1-800-Flowers.Com Inc (FLWS) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the 1-800-FLOWERS. COM, Incorporated Fiscal 2016 First Quarter Results Conference Call. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call will be recorded. I would now like to introduce your host for today's conference, Mr. Joseph Pititto, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Catherine. Good morning and thank you all for joining us today to discuss 1-800-FLOWERS. COM's financial results for our fiscal 2016 first quarter. For those of you who've not received a copy of our press release issued earlier this morning, a release can be accessed in the Investor Relations section of our website at 1800flowers.com or you can call Patty Altadonna at (516) 237-6113 to receive a copy of the release by email or fax.

In terms of structure, our call today will begin with brief formal remarks and then we'll open the call to your questions. Presenting today will be Jim McCann, CEO; Chris McCann, President; and Bill Shea, CFO. Before we begin, I need to remind everyone that a number of the statements that we will make today may be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements.

For a detailed description of these risks and uncertainties, please refer to our press release issued this morning as well as our SEC filings, including the Company's Annual Report on Form 10-K and quarterly reports on Form 10-Q. In addition, this morning, we will discuss certain supplemental financial measures that were not prepared in accordance with Generally Accepted Accounting Principles.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables accompanying the Company's press release issued earlier this morning. The Company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today's call, any recordings of today's call, the press release issued earlier today or in any of its SEC filings, except as may be otherwise stated by the Company.

I'll now turn the call over to Jim McCann.

Good morning, everyone. First, let me begin by saying that we are very pleased with our results for the fiscal first quarter. The positive trends that we saw throughout last year including solid top line growth and even stronger bottom line performance continued in this year's first quarter, positioning us well to deliver strong results for the upcoming holiday season and for the full year.

It was just a little more than a year ago that we closed on our acquisition of Harry & David, adding another iconic brand to our great family of gifting brands and significantly extending our position as a leader in the growing Gourmet Food and Gift Basket segment. At that time, we told you that we expected the acquisition to be highly accretive even before any operating synergies, and indeed, it has proven to be even better than we expected, helping us drive revenues past $1.1 billion and growing EBITDA, EPS and free cash flow significantly.

We expect these trends to continue and accelerate in fiscal 2016 and we're off to a good start in our first quarter. Worth noting is the fact that we presented our results for the first quarter on a reported and a comparable basis, adjusting for the fact that we did not own Harry & David during last year's summer quarter, the first fiscal quarter.

We believe that viewing our results on a comparable basis is important because it provides you with a true apples-to-apples comparison of our performance and a clear view of our progress in combining the businesses. Bill will take you through the comparisons in his remarks in a few minutes. But before I turn the call over to him, I like to cover a few highlights from this quarter. First, in our Harry & David business, we achieved solid year-over-year revenue growth while significantly reducing the seasonal operating losses for the period.

We did this by leveraging our shared services platform including our IT, human resources, technology and sourcing among other assets to capture operating efficiencies. These efforts, driven by the very talented teams that we have assembled across the enterprise are doing an excellent job of identifying and aggressively pursuing cost synergies in all areas of our operations. As a result of these efforts, we are confident in our ability to achieve the $15 million in operating cost synergies that we originally forecast and potentially exceed that figure in the years ahead.

In addition to Harry & David, we saw solid performance across our gourmet foods and gift baskets segment during the first quarter with growing customer demand in our Cheryl's and 1-800-Baskets brands in particular. As we noted in our release this morning, some of the revenues associated with this demand were shifted into the current fiscal second quarter based on when some of our customers requested their deliveries.

In our 1-800-FLOWERS.com Consumer Floral business, we recorded a fifth consecutive quarter of increased contribution margin on revenues that were essentially flat, primarily related to the sale at the end of last year of some non-core businesses. As we look at the competitive landscape in this category, we continue to see opportunities to expand our market leadership and enhance our profit margins by deepening the relationships we have with our customers through effective and efficient marketing programs.

In BloomNet, we achieved strong top-line and bottom line growth with revenues up nearly 8% and contribution margin up more than 6% for the quarter. BloomNet continues to extend its market penetration and outgrow the competition by levering its better value proposition for the florists and its well earned reputation for innovative products and services.

Overall, we believe the positive trends we are seeing across all of our businesses, bode well for the key upcoming holiday season and for the full fiscal year. I'll now turn the call over to Bill for a review of the financial and operating metrics for this quarter.

Thank you. As Jim noted is in his remarks, we have presented our first quarter results on both on a reported and comparable basis. This provides a more accurate view of the strong year-over-year performance by comparing this year's first quarter to a pro forma 2015 first quarter that has been adjusted to include Harry & David's results for that period as well as excluding one-time transaction and integration-related expenses incurred in the prior year and the current year period respectively.

As we have noted in the past, Harry & David's results were not including in our reported results for the last year's fiscal first quarter due to the timing of the close of the acquisition on September 30, 2014. In addition, our first quarter earnings include an after-tax benefit of $10.3 million or $0.15 per share, which reflects the final settlement of our insurance claim related to the fire at our Fannie May warehouse and distribution center that occurred on Thanksgiving Day last year and that of course related to the write-down of certain non-core foreign business assets, which I'll discuss a bit more in a moment. You'll also find details and a reconciliation of all these adjustments in the tables attached to this morning's press release.

Now regarding specific financial results and key metrics for the first quarter, total net revenues increased 23.2% to $156 million compared with $126.7 million in the prior year period. This reflects the contribution from Harry & David, which was not included in last year's first quarter numbers. On a comparable basis, including the pro forma Harry & David revenues in the prior year period, revenues were essentially flat year-over-year.

This reflects the combination of 7.7% revenue growth in BloomNet, which continues to benefit from new products and service offerings and strong e-commerce growth in our Gourmet Food and Gift Basket business, offset by slightly lower revenues in our Consumer Floral segment, which primarily reflects the sale of certain non-core businesses completed at the end of last year, and the shift of some mass market customer shipments within the Gourmet Food and Gift Basket segment into the current fiscal second quarter.

Gross margin for the quarter increased 120 basis points to 43.3% compared with 42.1% in the prior year period. This was primarily driven by 230 basis points improvement in our Gourmet Food and Gift Basket segment and an 88 basis point improvement in our Consumer Floral segment, which more than offset a 70 basis points decline in BloomNet's gross margin. Importantly, we see opportunities for continued gross margin improvements through product mix, synergy savings and our focus on efficient promotional and marketing campaigns.

Reported operating expense and operating expense ratio, excluding stock-based compensation, were higher during the quarter reflecting the Harry & David operating expenses, which were not included in the prior year period. On a comparable basis, operating expenses, excluding stock-based compensation, were down slightly to $87.4 million compared with the pro forma of $87.9 million in the prior year period and operating expense ratio improved 30 basis points to 56% of total revenues.

Adjusted EBITDA on a comparable basis improved 16.9%, or $2.4 million, to a loss of $12 million compared with a loss of $14.4 million in the prior year period. Net loss for the quarter was $4.5 million or $0.07 per share compared with a net loss of $4.3 million or $0.07 per share in the prior year period. Our net loss and EPS results for the quarter, including the aforementioned one-time after-tax benefit of $10.3 million, which reflects the combination of the following; the final settlement of our insurance claim related to the Fannie May warehouse and distribution center that incurred on Thanksgiving Day 2014. The final settlement was $55 million, which resulted in a pre-tax gain of $19.6 million in the first quarter. This was slightly offset by an impairment charge of $1.9 million relating to the sale, in October 2015, of the UK business and a write-down of $1.7 million related to an equity investment we have made in a small Floral e-commerce company in Brazil.

Net of taxes, the aggregate amount of these three events was $10.3 million. On a comparable basis, adjusted net loss improved $1.2 million or $0.02 per share to a net loss of $14.3 million or $0.22 per share compared with a pro forma net loss of $15.5 million or $0.24 per share in the prior year period.

In terms of customer metrics, during the quarter, our e-commerce orders grew 18.4% to 1,557,000 compared with 1,315,000 in the year ago period, primarily reflecting the Harry & David contributions. Average order size during the quarter increased 5.2% to $67.26 compared with $63.92 in the prior year period. And during the quarter, we added 500,000 new customers, up 16.9% compared with 427,000 new customers in the prior-year period primarily reflecting the contributions of Harry & David in the quarter. This was achieved while concurrently stimulating repeat orders from existing customers, who represented 55.4% of total customers.

In terms of category results; in our 1-800-FLOWERS Inc Consumer Floral segment revenues were $72.9 million, down 1.9% compared with $74.4 million in the prior year period and this primarily reflects the sale of two small non-core businesses that we completed at the end of fiscal 2015. Gross margin increased 80 basis points to 39.4% compared with 38.6% in the prior year period reflecting efficient use of promotional marketing campaigns as well as enhanced product mix. And category contribution margin in this segment increased for the fifth consecutive quarter up 4.1% to $7.5 million, compared with $7.2 million in the prior year period. The Company defines category contribution margin as earnings before interest, taxes, depreciation and amortization and before the allocation of corporate overhead expenses.

In BloomNet, revenues for the quarter grew 7.7% to $21.5 million compared with $20 million in the prior year period. Gross profit margin was 54.6%, down 70 basis points compared with 55.3% in the prior year period, primarily attributable to product and service mix. And contribution margin increased 6.4% to $6.9 million compared with $6.5 million in the prior year period.

In Gourmet Food and Gift Baskets, revenue increased 90.3% to $61.6 million compared with $32.4 million in the prior-year period, primarily reflecting the contributions from Harry & David. On a comparable basis, including the pro forma Harry & David contributions in the prior year period, revenues in this segment were essentially flat year-over-year. This reflects the combination of strong e-commerce growth in the segment, offset by the shift of some mass market customer shipments into the current fiscal second-quarter. Gross profit margin increased 230 basis points to 43.2% compared with 40.9% in the prior year period, reflecting product and channel mix as well as the contributions of Harry & David.

Contribution margin loss was $8.5 million compared with $2.4 million in the prior-year period, reflecting the seasonal operating losses associated with Harry & David. Importantly, we significantly reduced the Harry & David operating losses on a year-over-year basis by successfully leveraging our shared services and operating platform during the quarter. As a result, on a comparable basis, contribution margin in the segment improved 14% or $1.4 million to a loss of $8.5 million compared with the pro forma loss of $9.9 million in the prior year period.

In terms of corporate expenses, as I stated earlier, our category contribution margin results exclude cost associated with the Company's enterprise shared services platform, which includes among other services, IT, HR, finance, legal and executive. These functions are operating under a centralized management platform, providing support services to the entire organization.

For the fiscal first quarter, corporate expenses from continuing operations, including stock-based compensation but excluding approximately $800,000 in one-time integration cost was higher compared to the prior year period due to the incremental operating expenses associated with Harry & David. On a comparable basis, including the Harry & David results in the prior year period, corporate expenses were essentially unchanged at $19.4 million compared with $19.5 million in the prior year period.

Turning to our balance sheet, at the end of the first quarter, our cash and investment position was approximately $2 million. Borrowings for working capital under our revolving credit facility were approximately $129 million, primarily reflecting investments in inventory to support growth for the upcoming holiday period. This amount is consistent with the combined working capital borrowings of the Company, including Harry & David in the prior year period. Inventory of approximately $188 million was within management's expectations and reflects the seasonal increases to support growth across all of our Gourmet Food and Gift Basket brands during the holiday season.

Regarding guidance, we are reiterating the guidance we provided at the beginning of the current fiscal year, which calls for consolidated revenue growth in a range of 5% to 7% compared with revenues of $1.12 billion reported for fiscal 2015. In terms of bottom-line results, we expect to grow EBITDA approximately 10% and EPS in excess of 20% versus comparable fiscal 2015 adjusted EBITDA of $80.5 million and comparable fiscal 2015 adjusted EPS of $0.32 per diluted share. We anticipate generating approximately $35 million in free cash flow for the full year, excluding the insurance proceeds received related to the Fannie May fire.

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

Thanks Bill. Fiscal first quarter includes what is sometimes referred to as the slow summer months, but in reality, the period is anything but slow for us. Across all of our businesses and particularly in our Gourmet Food and Gift Basket brands, our teams have been working diligently to prepare for what we expect will be a very successful holiday season.

So in this call, we're excited by the increasing opportunities we see to engage with our customers and deepen our relationships with them through a broad range of cross-brand marketing and merchandising programs, including our multibrand website, where we're seeing steady growth in the number of customers who are engaging with multiple brands to solve their gifting needs for an expanding range of celebratory occasions.

While this initiative is still in its early stages, we continue to see incremental improvement in customer behavior in terms of enhanced retention, frequency and lifetime value. During the first quarter, we added boutique tabs for Harry & David and Wolferman's to the site, giving our customers even more opportunities for new plant discovery while providing these iconic brands with exposure to millions of potential new customers. In all of our marketing initiatives, we are increasingly leveraging our expanded customer database with millions of engaged shoppers as well as a new suite of CRM tools designed to help us improve our targeting and enhance the relevance of our marketing communications.

In our direct marketing programs, we've leveraged creative talents across the Company to develop and begin testing innovative multi-brand gift catalogs. We even have a compelling new catalog specifically designed to feature our expanded range of Gourmet Gift Clubs and subscription programs including everything from Harry & David's signature Fruit-of-the-Month Club, to Cheryl's Cookie Clubs, Wine and Cheese Clubs; Fannie May Chocolate Clubs and even a Moose Munch Gourmet Popcorn Club.

In retail, we're testing a new multi-brand kiosk model in several locations around the country, expanding brand awareness and reaching customers who like to do at least some of their holiday shopping on foot rather than online.

In mobile, we continue to be the leading innovator in our space, recently launching a new native android app for 1-800-FLOWERS. COM that includes a streamlined checkout process as well as easy access to our Celebrations Rewards program and special offers for returning customers. We've also launched a new tablet site that's fully optimized for large touch screens including iPad and Kindle devices.

And to paraphrase Jim's quotes from this morning's press release, these initiatives and many more like them are helping us to position us to be better than any time in the past to solve for our customer's celebratory and gifting needs and thereby deliver a strong holiday season and another full year of growth. I'll now turn the call back to Jim for the wrap up. Thank you.

Well, thanks Chris. You can see we're right where we expected to be and want to be. We're very pleased with our first quarter results. We continue to see positive trends across our businesses and we plan to build on those going forward. We're excited by the opportunities we see to deepen our relationships with our customers through our omni-channel focus which enables us to reach customers wherever, whenever and however they choose to shop for their gifts.

Our multi-brand website featuring our extended offering of great gift brands and unique suite of services including; the Celebrations Passport free shipping program, the Celebrations Gift Reminder service and the Celebration Rewards Loyalty Program. Our award-winning customer service platform and our industry-leading innovations in mobile and social commerce also help us. All of these initiatives, plus many more underway, are helping us become a unique, one shop destination for an increasing range of our customer's gifting and celebratory occasions.

They are also helping us drive enhanced top and bottom line growth and build shareholder value. Now that concludes our formal remarks and I'll ask Catherine if you'd give the instructions for the question-and-answer portion of our call.

(Operator Instructions) Jeff Stein, Northcoast Research.

Good morning, guys. Just a couple of questions here, first of all, maybe you can help us understand a little bit better the organic revenue growth excluding Harry & David and some of the noise that was created by the revenue shift and the asset dispositions. So maybe you can talk a little bit about Harry & David's growth, how much the revenue shift accounted for and the small asset dispositions.

Alright, this is Jim. Jeff, I'll ask Bill to give you the details on it. But overall, we continue to look at the portfolio of brands and services that we have, that we can go to our customers with and in the case of some of our international investments, we decided that it was a better way to manage those going forward, so we took some steps there. And then we had one business that too really wasn't growing and didn't have the growth characteristics of the rest of business, in the flowers business, so we decided to dispose of that.

So that's why you heard Bill say that we would have been a push on the flowers business in terms of growth, without that disposition. And on the Harry & David business, he will give you the details, but what we had was a good growth of several million dollars and good savings of several million dollars that were realized in two different places. Bill, a little color on that for Jeff?

Yes, so a few things. Getting back to the Consumer Floral, where we disposed of several non-core assets back in June of last year, we reported revenues down 1.9% or $1.5 million. Basically all of that was related to those non-core assets and Consumer Floral was essentially flat without -- on a true apples-to-apples basis. In Harry & David, we saw nice growth, several million dollars of growth in the first quarter, kind of on a core basis, in the mid to upper single digit growth from that standpoint. But as Jim referenced, equally as important is we were able to take several million dollars of cost out of the Harry & David business.

That reports on two different lines within the way we report our financials. One within the Gourmet Food and Gift Basket contribution, which are kind of direct items related to the Harry & David and then, certain of costs we were able to take out of the shared services platform like IT, finance, HR, those all sit on the corporate line. And then finally, on the wholesale revenues that shifted from Q1 to Q2, that's also in the several millions of dollars that we'll get in Q2 that were in the prior year, in Q1 and were planned for and budgeted in Q1, but because the mass merchant customers wanted them in Q2, we shifted them to Q2.

So Jeff, there are two situations that suggest that to get the best comparison, you should look at the first and second quarter combined, fiscal quarters and the third and fourth combined and the two shifts are increasingly we're seeing, some of our customers want their product later. So they don't have it on their books at the end of the quarter, so you see that impacting those shipments this year. Those are booked. Those are orders that have now been shipped.

Now actually shipped.

Yes, but it'd be shipped in this quarter, so the revenue is recognized in this quarter and the other factor is the Easter shift between the third and fourth quarters. So to give the best comparisons, it's good to step back and look at our business in two halves, first and second.

Got it. Are you expecting to see growth in the wholesale segment of Gourmet Food and Gift Basket business this year?

Yes.

You are? Okay and how should we think about measuring the traction you're getting from the multi-brand portal at this point? Do you have any metrics you can share with us in terms of cross-brand marketing and number of customers that have signed up for Passport and so forth?

Yeah Jeff, what you are continuing to see from us there is again, something like this is a long-term strategy as you move your customer database from one category into another. We're seeing good steady incremental growth and then also, as I've started to point out there, we have a number of tests going on right now both on cross-merchandising, cross marketing, whether it'd be some of the catalog tests that I mentioned, some of the [floral inserts]. What we're seeing really from our first true initiative, which is putting up the multi-brand website and those tab out there, simply exposing the brands in front of millions of customers is we're seeing good cross brand shopping behavior and it's a nice steady increase. So while still very early in the cycle here, we're very pleased with our early results.

Okay and final question, one for Bill. Wondering if you could tell us how much Harry & David boosted the gross margin in the Gourmet Food and Gift Baskets category?

Yeah. So we saw a 120 basis points improvement in gross margins overall, but even if we compare it on a pro forma basis and had Harry & David as of the beginning of last year. So apples to apples, it would still be a 100 basis point improvement in gross margin, even without Harry & David. I mean with Harry & David on an apples-to-apples basis.

And how much of that 100 basis points, Bill, would be attributable to synergies and how much is just attributable to some of the other things that you've done, maybe seeing lower commodity prices and so forth?

Yes, I would say, it's probably split in three ways. One is kind of sourcing synergies that we get. Additionally, lower promotional pricing, discounting was very -- conscious of that and into it some channel mix too. With some of the wholesale revenue shifting to the second quarter you get some benefit of the mix of revenues that are in the quarter that also contributed to that.

Linda Bolton Weiser, B. Riley.

I just wanted to, just again, go to the GFGB segment, the profitability and set the contribution margin line, so it improved $1.4 million year-over-year. I mean, is all of that improvement due to Harry & David or I'm just trying to figure out what the base business excluding Harry & David contribution margin did? Did it improve or did it deteriorate a little bit.

I think the answer would be, in the general sense, Harry & David was the biggest contributor to that. Without Harry & David, it would have been flattish, but because you had the expenses of the business that shifted but not the revenue from it. So if you put it all together and the timing was different, you would have Harry & David improvement and GFGB improvement.

Exactly right. So again you had [$7 million] of wholesale revenues that shifted from Q1 to Q2. If that was back in the first quarter, the spreading within -- the growth of contribution margin within GFG would have been much greater than the $1.4 million.

Yes, okay I understand. And then trying to ask about the Consumer Floral segment, I understand what you said about these businesses you exited. So that would be -- in effect that would continue on for the next few quarters. So, we have a negative Valentine's Day situation placement again coming up, I guess, in the fiscal third quarter. So it seems to me that the Consumer Floral sales for the year absolutely cannot be up. We're going to have to project some sort of a modest decline for the full year, is my thinking correct on that?

Yes, we think so and then the important thing that we look to do and even Bill mentioned just a moment ago as well on the gross margin improvement across the businesses where we're really focused on efficient promotional marketing campaigns, not chasing, like we did last year at Valentine's Day, not chasing on profitable business and that's contributing to how we've now just had five consecutive quarters in a row of improving the bottom line in Consumer Floral segment.

Right, and again Linda, within the Consumer Floral segment, in each of these quarters we'll give you kind of the core apples-to-apples, year-over-year performance because we do have few of the non-core businesses that we sold in June of last year. And as we announced today, we just sold in October, a small e-commerce business in the UK that rolled up into that segment as well. So you do have those lost revenues. None of those non-core assets were really contributing from a bottom line perspective and obviously our attention is focused on where we can actually grow the business

Which is why they are gone and why we expect to continue that trend of five quarters of steady improvement on the bottom line?

And then, can I just ask you about the cash flow? Of course there is a lot of weird comparisons here, but your operating cash flow was a little more negative than I would have thought. I would assume that's because of the inclusion of Harry & David and the inventory build. So in terms of the second quarter operating cash flow, the $238 million we saw last year which was a big number, but is that normal? I mean like in other words, would you expect at least as big, if not bigger in the second quarter of 2016.

Yeah, again Linda cash flow really I'll look at it on a -- it's not a great comparison on a quarter-to-quarter basis. We reported on a straight math of cash flow -- of free cash flow, like $90 million of free cash flow because of the timing of the Harry & David transaction last year. Our guidance on our normal free cash flow is in the mid-30s -- in the $35 million range. But we will drive significant free cash flow in the second quarter.

What you saw as kind of the negative in the first quarter is all the inventory build in support of the holiday. We have nearly 50% of our overall revenues and significantly more than 50% of our revenues within GFGB are all in this quarter. We've guided, Harry & David has 70% of their revenues in this quarter. So all that inventory turns into cash during this quarter and generates significant free cash flow in this quarter.

So in the second quarter, it will be positive but not as positive as the $238 million last year?

That's right. That was due to the timing of the Harry & David transaction.

Do remember, we didn't have all the inventory build last year because we didn't own them in the first quarter.

Okay, and then -- so I know you talked about the Harry & David synergies and there is the two lines where it's reflected, but if you put it both together, of the $5 million that most of us would expect in synergies this year. How much do you think you achieved in the first fiscal quarter?

It's hard to break it out on a quarterly basis. You saw an improvement of a couple of few million dollars in our cost basis toward that $5 million already in the first quarter, but that's where it's going to show up the most because the revenue is the lightest.

Yes, I mean, again the biggest items are in the shared services platform was platform we've taken costs out of IT, finance, human resources. Those types of costs are also streamlined. Those costs are gone, so you're going to get basically a quarter of that each quarter, going forward. And then obviously with respect to sourcing and other things, those would be more heavily weighted towards the other quarters, right?

This quarter because it's disproportionate share with the revenue for GFGB without Harry & David and certainly with.

Dan Kurnos, Benchmark Company.

I will do my best to ask several holiday questions, so maybe I will cover Linda's question in the process. But just first quickly, Bill, just to press on some of the stuff, Jeff and I guess Linda, to a degree was asking about. Can you just tell us, just for modeling purposes, if there is any seasonality to those divested businesses, and if $6 million is kind of a fair annualized run rate?

They've had some seasonality to that because of the floral nature of their businesses, the first quarter is their lowest in terms of revenue.

The one that we got rid of in the flowers business that was disproportionately the second fiscal quarter and the UK business was disproportionately third and fourth quarter because of its floral natural. But (inaudible) $6 million, [I think we're up].

It's actually bigger than that, between the [$5 million and] probably to the $10 million of revenues between what we disposed of in the second quarter year and what we will dispose.

And keep in mind, on the second piece Dan, the Floral business. When we said disposed of it, we traded it a minority interest in a much bigger company in Europe that we've been building and growing a good working relationship. Company is called Euroflorist. It's a pan European Floral company much like our own, here in the US, but when we looked at it, the scope of our dialog with them, they suggested and we finally agreed that it would made sense for us to contribute those assets to them.

They're going to grow bigger and faster on a bigger platform, and as Bill mentioned in his comments earlier, when we looked at our bandwidth and our focus, there are so many things we have on our plate here that warrant our time and attention that have outsized growth and outsize profit contribution potential that it made sense for us to contribute those assets and continue our partnership with a larger company by contributors those UK assets to Euroflorist and therefore maintaining a minority interest. So when we disposed of it, it's just in the form, so it's not going to be in our numbers, but we do have a minority interest.

Alright, good. That's good clarification, anyway, so people aren't taking all that extra revenue in. So couple other quick housekeeping questions. On BloomNet, can you just give us a sense of how much that new, I guess not really new, but you told the impact last quarter, the new incentive disincentive program benefited results and how many more quarters of runway you have there?

Yes, so we have two more quarters of runway with respect to the program that we put in place in the third quarter of last year. But we also had nice contributions from selling applied goods and the wholesale products in there, which contributed to the nearly 8% growth in BloomNet.

Yes, I was going to ask about that. I assumed it was some wholesale stuff that was maybe pushing margins a little bit down in the quarter, although profitability was still healthy so?

That's right (multiple speakers)

Yeah, okay And then -- well, just one last housekeeping question on Harry & David. I'm not try to ask it this way, but how much of the growth in the quarter that sort of mid-to-high single-digit as you called out Bill was reflective of the fact that obviously prior ownership pulled forward some sales last year out of Q1 ahead of the sale of the business unit?

Yeah probably half of that, so we still would have had nice growth in Harry & David even without that.

Perfect. Alright, thanks. And then let's me ask the holiday questions and whoever feel free to chime in. So first, I assume you guys are waiting to January to make a decision on essentially profit neutral H&D retail stores?

Well we're not going to wait. Dan it is Jim. We're an omni-channel retail, we like retail where it matters and where it pays. We told you during our last call and in subsequent dialog I'm sure that we like some of the retail operations that they have. The team there is testing seasonal stores. We actually increased the count on our seasonal stores a couple of units this year. We're also testing our multi-branded kiosk in the Midwest this year, featuring several of our Gift Food brands. We're excited about that.

In terms of the existing store footprint for Harry & David, we're running several different tests during this holiday period. We think we have some real gems in that. And then, we'll assess in January, what the results of those test have been and what our decision is on a go-forward basis in terms of where do we reinvest and double down on our retail growth strategies there and where do we prune, like we've been doing you see and the things we discussed earlier, we'll continue to prune but our overall intention is to grow.

And Dan, remember the leases are all tied to a January date. So that is a natural time, not only do you get the readings of the holiday season, but leases roll-up in January or a portion -- some of the store leases are up in January. So that is the natural time to take a look at that.

Got it. And then second, can you guys talk about maybe the levels of planned promotional activity versus last year when you obviously had the impact of the warehouse fire?

Well, I would say that let's isolate the businesses Dan. On the chocolate side of business, there wasn't' a lot of good news about the fire last year. But one of the good news, pieces we were able to discern as a result of that experience is that how loyal and steady our customer base is for the Fannie Mae Harry London products and so, we were obviously a lot less promotional last year, after the fire than we would have been under normal circumstances, because we just didn't have the inventory. And so the lesson learned there is we didn't need to be this promotional.

So I think you could expect that our chocolate brands will be less promotional. I'll tell you we're back. We're back in terms of our inventories have been replenished. Our supplies have been replenished. We're still in a temporary warehouse facility and we'll stay in that facility and it is operating fine through this holiday period. Our original facility is under construction now to be rebuilt, but we wouldn't expect we'll make that move until the new calendar year when we have this holiday well behind us. So, we'd expect that Fannie May and Harry London brands are -- and Fannie Farmer brands are all back fully stocked, fully inventoried with a really strong management team that really showed their stuff during this recovery period. In terms of promotional aspects in the Floral business, Chris, would you want to comment on that

So, I'll just say Dan, across all of our businesses what you continue to see from us is a very disciplined approach in how we manage our brands and how we position the value offerings of our brands to solve our customers' needs. So I think across, whether it'd be Floral or whether it'd be Gourmet Food brands, we continue to drive towards efficient promotional activity. We don't want to chase unprofitable business. And coupled with the fact that we just continue to add such iconic brands like Harry & David and then into the multi-brand strategy, the celebratory ecosystem, it gives us a long-term view of delivering value to our customers with a less dependency on promotional activity.

You heard me reference Dan to celebratory suite of services that help our customers, whether it's reminder for -- Celebrations Reminders, Celebrations Passport which is our free shipping program. Those programs are where you seeing those drive our energy efforts because they help us expose to our customers the broader range of our products and give them value for their increased relationship with us and frequency with us. So that's where we are shifting our efforts. It's in the database marketing side, the cross brand promotional things, the Celebratory suite of sticky services.

And Jim, since I was really directing that more to the chocolate side, just to be clear, we might see -- since you have the inventory back, we might see some more promotional activity than last year, but clearly, scaled significantly down from when you used to have it, is that a fair characterization?

I think that's quite fair. Last year, we couldn't do anything. In fact we lost effort because we had promotions planned that we didn't have the inventory for. So, yes I think it's in between just like you said, we certainly won't be as promotional as we were the year before. We were un-promotional last year because we didn't have inventory. So on the chocolate side, you'll see something a blend in between. But now that we have the inventory, we'll do some promotional things, but it won't be nearly as aggressive as it might have been in the past.

Got it. Just last one from me if I could. Can you guys speak of any expanded mass market penetration you're expecting to benefit from and maybe more generically, how your broader product offering is either opening doors or allowing you guys to create some new SKUs this holiday period?

I think, as Bill mentioned in an answer to a question from Jeff early on, we expect the wholesale side of our business to grow. We see that as a brand extension opportunity, a brand building opportunity. I'll give you a couple of [references] there. In our 1-800- Baskets division, our wholesale division of 1-800- Baskets, where we design, confect, source and deliver baskets to our wholesale customers, they're long told us that they wanted the Harry & David brand in their stores. They couldn't get access to it, now we can.

So we'll have a few SKUs of Harry & David product in our gift baskets in mass this year. We weren't able to do a lot because we didn't have the Company in our hands late last year to do that. Because this is -- we're selling now for Christmas of 2016. So you'd expect those four SKUs this year will be many more next year. So we see that's a big opportunity.

The other one is in Moose Munch. Moose Munch is a terrific brand, well known nationwide. It's amazingly small in revenue for a company that has such great product and great brand recognition. So that's one where we're seeing really interesting incoming calls and response to our dialog about what we might do with that in the wholesale channel. That's a great way to extend that brand, lever all facilities. I am excited about it because I think it can be a really big business for us without any CapEx behind it and it just create a big brand that's going to have a big e-commerce capability and opportunity as a result of the exposure it will get in a wholesale environment.

Anthony Lebiedzinski, Sidoti & Company.

So I was just wondering, as far as being less promotional, is that perhaps a function of just a competitive landscape, not being quite as challenging because one of your major competitors bought out another competitor. Just overall wanted to get your take on the competitive landscape for the holiday quarter?

Well I'll tell you, there is two different answers to that question, Anthony. One is the one that we were just talking about on the Gift Food side of our business, particularly on the chocolate side. It is as competitive as ever, perhaps more competitive, but what we found is the strength of our brands is such, the loyalty of our customers is such, is that we were overreaching in years gone by in terms of how promotional we would be. We misinterpreted how promotional we needed to be. Having had the negative experience we did last year, we now know that we don't have to be as price promotional, promotional in different ways, but not price promotional, therefore maintaining our margins.

On the Floral side, I think your question was, is it partially a result of the consolidation that's happened between our competitors on the Floral business? I would tell you that FTD having acquired ProFlowers, FTD is a good well-run company with a great brand. I think ProFlowers, the company they acquired was much more promotional. And frankly, it was damaging in some ways to the category screaming promotion, cheap flowers all the time. It sort of diminished the value of the product. I think now having the FTD management run these two; be stewards of those brands, I think you see them trying to build their brand value, which is good for them, good for the customer and good for us and the whole category.

Got, thanks for that. And earlier there were some questions about inventory levels and I was wondering if you guys could share with us what your expectation is where inventories and your debt levels could be at the end of your December quarter?

Yes, I mean a lot of the inventory that we have on the books now will turn during this quarter and turn into cash and I think I've mentioned that before also. Inventories will be down significantly and will be comparable to where they were at the end of the second quarter last year, maybe even slightly below that.

Quantify that, would that be $80 million, $90 million.

In that range, one another question, cash (multiple speakers). So, all of the, so the revolver where we're borrowing (inaudible) where I mentioned $129 million that we're borrowing on the working capital will be all gone. So we'll turn from end of the first quarter where, obviously cash is low and we have our revolver borrowings. So the revolver borrowings will be paid off and will be in excess of $100 million in cash at the end of the second quarter.

So a shift from the $129 million in the revolver today at the end of quarter to that being zero and about $100 million on the cash line.

That's right. In excess of a $100 million

That's very helpful. And lastly Jim, you had mentioned earlier that the source of synergies that you could potentially exceeded the $50 million number. So are we about a quarter away or two quarters or perhaps a year away before you could potentially adjust that synergy estimate?

I would say mid next year when I say that, in the second, third quarter, we should have much better visibility. Of course, we will have had gone through our big revenue quarter, our work streams will be continuing. So I would say, at the end of the third quarter or the end of the fourth quarter certainly will give you a renewed outlook on where we are there. What we're saying is the [$15 million] looks very accomplishable. If that was a target, we're telling you we're quite comfortable with that and we're hopeful and expecting that if the work streams continue the way they are going, the wonderful integration, the great job our management teams are doing that we'd hope to revisit that question, just as you suggest, in the third or fourth quarter next year -- this fiscal year.

(Operator Instructions) Juan Bejarano, Noble Financial.

Hi, good morning and thank you for taking my questions. So last year's holiday season, you run both Harry & David and 1-800-FLOWERS separate, so as not to disrupt either business. Now that you're integrated with Harry & David, maybe what's changed, if anything, do you feel everything is running smooth in fiscal Q2, may be running even better than you initially expected. Just want to get your comments around that?

Sure Juan. Last year, we closed on our transaction on September 30. We left everything in place for the fourth calendar quarter, the second fiscal quarter because their inventory build, their promotional plans, their merchandising schemes, their catalog distribution plans were build throughout the year and were all about execution during that quarter.

Fast forward a year later we have a new management team in there. We have taken a lot of cost out of it. The team is working real well together. Not only as a standalone unit, but now it's clearly integrated with the rest of our enterprise sitting on that platform. We call that [platform bowl], which is our logistics capability, our technology, our business operations capability and it's really come together now to be one enterprise platform. So from an enterprise integration point of view, good things happening there, it's essentially on the platform and getting deeper and entrenched every day. We feel really good about the management team both those that have stepped up and have been internally promoted within Harry & David and a couple of few people that we brought in from other parts of our organization or from the outside.

So we're happy to see how they jelled as a team. So we feel very good -- well we've been retailers for coming up on 40 years, and what you never do is tell everybody I'm extremely excited about the quarter because there are so many things that could go wrong or out of our control, but I'm telling you we're feeling very good about the quarter, we're feeling very good about the management team, and as you can tell from what Joe and Bill and Chris have expressed here, we feel like, if this quarter went the way it should, the first fiscal quarter, the one we're reporting on and here we are into the second quarter the all important one for us and we are feeling confident, but we've learned to never be overconfident.

Great, thank you for that. And, I know you currently have the multi-tab strategy, but would you ever consider or maybe what are you doing to provide a URL that incorporates all the brands under one URL and be like an Amazon. Is that something you would ever consider at all.

Juan, right now we're going down a strategy that we firmly believe in and really it's a multi-brand strategy especially as we move into the Gourmet Food category. Really, we have great brands that really have authority and relevance in their product categories. So what's unique about our strategy as opposed to a single-brand strategy is that people come in, they might form a relationship with Harry & David, might form a relationship first with Fannie May, and then they come into our ecosystem and we're able to expose them to those other powerful relevant brands that then we think is a better mechanism to gain increased retention and increased frequency from those customer relationships.

Juan, you should expect that we're always testing. We're always testing that hypothesis and that plan that Chris just referenced to you where we build a sanctity of each brand and use that in a very different strategy to others to go to market. So each of those brands continues to grow and have its specific category relevance. But we're always testing different ways to go to market. While that is our answer today. We are always mindful of the world could change and we want to know what the answers might be if we decide to go in other direction.

Got it, thank you for that, and maybe for Bill, I was just wondering if you have the total amount of e-commerce customers from last year, including Harry & David.

(Multiple speakers) 500,000 new customer that we have -- that we reported on included Harry & David versus the 427,000 a year ago was--

That was pro forma, that number or was the incremental (multiple speakers) did you got that one.

No, maybe if you can repeat that, I'm sorry.

So we reported on 500,000 new customers we gained during the quarter that included Harry & David this year. The 427,000 new customers that we gained in the first quarter last year was without Harry & David. So the lion's share of the growth was with the Harry & David customer base.

Thank you. I'm showing no further questions at this time. I'd like to turn the call back to Mr. Jim McCann for any closing remarks.

Well, thank you folks. It's a more difficult story to tell now and one what we understand. We're trying to get better at being able to give the transparency that helps you to understand our business better. We figure the more that we can do that the better you're going to see our business, understand our business and feel as good about it as we do. So I hope that was helpful to you. We welcome any other suggestions you have in terms of how we can do a better job of telling our story because with the addition of Harry & David we go from a Company that had three quarters of profitability to a Company that has one quarter of enormous profitability. And that's a more difficult story to tell.

But we appreciate the input, suggestions and feedback you've given us since our last call in terms of how to make the information better and I hope it was helpful for you today. So we look forward to continuing our dialog with you and wishing you as good and a successful a fourth calendar quarter second fiscal quarter as we're planning. Thank you very much.

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