1-800-Flowers.Com Inc (FLWS) 2016 Q2 法說會逐字稿

Good day ladies and gentlemen, welcome to the 1-800-FLOWERS.COM fiscal 2016 second 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, today's conference call is being recorded. I would now like to turn the conference over to Joseph Pititto, Senior Vice President of Investor Relations. Please go ahead.

Thank you. Good morning everyone. Thank you for joining us today to discuss 1-800-FLOWERS.COM Inc's financial results for our fiscal 2016 second quarter. For those of you who have not yet received a copy of our press release issued earlier this morning, the release can be accessed at the Investor Relations section of our website at www.1-800-FLOWERS.com. 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, 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 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 the 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 will now turn the call over to Jim McCann.

Good morning everyone. First let me begin by saying that we are very pleased to report another quarter of strong execution and earnings momentum. By many accounts the recent holiday season was a challenging, one and our top-line growth was not as strong as we would have liked. Nevertheless, we achieved strong bottom line results, with more than 20% growth in EBITDA, and more than 35% growth in EPS. In addition, we continued to execute our integration initiative for Harry & David, and we are now ahead of our forecasts for capturing operating synergies across our platform. These efforts are helping us to keep on track to hit our full year EBITDA and EPS guidance, which we reiterated in this morning's press release. Chris and Bill will both provide more details in their comments in a few minutes.

As most of you know, the acquisition of Harry & David last year marked a significant step in our strategy to expand our offerings, so that we can solve for a broader range of customers gifting and celebratory needs. The addition of Harry & David, Wolferman's, and Moose Munch to our family of brands has helped catapult us into a leadership position in the growing gourmet food and gift basket category, which now represents more than half of our annual revenue. This category is predominantly a holiday season business, representing more than 75% of our total sales for this past quarter. As such the year-over-year growth in this area on both a reported and comparable basis was the primary driver of our overall growth for the quarter.

During the period in our gourmet good and gift basket segment, we grew revenues in Fannie May, Harry & David's, Cheryl's, and had strong growth in our 1-800-BASKETS business. On a comparable basis our Fannie May business did not recover all of the sales lost in the prior-year period related to the Thanksgiving fire at our warehouse that severely limited inventories last year. This primarily reflected the widely reported weak customer traffic in malls and other retail locations. In our consumer floral category, the 1-800-FLOWERS.COM brand grew 1.1% on a comparable basis, adjusting for nearly $6 million in lost revenues, related to the sale of two small non-core businesses that occurred in this period. In this area the strength of the 1-800-FLOWERS.COM brand combined with our focus on efficient marketing and merchandising programs, enabled us to deliver another quarter of strong contribution margin growth.

In BloomNet while revenues were down slightly reflecting the timing of some wholesale product orders, we were able to generate higher gross margins and operational efficiencies, resulting in double-digit increase in its segment contribution margin. The key take-away from the December quarter is that we continued to successfully execute and produce strong bottom line results in what was a challenging environment. Before Chris and Bill cover a few more of the details, let me sum up the quarter.

It was a solid quarter and a solid first half. We would have liked to have more top-line growth, but we did have growth, but it was modest. We delivered strong EBITDA and EPS, and the Harry & David integration is ahead of plan, which enabled us to reiterate our bottom line guidance. The first phase of the integration was focused on cost and operations. Now as that continues we are excited about growth on an organic basis, that we see coming from our ability to leverage three things I would point out to you. Our multi-branded portal, and note that Harry & David and the Harry & David brands will be coming onto that portal in the spring of this year. Our consolidated database, now that it's fully consolidated we have a terrific database of really attractive customers from a demographic and income point of view, and we now have the CRM tools that we have invested in through our CapEx efforts over the last few years, to properly mine those databases for growth. And we have the celebration suite of services, passport rewards around reminders, that go into the efforts that will drive organic growth for us.

We have an all-star collection of brands, and we are now able to focus with those brands, and with those services and platforms and database that I mentioned above, now we're focused on purchase frequency, increasing that amount of customers, and driving ever-increasing lifetime value from that customer database. Candace, we will come to you for questions in a minute, but first let me turn now to Chris, who has some more detail on the quarter.

Thanks Jim. As Jim solid execution in the second quarter, and I am very proud of the teams across all of our brands, whose focus and hard work enabled us to achieve strong bottom line results by expanding margins and reducing operating expenses. In the gourmet food and gift basket category, we not only successfully completed the first phase of our integration of Harry & David, we also achieved the best quarterly top and bottom line results that brand has seen in nearly a decade. As Jim mentioned, our integration synergy savings are above and ahead of plan.

As noted in today's press release, we are revising upward our total synergy savings from the integration over three years to $20 million from $15 million. Importantly, the success we have had in merging our corporate cultures, and sharing Best practices across the enterprise, has us poised to drive accelerated growth for Harry & David in the years ahead. During the quarter our 1-800-Baskets, Cheryl's, and Fannie May brands, also notched year-over-year revenue increases. However, Fannie May's growth on a comparable basis was not sufficient to recover all of the sales lost in the prior-year period due to the aforementioned Thanksgiving day fire. The Fannie May team is intensely focused on developing and implementing initiatives to recapture customer traffic, while concurrently protecting and expanding margins. As we look out over the balance of the year, we have a number of exciting initiatives to expand our leadership positions in our businesses.

First, Harry & David will become fully integrated into our multi-brand portal this spring. Having the opportunity to introduce the loyal customers of each of our individual brands to Harry & David, and vice versa, will better enable us to meet all of our customers gifting needs, and deepen our relationship with them. Second, this allows us to expand the reach and benefits of our loyalty initiatives, Celebrations passport, rewards, and reminders across all of our brands. These programs have many benefits, including as an example the option to lock in free shipping across all of our brands for a full year for one low price.

Third, the initiative we have underway to consolidate all of our customer data will yield insights and intelligence on both customers and gift recipients, which can be leveraged by the marketing teams across all of our brands. Fourth, given the strong sell-through of our products in the mass channel over the holidays, we are confident that we can successfully expand the range of product offerings in this channel, particularly with the Harry & David and Moose Munch brands. Last, we will glean insight and intelligence from the multiple tests that we ran during the holiday period. Tests that cut across cross-brand merchandising, retail and marketing programs. Things like cross-brand email campaigns, multi brand catalogs and catalog inserts, multi-brand corporate gifting initiatives, multi-brand store-within-a-store tests. We are currently evaluate the results and information gleaned from all of these tests and many more, and we are excited by the opportunities this data will provide. With that let me turn things over to Bill for the key financial highlights. Bill.

Good morning everyone. The second quarter of fiscal 2016 represents the first time that we have had the Harry & David business in both periods. As you will recall we acquired the business at the end of the first quarter last year. However, as you may also recall, we had to report adjusted numbers in the fiscal second quarter of the prior year for two reasons. First, we adjusted for the lost sales of Fannie May business as a result of the warehouse fire in November 2014, and second, we adjusted for acquisition-related items, such as purchase accounting adjustments and transaction costs.

So to provide enhanced visibility I will speak to this year's Q2 results, compared with both the reported numbers, and for comparability purposes to the adjusted numbers from last year. In terms of revenue, total revenues for the quarter rose 2.6% on a reported basis, and grew approximately 1% on a comparable basis. As previously mentioned, our continued focus on leveraging our business platform to reduce operating costs, combined with the above plan synergy savings from our integration of Harry & David, enabled us to translate modest revenue growth into strong earnings growth.

Gross margin for the second quarter increased 110 basis points to 46.1%, compared with 45% in the prior-year period. Operating expenses as a percent of total revenue decreased 220 basis points to 28.8%, compared with 31% in the prior year. As a result EBITDA excluding stock-based compensation was $104.8 million representing an increase of 23.3% on a reported basis, and up 4% compared with adjusted EBITDA in last year's fiscal second quarter. EPS for the quarter was $0.92. Looks like a growth of 35.3% on a reported basis, and 10.8% versus the adjusted EPS in Q2 a year-ago of $0.83. EPS initiatives in Q2 also benefited from a lower effective tax rate due to several discrete tax credits. All-in-all we are very pleased with the consolidated bottom line performance.

Now I will touch on some highlights of each of the three business segments as well as corporate expenses. First, the gourmet food and gift basket segment. Revenue in this segment rose 4.7% on a reported basis, and approximately 1% on an adjusted basis. During the quarter on a reported basis we achieved a 70 basis point improvement in gross margin, and a 14.8% increase in segment contribution margin. On an adjusted basis contribution margin in the segment improved 1.5%. This was achieved while absorbing higher labor rates associated with a tighter employment market, and increased commodity costs particularly in cocoa and eggs.

In the Consumer Floral segment revenues decreased 4.8% on a reported basis, but increased 1.1% adjusting for the aforementioned sale of the two small non-core businesses. We achieved 160 basis point improvement in gross margin, and a 23.3% increase in segment contribution margin, due to a combination of reduced promotional pricing, shipping savings, and more efficient marketing spending. In BloomNet, revenues decreased 2.2% reflecting the timing of orders for wholesale products with Q1. If you recall BloomNet grew nearly 8% in Q1. However, we again achieved substantially better margins with 180 basis point improvement in gross margin, and a 10.5% increase in segment contribution margin.

Corporate expenses were $19.8 million, which includes stock-based compensation, and was down $3.3 million compared with the prior-year period. Primarily due to the acquisition costs included in last year's second quarter. On an adjusted basis corporate expenses increased 2.2%.

Turning to our balance sheet. At the end of our second quarter our cash and investment position was approximately $108.4 million, reflecting the completion of the seasonally strong holiday quarter. Our term debt was $124.7 million, and we had zero borrowings outstanding under our working capital line within our revolving credit facility. And the inventory at the end of the quarter was $95 million.

Regarding guidance. Reflecting the results of the first half of the fiscal year, we have adjusted our revenue guidance for fiscal 2016 to be an increase of 4% to 5%, compared with the revenues of $1.12 billion reported in fiscal 2015. In terms of bottom line results, we continue to expect to grow EBITDA approximately 10%, and EPS in excess of 20%, compared with the pro forma fiscal 2015 adjusted EBITDA of $80.5 million, and the pro forma fiscal 2015 adjusted EPS of $0.33 per diluted share. As Jim and Chris have mentioned, we have been able to offset the impact of the competitive environment and rising input costs, by effectively managing product, marketing and distribution costs. We are also above plan on integration synergy savings. Of the revised synergy savings expectation of $20 million, approximately $10 million is reflected in the current year guidance, and we expect an incremental $5 million benefit in each of the next two fiscal years. Lastly, we are also reiterating our guidance for free cash flow in 2016 of approximately $35 million. I will now turn the call back to Jim for his wrap-up.

All right. We'll come to you in a minute for your questions, but just a quick summary of what you have heard from Chris and Bill here this morning. What we have in total is a very solid team. We have a great operating platform, our acronym for the operating platform, we call it Bolt, we have an enviable customer base, we have the tools to work with our customer base on our multi-branded platform, our CRM capabilities, our Celebration suite of services. We have an all-star brand portfolio, and you can expect to continue to watch us focus on our costs and our operations, and now you will see us as we have digested the biggest chunk of that, you will see us now turn our attention increasingly to efforts around growth, and we have outlined to you some of the many tools we have available to us to pursue that growth. So now, I will turn to you for your questions, and ask Candace to restate the instructions.

Thank you. (Operator Instructions). Our first question comes Jeff Stein of Northcoast Research. Your line is now open.

Good morning guys. Nice bottom line results. Clearly though, for this Company to perform in the future, you have got to accelerate the top line, so I'm wondering first of all if you can talk about what are the key top line accelerators that you see in the back half of the year, because you have got to take it up a notch if you're going to get to 4% to 5% growth, and that also includes the fact that you have got the Sunday Valentine's Day placement this year. So maybe you can address the second half, and then looking perhaps over the next 12 months, what do you see as being the key top line drivers for the Company?

Jeff, I think we have, I will look back and look forward. Looking back over the last five years we're proud of the fact that through a combination of organic and acquired growth. On the organic side, over the last five years we have grown about 3% average top line organic growth rate. If you look back over that period with the acquisitions, particularly the Harry & David acquisition, we have almost doubled the top line of the Company and more than doubled the bottom line of the Company. And we have done that without any growth in our share count, and with I think a very prudent use of our balance sheet, we have a very modest debt position. And good free cash flow. So that also brought with it the opportunity to increase our bottom line by more than double, because of the synergies we have realized in the acquisitions we have done, and those that we have yet to realize.

So going forward-looking at the next, the second half of this year and the next year or so, the key drivers for our growth are the things we said we already have. On the bottom line side, clearly we'll continue to have a focus on our operations, and on our costs and we have every confidence that we'll hit the numbers that we have projected, and we're happy that we're able it raise our targets for our integration savings from the Harry & David acquisition from $15 million to $20 million over that three year period. And if you look at the things in our tool bag, with those brands as an Omni channel provider to customers of products and services, we have wholesale growth opportunities, we have direct to the consumer growth opportunities, we have club opportunities that enhance our lifetime value of our customers, and we have the three key tools that I mentioned to you in my remarks, which were A, the multi-branded platform with Harry & David and its other brands coming on fully integrated this year in the spring, we have our suite of Celebration services, and we have now the integrated database which we have long sought and now have, with the appropriate CRM tools. So we intend to and expect to rev up our organic growth rate, and yes, we have the flexibility to do things on an acquisition basis, but I wouldn't factor that into our plans, it's not necessary for us to a achieve those growth rates. Bill, is there anything that you would want to add?

No. I mean I think what we saw during this quarter, Fannie May not recovering fully, we're continuing to work on that, and get more and more of the traffic back into the stores, and to have some recovery second half of the year on that. So if you back out that the rest of the brands really did grow during the first half of the year, and the second half. So we do expect growth within GFGB during the second half of the year, we do expect growth within BloomNet, and growth within 1-800-FLOWERS on an everyday basis, so we have already accounted for it in our guidance, the fact that the day placement of the Sunday day placement of Valentines Day.

Yes, that is what I would add Bill, is just looking at things from a shorter term and longer term perspective, we talked about moving as we said before gaining more of the share of the everyday gifting business. I think if you just look at the results we had with Harry & David, having operated Harry & David now for two holiday seasons this past quarter growing 2%, but year-to-date we're growing Harry & David about 3%. So it's showing some pickup in the everyday business there.

So we don't have to change the trend lines to achieve what you're asking there. The trend lines, the only negative trend line we really had was in Fannie May in that it didn't pick backup enough. It was only half of what we expected in growth. We expect to pick up, turn that trend line, continue that trend line and accelerate it, so that we get it all back and more.

Do you think that perhaps you dialed back the level of promotional activity too much at Fannie May?

It's possible.

Are you making some adjustments to ramp that up a bit?

Yes. Certainly we're making adjustments. I don't think we're severely impacted by the fact that we didn't have inventory in the stores last year. I think we had a lighter promotional schedule for that brand this year, because we didn't know that it was necessary to until we step on the pedal harder, but I think the things we have done in the stores, the stores that we have revamped, are outperforming all of the others by quite a bit, so I don't think we have to be more promotional. I think the campaign that we already put in place is taking ahold now, but I don't think we have to ramp-up our promotional efforts to get all of those sales back and more.

Okay. Question maybe for Bill. Stock buyback. I mean your stock is getting hammered pretty well today, and if you look at the cash flow multiple on forward-looking earnings probably under 5 depending upon what kind of forecast you are using. Why not be more aggressive in buying back your stock?

Jeff, we haven't. I think we disclosed we have a $25 million authorization from our Board of Directors. We have been in the market the first half of the year, and we will be in the market the second half of the year.

And maybe Jeff, I think maybe that's a good point. We'll take it under advisement.

Okay. Alright. Thanks, guys.

Thank you.

Thank you. And our next question comes for foot line of Eric Beder of Wunderlich. Your line is now open.

Good morning.

Hi Eric.

Hi. Could you talk a little bit about the competitive environment you're seeing in the floral industry. Obviously this quarter has Valentines Day with its promotions. Do you expect kind of the limited or lower levels of promotions as you can see to continue?

Eric, this is Jim. Two things I would say there. One is I think you have seen with our growth, and now that more than half of our sales are in the gift food category, that we have sort of grown into a much bigger competitive arena. The competitive arena I would say two ways bigger. One is the Gift Food categories are a much bigger category, and we're a significant player in there, although yet small. So our arena is much bigger. And the second thing is the floral category we don't see it as nearly as competitive as it was. It's much more rational and appropriate, but for us we don't think that it matters that much to us anymore, as it did in the past when we were so heavily floral. As we're floral and gourmet gifts and gift baskets now, it's a broader category, and the competitiveness I think it's abated, and it's not as important, both at the same time.

Okay. And in terms of the gifting category this multi, you have had this multi-tabbed website for all of the different categories except for Harry & David for a while. What are you seeing from the customers who use the different tabs throughout, and kind of integrate and do use all of the different pieces of the website?

So a couple things there, Eric. The multi-brand website is one component really of our multi-brand customer strategy, and the multi-brand website, I would say really we've had every brands except Harry & David on there for one year now. It was this past January when we moved the flowers brand onto that multi-branded platform. We continue to see good steady increases in our cross brand promotional, or cross brand shopping activity between the customers, thus giving new exposure, so for example this holiday period while we had the boutique tabs of Harry & David and Wolferman's up on the site. We saw the benefits of exposing those brands to the customer traffic from 1-800-FLOWERS.COM and Cheryl's and Fannie May, et cetera. And saw some good activity and engagement there. Then you couple that with the capability that we brought to the table with the Passport program, that you can now use across all brands, including utilizing that on the Harry & David and Wolferman's tabs. And we're seeing good traction with the Passport program, out Celebrations reward and our reminders program, which the reminders program just became multi-branded really this past quarter, maybe even this past December.

So what we're really excited about is that we're in the early stages of this multi-brand customer strategy. The early metrics we see are encouraging, and we're just continuing to add new features and functionality to our multi-brand customer capability. Examples, this past quarter we just introduced a new search capability, where when customers come to the site, they can now search by the brand they came to, or they can search multi-brand. We did some testing with the different header lay out and changed the header layout that we currently have live, because we saw from the test that was getting even greater brand, or cross brands experiment expectation in shopping, so you will continue to see us add features and functionality either to the site, to our loyalty capabilities, and more and more to our overall marketing capabilities, to drive that multi-brand customer engagement, because what we see there is a significantly enhanced lifetime value, and it's, again, it's an early stage part of our strategy but one we're very, very excited about.

How should we think about the Harry & David brands in terms of the catalogs? Obviously they're a significant catalog player. Your other brands have kind of down played the catalogs a little bit. How is that going to go forward? How are we going to see that change?

Yes. I think the catalogs is on important piece of our marketing arsenal, whether it be for the Harry & David brand, or even for our other food brands. And you can see that evolve really as we get deeper and deeper into our CRM capabilities that Jim referenced before. Really getting in segmenting and understanding which customers are still really stimulated by a catalog, versus which customers are more stimulated by digital marketing. So that's an evolutionary process of just finding out what's the best contact strategy for each customer segment, but they will continue to play an important role in our marketing arsenal.

Finally, Bill what is the tax rate going to be for the back half the year?

Overall for the full year our guidance for capital was about $32 million. You saw us spend a little less than half of that in the first half of the year.

He said tax rate.

I'm sorry. I thought he said cap. The effective tax rate for this year is lower than it historically has been, so we've come down to post-Harry & David acquisition to about 36% this year, and this quarter we got some benefits of some of discrete credits that brought it down to about 33%. So for the overall year we'll be in that 33% rate, but that's because of the tax credits that we get this full year.

Great. Congrats and good luck for holiday, for Valentines.

Great thank you.

Thanks, Eric.

Thank you. Linda Bolton Weiser of B. Riley. Your line is now open.

Hi. Just on the Fannie May side, could you remind us how big Fannie May is for the sales roughly as a percentage for the whole year, and for the quarter? And then you mentioned that the revamped stores are actually performing quite well. Can you just remind us like what percentage of the stores have been revamped, and what's the plan going forward for doing more of those if there is a plan? Thanks.

I'll ask Bill to cover the first part of that, and Chris the second on the Fannie May stores.

Yes. So with respect to Fannie May overall it's about a $90 million brand for us, with about half of that within the retail stores. What we saw a year-ago with the impact of the fire, that we lost $13.8 million. We estimated $13.8 million of lost revenues last year. So on a reported basis, Fannie May got about half that back so on a reported basis Fannie May was up over 25%. However, when you compare it to the adjusted numbers from last year, by not getting, by only getting half of it back it was down double-digits it was down $6 million to $7 million on an adjusted basis.

And as far as our focus on the stores and revamping the stores going forward, we're very excited really about the repositioning of the product line that we put in place this past year. Really coming out of the fire, then rebuilding, and rebuilding and redesigning the packaging, really focusing on enhancing the brand image, which I think goes to the point also of how we plan on playing in the market, to the question of did we get too aggressive in pulling back our promotional activity. Probably not. Really we have a high value product there, a very well respected brand, and we want to make sure we're deliver our customers great value, which will hopefully also and what we're seeing, will enable us to enhance the gross margin and ultimately the profit margin of that business unit as well. So we're excited about that. Clearly we have to figure out how to utilize our product to attract the customer base a bit more and stimulate top-line growth, but we think we're on track to achieving that.

And sorry if you said it on Harry & David, but did you indicate how much in synergies that you expect in FY 2016, and then how much has been achieved year-to-date?

Yes. Linda, what Bill said was that for in fiscal year we have revved up the expectation from $5 million to now $10 million, which helped us to offset some of the headwinds we hadn't budgeted, higher labor costs which is a double-edged sword there. We had higher labor costs on our seasonal workforce, particularly in the Harry & David brand, which says A, more people are working, which is good in the long-term for us. But B, it was a headwind that we didn't expect. The other headwind was particularly on the commodity side I would point to eggs. It's great news that McDonalds went to an all day breakfast, and it certainly did impact their sales, but it impacted our egg costs dramatically, so that was a headwind we didn't anticipate. So the increased savings and accelerated savings from the Harry & David integration plan, which of course, isn't just Harry & David but is across the enterprise. Moved that savings this year from $5 million to $10 million, and that more than offset the headwinds that we had from the labor and the commodities, and still enabled us to improve the bottom line performance. And what he said next was that you could expect of the $20 million total targeted now, that $5 million would come in fiscal 2017, and $5 million would come in fiscal 2018.

Great. Thanks. I'm curious on the cost inflation items. Are you able to take pricing anywhere? Are there certain parts of your business where that pricing might be a little easier to achieve or not? I mean is that something you're looking at?

It really isn't, Lynn attachment we think we have the appropriate pricing across our portfolio. We experiment from time to time, but mostly it's a broadening of the range of products and price points, so we'll continue to introduce some higher price points, particularly you saw that this holiday season in our 1-800-Baskets business. They had some really nice more expensive bigger gift baskets and gift items that did really well, and then in other brands like in 1-800-Flowers we tested in some novelty items in the $10 and $12 range, just to see what that would do to traffic, so not changing price points but broadening price ranges.

Okay. Thanks very much.

You bet.

Thank you. And our next question comes from Jeff Stein of Northcoast Research. Your line is now open.

Sure. A couple of follow-up questions. First of all, Valentines Day, Bill in the past you have mentioned that's going to be about a $10 million hit because of the Sunday placement, and I know that the prior year you had roughly the same dollar hit. I think roughly $10 million so if Valentines Day is in on Tuesday the following year, do you get back theoretically $20 million, or how do you kind of see it looking ahead? I know that's a long way out, but that has been a big headwind for the last two years?

Yes. Jeff you're absolutely right about the last two years with it falling on a Saturday, it was about a $10 million impact last year, and we have guided to about a $10 million decline this year. We will get a nice chunk of that back next year when it moves to a Tuesday. We have discussed how Valentine's Day during the week is much better than it is when it's on the weekend, and as it gets later in the week, it gets better and better. So the $20 million is coming, the $20 million decline the last two years is coming off of Friday, and the Thursday, Friday are probably the best days, so we'll get a lot of it back next year. We won't probably get all of it back next year, but as Valentines Day goes on a wall over the next four years of Tuesday, Wednesday, Thursday, Friday, we get that all back, and hopefully then some.

Great. And where is the incremental expense savings coming from this year? Because that's almost double what you had thought originally?

Yes. So Jeff when I first gave --

It's actually a little bit more than double, Jeff, because remember, we had to back out the unanticipated expense increases, too.

That's right. But with regard to the integration savings and $10 million from the $5 million we originally got, the accelerated benefits we got there were just kind of the increase in benefits that we got from combining vendor contracts, that now kind of kicked in this year. So whether it was IT, areas like health insurance, where we combined everybody onto one provider, and we're getting better benefits in the marketplace as a result of that, and eliminating healthcare brokers, email providers having the entire enterprise on the same email provider, paper buying. Buying all of that, and really on inbound and outbound shipping rates, and getting better savings in that than we originally anticipated.

And in the next couple of years, Jeff, what we'll see that there is contracts that we couldn't get to this year that are coming up next year and the year after, it will help us there. A lot of redundancy in terms of elimination of positions that were redundant as we combined as a Company. So we're very confident about what we'll be able to do in the next two years based on what we have done this year.

Okay. And in terms of looking at the repeat rate, customer retention, can you talk a little bit about that for your core brands, and Harry & David as well? Was the repeat rate for example the same, better or below year-ago for each of the brands?

Yes. I think overall the same or better. Our core, if you break it out by brand, our core customer metrics continue to say very healthy. Whether that's from a repeat rate, a frequency rate, et cetera. And then as I mentioned, clearly small but a growing percent coming into that multi-brand customer strategy, where we see an increase in the retention, and an increase in the average per year spend, plus an increase in the LTV. So we're very encouraged by where we stand today, and with the increasing capabilities that we brought to the table, and the ability to look at all of the data that we get from the combined customer data base, and the recipient database that we can now look to mine, and convert those recipients into good value customers, really, Jeff, is what drives us in our excitement, really about that long-term multi-brand customer strategy.

Got it, thank you.

Thanks.

Thank you. Our next question comes from Dan Kurnos of The Benchmark Company. Your line is now open.

Alright. Thanks. Good morning. Let me start off, Bill, maybe you can start to clarify a few things, because I think there's a lot of confusion out there. Just on the one hand, let's just go over some housekeeping items first, in terms of the impacts of the divestitures, I'm assuming that's all Consumer Floral, and if you can just remind us the impact that we should expect to see over the balance of the year, because clearly this full impact was not embedded in numbers already?

Yes. So first, about $6 million during the quarter, and the second half of the year probably in the $2 million to $3 million range.

Per quarter or for the balance of the year?

For the balance of the year.

Okay. And then separately on GFGB just to make sure my math is right here. If Harry & David is up about 2-ish% on an adjusted pro forma basis, that implies the GFGB is flattish to slightly down core X-Harry & David?

Yes. Again the biggest on an adjusted basis, because you have the decline in Fannie May, by not being able to recapture all of those lost sales, so we saw --

Adjusted revenue.

On the adjusted numbers, so we saw nice growth within the baskets business, we saw nice growth within Cheryl, we had the 2% growth that Chris mentioned within Harry & David for the second quarter, and 3% year-to-date, but Fannie May again on a reported basis grew 25-plus percent, but it only recaptured about half of the $13.8 million that we identified as lost revenues last year. So that was down about 15%.

Right. So that's what I'm getting at. I mean the whole point is the numbers do indicate that the balance of the GFGB segments are in fact growing, if you're only flattish GFGB X-Harry & David, if Fannie May is down 15%. So I guess really to follow up on this from a higher level, I guess for Jim and Chris look, obviously the stock reaction today is indicating that the investment community doesn't believe you can re-accelerate sales and a lot of it has to do with some of these one-time items that I think people are missing, where as I think just talking, if you kind of do the math here, Consumer Floral is on a normalized basis maybe even up this year if you pull out the divestitures and the Sunday day placement. So I guess really maybe going back to Jeff's initial line of questioning, how do you kind of restore investor faith that you guys can re-accelerate this thing, understanding that you have some tailwinds just from migrating the Harry & David platform alone, and in conjunction with that you have had two quarters now of upside to EBITDA and not raised guidance, and I understand why, how that would look in this particular quarter, but does that imply that you guys are going to get maybe more aggressive on spend to re-accelerate the top line, or is it just you're going to remain conservative, and just continue to go about what you guys have kind of outlined, and still try to expand margins which could leave room for further upside over the balance of the year?

Dan, I think we can do both, and I think that's our intention. I think we can both accelerate our efforts on the top-line growth by deploying the tools we talked about earlier that we now have in place that we didn't have before. And I think on the other side of the coin I think you can expect us to continue to be vigilant in improving the operations, and finding those cost synergies that we have identified, and going beyond that. So we feel very good about the spot, and appreciate your help and efforts to point out the true performance. If you look at it's confusing, but if you look at it, the flower business continues to grow and being a good producing business with good margins, the growth is not huge, but it's good and it's solid in a market that otherwise is not doing, seeing a lot of growth. The areas that we have invested in over the last several years are growing nicely. We do have the confusion of the noise around the fire episode, and the new company and brands with Harry & David, and its other brands. But we had a company there that hadn't grown in years and gone backwards, and now has had two years of good organic growth, and the additional headwinds there that we didn't mention, as we close stores there and we closed a couple last year, we'll close a couple more this year, that comes off of the top line growth number. So it disguises the fact that all of our businesses are healthy and growing, so that gives us the confidence on the bottom line, and we freed up enough excess through our synergies programs that we can over-deliver on the bottom line, at the same time we turn our attention to much more aggressive organic growth rates.

So to that since you did bring up the Harry & David stores, I just wanted to double check. It sounds like you still have plans to kind of rationalize the store footprint based on the underperforming stores, regardless of what happens this quarter and the impact on revenue it will have in the next, in the March quarter?

Yes. And it's sometimes confusing because this year we gave up $1.5 million to $2 million worth of top line there, which impacts the look of the overall growth rate, but all we did is shut a couple of stores that weren't going to make money, did not make money and were not going to make money. As we get to the beginning of each year, and we look at our lease contingencies, we have an opportunity to examine the stores in our portfolio. We have a lot of really well, really good producers, we have some that are in the middle, and we have some that are at the end. At the bottom of those that aren't producing well, right now we're looking through that portfolio, we think we have fixes for most of them that will turn them into nice producers. We have opportunities for really good growth in some of those stores, and then the two or three that we don't think we have the right fix, or it's the right location we'll exit them early this year.

Can you maybe, Bill, then just kind of quantify that potential impact, just so people are expecting it, and it doesn't look like another revenue shortfall if it happens?

Yes. Each store, on average is about $750,000, so as we shed each store, to Jim's points of before we closed two stores last January, so year-over-year on that was about $1.5 million. We are looking to close probably in the neighborhood of two to three stores this year, so that will have a similar impact of maybe upwards of $2 million annually on the GFGB results.

Great. And then another just quick housekeeping question just on Harry & David. I know you guys may not want to go into this much granularity, but can you just quantify or at least directionally give us a sense of what the year-over-year improvement was in contribution margin at Harry & David?

Well, it was taken out of the cost initiatives that go across the enterprise, but Harry & David does benefit from that as well, but say we gave you the top line 2% growth in the quarter, 3% year-to-date, and contribution margin is up nicely both in the quarter and year-to-date.

Okay. I'll follow up with you on that offline. Last question for me then, Jim just going back to my first question. One of the kind of big knocks on the story I think has always been the inability to sort of scale these regional brands, and I know that there were certainly a lot of mitigating circumstances in this particular holiday period, but as you look at Fannie May, and obviously Cheryl's has been performing very well, and continues to perform well. Fannie May had its struggles a couple of years ago, looked like it was back on track. I guess how do you address kind of sort of what you think the addressable market opportunity is there, so that people don't get concerned that there's either a saturation point at Fanny, and that this thing can continue to grow, and return to sort of a double-digit pace once you get things kind of fixed from a testing standpoint?

Well, I think there's a couple of avenues for growth at Fannie May. I think you're right we certainly did struggle with it a few years ago, changed the Management Team, changed the operations, changed the store configuration, merchandising schemes, all of which are taking place now. So we had good growth not as good as we thought we would have it at this time, but our growth in the future from a more macro look at Fannie May, is it's a good brand, it's a growing brand, it's a brand that you will see us emphasize growth in terms of its third-party provider outlets, those we call wholesale and our e-commerce businesses. Wholesale business was terrific this year. Small because we have just been getting into it in a serious kind of way, but the sell-throughs were really, really good, and the e-commerce business grew this year too. So you are not going our see us spend a lot of money on store roll outs. We experimented around with some seasonal stores there that didn't get us terribly excited, because as we look at the ways we can growth that brand, the ways it's most beneficial, and has the most leverage, are in the things that we did well at this season. That is the e-commerce growth and improving the stores that we already have, and the merchandising mix in those, and then finally, the third-party sales opportunities with wholesale relationships that did terrific this year.

Okay. Great. Thanks for all the color, guys. Appreciate it.

You bet.

Thank you. The next question comes from Juan Bejarano of Noble Financial. Your line is now open.

Good morning. Thanks for taking my questions. Most of the questions have been asked, but as far as the Celebration suite, I think it can really help the frequency of people ordering more items and such. Just wanted to ask you on Celebration passport, would you ever consider providing metrics surrounding this, maybe how many new customers joined up in Celebration passport in the quarter, and such? But aside from that, can you also discuss overall how the program is doing, are you seeing the clients that have joined have you seen them ordering more frequently?

Yes. So we're very pleased with the progress we're making with passport, and to your last point there what we see is when customers join passport their frequency increases and their multi brand usage increases, rights? And that's another key factor that we point to, that really increases lifetime value of that customer. So the passport we view as an important program. Again it's still such early stages in its growth, and its influence on the overall business, this is why we don't report metrics on that specifically. We think it needs to get to be much more sizable so that we can point to the impact on a go-forward basis, and we look forward to doing that, Juan, but you're right the Celebration suite are just other tools as part of the whole multi-brand customer strategy, like the multi-brand portal with the Celebration suite of capabilities, et cetera. So we're very happy with the progress we're making on all of those fronts, and especially on passport.

Great. Thank you. And just a follow-up on the stores. If I'm not mistaken you guys were testing pop up stores at the malls and other areas. Was this the case? How did that perform?

Yes. We had a combination of pop up stores and kiosks, and this is something that Fannie May has been involved for a while, and we continue just as the overall store strategy, we're continuing to evaluate that. I would say we had some stores that were successful, and some locations that were not successful.

Very small numbers, Juan.

But that's parts of the overall testing and learning that we will apply going forward.

Great. Thank you.

Thank you. (Operator Instructions). Our next question comes from Anthony Lebiedzinski of Sidoti. Your line is now open.

Yes. Good morning. Thank you for taking the questions.

Sure.

So you were able to track the 1 million new customers during the quarter. Are most of those customers coming directly to your website, or are you seeing perhaps more of them coming through Google advertising? If you could just shed us some light, how are you actually specifically able to drive new customer growth?

It's a tough one, Anthony. It really is across-the-board. It's from some of our direct mail prospecting, and then certainly in the online world we have a good percent because of the strength of our brands, a good percent that do continue to come to our URL directly. With that said, over the years clearly consumer behavior has shifted to where people utilize search, utilize Google really as a de facto, URL bar, their de factor browser, so that drives where we see, therefore increases in search. In a natural search or page search, and maybe those are customers that previously would have come to the site directly. So it's a mix, right? And we're looking at constantly working with our affiliate networks, our display advertising has been strong lately. So it's really hard to say. Where we deploy our dollars is where we see a good return on both new customer acquisition, as well of course as repeat. But re-look to the higher percentage of new customers coming through that particular channel.

And Bill, I think it would be fair to say that as evidenced in our marketing has become more efficient and less search dependent, our overall operating costs and margins are improving.

And our marketing costs as a percentage of revenues is down.

Yes.

Got it. Got it. Okay. And then at the Analyst Day in Oregon, you guys had mentioned about Moose Munch being something that you were particularly excited about. Could we see at one point that you would separate that out and highlight that brand specifically on your multi-branded portal?

Yes. I think from a longer term perspective that is something we're looking at doing. I think the Moose Munch because of where it was to begin with, which is mainly in the wholesale channel where we saw some really good sell-through this season, I referenced that earlier, where our excitement is. So that's where the shorter-term benefit comes from is really Moose Munch more to the wholesale, while we are concurrently developing the direct to consumer strategy behind Moose Munch, but that is a direction that we're going, Anthony.

It will take some work Anthony, in terms of the packaging product and product assortment, before we could make that a destination e-commerce brand on its own.

Got it. Got it. Okay and then as far as the BloomNet, can you remind us what the extent of the timing of the orders for the quarter?

Well, yes I think if you look I think what Bill mentioned if you look at BloomNet, he is expecting 3% growth across the year. In the first two quarters of this year between down 2 in the second fiscal quarter, up 8 in the first fiscal quarter. It was right around that 3% growth rate, so he is projecting that throughout the rest of the year. So he said yes, it was definitely a timing issue in these first two quarters.

Got it, okay. Thank you very much.

Thank you.

Thank you. Our next question comes from Jeff Stein of Northcoast Research. Your line is now open.

Yes. Just a quick one, Bill. In the past you have cited average order value for the business, and I know it's probably getting a little bit confusing with Harry & David, because that would tend to raise it, but can you talk about the average order value for the core, and the average order value for Harry & David, and how it changed for each of those segments year-on-year?

It's actually pretty consistent across a lot of our brands. AOV was up slightly, probably about 1% during the second quarter, and the larger brands like 1-800-Flowers was up 1%, and Harry & David is in a similar amount.

Okay. Alright. Thank you. And how about Popcorn Factory? That was not mentioned. What's going on there? It seems like that business has been kind of in a slump for lack of better description for a while. What are you doing to kind of revitalize that business?

I think it needs a refresher. The product is good, but the whole brand needs a refresher, so we're taking steps now in terms of giving it more attention, and integrating it more into the overall mix of products, and expanding its product line. So you will see it get a big refresher this next couple of quarters.

Thank you.

Thank you. And I am showing no further questions at this time. I would like to turn the conference back over to Mr. McCann for closing remarks.

Thank you. And thank you for your time and your interest today. I think you see that as I look at it, we have quite a solid team here. We have a really good and ever- improving operating platform. We have an enviable customer base, we have tools to mine that customer base like our CRM assets, our multi-branded platform, our Celebration suite of services, which we spoke quite a bit about today. You couple that with our all-star brand portfolio, you will see us continue to focus on our cost and operational efficiencies in this second half of the fiscal year and next. But you will also see us increase our efforts now on growth stories that will develop our organic growth rate, because now we have the opportunity to do that, having completed the integration, the big phase of it, and now we can leverage the tools and assets that I just mentioned. So we feel good about the quarter we just delivered, we feel good about the first half. We feel good about the assets that we have in front of us, and now we have two quarters in front of us that are much more predictable, because it's much more akin to what we looked like before we were fortunate enough to append Harry & David and its brands to our portfolio. So nothing, but we see blue skies ahead. Thanks for your interest today, and for your questions, and we look forward to interacting with you, as you have time in the days and weeks ahead.

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