1-800-Flowers.Com Inc (FLWS) 2017 Q1 法說會逐字稿

Good morning and welcome to the fiscal year 2017 first quarter results conference call. All participants will be in listen-only mode. (Operator Instructions). After today's presentation there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

I would now like to turn the conference to Mr. Joseph Pititto, Senior Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, Aaronson. Good morning and thank you all for joining us today to discuss 1-800-Flowers.com's financial results for our fiscal 2017 first quarter. For those of you who have not received a copy of our press release issued earlier this morning, the release can be accessed at the Investor Relations section of our website at 1-800-Flowers.com or you can call Patty Altadonna at 516-237-6113 to receive a copy of the release by email.

In terms of structure, our call today will begin with brief formal remarks and then we will open the call to your questions. Presenting today will be Jim McCann, Chairman; Chris McCann, CEO; 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 and could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed descriptions 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 Accepting 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 and recordings of today's call, the press release issued earlier today, or any of its SEC filings, except as otherwise stated by the Company.

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

Good morning, everyone. We are pleased to report that fiscal 2017 is off to a very good start. During the first quarter we saw a continued continuation of the positive trends we have been seeing in our business for some time now. As we head into this key holiday season, we are well-positioned, frankly better than ever, to build on these positive trends and deliver strong top- and bottom-line results for the first half and for the full fiscal year.

Before I turn the call over to Chris and Bill for highlights of the first quarter, I think it's worthwhile to take a step back and view our business and the tremendous opportunities we see ahead of us from a broader perspective.

Over the past several years, we have nearly doubled our top line through a combination of solid organic growth and our disciplined approach to M&A. We have also concurrently more than doubled our bottom line in terms of EBITDA, EPS, and free cash flow. We have done this while facing a number of headwinds including, among others, rising labor costs and tightening market for seasonal labor, increases in commodity prices, and unfavorable day placements for the Valentine holiday in the floral business.

As we look ahead, there will always be headwinds that we need to manage through and we are now seeing more nice tailwinds in our business in the form of the successful integration of Harry & David, which is generating both operating synergies as well as significant revenue growth opportunities. We see strong momentum in our 1-800-Flowers business where we are extending our market-leading position while enhancing our profit margins and where we now have favorable day placements for Valentine's Day for the next several years. And the immigration of our brands onto the multi-branded platform, which has only recently been completed, enabling us to drive more cross-brand marketing and merchandising programs and create more multi-brand customers.

Our entire management team, led by Chris, is intensely focused on executing the business plans and building on the positive trends that we see in our business. To do this, we will leverage the strong business platform that we have built, which includes our all-star collection of brands; our growing customer base with very attractive demographics and deepening relationships; our unique operating platform, we call that bolt, B-O-L-T, our business operations logistic and technology platform; and our strong balance sheet, which allows us to invest in key growth areas such as we have in mobile, social, and now in the fast-evolving conversational commerce space; while we also continue to look at new business partnerships and potential acquisitions that can help us to accelerate our growth.

As you can tell, I'm very excited about the current fiscal year and the opportunities that we see for the years ahead. Now, I'll turn the call over to Chris and Bill to review some of the highlights from our first quarter as well as the outlook for this key holiday season. Chris?

Thank you. As, Jim mentioned, our first quarter results reflect a continuation of the positive trends we've been seeing across our business. We're particularly pleased with the strong revenue growth we achieved in gourmet food and gift baskets during the quarter. This was driven primarily by double-digit growth in our wholesale gift basket business as well as in our Cheryl's and The Popcorn Factory brands. In addition, Fannie May recorded positive same-store sales for the quarter as the initiatives we put in place to enhance the brand's performance have begun to take hold.

In our Harry & David business, we saw an increase in wholesale orders, reflecting some early success in introducing Harry & David's products in its Moose Munch and Wolferman's brands to our growing list of customers in this channel.

Our floral business segments also continued to see positive trends during the quarter. The 1-800-Flowers brand continued its solid top- and bottom-line growth trends with revenues, gross margin, and contribution margin all rising in what is traditionally a seasonally slow quarter.

Following our strong performance in this area last year, we've now built some excellent momentum in 1-800-Flowers through a combination of our category-leading initiatives in mobile and social, where we are reaching our customers when, where, and how is most convenient and relevant. This extends to our recent foray into the exciting new world of AI-driven conversational commerce where we have also staked out an early-mover position. Our relentless focus on enhancing the customer experience and driving exemplary customer satisfaction metrics. And our truly original product offerings from our signature floral birthday cake to our brand-new Fabulous Feline floral arrangement for all the cat lovers out there, building on the tremendous success we have had with our a-DOG-ables product line. We are confident that these initiatives, among others, will enable us to extend our market leadership for 1-800-Flowers while continuing to deliver strong bottom-line contribution.

In our BloomNet wire service business, we drove very strong bottom-line results during the quarter, increasing its contribution margin to nearly 35% despite slightly lower revenues, which primarily reflected the timing of some wholesale orders that shifted into the second and third quarter of the year. We're confident that BloomNet is well-positioned to achieve both top- and bottom-line growth in the current fiscal second quarter and for the full year.

This will come from a combination of areas, including increasing order volumes particularly in the second half of the fiscal year; from growing 1-800-Flowers and florist shop-to-shop orders in everyday occasions such as sympathy as well as from the favorable Valentine's Day placement; increased product sales to an expanded range of wholesale customers; and new web marketing services and digital directory advertising offerings that will be rolled out across the year.

Overall, we are pleased with the solid execution and performance in all of our businesses. Our consolidated top- and bottom-line results for the first quarter are in-line and, in some cases, ahead of our expectations. As we move into the key holiday period, we're laser-focused on executing our plans to enhance customer engagement and become our customers' destination for all of their gifting needs.

Now, let me turn the call over to Bill to cover Q1 metrics in more detail. Bill?

Thank you, Chris. As you have just heard, we are off to a good start in fiscal 2017. Our top- and bottom-line results for the quarter are in-line with our plan for the year and we are well-positioned as we head into the key holiday season.

Breaking down our first quarter, first in terms of revenues, total consolidated revenues grew 6.3% to $165.8 million compared with $156 million in the prior-year period. This was driven by 13.3% growth in our gourmet food and gift baskets combined with 3.1% growth in consumer floral, which more than offset the 2.7% decline in revenues in BloomNet during the quarter.

As we noted in our press release, the growth in gourmet food and gift baskets includes the pull-forward of some gift basket shipments into the first quarter at the request of some of our wholesale customers. Adjusted for this growth, growth in the segment would have been approximately 6% for the quarter, ahead of our expectations for the period. In consumer floral, while the reported revenue growth was 3.1%, actual comparable growth was 4.2% for the quarter, adjusted for the loss of revenues associated with the sale of the iFlorist UK business, which closed in October last year. So, combined with BloomNet's results, total adjusted revenue for the quarter would have been approximately 4%, in-line with our plan and in-line with our guidance for the year.

Second, in terms of EBITDA and EPS, the increased year-over-year loss primarily reflects the anticipated increases in labor and insurance as well as the planned marketing investments in preparation for the upcoming holiday season. As a result, our bottom-line results for the period were in-line with our plan and we are well-positioned to drive strong top- and bottom-line growth in accordance with our guidance for the full year.

Regarding gross margin and operating expenses, gross margin for the quarter was 43%, down 30 basis points compared with 43.3% in the prior-year period. With gross margin up 110 basis points in consumer floral and plus 170 basis points in BloomNet, the decline in consolidated gross margin is directly attributable to the aforementioned pull-forward of wholesale basket revenues into the quarter, which resulted in a decrease of 200 basis points in gourmet foods and gift baskets. Adjusted for this, consolidated gross margin would have been up modestly for the quarter.

Operating expenses as a percent of total revenues was 57%, unchanged compared with the prior-year period adjusted to exclude prior-year integration costs. This primarily reflected the increased revenue in the period, which more than offset higher labor and insurance costs as well as the increased marketing spending in preparation for the upcoming holiday season.

In terms of category results, in our gourmet food and gift basket segment revenues for the quarter increased 13.3% to $69.8 million compared with $61.6 million in the prior-year period. In addition to the aforementioned wholesale basket revenues, revenue growth for the period also benefitted from double-digit increases at Cheryl's and The Popcorn Factory as well as positive same-store sales at Fannie May.

While it is still early, particularly with the holiday season in front of us, we are pleased with the positive trends we are seeing in our Fannie May business, which reflect the success of some of the initiatives we've put in place to improve brand performance.

Gross profit margin was 41.2% compared with 43.2% in the prior-year period primarily reflecting product mix associated with the aforementioned increase in wholesale gift baskets shipments. Contribution margin loss was $9.3 million compared with $8.5 million in the prior-year period. This reflects the aforementioned increases in labor and insurance costs as well as the marketing investments in preparation for the upcoming holiday season.

In consumer floral, revenues increased 3.1% to $75.2 million compared with $72.9 million in the prior-year period. As I mentioned earlier, on a comparable basis, revenue increased 4.2% adjusted for the lost revenues associated with the sale of the iFlorist UK business last year.

Gross margin increased 110 basis points to 40.5% compared with 39.4% in the prior-year period primarily reflecting improved shipping costs as well as efficient use of promotional marketing programs. Category contribution margin increased for the ninth consecutive quarter, up 8.4% to $8.2 million compared with $7.5 million in the prior-year period. As Chris mentioned, 1-800-Flowers has built some nice momentum and we expect to build on this going forward, particularly in the second half of the fiscal year, which includes the key Valentine's and Mother's Day floral holidays.

In BloomNet, revenues for the quarter were $21 million compared with $21.5 million in the prior-year period. The slight decline reflects the timing of some product shipments to wholesale accounts, which we expect to get back in the fiscal second and third quarters. Based on the number of initiatives underway, including new product and technology offerings, we are confident that BloomNet will see improved top-line results beginning in the second quarter and for the full year.

Gross margin for the quarter was 56.3%, an increase of 170 basis points compared with 54.6% in the prior-year period, primarily attributable to product mix. The increased gross margin combined with efficient cost management resulted in a contribution margin increase of 5.3% to $7.3 million compared with $6.9 million in the prior-year period.

In terms of corporate expense, category contribution margin results exclude costs associated with the Company's enterprise shared services platform, which includes, among other services, IT, HR, Finance, Legal, and Executive. These functions are operated under a centralized management platform providing support services to the entire organization.

For the fiscal first quarter, corporate expense, including stock-based compensation, was $21.3 million compared with $20.2 million in the prior year. This primarily reflects the increased labor and health insurance costs.

Turning to our balance sheet, at the end of the first quarter, our cash and investment position was approximately $6.8 million. Borrowings for working capital under our revolving credit facility were approximately $125 million, down slightly from a year ago, and reflects investments in inventory to support growth for the upcoming holiday period. Inventory of $191.4 million was within management's expectations and reflects the seasonal increases to support growth across all 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 the range of 4% to 5% compared with revenues of $1.17 billion reported in fiscal 2016. In terms of bottom-line results, we expect to grow EBITDA in the range of 8% to 10% compared with adjusted EBITDA of $85.8 million reported for fiscal 2016 and EPS to grow in the range of 5% to 10% compared with adjusted EPS of $0.43 reported in fiscal 2016. Finally, we anticipated generating approximately $40 million in free cash flow for the full year compared with $24 million in fiscal 2016.

I'll now turn the call back to Chris.

Thank you, Bill. So, to sum up, we've had a good start to fiscal 2017. During the first quarter, we saw a continuation of the positive trends in our business. In our gourmet food business, we saw a strong revenue growth in gift baskets, Cheryl's Cookies, and The Popcorn Factory, as well as encouraging early signs of a rebound in our Fannie May business. The 1-800-Flowers brand continued to extend its market-leading position delivering strong top- and bottom-line results. And BloomNet continued to drive a very strong contribution margin.

As we look ahead into the key holiday season, we are well-positioned to expand and build on these positive trends. In addition, we'll benefit from a number of key developments, including having all of our brands now on the multi-brand website; growing customer adoption of our Celebrations suite of services including Celebrations Passport, rewards, and reminders; the launch of innovative new products including new packaging designs and personalization capabilities across all of our brands; and our continued focus on being an early mover in terms of technology innovation in social trends that help shape consumer behavior.

As we've told you in the past, this is something that really is in the DNA of our culture. We are excited about our industry-leading initiatives in conversational commerce, including being one of the first commerce bots launched on Facebook's messenger platform where they have more than 1 billion monthly active users; being one of the first external commerce brands on Amazon's Alexa voice-enabled platform and having our brand featured in their recent TV commercials; and our launch of GWYN, our AI-based gift concierge service powered by IBM's Watson platform.

Just last week, we had the pleasure of being featured at the IBM World of Watson conference as one of the first companies to embrace AI to enhance the customer experience. We're also very pleased to be featured in IBM's national print and TV advertising campaign for Watson that started back in September and will run through the holiday season.

By executing against all of the opportunities we see across our business, we are confident that we will achieve accelerated organic revenue growth and enhance profitability.

With that, I'd like to open the call up to any questions there might be. So, Aaronson, would you please repeat the instructions for Q&A?

Absolutely. We will now begin the question and answer session. (Operator Instructions). Jeff Stein, Northcoast Research.

Good morning, guys. I've got a number of questions. First of all, wondering if you could tell us how Harry & David performed during the first quarter. There was no mention of that, I guess, in the prepared remarks.

Sure, Jeff. I'll address that first. First quarter for Harry & David starts off, it's a small quarter, especially relative to the second quarter. With that said, we were very pleased that we saw increased demand in both our consumer and our wholesale businesses there. So, we're very happy with that.

And, again, put that into context of the momentum that we're building there. When we first acquired the business, they had not had growth in several years. So then, we took it to 1% growth in year one, 2-plus% growth in the next year, and now we expect to continue to build on that and we're seeing trends move in that direction.

Okay. So, last year I think you were up about 3% at Harry & David. So, for the first quarter, was it in that range?

Hey, Jeff, we really don't break it down by quarter, but our anticipation for the year is that Harry & David will grow in excess of 3% this year.

Okay. And, Bill, you usually give some consumer metrics such as percent of repeat customers, e-commerce orders, number of new customers. Do you have that data available?

Hey, Jeff, I think we can go over customer metrics separately. I mean what I can say; new customers were up year over year. Existing customers were up year over year. The repeat rate was in the mid-50s%.

So, consistent with what we've seen?

Yes. And we'll take the rest of it offline.

Great. Okay. And how about cross-brand penetration? Are you beginning to see the kind of movement that you expected now that you have all your brands on the portal?

Yes. We're very pleased. We continue to see good steady growth there in cross-brand shopping that we're seeing from our customers. We're continuing to see good steady growth in the multi-brand customers. And then, of course, that takes with it increased retention and frequency. So, again, we just continue to see the trends that we've been talking about for a while moving in the right direction. So, we're very, very happy.

Jeff, this is Jim. It's an important question you ask because it's so important to our growth thesis here. That is, if you look at the floral category, not a category known for outlandish growth opportunities, but obviously we're growing and growing well. And what we find, our whole premise here is that with the flowers category we still find a very cost-effective acquisition vehicle to attract really attractive demographic demos on customers who come to us for a gifting need in floral.

And now that we have all of our brands on a multi-branded platform, including Harry & David, our expectation is that their second and third and fourth purchase might be across our other brands, giving us an opportunity to leverage the spend to capture the capture the customer in the floral space and very cost-efficiently introducing them to other products and services that they're already spending on, but now they have an opportunity to spend within our ecosystem. So, it's an important question and the trend lines, as Chris said, are very positive in the early stages.

The trend lines continue to be positive and we just continue to enhance the capabilities. If you just look in the past six months, past year or whatever, as we look at moving everybody onto the multi-brand website, adding in new search capabilities, launching a new global header, launching multi-brand confirmation emails, adding a dynamic pricing service at checkout to help us promote Passport, new rewards functionality. We enabled a new multi-brand reminder program. So, frankly, we're just beginning to scratch the surface here, as we've been talking about, but, with all of this continued added functionality, it's continuing to drive the trends that we see.

Great. And final question. I have not heard Popcorn Factory name mentioned on a conference call in years. And double-digit increase there kind of is interesting. What's going on there that has changed the direction of that business?

I think there's a couple of things; just whether it be Cheryl's, which we continue to see good positive momentum. And we've been saying Cheryl's has our fastest growing business unit right now. And the capabilities and the benefits there also being seen in Fannie May's e-commerce, The Popcorn Factory.

It really is a combination of number of things. It's a combination of all the businesses leveraging the customer database, leveraging our digital marketing capabilities, leveraging the multi-brand customer initiatives that I just talked about. So, clearly, there's no silver bullet otherwise we would have found that a long time ago, but I think we're benefitting from just a combination of all the initiatives and all the innovations that we're bringing to the table.

Got it. Okay, thank you very much.

Thank you, Jeff.

Michael Kupinski, Noble Financial.

Thank you. First, I wanted to congratulate you on the quarter. But a couple of housekeeping things. G&A expense was a little higher than expected and I was wondering; is that a good run rate number for the balance of the year or were there some issues that would have accounted for a higher G&A expense?

Yes, Michael, I think whether you're looking at a G&A expense or whether you're looking at it on a segment basis and you talk about our corporate expense, we expect it to be up around 3% for the year. If you look at, actually, corporate expense you'll see it's actually down from fourth quarter of last year. So, in certain cases, we have increased costs in our infrastructure that we built throughout last fiscal year that lapse in Q1 of this year and it didn't exist in Q1 of last year. But it should be up around 3% year over year.

I got you. And in terms of consumer floral, that was a little bit above my expectations there as well. What was the big key driver to the growth there? Can you give us a little update about the competitive nature of the business, that sort of thing?

Well, Chris will answer that, Michael, but before he starts, I just want to point out that we've had nine quarters of that kind of performance, now, in a row, for the flowers brand. The team is doing a really good job there. I think, Chris, you'd say that the answer there is similar to your answer to The Popcorn Factory. It's a confluence of different activities and the Celebration suite and our data mining capabilities. What else would you add?

It's clearly, Jim, similar. And then I would say digital marketing expertise and first-mover initiatives in mobile and social are really coming to fruition and paying off now as we see the consumer migrate to that channel across all of retail, right? Our early moves into conversational commerce will certainly pay off in a similar fashion in the future. It's our relentless focus on the customer experience and driving those customer satisfaction metrics.

And, most importantly, our truly original product offerings; Fresh Flower Pumpkin and the Shock-Tail Martini bouquet that we had up for the Halloween holiday. And, clearly, I mentioned in my remarks that this launch of it's kind of fun product, Fabulous Feline, which really picks up on the a-DOG-ables, the collection of the a-DOG-ables collection. And just we're really happy with a lot of the social media presence that we've gotten since launching the Fabulous Feline, generating hundreds of thousands of impressions in social media. So, it always begins and starts with putting out product that the consumer wants.

And, Michael, I'd add an underline to what Chris said on the mobile side. We talk about our investment in mobile. That's been an eight- or nine-year effort for us now. So, I think we were glad that we were early there. And I think the way we feel right now is our investments in augmented or artificial intelligence remind us of the very early days, eight, nine years ago, where we were investing in mobile when it wasn't quite in fashion. I think, in a mature brand like 1-800-Flowers, we're seeing that pay off disproportionately.

Thank you for that color. The largest variance in the numbers obviously came from the gourmet gifts. And you talked a little bit about the wholesale pull-forward. And you had a number of wholesale initiatives, I think, in the gourmet gifts. Can you quantify, first of all, you mentioned the growth rate, but what was the dollar amount for the pull-forward in the quarter related to the wholesale business? And did that contribute to the lower gross margin as well because of the wholesale, maybe lower margins of the wholesale business? And gross margins would have been up a little bit higher if that pull-forward didn't happen? I mean can you just give us a little color there?

The answer, Michael, is yes. And Bill will give you some color.

Yes, Michael, as we mentioned in kind of the formal remarks, about half of the growth of gourmet food and gift baskets really was attributable to the pull-forward. So, it's nearly $5 million of kind of pull-forward of wholesale revenues into the first quarter.

You really got to look at our overall, I think, year. We talk a lot about Q3 and Q4, looking at them on a combined basis because of Easter. But you really almost need to look at Q1 and Q2 in a similar fashion. Because our wholesale business is growing, a lot of that wholesale business happens for the holiday season and September and October were the key months for shipments to our wholesale customers. So, in some years, they request it early into September. In other years we've seen it later into October.

So, we did have about $5 million, so to quantify the number, about $5 million got pulled forward. That is lower-margin business so that did impact the gourmet food and gift basket overall margin. So, while our margins were down 30 basis points on a consolidated basis, they would have been up if not for the pull-forward of that revenue, as you saw the very strong margins in consumer floral and within BloomNet.

Got you. Those are my major questions. Thank you.

Thank you, Michael.

Thank you.

Dan Kurnos, The Benchmark Company.

Great, thanks. Good morning. So, we all ask the same sort of boring questions every call. So, let me start with a fun one for you guys. You've got Fannie May in Chicago. You've got Cheryl's in Ohio. Any benefit from the World Series and any way to leverage brand recognition?

Yes. Well, we'll have to take a look. First, we are very interested to see which one of our teams has to take the polar plunge because that's the bet between the teams in Chicago and the teams in Ohio; that the loser has to take a plunge in their respective lakes. So, we're looking to see that.

We are the chocolate sponsor of the Chicago Cubs so we expect to get a little bit of lift from our Cubby bars. I don't think it's anything impactful, but it's good to have and it's nice to be there. And, clearly, we were rooting for a seven-game series.

Yes. We have good brand exposure in the stadium. We have a Cubby bars that we sell there. So, it's a very good branding event for Fannie May in a market that's pretty excited about tonight's game.

Great. And then, now for the boring questions. On Harry & David, to go back to the wholesale side, can you just talk about -- I know we've talked about what Harry & David used to do historically in wholesale. And you guys talked about some success with Wolferman's and Moose Munch on the call. So, can you just help us think about how the success that you're seeing now is either addressing what used to be the historical market opportunity versus what you would view as incremental channels or add-on to what used to be that opportunity?

So, as Chris pointed out early with Harry & David, it was a company that had a decade of decline. We're pleased that in our stewardship it's seen a 1% growth in the first year where we had little influence over the operating plan. Second year is 2-plus%. We're budgeting 3-plus% this year.

On the wholesale side, it's a different story. The emphasis in the first year or so of our operating has been on the direct to the consumer side where we do have some leverageable expertise. We think that the third-party sales or wholesale opportunities are strong for us. And, right now, we're still in the mode of recapturing what had been a neglected business under prior ownership. So, we've not yet even gotten close to what they had historically been.

We do, however, feel that with the mix in product, with the Moose Munch brand, as you suggest, that we can grow over the next few years through what had been their historical levels and go a great deal higher than that. Bill, anything you'd want to add from a color perspective?

No. I mean I think, overall, we are seeing growth within Harry & David wholesale, as we are seeing with wholesale across our business. We think it's a significant opportunity for us, but a lot of it is in front of us.

Yes. And the only thing I would add to that is keep in mind as we've said previously, from the timing point of view, this is really the first season we could affect in the wholesale channel cycle because of a one-year sales cycle. And we're seeing some early benefits of that focus.

And we've invested in talent there in the wholesale side of the business. And our interactions with that team give us opportunity for excitement in terms of their plans, not only for this year where we're seeing improvement, as Bill and Chris have talked about, but real excitement for the future that we can really -- it's a long-cycle business and the bricks that they're putting in place now give us excitement in terms of what it can be, which is way beyond what it had historically been at Harry & David.

Thanks for that color. And just to follow up on that, it's all promising. Are you guys getting any pushback, though? It doesn't sound like it. But are you getting any pushback given the challenges that we're seeing at the department store level?

No, we haven't seen that. In fact, talking about long-cycle business, demand from the department stores, as they change their mix to be less dependent, I think, on soft wear, on apparel, and more focused on the things that customers want, like our gourmet gift products, I think it's actually, in the near term, quite an opportunity for us.

Great. And then, if I could just shift to Fannie May for a second. Could you just -- understanding the seasonality, if you took kind of seasonality out of the equation, are the comp sales, the same-store sales getting better sequentially and pacing better into the holiday period?

And then, on the promotional side of the ledger, marketing expense is up. I know you guys talked about it on the call. I know you guys have slimmed down the catalog and done sort of like a preview rather than a kind of the general thick booklet you used to do. I know costs are down there, but how do you feel about the promotional environment that you're going to need to put in place in terms of sustained marketing expense now versus how much of that was already spent in this quarter?

So, from a Fannie May perspective, Dan, I think, again, we're seeing early signs. And, similar to my comments on Harry & David, Q1 is very small related to Q2. But, with that said, we're seeing early signs and benefits from the operating costs that we've pulled out of the business, focus on enhanced marketing -- well, first product and merchandising, then marketing programs to generate the customers into our stores that's helping to increase these comp sales we're seeing with less promotional activity, which we're very happy to see. So, that's kind of specific to the Fannie May brand.

But, from an overall point of view, it's something we manage diligently. Clearly, as we move into the holiday season, the retail environment will become more and more promotional, but I will rest on the history of our business. We've been able to manage through that and continue to grow our gross margins while generating increased revenue cycles. So, we're pretty confident we'll be able to manage through that again.

Alright, great. Thanks for all the color, guys. Appreciate it.

Thanks, Dan.

Eric Beder, Wunderlich Securities.

Good morning. Congrats on a nice start to the year.

Thank you, Eric.

Thanks, Eric.

This $5 million shift in terms of the wholesale, now should we think -- do you consider that a potential that there might be more demand here given that they moved it forward for the holiday season? And, if there is more demand from wholesale than you budgeted, can you respond quickly to that order demand?

Bill, does it create more opportunity?

Not in this particular case, Eric. The $5 million, this is a gift basket order from, I'll say, from Sam's Club that actually shifted from October to November. It's in preparation for the holiday season. There is no real reorder on this particular item. We are encouraged with trend lines across the business, but this particular pull-forward does not present an opportunity.

So, we don't have inventory exposure there, which is the good news. The bad news is if we have good sell-throughs earlier than expected, which is a real possibility with the products being merchandised in the store earlier, we don't have the inventory to help them with reorders. So, it's a one-time thing. Good news is better sell-through opportunity; bad news is we can't replenish.

Okay. In terms of the change in your website, now that all the tabs are on one site, what are you seeing in terms of behavior from the customers who are -- are you seeing more customers use multiple brands? And are the ones that are doing that spending more money? How does the behavior of the people that are doing this? I know it's a small quarter, but I'm curious where that's going.

Yes. And, again, Eric, I think it's -- to answer that question I'd say, first off, the multi-brand website is but one of the tools that we utilize. And, within that website, I think we continue to learn how to introduce the customers that may come to the website for one brand into opportunities with the other brands and then really follow on with our marketing capability set; Celebrations rewards, Passport, our reminder programs, other just package inserts, catalog inserts; every way the go about continuing to introduce that to our customers.

So, we continue to see good, steady growth. As we said from the beginning, this is a long-term play. And we're seeing good early signs of it so we're very positive about the future there because it's trending in the right direction.

I'll just give you one quick little anecdotal story. I was in one of our Harry & David stores on Sunday, over the weekend. And we just recently introduced the Celebrations rewards programs, replacing the loyalty program that used to be in the Harry & David stores. And I was thrilled to see, as customers came up to the counter, and the team, the manager and the team, the salespeople helped the customers and they went to use their existing rewards program -- which I was thrilled. As they introduced the new program, customers were very receptive, and what I loved, also very aware of the family of brands that we have out there. So, that's just another example of how we continue to permeate all of our communication points with this multi-brand strategy.

Great. And in terms of the debt, you've done a great job of reducing the debt. It's down, I think, about $20 million year over year. And you're going to do more free cash flow this year. I'm assuming next year is somewhere around at least the $40 million you've said. What's the goal in terms of the debt? And what's the potential, if you wanted to, to do another acquisition?

As we've stated before, Eric, we're pleased with the nice increase in free cash flow that we're generating at the $40 million level this year. That gives us the opportunity to pay down debt. But the real question, I think, there is; what is our intent in terms of the excess free cash flow that we're generating every year?

And what we've said there is we want to be shareholder-friendly and, right now, the best determination of how we can do that is to continue the pace of our buyback program. In fact, our board, at the last meeting, just approved a replenishment of our buyback program back to the $25 million level. So, we had used up $12 million or $13 million and they replenished that so we're back to a $25 million opportunity there. So, we'll continue to that.

We also have our eyes on ways that we can enhance our customer experience through different products and different services. So, there will always be the M&A opportunities out there. We intend to be judicious about the use of our very clean balance sheet. We know that we have a lot of debt capacity and we think that a prudent use of debt in this environment for smart acquisitions makes sense should we find those.

So, you could expect customer-friendly in terms of buybacks. You could expect us to have a very sound and pristine balance sheet, like we do. Where we have excess free cash flow, as we are generating, we'll pay down debt, we'll make investments in our business, in our buy and build strategy, and we'll look for the appropriate acquisitions.

If you look back over the last five years or so, we more than doubled the top line through organic growth and smart M&A activities and more than doubled the bottom line. That's our plan going forward; that five-and-ten strategy of organic growth rate of 5% or so, bottom-line growth rate of 10% or so based on that organic growth rate. And when we find the opportunities for good strategic M&A activities, we'll use our very clean balance sheet to achieve that.

Great. Good luck in the holiday season.

Thank you, Eric.

Anthony Lebiedzinski, Sidoti & Company.

Good morning. Thank you for taking the questions. So, back in July, you partnered with SCI. Just wondering how that relationship is going. Is it up to your expectations? Any comments on that?

Well the SCI relationship is one we're very proud of. It's a long-term relationship that we've just begun. I wouldn't even tell you we're fully up to speed yet. But we're delighted with the results so far. We're delighted with our ability to partner with SCI. And they're operating funeral homes around the country, around the Northern hemisphere here. Just terrific partners. But we have so much more in our -- so, yes, meeting our expectations, probably exceeding them a little bit in the near term.

But our expectations for this partnership, which involves a much broader go-to-market strategy to help the breadth of our customers to express themselves and connect around those important sympathy occasions, we're at the very, very early stages of that. It goes way beyond the relationship. But the cornerstone of our efforts is our partnership with SCI.

Got it. Thanks for that color. And also, just switching gears, as far as the quarter that you just reported, you cited increased marketing spending for the upcoming holiday season. So, obviously, we still have the holiday season ahead of us. So, just if you could give us more color as to; how are you approaching marketing spending for the second fiscal quarter? Should we see more of the same as far as the growth in expenses there? Or any sort of color that you could give us, that would be very helpful.

Bill.

Anthony, I think the way, I talked about his before, is you got to look at the first half of the year in combination. So, we do sometimes incur costs and we have in preparation for the holiday season. When you cull out all the noise of the wholesale orders, basically our organic growth that we grew in the first quarter is about 4%, which was in-line with our plan and in-line with the guidance going forward. So, we reiterated guidance and we plan to spend to support that growth in the second quarter and the second half of the year.

The only other thing I would add to that, especially we move into the holiday season, which is so big for our food businesses, and a big part of our marketing strategy for our food business is catalogs. So, some of that is kind of baked in and we have to plan well in advance. As we move the food businesses to a greater percentage of that marketing spend, which takes time, being in a digital channel like the flowers brand is, it gives us a little more flexibility to kind of pull back or spend into opportunities. So, that's where we have some more flexibility as we go into the holiday season.

And we do think, Anthony, that we have sufficient dry powder to chase those opportunities that Chris just talked about, especially in the digital and broadcast world.

Got it. Okay. And then, I think, Chris, you mentioned that you were in one of the Harry & David stores. So, can you talk as far as what you're thinking about, longer term, for the retail store base for Harry & David? And, separately, also I think you guys have done some seasonal kiosks in the past. Do you expect to replicate that this year?

Overall, in the Harry & David stores, as we've been saying for a while, we think there is a good viable strategy there. And I was very happy to see, and I've been a couple of stores recently, the merchandising changes that we've made in there I think are resonating well. The one particular store I was in on Sunday told me they had a killer day on Saturday. So, I was certainly happy to see that.

And we're continuing to look at what's the right optimal merchandise mix model, but also what's the right size of store model as we go forward. So, we'll continue to work that and evaluate as we go. We're still going to do some seasonal stores. We're doing less kiosks this year than we did in last year. We found the pop-up stores worked a little bit better so that's a little bit more of the mix this year. But seasonal opportunities are things that we look to go after.

Just to point out to you, Anthony, as we talked about headwinds that this management team is charged to managing, those that are anticipated and those that are unanticipated, in the anticipated column would be we have two fewer Harry & David stores this year than we did last year. Chris just mentioned we're doing fewer kiosks this year. So, that's a several million dollar headwind that's already baked into our numbers with our 3-plus% growth forecast for Harry & David. That's overcoming those millions of dollars in revenue lost from closed stores and reduction of what was less than an optimum kiosk program that we inherited last year.

Great. Thank you very much.

Linda Bolton Weiser, B. Riley.

Yes, hi. So, one of the things you talked about in Harry & David was the opportunity to take Moose Munch into more wholesale/retail channel. Can you talk about whether you've been able to work on that for this holiday and if you have any new wholesale customers there?

Yes. Linda, it's Jim. Moose Munch is one of the success stories for the wholesale group this holiday season. The big opportunities are in front of us. It's a small brand, but take rates have been very good. They've opened up some new channels that we'll report on after the holidays, we see what success we've had there. So, interesting new third-party marketing opportunities we have for the Moose Munch brand, which we're very excited about, but it isn't going to impact the total sales number of our third-party wholesale sales in Harry & David or in Moose Munch this holiday period, but very encouraging for the long term.

Yes, and I would say, yes, Linda, Moose Munch is part of the kind of first season encouraging wholesale signs that we talked about before for the Harry & David brands, Harry & David Moose Munch and Wolferman's. And, yes, we've been able to gain both new customers, but also new maybe to Moose Munch from a cross-pollination of customers. As we look at customers that may be 1-800-Baskets we're selling into a Fannie May and introducing those customers who are existing to the Company to a new product line has worked as well.

There, you'd be referring to some of our gift basket businesses that included Moose Munch and are now in those club channels, for example.

Correct.

Okay. And can I just ask a little bit more about the BloomNet? You had mentioned that there were some sales that would be occurring in future quarters. Can you just give a little more color on what's the nature of that shift and why you're confident that you will see that in a future period?

Bill, you want to take that?

Yes, Linda, we have some wholesale customers within some of the hard goods that we sell within BloomNet and they have actually already ordered and it's just the delivery of that did not happen in Q1. It's going to happen in Q2. And we have some that actually shifted to Q3. So, it really is orders in-house that just didn't ship.

Okay. Got you. And then, finally, when we toured your facilities in Ohio you talked about how you were managing through the labor issues for the period, for the holiday. So, it sounds like you've done a good job there. Can you talk about if there's any cost increases in your other types of input costs, like some of the key raw materials like the eggs, sugar, cocoa, etc.?

I'll take the first part of that, Linda. This is Jim. And then, Bill and Chris will jump in on the second part. On the labor side, the management team is charged, as I said, managing through headwinds, known and unknown. And the known last year was that the good news is, from a macro point of view, the unemployment number is going down. The macro trends are looking good. Auto sales, we just saw, were better than expected. Housing costs are increasing better than expected. So, all the macro trends look awfully good. The consumer confidence index is still lagging that, which has a direct bearing on any of us in a consumer-facing business. So, we think that there's a lot more opportunity in front of us as the macro trends look good.

One of the macro trends we look at, and we're obviously immediately impacted by, is labor cost. So, labor markets are tightening up. Our costs are tightening up. We planned on a several million dollar increase in labor costs last year. Frankly, it wasn't enough. That's good news, in that the labor markets are firming up. And, of course, you have minimum wage increases in different markets where we do business. We obviously pay more than the minimum wage. But that puts different kinds of pressure on our costs, on our labor costs. So, we underestimated the impact last year. We thought there would be an impact. We underestimated it.

This year, I think we've done two things. We better forecast and planned for the increased labor costs and that's baked into our numbers. And the HR teams across our brands have done a terrific job of anticipating tighter labor markets and taking corrective steps to be earlier in their recruitment efforts, to be better in retaining people who came to us last year.

Keep in mind, we're 4,000 people day to day and at holiday time we jump to 12,000 people. So, it's an enormous ramp up. But they've done a really good job. And Bill, Chris, and I were just looking yesterday at our fill rates and every brand, every brand has really done a good job of fulfilling all their job openings. We still have the service platform hiring in front of us that's taking place now so we can't confirm that that's as good as we hope. We think it is, but it's still in front of us.

So, overall, the management teams, the HR teams, our hiring teams have done a terrific job of anticipating that. And, Bill, we've also anticipated trying not to hire as many people by pre-making product where we can. Maybe a little color on that?

Yes. So, two points. One, Jim, on that, we did pull forward and you saw our inventory a little bit up at the end of the fiscal year, our year end, as we started to pull forward and do production of Halloween product and fall product during the springtime with our regular workforce. This would put less pressure on the seasonal workforce, as we started to ramp for the holiday season. So, that put less pressure on it so that helped out with those fill rates that Jim was talking about.

Linda, on your other point, some of the other cost inputs, while we're locked in on contracts on cocoa and we're paying below market prices for cocoa today, cocoa is still more expensive today and we're spending more today than we did a year ago. There are other commodity costs that kind of go up and down. Actually, even oil, even though we're all benefitting from the continued low oil, the way the third-party carriers charge us back for surcharges, they've changed that around a little bit and our surcharges are higher than they were a year ago. So, there is incremental cost associated with that.

With that said, as Jim referenced with respect to the labor, we've built all this into our models and our guidance that we've provided. So, we're not expecting any surprises.

Great, thanks. And congratulations.

Thank you, Linda.

Thank you.

(Operator Instructions). Alex Fuhrman, Craig-Hallum Capital Group.

Hey, guys. Just a quick one here on Passport. It sounds like you guys are pretty happy with the customer behavior metrics. I was just trying to get a sense, I mean if this program ends up being a homerun in terms of getting people to really consistently shop across the brands and increase their total spend, if you keep acquiring customers into the program at the pace you've been doing, at what point would this really move the needle? And, obviously, you guys are building this for the long term. But, at the current growth rate of membership, I mean could this be a needle-mover in 2017 or 2018? Or is this really more of a five-, 10-year strategy?

Chris, without giving specific guidance into the upcoming years, just some color on the overall impact.

Yes. So, I mean, as I said, we're very pleased with the continued growth. And it's one of the items. Passport specific is one of the several items that we use to help drive multi-brand customers. All of those initiatives and all of those innovations are really to helping drive the results we talked about, whether it be the 1-800-Flowers growth of last quarter almost 5%, 4.2% this quarter; the Fannie May e-commerce growth we're seeing; the Cheryl's growth; even Popcorn Factory. As Jeff pointed out, we hadn't really talked about that for a while. So, we're seeing it start to permeate across the business.

With that said, it is more of a multi-year strategy. So, I don't think -- it won't be necessarily a large needle-mover this year. But we're seeing it start to impact the business so we're very hopeful going forward.

Keep in mind, just to help you, the way we think about this, Alex. Right now we get a couple of orders out of a customer a year. That's very good and the economics are great on it. But, over the course of the next several years, as these programs take root and really shape the consumers' behavior and their spending pattern, if we get one more order from a customer on the same acquisition cost, you can imagine the leverage that gives us, with the gross margins that we enjoy, in terms of the impact on our business. So, from a moonshot point of view, that's our dream and that's what we're focused on.

That's great. Thank you very much and good luck.

Thanks, Alex.

Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Chris McCann, CEO, for any closing remarks.

Thank you, Aaronson, and thank you all for joining us on the call today and for your questions. If you have any additional questions, of course please don't hesitate to contact us. I also encourage you to visit our multi-brand website and check out any of our great brands on your mobile device. And, please, start a conversation with GWYN. She will be happy to help you find the perfect gift for everyone on your holiday shopping list. Thank you. Goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.