1-800-Flowers.Com Inc (FLWS) 2012 Q2 法說會逐字稿

Good day everyone and welcome to the 1-800-FLOWERS.COM fiscal 2012 second 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.

Thank you. Good morning everyone and thank you for joining us today to discuss 1-800-FLOWERS.COM's financial results for fiscal 2012 second quarter. For those of you who have not yet received a copy of our press release issued earlier this morning, the release can be accessed at the investor relations section of our website at 1-800-FLOWERS.COM, or you can call Patty Altadonna at 516.237.6113 to receive a copy of the release by e-mail or fax. In terms of structure, our call today will begin with brief formal remarks, and then we 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 remind everyone that a number 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 detailed description of these risks and uncertainties, please refer to our press release issued earlier this morning, as well as our SEC filings including the Company's annual report on form 10-K and quarterly reports on form 10-Q. In addition, this morning we will discuss certain supplemental financial measures that 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 early this morning. The company especially 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 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 second quarter, we saw continuation of the positive trends that we have seen in our business since last year. In Consumer Floral, revenues continue to grow at a strong rate and gross margins increased further, as customers responded positively to our enhanced merchandising and marketing efforts. BloomNet grew at a double-digit pace benefiting from increased shop-to-shop order volume and further market penetration for our expanded suite of products and services. And, our Gourmet Food and Gift Basket business saw solid growth in E-commerce, which helped offset weakness in the wholesale baskets for the mass market channel which we describe to you in past calls. As a result of these factors and our continued focus on improving our operating expense ratio, we achieved enhanced bottom line results for the quarter.

We also continue to strengthen our balance sheet finishing the quarter with more than $30 million in cash and net debt of approximately $7 million. Since our peak in fiscal 2008, we have paid down more than $90 million on our term debt despite a challenging economic environment. We believe this provides us with significant flexibility to grow our business using our multi-channel retailing strategy and emphasizing e-commerce, while concurrently seeking growth in local markets, where we primarily do it through our franchising initiatives. In wholesale, where we see increasing opportunities for our Gourmet Food and Gift Baskets brands, with leading department stores and mass accounts. And in BloomNet, where we continue to expand our offerings and deepen our relationships with our florists. And in the social and mobile media areas, where we have investments that we've made over the past several years, have positioned us as a leader in both mobile and social.

Before I turn the call over to Bill, for his review of second quarter metrics, I'd like to touch on two specific topics. First, during the second quarter, we announced the 62-store franchise deal with Fannie May with GB Chocolates, a partnership that includes some of the preeminent franchise operators in the United States. The agreement includes development rights of 45 new stores to be opened over the next three years in several Midwest states, as well as specific cities in Florida and Ohio. The deal also included the sale of 17 of our existing Fannie May stores, located in areas outside of our core Chicago market. While the sale of these stores during Fannie May's biggest season reduced our revenues for the period, it provides us a solid platform for our new franchise partner to accelerate their growth plans while providing us with future revenue streams, through franchise and area development fees and product sales.

As I noted in the past, at one time there were more than 500 Fannie May and Fannie Farmer stores stretching from the Midwest and East Coast. As a multi channel retailer, we believe that growing our local market presence through franchising is the most capital efficient way for us to expand Fannie May's footprint and brand awareness, and thereby drive both retail and e-commerce revenue growth. Second, in terms of our Gift Baskets business, while our 1-800-FlowersBaskets.com directed consumer brand, is performing well, our wholesale basket business continued to underperform. To address this area, we have installed a new management team that has put in place new processes, to improve the division sourcing, operating, and reporting infrastructure.

In addition, we have hired new talent to lead our sales efforts with extensive experience in the mass channel. And, we have stepped up our efforts to expand the customer base to reduce dependencies and increase customer reach. We are confident that these changes and others under way will produce improved results in this category. I will now turn the call over to Bill for review of the financial and operating metrics for this quarter.

Thank you Jim. As indicated in our press release issued this morning, our fiscal 2012 second quarter is characterized by the continued strong performance of our consumer floral business as well as growth in our BloomNet and Gourmet Food and Gift Basket categories. In our Gourmet Food and Gift Basket category, for which our second quarter is our largest in terms of sales and profits, we saw good e-commerce growth, as well is solid growth for some new wholesale accounts for our HarryLondon Chocolates and Popcorn Factory brands. This, however, was largely offset by underperformance in our wholesale baskets business which we have discussed with you in previous calls.

Also in the segment, as Jim mentioned earlier, we closed an important Fannie May franchising deal during the quarter, with one of the leading franchise operators in the United States. This 63-store deal, greatly accelerated our Fannie May franchising program, which we believe has significant long-term benefits in terms of franchise and product revenue streams, enhanced manufacturing utilization and expanded brand awareness on a national level of Fannie May an iconic chocolate brand. Part of the deal included the sell of 17 Fannie May Company-owned stores to a new franchisee. While this resulted in some lost revenues and contributions during the seasonally strong holiday period, impacting EPS for the quarter by approximately $0.01 a share. It also provided approximately $500,000 in new franchise fees, as well as a pre-tax gain of $3.8 million recorded in the quarter. Additionally, as Jim mentioned, the deal creates future revenue streams related to area development fees, initial franchise fees and wholesale product revenues

Providing specific financial results and key metrics on continuing operations from the second quarter, total net revenues from continuing operations increased 4.8% to $239.8 million compared to $228.9 million in the prior-year period. During the quarter, our e-commerce orders totaled $2.829 million compared to $2.928 million in the year-ago period. Average order size during the quarter increased 10.5% at $58.38 compared to $52.81 in the prior-year period. During the quarter, we added 612,000 new customers. This was achieved while concurrently stimulating repeat orders from existing customers who represented 61% of total revenues, unchanged compared to the prior-year period. Gross margin for the quarter was 41.8% down 60 basis points compared to 42.4% in the prior-year period. This is due to a combination of factors including product mix, with strong growth in consumer floral segment, and an increase in wholesale business in Fannie May and The Popcorn Factory, low gross margins in BloomNet, reflecting an increase in shop-to- shop quarter volume growth, and lower margins in our wholesale gift basket business. However, it should be noted that gross profit margin in our e-commerce channels increased 30 basis points, driven by continued focus on reducing promotional pricing and enhanced manufacturing efficiencies, which more than offset commodity price increases.

Operating expenses improved 20 basis points as a percent of total revenues to 31.6% compared with 31.8% in the prior-year period. This improvement reflected the revenue growth in the quarter as well as our continued focus on leveraging our business platform. Total operating expenses were $75.7 million, compared with $72.8 million in the prior-year period. This reflected several factors, including operating costs associated with three small businesses we acquired over the past year, including Mrs. Beasleys and FineStationery.com in the second half of fiscal 2011, and Flowerama, early in the first quarter of this year, as well as the licensing agreement we signed early this year to operate the Stockyard.com e-commerce business. Excluding these businesses-- these business additions, operating expenses would have been down, demonstrating our business leverage. Operating expenses also included continued investment in our strategic initiatives we have described to you in the past, including franchising, BloomNet, and the mobile and social commerce area.

As a result of all these factors, and including the aforementioned pretax gain of $3.8 million on the sale of 17 Fannie May stores during the quarter, EBITDA increased 13.1% or $3.9 million to $33.3 million. Excluding the impact of stock-based compensation expense, EBITDA increase 13% or $4 million to $34.5 million. Income from continuing operations increased 26.8% to $16.6 million or $0.25 per diluted share compared with $13.1 million or $0.20 per diluted share in the prior-year period. As previously discussed, EPS for the quarter include the benefit of about $0.03 per share from the sale of 17 Fannie May stores to a franchisee.

In terms of category results, in our 1-800-FLOWERS.COM consumer floral business. During the second quarter, revenues in the category increased 10.3% to $91 million, compared with $82.6 million in the prior-year period. This was driven by solid e-commerce growth for the 1-800-FLOWERS.COM brand, as well as the contribution from two small businesses added at the end of last year and early this year. Gross margin for the quarter increased 40 basis points to 39% , compared with 38.6% in the prior-year period. Category contribution margin increased 22.1% or $1.8 million to $10 million, compared with $8.2 million in the prior-year period. This reflected the strong revenue and margin growth in the quarter, as well as effective management of operating expenses. The Company defines category contributions margin as earnings before interest, taxes, depreciation, and amortization, and before the allocation of corporate overhead expenses.

In BloomNet, revenue increased 12.7% to $18.3 million compared with $16.2 million in the prior-year period. This growth reflects a significant increase in shop-to-shop order volume as well as increased sales of wholesale products and services to florists. Gross margin was 49.2% compared with 56% in the prior-year period. As we discussed in our quarterly call, since the third quarter of last year, the declining gross margin percent primarily reflects BloomNet's significant increase in shop-to-shop order volume, as well as wholesale product mix. While the shop-to-shop orders carry a lower gross margin percent, the significant increase in order volume helps drive revenue and gross margin dollar growth.

The added orders also increased leverage for sales of our expanded suite of wholesale products and services, which grew approximately 10% during the quarter. Since the majority of the shop-to-shop order increase began in the third quarter last year, going forward we will not see the negative gross margin percentage comp. Rather, we anticipate BloomNet's gross margin percent, will remain in the current range of 45% to 50%, as we further leverage these orders and grow both revenues and category contributions. For the fiscal second quarter, category contribution margin was $5.1 million compared with $5.4 million in the prior-year period. I should note that last year's fiscal second quarter included a contribution of approximately $800,000 associated with the tri-annual shipping of our flower selection guide, which we did not have this year.

In our Gourmet Food and Gift Baskets segment, revenue increased 0.7% to $131.1 million compared with $130.1 million in the prior-year period. This reflected e-commerce growth of approximately 5% across the category, an increase in wholesale revenues from Fannie May related to a new department store program for its HarryLondon brand. This growth, however, was largely offset by the reduced wholesale basket orders from mass market customers, as well as the sale of 17 Fannie May retail stores. Gross margin was 42.4% compared with 43% a year ago. Category contribution margin was $30.2 million, including the aforementioned $3.8 million pre-tax gain, compared to $27.7 million in the prior-year period. Without the gain, contribution margin was down $1.3 million, attributable to the weak performance in our wholesale basket business and the contribution associated with the 17 Fannie May stores sold during the quarter.

In terms of corporate expense. As I stated earlier, our category contribution margin results exclude cost associated with the company's enterprise services platform which includes among other services, IT, HR, finance, legal and executive. These functions are operated under a centralized management platform, providing support services to the entire organization. For the fiscal second quarter, corporate expense from continuing operation, including stock-based compensation, was $11.9 million, compared with $11.8 million in the prior-year period.

Turning to our balance sheet, at the end of the second quarter, or cash and investment position was approximately $30.1 million. The increase from our year-end results, resulted from our free cash flow, the proceeds from the sale of our wine services business in the fiscal first quarter, the proceeds from the sale of the 17 Fannie May stores this past quarter, net of our acquisition of Flowerama in the fiscal first quarter, and the pay down of our debt. Our borrowings under our credit facility were approximately $37 million, in term long debt, and zero outstanding under our revolving credit line. Inventory of approximately $59.6 million was in line with management' expectations and reflects the increase in wholesale operations, as well as our recent acquisitions and positioning for the upcoming Valentine holiday.

Regarding guidance, based on the $0.08 revenue growth that we achieved in the first half of fiscal 2012, which was driven by 11% growth in our consumer floral business, we are increasing our guidance for full year revenue growth to mid- to upper single-digit range from the previous low to mid-single-digit range. In terms of bottom line results, we continue to focus on enhancing our operating leverage and expect to grow our EBITDA EPS and free cash flow at rates in excess of our guidance for revenue growth.

Summary, as we enter the second half of our fiscal year, we plan to build on the positive trends that we have seen since last year, and we remain focused on. Seeking cost efficient ways to stimulate consumer demand across our brands and businesses, continuing to seek other creative growth opportunities, improving growth profit margins, and managing our operating cost by leveraging our business platform. I'll now turn the call over to our president, Chris McCann.

The fiscal second quarter marked our fourth consecutive quarter of growth driven by the positive trends we have seen in our 1-800-flowers.com consumer floral business. These positive trends are the result of the initiatives that we put in place to enhance our marketing merchandising programs, which have enabled us to embrace our florists and engage directly with our customers to help them deliver smiles. Our marketing messaging, reminding our customers to wow their recipients and don't settle for less, are resonating well as evidenced by the continued growth in our average order value. To deliver our message, we are increasingly integrating social and traditional media channels to reach the broadest possible audience. For instance, our Valentine's Day holiday customer engagement effort invites people to vote for the Wow sports moments of the day on their Facebook page, giving us a tremendous multiplier effect, as we reach not only their friends, but friends of friends. The contest is also being broadly promoted by our endorsement radio personalities on ESPN, where they will be talking about it live, on-air, during their shows.

In addition to featuring it on the 1-800-flowers.com website, and on our Facebook page, and on ESPN radiodot com, it is also being promoted on ESPN first foray into Facebook on the new Mike and Mike Facebook page. We are also excited by our new partnership with TVland's hit comedy, Hot in Cleveland, featuring one of today's hottest media stars, Betty White. Special video content from the show is being promoted through various social media channels to tell all the helpless guys out there what women really want for Valentines Day, to be wowed with beautiful flowers from 1-800-flowers.com

On the merchandising front, we continue to focus on truly original product designs, working directly with our BloomNet professional florists to develop gifts that help our customers express themselves perfectly, such as our Lucky in Love a-DOG-able arrangement for Valentine's Day. In terms of our efforts in mobile, I mentioned at our last call the launch of our completely redesigned site in early September, which helped us pick up the best mobile site of 2011, following a similar honor in 2010. I am pleased to report that our mobile customers are responding enthusiastically.

Looking ahead to the second half of our fiscal year is driven largely by our floral business due to the Valentine's and Mother's Day holidays, as well as other spring gifting occasions. We built some nice momentum in this area, and we plan to build on the positive trends we have discussed today going forward to achieve enhanced results. I will now turn the call back to Jim.

Thanks Chris. Our customers continue to turn to us to help them deliver smiles. That's the business we are in, helping them connect and express themselves for all of their celebratory occasions, from the everyday to the once-in-a-lifetime. The strong results and the strong growth results we achieved in our second quarter and throughout the first half of our fiscal year, and the positive trends we are seeing for, frankly, more than a year now, attest to the fact that our messaging and positioning as a florist and gift shop is resonating. We are growing our business to our focus on providing truly original floral arrangements, as well as expanded offering of gourmet food and gift baskets, featuring highly relevant gift brands that our customers expect from us. We have a multi-channel business model that emphasizes e-commerce, while including our local retail presence. Our business philosophy is to engage directly with our customers, invite them behind the curtain, if you will, to work directly with us on the design and development of products and services and even our marketing and advertising programs. Towards this end, we have embraced early on the new social and the mobile tools to become the next-generation retailer. We have become a leader in our space and social and mobile commerce as a result of a strategy to invest in innovations for the future, and to embrace new technologies and modes of customer engagement that will help us develop and deepen those relationships.

To wrap up, we are pleased with our second quarter and fiscal first-half results and the positive trends that we see continuing in all of our businesses. We are heartened by the recent reports of improvement in consumer confidence but we remain cognizant of the challenges in the global economic environment. As a result, we will continue to focus our efforts on managing those aspects of our business that we can control. Our relationships with our customers, our operating expenses, our financial strength and flexibility, and our growth initiatives. We believe this focus will enable us to continue to grow and create additional leverage within our business model and thereby drive good value creation. That concludes our formal remarks, and we will now open the call to your questions.

Thank you ladies and gentlemen. (Operator Instructions) Question from Anthony Lebiedzinski of Sidoti & Company.

First question on the Consumer Floral segment. Just wondering if you could give us a breakdown between order volume versus the average order value, just for that segment?

Sure, Anthony. Thank you. I will ask Chris to cover that.

I think what we're seeing is good trends in both areas. The average order value - we're seeing our customers really respond to our focused merchandise strategy on good, better, best, and wow strategies. So, we are seeing the average order value continue to increase year-over-year. Of course that starts to level out. And we're seeing positive trends for the last several quarters now on order accounts.

Yes, basically for the first half of the year, almost flat on order accounts with Consumer Floral. You go back to last year, we were significantly negative on year-over-year order accounts. AOV was -- started to drive our growth, but now we are looking forward to be on both counts.

So the trend lines on - continue to have good trend lines on the AOV, and now good trend lines now for a couple of quarters on the order count as well, Anthony.

Okay. That is helpful. Looking forward to Valentine's Day this year, is on a Tuesday versus Monday last year. Just wondering if you talk about the benefit of this calendar placement, and also, what is your promotional strategy going to be around this Valentine's Day versus last year?

I'll ask Chris to cover the second part of your question, Anthony, with regard to our approach to the market with promotions and our merchandising strategy. The first part of it, on Valentines day in general. Valentines Day is a crazy busy period for us in the middle of what is an otherwise quiet quarter. It is always challenging. I say that because you have a huge variable that really impacts us here more than it does for the Christmas holiday, certainly more than it does for the spring floral holidays, and that is the weather. So, that is the first and foremost, the primary concern we have going in. There are lot of logistics issues really into the holiday, and of course, for other retailers who don't have the benefit of being a year-round retailer like we are, they sometimes become exceptionally promotional. But Chris, would you cover our approach to the merchandising strategy, marketing strategy for Valentine's Day?

So, what that tells you is we continue our focus again on our good, better, best and especially the wow messaging that is resonating with our customers. It enables us to focus really on our, as a mentioned in the call, our florist-ness, and working with our creative florists moving truly original products and that is what we see our customers migrating to, as opposed to looking just for the cheapest product they can find on the marketplace. So, we're very happy we're continuing that effort, picking up on the things we learned last year. And again, taking a nice broad approach. We are into the Valentine's swing.

So, taking a broad approach in our marketing efforts, continuing our radio promotions as we have done throughout the year, leveraging them, as I just mentioned, with our partnership with ESPN.com in the customer engagement program that get us into the social media channels, which again gives us a multiplier effect on impressions that we can make. We think we have good plan in place, and we look forward to a successful Valentine's Day.

Anthony, I read with interest last night and today about JCPenney's announcements about their new go-to-market strategy. Although I only read the headlines, but it seemed a very much like a program that we developed for the last two years now. And for us, it is producing the growth we expected. I certainly don't know how it will impact them, but certainly it is producing the growth we hoped for.

Okay. And my last question on the gourmet food gift baskets segment. You mentioned that you're looking to expand the business more department stores. Just wondering how many have right now and what is your expectation for later this year?

Well, I think what you've seen us do is, we are a retailer. We are a e-commerce retailer that likes to be multi-channel. We embrace the multi-channel aspect or that, the retail part of that through a franchising model. That works for us. On the e-commerce side, we are focused on growing our e-commerce relationship, embracing the social aspect of that. So clearly on the path of becoming a truly social retailer, social commerce player, and we think that mobile accelerates all of that.

But when it comes to how -- when it comes to how we will expand our other relationships in the wholesale channel -- wholesale for us is simply a way for us to leverage the assets we have. So we will do it from a market perspective, we will do it from a utilization perspective, and we will do it from a brand extension perspective. So, it is not a big part of our business, but we will do it when we can because it gives us contribution margin, it give us leverage on our facilities, and it gives us brand extension opportunities.

Okay. Thank you.

(Operator Instructions) Our next question is from David Kanen of WFG Advisors.

Good morning. Congratulations on a good quarter.

Thank you.

First question regarding BloomNet. What was the -- sequentially what happened with gross margin? I know it was 49.2%, but how does that compare with the September quarter, if you have that number, Bill?

Yes, it was up - we talk about gross margin for BloomNet being between 45% and 50%, it was 49% this quarter. I think it was 46%, 47% in the first quarter of this year.

But maybe step back, Bill, and give David a little color in terms of the extent of the gross margin situation and the gross margin dollar situation that BloomNet will be.

BloomNet has always had a strong gross margin and it will continue to have very strong gross margins; it's in that 45% to 50% range. As we have always said, our goal with BloomNet is to really drive both the top and bottom line -- say a program about a year a go to really step up our shop to shop orders and to -- which is ultimately, allow us to sell all their products and services, and many of those on a wholesale basis, that will drive incremental gross margin dollars, but will drive down gross margin percent from where it used to be, which was above 50%. I think we're now anniversarying that period of time and therefore we will now have more comparable gross margins going forward. Obviously, the idea behind BloomNet is to grow top line and grow contribution margins within that segment.

Okay. So, is it safe to say that gross margin troughed last quarter in the BloomNet segment?

I think what we could say, David, is, we don't see it as a trough. We told you it would be in that 45% to 50% range. Gross margin dollars were up this quarter, gross margin dollars were up last quarter. What we think we'll see is we're having good success in introducing new products and services. So, the good news is, gross margin is down because we have had real success at deepening the relationship we have with our BloomNet shops from its traditional high points. But that 45% to 55% range is enviable in anybody's book, and we are very proud of it, and we expect that will be the range going forward as well.

Okay. Next question. You have been co-branding floral shops. Partnering and co-branding. I know locally I've seen signage change and so forth. What are those shop owners experiencing in terms of organic growth, if any? And are you tracking in those local zip codes what is happening on the e-commerce side, if there is any benefit there?

David, our efforts that you are referencing here are all part of our BloomNet strategy. Our BloomNet strategy is to have a stratified layer of options for our BloomNet florists in terms of how much they want to participate with us, and what kind of depth of relationship they want to have. As we pointed out, as a result of several different things here, including the huge impact that the show Undercover Boss had on our relationships with our florists, exposing so many of BloomNet members to the opportunity that they saw some of their cohorts experiencing by becoming a co-branded partner of ours, we decided to experiment with that, and to introduce that as a possibility.

There's an enormous demand from our florists who would like to participate in that, but we don't have an enormous capacity, so we are very limited, and we're testing our way into that program. I will tell you, anecdotally, the florists who we have allowed into the program, which are few in number, have experienced a very good situation, but we don't have hard data to share with you on that today. It is an effort we introduced several months ago. The branding experience that our florists are experiencing is quite good. We know it is good for us.

It's part of our overall strategy to be a multi-channel retailer, as we said, whether it is in the chocolate brands, or in our bakery brands or in our floral brands. We'll do our local piece in our franchising model. But It is too early to say on this very deliberate effort that we have on the floral side about our early results from our franchising efforts. We're happy with them. We're pleased with them. We will continue to go. But, it is very early in its development.

I know that you just launched fruit bouquets not too long ago. Approximately, how many floral shops do you have in total in your network and approximately how many shops are enabled right now? And what is your strategy over the next two years?

Well, as we told you a quarter ago, we think that this category of fruit bouquets is a strong category. We have looked at it for a number of years now, and we've decided that the best way for us to enter into this business is in partnership, primarily, with our retail floral partners. In terms of the size of BloomNet, we told you, it is well over 7,000 members of BloomNet; it has been for a long time. We're not allowing that number to grow, although there is a great interest on the side of retail florists to become a part of that network. We think we have the right sized network today.

Within that network, we have two things happening. As you mentioned in your first question, many of our florists have applied to become co-branded partners of ours, and we are deliberately pursuing that and letting a few of them in. Secondly, on the fruit side, it's a big shift in terms of we've done all the things we needed to do in terms of creating the product line, creating the technology behind that, creating the training programs, the merchandising materials, and the marketing support for the program. And, that is what we've done since we initiated this program at the beginning of the second quarter of this fiscal year, August, September timeframe, when we introduced this idea to the community and to you.

So far, what we are seeing is very good response, but it's a long lead time in terms of building the physical plant that they need for it, the permitting they need, the training programs that we put them through, the marketing, merchandising training that we put them through. So, we will, in the future calls, give you color on numbers of those when it is significant and it's meaningful and we have data to back it up. I will tell you that those who have converted to the program are having a very positive experience. This is a deliberate long-term effort.

And like baskets, and like our chocolate business, our fruit bouquet business will become a very big and very important part of our mix, and it is a wonderful, wonderful and natural addition to our BloomNet florists to have this program as part of their mix. It is something that some of us as florists have done for decades, but now to have it as a formal program with a great marketing support with all the trimming that we have done around his, it's going to help a bunch of very successful florists become even more successful by adding this product mix to their menu.

With the limited number of shops that are, let's call them fruit-bouquet enabled, if you will, are they seeing double-digit same-store sales growth or high single-digit same-store sales growth? I know it is not a large number, but can you give me a sense, numerically, as to the effect it is having on the local store?

Yes, I could, but it won't. It is too early fro us to say. I don't want to mislead you with the good news we've seen so far. I don't think there are enough florists out there in terms of those who have already sold it. I might give you a misreading. I don't want to lead anyone on there. We're very pleased with it. We're putting a big effort behind it. It is too early for us to give you that, what seems like good news, it seems like exceptional news, until we have really dug in and put some qualifiers and quantifiers behind it.

Okay. Final question. I know you raised guidance to mid- to high-single digit growth overall. In the balance of this year, assuming you hit that target, will we see an expansion in the operating margin? Will you get some operating leverage off that growth in the top line?

I think the answer is true. I can ask Bill if he would like to give any color to it, but when you have accelerating growth on the top line that we had, when you've seen us control our operating expenses on the same, like to like model, like to like without some of the new additions of new businesses we created or attached in the last quarter or two. If you looked at our operating expenses, they're actually down year-over-year without those additions. You see we have pretty good discipline in controlling our expenses and you have improving gross margins, and Bill mentioned earlier, that he expects our gross margins to continue to improve in the second half of the fiscal year. That results in our earnings improvement. Bill?

I think Jim covered it. You basically saying we are confident that our gross margins can improve the second half of the year. We continue to do demonstrate leverage on the bottom line, and we raised our guidance on the top line. So all those lead to that. We broad-brushed our guidance that our EPS, EBITDA, cash flow will grow at a faster pace than our revenue.

We do have Valentine's Day ahead of us. I mean when I say ahead of us, we are already into the Valentine rush. It's, frankly, the holiday that gave me my hairline.

I'm sorry. I should have asked this earlier. I would like to get a little color on -- I saw this announcement on the franchise deal for the Fannie May stores. Can you -- I think it was 45 new store openings. What is the approximate timeline on that? Will you be getting royalties? Will it be a traditional franchise model where you get 6%, 7% royalties on the total sales?

Thank you for that question, David. We will give you the broad numbers here. It is a 62 store deal. That means, we sold them 17 stores that we had that were outside of our core Chicago marketplace where we own the stores. We sold 17 of our 95 stores at that point to this new group that are very seasoned and happen to be really, good knowledgeable people and very seasoned franchise operators. So they bought 17 stores. In addition, their contract requires them to open up to 45 stores. They may want to do more, but certainly a minimum of 45 stores in a three-year period. They already opened a few those stores, so they are well on or ahead of schedule.

As a result of that, what we get is a few things. One is we get the traditional franchise fees, opening fees, license fees, etc. and the ongoing royalties and marketing contributions that go along with that. In addition, we're the manufacturers, so we have a slight margin on the product we manufacture and we get the benefit of utilization which is one of the reasons why we are in the wholesale business. So it expands our business and our respect. So, from every way, they get a good deal. They get a great brand. The economics on those stores that are already open and the stores that they will open are terrific. They are great operators; great partners. It has already attracted a lot of attention from other operators like them who would like to become part of the program, so we continue to see it is wonderful way to prime the pump on a very important effort. Oh, and by the way, the other thing we get that you referenced in your question about florists, is we get the rainbow effect of that living billboard, the store being in a marketplace, giving benefit to all of our channels. The retail channel, the wholesale channel, and of course, the most importantly, the e-commerce channel as well.

Just before I get off. I have just a comment. With your stock under $3.00 and now essentially the balance sheet being almost net debt free, only $7 million in net debt. I would, as a shareholder, I would like to see the company be very aggressive in buying back stock because it would move the needle in terms of the bottom line results. Just a comment. And you could -- I am going to get off-line now if you maybe comment on that later. Thanks.

David, I'll comment on it now. And thank you for your point of view and for being an interested and passionate shareholder. I think the good news is, we've stuck to our guns over the last few years and did what we said was our highest priority. Our highest party were three things. One, get closer to our customer, improve our operating leverage and having its beneficial impact on our balance sheet, yet at the same time continuing to invest in the future. The good news is the economy is stabilized and allowed us to do those three things and achieve what we have. You can see the evidence of our getting closer to our customer by Chris' report on all of our brands showing growth once again.

Second, the balance sheet -- over that three-year period, we paid down $90 million in debt, and we are on a pace to be net debt free. Now, but certainly by the end of this fiscal year in June. On the current trends we have going on now. And then, third, we have continued to invest in the future. With the introduction of the food bouquet program and celebrations.com and half a dozen other initiatives that we have continued to invest in. Here we find ourselves now with growth, good bottom-line performance and good trend lines and a balance sheet that is fairly pristine. It is nice to have options.

I think it is a responsibility for us as shareholders and as stewards of these assets to look at all of our options in terms of how can we best continue to create value and continue to create opportunities for us as shareholders and for our outside shareholders. We're having interesting and good thoughtful discussions with people like you, David, who have the same interest we have in helping us to explore all of our options. But I will just affirm, it is nice to have these good options.

Okay. Thanks guys. Good luck.

Thank you David.

Thank you. Next question is Anil Gupta of Imperial Capital. Your line is open.

Hello. Good morning. One quick question I had on the mobile segment. I think you have both an app and then a specific mobile website. And was wondering if you can provide metrics or just some color on how those platforms are performing for you. So, some examples would be either a number of orders placed on either the app or the mobile site. Average order value relative to the internet orders, number of downloads, etc. Just trying to get a sense of to how valuable that platform is for you right now. Thanks.

What we see in the mobile channels, you're right. We have mobile website as well as apps across the three major platforms. What we're seeing is a good early adoption. We're not seeing really any difference to speak about in AOV across the e-commerce channels or m-commerce channels. The majority of business does take place on the mobile website as opposed to on the apps.

Some people like the apps better. We are getting good learning from those apps and will be applying them as we go forward into the tablet world. There are different ways we can stay engaged with our customers on that. Again, you can't really provide any color beyond that between -- and we don't track it that way, necessarily on which different app is producing. The mobile web is the leader.

I think we agree with you, Anil. The whole world is mobile. I just did a conference a day or two ago. The interactions I've had with people, internationally especially, is that the whole world is mobile. The reason why we have been investing there and the reason why we have the CapEx that we do. The good news is that we can afford to have the CapEx we do because it's essentially all technology spend and a big chunk of that, of course, has been to give us a platform that will allow us to do all of these new things in the years ahead. But the biggest part has been affording us the opportunity to be active and aggressive in a mobile world. It is very much like the early days of the internet, in that it doesn't amount to a whole lot on a percentage basis, in the early days, and all of the sudden a tipping point comes and it really matters. We have made the investments. We have all the apps. We have the direct mobile web platform. So they are all working for us. The average order seems to be about the same or similar to what we have experienced in all our other channels. Now it gives us the opportunity, as that channel improves and develops, we are already there. We are noted for our leadership there. We should reap an outsized reward for those efforts.

And what is nice with the mobile channel too is our customer base is very tech savvy. So, it allows us to give them another vehicle to reach us, to access us, as well as, also like Jim mentioned in the early e-commerce days, it allows us to extend our brands even further into a very tech savvy audience and acquire new customers.

Okay. Thanks. A couple of other quick ones. One would just be, any trends you are seeing in the online ad pricing world, and then -- I don't know if you've disclosed this before, but a percentage of your traffic which is organic versus paid.

We continue to see trends in the -- I think things are fairly stable there. Trends - I think what we continue to see trends in the ad tech world really, not so much a trend in cost, I think things are fairly stable there, but just the emerging technologies and how we can reach customers, how we can speak to different customers differently continues to emerge, providing great value to retailers that really understand it's all about building relationship first and doing business second.

I think we are seeing cost remain fairly flat, Anil. A world that you know so much is, the ad tech world here is changing very quickly, and it is a place I know Chris focuses his team's time and attention on, because I think the yield for us as an e-commerce player is improving all the time because of the benefits of the new technologies in marketing and advertising online. So, for the same dollar, we are able to reach more effectively customers, and it's, I think, one of the reasons contributing to the renewed growth you're seeing in 1-800-FLOWERS.COM and all of our consumer brands.

Specifically, one of the things we do benefit from is the value of great, well-known brands. So, why we certainly don't break out the traffic between paid and natural, we do benefit from the fact that we have well-known brands and therefore get a decent amount of direct traffic.

Okay. Thanks. Two other quick questions. One would just be, any impact that you're seeing in terms of foreign currencies, specifically in the UK. I am not sure how big the business is over there, but any comments there. And then, just in terms of the general market, do you feel like you are taking share from competitors, FTD, Pro-flowers, et cetera, and just what you're seeing in the marketplace?

I will go in reverse order on that, Anil, in terms of trends. The indications we get, there is not really good hard data on the floral and gift categories that we play in. Our sense is, there's not been a lot of growth there. Maybe some, now, but not a lot. So, that would factor taking some share from somebody because of our growth. On the second piece of that, on the international, we are still a very heavily a US player. We have a few investments that we will talk about in future quarter calls in our international arena, but they are very small so there's no really consequential impact of any kind on our sales.

Okay. That's all I got. Thanks.

Thank you.

We have follow-up from David Kanen of WFG Advisors. Your line is open.

Bill, what was CapEx for the quarter? And, where do you expect it to fall for the full year?

We expect the full year to be about $17 million. For the first half of the year it was just about half of that. It was a little over $8 million for the first half of the year.

Okay. And I don't know if you can answer this question, but -- I know it's a small part of the business, but what was the growth rate for mobile year-over-year?

You are right. We didn't state that. So you didn't miss that, David. It is too early for us to be reporting on the growth rates in mobile. The size of it, it would sound silly.

Okay. Thanks.

Thank you. There are no more further questions at this time. I would like to turn the call over to Management for any closing remarks.

Thank you all for your time and attention today. We are very pleased with our results for the quarter. We are very hopeful and expecting a good solid second half of the year. It is nice to have growth. It is nice to have options. It is nice have performance in what is otherwise still not a terrific retail environment. I think our strategy in terms of being a multi channel retailer, focused on the e-commerce, focused on new commerce. And I think our investments that we've made through very difficult couple of years on the future are starting to bear some fruit now, pardon the pun there, but clearly bearing fruit.

And finally, as a reminder, that Valentine holiday that we talked to you about that is so important to us, and, frankly, is pretty important to you. And I'd encourage you to come to 1-800-flowers or any of our retail sites to find (inaudible) loved ones in your life and to find only the best floral arrangements as well as some wonderful gourmet gifts that will help deliver smiles to the important people in your lives. Thank you for you time and attention, and I look forward to servicing all of your needs for this Valentine's Day.

Ladies and gentlemen. Thank you for your participation in today's conference. This concludes the program. You may now disconnect and have a wonderful day.