1-800-Flowers.Com Inc (FLWS) 2018 Q1 法說會逐字稿

Good day, and welcome to the 1-800-FLOWERS.COM, Inc. 2018 First Quarter Results Conference Call. All participants will be in a listen-only mode. (Operator Instructions) Please note this event is being recorded. I would now like to turn the conference over to Joseph Pititto, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Nicole. Good morning, and thank you all for joining us today to discuss 1-800-FLOWERS.COM, Inc.'s financial results for our fiscal 2018 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 corporate website at 1-800-FLOWERS, Inc.com (sic) [1-800-FLOWERS.COM, Inc.]

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 Chris McCann, CEO; and Bill Shea, CFO.

Before we begin, I need to remind everyone that some 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 risks and uncertainties, please refer to our press release issued this morning as well as our SEC filings including the company's annual report on Form 10-K and quarterly reports on Form 10-Q.

In addition, this morning, we will discuss certain supplemental financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliations of these non-GAAP financial measures to the most direct comparable GAAP measures can be found in the tables accompanying the company's press release issued this morning.

The company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today's call, any recording of today's call, the press release issued earlier today, or in any of its SEC filings except as may be otherwise stated by the company.

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

Good morning, everyone. We are pleased to report that fiscal 2017 (sic) [2018] is off to a good start. During the first quarter, we saw a continuation of several positive trends in our business. In particular, we had solid growth in our gourmet food and gift basket segment, which bodes well for the upcoming holiday season. Growth in this segment was led by Harry & David, which was up more than 5% for the quarter. Harry & David is benefiting from the initiatives we told you we would be putting in place back in January. These include the consolidation of digital marketing under our enterprise marketing team, which includes an increase in marketing programs in display, video, social and mobile.

We also made significant improvements to the navigational flow for Harry & David's important gift list functionality. This is historically one of Harry & David's best marketing vehicles. As we mentioned last year, customers were confused by the change in navigation when we first moved gift list onto our multi-brand website. This has been corrected and improved and customer response has been very positive since early September when gift list use kicked in for this year's holiday season.

In addition, Harry & David and frankly all of our gourmet food brands are benefiting from an increased focus on everyday gifting occasions. Here we are leveraging the core strength of the 1-800-FLOWERS brand as an everyday gifting destination. As a result, our gourmet food brands are seeing strong increases in sales for such occasions as birthdays, sympathy, new baby, thank you, and others.

We are also seeing solid growth in our wholesale businesses for gift baskets and other gourmet gifts. These positive trends position us well for the upcoming holiday season.

In our floral businesses, during the quarter the 1-800-FLOWERS brand grew revenues approximately 2%, despite the impact of Hurricanes Harvey and Irma, which disrupted Texas and Florida, two of our top markets. Lower category contribution in this segment reflected the impact of the hurricanes as well as increased investments we made during the first quarter in technology, analytics, and research. These investments included increased use of personalized messaging and targeting to drive Celebrations Passport enrollments and Celebrations Rewards engagement and testing of some new digital marketing strategies in search, video, display, some other areas, all being done prior to heading into the holiday season. These are the kind of investments that have historically kept the 1-800-FLOWERS brand well ahead of the competition and we expect the results of these tests will help us enhance our marketing return on investment across the enterprise going forward.

As a result, we are confident that the 1-800-FLOWERS brand will continue to expand its market-leading position and deliver solid top and bottom line growth for the full fiscal year.

In BloomNet, seasonally softer sales were further impacted by the hurricanes in Texas, Florida, and Puerto Rico. In response to the storms, we made the decision to waive all florist fees and to provide financial aid and other assistance to our BloomNet florists in the affected areas. We are confident that BloomNet is well positioned to recapture the lost revenue and achieve top and bottom line growth in fiscal '18.

Overall, as we move into the key holiday season, our outlook is buoyed by the positive trends we are seeing, particularly Harry & David's accelerating growth. As a result, we are confident that we will deliver solid top and bottom line growth in the current fiscal second quarter and for the full year.

Now I'd like to turn the call over to Bill to cover the Q1 metrics in more detail. Bill?

Thank you, Chris. As we indicated in this morning's press release, to provide better disclosure and transparency, we are presenting our results for the quarter on both a reported basis and adjusted for the sale of Fannie May Confections brand business, which closed back in May. To quantify the adjustment, for the first quarter of last year Fannie May contributed $11.2 million in revenues, generated a contribution margin loss of $3.2 million, represented approximately $400,000 in corporate expenses and $800,000 in depreciation and generated a loss of $0.04 per share. Our comparable results are adjusted where appropriate for these amounts.

In addition, the first quarter of this year was somewhat impacted by the hurricanes that hit Texas and Florida. The hurricanes primarily impacted our floral businesses as floral shops in the affected areas were closed and third-party shippers such as Fed Ex were also unable to make deliveries. As a result, we shut off order taking for these zip codes and waived all florist fees in those areas while providing financial and other assistance to local florist communities. In total, the estimated impact of the hurricanes during the quarter was approximately $1.1 million in lost or waived revenues and a $600,000 impact to EBITDA.

Breaking down our first quarter, first in terms of revenues, total consolidated revenues were $157.3 million compared with reported revenues of $165.8 million in the prior-year period. On a comparable basis, adjusted for the Fannie May sale, revenues grew 1.8% compared with adjusted prior-year revenues of $154.6 million. Growth in the quarter was driven primarily by our gourmet food and gift basket segment, which increased 4.4% on a comparable basis. This combined with revenue growth of 1.9% in consumer floral segment more than offset lower BloomNet revenues, which were down 5.7% for the quarter. Consolidated gross profit margin for the quarter was 42.8% compared with 43% in the prior-year period.

Operating expenses as a percent of total revenues was 55.2%, representing a 180 basis point improvement compared with 57% in the prior-year period. This primarily reflects the operating costs associated with Fannie May included in the prior-year period results. Adjusted for the sale of Fannie May, comparable operating expenses still improved 70 basis points. The combination of these factors resulted in adjusted EBITDA loss for the first quarter of $10.1 million compared with an adjusted EBITDA loss of $13.1 million in the prior-year period. On a comparable basis, the prior-year adjusted EBITDA loss was $9.5 million. The increased loss in this year's first quarter on a comparable basis reflects the impact of the hurricanes during the quarter.

Net loss for the period was $13.2 million or $0.20 per share compared with a net loss of $15.8 million or $0.24 per share in the prior-year period. On a comparable basis, the net loss in the prior-year period was $12.9 million or $0.20 per share.

Turning to category results. In our gourmet food and gift basket segment, revenues for the quarter were $61 million compared with reported revenues of $69.8 million in the prior-year period. On a comparable basis, revenues for the quarter increased 4.4% compared with $58.4 million in the prior-year period. Revenue growth was driven primarily by our Harry & David, which increased more than 5% during the quarter, combined with solid growth in our 1-800-BASKETS and Cheryl's brands.

Gross profit margin was 41.2% for the period, unchanged with the prior year. On a comparable basis, gross profit margin declined 30 basis points for the quarter compared with 41.5% in the prior-year period. As we mentioned in our August call, we expect gross profit margin in this segment to increase for the full fiscal year based upon initiatives we have underway in our manufacturing, warehousing, and distribution operations.

Contribution margin loss for the quarter was $5 million compared with a loss of $9.3 million in the prior-year period. And on a comparable basis, contribution margin loss for the quarter improved to 18.3% compared with a loss of $6.1 million in the prior-year period.

In consumer floral, fiscal first quarter revenues in this segment increased 1.9% to $76.6 million compared with $75.2 million in the prior-year period. Gross profit margin declined 40 basis points to 40.1% compared with 40.5% in the prior-year period. This primarily reflected an increase in Passport program sales as well as slightly higher shipping costs in the period. Category contribution margin was $7 million compared with $8.2 million in the prior-year period. The lower category contribution margin reflects the impact of the hurricanes as well as increased investments in specific areas of digital marketing as Chris mentioned in his remarks. We believe these investments will help drive enhanced top and bottom line performance in this segment for the full fiscal year, particularly in the second half which includes the key Valentine's and Mother's Day floral holidays.

In BloomNet, revenues for the quarter were $19.8 million compared with $21 million in the prior-year period. This primarily reflected seasonally soft demand that was exacerbated by the impact of the hurricanes, including our decision to waive all florist fees and provide financial and other aid to florists in the hurricane-affected areas. Gross profit margin was 56% compared with 56.3% in the prior-year period and contribution margin was $6.7 million compared with $7.3 million in the prior-year period. Based on a number of initiatives we have underway including new product and technology offerings, we are confident that BloomNet will achieve year-over-year top and bottom line growth.

In terms of corporate expense, our 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 operating under a centralized management platform, providing support services to the entire organization. For the fiscal first quarter, corporate expense, including stock-based compensation, was $20.2 million compared with $21.3 million in the prior-year period.

Turning to our balance sheet, our cash and investment position was approximately $9 million at the end of the first quarter. Inventory was approximately $148 million compared with inventory of $191 million at the end of last year's first quarter. And we had zero borrowings under our revolving credit facility compared with borrowings of $125 million at the end of the last year's first quarter. The lower borrowings and inventory levels reflect the sale of Fannie May.

Regarding guidance, we are reiterating the guidance we provided at the beginning of the current fiscal year, which calls for consolidated revenue in the range of $1.14 billion to $1.16 billion, EPS in the range of $0.46 to $0.48, adjusted EBITDA in the range of $90 million to $93 million, and free cash flow for the year in the range of $30 million to $40 million.

I'll now turn the call back to Chris.

Thanks, Bill. So to sum up, we've had a good start to fiscal 2018. As I stated earlier, our results for the first quarter were largely in line with our expectations, aside from the impacts of the hurricanes. Most important, during the quarter we saw positive trends in our business, particularly in Harry & David, including increasing customer demand, reflecting our enhanced focus on digital marketing programs, positive customer response to the enhancements we have made to the Harry & David gift list navigation and functionality, growing sales with everyday gifting occasions, and strong growth in our customer file. These trends position us well to deliver strong holiday season results. In addition, we will benefit from several new developments including further enhancements to our multi-brand website, and the launch in November of two new brands, PERSONALIZATION UNIVERSE, a business that we have been developing for the past 18 months and we are now porting onto our multi-brand commerce stack. At PERSONALIZATION UNIVERSE, we are working with a broad range of third-party vendors to offer our customers a tremendous assortment of personalized gifts from wine glasses to picture frames to apparel and many, many other products.

We will also be launching our new chocolate marketplace in November. As we discussed when we announced our sale of Fannie May, we retained the ability to sell Fannie May and Harry London chocolates and gained access to the Ferrero chocolate line. Since the sale, we've been developing a new chocolate marketplace designed as a destination for all things chocolate, with extensive content and social features designed specifically for chocolate lovers. Now while we're keeping the name secret until we launch, but the marketplace will feature a broad range of well-known, premium chocolate brands as well as some of the hot artisanal brands that have really captured the attention of chocolate lovers for both self consumption and, of course, for gifting.

We are launching both new sites during the peak holiday season in order to introduce them to our millions of customers who will be visiting our sites for their holiday gifting needs in the upcoming months. As such, we expect to gain valuable learnings that we can then apply as we further develop these brands. And we are very excited about the growth opportunities we see for them going forward.

One last comment regarding the impact of the hurricanes. First and foremost, throughout what was a devastating hurricane season, the safety and well-being of our associates and our BloomNet florists was our number one priority and we are very grateful that all of them remained safe. Second, I'd like to thank all our associates across the company who went out of their way to provide support and assistance to those impacted by the storms. And I'd like to commend our entire BloomNet team for everything that they did, including monitoring the safety of our BloomNet florists, providing flower shops with fresh flowers, vases, marketing materials, even computer equipment to help them get their businesses up and running again and for taking the lead in setting up a relief fund in cooperation with the American Institute of Floral Designers for all florists in the affected communities. These efforts illustrate the caring and dedicated culture we have in our company.

Now, as we prepare to enter the key holiday season, we are laser focused on executing against all the opportunities we see in our business. And we are confident that we will drive accelerated revenue growth and enhanced profitability in the current fiscal second quarter and for the full year.

With that, we'll now open your call for questions and I'd ask Nicole to please repeat the instructions for Q&A. Nicole?

Thank you. We will now begin the question and answer session. (Operator Instructions) Our first question comes from Eric Beder of FBR. Please go ahead.

Good morning, congratulations on a solid start to the fiscal year. When you look at the holiday season in terms of Harry & David and leveraging kind of the harvest, how did the harvest come for the product for the holiday season? And kind of what are we going to see further in terms of product offerings there to expand on Harry & David?

So as we look forward, first off, Eric, thank you. The harvest season was a good season for us and it moved later in the season this year than it has been in the past several years. And that actually works better for us. It's kind of back to normal. When it moved up into August it provides other operating challenges, but it's when it's later into the September timeframe it just works better and we're able to staff it better. And things went very well for us there. The quality of the product is good. We're getting really good early response to the fruit. I know I was on a recent investor trip and the investor we met with had just received her pears and was raving about them. So, it's a good way to start that meeting. So we're off to a good start there.

I think from a product point of view, the team at Harry & David has been doing a really good job of bringing new gourmet food products to the table and complementing our food offerings. We're very encouraged that our fruit sales are growing right now. Late into the season, that we haven't seen as much as we have in past years. So, we're very positive there. Subscription fruit sales are growing. So I'm happy to see that. We had a great peach season during the summer, July month so that worked well. But other than that, as we develop our other gourmet product lines, which include wine. Wine is growing for us. The other gourmet foods, what we also find is the other gourmet food product lines are really helping us to attract a younger demographic. So we're pretty happy with that.

In addition, some things that really just have us encouraged. We have a new B2B site that we launched. We've made improvements as I referenced in my remarks to the homepage design at Harry & David to really give the opportunity for bolder product imagery, really selling the great delicious products that we have with, you know, we've made the enhancements to the gift list that I mentioned. We're seeing subscription growing. So besides the harvest, there's a number of really good initiatives in place right now for Harry & David.

Hi, Eric. I was just going to add in, we're seeing it in the results. You know with, you know with over 5% growth in the first quarter you know for Harry & David.

Yes, it's impressive. When you look at the wholesale business, including Harry & David, but also like Popcorn Factory and for the holidays are you seeing more kind of gifting in businesses, the B2B side throughout not just in Harry & David, is that business coming back and continues to, has it continued to come back?

So it's kind of two questions. I'll ask Bill really to address the wholesale and then I'll follow up on really the B2B, what we call our business gifting services.

Yes, Eric, overall wholesale should be you know in the mid single digits for the first half of the year. And we hope to accelerate that you know in the second half of the year through everyday initiatives with Moose Munch and with, actually with gift basket initiatives into some of the club stores for some of the smaller holidays. So, you know we have great visibility into our holiday wholesale at this point in time. And we're seeing that, you know, up in the mid single digit range.

Yes, and on the what we call B2B or BGS, our business gifting services, we're seeing some good positive early results there as well across our brands. Harry & David is really, is kind of leading the way there as they're usually earlier in the cycle, sales cycle for it. But we're seeing that in several different areas. I would say yes, over the years that we have seen different industries change in our corporate customer mix, it's less of a dependency on financial services, as an example, but we see other industries, travel industries, real estate industries, etc. where we're seeing growth. So we're pretty comfortable based on what we're seeing right now. And again, I mentioned the launch of our new B2B website. And it's a very consistent look and feel. So, when you go into any one of our brands, you go into our B2B website, it features the brand that you came in on but then clearly is demonstrating all of the choices of the different product categories and all the brands that we have to offer. Again, from a B2B perspective, we think we have a breadth of product offering that is unrivaled in the marketplace.

Great. Good luck for the holiday season.

Our next question comes from Kara Szafraniec of Northcoast Research. Please go ahead.

Good morning, everyone. I wanted to tag on another question about wholesale performance in the quarter. Just wondering how you guys have been impacted by department store closings? And how you're offsetting that lost business, whether that's in new wholesale customers or larger, average order volumes from your existing customers?

You know despite the challenges of foot traffic that many retailers are having, some certainly of the big box mass stores, we're seeing growth in those areas, so the Costcos, Sam's, BJs of the world. We continue to see growth. And some of our products still play well within the, you know, the retail footprints that we sell into.

Yes, and one of the things that I think we've seen there, with the store closings, those are generally they're underperforming stores and then these big retailers are putting more focus on their better performing stores. And that's where we're actually getting some growth from. In addition to your point, Kara, on new products, we are seeing it's kind of early season for us right now, but a lot of our new products would also show up in the spring holiday season, which is a much lower season for us on the wholesale but we're pretty optimistic of the feedback we're getting there, based on new products we're bringing to the table, for example, pet products under our Max & Milo collection or products for the, just the Valentine's and Easter holiday season. We're seeing some good responsiveness.

Great. And then just wanted to touch on the increased marketing investments within the consumer floral segment. Can you give us maybe just some additional color on the changes that you're making? And are these changes in response to an overall change in the competitive marketing landscape? And finally, should we expect to see these elevated levels of marketing investment through the balance of the year?

I think a couple of things there, Nicole. As we look at the extra investment, it was in a couple of different areas. It was in some technology. It was in some research. It was in some marketing tests. So it wasn't all in marketing tests, but just part of it was. And I think in the summer time is a good time for us to always do some of that. And keep in mind, some of the spend, quite frankly while the flowers brand [beared] the expense of it, these are tests that we will apply learnings across to all of our brands. So even the testing that we did wasn't necessarily just for the flowers brand, it's just that that's where the expense was really.

And again, some investments in technology and some of the tools that we're putting in place behind business intelligence. We increased or we organized our business intelligence team this year where it used to be separated by brand. We pulled it together under our enterprise marketing team. So there were some investments made there that we're seeing the payoffs from already. We're seeing deeper segmentation being done by each of the brand marketing teams. I think that's showing up as an example in the everyday gifting space. And then other than that, marketing tests, we'll always be running tests around, are we seeing -- just to see if we are seeing changes some times in search marketing and any algorithm changes that we need to adapt to. What are we seeing in display? What are we seeing in video? So, just a lot of normal testing to set us up for the upcoming holiday period. So really not in response to anything. And I also would say, not anything that you would expect to see at an elevated level going forward.

Thank you, guys.

One final point -- you know we would -- you know we expect top and bottom line growth within the consumer floral segment for the full year, especially in the second half of the year.

Great. Thank you, guys.

Our next question comes from Dan Kurnos of Benchmark Company. Please go ahead.

Thanks. Good morning. I just want to follow up on the last question a little bit. Obviously, we've seen FTD pushing some more display and high prominent postings on search. You know obviously Q3 or calendar or Q1 for you guys, calendar Q3 is not a super meaningful quarter. So you pulled back, I'm assuming, on some of your radio spend. We didn't hear as many ads. But you know on a go-forward basis, just as you kind of think about your digital marketing spend, Chris, you know based on some of these initial learnings, if you could just give us a sense of, you know, maybe, at least initially what you've learned and whether or not you're being bid up for either key words or placements? And then on the investment side in analytics, look I mean you guys have been investing in analytics for a long time, you know I assume that these are sort of tweaked to the underlying platform to get better LTV calc data for you guys. But, you know, I just wonder sort of where's the end game in that? And sort of how quickly do you think you can get a return on this internal investment? Cause that's a question that keeps cropping up. Thanks.

Sure. Thank you very much. I'll start on the last part of your question first, on the analytics, because yes we've been building our capabilities for a while now and we're pretty excited about where we stand today. So it took us a while, as you know, to get the fully integrated customer database to a useful point where we wanted it to be. It's there. We've added some campaign management tools to the team. We've added some other data mining tools to the team. And most importantly, kind of reorganized the team into an enterprise-wide team as opposed to brand-by-brand analytics teams that we had. First, we needed to get the technology in place. Then we needed to get the team organized appropriately. So that's just been completed really in the last quarter or so. And I think we're starting to see the early benefits of that. We have a great team of analysts in place and really looking forward to the results they're already starting to bring to the table but much more as we go forward.

From a testing point of view, clearly I need to be careful not to go into too much specifics of exactly what we tested from, you know, just from a competitive point of view. But as we look at things, especially in Q1, as you -- fiscal Q1 for us as you pointed out, there's not a lot of competitive activity. So it's also a good time for us to get in there and just do some testing as we did to see are there any changes in general within the worlds of display, video, search, anything else, without being caught up in a holiday competitive environment where it's hard to get a good solid read. So those lessons really apply more to our everyday marketing efforts going forward. Once we get into a holiday season and it gets much more competitive, then it's a lot of real-time testing and learning on the fly to make sure we're holding our position.

At the end of the day, I think nothing from us and from our strategy is really -- there's no dramatic change. Of course, we're always tweaking it. But we'll continue to focus on marketing and allocating our marketing spend where we get the highest returns and constantly working to enhance the customer's experience. We find the more we focus on the customer experience, bringing truly original products to the table, focusing on our brand strength and utilizing that brand recognition and brand attribute strength in our marketing, really helps to pull the response rates.

Got it. That's helpful. And then as we look into the holiday period, if you could just remind us now where Passport penetration rates stand and are you going to use Passport as an incentive tool to drive order volume in Q4?

So Passport is continuing to grow nicely for us. We don't really say what the number is but even as Bill mentioned in the gross margin, we're seeing more and more activity from Passport customers and more and more Passport enrollments. Some of the testing we did earlier as I referenced was to even increase the enrollment numbers of Passport. So we're very pleased with the progress. And the answer is, yes, we will use Passport very aggressively in our marketing programs as we move forward. We find our Passport customers, because they are so much more engaged, are much more naturally responsive to the messages and the offers we put out to them for them to use their free shipping capability across our platform of brands. So the more of that we can do, I think the better off we have because the more we can deepen that relationship with an already deeply engaged customer, the better ROI our marketing spend will have.

Great and just one more if I could, Chris. Obviously, you deployed a lot of your capital building up inventory ahead of the holiday period, but you know you still have that lingering nice bucket that you can pull from here, depending on what you want to do with it. You talked a lot about getting deeper into the personalization space. Obviously, that's been an area of interest. So at this point, if you could just refresh us on your thoughts on use of cash over the next, call it, 12 months that would be helpful. Thank you.

Certainly, Dan. Thank you. I think as we look to answer that question, I always step back and as you pointed out, starts with our balance sheet and how we have historically and how we will going forward manage our balance sheet to drive shareholder value. We've been recognized and thankfully as being good stewards of that balance sheet over the years. So we continue to look at it. We continue to be actively looking at acquisitions. We're in a very strong place today with our balance sheet and our cash position. So we're looking at acquisitions that can add to our celebratory ecosystem. And when I say that, either add a capability, leverage the capabilities that our operating platform [Vault] brings to the table and help us grow our celebratory ecosystem. We'll always be doing that and we'll always be very disciplined in our approach in the world of M&A.

While we're doing that, we'll also be looking to make sure that we're, you know, for example right now we've made the decision that now is the right time and we think it's prudent for us to be increasing our share repurchase efforts. So we announced back in September that we got a raised authorization from our board to $30 million. And we've been more aggressively buying in the market during Q1. And I think you'll see that continue as we move forward. With the stock price where it is right now, we think that is a prudent move to help return value to shareholders.

So, in addition to that, I think we'll always be looking well where else can we be utilizing the balance sheet to invest in our core business, so to help us grow new products and categories. So as an example, we are using the position we're in right now to launch two new businesses right in the middle of the holiday season, PERSONALIZATION UNIVERSE and our chocolate marketplace. So good examples of where we're looking at and always doing a buy versus build analysis as well.

Got it. All right, great, thanks for all the color, Chris. Appreciate it.

Our next question comes from Michael Kupinski of Noble Capital Markets. Please go ahead.

Thank you. I have a couple of questions. First of all, congratulations on getting Harry & David moving in the right direction there. That's really good performance, so I appreciate that. On your stronger performance with Harry & David, can you just talk a little bit about you obviously had some changes in marketing strategies earlier in the year, and I was wondering is there a way to quantify how much of the growth or that 5% growth that we, that you had was due to new product initiatives versus what you might feel were the impacts from your changes in digital strategy?

Michael, I think it's hard for us to quantify it exactly the way you asked but let me give a little cut at it. I think as we first look at the momentum that we have at Harry & David, I have to go to the team that we have in place and really compliment the team that Steve Lightman has assembled. We have some new people on the team that we had mentioned during our last call I believe. And then just really working well and have taken a very strong disciplined approach and put together a great go-to-market strategy for this upcoming holiday season. And quite frankly for the quarter that we just went through and that's why we're seeing the benefits of that.

New product is clearly always a part of the -- part of every season we come to the table with. But I would have a hard time and the new products are doing well, as I mentioned, a lot of those new products are helping to drive what we're seeing in everyday gifting. So that's working well for us. New products in the gourmet food area is an example I referenced earlier, which also are helping us to attract a younger demographic is working well. New introductions into the wine category is working well for us. But it's really hard to separate out that versus the balance in any different marketing strategies.

But again, we'll just continue to enhance the capabilities, enhance the gift list capability that we said and we're seeing good early results there. You know the multi-recipient capability whether it's within gift list or not within gift list, used to be limited to I could order at one time for 20 recipients on one form. Now our customers could order for up to 100 recipients on one form.

In our new mobile site for Harry & David, you can now use Apple Pay and you can use PayPal, our new B2B site. So, a lot of newness, hard to say which one is really generating the best returns. We're just happy with the momentum that we're seeing across the board that's been put forth by the team that we have running the business.

Great. And then on your -- can you provide a little bit more color on your initiatives in the warehouse and manufacturing gourmet foods that you alluded to? You said that that's to improve some margins there. In that light, you know what type of investments might you make there and if you could just give us your thoughts on CapEx.

Go in return. I mean our CapEx overall you saw in the first quarter was in the $4 million to $5 million range but our plan for the year is still on that $32 million range. And that covers both the technology side, which we're always continuing to enhance as well as on the food side of our business since we're vertically integrated, the equipment and investments in our orchards. You know with regard to manufacturing, distribution, we continue to -- this was kind of like the third stage of synergy benefits that we had where we're starting to look at consolidating facilities and doing fulfillment out of multiple brand fulfillment out of facilities saves on the logistics side. We always go back to our third-party carriers and try and get the best rates that we can. And we have initiatives in place for that as well. So these would be the items that will drive kind gross margin improvement going forward.

Got you. And in -- can you just give us an update on the M&A environment and anything in the hopper or things that look appealing at this point?

I would say, Michael, as I just mentioned, we continue to look at M&A activities. Nothing necessarily in the immediate hopper that we'd like to talk about today. But we're always looking at businesses that we could expand our celebratory ecosystem. Again, businesses that could leverage the capabilities and the customer database and all the great cross brand marketing tools that we have like Passport and Rewards. Or businesses that can add capabilities to our ecosystem. Right now, what we're focused on really is the addition of our two new brands, PERSONALIZATION UNIVERSE and chocolate marketplace that we'll be launching in November and putting them in front of that commerce stack and all of those marketing tools. So while we look to acquire businesses to leverage those tools and sets and our operating platform, we also build new businesses to leverage those capabilities.

Final question and I appreciate that, the time. You mentioned PERSONALIZATION UNIVERSE is a new product and so forth. What other categories are you looking at? Like you mentioned pet, is that a potential new product offering going forward?

Yes, pet could be a potential new product. We launched it today or this week, actually we launched it under the 1-800-baskets brand. If you go on there, you'll see Max & Milo, our new pet collection. And that program, product category really, as with many of our product categories, is an outgrowth of feedback we get from our customers. So, it really started with feedback from our wholesale customers in the baskets business and we've taken some of the products that we've developed there and are now positioning them. I think we only launched this week with about eight products for gifts for pets. But there's a lot of momentum. There's a lot of excitement behind that category. I think that's one we'll look to expand.

Great. Thank you.

Our next question comes from Mark Rosenkranz of Craig-Hallum Capital Group. Please go ahead.

Hey, great. Thanks for taking my question. Just a kind of a broad question on the Passport program. I was just wondering how you feel kind of entering the holiday program and what you're seeing with regards to the new digital marketing in terms of the benefit you are seeing at Passport and how well you've been able to maybe have some of those Passport customers go from brand to brand across different holiday seasons. Thanks.

So that's clearly one of our objectives as we look at the Passport program, Mark. Thank you for the question. And we have more of a concerted effort. Even some of the testing I alluded to is to increase our marketing to our Passport customers and try to get it more personalized and customized or segmented to the brands that we think they have the most affinity to go to next. So (A) that happens on its own. We find customers just migrate and shop on their own and that's great. But now we have other programs in place that are gaining traction that we're able to offer them the brands and the product lines that we think they have the most affinity for. And again that's coming out of our business intelligence group. So as we look at the holiday season, we're very excited about (A) the growth that we have in Passport enrollments but also more importantly the behavior metrics continue to bode very well for good cross brand shopping in the holiday season.

Okay, great. Thanks. That's helpful. Then switching gears to the chocolate marketplace, just wondering how you can talk a little bit about the balance between the three brands. Obviously now that you don't have it under your roof, between Ferrero, Fannie May, and Harry London, just kind of the initial thoughts you guys talked initially of you know kind of going broad with all three brands and seeing what customers are responding to, which initiatives? Just where you feel that chocolate's best positioned going into the holiday season?

Certainly, Mark. As we look at our chocolate marketplace, what we're really doing is going out there and looking for much broader offering. Those three brands, Fannie May, Harry & David, (sic) [Harry London] and the Ferrero brands will be part of this offering. But I think when we launch, we're going to be launching with approximately 25 different brands. We'll be featuring about 9 or 10, but there will be about 25 that are really in the marketplace to start with featuring well over 100, 150 different SKUs. So what we're trying to do is really go after a broad range of chocolate lovers and get and it's in build more of a community. Again, that's why it is such an emphasis going to be on the content and on the social strategy of this brand and this even within this site, the social element and people and user-generated content will be a large part of this.

Really going after that chocolate lover. We'll be bringing -- featuring our artisanal chocolatiers. I think one of the first chocolatiers that we'll be featuring when we launch, the team is probably getting a little annoyed of me getting ahead of myself here, so I'll back off on that comment. So there's some really great artisanal chocolatiers out there that we will launch with and really tell the story behind them. And then we'll rotate those chocolatiers, those artisans and tell the different stories. So, yes those three brands that we've always enjoyed, the two that we had plus the Ferrero chocolate will be a part of this marketplace, but it's much broader.

Okay, great. Thanks for taking my questions.

Our next question comes from Linda Bolton-Weiser of D.A. Davidson. Please go ahead.

Hi. I was wondering if you could quantify of the 180 basis point decline in the consumer floral margin, how much of that was the hurricane impact versus your investments?

Yes, Linda, this is Bill. You know Linda, probably about a third of the year-over-year decline in contribution margin was specific just to the hurricane and the remainder is related to the investments that Chris described both in his formal remarks and in the Q&A.

Thanks. And then you know we always hear when we toured the Harry & David facility of your strategies for getting seasonal workforce and it seems that the labor market is even tighter than usual this year. So how are you dealing with that and are you figuring in to your budget some increase in labor costs for this holiday, for the seasonal hiring or can you just give a little color on that strategy?

Sure. The seasonal workforce is a headwind that we've discussed on these calls in the past. As a manufacturer, distributor we want to, you know we operate contact centers. We have brick and mortar retail and we're a seasonal business. So, you know, we have a need for that seasonal workforce. And it does cost us incremental dollars each year. We build that into our budgets and we build it into the guidance that we provide.

You know with that said, we continue to look at automation initiatives, lean initiatives within our manufacturing processes to drive efficiencies. In some cases we, we move forward and pull forward some manufacturing with our core staff. So we're less reliant on the seasonal workforce each year. But we are reliant on that.

And with that said, though, sitting here today on Halloween we feel very comfortable at where we are with our -- in getting the seasonal workforce that we need. As Bill mentioned, we're in budget with where we need to be and we did factor in some increases into the budget and less the guidance. But based on the numbers in the recruiting process, sitting here today we're pretty comfortable.

Okay and then, you know, we haven't heard in a while about Fruit Bouquet, that initiative. Is that still going? Is that growing? And is that actually kind of seasonal like do you do more in the summer in that business? Can you talk about that?

Yes, Fruit Bouquet has been a great product extension for us and continues to grow for us as well. The customers, as we've said before, customers love that product. They love the shareability factor of that product. And we are continuing to give it more and more exposure to our customers really as part of the flowers merchandising mix.

When you talk about the seasonality, one of the things that we really find about that product, it's great for everyday occasions. Sympathy is an example. It's a great product category for fruit bouquets, just mainly because of that shareability factor, when people are sending things to the home. So we see that there. It is a holiday play as well. I wouldn't say it's as big of a holiday spike, but we see it's birthdays, it's sympathies, it's other gathering times throughout the year.

Okay. On the Fannie May divestiture, I know that you gave some comparable margins kind of showing the effect of that. But I mean are you actually experiencing deleverage because of the loss of that business or are you actually trimming your corporate expense or your overhead so that the deleverage effect isn't that major?

Yes, I think as we've you know indicated in the formal remarks, Fannie May did a little over $11 million on top line. Its margins were in the $4.5 million range. It, but it had a contribution margin loss of $3.2 million during the quarter. I think as we described you know Fannie May lost money in Qs 1, 3, and 4 and made a decent amount of money in Q2. So, you know, we're going to show the negative straight comps to the recorded revenue numbers each of the quarters. But we're going to show improved on the reported numbers, you know bottom line. So we think the best disclosure and transparency is to give those metrics with regard to, you know, without Fannie May over the prior year. So, but I think from a standpoint of with Fannie May overall of being $86 million in total revenues, a couple million dollars worth of EBITDA, we've built that all into the guidance that we've provided.

And sorry if you've disclosed this, but have you said what the contribution margin or profit of Fannie May was in the fiscal second quarter last year?

Yes, I think what we were trying to, you know, guide everybody, the analysts, to guidance, they did about $6 million of EBITDA in the second quarter. So you know we saw that they had a contribution loss of $3.2 million in the first quarter, overall EBITDA probably $3.5 million. And then $6 million of EBITDA in the second, and positive EBITDA in the second quarter.

Okay, thanks very much.

(Operator Instructions) Our next question comes from Anthony Lebiedzinski of Sidoti & Company. Please go ahead.

Yes, good morning and thank you for taking the question. So, I was actually curious as far as the Passport program. So you've had this for a few years. What are the typical renewal rates? Do you find that most people that get on the Passport program, do they typically renew every year or so on? If you could just comment on that I'd be curious to know what that is.

Anthony, it's Chris. I'll take that. And I'll be able to comment on generally. We're not going to report the exact renewal rates. But I think in general we see a good renewal rate out of the Passport programs, especially the more engaged users. I think with any type of program, you basically wind up in a couple of different segments. You're highly engaged. You're medium engaged. You're less engaged. So the less engaged is where we have to worry about renewal. The others will come along.

In that, there's even different things that we had to make sure we put in place and I think one was just recently introduced where it makes it easier for us to renew it if we had this new credit card mechanism. Cause a lot of times the non-renewals tend to be the credit card expired when we go to renew it. And then it's just a little bit more of a hassle to track the customer down and then get them to renew again as opposed to just auto renew with their credit card. So we have some changes to go in place to improve that area.

But I would say overall the renewal rates are good. I think they can always be better. And we'll always focus on that on how do we continue to enhance the Passport program? What other services can we add in that make it much more of a value-add program? Certainly we've seen others in the industry do that with their loyalty programs and we're looking to do the same. Quite frankly that's also some of the money we've spent on research in Q1 is looking at our loyalty programs, on how -- both Passport and Rewards on how we can enhance them.

Okay, thank you for that. And also, Chris, you mentioned in your closing remarks that you've had strong growth in the customer file, the Harry & David. I may have missed that, but did you give a number as far as what that growth was in your customer file?

No I did not and I would say my comments should have been strong growth in that customer file for Harry & David, yes, but also growth in the customer file across the board that has us very encouraged as we move forward throughout the year.

Got it. Okay, thank you for that. Also, I'm curious about the BloomNet segment, you waived the fees in the hurricane-affected areas. And I was curious to know if the fact that you did this, did that lead to any additional new BloomNet customers that heard about what you were doing?

I would say not yet, but certainly first and foremost that's the right thing to do. These shops were clearly out of business and had no mechanism to really recoup their fees from being open for business. So it was the right thing for us to do and we'll always do something like that. It just again fits with the culture of our company. That does generate good, good press or just goodwill. Generates goodwill for us. I expect that will come back to us over time as Florida, as word of mouth marketing spreads. So, (A) it's good to do and (B) I do think we get some goodwill out of it.

Okay, well sounds good. Thank you very much.

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

Thank you all for joining us today. I hope you all had previously placed your orders and will today experience the wonderful holiday treats that you ordered from our several different brands for Halloween. But certainly keep us in mind as we move into the Thanksgiving season now. And it's always a great time to reach out and say thanks to the many, many different people that deserve your thanks throughout the year. Thank you again for taking the time with us today. If you have additional questions, please don't hesitate to contact us.

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