1-800-Flowers.Com Inc (FLWS) 2012 Q4 法說會逐字稿

Good day, everyone, and welcome to the 1-800-FLOWERS.COM Incorporated fiscal 2012 fourth-quarter and full-year results conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to the Company's Vice President of Investor Relations, Joseph Pititto. Mr. Pititto, please go ahead, sir.

Thank you, Karen. Good morning, and thank you all for joining us today to discuss 1-800-FLOWERS.COM's financial results for our fiscal 2012 fourth quarter and full year. For those of you who have not received a copy of our press release issued earlier this morning, the release can be accessed at the Investor Relations section of our website at www.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 to remind everyone that a number of the statements that we will make today may be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed description of these risks and uncertainties, please refer to our press release issued this morning, as well as our SEC filings, including the Company's annual report on Form 10-K, and quarterly reports on Form 10-Q.

In addition, this morning we will discuss certain supplemental financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables accompanying the Company's press release issued this morning. The Company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today's call, and a recording 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. The strong top and bottom line results we achieved in fiscal 2012 coming on top of last year's strong results reflect the positive trends in all three of our business segments, which we have described to you in past calls. In particular, our core Consumer Floral business continued to perform well, with revenues growing nearly 8% or $29 million to roughly $400 million for the year. Gross margin and average order value in this category also increased again, with gross margin up 90 basis points on top of last year's significant gains, and AOV, or average order value, up 5% to $71 for the year.

These results illustrate the effectiveness of our marketing and merchandising programs focused on engaging directly with our customers to deepen our relationships and help them deliver smiles. We accomplish this through our truly original product designs such as our exclusive customizable Vase Expressions arrangements and our hit a-DOG-able line, through our marketing, messaging, and emphasizing wowing recipients, never settling for less, and through our advertising programs that leverage our industry-leading efforts in the social and mobile arenas. As a result, category contribution margin increased almost 20% for the year to $39 million. We believe these results, coupled with last year's strong results, have enabled us to further extend our market leadership in the Consumer Floral category.

Our BloomNet wire service business achieved double-digit growth of both top and bottom line for fiscal '12, representing a second consecutive year of strong results. BloomNet has established itself as the growth leader in the wire service category with unsurpassed innovation in the expanded suite of products and services it offers, including our unique digital directory with its enhanced search and advertising capabilities, and the Floriology Institute, which provides industry-accredited educational and community building programs through our training center in Jacksonville, Florida, and in seminars that we conduct across the country. As a result of these efforts, BloomNet is growing its market position as it deepens its relationship with professional florists throughout the country.

In our Gourmet Food and Gift Baskets businesses, we increased total revenue for the year, reflecting strong e-commerce growth in our Cheryl's, 1-800-Baskets.com, and The Popcorn Factory brands, as well as wholesale channel growth for our Fannie May Fine Chocolates business. This growth more than offset the loss of revenues associated with the sale of 17 Fannie May retail stores that we discussed with you back in our fiscal second quarter. The strategic sale of the stores was part of a 62-store franchise deal with a leading national franchise operator that includes them opening an additional 45 new stores to be opened over the next three years, several of which have already opened and more scheduled to open this Fall. This deal significantly accelerated our Fannie May franchising program, and in addition to other franchise agreements already signed or in development, will provide multiple benefits to the iconic Fannie May brand including enhanced growth opportunities across our e-commerce, retail, and wholesale channels.

It is important to note that both revenues and profitability in our Gourmet Food and Gift Baskets category were impacted again this past year by reduced order volumes in the wholesale gift basket business. However, I am pleased to be able to report that for fiscal '13, we expect to see positive results in terms of revenue growth and improved bottom line performance in this area as we are now seeing improved demand from our key accounts.

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

Thank you, Jim. As we noted in our year-end press release and conference call last year, because we follow a retail calendar, our fiscal year varies in length by one week every four to five years. As a result, our fiscal 2012 full year included 52 weeks of business compared with 53 weeks in the prior year, and our fiscal '12 fourth quarter included 13 weeks of business compared with 14 weeks in the prior-year period. In addition, our fiscal '12 fourth-quarter results include the impact of the shift of the Easter holiday to early April this year. As we reported in our third-quarter press release, the shift increased revenues in the third quarter while reducing revenues in the fourth quarter, particularly in our Gourmet Food and Gift Baskets segment.

We have provided our revenue results for the year and the quarter on a comparable non-GAAP basis adjusting for the aforementioned factors, as well as providing results on an as-reported basis. We believe this additional information provides a clearer picture of our performance for both the full year and the fiscal fourth quarter compared with the respective prior-year periods.

Regarding specific financial results and key metrics from continuing operations. For the full year, revenues grew 7.6% to $716.3 million on a comparable non-GAAP basis, excluding the 53rd week in fiscal 2011 compared with 52 weeks in fiscal 2012. On a reported basis, revenues grew 6.6%, compared with $671.6 million in the prior year.

Gross profit margin was 41%, compared with 41.2% in the prior year. The consolidated gross margin reflects the higher year-over-year gross margin in our Consumer Floral business offset by lower gross margin in BloomNet, and Gourmet Food and Gift Baskets, resulting from product mix as well as higher commodity costs and shipping fuel surcharges. Importantly, gross profit margin increased 100 basis points during the second half of our fiscal year, a positive trend that we expect to build on in fiscal '13.

Operating-expense ratio improved 90 basis points to 38.3% compared with 39.2% in the prior-year period. And as a result, EBITDA for the year, excluding stock-based compensation of $4.9 million, increased $10.3 million or 27.6% to $47.6 million, compared with $37.3 million in the prior year. Including the impact of stock-based compensation, EBITDA for the year increased $9.4 million or 28.2% to $42.8 million, compared with $33.4 million in the prior year.

Net income from continuing operations grew 131% to $12.7 million or $0.19 a share, compared with $5.5 million or $0.08 a share in the prior year. Free cash flow increased 65.9% or $9 million to $22.9 million compared with $13.8 million in the prior year. As a reminder, fiscal '12 EBITDA, EPS, and free cash flow include a pretax gain of $3.8 million from the aforementioned sale of the 17 Fannie May retail stores to a new franchisee. Excluding this one-time gain, EBITDA, EPS, and free cash flow still showed strong increases, growing 17.4%, 100%, and 48%, respectively, compared with the prior year.

For the fiscal fourth quarter, total net revenues increased 4% to $179.6 million on a comparable non-GAAP basis, excluding the additional 14th week in the fourth quarter of fiscal 2011, and the shift of the Easter holiday. On a reported basis, revenue for the quarter decreased 1.4%, compared with the prior-year period. Gross profit margin increased 100 basis points to 41.2% compared with 40.2% in the prior-year period, reflecting increases in Consumer Floral and BloomNet.

Operating-expense ratio improved 30 basis points to 39.9% compared with 40.2% in the prior-year period. As a result of these factors, EBITDA for the quarter, excluding stock-based compensation expense of $1.1 million, increased $2.3 million or 38% to $8.4 million compared with $6.1 million in the prior-year period. Net income from continuing operations for the quarter increased to $1.3 million or $0.02 per share, compared with a loss of $360,000 or $0.01 loss per share in the prior-year period.

In terms of customer metrics from continuing operations -- for the year, e-commerce orders increased to 8.25 million compared with 8.147 million in the prior year, despite the aforementioned impact of the additional week in fiscal 2011. Reflecting both the extra week in the prior year and the Easter shift, e-commerce orders in the fiscal-2012 fourth quarter totaled 2.182 million compared with 2.258 million orders in the year-ago period.

Average order value for the year increased 4.8% to $62.45 compared with $59.58 in fiscal 2011. And average order value for the fourth quarter increased 1.8% to $63.74 compared with $62.63 in the prior-year period. For the year, we added 2 million new customers, with repeat orders representing 55.8% of total customers. And during the fourth quarter, we added 577,000 new customers, while concurrently stimulating repeat orders from existing customers who represented 63.7% of total customers.

In terms of category results, as I stated earlier, results for fiscal '12 full year include 52 weeks compared with 53 weeks in the prior year, and results for fiscal '12 fourth quarter include 13 weeks compared with 14 weeks in the prior-year period. So, now within our 1-800-FLOWERS.COM Consumer Floral business, full-year revenues grew $29 million or 7.9% to $398.2 million, and fourth-quarter revenues increased approximately $336,000 or 0.3% to $124 million, compared with $369.2 million and $123.7 million in the respective prior-year periods.

Gross profit margin increased 90 basis points to 38.9% for the year, and 90 basis points to 39.2% for the fourth quarter, compared with 38% and 38.3% in the respective prior-year periods. This significant improvement in gross margin reflects enhanced product mix, logistics, and reduced promotional marketing campaigns.

Category contribution margin increased 19.8% to $39.1 million for the year, and 9.8% to $12.2 million for the fourth quarter, compared with $32.7 million and $11.2 million in the respective prior-year periods. The Company defines category contribution margin as earnings before interest, taxes, depreciation and amortization, and before the allocation of corporate overhead expenses.

In our BloomNet wire service business, full-year revenues increased $9.3 million or 12.7% to $82.6 million, and fourth-quarter revenues increased approximately $400,000 or 1.9% to $21.7 million, compared with $73.3 million and $21.3 million in the respective prior-year periods. Gross profit margin was 46.9% for the year and 48.2% for the fourth quarter, compared with 50.3% and 44.6% in the respective prior-year periods. The higher gross margin in the fourth quarter reflects the normalization of gross margin percentage as the Company leverages its increased order volumes. Category contribution margin increased 10.6% to $22.3 million for the year, and 23.6% to $6.4 million for the fourth quarter, compared with $20.2 million and $5.2 million in the respective prior-year periods.

In Gourmet Food and Gift Baskets, full-year revenues increased 3.2% to $236.7 million, while fourth-quarter revenues declined 8.8% to $33.9 million, reflecting the shift of the Easter holiday, compared with $229.4 million and $37.2 million in the respective prior-year periods. Gross profit margin was 42.1% for the year and 43.6% for the fourth quarter, compared with 43.1% and 43.7% in the respective prior-year periods. Gross profit margins for the year and fourth quarter were impacted by increased commodity costs and shipping fuel charges, as well as product mix related primarily to our wholesale Gift Baskets business, which we anticipate will improve significantly during fiscal '13. Combined with enhanced manufacturing efficiencies, we anticipate improved gross profit margin for our Gourmet Food and Gift Baskets category in fiscal '13.

Category contribution margin for the year was $26 million, excluding the gain on the aforementioned sale of 17 stores, and $600,000 in the fourth quarter, compared with $27.8 million and $1.5 million in the respective prior-year periods. Category contribution margin for the year was impacted by the sale of the 17 Company-owned Fannie May stores, as well as weaker performance in our wholesale gift basket business, while fourth quarter contribution margin was impacted by the shift of the Easter holiday.

In terms of corporate expense, as I stated earlier, category contribution margin excludes costs associated with the Company's enterprise shared services platform, which includes, among other services, IT, HR, finance, legal, and executive. These functions are operated under a centralized management platform providing support services for the entire organization. For the full fiscal year, corporate expense from continuing operations, including stock-based compensation, was $48.5 million, compared with $47.3 million in the prior-year period. For the fiscal fourth quarter, corporate expense from continuing operations, including stock-based compensation, was $12 million compared with $12.8 million in the prior-year period.

Turning to our balance sheet. At year-end, our cash and investment position was $28.9 million, compared with $21.4 million at the end of fiscal 2011, and we had no borrowings under our revolving credit line. Inventory was $55.7 million, compared with $52 million in fiscal 2011. Long-term debt at year-end was $29.3 million. Combined with our cash balances, we finished the year virtually net debt free, and we expect to reduce our term debt by a minimum of $16 million during fiscal 2013.

During fiscal '12, the Company generated $22.9 million in free cash flow including the aforementioned pretax gain of $3.8 million from the sale of the 17 Fannie May stores. The Company defines free cash flow as net cash provided by operations, less capital expenditures. Also during the year, we repurchased approximately 1.1 million shares of our stock at a cost of approximately $3.2 million.

One last point on our balance sheet. As we noted in this morning's press release, we are in the final stages of a review of a matter from several years ago related to accounting for goodwill and deferred taxes. We expect the final resolution will be a positive pick-up to net income, which we will flow through fiscal-year 2009, as well as an adjustment to goodwill and deferred taxes. The adjustment will be reflected in our Form 10-K to be filed next month, and does not affect any of the aforementioned results for fiscal 2012 or, quite frankly, fiscal 2011 or fiscal 2010.

Now turning to guidance. For fiscal 2013, we anticipate achieving revenue growth across all three of our business segments resulting in consolidated revenue growth for the year in the mid-single-digit range. We expect to achieve continued improvements in gross profit margin and operating leverage during the year. As a result, we anticipate growing EBITDA and EPS, adjusted for the aforementioned gain from the sale of the 17 stores, at a double-digit pace in fiscal 2013. In terms of free cash flow, we expect to again exceed $20 million for the year.

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

Thanks, Bill. As Jim and Bill have noted, our fiscal '12 results reflect the positive trends that we've been seeing in our business for the past two years. In particular, in our core 1-800-FLOWERS.COM Consumer Floral business we have extended our market leadership by delivering solid revenue growth with efficient marketing spend; increased average order value through effective merchandising programs focused on truly original products; strong growth in gross profit margin through a combination of higher-margin product offerings and disciplined promotions; and reduced operating-expense ratio by continuing to leverage our business platform. As a result, we achieved significant improvements in category contribution in this area. These results have been driven by a number of initiatives designed specifically to help our customers deliver smiles.

In merchandising, our focus on new product development working directly with BloomNet professional florists in our design council has resulted in several great hit products including our expanded line of a-DOG-able floral baskets, the irresistible floral puppies that we have described to you in the past; our new and improved Happy Hour Collection of hand designed floral cocktails perfect for toasting any celebration; our new exclusive Vase Expressions line of uniquely customizable vases including easy-to-use photo and graphics uploading capabilities for truly personalized gifting; and our Store Within a Store collections featuring exclusive artisanal offerings of orchids, sunflowers, roses, and even some one-of-a-kind bonsai plants for the true gifting connoisseur. This focus on offering truly original gifts designed to wow their recipients is clearly resonating with our customers.

In marketing we continue to focus on deepening our relationships with our customers through our messaging that emphasizes delivering-smiles mantra, as well as our floral heritage. Throughout the year, we expanded our industry-leading position in social and mobile with innovative customer engagement programs on Facebook, Twitter, Google Plus, Pinterest, and with thousands of influential bloggers. These programs enhance the relevance of our brand messaging by reaching customers by their preferred modes of communication at the right time with the right products to help them deliver smiles.

Building on this concept, we kicked off fiscal '13 by launching our Summer of a Million Smiles campaign, a community-based outreach program involving associates across all of our brands, as well as our BloomNet florists, participating in volunteer efforts in their local neighborhoods, and in sharing their smiles stories with our customers via our growing social networks. The Summer of a Million Smiles program illustrates our holistic approach to integrating social and mobile communications into all facets of customer engagement, and I'm happy to report that we have already significantly exceeded our goal of delivering 1 million smiles this Summer.

Now I'll turn the call back to Jim.

As you've heard this morning, fiscal '12 was a good year for 1-800-FLOWERS.COM. In addition to the strong financial results and positive trends that we've discussed with you today, we also achieved a number of important strategic objectives. We sold a non-strategic asset in our winery services business for $12 million in cash, and recorded an after-tax gain of $4.5 million. This enables us to focus on growing our direct-to-the-consumer wine business under the www.winetasting.com and Napa Connection brands. We executed a 62-store deal with a leading national franchise operator of our Fannie May Fine Chocolates business, significantly accelerating our efforts to expand this iconic brand nationally. This deal is already providing benefits in terms of new store openings, as well as attracting additional multi-store agreements both signed and in development.

We expanded our floral franchising initiative where we continue to hear from BloomNet florists who would like to elevate their relationship with us, becoming 1-800-FLOWERS franchisees. We launched our www.fruitbouquets.com business, a new line of beautifully handcrafted fresh fruit arrangements. We believe fruit bouquets represent a significant incremental growth opportunity for us, and for our franchisees and select BloomNet florists, a product line that our customers expect us to offer. We continue to plant seeds for international growth with our equity investment in florists online in Brazil. Combined with our ongoing investments in iFlorist in the UK, we are excited about the opportunities we see internationally, as well as customers being increasingly global.

We continue to evolve our 1-800-FLOWERS baskets brand where we see customers increasingly embracing our expanded product offerings for their everyday gifting needs, and we've launched a new baskets program for our BloomNet professional florists, enhancing their same-day gift offerings. We made changes in management as well as sourcing and sales processes improvements to our wholesale basket operations, resulting in the outlook for a return to positive growth in sales and contribution margin, as I already mentioned. And we continue to make investments in our multi-branded portal, and our industry-leading social and mobile programs to further enhance our customer engagement and customer experience.

Looking ahead into fiscal '13, we feel good about the positive trends we're seeing across all three of our business segments in terms of revenue growth, enhanced gross margins, and increasing contributions. We also feel good about our financial strength including our balance sheet with essentially zero net debt and our outlook for growing cash flows which positions us well to invest strategically for future growth. We feel good too about our deepening relationships -- they're the ones we have with our customers based on our unique ability to help them deliver smiles.

That concludes our formal remarks. I'll ask Karen now to give you all the instructions in terms of posing any questions. Karen?

Thank you, sir.

(Operator Instructions)

Eric Beder, Brean Murray.

Good morning. Congratulations.

Thanks, Eric.

When you look at your guidance and what you're thinking, how are you seeing the consumer? And how are you thinking about the consumer landscape in terms of their desire to spend?

Eric, our guidance that we gave this year is very similar, is consistent with the guidance we gave last year. We feel good about the trends we're seeing. We're feeling good about the margin improvement that we've seen. We feel good about the fact that our customers are embracing the new product introductions we've done, warmly, enthusiastically. From an overall point of view, we're not expecting or anticipating any dramatic growth in our category or in consumer spending. So our forecasts are based on, with what we know today, let's be cautious about the consumer, but we have to recognize the fact that we have very positive trends in all the measurable areas of our business, so that's why we gave the guidance this year consistent with what we gave last year.

In terms of the floral product, you've done a great job of creating these very differentiated items. Are we going to see further lines besides the a-DOG-ables and Cocktail Collection being added to that mix? And I'll assume, are we going to see some further extensions on those lines we have now?

Eric, this is Chris.

I think you'll continue to see, as we always have been the innovative leaders of product development, especially in the floral space, we'll continue to come out with new products like that. But you've also seen us expanding our product line, that really resonates with our customers. You see that in some of the boutiques that we've launched. Boutique into the Bonsai Collection, the Orchid Collection, the Sunflower Spectaculars that we've run.

A fairly new line that we've introduced, taking on the success with our plant category, of trees, and especially trees used for memorial capabilities. We're really happy with the recent introduction, exclusive only to us, is the Vase Expressions products which really gives our customers the ability to personalize gifts that help them express themselves perfectly. So I think you'll continue to see us innovate, not only in the floral category, but in our food categories as well. We have some pretty good product innovations happening there as well that we're pretty excited about.

To continue with that Chris, would be some of the everyday basket collections that have been introduced and seem to be well embraced by our customers.

Premium chocolates that we introduced this year; some of the development going on there and other parts of the food business.

Speaking of baskets -- you talked about how you have renewed confidence that the wholesale basket division will start to bounce back. Is that just a function of the tenor of orders you're seeing? Or what you're hearing from your buyers? What gives you the confidence that for Christmas, we'll see the wholesale basket business start to rebound?

What you might recall, Eric, from other calls that we've done, is that the wholesale side of our basket business has a selling cycle that happens throughout the spring. So we do development in the winter, we sell through the spring -- all of which is going to be manifested in sales this fourth calendar quarter, our second fiscal quarter. So for the first time in a few years, this has been a disappointment for us.

But now I can tell you that, based on what we see from our key accounts and orders that we've already booked, that we're going to have positive revenue year-over-year, top line growth on the wholesale side of our basket business, as well as improved contribution margin there. So we think we've turned a corner there, and the evidence of that is our book of business that we already have for the second fiscal/fourth calendar quarter.

All right.

And last question -- in terms of tying together the different brands online -- I know you've done a lot of work in terms of getting the tabs all together and having a single basket -- how has that changed your business? And how do you think that will change it going forward?

Yes, so I think again, it's still fairly early in our efforts there. Especially in the consumer's mindset. So we introduced that expanded multi-branded presence this past October, but from a consumer's point of view, it's still very early. But again, we're pretty confident that, based on what we've seen from the combination of 1-800-FLOWERS and 1-800-BASKETS, and how we're seeing our customers continue to come back for their floral gifting needs, as well as all their gift basket and food gifting needs, plus increasing and deepening the relationship with our customers.

I think, Chris, one of the things that you've done multi-brand is the Summer of Smiles campaign, because each of our products helps our customers to deliver a smile to them and to the recipients of their gifts. And the fact that you and the team linked the Summer of Smiles across all of our brands this year and really emanated out, Eric, out of our Cheryl's product line, some of the experimentation they were doing there -- it typifies how you could expect this to behave going forward, where you have one arching theme and execution across our different campaigns. So our Summer of a Million Smiles is an early indication of how we can now start to link all our brands. And one of the things is, we have a very fun introductory product in Cheryl's that our team came up with there, which is a single butter cream iced cookie, oftentimes with a smiley face.

We invite out customers to just -- we want them to sample our product, and so they came up with a product that's $5 retail price point complete. It's a single cookie in a beautiful little gift box. People are coming to our site and buying those cookies, sending them to people for just $5. Chris and the team on the 1-800-FLOWERS side just put that product on our 1-800-FLOWERS site to give customers in that buying category an opportunity to do something whimsical and fun for one or for a couple of dozen people.

So it's how we're starting to, in the early stages, link our promotional efforts and our product efforts, all to help our customers be aware of wide variety and assortment of products we have and integrate them across our different gifting categories.

Congratulations on a solid year.

Thank you.

Dan Kurnos, The Benchmark Company.

First, could you tell us what the Consumer Floral revenue growth was on a comparable week basis in Q4? And then, what would you say was the revenue impact of the reduction in the promotional marketing programs you talked about in the press release? And do you think there's a possibility that you'll reduce your overall level of promotional activity going forward?

Bill, would you like to handle the first part in terms of comparable revenue --

'12 to '11.

'12 to '11.

Yes. With respect to that it was about 5% in the fourth quarter. 7.9% for the year.

Then, I think, if you look at things, one of the things we're really proud about is that our product lines, our marketing messages, are really resonating with our customers, thereby allowing us to not be extremely promotional in the marketplace, as evidenced by the increase in gross margin that we've had throughout the year and especially in the second half of the year. So what you can see, we're confident we'll continue to grow -- our customer counts, our transaction counts, based on the great products and good marketing messages and relationships that we're building with our customers.

Great.

And then on BloomNet, you had some decent growth there despite a difficult comparison, and you mentioned it quickly in your prepared remarks. Could you give us a little bit more color on how the franchise effort is going? And if you're seeing any pickup in add-on services or wholesale products for your BloomNet members?

Sure, Dan. This is Jim.

We view our relationship with our BloomNet florists as being pure middle in its nature. That is, we have several gradations of depth of the relationship, based on the flower shop's interest and their qualifications. We view franchising as the top of that pyramid. Yes, there's good interest on the part of our florists who want to be a partner, step up their relationship with us into the top of that pyramid on the franchising side, but we're being very deliberate and very strict about who we allow into that program, and we've been very diligent about how we do that.

In terms of the depth of relationship and why we did have such a good year in BloomNet -- again, a couple now in a row -- I think it's exactly what you attributed it to. It's the depth of the relationship. We've spent a lot of time and effort leveraging our resources to provide them either products and services like our digital directory, or with software services that we make available to them. But also on the product side -- we're leveraging our buying power to help our florists buy product at a better cost so they can deliver a better value to their customer and at the same time improving their expense posture as well, so they can be more profitable and grow their businesses. So it's a combination of those two.

We're pretty happy. BloomNet has established itself as the growth leader in the wire service category, with unsurpassed innovation in the product suite, and services that we offer.

Great. Just one more from me.

On the mobile and social fronts, I'm just curious if you've seen any improvements in conversion or monetization, particularly with regards to social, excluding daily deal sites? And are you getting a better sense now of how much of the traffic and revenue generated from those media is incremental to results, as opposed to shifting from the traditional website path? Is there any further color you could give us as to customer behavior, lifetime value, from those media sources?

So I think, again, with each of those, social, mobile, you're still in early days. Yes, we continue to get improvements in both our capabilities to generate traffic to increase conversion rates, and thus monetize our spend in those categories. That continues to grow and evolve.

I think from a consumer point of view, with any kind of emerging access channel you get migration between -- from a desktop to a mobile site, et cetera. However, with any new emerging channel also you have the ability to reach a new audience -- the early adopter audience, right. In those channels we tend to get higher rates of new customer acquisition than in the more mature channels. And thus, we're pretty happy with the results that we're seeing there.

I'm glad that, even though we've had to tell you over the last couple or few years that we've been investing in our CapEx and investing in our marketing spend, in emerging channels like mobile and social, it had been a drag on us for the last couple years. But we just knew that those phenomenons were going to become real and deliberate channels and impacts on channels, as social is and mobile as a channel. We just knew that it was going to have a big impact on the consumer and therefore on us. So we knew we had to do it over the last several years, and even though it was a tougher economic environment as we look back, it was still clearly the right thing to do. And now as mobile in particular starts to mature as a channel, we'll start to see the benefit of those investments over the last few years.

All right. Great. Thanks very much.

Anthony Lebiedzinski, Sidoti & Company.

That was the best pronunciation of your name a long time.

Absolutely. Thank you very much. (laughter)

Now, first question here is on BloomNet. As far as gross margins -- is this kind of the trend that we should expect going forward? I know there had been some noise with the shop-to-shop order volumes, so is this where we should expect that to go, going forward?

Anthony, this is Bill.

As we described in the past as we entered calendar '11, we kind of changed the model a little bit with BloomNet that was going to produce incremental gross margin dollars, but it would have an impact on the gross margin percentage. We've now normalized that. We've anniversaried that back in the third quarter of this year, and we're starting to see and we saw in the fourth quarter the growth in gross margin dollars, and we think we really have now normalized the margins, and we'll start seeing margins where we can start improving margins going forward.

Yes. Also, I was wondering if you could comment on the impact of commodity costs -- how much was that a pressure during the quarter? And where do you see that heading for fiscal '13?

Commodity costs involve a number of different areas for us. Probably the largest commodity cost that we have is cocoa, and we seem to control that very well. We have bought forward in cocoa both for this year, to protect ourselves, and into next year to protect ourselves. The second probably biggest one is fuel. And we continue to see the fluctuations that we have in fuel prices.

Fluctuations -- it's still at a very high level.

At a very high level. Fiscal '12 clear clearly was over fiscal '11. It impacts our margins. We have to manage in that environment. We've seen a little dip in the spring and then it bounced right back up in the summer. So we can't manage for positive impacts on fuel even though it's at a very high level. We manage to where they are.

I think the biggest impact on fuel is the mindset of the consumer. The high fuel -- it impacts consumer confidence, and that impacts ultimately demand for the business. We're probably more concerned with that. We manage around the cost implications of it.

Thank you.

For fiscal '13, are there any calendar shifts that we should be aware of?

Bill, there is one. We don't have the extra week this year. We won't have to talk about that for another four years.

Talk if you would about Easter.

We talked already this year at the end of Q3, we talked about it in this release regarding the shift in Easter. This past year, in fiscal '12, because of Easter being at the end of April a year ago and being in early April this year, and it pulled forward probably $4 million of revenues into our Q3 this year, mainly impacting our Gourmet Food and Gift Basket business.

As we move into fiscal '13, we have a further shift. Easter is the one holiday really bounces around and impacts multiple quarters. Next year, Easter falls on March 31, the last day of our fiscal third quarter, so all the revenues of Easter will now be in Q3 next year. That can probably pull forward even more revenues than it pulled forward this year into next year.

I think the way you need to look at our business is really combining the second half of our fiscal year and look at Q3 and Q4 combined. Because Easter does shift around.

Okay. Thank you.

And then CapEx -- where do you expect that to be for this upcoming fiscal year?

I think we've been managing CapEx -- you saw this year at about $17.3 million. Jim alluded to some of the areas where we spend our CapEx. And while we are multi-channel, and we do need to support the vertical integration of our Gourmet Food and Gift Baskets, we are an e-commerce player, and so most of our CapEx goes towards technology. As e-commerce plays into the world of social, it gets more and more mobile -- the technology areas and what we lead with -- that's where we spend the lion's share of our CapEx. We believe our CapEx will continue to be below the $20 million level.

Anthony, just to expand on that point that Bill made -- when you strip it all away, what are we as a Company? We happen to have a core competence around e-commerce. And we like multi-channel, as Bill mentioned, but we've made the decision over the last couple of years that, although we love retail and we know it's important from a multi-channel mix point of view, we've chosen a franchisee model to approach retail, so it gives us a better capital posture and good partnerships with local operators.

So we're a multi-channel but heavily focused e-commerce player that happens to be in the floral and gift business. Increasingly, especially as you see our CapEx, you see that we're morphing more into a social commerce company as, frankly, we think most e-commerce companies will or will have to migrate and embrace the social technologies and the mobile technologies. That's clearly what we're becoming and what our CapEx expenses have helped us to become.

Thank you very much.

David Kanen, WFG Advisors.

Good morning. Congratulations, guys.

Thank you.

First question -- on BloomNet, because I'm traveling today. If you could tell me, what were gross margins sequentially? I know they were up, but from Q3 to Q4?

Q4 was a little over 48%, as we reported this year. A year ago, gross margins were in the 44%-plus range. Back in Q3 -- I have to go back and check it, I don't have it in front of me -- I believe it was in the 46%, 47% range.

So what we said was, depending on product introductions versus service introductions, we're going to keep it north of 40%. It's going to fluctuate. We've hit a normalized date, but we could introduce a new product or service in the quarters ahead that will influence it either up or down. But always an eye toward an improvement in net dollar contributions. You expect that percentage will average out about where it is, but certainly in excess of 40%, even with fluctuations.

Okay.

And then, I know you made reference to the wholesale -- your order book for the wholesale Gift Basket business -- that for the first time in a few years it's looking like it's going to be up year-over-year. Do you expect a double-digit increase or is it modest and in the single digits?

David, we're thrilled to be able to tell you we can see that we're turning the corner in this business. It's been a drag on us for the last few years. It's masked the good performance in the rest of our Food and Gift Basket businesses. What we see is that we definitely have improvement in the top line there, and that would definitely allow us to have an improvement in growth in the contribution margin. But I don't want to get more specific than that because we have a lot to go before, in terms of incremental orders that will come in and the execution ratio we deliver on those orders.

But I'm just thrilled to be able to tell you that for the first time in a few years we've turned the corner, we'll see growth there, it will no longer hide the good business that's being done in the other Food businesses. In fact, it will contribute this year.

Great.

And did you guys -- how many shares did you guys buy back during the quarter?

1.1 million.

1.1 million for the year.

We only started buying back stock early in the third fiscal quarter.

Okay.

It looks like now you no longer have net debt, and if things go according to plan where you generate the free cash flow that you expect, do you see yourself deploying additional capital into stock buybacks at this level?

I think what you've seen from us, David, especially as we hit the rough period of '08, '09, and '10, that we've made sure that we're good stewards of the assets we're fortunate enough to have here, in particular our balance sheet. So since 2008 we've paid down more than $100 million in debt, and that gives us good comfortable breathing space with a really, as you mentioned, net debt free balance sheet with plenty of borrowing capacity if we need it. And we've continued to invest in new businesses; we continue to invest in our technology; and we've continued to make strategic investments in bolt-on acquisitions and ideas that can accelerate some of our core capabilities today and of course we made a few investments internationally now, which are proving to be quite good as well.

So you see how we use our cash -- pay down debt, invest in the future, invest in your good and your growing businesses. But we've had the flexibility on top of that with the performance that we demonstrated in the last couple of years, to generate excess free cash flow over our needs; and there we've -- now that we're getting to the point where we have little debt, we'll pay down. We're scheduled to pay down another $16 million in debt this year -- that's a minimum we'll pay down -- gives us some flexibility to make other decisions there. I think you could expect that we'll continue to be active on a go-forward basis now that we've passed our blackout period, or will in the next few days, to be active in buying our stock again.

Great.

And then the last question is on the Fruit Bouquet business. Can you give me an update there in terms of the number of floral shops that are prepared to give that offering?

We're pretty happy with the way the Fruit Bouquet business has gone really in its first year of introduction, and shops that are retrofitting their capabilities to really provide that business. The ones that have, not only are doing a good job of fulfilling the orders we generate from e-commerce, but doing a really good job in generating local retail sales as well. We're very happy for those franchisees that have embraced it early on.

We're continuing to add the shops. We will continue to do that throughout the year. Some places it takes longer than others, depending on permits and things like that. But I think you'll see a steady growth of the zip codes that we cover. If you look at our website, you'll get an idea of how many zip codes we cover through the Fruit Bouquet program, so we're very happy with the growth rates we're seeing there.

David, this is Jim.

This is a product -- I've been at this now for more than three decades, and this is a product that, frankly, I remember making for customers back three decades ago. So I almost feel a little bit embarrassed that we didn't realize earlier on how much of an incremental product this could be for us and our franchisees. But clearly it is. Clearly, our customers like it. Clearly, our customers have been asking us for this product for a few years now.

So we're on the stage now. We have a good brand name and I think we brought our florists' creative capabilities to the product line. I encourage you to take a look at it at the website -- really good product. It's great for our [partners] because you have you to have some CapEx to get into the business. Once they do, as Chris mentioned, the local business is terrific in the Fruit Bouquet area and the business that we generate through e-commerce that we can send to them is as good if not better than the local business they get.

So everybody wins on this. The customer gets a good product; our franchisees get a good margin product, leveraging their facilities, their delivery capability, and their creative skills; and our customers get a product they truly like and enjoy. As Chris said, our effort will be to continue in a very steady stream of adding new zip codes with new capabilities as we train our florists, as they come through our Floriology Institute, get trained on the product, on the sourcing of product. We have field staff helping them into the product. This will be a big multi-year effort that will result in us having another product category that's very substantial and is all incremental for the flower business.

Thanks, guys. Best wishes for 2013.

Thank you, David.

(Operator Instructions).

Jeff Walkenhorst, Copeland Capital.

Wanted to follow up briefly on the capital allocation question. I know, Jim, you touched on it in some detail there, but I was curious, as we've now reached the inflection point on the balance sheet with where cash should hopefully continue to build, at what point would you consider the possibility of initiating a dividend as part of your capital allocation?

It's something that we have to consider, Jeff. As you say, we've hit an inflection point and we feel very confident about this fiscal year in spite of the uncertainties that we can't control or know enough about. I would say, over the next couple of months, as we get a good feel for how the consumer will behave, as we enter the holiday period, that will give us another data point as we consider the options we have in front of us.

I think there are good and interesting ways that we can grow our business with strategic development activities, and I think that I'm happy to be a purchaser of our stock. I think it's good for existing shareholders and I think it's very good for our flexibility and for our balance sheet as well. And as a dividend question is one that we'll revisit as we do periodically as one of the options we have available to us.

Okay. Thanks. That's helpful.

And on the acquisition front -- so you have made some smaller tuck-in acquisitions in recent years -- Mrs. Beasley's; you mentioned the iFlorist. Could you spend maybe a few minutes on how some of these acquisitions have worked out to plan? Or maybe where have there been troubles? Or are you pleased with how they've gone?

I can tell it to you easy. The only one that has not worked out to plan was our wholesale basket efforts. As I expressed some delight being able to tell you, that I think we've changed direction on the wholesale basket business. All the others have worked pretty much to plan, some far ahead.

Internationally, the two investments we've told you about where we have deployed some capital -- in the UK, our partners there have done a terrific job of growing their business over the last few years. It's not consolidated in our numbers because we're in a minority position there, but we've given them financing; they've leveraged our expertise in terms of promotion, marketing, mobile efforts. And these guys are just doing a terrific job as they become closer and closer to our business. That's one I'd point to that's just absolutely over-the-top in terms of delivering against the plan we have. They're far in excess of the plan.

Our newest investment is in a company that we've come to know well over the last couple of years, a company that mimicked what we were doing here in the US over a dozen years ago, a family business -- good values, good capabilities, wonderful people, people that we're proud to be partnered with. And I expect, although in its early months of that relationship, because we know them for a couple of years quite well, I'm very confident they'll perform just like iFlorist has, and exceed their plans quite successfully.

You mentioned Mrs. Beasley. And that's a very small acquisition but that's on or ahead of plan as well. There we were able to buy some assets, put them on top of a platform we already had, not inherit any of their expense posture except for the store that we kept open out in California, which was their base store and their lead store. So we had very little increases in overhead or expenses and the few million dollars in top line business that we moved over came over at a very profitable basis for us.

Okay.

I think that's a higher price point, some of these products. Have you been able to scale those successfully to your current customer base?

I think we have. And I think that our customer base, being a higher price point, very thoughtful, very personalized gifter, will be a very good customer for our Fruit Bouquets, for our other Cheryl's product line, which is different price points, and frankly for our Gift Baskets, because they've been purchasing a gift basket of muffins and cookies from Mrs. Beasley. While small, we think that they'll be a top candidate as a customer to be a multi-product purchasers of ours.

Okay.

And would it be a safe assumption on the acquisition front to think that, going forward you are more inclined to make these smaller tuck-in type acquisitions versus the wholesale basket-sized deal that was a few years back?

I think we have a responsibility to look broadly at the marketplace, because of our first and foremost desire to make sure we had the balance sheet flexibility that we wanted, so that I could look you as an investor in the eye, and look all of other [constituentories], our staff, et cetera, in the eye and say that we are on solid financial footing. We clearly are now. So I think it gives us the opportunity to look more broadly. I think we always do. But now it gives us more wherewithal to look bigger than we have.

Plus, when you look, it helps you think about your strategic direction. It helps you analyze the businesses you already have. It gives you benchmarks for your thinking in terms of your performance to date and other opportunities. And I would point out that the largest acquisition we ever did, which was Fannie May, has just worked out gloriously.

We're quick to be self-critical and expose our warts with the wholesale business. But that also begot us the opportunity to get into the very successful consumer side of the Basket business. So while we stumbled on the wholesale side -- mea culpa and full confession -- we think we have that headed in the right direction now. And the largest acquisition we ever did, Fannie May, is just becoming a very strong pillar of our product line and our opportunity set for how we grow our business.

Thanks.

That's actually a great segue. I just had a couple of questions on the Fannie May business. Did you break out or mention the online growth for the business in the quarter and in the year?

No, we haven't.

We have not.

Is it sort of mid-single digit? Or can you give us a ballpark idea of how it's performed?

It's growing in line with the rest of the businesses. Remember, it's a business we introduced probably five years ago now. So it's growing on pace. I think we can look to accelerate that growth this year. It was out-shone by its wholesale growth, and that really shouldn't be the case; just that the wholesale guys did a great job, and I think we can do a better job on the consumer e-commerce side and I think you can expect to see that this year.

Are you still in a position with manufacturing capacity where you don't really need to deploy incremental CapEx to ramp up volume if you have the demand?

That's right. We have capability, we have capacity to expand. There's always some incremental capital you put in for updating, things like that, but we don't need to for expansion purposes.

When Bill mentioned some CapEx, at about 75% of our spend is on technology. It's the other 25% that will go to other stuff, like improving your functionality or existing facilities. We don't anticipate any large need for additional facilities to handle the growth we project over the next few years.

Okay.

And one final question. Have you been able to take any pricing or bump prices upward in the Chocolate business? Or have discounting kept prices flattish, especially as input prices rise?

Pricing has been -- we touched a little bit on the commodity costs of cocoa, and we've seen that jump around quite a bit. I think we've been very smart in our purchasing of cocoa, so we've been able to maintain our margins without increasing our pricing. It is a product that at different times of year there are some promotions with that category, just like we do throughout the rest of our business.

We use promotional pricing to bring new customers into our stores, to get them to our website; and I think that the team on the Food side of our business, the Management group there that's been in place now for a good number of years, did a really good job of hedging our exposure there so that we prepare our budget for this year that we've given you guidance on, that fully anticipates our commodity costs and in many cases has hedged us throughout the year. They've done a very good job of being very prudent about how they manage that expense side of our operation.

And the last thing I'll add there is similar to what we've done on the Flower side and other brands -- we've made sure we offer a good, better, best merchandising strategy. So we have lower price-point items for our customers to core price point, and then higher-end items and thus we've increased our AOV.

And I mentioned earlier, Jeff, the great job that the team at Cheryl's have done at introducing a $5 price point. I think we're learning some really interesting lessons there, and while you can't make money at that price point, clearly, what we're seeing is a really good uptick in people who have received and sent those cookies, of them becoming regular customers of our regular product line at our regular price points. So there, is that a marketing expense, is it a product expense? Yes to both, but clearly it's turning a lot of new customers on to our product line and it's being done quite efficiently.

Right. Right.

If you could go maybe from a 10,000-foot level -- if I look out over the next several years, three to five years, would you expect the Chocolate business to have better -- an ability to bring -- push prices higher with inflation? Is it that type of business? Or, when you think about a See's Candy, which has been able to raise prices over time, how would you classify Fannie May?

I think what you've seen historically is what you'll see going forward. We've introduced different price points, both higher and lower, which has allowed us -- we introduced our artisan line of chocolates which is much higher price point. That's given us margin expansion there. On the same token, in our stores they've introduced a wrapped product line that's a lower price point on a per pound basis, and that's increased our traffic.

So you'll see that management team there continue to push us in both directions so we serve more and more consumers and we have more and more flexibility to attract them into our store and into our franchise without it compromising our margins.

Got it. Thanks so much. Good luck with everything.

Thank you.

Thank you. I show no further questions in the queue at this time.

Thank you, Karen. Thank you all for your time and attention today, and of course we're available for any other comments or questions you have. Feel free to reach out to us. I think you all know how to do that.

As a reminder, I encourage you to take a visit of our website, where you can see the Summer of a Million Smiles program and all the ways it brightens the days of many people around the country. It's something that our team here has really gotten engaged in, our franchise and BloomNet communities have all gotten engaged in. It just helps you to realize the business that we're in and how lucky we all are.

Thanks for your time and attention today. Look forward to chatting with you again soon.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone, have a good day.