1-800-Flowers.Com Inc (FLWS) 2013 Q3 法說會逐字稿

Good day, everyone, and welcome to the 1-800-Flowers.Com Incorporated fiscal 2013 third quarter results conference call. This call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the call over to the Company's Vice President of Investor Relations, Joseph Pititto. Mr. Pititto, you may please begin.

Thank you, Charlotte. Good morning and thank you all for joining us today to discuss 1-800-Flowers.Com's financial results for our fiscal 2013 third quarter. 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 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. 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, 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. I'm pleased to report today on another strong quarter for our Company. The solid top and bottom line results for our fiscal third quarter reflected a continuation of the positive trends that we have seen in our business for several years now. During the period we grew revenues by more than 7% to approximately $193 million despite the continued uncertainty in the consumer economy. Importantly, our EBITDA and EPS growth significantly outpaced our strong top line growth, illustrating the effectiveness of our initiatives to achieve enhanced operating leverage across our business.

Results for the quarter were primarily driven by a strong Valentine Day holiday performance in our 1-800-Flowers.Com brand, which grew revenues more than 11% during the month of February as customers continued to embrace our enhanced marketing and merchandising programs, including our focus on truly original gifts, such as our [Wow] collection of luxury gifts and our signature A-Dog-Able, Lucky-in-Love, and Happy Hour Love Potion floral arrangements, combined with our marketing messaging that encouraged our customers to wow the recipients and never settle for less, we were able to increase gross margin 100 basis points. This reflects the strength of our brand and our disciplined approach to marketing programs even in the highly promotional competitive landscape.

In our [Gourmet Foods] Gift Basket business we saw double-digit revenue growth for the quarter primarily driven by the shift of Easter, of the Easter holiday into the third quarter. Revenues in this segment also benefitted from strong ecommerce growth in our Cheryl's and the Popcorn Factory brands, as well as the launch of our new Fannie May Berries line, which I will ask Chris to tell you more about in his remarks in just a few minutes.

In BloomNet revenues for the quarter were down approximately 5%, this was primarily related to the product and service mix and the revenues for the quarter, including lower sales of our wholesale products to our florist members, which was offset by the growth in sales that we saw in several higher margin categories.

Fortunately, as a result of the mix shift, which we tend to see in BloomNet from time to time, this segment's gross margin increased significantly, up 530 basis points to nearly 50% for the quarter and contribution margin for the period increased more than 11% to $7 million. We see BloomNet continuing to expand its market position versus the competition as we benefit from initiatives to deepen our relationship with our florist members to a high value product and service offerings, such as our unique digital director and new POS technology platform.

Before I turn the call over to Bill for his recap of specific results and metrics for the quarter, I'd like to highlight our financial strength, in particular, our strong balance sheet and our new credit facility. Over the past several years we have focused on strengthening our capital structure. We have paid-off more than $100 million in debt despite our challenging environment, and we expect to finish the current fiscal year in June with no debt outstanding and a positive cash position on our balance sheet. We further strengthened this position with our recently announced credit facility. This new agreement is comprised of a $200 million revolving credit line that features very attractive borrowing costs and increased flexibility.

Combined with our strong balance sheet and our growing EBITDA and free cash flow this new credit facility provides us with significant flexibility as we grow our business. We grow our business with investments to accelerate growth in our existing brands with a multichannel approach that emphasizes our ecommerce capabilities, in doing initiatives, such as Fannie May Berries and FruitBouquets.Com, where we see a significant incremental growth opportunity that leverages our core assets and operational capabilities, and in new innovative technologies that keep us on the leading edge of the fast-growing mobile and social gifting areas.

We will continue to look for opportunities through strategic acquisitions and complementary business development efforts that can help us increase engagement with our customers and deepen our relationships with them as their destination and trusted resource for all of their gifting and connected needs.

Our financial strength and growing cash flows have enabled us to be active with our stock buyback program under which we've spent approximately $3.7 million to purchase more than 900,000 shares of our stock during the fiscal third quarter and approximately $9 million to buy back 2.4 million shares of our stock since the start of this fiscal year. We recently extended our buyback program through a new $20 million authorization from our Board of Directors and we plan to remain active in this area going forward. We believe these initiatives, among others, position us to grow our business and build value for our stakeholders even in what remains an interesting environment.

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

Thank you, Jim. As indicated in Jim's comments and our press release issued this morning, our fiscal 2013 third quarter was characterized by solid revenue growth affecting both the strong Valentine Holiday performance and our 1-800-Flowers.Com brand and the benefits from the shift of the Easter holiday into the period.

Most important, as we have demonstrated for several years now, we have continued to focus on our efforts in those areas of the business that we can control and where we believe we can enhance results, particularly in our marketing and merchandising programs and our efforts to enhance our operating leverage.

As a result, we continue to achieve growth in our gross margins, despite a challenging competitive marketplace, while concurrently reducing our operating expense ratio. This is enabling us to grow our EBITDA and EPS at significantly faster rates compared with revenue growth.

Regarding specific financial results and key metrics from continuing operations for the third quarter, total net revenues increased 7.2% to $192.6 million compared with $179.7 million in the prior year period. During the quarter our ecommerce orders increased 13.7% to $2.318 million compared with $2.038 million in the year-ago period, and ecommerce revenues increased 9.6%.

Average order size during the quarter was $62.50 compared with $64.85 in the prior year period. AOB was impacted by the success of our Cheryl's Cookie Card initiative and the launch of Fannie May Berries. AOB on the 1-800-Flowers.Com ecommerce orders was up slightly during the quarter.

During the quarter we added 702,000 new customers, up 14.6% compared with the prior year period. This was achieved while continuing to stimulate repeat orders from existing customers, who represented 58.4% of total customers in the quarter.

Gross margin for the quarter increased 100 basis points to 41.7% compared with 40.7% in the prior year period, and operating expenses improved 100 basis points as a percent of total revenues to 39.6% compared with 40.6% 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 $76.3 million compared with $72.9 million in the prior year period, affecting the operating costs associated with the launch of our new Fannie May Berries line, as well as continuing strategic investments that we have described to you in such areas as BloomNet and the mobile and social commerce areas.

As a result of these factors, adjusted EBITDA for the period, excluding stock based compensation, increased 56.3% or $3.7 million to $10 million. Including stock based compensation EBITDA increased 78% or $3.9 million to $8.9 million.

Income from continuing operations increased to $2.6 million or $0.04 per fully diluted share compared with breakeven results in the prior year period.

Now in terms of category results, in our 1-800-Flowers.Com and Floral business during the third quarter revenues in this category increased 7.1% to $121 million compared with $113.3 million in the prior year period. This was driven by strong ecommerce growth from the 1-800-Flowers.Com brand, which grew 11.4% during the month of February, as well as the contributions from the shift of the Easter holiday into the period, compared with last year when Easter fell in our fiscal fourth quarter.

Gross margin for the quarter increased 100 basis points to 40% compared with 39% in the prior year period, reflecting our focus on truly original product designs and a disciplined approach to promotional marketing programs.

Segment contribution margin increased 27% or $3 million to $13.9 million compared with $10.9 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.

In BloomNet revenues were $22.8 million compared with $24.1 million in the prior year period. The 5.2% decline reflected changes in mix of products, services, and order volumes during the quarter, highlighted by reduced sales of wholesale products to florists.

Gross margin increased 530 basis points to 49.9% compared with 44.6% in the prior year period. This was driven primarily by the aforementioned changes in revenue mix, which included growth in the sales of higher margined services, such as our web marketing and directory advertising programs. As a result of these factors, segment margin increased 11.1% to $7 million compared with $6.3 million in the prior year period.

And our Gourmet Foods and Gift Basket segment, revenues increased 14.5% to $49.3 million compared with $43.1 million in the prior year period. This primarily reflected the shift of the Easter holiday into the period, as well as contributions from the newly launched Fannie May Berries line and strong ecommerce growth in our Cheryl's, Fannie May, and Popcorn Factory brands.

Gross margin was 41.4% compared with 42% in the prior year period, primarily reflecting product mix.

Segment contribution margin increased 2.3% to $970,000 compared with $948,000 in the prior year period, reflecting the higher revenues in the quarter largely offset by the lower gross margin, as well as the investment cost associated with the launch of the new Fannie May Berries line and efforts to enhance our Fannie May operations.

In terms of Corporate expenses, for the fiscal third quarter Corporate expense from continuing operations, including stock based compensation expense, was $12.9 million compared with $13.1 million in the prior year period.

Now turning to our balance sheet, after the pay-down of $11 million in debt and spending $9 million in stock buybacks year-to-date, our cash and investment position at the end of the quarter was $17 million. Our borrowings were $18 million at the end of the period, and we anticipate finishing the fiscal year with no debt outstanding and a positive cash position on our balance sheet.

Inventory of $59.9 million was in line with Management's expectations and reflects positioning for the upcoming Mother's Day holiday. We anticipate finishing the fiscal fourth quarter with reduced inventory.

Providing guidance, as we enter our current fiscal fourth quarter we remain cognizant of the uncertain consumer environment as evidenced by the continued weakness in the consumer confidence index. It is important to note that year-over-year results for the period will be impacted by the aforementioned shift of the Easter holiday into our fiscal third quarter. As a result, we believe it is more comparable to look at the combined results of our fiscal third and fourth quarters in any year-over-year comparison.

With that said, we are reaffirming our top and bottom line guidance for the full fiscal year, which includes revenue growth from continuing operations in the mid single-digit range, along with double-digit increases in EBITDA and EPS, reflecting our continuing improvement in gross margin and operating leverage. We also continue to expect to generate free cash flow in excess of $20 million for the year.

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

Thanks, Bill.

During the fiscal third quarter we achieved solid revenue growth. Partly, we achieved this in conjunction with a 100 basis point improvement in gross margin, despite the highly promotional competitive environment typical of the Valentine holiday. We believe these results reflect the success of our continued focus on enhanced marketing and merchandising programs that focus on the best of our good, better, best gift offerings.

In addition, our marketing messaging helped set 1-800-Flowers.Com apart from the competition by encouraging our customers to wow their recipients and to never settle for less. Our goal is to always provide our customers with real value in the form of truly original products that help them express themselves perfectly, including personalized gifts, such as our vase expressions and message in a bottle offerings, also which were big hits for the Valentine holiday.

For the launch of our new Fannie May Berries and FruitBouquet.Com lines we have applied the same philosophy, introducing a differentiated top quality product that our customer can see as having great value. With both new offerings we are leveraging our core capabilities to provide a truly original gift.

In the case of Fannie May Berries, unlike many of our competitors who use a compound coating, we dip our specially selected, extra large strawberries in real chocolate. We are also leveraging the iconic Fannie May flavors that customers have come to love by offering strawberries dipped in our pixies, mint meltaways, and Trinidad flavors, in addition to creating a whole host of other unique flavor profiles. Based on the very positive customer reaction we saw during the Valentine holiday period we believe Fannie May Berries can become a significant new product category for us as we will continue to invest in both operations and marketing to achieve this goal.

In Fruit Bouquets we are leveraging the design and local marketing and operational skills of our 1-800-Flowers franchisees and our BloomNet Flowers network to gradually rollout across the country. Again, we've seen a strong positive reaction from our customers for this new gift line, and we're excited by the opportunity to grow a new product category over the coming years.

As we prepare for the upcoming Mother's Day holiday we are again leveraging our leadership position on the social and mobile front. We are encouraging users to Tweet why their mom means so much to them and entering them in our contest to win prizes awarded daily for their Tweets. Anyone can participate by using hash tag my mom.

We've also launched a the Twitter scavenger hunt featuring clues and descriptions of other themed flowers, gifts and treats that can be found on our website, with prizes from all of our great brands.

On Facebook we are once again asking customers to vote for their likes and post photos with the best gifts for Mother's Day, allowing our customers to socially carry our product offerings and create mom approved gifts.

Looking ahead, we are excited about the opportunities we have seen across our growing family of great gift brands, and believe we are well positioned to keep our relationships with our customers and continue to deliver strong results.

And I'll turn the call back to Jeff.

Our strong third quarter results represent a continuation of the positive trends we've been seeing in our business over several years now, in terms of revenue growth, improving gross margins, and increased operating leverage. By continuing to focus on these aspects of our business that we can control, including our merchandising and marketing messaging, as well as programs to enhance our operating leverage, we've been able to deliver outsized bottom line performance.

We have also continued to focus on strengthening our fiscal position using our growing cash flows to pay-off debt, while concurrently investing in innovation and new business opportunities that we belief offer a significant growth opportunity for the future.

Our mobile commerce platform, for example, our social commerce and engagement efforts, our new gift initiatives and brands, including Fannie May Berries and Fruit Bouquets.Com, and our multibrand, multichannel business strategy with emphasis on our core ecommerce capabilities.

To wrap-up, we are pleased with our third quarter and year-to-date results. Looking ahead, we remain cognitive of the uncertainties in the marketplace. With that said, we are confident that our strategic focus will enable us to build on the positive trends in our business for fiscal '13 and we are increasingly excited by the growth opportunities that we see in our business for the years ahead.

Now that concludes our formal remarks. I'll ask Charlotte now if she'll please restate the instructions for the Q&A portion, Charlotte?

(Operator Instructions)

Our first question comes from the line of Eric Beder from Brean Capital. Your line is now open and you may proceed with your question.

Good morning. Congratulations on a solid quarter.

Thanks, Eric.

When you look at innovation, you guys have done a number of very innovative things in the floral business and now you're doing some of the things with the food, where do you see the next step in this kind of being more value added and innovative in terms of your offering?

On the product side, Eric?

Yes?

Well, I would say from a -- what facilitates our ability to bring new products to market is our embrace of social marketing, social relationship building, all of which is aided by the best embrace of mobile efforts.

In terms of product mixes, I think you've seen some innovation from us in our Fruit Bouquets program and our Berries program, where we're bringing new products to market that don't take a lot because our customers are telling us what they want from us.

In addition, I think I'd point to our innovation in terms of price points, while our price points were very good this quarter and our margins improved, we did that at the same time we've been pushing our cookie card program, which has a very low price point and low margins, but we find it an attractive way to engage customers, particularly in the social gifting space, which is one that we're paying a lot of attention to.

Chris, what would you add in terms of product innovation?

Well, at the same time what we do is we continue to involve our customers in running our business and, again, as we've spoken about the social capabilities allow us to do that, whether it's curating our [inaudible] gifts for Mother's Day or getting feed and read back, reads and feedback from them on our cookie programs and then the launch of our cookie [power top] line, as an example. So the continued feedback from our customers, as well as really looking across the portfolio of capabilities that we have and combining products, as well, that we see some good innovations lined up for the future.

A little bit more color on the customer suggestion on the cookie bouquets, which we call the [flower pot] program?

Yes, so it's again it's just looking to take our floral customers, looking to combine with our cookie capabilities and putting it in a nice arrangement, and I think that's a good -- it's like we were with Fruit Bouquets, it's a great sharability factor, and we just continue to take that feedback and put it inside the development pipeline.

So these are our arrangements of cookies and cookie bouquets, and we started introducing them at Valentine's Day, they build on our Cheryl's product, which is delicious, they're individually wrapped stem and arranged in creative bouquet arrangements. So I think you'll see Fruit Bouquets, fruit and various program from Fannie May, and now our cookie bouquets are examples of the innovations in terms of how we package products we're already very strong in.

And then just one last element there, which I mentioned in my remarks, it's always a focus on great value, great quality product, so those cookie bouquets, again, are leveraging great, great products from Cheryl's brand, and I'd stack those up against anything that's out there on the market, the quality of the product just doesn't compare.

Okay. Thank you for that color. One more question, you have had now -- you're probably running the third year in a row where you're operating and EBITDA margins are going to be higher than the year before, and given the economy that's quite an impressive feat, where should we think longer term about potential for these margins to keep on going? And I guess tying into this innovation piece, does that lead you to have the ability to drive even higher margins?

I think you'll see a combination of a couple of different things. I think if we were staying steady state and not innovating our product line we still think there's opportunity to improve our margins. However, some of the experiments that we have going on, where we think we can really [jazz] volumes of product, we will go for a smaller margin just to create new customers, introduce our product line to a new customer base, and there you'll see margins more compromised, but that would only be on a new product introduction. If it's steady state on the existing product mix we have we're comfortable that we can continue to improve our margins.

Bill, would you concur with that?

Yes, Eric, as you've seen year-to-date we've shown -- we've demonstrated 40 basis point improvement in gross margin and 60 basis point improvement in our operating margin, so as we've guided at the beginning of the year we believe not only would we be able to achieve mid single-digit top line growth, but we'd be able to move those important metrics, both in the right direction, and we think we can continue to do so for the foreseeable future.

Great. Thank you. Congratulations.

Thanks, Eric.

Thank you. Our next question comes from the line of Anthony Lebiedzinski from Sidoti. Your line is now open and you may proceed with your question.

Good morning. Just on the BloomNet business, what percentage of your flowers would you say use the full assortment of services that you offer, such as web marketing, direct free advertising programs? Just want to get a better understanding as to the penetration levels there and opportunities?

Well, Anthony, Bill might be able to provide more color, but just from a [inaudible] perspective BloomNet has had a [staggered] membership now for awhile, so our focus is, as you suggest, [all-on] penetration. So we have new programs that have very, very small penetration that we're excited about. The directory program has been out for a year or two, but it's penetration increases over time. Our point of sale system is very new, so it's very small penetration, but because we've already spent all the money on the R&D and the technology build out those have high revenues as its penetration increases because we already have the expense, our capital expense in it.

And, as we've mentioned in this quarter, we still have a little bit of a hangover from the impact of Sandy on the florists in the three or four state area that was so heavily impacted, and they went from buying a quarter ahead to buying nothing for awhile, and now we see them just starting back to the marketplace on the product side, you'll see it take another month or so for that to get back to regular steady state levels.

But in terms of overall penetration, Bill, Chris, what would you offer in terms of some insights?

Yes, I mean I guess we kind of look at it it's about a third or in that range that are participating at various levels. I think you hit it right, Jim, depending on the product line, the product and services are different penetration levels, but suffice it to say I think there's good opportunities still to penetrate further. As we've already said, that does take time, but we see good opportunity in front of us.

Yes, we've identified, Anthony, that BloomNet, even though it's a mature business in the sense that it's been around for about nine years for us now, we still think it's one of our key growth areas, and one of the half dozen or so that we've identified to you and that's almost exclusively a function of our ability to increase our penetration of products and services to our steady state pace of florists in that category. So we still think of all the things that we have going it's still the one with the most opportunity for that very reason.

Okay, and then it looks like you made a small acquisition in the quarter, can you just tell us what that was for and also what your outlook is on future acquisitions?

Bill?

Yes, this acquisition really was just to acquire intellectual property in Europe, so basically what we did is this entity had, we acquired certain assets of this company so it was domains, trademarks, phone numbers related to kind of the 1-800-Flowers intellectual property. It's an asset that we saw this great opportunity to get it, we can get it at the right price, and something that we just put into our arsenal and we'll decide when to execute against that.

I'd point out the other side of that, this has been something that's been running through our P&L as a litigation expense, Anthony, for a dozen or more years now, and the circumstances finally became right, the price became appropriate, and we were able to not only pick-up our own assets, our own intellectual property assets on a more global basis, giving us opportunities for the future, but also eliminates the constant barrage of litigation expenses we've had to endure, and puts that whole chapter to bed and creates an opportunity for the future.

Okay, that's good to hear. And with your improving balance sheet can you just talk about what your priorities are for cash flow usage?

Well, I think we have a good track record that will paint the picture of what our behavior has been and what our behavior is likely to be. So clearly it was to pay-off debt during a time of real uncertainty. We've done that. Now it's to use that cash flow to build our opportunities to grow our business organically, perhaps from a business development point of view there'll be some opportunities, but then when we turn to a cash positive, net cash positive position you saw us just this fiscal year begin a stock buyback program. We were able to buy-back that $9 million in stock year-to-date, fiscal year-to-date. We expect to continue to be active with our program and, as such, we just secured from our Board of Directors a $20 million new authorization.

So you'll see us very prudently guarding that balance sheet, which creates more and more opportunities for us as we develop the programs internally, if there was something external we'd certainly have the capability to look at it, and now with the new credit facility it gives us all the more flexibility, but I think you can see prudent organic growth rates, like we've been able to deliver, building and investing for the future with our new programs that we've talked about today, and now investing in what we think is a terrific investment opportunity for us, buying our own stock.

And as of today how much do you have left on your share repurchase program?

We have all of the $20 million left. We just initiated a $20 million buyback during the quiet period so we weren't active, we haven't been active in the last month or so in the stock buyback, so that we have all of that $20 million available.

All right. Thank you very much.

Thank you. Our next question comes from the line of Michael Kupinski from Noble Financial. Your line is open and you may proceed with your question.

Hi, good morning. This is [Juan Barahona] in for Michael Kupinski, and thank you for taking my questions -- great quarter, by the way.

Thank you.

It seems that the floral industry has heavily run-up promotions in advance of Mother's Day this year. I think Teleflora is offering $20 spot treatments and others are significantly discounting prices. While you have certainly positioned yourself as a premium brand, are you above the trenches in the price wars or do you anticipate some pressure there?

Maybe I'll ask Chris to answer this question for you, but I think that I don't remember when this category hasn't been highly promotional. The point is change, and the more aggressive partners might change faces from time to time, but it's always been a very, very competitive category, particularly around these holidays.

Chris, would you further answer Juan's question?

Yes, I think, Juan, I think you're exactly right, we have done a good job I think, and we're very proud of the way we've positioned the 1-800-Flowers brand to really deliver on that best element of our good, better, best merchandising strategy. So we continue to be -- we have planned promotional, every retailer does, and you're right, our floral competitors have gotten extremely aggressive here, but I think as evidence that you saw through Valentine's Day we continued to increase our orders, we continued to maintain or slightly increase our AOB in the Flowers brand and at the same time a 100 basis point improvement in gross margin. So we're pretty comfortable that we're well positioned for that battle.

Okay. Thank you. And the Company has kept marketing costs really low and stable, is there a point at which you will need to ramp-up advertising and marketing? I guess what I'm trying to get at is what would be the key metric that we should look for that might indicate a change in future marketing costs?

Yes, I think, again, we manage the marketing cost very closely on a daily basis, basically, and there are times when we'll pull back and times we will increase and we'll increase our marketing spend as a percentage and also providing new customer acquisitions, et cetera. So we watch our marketing spend as a percentage of our marketing cost per order and we will pull it back or let it out a little bit when we believe it's providing the ROI based on a long-term value of customer acquisition.

And I'd add, Juan, to that that some of the things that we've been spending money on, multibranded portal, our technology platform, which we call [Agile], the new database capabilities, we think that the real opportunity to accelerate growth even beyond where we've been is with the good use of that CapEx spending that we've been doing to give us more and more tools in our marketing holster.

Okay. Thank you. And I'm not sure if I missed this, but is the Company looking to expand the Cheryl's business?

I think each of our brands we're constantly looking to expand each and every one of the brands. Cheryl's has been doing extremely well. I think we see the prospect of Cheryl's doing well for the foreseeable future, for the next several years.

Yes, I think as Chris has pointed out that of all of our food brands that are growing that's been growing the most and doing the most innovative things that are now embraced by the other brands in the food group. So we expect growth from all of them, but we think that Cheryl's will probably provide some outsized growth in that category for the next couple of years, certainly.

Okay, so as far as those expansion plans, you're going to expand, would it be due to increased capacity or is it just to expand product offerings

I think as our business continues to grow, as we reach a broader and broader customer base, certainly, innovative product offerings, but with that comes the need for capacity and we manage that on an ongoing basis. So you'll see us continue to add capacity capabilities as customer demand warrants.

Okay, great. Thank you. That's it for me.

Thank you, Juan.

Thank you. (Operator Instructions)

Our next question comes from the line of Jeff Stein from North Coast Research. Your line is now open and you may proceed with your question.

Morning, guys. A question on the outlook for commodity costs over the next six to 12 months and maybe more specifically cost of cocoa?

Bill, do you want to --

Sure. Yes, Jeff, we talk about cocoa, that is our largest commodity that we have, and it does and it has been kind of fluctuating over the last number of years with the unrest in the Ivory Coast where most of the world's cocoa comes from. We've done a pretty good job of buying or committing and getting pricing commitments when there's been dips in pricing, and we've done so again now, and so we've kind of locked into the next holiday season some pricing on cocoa that we feel very comfortable that we're not going to be adversely affected by any shifts in pricing on cocoa.

As we've talked about in previous calls, the one that we always monitor very closely is fuel, that's been high for several years now we've had to absorb the fuel surcharges that get passed along to us by the common carriers, UPS and FedEx. And so we continue to monitor that. This year is pretty close to where last year's numbers were, but certainly very high compared to any kind of historical levels and we have to continue to monitor that and take that into account in our business plans.

So, and with respect to Fannie May, do you believe you'll have to take any price increases as a result of the costs that you've locked in in cocoa for 2013 or should we look for relatively stable pricing?

The prices we've locked in '13 are consistent with the prices we're paying now, so we do not envision any price increases as a result of commodity changes.

Okay, and can you talk a little bit about the outlook for the wholesale business? This past year you began to regrow the wholesale business again, and wondering if you see that sustainable with the next fiscal year?

Jeff, this is Jim. I think in the few places that we're involved in the wholesale business and the gift basket business, a little bit in the chocolate business, we expect that to continue to grow. We've turned that into a growth opportunity. It's a small part of our business, but it will continue to grow, but our primary emphasis is on the ecommerce and retail sides of the business where we can have the best market, use wholesale primarily to supplement our manufacturing and baking capacity.

And a final question, guys, I know you had an issue in the second quarter I believe it was of consolidating your distribution facility for Fannie May, is that now behind you? And, if not, is it anything that could linger into Q4 or beyond?

Yes, we've had some challenges with some of the both production and distribution center, so like Fannie May, we absorbed a lot of that in both Q2 and it's continued, and we're making improvements there into Q3. Yes, the idea is to have it, obviously, fully corrected as we head into the holiday season for next year, and that will occur.

So we're confident that by [summer] production that's behind us.

That's right.

Got it. Okay, thanks, guys.

Thank you, Jeff.

Pardon me, I'm not showing any further questions. At this time, I would like to turn the call back over to Management for closing remarks.

Thank you, and thank you, all, for your questions and your interest. If you have any additional questions please contact us.

As a reminder, though, Mother's Day is just around the corner, a week from Sunday, and we all know that around here moms mean so much. Fortunately, at 1-800-Flowers.Com we know exactly what gifts mom wants because thousands of moms have been telling us every day on our Facebook page, so visit our mom approved gift center to find out what your mom is hoping to receive this Mother's Day. Thank you and have a good spring and a good Mother's Day holiday.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.