1-800-Flowers.Com Inc (FLWS) 2017 Q2 法說會逐字稿

Good day and welcome to the 1-800-Flowers.com Incorporated FY17 second-quarter results conference call.

(Operator Instructions)

Please note this event is being recorded.

I would now like to turn the conference over to Joseph Pititto, Senior Vice President Investor Relations. Please go ahead.

Thank you. Good morning, and thank you all for joining us today to discuss 1-800-Flowers.com's financial results for our FY17 second quarter. For those of you who have not received a copy of our press release issued earlier this morning, the release can be accessed at the investor relations section of our website at 1-800-Flowers.com, or you can call Patty Altadonna at 516-237-6113 to receive a copy of the release by email.

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 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 results and uncertainties, please refer to our press release issued this morning as well as our SEC filings including the Company's annual report on Form 10-K and quarterly reports on Form 10-Q.

In addition, this morning we will discuss certain supplemental financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables accompanying the company's press release issued this morning. The Company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today's call or any recordings of today's call, the press release issued earlier today, or any of the SEC filings except as may be otherwise stated by the Company.

I will now turn the call over to Jim McCann.

Good morning, everyone. We are pleased to report another quarter of strong execution and solid financial results for our Company. As Chris and Bill will discuss in more detail, the second-quarter and the first-half results are largely in line with our plan for the year, and we continue to see significant opportunities to drive accelerated growth across all of our businesses and brands.

During the quarter and throughout the first half, we saw a continuation of the positive top and bottom line growth trends in our 1-800-Flowers brand, a reacceleration of top line growth and BloomNet to go along with their consistently strong bottom-line results, and continued e-commerce growth in our gourmet food and gift baskets brands, including Harry & David, Cheryl's, 1-800-Baskets.com, and The Popcorn Factory.

With that said, revenue growth in second quarter, specifically at Harry & David, our largest gourmet gift brand, was below our expectations. This reflected a number of factors. In particular, executional issues related to the speed at which we have been transitioning Harry & David to a digital-first marketing focus clearly not fast enough. We are moving quickly to address this area, and Chris will provide more color in his remarks in a few minutes.

Most important, we remain highly confident that the plans we have in place will enable us to tap the tremendous revenue synergies we see in Harry & David and accelerate its growth going forward.

Last quarter I shared with you some of the exciting opportunities that lay ahead for us and my view of our business from a broader perspective. I noted that we have more than doubled our top line over the past several years, and we did this through a combination of solid organic growth combined with our disciplined approach to mergers and acquisitions. We have built the unique business platform that includes our all-star lineup of gifting brands, our growing customer database with very attractive demographics, our unique operating platform, which we call [Bolt], and a strong balance sheet with growing cash and low debt.

In addition, our strong balance sheet and growing cash flows enable us to be proactive in terms of identifying, pursuing appropriate M&A opportunities, which will further accelerate our growth. With this platform in place, we are well positioned to accelerate our growth, both top and bottom line, in the second half of the current fiscal year and going forward.

Now I will turn the call over to Chris and Bill to review some of the highlights from our second quarter as well as our outlook for the second half of FY17. Chris?

Thank you, Jim. For the second quarter we achieved consolidated top and bottom line growth in what was a consumer environment characterized by uneven consumer demand throughout the holiday season.

Our year-over-year increases in revenue, gross margin EBITDA, and EPS reflect positive contributions across all three of our business segments. Our total revenue growth for the quarter, while below our expectations, was supported by good growth in our consumer floral and BloomNet segments, as well as e-commerce growth in most of our gourmet food and gift basket brands. However, this was partially offset by slower-than-anticipated growth at Harry & David, our largest brand in the gourmet food and gift baskets segment, which accounts for the majority of total revenues during the fiscal second quarter.

For the quarter, Harry & David saw modest growth in e-commerce, its largest channel, good growth in wholesale, and lower year-over-year sales at its retail channel, reflecting a combination of a planned reduction in seasonal store counts, reduction in the number of our year-round stores, and declining traffic. Based on customers' feedback, Harry & David's product offering this holiday was excellent both in terms of selection the quality, particularly its signature Royal Riviera pears, which were truly exceptional. We continue to see significant strong growth opportunities across Harry & David's product offerings: the Royal Riviera pears, to Moose Munch, to [Wolferman's], and the new Orchard Table collection that was launched during the holiday season.

We are intensely focused on accelerating Harry & David's revenue growth rate, and we have a number of initiatives in place that will help us leverage the assets, experience, and expertise we have across the enterprise. While catalog and email marketing underperforming the quarter, Harry & David saw some good results in its digital marketing efforts including display, paid social, video and affiliate programs, all of which generated year-over-year increases. Going forward we will be increasing our efforts and investments in these areas to accelerate Harry & David's transition to a more digital marketing focus where we see higher returns and increasing customer engagement.

At our floral businesses, we saw continued strong performance during the quarter. In consumer floral, 1-800-Flowers continue its trend of solid top-line growth, further extending its market-leading position and its record of consecutive quarters with increased bottom-line contribution.

We are continuing to distance ourselves from the competition in the floral gifting space through our relentless focus on enhancing customer experience, our commitment to reaching our customers and engaging with them when, where, and how it is most convenient and relevant to them, as seen in our innovative mobile and social programs, as well as our first move to position in conversational commerce, and our focus on truly original product designs developed in collaboration with our BloomNet florist design council and using input we received directly from our customers.

Examples of this range from our local artisan program, featuring exclusive local arrangements created by the incredibly talented BloomNet professionals florists around the country, to the now Flirty Feline arrangement for all of the cat people out there and our exclusive Waterford Glass Rose, all just in time for Valentine's Day.

At our BloomNet business during the quarter, we achieve solid revenue growth to go along with BloomNet's consistently strong bottom-line contribution. As we noted in our last call with you back in November, BloomNet is accelerating its revenue growth in a number of areas, including increasing order volumes, both from 1-800-Flowers and shop-to-shop florist orders, increasing product sales to our BloomNet florist and an expanding range of new customers, and a host of new digital marketing and advertising services. As we head into the second half of FY17, which is typically dominated by floral gifting occasions, we expect the positive trends we are seeing in both 1-800-Flowers and BloomNet to continue.

Combined with a number of tailwinds that we will benefit from, including better day placement of the Valentine holiday and growing everyday gifting in our gourmet food and gift basket brands, we expect to drive accelerated revenue growth in the second half and deliver strong top- and bottom-line results for the full fiscal year.

Longer term, we are excited by the opportunity we see to achieve sustainable, faster rates of growth through the expansion of our multi-brand customer strategy. In this key focus area, we are continuing to make good progress. The number of multi-brand customers is growing at a strong year-over-year rate and passport program sign-ups are growing even faster.

Most important, the behavior of these customers continues to bode well for our future growth. Multi-brand customers purchase frequency is nearly three times that of single brand customers, and it continues to increase year-over-year. Passport customers, who have a high propensity to become multi-brand, are also spending at rates approximately three times that of non-passport customers.

Retention rates, annual spending and customer satisfaction metrics are also strong and getting stronger leading to significantly enhanced lifetime customer value. And we've only scratched the surface with multi-brand customers, still representing less than 10% of our total customer base, giving us a lot of runway to accelerate growth.

Now I'd like to turn the call to Bill to cover our Q2 metrics in more detail.

Thank you, Chris. As Jim and Chris mentioned, we are pleased to have achieved positive top- and bottom-line results across all three of our business segments the second quarter. While the 1-800-Flowers and BloomNet businesses showed solid revenue gains, total revenue growth for the period was below our expectations due primarily to the slower growth at Harry & David.

We have a number of initiatives in place to address this going forward, including speeding up the pace at which we are integrating Harry & David's marketing programs so that they can better leverage the digital expertise and experience we have across the enterprise. We have also accelerated our initiatives in wholesale to build on the solid growth we saw in the first half and expand the list of customers in this channel for Harry & David, Moose Munch, and Wolferman's products with an eye towards growing both everyday gifting and self consumption.

We are confident that these efforts combined with the promising, albeit early-stage success we are seeing in increasing everyday gifting across all of our gourmet food and gift basket brands for birthdays, sympathy, new baby, and other non-holiday occasions, will enable us to accelerate revenue growth over time.

The slower growth in the second quarter, our largest revenue period, offset the strong growth we achieved in the fiscal first quarter, which is our smallest revenue period. As you may recall, part of the strong first-quarter growth was related to timing with the pull forward of some wholesale orders at the request of our customers. As a result, our revenue growth for the first half of FY17 was 2.3%.

Looking at the second half of the fiscal year, we expect our growth rate will accelerate to more than double that of the first half, driven by the positive trends in our floral businesses combined with the tailwinds of favorable holiday date placement and growing everyday gifting across our platform.

Now breaking down our second quarter results. In terms of revenues, total consolidated revenues grew 1.1% to $554.6 million compared with $548.4 million in the prior year period. This reflects growth of 0.06% in our gourmet food and gift baskets segment, which represents nearly 80% of total revenues for the quarter combined with 3.1% and 4.2% growth in the consumer floral and BloomNet segments respectively.

Second, gross margin for the quarter improved 20 basis points to 46.3% on a consolidated basis. Gross margin benefited from increases in consumer floral and BloomNet segment of 90 basis points and 310 basis points respectively. Gross margin in our gourmet food and gift baskets segment was consistent with the prior year at 46.7%. This reflects continuing benefits from logistics and operational improvements, which more than offset the impact of what is always a highly promotional holiday season.

Operating expenses, excluding D&A, was 27.3% of total revenues, unchanged compared with the prior year period. This reflects the cost benefits we continue to get from integration of Harry & David combined with other ongoing cost reduction programs across the enterprise, which has enabled us to absorb some significant cost increases in seasonal labor, insurance, and commodity cost. The combination of these factors enabled us to deliver EBITDA for the quarter of $107.4 million, up 2.5% or $2.6 million compared with the prior year period. As previously noted, this reflects positive contributions from all three of our business segments in the quarter.

Our GAAP EPS was $0.93 compared with $0.92 in the prior year period.

Category results in our gourmet food and gift baskets segment, revenues increased $2.6 million or 0.6% to $436.9 million compared with $434.3 million in the prior year period. This reflects solid growth in our Cheryl's, 1-800-Baskets, The Popcorn Factory, and Fannie May brands, which was largely offset by the aforementioned slower growth at Harry & David.

Also as discussed in our first-quarter conference call, we pulled forward some wholesale revenues in the first quarter due to customer requests. So revenue growth for the first half of FY17, which eliminates the timing of wholesale shipments between the quarters, was 2.2% for this segment.

Gross margin for the quarter was unchanged compared with prior year at 46.7%. And segment contribution margin increased $760,000, or approximately 1%, to $104.6 million compared with $103.9 million in the prior year period.

In consumer floral, revenues increased 3.1% to $97.8 million compared with $94.8 million in the prior year period. Gross profit margin for the quarter increased 90 basis points to 41.2% compared with 40.3% in the prior year period, reflecting our focus on efficient promotional marketing programs, logistics savings, and strong customer satisfaction metrics. As a result, segment contribution margin increased year-over-year for the 10th consecutive quarter up 11.9% to $13.1 million compared with $11.7 million in the prior year period.

As Chris mentioned, 1-800-Flowers has 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 fall holidays.

At BloomNet, revenues for the quarter increased 4.2% to $20.5 million compared with $19.7 million in the prior year period. BloomNet's revenue growth is benefiting from a combination of increased order volumes and an expanded offering of digital marketing and advertising programs. We expect this to continue and build during the second half of the fiscal year.

Gross margin for the quarter increased 310 basis points to 60% when compared with 56.9% in the prior year period, reflecting strong product mix. Segment contribution margin increased 11.3% to $8.2 million compared with $7.4 million in the prior year period.

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

For the fiscal second quarter, corporate expense, including stock-based compensation, was $20.2 million compared with $19.8 million in the prior year period. This increase reflects increased medical insurance cost for the quarter.

Turning to the balance sheet, at the end of the second quarter our cash and investment position was $114 million. Our term debt balance net of deferred financing costs was $111 million, and we had zero borrowings outstanding on our working capital line within our revolving credit facility. It should be noted back in December we amended our credit facility, extending its term out to 2021 at favorable rates and terms.

Finally, inventory of approximately $93.4 million was down several million dollars compared with a year ago and within management's expectations.

Regarding guidance, based on our expectation to accelerate revenue growth in the second half of FY17, combined with the results of the first half of the year, we are revising our full-year revenue growth guidance to a range of 3% to 4% compared with the revenues of $1.17 billion in the prior year. As a reminder, revenues for the second half of the fiscal year will reflect a shift of the Easter holiday into the fourth quarter compared with the prior year period when it fell in our fiscal third quarter.

In terms of bottom-line metrics, we are reiterating our guidance we provided at the beginning of the current fiscal year, which calls for EBITDA growth in the range of 8% to 10% compared with adjusted EBITDA of $85.8 million reported for FY16 and EPS growth in the range of 5% to 10% compared with adjusted EPS of $0.43 reported in FY16. We're also reiterating our expectation for free cash flow to be approximately $40 million for the full year compared with $24 million in FY16.

I'll now turn the call back to Chris.

To sum up, we feel extremely well-positioned as we enter the second half of the fiscal year. As we've discussed, the first half of the year with largely on track with our full-year plan. The back half of the year is driven by our consumer floral and BloomNet businesses, both of which have strong momentum.

We have the incremental benefit of better timing for both Valentine's Day and somewhat for Easter. We have implemented changes to drive digital marketing in everyday purchasing at Harry & David, and we are seeing traction in our multi-brand customer initiatives. For these reasons we remain highly confident that we will accelerate revenue growth in the back half and achieve the bottom-line goals that we previously laid out for you for the year.

Looking beyond FY17, we believe the future is even brighter based on the combination of our industry-leading multi-brand initiatives, the strength of our growing loyalty programs, our expanding leadership in the floral category, and the enormous opportunity we have in the everyday food gifting. These factors give us confidence that we can consistently drive organic revenue growth at a mid single-digit rate while driving our bottom-line results at double that pace. We are very pleased with the progress which we have made, and we are even more excited about the future.

With that, let me turn the call over to our operator Steven, so we can take any questions that you might have. Steven?

Thank you

(Operator Instructions)

Jeff Stein, Northcoast Research

Good morning, guys. Couple questions and maybe I'll start with a comment. One of the things I've noticed about your email marketing program, and I don't know if this shows up with your customers who do receive your email, but every single day I receive an email from every single one of your brands. And it would seem to me that at some point perhaps you might begin to see customers either unsubscribe or send your emails into their spam folders. And I'm wondering could this potentially be one of the reasons why your email marketing is not as effective as it has been in the past?

Then I've got a couple follow-up questions.

Okay, Jeff. This is Chris. I will take that one. So I think your observation is good, and I think that has (inaudible) definitely in the peak of the holiday season you're seeing lots of emails from all of our brands.

So a couple different things. Overall, email marketing in the Company has done pretty well except at Harry & David. So just to set that stage. As we've learned over the years, I think the 1-800-Flowers brand has been out on the forefront of this as they ran into some challenges with email marketing two or so years ago for this reason: hitting the fire a little bit too much, a little bit too hard, not changing the creativity.

We've migrated that where the Flowers brand has decreased its frequency of email and also, I think, increased its engagement metrics through a more creative approach to the consumer. So we've begun taking those learnings and driving them across the other brands.

Harry & David is probably the one that we've gotten to the latest. Again, if we look at -- I spent a lot of time on Harry & David email myself during the holiday season, and that's an area where we have to be able to figure out the optimal frequency and the optimal creative messaging. So that's in the works because we do worry about email file fatigue.

There are other things that we are doing as well as constant test that we have run. Some are starting to get some data back already from the holiday, and we will be looking at it over the next coming weeks actually. Taking similar segments of our customer file and doing email frequency tests, doing tests with them; some get catalogs, some don't get catalogs. So those tests at the Harry & David file really were probably the most penetrated this holiday season on that brand, and we'll be applying those learnings going forward.

In our other brands we continue to really monitor customer behavior to make sure we are not over-saturating them.

So it sounds to me, Chris, like your other brands are doing okay with email. Is there something about the Harry & David customer that makes them different? And in line with that, it seems that you're just not quite getting the traction from their inclusion in the multi-brand portal, which obviously they weren't on the portal last year. They were this year.

Is there something about the way you have designed the portal that perhaps customers are just not picking up on the fact that Harry & David is a member of your gifting family?

So I don't think it's anything as far as the customers being very much different. Again, bi-brand has always slight differences in our customer demographics. And Harry & David would be one of those brands where the consumer demographic averages on the higher side.

So I don't think there's anything really particular to the consumer as much, but we do have to recognize different factors. One of the things I think this holiday we saw is that -- keep in mind we brought the Harry & David website onto the new platform in April. Harry & David is a very seasonal business. So this was the first holiday season that those customers were really exposed to that website.

So just being exposed to change, I think we struggled with that a little bit during the holiday. Some of our metrics started off slow but really picked up strong. As far as multi-recipient orders, as an example, started off slow but finished strong.

So we think there was a little bit of an adjustment phase, not that the customer is any different, but if we go back to our other brands we saw the same thing. The big holiday season they come to a new environment, it's a little bit different, it takes some adjustment.

With that said, again, we are always trying to tailor our messaging to the appropriate demographic of each brand's customer.

Okay. How are you intending to deal with the catalog issue with Harry & David? My understanding is I think you send out something like 50 million catalogs a year. Catalog fatigue I would think has also got to be an issue. We've seen one of our other companies, Elle Brands, just completely eliminate its Victoria's Secret catalog and go strictly to digital.

So how do you see the evolution of your marketing playing out over the next 12 months with Harry & David with respect to its catalog marketing?

I think similar approach to what we've done with our other brands that we've acquired in the food gifting industry that have been dominantly catalog driven, i.e., Cheryl's is one of the great examples there. It takes time. So I want to set the stage there.

I think if we try and force consumer behavior too rapidly, we can endanger the customer relationship there. So we need to be careful.

What we want to do and what we saw is, we saw some good early signs of our digital marketing during the holiday season with the Harry & David brand, whether that be in display, paid socials and search marketing, affiliate marketing channels did well especially as we moved into November and December. And then we break down those channels and look and say which ones are producing the higher percentage of new customers, and those are the ones that we want to invest in the most, those channels that produce the highest percentage of new customers, so that we are adding new digital-focused customers to our file.

And then we're constantly going to be doing testing, like I mentioned, where we are taking different cells, giving them all-digital marketing, giving a hold-out group, digital marketing plus the catalog, and seeing how, over time we can moderate that balance. I don't think you'll see us shifting away from catalog anytime soon. It is too high risk in my mind. But we are working to diligently find the right balance between catalog and digital.

Okay and just one final question if I may, and this one is for Bill. My understanding is in Q3 you should pick up about $8 million of revenues for Valentine's Day due to the more favorable date placements, but at the same time, you are going to lose some revenue from the later Easter this year. So when you net it all out, how do you see the revenue growth if you are looking at mid-single-digit revenue growth for the back half of the year? How do you see it stacking up between Q3 and Q4? Is it going to be all Q4 where we should see the revenue growth, or will there be some shift between quarters?

Jeff, both quarters will grow, but the higher growth will be in Q4. Easter is about a $12 million or $13 million holiday on the e-commerce and retail channels, which is what gets impacted, and those are our higher-margin channels. So you will see more revenues going out of Q3 into Q4 than when we pick up as a result of the Valentine's Day date placements. And your estimate of Valentine's Day is in line with what our estimates are for the pick-up for Valentine's Day.

Got it. Thank you, guys. Thank you.

Dan Kurnos, The Benchmark Company

Thank you, good morning. Let me just follow up on Jeff's questions on H&D with just sort of a different vein here. My understanding is you guys shifted to more of a promo-catalog-type event and that was deemed received favorably. I don't know how aggressive you were during the holiday season with more of the traditional catalogs one you got to the ordering season, so I'd like to get a little bit of insight there.

And then, on the digital front, obviously having a background in e-comm and advertising, there is certainly a risk that you guys run into, more of a negative ROI situation understanding versus print catalog probably not, but just depending on which paid channels to push. I'm curious now since your messaging had some issues, Chris, that you were implying, as you push more into the digital arena for Harry & David, just how you think about when you get aggressive in those paid channels, how you think about ROI, margin considerations, and whether or not you think the Harry & David brand can actually resonate with the digital-first consumer.

Dan, this is Jim. I will start to clear up one point there, and I would like Chris to get to the meat of your question. One of the things that we delayed doing as part of the integration was integrating the Digital Marketing Teams. There is an awful lot of resident talent here in the Company that existed before the acquisition of Harry & David.

We let that Digital Team operate autonomously throughout this holiday period to cause the least amount of disruption. That was probably and certainly, I would, say a mistake. So one of the things we talk about in terms of our new digital effort is only to take the Digital Team that's at Harry & David, meld them in with the enterprise-wide Digital Team and that they can benefit from that institutional knowledge we've developed and our strategies going forward.

So then I'll ask Chris to get to the meat of your question.

I'll say on the digital market, with that we have the ability really of one team (inaudible) ad-spend metrically used their digital channels as well as -- and constantly looking at which ones work for each brand. And if we see a vein of gold in one brand, we start to try it in the other one. And we can do that faster than we were able to do it just trying to share that knowledge. So here we of move to a model where leveraging expertise, leveraging tool sets more than we were prior to the holiday change.

But then I think we actually see the opposite. We see less risk in the digital channels and the opportunity to manage that because we can really react real-time. So if we see a metric start to move out of parameters for any reason, we can pull back on it and shift the spend there. In catalog we cannot do that. We really get locked into certain spends, and we have to ride it throughout the holiday season.

So the flexibility digital channels give us, the visibility we have across all of our brands, the expertise that we have, and, like I say, when we look at the return on ad-spend, we also couple that with the return on customer. So in certain channels where we're getting a higher percentage of new customers coming in through that channel, we will ramp up the [row ads] on that channel because we know we're benefiting on a cost per customer. So we really think it gives us better spending controls and flexibility to drive revenue as we move away from catalog.

The first part, I'm not really too sure on the question on the comment on the promotional type catalogs. I think really we went into this holiday season from a catalog perspective looking to decrease our promotional activities. So while there is always offers out there, we were attempting to -- I don't think we were not as successful as we wanted to be in decreasing the promotional activity around catalogs, but that was the intent.

One final point, Chris mentioned earlier that we were seeing success of the Harry & David customer on a number of the digital offerings that we had in the different channels that we had, so the question really is the timing and the speed at which we can migrate that customer over to the digital. We can't do it too fast, but maybe we were too conservative this past year.

Again to one of our points of our objectives going forward now, as we've been building the capability around moving our food brands more and more in the forefront of everyday getting, that has to come through digital marketing channels. We do not think you can cost-effectively do that in a catalog model; (inaudible) digital capabilities that will help drive that.

So two points of clarification. Just one, by promotional catalog I meant a lighter version of the heavy, multi-page catalog as sort of a cost reduction effort. So that's more what I was meaning, and you sent it out a little bit earlier this year than more around ordering time. That is all I meant on the promo side.

And then just on the digital side, don't get me wrong, I think 100% agree that moving to digital is the right strategy, but I think the questions that a lot of investors are having right now is, as you guys do this, and you look at the multi-branded portal and integrate all of this, it is about learnings and analytics on the backend.

I think everyone agrees that you can get stickier users by going paid-channel, but I guess maybe, Chris or Jim, if you have more color just on any metrics you can provide on what you are seeing from the channels you are pressing, how confident you are that you can get better lifetime customer value out of pushing those channels. Those are the things that I think would give people more confidence that the shift in strategy, while granted much more flexible, is going to serve you better at least in the immediate term for a revenue acceleration.

I think we are in agreement, Dan. This is Jim. One comment before Bill and Chris add more to your question for color there is that one of the benefits that we've already seen and we point to in terms of the advantages of multi-branded platform is going to show up first in the smaller brands, just because of the size comparisons. So you saw renewed growth for the first time in a long time in The Popcorn Factory. You saw renewed growth in e-commerce in Fannie May. You saw accelerated growth in e-commerce in 1-800-Baskets.

So the smaller brands, Wolferman's for example, all saw accelerated e-commerce growth, and I would argue that that's primarily due to their exposure on the multi-branded platform to the customers that are coming in disproportionately this quarter from Harry & David. So Harry & David saw 1% growth, and we saw overall for the half 3% growth for the category. I would say a good part of that growth, I would guess, Bill and Chris this is a question to you, too, I would guess we would assign a good portion of that growth in the smaller brands to their exposure to the Harry & David customer and the 1-800-Flowers customer seeing them as a result of the exposure opportunity they get on the multi-branded platform.

Clearly as a multi-branded platform, one of the great benefits that you first get is simply brand awareness. And as we moved the Harry & David brand onto the portal back in April and this being its first big holiday season, all of those Harry & David customers were now exposed to this family of brands for the first time, and that creates trial of those other brands. So we're seeing that taking place.

That, as well as other marketing capabilities, and I would say, Dan, this moves more outside of external channels but more into our website, our ability to increase the growth in multi-brand customers through our different cross-merchandising programs increased the sign-ups into our loyalty programs like Passport is showing us good capabilities in that digital channel.

And again, as I reference, what we do is we look at each of the different channels from, and I don't want to breakout for competitive reasons which ones we're seeing higher customer acquisition, new customer rates versus existing customer rates; but those are the ones where we are placing our ad dollars. And again, we're looking at that brand-by-brand to see if there are any anomalies to move that.

So I think we're in a good position as we've demonstrated throughout the migration from the 1-800-Flowers to the other food brands and the expertise in digital marketing can now apply that to Harry & David as well.

And Bill, is it the case, too, that we could point to that the fact that we were able to, in spite of the built-in headwinds that a Company our size is going to face, let's call it $30 million, $35 million worth of natural headwinds in labor and other related cost. The fact that we were able to absorb those, meet those, and even though we didn't have the sales performance we wanted at Harry & David, we saw growth but not the growth we wanted, we were still able to come quite close on our bottom-line projections. That has to be the result of a cost-effective customer acquisition of the smaller brands as a result of the multi-branded portal and our ability to manage those built-in headwinds of expenses.

Focus on our operating costs and marketing efficiencies is clearly something that -- marketing spend is a big piece of our operating expenses, so we are continuing to look for how we can drive better marketing efficiency, and the multi-branded portal allows us to do that, which allows us to offset some of the headwinds that every company has with regard to rising costs.

I don't think anyone is ever taken issue with your solid execution on the cost side. Last one and I will step away. I've taken enough time here. Just on Q1, calendar Q1 fiscal Q3, it sounds like from what we've heard from FTD publicly and from speaking with them that they just, given the transition period they are in right now, they haven't had a time to really get more aggressive on Valentine's Day spend. So I don't know if you're seeing that in the market place or if you can comment on that, because if they're not, then it sounds like you should see more share gains for the near term. Thank you.

It is too early to say if we are seeing any the impact of that for the Valentine's Day holiday period. We are seeing them active in advertising for the holiday period. I happened to see a television spot this morning, as a matter of fact.

But I think our concern is making sure we're well-positioned, our inventory is well-positioned, and our timing of marketing programs we think is well-positioned to take advantage of this day shift. So as we move into the holiday, that's our focus, and I think we are well-positioned to execute.

All right. Thank you, guys.

Thank you.

Eric Beder, Wunderlich

Good morning. Could you talk a little bit about the Harry & David stores, what we should be expecting from those? You talked in your press release about how that was a drag. Where is that going?

Eric, this is Jim. I'll take the first crack at it, and you follow up in any way appropriate. The Harry & David had a multi-channel strategy as we did as a Company when we acquired them. The least important aspect of that for us was the retail channel. They had melted back from 150, 160 stores to around 50 when the acquisition closed a couple of years ago.

This year we said that the headwind on the top line from retail, there was. We closed a couple year-round stores, we cut back dramatically on the seasonal store program, and the overall traffic, while the AOB was up, the overall traffic was down. So there was a headwind from retail in general.

What our plan going forward is, we just changed leadership at the retail level. We think there is some interesting opportunities there. We will continue to pass stores where appropriate, pardon the pun on the paring, we will continue to cut back on stores where appropriate. Our seasonal store campaign is a fraction of the size that it used to be.

So that headwind was substantially absorbed in the fourth quarter on a comparison basis. We think that some of the stores are doing very, very well. We'll look to see if we can cross pollinate those efforts in the stores that are doing well and the others, but retail is not an important growth focus for us going forward.

And we have had successes in improving stores. So there were stores that were in the loss column that are now in the profit column, and we continue to drive towards that.

Jim mentioned some of the management changes that we've made. To really put a better focus on the in-store merchandising, the in-store marketing, the sampling programs, one of the things we did this holiday season was introduced the Orchard Table product line in several stores through a nice sampling program; very well received by the customers. So we're focusing more and more on the experience in the store, which is helping to put all the stores on an improvement track.

So if you look at the stores primarily now as an option holder for us, if there's something there that really warrants our investment in growth, we will. We have done the paring on it of the expenses, and we have a platform there that gives us good market exposure in communities.

But certainly there's no plans to grow that unless, as Chris said, we found some vein of opportunity there that keenly piqued our interest. But we have essentially taken the bad performing stores out of the system, and so we are at a pretty good, solid place right now.

Great and when you look at the wholesale opportunities for Harry & David, last year you really could affect that, this year you did. What were the learnings and where do you want the wholesale opportunities to go?

I think we got good learnings last year. We've been able to put the wholesale business onto a growth track. So we're very happy with that.

We just recently last week had the Specialty Food Show in San Francisco where we got to introduce a number of our new product lines: some redesigns, some new products from Harry & David, and especially our Moose Munch product line, which we have begun some rebranding of it, which was very, very well received at the Specialty Food Show.

Also, for the first time displayed at the Specialty Food Show was the Wolferman's product line, which also got some good early indication of interest there. So based on the success we've had so far in putting onto a growth track, the changes of product development, which as you know take some time, we first really introduced just last week or two weeks ago at the Specialty Food Show and the reception we had, we think we have Harry & David wholesale business in a good position.

Great. And last question, in terms of -- you guys did a fantastic job with the inventories. What should we be thinking about going forward in terms of your ability to continue to have inventories grow at less than the Company is growing?

That's the plan, Bill, right?

We committed to everybody on this call that we're going to take inventories down this year. And that is the plan. We are on our plan.

There are times at the end of the fiscal year to take advantage of building some inventory early to lessen the burden of the seasonal workforce. If we have those opportunities, we will take them. We did that this past year, and we will probably take advantage of that again this year. But overall, we're going to continue to drive our inventories down.

So sales are up. Inventories are down. We expect that trend to continue for some time. Proportionately

All right. Good luck with the Valentine's Day season.

Thank you.

Anthony Lebiedzinski, Sidoti & Company

Good morning, and thank you for taking the question. So take a step back and look at the quarter, obviously there's a lot of noise involved with election and post-election and everything. So just wondering if you could comment maybe give us a sense as how the monthly trends were on a year-over-year basis. I'm not sure how specific you want to get, but if you could give us some color on that, that would be very good.

I would say it's hard to give monthly trends necessarily. What we did see, and it's my comment early on, we saw an uneven holiday. So I think as we ran up to the election, we saw some pullback as to consumers just distracted. I think that was expected and seen by many different retailers.

Following the election, a little bit of a boost, quite frankly not as strong as we expected. Then we ran into Thanksgiving/Cyber Monday where I've spoken to many people in the industry, where it was a strong weekend and we don't necessarily participate in that weekend as much as other major (inaudible) prime retailers, quite more of a secondary gift coming out of that. But the consumer then seemed to take a little bit of a dip coming out of the Cyber Monday promotional activities. Like everybody took a breath, stepped back, and said okay, when is the next round of discounts coming?

And then it started to rise, and it started to rise and rose strong right into that third and fourth week of the holiday. The question always then, as we experienced in the case of Harry & David, not enough time then to make up for that earlier lull that we experienced in the beginning of December.

So it was a little choppy. And so it's hard to say a monthly trend, but that's how we saw it come out in an uneven character.

This is consistent with what we've seen now with the contentious elections we have had each of the last four years. It has an impact, and we catch up at the end, but you sort of run out of days. Overall though, we're pretty buoyant about where we are. Employment is up. Payroll is up. Interest rates are low. Housing prices are rising. So hard-working, happy consumers are good for us.

Thank you for that color. And also just wondering about the Fannie May segment. Could you perhaps give us a sense of how the same-store sales were at the Fannie May stores?

Fannie May was seeing good steady improvement in trends, both from a cost-control point of view and in same-store sales. And same-store sales for Q2 did not get into the positive range but certainly a better trend than we had last year. And we have seen that trend now continue for a good six months. Wholesale has recovered even stronger than the retail environment, so we saw good results in the wholesale channel for Fannie May as well.

Got it. Okay. And then, your tax rate was a bit lower than what we had expected. I think you had originally said at the beginning of the year 35%. Where do you think that will -- do you still think it will end up a 35% or perhaps lower?

What you see for the year-to-date numbers should carry through for the full year. We get the benefit of some research and development credits and some what they call WOTC credits, which are work credits. And as we continue to evaluate those, we take advantage of those. So we're able to get our effective tax rate lower than what we had originally guided. A little higher than a year ago, though, if you look.

Right.

And for the year?

33.5% rate.

Okay that's helpful. Thank you.

Thank you.

Linda Bolton Weiser, B. Riley

Hello. So you've done really well in the BloomNet segment, both on the revenue and in the profitability. Can you give us some idea as to what is the potential there? It is a little hard to compare your margins to FTD's because you include different expense items, but is a 40% contribution margin positive someday, or do you expect that to slow down? Or can you continue that pace of a percentage point a year of margin expansion?

We're pretty happy with BloomNet, the way it's been performing, its growth rate that we have going right now. It is good to see that growth come back. As you know, we stalled a little bit on the growth.

And the growth is always going to be a mixture of different products and services that will affect, A, first and foremost the contribution margin depending on how that mix comes in, if we're selling some marketing services, for example, that have a higher margin that will go up. But if we get strong success, which we are having now, on the product side of the business into Flowers or into other retailers that we are selling into, that will come with a lower gross margin and less impact to contribution margin.

We are very, very pleased with that contribution margin being in the range that it is in, in that low 30% range, which is higher than our competitors to the best of our knowledge. So we're very comfortable with that, and our focus is growing contribution dollars in that business.

Thank you.

Thank you.

(Operator Instructions)

Alex Fuhrman, Craig Hallum Capital Group.

Thanks for taking my question. Just wanted to drill down a little bit more on the revenue guidance for this year. It seems like generally speaking, you guys have always talked about the food business growing a little bit faster than the floral business over time. I am wondering here with Harry & David growing a little bit less than expected here in the second quarter combined with the favorable date placement of Valentine's Day, is it likely that this year we're going to see the floral business grow faster than the food business just given those couple of things that have already happen this year?

I think so. I will ask Bill to give a little bit more color on that, but yes, I think that's the case, especially -- again, Harry & David grew slower than we expected. We look at the second half of the year, consumer floral, BloomNet very well-positioned with the momentum that we have going there, again the timing of the holidays, Valentine's Day, Easter that we covered already.

We don't have some of the headwinds this next quarter that we had last quarter. For example, the Harry & David retail planned reduction in seasonal stores and a couple of core stores. We are seeing traction in our multi-brand initiatives that I think will benefit in floral in the second half of the year just because floral occasions pop up in the second half of the year.

Just to go through the seasonality, we are in Q2 nearly 80% of the revenues are [GFGB]. Second half of the year, about 65% of the revenues are coming from the floral businesses, a mixture of largely consumer floral and then maybe 10% or so from BloomNet. And with the tailwind that we have in the second half of the year with the date placement of Valentine's Day, the momentum that the floral businesses have, this will be a year where we will see the floral side have a higher growth rate than the GFGB side.

Easter being later also impacts the benefit on the floral business. When Easter is early in the cycle, like it will be in 2018, it sort of sneaks up on people. When it is later in the cycle, especially with a late Mother's Day, it's beneficial for us.

Great. That's really helpful. Thank you.

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

So thank you all for joining us on the call today and for your questions. If you have any additional questions, please don't hesitate to contact us. And certainly as a reminder, Valentine's Day is just around the corner, and I encourage you to visit our multi-branded website, check us out on your mobile device, or through any of our stores or social channels to find the perfect gift for all, and I do stress all, of the Valentines in your life. Thank you.

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