1-800-Flowers.Com Inc (FLWS) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the 1-800-FLOWERS.COM fiscal 2015 second-quarter results conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will be given at that time. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to hand the conference over to Joe Pititto, Senior Vice President of Investor Relations. Please go ahead.

Thanks, Karen. Good morning and thank you all for joining us today to discuss 1-800-FLOWERS.COM's financial results for our fiscal 2015 second 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 1-800-FLOWERS.COM or you can call Patty Altadonna at 516-237-6113 to receive a copy of the release by email 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, 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 will now turn the call over to Jim McCann.

Thank you. As you all saw in our release this morning, we had a good fiscal second quarter -- frankly, better than good. To provide you some context, we started the quarter by closing on the largest acquisition in the history of our Company, adding the iconic Harry & David brand to our business, which takes our annual revenues past the $1 billion mark and makes us a leading player in the growing gourmet food gift space. We achieved solid revenue growth of nearly 5%, excluding Harry & David, with growth across all three of our business segments.

This was highlighted by nearly 7% growth in our gourmet foods and gift basket business, adjusted for the impact of the Thanksgiving Day fire at our Fannie May warehouse and distribution center. Speaking of the fire, we were able to overcome these incredible challenges posed by the loss of some $30 million in inventory and the destruction of an important distribution facility, impacts that were felt across virtually all of our brands and businesses. This is an accomplishment for which I'm extremely proud of our associates across the enterprise. More on this in a moment.

Lastly, during the quarter we expanded the reach of our omni-channel multibrand customer strategy with the rollout of our multibrand website. Based on our early read of our customer metrics and behaviors, we are very excited by the opportunity we see to deepen the relationships we have with our customers and increase our share of their celebratory and gifting wallet.

In terms of our results for the quarter, we more than doubled our revenues and tripled our bottom line year over year. This reflects the contribution from Harry & David, which performed as we expected. Importantly, with the holiday season behind us, we have now begun our comprehensive integration program with work streams in place to identify and pursue opportunities for both synergistic revenue growth and operating efficiencies.

Clearly, we had a lot going on in this quarter and almost all of it good -- excluding, of course, the fire -- but including the incredibly positive response of our team, a response that I believe has made our Company stronger than ever. The fire, in which, thankfully, no one was injured, destroyed our facility and all of the inventory and equipment stored there for the key holiday season. As a result, we had extremely limited supplies of our iconic Fannie May and Harry London chocolates during this key holiday season across all of our sales channels.

As you can imagine, the timing of the fire on Thanksgiving Day was especially challenging, particularly since Fannie May's business trends leading up to Thanksgiving had been very strong. Fortunately, our insurance policies cover us for all material losses and business interruption.

Most important was how Fannie May and our entire Company responded to the challenge. As I mentioned earlier, I am particularly proud of the tremendous response and positive spirit of our dedicated associates throughout the Company, who worked around the clock on Thanksgiving Day and throughout the remainder of the quarter developing and implementing contingency plans to accelerate production and identify alternative warehouse and distribution options so that we could minimize the impact of the fire on our business and continue to help our customers deliver smiles during the holiday season.

Chris will provide some additional color on the Fannie May strong initiatives in his remarks in just a few minutes.

Lastly, before I turn the call over to Bill for his review of the financial and operating metrics for the quarter, I would like to point out the performance of our 1-800-FLOWERS.COM consumer floral brand, which showed continued top and bottom line growth during the second quarter. The 1-800-FLOWERS.COM brand grew revenues nearly 3% during the quarter and maintained solid gross margins despite an extremely promotional competitive environment.

As a result, bottom-line contribution in the consumer floral segment increased approximately 10% for the period. These results build on the positive trends that we saw in our first quarter and illustrate the strength of the 1-800-FLOWERS.COM brand as a leader in the floral gifting space.

Based on the positive trends we have seen across all of the businesses through the first half of our fiscal year, we are very comfortable with our guidance for fiscal 2015, and we are increasingly excited by the opportunities we see ahead for us to build our position as a leading omni-channel gift provider for our customers.

Bill, would you run through the metrics for the quarter?

Thank you, Jim. As you just heard, we had a very eventful and good fiscal second quarter.

Beginning with the close of the Harry & David transaction at the start of the quarter, our largest acquisition to date and one that makes the already important holiday season even more so, followed by the fire on Thanksgiving Day that destroyed our Fannie May warehouse and distribution center including the inventory that had been built for Black Friday, Cyber Monday, the upcoming holiday period and Valentine's Day, thereby posing some unique and significant challenges across the enterprise, and culminating with the solid top and bottom line results for the quarter that we announced this morning.

As Jim mentioned, Harry & David performed as we expected during the holiday period. And we are particularly proud of how all our associates across the enterprise, including many of our new team members at Harry & David, rose to the occasion to address the challenges posed by the Fannie May fire and, as a result, helped us deliver the solid results you saw in this morning's release.

In our release we provided our top and bottom line results both as reported and on an as-adjusted basis with accompanying tables at the back of the release to explain the various adjustments. We believe the adjusted results provide a more comparable view of our business performance in the second quarter by adding back one-time costs associated with the Harry & David acquisition, as well as adjusting for the impact and related insurance coverage associated with the Fannie May fire.

In terms of the adjustments related to the Harry & David acquisition, we incurred $3.8 million of transaction and related costs associated with the acquisition, primarily related to legal, accounting and other third-party services. In addition, we recorded several purchase accounting adjustments in accordance with GAAP accounting rules that resulted in a $1.6 million reduction in the value of deferred revenues and a $4.8 million increase in the value of inventory as of the acquisition date.

The combined impact of these purchase accounting adjustments was to reduce reported second-quarter revenues by $1.6 million and reduce gross margins and EBITDA by $6.4 million.

Regarding adjustments for the impact associated with the Fannie May warehouse fire, the fire destroyed approximately $30 million of assets, mainly inventory. In addition to being the warehouse, the facility also served as the primary distribution center for the Fannie May and Harry London chocolates for the retail, e-commerce and wholesale channels, the distribution center for our Stock Yards Steaks business, and one of our direct ship floral gifts DCs that we operate around the country.

Between the lost inventory and disruption to our distribution capabilities, we estimate the impact on reported revenues during the quarter was $13.8 million, comprised of $13.6 million impact on our gourmet food and gift basket segment and a $200,000 hit to BloomNet revenues. The impact of these lost revenues on our gross margin and EBITDA for the quarter was approximately $5.9 million and $5.6 million, respectively.

Now, regarding specific financial results and key metrics from continuing operations for the second quarter, total net revenues from continuing operations increased 100.6% to $534.3 million compared with $266.3 million in the prior year period. Including the aforementioned adjustments for the Fannie May warehouse fire and the impact of the purchase accounting related to the Harry & David transaction, total revenues for the quarter increased 106.4% to $549.7 million.

During the quarter, our e-commerce orders increased 62.7% to $5,302,000 compared with $3,258,000 in the year-ago period. And average order size during the quarter increased approximately 40% to $77.13 compared with $55.04 in the prior period.

During the quarter, we added 1.3 million new customers. This was achieved while concurrently stimulating repeat orders from existing customers, who represented 60.4% of total customers during the quarter. These metrics reflect the contributions from Harry & David during the quarter as well as the continued year-over-year growth excluding Harry & David.

Gross margin for the quarter was 45%, up 330 basis points compared with 41.7% in the prior year period, primarily reflecting the contributions from Harry & David. Operating expenses as a percent of total revenues, including depreciation and amortization was 31%, up 10 basis points compared with 30.9% in the prior year period. This reflects the aforementioned impact on the lost revenues associated with the Fannie May warehouse fire and the purchase accounting adjustment on Harry & David revenues. Adjusted for these impacts, operating expenses as a percent of revenues would have improved by 70 basis points to 30.2% compared with the prior year period.

As a result of these factors, reported EBITDA, excluding stock-based compensation, increased 144% to $85 million compared with $34.9 million in the prior year period. Reported net income attributable to the Company increased 162% to $45.8 million or $0.68 per diluted share compared with $17.5 million or $0.27 per diluted share in the prior year period.

Excluding stock-based compensation expense as well as the impact of the aforementioned Fannie May warehouse fire and the transaction costs and purchase accounting adjustments related to the Harry & David acquisition, adjusted EBITDA increased 188.5% to $100.7 million compared with EBITDA excluding stock-based compensation of $34.9 million in the prior year period.

Adjusted net income attributable to the Company and adjusted EPS from continuing operations increased 218.3% and 207.4%, respectively, to $55.7 million or $0.83 per diluted share compared with $17.5 million or $0.27 per diluted share in the prior year period.

In terms of segment results, in our 1-800-FLOWERS consumer floral segment during the second quarter revenues in this category increased 2.5% to $99.6 million compared with $97.1 million in the prior year period. Gross profit margin for the quarter was 38.7%, essentially flat with the 38.8% in the prior year period. Segment contribution margin increased 9.8% to $9.5 million compared with $8.7 million in the prior year period. The year-over-year increase in contribution margin primarily reflected enhanced operating leverage associated with the increased revenues.

In our BloomNet segment, revenues increased 1% to $20.1 million compared with $19.9 million in the prior year period. BloomNet revenue growth was impacted by product shortages associated with the aforementioned Fannie May fire warehouse as well as delivery delays related to the continuing dock strikes on the West Coast. Adjusted for these impacts, BloomNet revenues would have increased approximately 3% for the quarter compared to the prior year period.

Gross margins for the quarter increased 100 basis points to 55.1% compared with 54.1% in the prior year period, primarily reflecting product and service mix. And segment contribution margin increased 2.2% to $6.7 million compared with $6.5 million in the prior year period, primarily reflecting the strong gross margins and the continued focus on managing operating expenses.

In our Gourmet Food and Gift Baskets segment, revenue increased 177.1% to $414.7 million compared with $149.6 million in the prior year period. This reflects the contribution from the Harry & David brand, which was acquired at the start of the quarter. The category also benefited from strong sales growth at our Cheryl's and 1-800-BASKETS brands as well as the continued growth for DesignPac wholesale gift basket business.

As previously mentioned, the Fannie May warehouse fire impacted revenues in this segment by approximately $13.6 million. Adjusted for these lost sales, and excluding Harry & David, revenues in this segment increased 6.9% to $160 million.

Gross margin for the quarter increased 430 basis points to 46% compared with 41.7% in the prior year period, reflecting the contributions of the Harry & David brand. Segment contribution margin increased 191.4% to $90.5 million compared with $31 million in the prior year period, also reflecting the contributions from the Harry & David brand. Adjusted for the aforementioned impact from the Fannie May fire and the purchase accounting on Harry & David, segment contribution margin increased 230 basis points to $102.4 million.

In terms of corporate expense, our segment contribution margin results exclude costs associated with the Company's enterprise shared services platform, which includes, among other services, IT, human resources, finance, legal and executive. These functions are operated under a centralized management platform providing support services to the entire organization. For the fiscal second quarter, corporate expense from continuing operations including stock-based compensation was $23.1 million compared with $12.5 million in the prior year period, reflecting the addition of the Harry & David overhead expenses in the quarter, as well as the one-time transaction costs.

Turning to our balance sheet, at the end of the second quarter we had $101.2 million in cash and equivalents on our balance sheet. Long-term debt was $139.6 million, reflecting our first quarterly payment on the original $142.5 million term loan associated with the Harry & David acquisition. Additionally, there are no borrowings under our revolving credit agreement.

Our receivable position of $74.4 million reflects our revenue growth during the quarter including the incremental receivables associated with Harry & David, as well as a $15 million insurance receivable for our lost inventory related to the Fannie May warehouse fire. The majority of these receivables will be converted into cash during the current quarter.

Inventory of $70.8 million reflects the incremental inventories associated with the Harry & David business as well as inventories across all of our brands in preparation for the Valentine and spring holiday season, somewhat offset by the inventories lost in the Fannie May warehouse fire.

Now regarding guidance, based on our strong results for the first half of our fiscal year we are reiterating our guidance for fiscal 2015. For the year, we anticipate generating total revenues from continuing operations in excess of $1.1 billion. Regarding bottom-line results, we expect to generate adjusted EBITDA of approximately $90 million, excluding stock-based compensation, as well as the aforementioned transaction and purchase accounting adjustments related to the Harry & David acquisition and the adjustments for the impact of the Fannie May warehouse fire.

Adjusted EPS for the year is expected to be in the range of $0.45 to $0.50 per diluted share, excluding the aforementioned transaction-related costs and purchase accounting adjustments and adjusting for the impact of the Fannie May warehouse fire. Our full year guidance includes the anticipated losses in our fiscal third and fourth quarters, associated with the seasonality of the Harry & David business.

Lastly, as we mentioned in our press release this morning, with Harry & David's key holiday season now completed, we recently launched a comprehensive integration program designed to identify and pursue synergistic opportunities for both revenue growth and operating efficiencies. We have a number of initiatives underway across our business platform, which we believe can generate operating cost-efficiencies in excess of $15 million over the next 36 months.

We anticipate that achieving these savings will likely require some investment which would offset any savings during the current fiscal year. As a result, we expect the full benefits of these operating synergies to be realized over a three-year period beginning in fiscal 2016.

I will now turn the call to Chris.

Thanks, Bill. Our fiscal second quarter was a challenging but good period for us. In addition to our top and bottom line results, the acquisition of Harry & David also significantly broadened our great gift offering. With their unique Royal Riviera pears, Signature Gift Towers, Moose Munch treats, Wolferman's Muffins and much more, Harry & David's gift offering fits perfectly with our focus on providing our customers with truly original products at the very best quality, value and selection.

Harry & David also adds millions of new customers to our already large and growing customer database, further expanding our reach and providing a tremendous opportunity for cross-brand marketing and merchandising. As we've mentioned in past calls, cross-brand marketing and merchandising is the impetus behind our multibrand customer strategy.

During the second quarter, we completed the transition of our gourmet food gift brands onto the new multibrand website, providing customers with the convenience of one sign-on, one shopping cart, one address book and much more, all designed to help them deliver smiles for a broader range of recipients and occasions. Throughout the quarter we added a variety of features and functions including our Celebrations Rewards program that enables customers to earn points and use them across all of our brands and Celebrations Passport, our pay one price for year-round free shipping program across all of our brands. Both programs are quickly gaining traction with our customers.

While the multibrand website is still in its early stages, we are already seeing positive trends in the customer metrics that we expect and that make us so excited about the potential for this platform, including incremental growth in cross-brand purchases with related improvements in repeat rate and average spend.

Looking ahead, we will be stepping up our cross-promotion efforts, designed to engage and educate our customers. We will enable Celebrations Rewards to live in our customers' mobile wallets on the Apple and Android platforms. We will utilize our new consolidated database and CRM tools to expand our marketing efforts from a primarily occasion-based focus to an increased emphasis on recipient and category-based marketing.

We will also begin the planning in order to move the Harry & David brands on to the multi-brand website to further expand the celebratory ecosystem that we are building for our customers.

Lastly, in terms of challenges faced and overcome, I would like to add to Jim's comments about how proud we are of our associates across the enterprise for the way they responded and worked as a team to mitigate the impact of the fire at our Maple Heights, Ohio facility. To give you an idea of the scale and challenge that we faced, the fire on Thanksgiving morning heading into one of our biggest shopping weekends of the year destroyed approximately 100 million pieces of chocolate, including more than 100,000 pre-booked customer orders, 100% of our Stock Yards Steak inventory, a variety of hard goods destined for BloomNet customers, and eliminated one of our direct-ship floral locations. In addition, with the facility unusable, more than 100 associates who worked there were immediately displaced.

Fortunately, the Fannie May management team, led by Kevin Coen, quickly rallied key people and resources from across the enterprise. By that following Monday, only three days after the fire, we had ensured that all of the associates from the Maple Heights facility would have a place to work, busing many of them to our Fannie May chocolate factory in Canton, Ohio, where they helped ramp up production and fulfillment operations for the holiday season.

Within days, our facilities team had secured a new food-certified refrigerated warehouse and distribution center only minutes from the Maple Heights facility. The Fannie May website, which had to stop taking orders over the Thanksgiving weekend, was up and running within days. And as of today, we have nearly 100% of our original product offerings available on the FannieMay.com website.

While our business during the holiday season was clearly impacted by the fire, I am certain that Fannie May and our entire organization is stronger than ever, having risen to the challenge.

I will now turn the call over to Jim.

I think that's a fitting description, stronger than ever and better positioned, frankly, than ever. As we head into the second half of our fiscal year we see numerous opportunities to deepen our relationships with our customers as we become the preferred destination for all of their celebratory and gifting needs.

Our 1-800-FLOWERS.COM brand continues to grow and extend its leadership in the floral gifting space. Our collection of Gourmet Foods and Gift Basket brands continue to grow nicely, nearly 7% for the holiday quarter before the addition of Harry & David. And now, combined with the iconic Harry & David brands, we are a clear leader in the growing gift segment.

And all of these initiatives -- in food bouquets, mobile and social commerce and our omni-channel multibrand customer focus -- I think you can see that we are pretty excited about the growth opportunities we see in front of us.

Now, that concludes our formal remarks and I will ask Karen to please give instructions on how we can go to questions.

(Operator Instructions) Dan Kurnos from The Benchmark Company.

Strong quarter, guys. Just a few questions here, Bill, just a quick housekeeping question -- you did give some impact from the fire. Obviously, thanks for all the detail so far. On the revenue line, splitting out organic Gourmet Food and Gift Basket revenue, could you also give the contribution to gross dollars and EBITDA, both on a reported and adjusted basis, on an organic basis for the GFGB segment, ex-Harry & David?

Harry & David or for the impact of the fire? So, the impact on the top line was about $13.8 million; $13.6 million impacted that Gourmet Food and Gift Basket segment, about $200,000 was on BloomNet, with about the bottom line contribution about $5.6 million, $5.5 million of it in the Gourmet Food and Gift Basket segment.

Okay. I'll take it off-line with you, anyway; I just wanted to get some more clarity just on the actual dollars contributed by organic GFGB. But that's fine.

Just a couple high-level questions, then. Jim, obviously you had really strong demand despite scaling back your promotions. We know that with the absence of the inventory at the retail level, you scaled back on a lot of the promo stuff. And I guess I wanted to hear from you guys how you think about your game plan going forward, now that you've at least tried to realign consumer behavior, purchasing behavior, especially with regards to Fannie May.

Sure. On the Fannie May front, I think you always -- once you get hit in the gut like we did and you see the recovery and you see the effort of the people, you see how teams come together quickly, you see leadership really emerge -- remember, this is the team that we rebuilt over the last couple of years. And going into this event our trendlines looked very strong.

We had double-digit comp store sale increases, we had double-digit ecommerce increases. So things were looking really good. And frankly, the changes at the management at Fannie May were making in the stores had not been realized yet. Just the basic things had been, but the real programmatic changes were yet to come. So we were really excited about where they were going.

Then, you had the fire. And you see how they recover, how the team responded, how the real leadership stepped up, how everyone across the enterprise chipped in to help them. It was extraordinary to see.

So I think that that leaves us in an awfully good position because, as they get their inventory back, there will still be a lingering hangover in this quarter because some of what we lost in the fire in Maple Heights included packaging and inventory that we were readying for Valentine's Day. They ramped up production. And of course, as a consequence of that, rather than doing that with ingredients that you purchased at favorable terms, we were buying those ingredients at less favorable terms.

But Bill has already incorporated that into all the numbers you've heard from him. So they responded well.

I think they're stronger than ever because some of the lessons they learned through the holiday really, by force, took us away from other promotional activities we would have done. If you don't have the inventory, there's no sense discounting.

But what we saw is a really good response from not only our internal associates but from our vending community. We also saw a tremendous response from our customers. They wanted our brand. They wanted our specific products and they were willing to wait for it, they were willing to stand in queues knowing that inventory would be getting to the stores as we made it fresh every day. So what we see is the customers were there, wanted our brands, wanted our specific products. Discounting was eliminated and yet they were still there.

So net-net, we feel that, as we anniversary that event next year, as we enter next year's holiday season we will be bigger, stronger than ever with a better positioned brand, with good wholesale relationships and wholesale relationships that, frankly, stood by us through this difficult time and appreciated the efforts that our team went through to satisfy their customers.

So net-net, I think we have a bigger and better brand. We've learned a lot about our customer and the position of our brand. And now we will have more efficient operations as a result of being able to reengineer everything anew.

But since you brought up the vendors, can you just confirm or give us some color on whether or not there was any forward strain after the fire going -- as we look out now on your vendor relationships? And if you could just remind us what your thoughts are on a long-term replacement plan for the destroyed facility?

I'm not sure I understood the first part of your question. Bill, did you?

Yes, I'll take that. I don't really see any real strained impact from vendor relations. I think overall we had really strong vendors, to begin with. And what Jim commented on is they stepped up and responded well.

One of the things that Jim mentioned also is the replenishment of some of the raw materials and packaging costs at less than favorable prices. That's something that I think you've seen us manage through, facing any kind of rising commodity prices, decreasing commodity prices, et cetera. And we will continue to manage that. So there's no severe impact going forward on that.

I would say going forward we think that our prices will normalize. I think we are excited about the opportunity for some marginal -- margin improvement.

And on the long-term replacement plan for the distribution facility?

From that standpoint we have a long-term lease at that Maple Heights facility. To the extent that it's really in the hands of the landlord, if he rebuilds that facility, then we are committed to move back into that facility. But that's up to the landlord at this point in time.

Yes, but in the meantime we are operating, as I mentioned, in a great facility right nearby. We've -- this way, we are able to keep our management team, our employee base in place. And we were very fortunate to get that facility so quickly and so nearby.

One asterisk there is the Stock Yards business that we created a couple years ago. It was totally knocked out of commission in that fire because its fulfillment was there in Maple Heights alongside Fannie May. Bill also mentioned in his remarks that it was one of our floral fulfillment sites too. That, we were able to distribute its volume across our other sites. Stock Yards we moved to the Harry & David Hebron, Ohio, facility where they had the capacity and facilities there to move that business. That would likely stay there.

Great. And then just on the consumer floral side, since FTD acquired Pro, have you seen them scale back any of their advertising, especially around Valentine's Day? We know Pro has been especially aggressive around Valentine's Day in the past. But with it falling on a weekend this year, is there any room for them to pull back? And have you seen that in the marketplace?

It's been a month since that deal was closed. We have not really seen anything, nor do we anticipate any real change this quickly from them, in this short time period. So I think as we move into the Valentine season we will expect the normal, very promotional activity from both those brands, FTD and ProFlowers, heavy discounting we will expect as we go through the holiday.

But again, as you've seen, we continue to grow. We continue to increase our profitability on the bottom line, which shows that the 1-800-FLOWERS brand is very well positioned in the competitive landscape.

And just last one for me, then, since you gave some good color on expected cost synergies, just any thought on timing or quantity for revenue synergies?

Yes. I think the revenue synergies -- those are usually a little more difficult to quantify. And also I think maybe somewhat longer term, especially as we focus on our multibrand customer strategy. That's where we increased the repeat rate and the frequency -- what we are seeing already, though, from the holidays, some cross-merchandising opportunities that we saw. We saw a strong response to the Harry & David branded product on the 1-800-FLOWERS website. We will be digging in, doing some direct marketing, picking up on the learning, analyzing the tests that we put in place during the holiday and driving forward on some direct marketing capabilities, focusing on the customer database integration and then also focusing on the website as we looked at moving the Harry & David brands on to the multibrand website later in the year.

Great. Thanks for all the color and nice holiday quarter, guys.

Jeff Stein from Northcoast Research.

First question on Harry & David. I'm wondering if you could talk a little bit about their various operating segments because it looks to me, if I did my math correctly, like Harry & David's aggregated revenues were down a little bit year on year. So, if you look at direct marketing, the retail segment and their wholesale segment, can you talk a little bit about how each of those segments performed?

Yes. Jeff, overall actually Harry & David grew about 3% year over year during the quarter. They were impacted by -- slightly by that purchase accounting adjustment, the $1.6 million that came out of that. Most of that growth came from -- all that growth really did come from the direct marketing side of it. Retail is a much smaller piece of the business and wholesale is obviously even smaller than that. And wholesale actually grew as well.

Okay. So if we look at the cost synergies over the next three years, any sense in terms of the timeline? Will you capture -- if you look at fiscal 2016, would you capture a third of that? Would it be a third, a third, a third? Or how do you see that splitting up? And how much of that would you estimate might be captured through reduction of losses at retail, which last year totaled about $9 million?

Well, I think it's all in how you calculate the retail side of it. I would expect that over the three years it would be a little bit more heavily weighted to the beginning. You will see growth synergies kick in later in that cycle, so as you look at the blend, it might look equally distributed across the three -- but the cost side savings would be earlier and the revenue side savings would be larger.

The retail business all depends on allocations and we are looking at the overall cost structure, the combined enterprise, and we will try and rationalize that as we get the products of these different work streams at the leadership of Harry & David and the other 1-800-FLOWERS' existing brands now work through those work streams.

Yes. And Jeff, that $9 million number is a fully allocated number. That's not really the contribution from those stores. The losses a much lower number than that on a true contribution basis. We have the relatively short-term leases overall throughout their portfolio and we will continue to evaluate. We have a work stream in place to look at retail and look at the performance of retail.

And experiment with other growth opportunities within retail.

So if we look at $50 million of synergies -- I just want to make sure I understand this correctly. Is part of that expected revenue synergies and part of it is cost? Or is it all cost?

That's all cost synergies.

And again, over three years.

Right, exactly. And as far as adding Harry & David to the multibrand portal, can you give us some sense in terms of what the timing of that might be and what the issues might be to get it onto the portal?

Chris, what are your early indications telling you there?

So we will be looking to have that onto the multibrand portal by the next holiday season. Again, while we are in the process of doing from the integration, as Bill mentioned, of different work streams -- clearly there's an IT work stream -- putting together what all the key priorities are. Clearly, that is one of if not the top priorities. We will need to dig in and do a feature functionality gap analysis, understand what full development needs to be done. Are things -- are different features and functions in the same kind of services-oriented architecture that we developed in, those things will need to be done.

So that planning is underway now. But clearly, our target would be next holiday season.

It doesn't make much of a difference before that.

Got it, got it. And Bill, wondering if you could talk a little bit about the impact of the Saturday placement on Valentine's Day? And then looking out a bit further, if you can talk about how you see the timing of Easter this year versus last year affecting each segment of the business?

Bill, if you would take that? I think what you see is -- a preface to Bill's comments -- is you really now with the addition of Harry & David and the related brands and their concentration of business around the key fourth calendar quarter holiday season, you really need to look at us as a full-year business now. And Bill, give color on those (multiple speakers) --

This is on Valentine's Day. The last time Valentine's Day fell on a Saturday it was Valentine's Day 2009. The business was down substantially. It was down over 20% that holiday. That also was coming off of the meltdown in the financial markets that happened in the fall, started in the fall of that year.

We are building into our plans that the holiday will be down, it will be down double digits, low double digits for this holiday season. But profitability will be at or above last year for that holiday season.

Easter being on the fifth versus later in the month last year -- you pulled some of that into the third quarter this year. So it does equalize that we will have components of consumer flow, which will still be in the fourth quarter. But you will have from both from Harry & David and from the rest of the GFGB brands will really be mostly in the third quarter this year.

We've always said, Jeff, as you recall, with Easter getting close to the quarter's edge there that you really needed to look particularly at our gift food businesses as a second-half business. And now with the addition of Harry & David, you will get that color on Easter from Bill, and he's already built that into our plans. But we more and more are a full-year business.

Got it. Okay, guys, thanks a lot and congrats.

Anthony Lebiedzinski from Sidoti & Company.

So, my first question is on the multi-branded website. You have had it for the last couple of months. What are you seeing in terms of improvements in your AOV and the order frequency? If you could give us some metrics, that would be very helpful.

It's very early to be able to really point to anything in frequency. We are seeing good early signs of traction.

Keep in mind, we moved the Gourmet Food brands onto the website during this past fiscal quarter. We moved the Flowers traffic on to the website this past month. So that was starting to see even more activity of cross-tab shopping. And then there is a lot of experimentation going on still, leaving creative -- how we put the tabs out there, how we display them differently, how we introduced the Rewards program and Passport program.

We are seeing some activity that points to, as I mentioned, the expected repeat rate and the expected increase in average spend in a given year from the customers. So what we are seeing is encouraging because it's holding up what we've anticipated happening. It's too short of a timeframe to really see any impact.

Okay, got it. And as far as for the quarter, just the AOV, if you were to exclude Harry & David, do you have that perhaps handy?

Yes, it was basically flat year over year, right, in that $55 range.

Got it, okay. Thank you. And also you talked about making some investments in the second half of fiscal 2015. Can you give us a little bit more details about that?

Sure, Bill will cover that for you. But already baked into our number would be any of that spend, so it's not in addition to anything we reported. But Bill, you have consultants working with us on the integration plan; I assume that's one of the expenses that would pop up in the second half of this fiscal year.

That's really the primary investment. So as we look at our work streams and some of the more longer-term initiatives that we have, which is looking at both West Coast and Midwest manufacturing and distribution, those would require more capital investments. But that would not happen in this fiscal year. What we are talking about in this fiscal year is probably more the kind of outside consultants and --

Professional services.

IT software.

-- And some IT software, right.

Got it. Okay, thank you for that. And any new updates on FruitBouquets as far as what their coverage is? If you could fill us in on that, that would be great.

Yes, sure. On FruitBouquets we continue to be very excited about and continue to make good progress there. And what we see is we said -- last quarter I think we said we were more than (inaudible) in that 50% coverage. And it continues to grow. And FruitBouquets for us, really, as evidenced by what we have been saying previously, the great appeal it has with our customers -- it's a great example of how we continue to build out our strategy of creating a celebratory ecosystem for our customers and finding products and the appropriate product expansion that continues to meet the needs of, I guess pun intended, the taste of our customers here. So, we continue to see good sales growth in FruitBouquets.

To follow up on Chris's comments, I think the investment in the pipeline of products and services that appeals to our customers, that they request from us, like we did now a couple of years ago with FruitBouquets, is an example of why 1-800-FLOWERS.COM as a brand is able to grow and grow nicely and improve their margins at a time when others are contracting or when the category, as a whole, is struggling.

So I think it's the innovative merchandising and product introductions that we've introduced there in the 1-800-FLOWERS brand, like FruitBouquets, that is helping that grow.

Okay, well, thank you very much.

(Operator Instructions) Juan Bejarano from Noble Financial.

Congrats on the strong quarter. Many of the questions have been asked, but I was just wondering if you can talk a little bit about if there are going to be any additional merger-related costs that will be coming up in the upcoming quarter, or are all these costs behind us? And I have a few other questions.

Sure. Bill will handle that one for you first.

Yes, from a pure transaction standpoint those costs are behind us. As we were talking about earlier, there could be some integration cost that we incur in the second half of the year. But from a transaction standpoint those costs are behind us.

Not in any way to shape our expectations in terms of the guidance we've given for the full year.

Correct.

Okay, thank you. And then on the Consumer Floral, it was quite positive, better than we had expected. Can you maybe talk about the segment? Do you believe you are taking share from other players or are you just growing with the market?

I would say that the only public data we have available for the category that's near term, near time, indicates that if we are the largest in the category and we are growing on the largest base, that that's likely coming in some way from our competition.

But frankly, we think that we can continue to grow, regardless of what the overall category does, because of how our merchants have innovated and iterated their lines of products that we have available to help our customers express themselves and connect. We will continue to use the very cost-effective vehicle of 1-800-FLOWERS to attract and introduce customers to our celebratory ecosystem, and our hope is to be able to monetize them with lower price points and higher price points with all the other wonderful gifting products that we've introduced, whether it's our Cheryl's cookies or it's our -- now our Harry & David or our Moose Munch program.

So the whole idea is, if we can attract them cost-effectively and do that in a growing business environment like we are in the 1-800-FLOWERS.COM brand, have the omni-channel multiproduct, multibrand strategy of the web environment to lure those customers with our Rewards programs, with our Passport programs, with their ability to earn and burn points and introduce them to those other products, we feel that we have a shot at changing the floral category and making the introduction to a broader gifting category.

Okay, thank you. That's helpful. And then on the social front, you obviously work closely with Facebook and launched the Just Because campaign. Can you maybe discuss, first, your relationship with the Facebooks of the world? And then how is the Just Because campaign going? And maybe are there any other ideas that you've launched, products that you've launched, to reach a younger demographic?

Chris will give you the color on the relationships we work hard to develop and maintain there. I think what we've said in the past is the fact that back in that period of 2008-2009, when we had to make some tough decisions about which programs we would invest in, the good news is we were always -- remained comfortably profitable during that area. And we were able to invest for the future. Now, not to the breadth that we would have liked, but we still had half a dozen investment programs underway. One of those was mobile and another was social. And mobile has just exaggerated the impact of social on our lives.

And so we said back then that we were on our way to becoming a mobile/social commerce company. And now you hear us refer to the omni-channel and multibrand. And I think that decision that we made back before that to introduce other products, and during the 2008, 2009 and 2010 periods that were tougher as a result of the recession, we continued to invest because we knew that social, aided and abetted by the introduction of smart phones, was just going to increase.

I think our teams have done a reasonably good job of keeping us in the forefront of activities that help us deepen our relationship through social media with our customers and expand our customer base in those channels.

Yes, well, it's always been a focus of ours to make sure that we are staying innovative as a company, especially in the area of embracing new technology. So that's a requirement, that we build and maintain relationships not just with the Googles and the Facebooks of the world, Instagram, Twitter, but all of the new emerging platforms and new capabilities that are coming out and being very willing to experiment. That's what helps build those relationships and continue it.

And as far as some of the learnings that we've gotten with the Just Because initiative, you will continue to see us in each of our different brands find different products like our cookie cards and some of the other products that we've introduced that really help us have that entry point purchase to bring customers into that celebratory ecosystem and then allow us to kick in all of the marketing programs that we've been discussing to really manage and build and to grow that relationship.

Just to follow up on Chris's point, Chris has charged each of our brands with mimicking the strategy that we have in the Cheryl's brand in terms of introducing entry-level price points, not only for people to use on those everyday locations like birthdays or get well or new baby or just because, but to do it with a broader breadth of our products.

So I think you will see more efforts from us in that regard because of the success we've seen with those of low price points in the Cheryl's product.

Okay, great, thank you. That was very helpful. That's it for me.

Jeff Stein from Northcoast Research.

Okay, a couple of financial questions -- first of all, I'm wondering, Bill, if you could talk about the adjusted gross margin at Gourmet Food and Gift Baskets, excluding Harry & David. Was it up, down or flat to last year? That would be, again, adjusted but excluding Harry & David.

Okay. So adjusted would be relatively flat year over year. The reported number would have been lower but that was because of the impact of the Fannie May fire. But once you (multiple speakers) --

So adjusted for the fire, about the same?

About the same, yes.

Okay, great. And wondering will there be any additional purchase accounting adjustments in the third quarter or fourth quarter?

No.

Okay. And then a final financial question -- you had a roughly $13.5 million negative effect on revenues in Q2. What do you guesstimate the revenue effect will be in Q3, and will it extend beyond Q3?

In Q3 we think it's going to be in the several million range. We lost a whole bunch of Valentine's-related (technical difficulty) boxes and packaging that caused some miss on the wholesale revenues that we have in the quarter. So probably in the $2 million to $3 million range from a topline perspective.

And into the fourth quarter, do you think?

Don't believe into the fourth quarter. What we don't know as we go into the future, into the next fiscal year, as we cycle around into the next holiday season -- do we lose some revenues that we lost this year does not come back to us? And we're not going to know that until we get into the holiday cycle next year.

Okay.

And there's potential upside there as well, Jeff. It's not just downside because some of the -- we had such success leading -- such good trend lines, as I mentioned, leading in, some of those customers that can move the needle with single orders have been very receptive to the efforts that we've made to ameliorate these difficulties, and there could be some upside there as well.

Okay. So you don't see any damaged relationships, as you indicated earlier?

No. On the contrary, I think the relationships are deeper and stronger.

Okay. And final question would be relating to Harry & David, can you talk about some of the metrics that you typically cite for your core business, such as how many new customers specifically did Harry & David generate during the holiday season? What was their repeat rate, relative to last year? And can you talk about maybe the split between their online and catalog sales and what kind of growth they registered in each of those segments?

Well, Bill will fill in where he can on this; there's a limit to how specific we are going to get. But the trend lines continued apace at Harry & David that they've seen in the last, the prior two years, in terms of that 3% growth rate, consistent average tickets and a basically flat acquisition cost.

One point you made was the difference between catalog and e-commerce sales, and there really is not a difference. What we found here in the Harry & David brand is the same thing we found when we had other catalog brands. But the catalog now is simply a marketing tool that begets response, whether it's telephonic or online customer sales, which is all e-commerce of sorts.

So, Bill, any other color that you would add?

Yes. They had about 2 million orders during the quarter. Their repeat rate is slightly higher than the Flowers brand, but it's not significantly higher. But the fact that they still use a catalog as their main source of marketing and stimulus -- that hit the existing customer base more. So they are slightly higher than us. Their AOVs are well over $100, and that's why we had the big lift in overall AOV from 55 into the --

And that AOV was consistent with last year?

And that AOV was consistent from last year.

So consistent in the gift food and gift baskets brands for the legacy flowers business, consistent AOV there and, on top of that, the Harry & David AOV was consistent with their last year number.

Yes, and final point, on the new customers -- it was relatively split evenly between Harry & David and the business excluding Harry & David during the quarter.

Great. Thanks a lot, guys.

Thank you. And I have no further questions at this time. I would like to turn the conference back to management for any closing comments.

Thank you, Karen. I think, as we evolved, I've mentioned a few times now, because of the impact of the Harry & David and related brand's acquisition, it really does become more important that you view the Company as a full-year company because comparisons with prior years will be a little bit distorted. And the way we view it now, we have two distinct business types. We have a wire service business which is a good and growing business with very attractive margins. And then we have a $1 billion consumer gift business which is growing at about 5% organically. It has good and improving margins.

We have a pipeline of exciting new products that will stimulate customer interest, we think. We are focused on growth particularly in the gift food segment where there is a growing category. We have an omni-channel multibrand customer strategy which we think is already starting to show its benefits. And I think that we are starting to benefit from the strategic decisions we were fortunate enough to make years ago that are starting to really, pardon the pun, bear some fruit here.

I think all the above positions us to capture an ever larger share of our customers' wallet in that whole celebratory gifting space. So we think we are well-positioned for the future. We are pleased with what we were able to deliver this quarter. And we expect to do similar things in the quarters ahead.

So thank you for your time and interest today. And please don't forget to wow those folks in your life with the appropriate Valentine's gift.

Thank you. 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.