that we discussed with you in our last two calls. And more than 20% growth in our extended suite of products and services.

Gourmet Food and Gift Baskets also achieved strong revenue growth. This was driven by several factors including e-commerce growth in our 1-800-Baskets and Cheryl's brands, significant wholesale business growth, including chocolates and popcorn for the department store channel and some early shipments of wholesale gift baskets for the mass merchant channel.

And it was driven by increased store traffic and same-store sales growth in Fannie May, which recently launched its exciting new super-premium Fannie May Artisan chololates line. Also during the quarter, we completed the sale of our winery services business, our non-strategic asset. This further strengthen our balance sheet and allows us to focus our efforts on growing our WineTasting.com direct to the consumer wine business.

Throughout the fiscal first quarter, we continue to execute on our programs to manage our total operating expenses, which improved 370 basis points as a percentage of total revenue. We accomplished this, while we are continuing to innovate and invest for the future across a number of initiatives that we believe will drive growth going forward, including our efforts to build local presence through BloomNet and our franchising programs, our efforts in social marketing and e-commerce where we are a recognized leader in the space. Our programs to enhance the floral industry supply chain where we are deepening our relationships with growers and wholesalers alike to leverage our combined assets.

At celebrations.com where our unique party planning content and customer engagements efforts have made the online destination -- this month -- made as the online destination this month for Halloween party ideas and inspiration.

And in mobile commerce, where we recently launched our brand new 1-800-FLOWERS.COM mobile website, which I will ask Chris to tell you more about later in the call. As we noted in the past, we believe our focus on investing in innovation for the future, even in challenging times is essential to building future value.

I'll now turn the call over to Bill, for him to review with you the financial and operating metrics for the quarter.

Thank you, Jim. As indicated in our press release issued this morning, fiscal 2012 first-quarter was characterized by strong revenue growth across all three of our business segments.

Our gross profit margin was impacted by product mix, including some early shipments, wholesale orders in our Gourmet Food and Gift Baskets category as well as commodity and other cost increases. We continue to focus on managing cost across our business platform, which resulted in lower operating expenses as a percent of total revenue.

Regarding specific financial results and key metrics from continuing operations for the first quarter, total net revenues from continuing operations increased 15.2% to $117.2 million, compared with $101.7 million in the prior year period.

During the quarter, our e-commerce orders totaled 1,212,000 compared with 1,152,000 in the year-ago period. Average order size during the quarter increased 5.1% to $64.99 compared with $61.84 in the prior year period.

During the quarter we added [384,000] new customers. This was achieved while concurrently stimulating repeat orders from existing customers who represented 62% of total revenues compared with 64% in the prior-year period.

Gross margin for the quarter was 39.7%, down 260 basis points compared with 42.3% in the prior period. This reflected a combination of factors including product mix with an increase in wholesale business in the Popcorn Factory and Fannie May, as well as some early shipments of wholesale basket orders.

Lower gross margins in BloomNet reflecting the significant increase in shop-to-shop order volume growth and higher margin cost and shipping fuel charges.

Operating expenses before depreciation and amortization improved 300 basis points as a percent of total revenues to 42.1% compared with 45.1% in the prior year period. Total operating expenses improved 370 basis points. This improvement reflected a revenue growth in the quarter, as well as our continued focus on leveraging our business platform.

Importantly, our operating expense ratio improved despite the increase of approximately $3.5 million in operating expense dollars to $49.4 million compared with $45.9 million in the prior year period. This increase reflected several factors, including operating cost associated with the three small businesses we acquired over the past year including Mrs. Beasley's and FineStationery.com in the second half of fiscal 2011 and [Flowerama] early in the first quarter this year.

Increased compensation expense relating to [accruing for incentive] compensation at a higher rate early in this year compared with lower accruals in the same period last year. And continued investments in strategic initiatives we have described to you in the past, including franchising, (technical difficulty) and the mobile and social commerce areas.

For the quarter, depreciation and amortization was $4.9 million compared with $5 million in the prior year period. And as a result of these factors, EBITDA loss from continuing operations for the quarter was $2.8 million compared with a loss of $2.9 million in the prior year period. Excluding the impact of stock-based compensation, EBITDA loss for the quarter improved by approximately $500,000 to a loss of $1.7 million compared with a loss of $2.2 million in the prior year period.

Net loss from continuing operations was $5.1 million or $0.08 per share, essentially unchanged compared with the prior year period. And as previously announced in our September 6, 2011 press release, during the fiscal first quarter, we made a strategic decision to sell our WTN winery services business for $12 million in cash. This resulted in after tax gain of approximately $4.5 million or $0.07 per share. As a result, consolidated net loss for the quarter was $0.01 per share, compared with a net loss per share of $0.08 in the prior year period.

Turning to Category results, in our 1-800-FLOWERS.COM Consumer Floral business, during the first quarter, revenues in the category increased 12% to $70.1 million compared with $62.6 million in the prior year period. Excluding contributions from the acquisitions, revenues increased 8% compared with the prior year period.

Gross margin for the quarter was unchanged compared with the prior year period at 38.1% and category contribution margin increased approximately $600,000 to $6 million compared with $5.4 million in the prior year period. This reflected a strong revenue growth in the quarter as well as effective management of our operating expenses.

Company defines category contribution margin as earnings before interest, taxes, depreciation and amortization and before the allocation of corporate overhead expenses. In BloomNet, revenues increased 23.7% to $18.5 million, compared with $15 million in the prior year period. This growth reflected significant increase in shop-to-shop order volume as well as increased sales of wholesale products and services to FLOWERS.

Gross margin was 46.1% compared with 56.6% in the prior year period. As we discussed in our past two quarterly calls, the decline in gross margin percent primarily reflect BloomNet significant increase in shop-to-shop order volume as well as the wholesale product mix.

Although the shop-to-shop orders carry a lower gross margin percent. The significant increase in order volume helps drive revenues and gross margin dollar growth. The added orders also provide increased leverage for sales of our expanded suite of products of wholesale products and services, which grew more than 20% during the quarter.

Going forward, we anticipate BloomNet's gross margin percent will remain in the current range 45% to 50%, as we continue to grow both revenues and category contribution. For the quarter, category contribution margin increased to $4.6 million compared with $4.3 million in the prior year period.

In our Gourmet Food and Gift Baskets segment, revenue increased 18.6% to $28.6 million compared with $24.1 million in the prior year period. This growth reflected several factors, including Fannie May retail same store sale growth of more than 4%, solid e-commerce growth in our 1-800-Baskets.com and Cheryl's brands and a significant increase in wholesale business in several brands including Fannie May, The Popcorn Factory and wholesale gift basket orders.

Gross margin was 39.2% compared with 44.1%, primarily reflecting product mix due to the increase in wholesale orders and the early wholesale basket shipments as well as commodity and fuel price increases. Category contribution margin was a loss of $1.9 million, essentially unchanged compared with the prior year period.

Turning to corporate expenses, as I stated earlier, our category contribution margin result exclude cost associated with the Company's enterprise shared services platform, which includes among other services, IT, human resources, finance, legal and executive. These functions operate under a centralized management platform, providing support services to the entire organization.

For the fiscal first quarter, corporate expense from continuing operations, including stock based compensation, was $11.5 million compared with $10.6 million in the prior-year period.

Turning to our balance sheet, at the end of the first quarter our cash position was approximately $5.7 million. Our borrowings under our credit facility were approximately $41 million in term loan debt and $38 million outstanding under our revolving credit line. The borrowings under the credit line reflect the seasonality of our business, specifically the increased investments in inventory for the upcoming holiday period.

Inventory of approximately $82 million was in line with management's expectations and reflects the aforementioned build-up for the year-end holiday season.

We anticipate that we will finish the current fiscal second quarter with significantly-reduced inventories, zero borrowings under our revolving credit line and a strong cash position.

Regarding guidance. Based on the continued uncertainty in the overall economy, we do not anticipate significant improvements in consumer demand for discretionary purchases. As such we are reiterating the revenue guidance we provided at the start of fiscal 2011, which calls for consolidated revenue growth for the full year in the low to mid-single digit range.

In terms of bottomline results, we expect to grow EBITDA, EPS and free cash flow at rates in excess of our revenue growth.

In summary, as we enter our fiscal second quarter, we plan to build on the positive trends that we are seeing in recent quarters and we remain focused on seeking cost efficient ways to stimulate consumer demand across all of our brands and businesses, improving gross profit margins and managing our operating cost by leveraging our business platform.

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

Thanks, Bill. So what we're seeing is that the positive trends we're seeing in our business since last year and the strong revenue growth we achieved this quarter, illustrates the success of our initiatives to enhance our marketing and merchandising programs, particularly in our core 1-800-FLOWERS brand.

In merchandising, our product design teams are working more closely than ever with our BloomNet and 1-800-FLOWERS franchised florists through our Floral Design Council and our Floriology Institute (technical difficulty). We've also invited our customers behind the curtain so to say, through Facebook, Twitter and customer panels to help us create truly original designs that help them express themselves perfectly. This collaborative effort has resulted in hit designs such as our Adogable line of irresistible arrangements in the shape of puppies in a basket dressed to fit any occasion including [our little] Halloween, Witchy-Pooch and Pup-cake in Bloom with a Happy Hour Collection.

And Halloween specific designs like the Shocktail and Witchy Sour bouquets and our expanded collection of beautiful centerpieces designed to put you at the center of the table and family traditions for the holidays.

Our customers have responded enthusiastically to this focus resulting in continued growth in average order value as well as improving trends in customer accounts, conversion and transactions. In terms of providing easy way to deliver smile, we would continue to invest and innovate in our award-winning website design and our industry-leading mobile commerce efforts.

Continuing the evolution of our website, we recently expanded our cross-brand marketing and merchandising capabilities via our newly launched multi-branded website, (inaudible) Fannie May, Cheryl's and Popcorn Factory brands.

Just in time for the holiday season, this effort builds on the success of our 1-800-Baskets brand by further leveraging the significant web traffic and multi-million customer base of our core 1-800-FLOWERS.COM.

In mobile commerce, we recently followed up the two best of the web awards that we picked up last year by launching a completely redesigned mobile site in early September. As a result, we received the Best Mobile Site of 2011 at the eTail Mobile Shopping Summit just last week, beating out a number of heavyweight retailers and extending our industry leadership in this fast-growing channel.

Most important, our mobile customers are voting with their gifting wallets, illustrated by the more than doubling of conversion rate on our new mobile site with sales growing at a rate reminiscent of our early days on the web. In marketing, we further expanded our successful radio program where we recently added the nationally syndicated radio personality Sean Hannity, joining a master of stars including Dennis Miller, Charles Osgood and ESPN radio's local and national personalities.

Most important, all of these efforts are backed by our caring team that is obsessed with service. This emphasis on exceptional service team permeates our entire organization as illustrated by the overwhelmingly positive feedback we receive from our customers, our consistently rising service metrics and the [growing number of] industry accolades including the recent unique ranking by STELLAService for customer satisfaction.

All in all, we believe this focus positions us well to build on the positive trends we're seeing in our business for the remainder of fiscal '12. Jim?

To wrap up. We are really pleased with our first quarter results and the positive trend in all of our businesses. At the same time we remain cognizant of the challenges in the current environment. We plan to continue our focus on managing those aspects of our business that we can control.

Our operating costs, our relationship with our customers and our financial posture. While we continue to invest in the future and things like the celebrations.com, 1-800-Baskets.com, Agile, which is our collection of technology platforms, fruitbaskets.com and our local presence to BloomNet and franchising. We believe this focus combined with the initiatives that we've outlined today will enable us to create additional leverage within our business and provide long-term growth opportunities.

That concludes our formal remarks and I'll now ask John, if you would re-instruct everybody into Q&A. How we get to the Q&A. John?

(Operator Instructions). Eric Beder, Brean Murray.

Good morning, congrats on a solid start for the year.

Thanks Eric.

Thanks Eric.

Could you talk a little bit about the franchising effort and where you're trying to take that? And in addition, what is your -- now that you've expanded the services to florists, what is kind of the main kind of product categories that they're looking forward to you to add on?

Taking the two pieces of that Eric, the first is, franchising, we've been a franchiser in the flower space for 15 plus years. Over the last six years, we haven't allowed any new franchisees into our system. But frankly, as we finished building our BloomNet there was a suggestion from many people in our BloomNet organization that they'd like to deepen their relationship with us and move to a branded or co-branded status. Frankly, that was ignited quite a bit by the airing of the show Undercover Boss where Chris was featured and it showed to many people in the florist community, how we embrace our relationship with our florist, how we've tied our success to theirs and how well the florist in that show were depicted as caring, thoughtful members of their community who are real artists and craftsmen and had a real sense of caring. So many people were impressed with how florists were depicted in that, particularly and on BloomNet ranks, but not just. That many of them have petitioned us to re-open the opportunity for them to become franchisees.

We view franchising at the top of our pyramid of our BloomNet relationship. So it's just another part of BloomNet. And so right now we have three aspects of BloomNet. We have our franchising, which is the top of the pyramid, we have our premier members and we have our general BloomNet members. So we decided on a very select basis to allow a few more shops to renew and have good long relationships with -- to convert to a co-branded status, benefiting from the best local brands married to the best national and international brands in 1-800-FLOWERS. So we're going about it slowly. We've just begun to have let some new people in and we are very pleased with the earlier results and we're hoping the quarters ahead to be able to give you some color on how that's going, but again very early into that effort.

The other side of franchising is in the -- in terms of our personnel is on the Fannie May side. And I'd expect that after Christmas holiday we'll shine a light on how things are going. [They are at] early stages there as well. But we think that in this economic environment, the local is extremely important to us, we achieved that on the Floral side with BloomNet and 1-800-FLOWERS' franchise stores and we achieved it in Fannie May, which our Company owned stores and our franchising efforts. And we think it's a good opportunity for our individual families and business people and successful franchise organizations that already exist to partner with us to bring to their customers, the best products and the best brands and it's a good way to leverage our capabilities with their. So we'll put more color on the franchising in the quarters ahead.

On the product side, what we're seeing is we're leveraging our buying power on the -- first FLOWER side and on the product and [hardgood] side. So introducing these terrific products that customers are warmly embracing, like the Happy Hour collection, birthday flower cake, the Adogables collection. And they were levering on buying power, Eric, to secure the [hardgood] supplies and the other supplies that they need to make those products so that we give them an opportunity to deliver good value to the customer, at the same time they are leveraging our buying power to improve their margins. So, mostly the product sales are products related to the items that we're selling and we are leveraging our sourcing and buying powers to achieve and enhance margin for them and create a small margin opportunity for us as well.

Okay. And in terms of the website now, that has got the multiple tabs on it. What are you seeing in terms of consumer behavior, now they can do Fannie May and Popcorn Factory and 1-800-FLOWERS all on the same card? How is that changing the behavior there?

Well, what we've seen, Eric, it's been a little bit now -- little bit of time now that we've had 1-800-Baskets and 1-800-FLOWERS up there in that kind of co-branded fashion. And what we've spoken about previously is that, we see customers buying either FLOWERS or baskets, it's not necessarily a lot of combined product in one shopping card, usually -- mostly in a gifting balance, a single item to a single recipient. But what we have seen is a steady increase to track that direct to the 1-800-Baskets.com URL, which gives us validation and it's a good way to build a brand and build brand recognition. So the same thing now, we're very early, it's is just a month or so since we have added the other tabs on to the site now and we expect the same kind of things to happen. Our customers become aware of those products, aware of the brands, aware of the recognition that in the future for their gifting needs, in addition to their floral gifting needs they will be coming back to those other brands.

Great. Thank you.

Thanks Eric.

Jeff Stein, North Coast Research.

Good morning guys. Good morning guys. Very good start to the fiscal year. Just a question on marketing because you really don't think there is a great deal of competition in the September quarter, which really is kind of a non-gifting quarter in your business, but as you're moving to holiday, obviously you're going to face a lot more clutter from a marketing standpoint and I'm wondering what some of your strategies might be to kind of cut through the clutter and to get your marketing message across to customers?

Well, thanks, Justin and we view this first quarter the same way. We view it as a good start to a year, it doesn't make the year but certainly it's a good start, so I'm pleased with the trend lines we're seeing. In terms of the quarter, you're absolutely right.

The second quarter is a very noisy crowded quarter, we're competing with everybody this quarter. And I think what you will see is that our marketing strategies that we've embraced in terms of really connecting with our customers using all the new tools available to bring our customers (inaudible), will serve us well particularly in the product categories that we think are best positioned to compete this quarter that would be our 1-800-Baskets product and frankly all of the products that we have in our Gourmet Food and Gift Baskets category, including Cheryl's, our Fannie May product and our Popcorn Factory product.

So we think we have distinct strategies for each of those brands and clearly as they come into our shop, the 1-800-FLOWERS, being able to merchandise our store with the products that are more competitive like our basket product, I think positions us well to shine particularly in the category where if you were only of florists with only floral product, I think you would be more challenged as these holiday quarters become more competitive. I think that we have introduced over the last half a dozen years now this broader range of gift product, in particular the 1-800-Baskets line for the holiday period positions us well. We have discrete marketing strategies against each of the brands and collectively for 1-800-FLOWERS that gives us the confidence that we'll have a good and solid quarter this year and frankly position us even better for the second half of the year.

Jim, are you intending to spend any more and is your media mix going to be appreciably different this year versus last?

Well, I think that where we find opportunities where we think we're getting the good yield, we will be comfortable spending more money on our marketing efforts and the mix along the trend lines will continue in the way that we've had. We see all of the appropriate channels working for us but the mix will change as we go into the next two quarters. And I think you will see evidence of that as you see us in the marketplace (technical difficulty) specifically saying, where we are going to be spending in the next two months.

Got it, okay. Thank you very much.

Thanks Justin.

David Kanen, Williams Financial Group.

Good morning. Congratulations, good start to the year.

Thanks David.

First question is on the BloomNet side, revenues and it looks like revenues have been growing at a faster rate, you are gaining some market share, when do those revenues translate into better gross margins, if at all?

Well, I think what Bill said, and I'd ask him to chime in is we are seeing, yes, BloomNet is doing well, its revenues are growing nicely, our market share is growing, our share relationship is growing, in what is otherwise a challenged environment. So now that we're pleased with the growth of BloomNet, but we are especially pleased with the growth of BloomNet and considering that the category of retail for us in this (inaudible) is a struggle for the -- in the broader picture. So our growth is particularly good in that light. But I think what Bill said was, the outline what we expect our gross margins to be in that 45% to 50% range. So you see an increase in gross margin dollars in this quarter. And we're very happy with that because we are helping our florists to improve their gross margins by leveraging our buying capacity, to make more products available to them to -- put more smiles on our faces and customers. So Bill?

So I think just a few more points there to what Jim said and that is, the strategy to increase our shop-to-shop order and shop-to-shop orders do have lower gross margin percent. But as you mentioned, they do drive both revenue and gross margin dollars. They also from a competitive standpoint, they take those orders away from our competitors. So we feel -- we feel good about that. But what they really do is position us to really kind of optimize a little more leverage to sell older product and services to them. So, it's kind of like -- BloomNet has -- we try to get of course is -- BloomNet has a new model now with a new modeling structure, still going to be very strong in the contribution margins. The gross margins are going to be down slightly for another quarter. We are going to still see that high growth that we have seen in the last three quarters. But we have a new kind of margin structure, but we think it does provide lot of other benefits for us, providing leverage for incremental opportunities for our products and services.

Okay. So, over time you do expect as you sell more products and services to those new members on the network, in a few quarters, the gross margin percentages should creep up a little bit, is that accurate?

(technical difficulty) to continue to see is some topline growth and contribution margin increases. So we want to drive incremental gross margin dollars and thus incremental contribution margin dollars. We are not concerned about the gross margin percent, there's going to be a strong gross margin percent but it's down [to those] historical level.

So our business, David, it's good, it's growing, it's growing in a tough environment. Our gross margin dollars are improving. Our top line is improving. And as a consequence to that is we are helping our florists to be more successful every day while we still have a very good gross margin business and our gross margin dollar base is improving every quarter.

Okay. And what are you seeing now in terms of costs, in particular, cocoa materials and fuel surcharges? Is the worst behind you or do you still see -- should we expect those cost to continue to creep up?

Yes, well to be able to predict the future is difficult. But what we've seen is kind of a leveling out on the commodity side including fuel. What we'll still see in Q2 is some negative comps. But if things stay at the current level with respect to -- certainly with respect to fuel, we'll start comping even and maybe start getting positive in the second half of the year. From a commodity standpoint, the biggest commodity that we have is cocoa. We're still feeling a little pain year-over-year on cocoa, but that levels out and we think we've protected ourselves, and especially as we get to the second half of the year.

And we reaffirmed our guidance, David, so that gives you an indication that this is the quarter where we have the biggest food commodity expenses. So we've already absorbed all of that and we feel comfortable that our margins are still improving in spite of the fact that we had to absorb some of the other increases but we actually -- we know what they are for the bulk of our business on our food side because this is our big food gift quarter.

Okay. And then in the press release that you put out, there is sort of a cautionary tone in regards to guidance or the economy now, is that just based on the macro view, what you're seeing in the U.S. economy or is it something specific to your own business because this is the second time you have done it and last quarter, I mean, revenues were up 15% year-over-year but yet there was a very cautionary tone. So I just want to -- if I can get a little more color on that?

I think it's a direct outgrowth of the Greek debt crisis that we're commenting on. It's funny that, here we are [flower] and gift shopping we're having to view commodity prices across the world and be sensitive to the machinations in the financial climate across Europe and U.S. So, I think you're correct in your first guess there that this is just our take on the consumer environment, particularly in North America where our primary business is that is and you still have 9% plus unemployment and you still have housing underwater and you still have unemployment construction starts (inaudible). We're looking at a macro environment saying we are so pleased with how we're doing especially in this kind of an environment, that we can't help to be cautious about the macro environment. And as we've said many times let's work on the things that we can control ourselves; our costs, our balance sheet, our investments for the future, our going after margin dollars and incremental customer acquisitions where we can cost effectively do that.

So let's be cautious, let's keep our ears up for any changes in the environment, but let's be deliberate about the things we can control and be creative in how we develop growth in what is otherwise a (inaudible) environment. So yes it's just an overall macro concern and clearly, clearly we're quite bullish on our abilities to both control costs and invest for the future at the same time we're growing our business and improving our margins.

Okay. And last question is, I view you guys as a gift giving company. So if there are creative products under services that you could plug into your distribution network, you can get significant leverage off of that. Is there anything new, any new products on those services that you can plug in that you're excited about, anything that you can talk about, I could understand for competitive reasons maybe you wouldn't, but anything out there you can share with us?

I think you're viewing our business in a right way, we're flowering gift shop. So clearly it's all about gifting but not just -- I think, recently it's not just, but primarily it still is a gifting business for the florists in gift shop that we are. We've been delivering over the last six to seven years of introducing into that shop the appropriate brands that our customers tell us that they are interested, others that we anticipate they will be interested in like the basket business. So the 1-800-Baskets is I think they were most excited about as a new entrant less than 24 months in existence now. Capitalizing on the track that 1-800-FLOWER site generates the share of wallet opportunities that we have with our customers who told us that we are buying baskets elsewhere before we introduced 1-800-Baskets as a new enhanced product category.

So, yes, that's the one we're most excited about and the only other one I'll put a light on today is in very earlier stages. And that's the fruitbouquets.com business that we're just in the process of starting to introduce. It's a big business, it's a business that we've been conjunctionally involved in for all of the 35 years that we've been in business, something that I literally made myself 35 years ago. But clearly we see from our customers over the last year, our customers telling us they'd like us to be in that business. They'd like to have a branded company that they know and trust that they already transact with, provide that product. There are lots of issues in terms of getting it rolled out into the marketplace, so we mentioned in last call for the first time that Fruitbouquets will be an important part of our business going forward.

We've been slow and deliberate about it and are working with our BloomNet florists, in particular our franchisees to develop that capability on a local basis across the country. And that's the one I've expected in the next several quarters and as we reach next summer, frankly to be shouting about because I think it can become a very good and big business for us. But it does exactly what you said, David, it leverages our BloomNet network, it leverages of our franchise network, it leverages some of our capabilities and our relationship with tens of millions of customers, who by the way told us, hey guys, I can't believe you don't already provide this product. So that's one, in addition to 1-800-Baskets that we're keenly excited about and hopefully in the quarters and years ahead becomes a very big business for us.

Okay, I like that. I have an idea for you, I'm not going to share on the call, but maybe we'll talk off-line. Thank you.

Thanks David.

(Operator Instructions). Anthony Lebiedzinski, Sidoti & Company.

Hey, Good morning, guys. Good, I’m doing well. My first question is on BloomNet. You talked about the expanded suite of BloomNet products. So, I was just wondering if you could further discuss that, and also wondering about the point of sale systems. I know you have your florists using some of your point of sales systems, so just wondering about the potential going forward, as I think, I would imagine a lot of florists use still some older technology, just wondering about the opportunity for them to upgrade it into newer point of sale systems and any other products that you offer?

Sure. Anthony, I'll ask Chris to talk about the product changes, I'll just talk quickly on the technology side. On the technology side, what we are doing in BloomNet is what we're trying to do elsewhere. We're leveraging things that we already do to benefit all florists. So, we have technology and capabilities that we can retool and reengineer, so that it's available to our florists to help them manage their shops better, help them to manage their communications with their florists, help them to have access to the products that we already have available to our customers, so it's available to their customers on a local basis, it behooves us to lever that capability. And so that's what we're doing. And the technology services that we've introduced last year, although we see this kind of (technical difficulty) benefiting from that leverage. As concerns the product side of it, I'll ask Chris to cover that question for you.

[Well I think, Anthony] what we're seeing really is, we've been saying for a while that it's a slow steady increase of penetration of sale of our products and services (technical difficulty). We're continuing to increase our penetration of the Napco product line and our glass product line to the florist and continue to gift baskets down to the florist line. There have been print capabilities we brought to the table. So, it's a continuation of just working with our florists, what are the products that they need to run their shop, and how can we play a role in providing a better buying opportunity to them and we're seeing our florists (technical difficulty).

Chris, I think one of the other areas I mean – I touched on for Anthony is that when we say embracing our florists is there are a couple of categories that are essential to florist and have not ever received the big marketing push and we're starting to put our marketing push on those two categories, particularly because they benefit our retail floral partners in BloomNet and in our franchising network. And that's a sympathy category and a wedding category.

And the wedding category is one where there are a lots of products that we can put into the pipeline that help them to make better products for their customers, have better selection to make them much more competitive in their own local markets to be a better wedding vendor for their specific communities. So that's the area where we're putting some attention both on the sympathy product side and on the wedding product side where we're creating great product assortments leveraging our volume power and our relationship with vendors to bring more and more products for them to help them to be better florists in their own community and get their fair share of the sympathy business, which is extremely important for us and a wedding category which is still a growing category where our florists see competition not just from other florists but from supermarkets and wedding planners and all other kinds of people. So we're helping from a branding point of view and from a product point of view to help them to be more competitive in those two important areas to help them and help us embrace our florisness.

Okay. So thank you. And also as far as BloomNet, the gross margin decline I know you talked about the mix shift, just wondering when you look at that segment, which one had a bigger impact, the shop-to-shop order volume, increasing or was it the increased wholesale business in that segment?

Anthony, it really is – comes from both.

Okay. All right. And as far as the Gourmet Food and Gift Baskets business, you talked about the early shipment of some wholesale gift basket orders to your customers. Can you give us an idea as to how much impact that was?

Well, just bridging the two quarters, our wholesale business in the chocolate area and the popcorn area in particular, have really had a strong quarter here. So we're excited about that and we're excited about the trendlines. There is a difference though on the basket side, so we have 1-800-Baskets, which is our direct to the consumer business and we have DesignPac, which is our wholesale business. DesignPac has been struggling in the wholesale business. So you can have two effects here between the first quarter and the second quarter.

One is the wholesale sale of baskets to big box retailers is still going to be down this year over last year. And add to that the fact that some of those customers ask for early shipments. So that will have a two-pronged effect on the basket wholesale business between the first and the second quarter. The wholesale business from our other food gift products is frankly going very, very well. So that will continue through this second quarter. The other thing I'd add though is, even though the wholesale business in the basket area is not going where we'd like, we think we have fixtures in place that will turn that business around and I will start to grow it again. That won't be seen until next year, we're in that, we're just starting that sales process now for next year. So we're hopeful and expecting that the wholesale basket business which has suffered for the last couple of years will improve next year and we hope to be able to report that with great results against that -- those efforts this time next year and we're in that process now.

But the better news is, that the direct to the consumer piece where we have much more control is going very nicely and we actually think that that will have a bearing on the wholesale business as we share that data with the mass merchant retailers who are the customers of our wholesale product. When they see the success we're having with these products for the consumers, I think that will give them the initiative and the confidence to order those products on a wholesale business, because we have demonstratable evidence that our customers are embracing this product and really accepting and our sellthroughs are terrific. So, that's a long answer to the wholesale piece product.

Okay. Thank you.

The (inaudible) doing well the basket business on the wholesale is struggling and the basket business on the direct to the consumer side is doing very well.

All right. Thank you.

You bet.

Okay. Thank you. This does end our Q&A session for today. I'd like to turn the conference back to your host for any concluding remarks.

Well, thank you for your questions and your interest and if you have any additional questions please contact us. As appropriate, I mean what I was just mentioned that in embracing our florists it behooves us to do things that are beneficial for our retail Floral partners in BloomNet into franchising. And we mentioned sympathy and wedding, and wedding is an important category and to help build our brand, which benefits our florists, we have a new initiative called -- a new TV initiative called "I Do Over" a TV show that's launching Sunday, November 13 at 10 PM on the WE network and I encourage you to tune in and see what our florists can do, to really make a wedding something extraordinary over the top.

So to help our florists, to help our brand to be positioned well to participate more aggressively in the wedding category, we've created this TV show called "I Do Over" in partnership with Rainbow Media and you'll see the evidence of that November 13 at 10 o'clock at night. I hope you tune into the WE network. Thanks for your time and attention today and look forward to helping you with any of your last minute Halloween needs as it's just this weekend. Thanks.

Ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.