1-800-FLOWERS.COM, Inc. (FLWS) Q4 2006 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Q4 2006, 1-800-Flowers.com Earnings Conference Call. My name is Cheryl and I’ll be your facilitator for today. [Operator instructions]. I will now like to turn the presentation over to your host for today’s call Mr. Joseph Pititto, Vice President of Investor Relations, please proceed.

Thank you Cheryl. Good morning and thank you all for joining us today to discuss 1-800-Flowers.com’s financial results for fiscal 2006 Q4 and full year. My name is Joe Pititto and I’m Vice President of Investor Relations. 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 www.1-800-Flowers.com or you can call Patty Altodama at 516-237-6113 to receive a copy of the release by e-mail or fax. In terms of structure, our call today will begin with brief formal remarks and then we will open up the call to your questions. Presenting today will be Jim McCann, CEO, and Bill Shea, CFO. Also joining us today for the Q&A section of our call is Chris McCann, our President. Before we begin, I need to remind everyone that a number of the statements that we will make today may be forward looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed description of these risks and uncertainties, please refer to today’s press release and to our SEC filings including the company’s annual report on Form 10-K and quarterly reports on Form 10-Q. The company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today’s call, or any recording of today’s call, the press release issued earlier today or in any of the SEC filings, except as maybe otherwise stated by the company. I’ll now turn the call over to Jim McCann.

Thank you Joe and good morning everyone. As we noted in this morning’s press release, during the Q4 we achieved several important strategic objectives. Notably the acquisition of Fannie May Confections and the continued strong development of our Bloomnet business. However, our financial results for the period were below our expectations, which we attribute to several facts. While we achieved good revenue growth of more than 13% for the quarter, this was below the level that we have targeted with our increased marketing spend. Additionally our flat gross margin year-over-year was well below our target and insufficient to offset the increase in our marketing cost. Lastly, as expected and previously announced the quarter’s results were also impacted by cost related seasonality of Fannie May. The good news here is that we expect to see significant contribution both top and bottom line from Fannie May during our current fiscal year, particularly in our fiscal Q2 the holiday period. Before I turn the call over to Bill, who will take you to the details about financial results and matrix for the quarter and the year, I would like to make a few additional points. Over the past several years through a combination of organic efforts and strategic acquisitions, we have demonstrated a proven ability to grow revenues at very attractive rates. Having established a solid base of business first approaching a billion dollars our management team is now laser focused on improving our bottom line performance. Towards this end, we have put in place a number of initiatives specifically designed to reduce operating cost and enhance gross profit margins. I will provide a little more detail on some of these efforts after Bill reviews our metrics. In addition to these programs we have made several changes in our management structure. We have added new management talent at the senior level, whose sole job is to extract cost savings and achieve operating process improvements, and we’ve revised our compensation programs throughout the company to reflect this intensified focus on bottom line results. We also expect significant bottom line contributions from our new business efforts. In our “Food, Wine and Gift Basket” category the Fannie May acquisition significantly expands our offering in an area where we are rapid with becoming a market leader. By building on a tremendous base of costumer loyalty, Fannie May, offers an excellent growth potential particularly to the leveraging of our assets and capabilities in the online and direct marketing space. Combined with its strong operating margins, we expect Fannie May to contribute significantly to our operating results this year and beyond. In our Bloomnet operations with the roll out investment that is now completed we expect to see significant contribution this year. Bloomnet’s superior value proposition for florists has been very well received. This is illustrated by our latest directory (inaudible), which includes thousands of pages of listings and advertisements. Bloomnet membership has increased three folds since we launched this initiative and now includes more than 9,000 florist members. As we stated in the past in growing Bloomnet we are permitted to maintaining our industry highest quality standards while providing our florists with products and services that they need to grow their businesses and enhance their profitability. As we continue to grow both the network and the products and services we offer. We expect to see a growing contribution from this high margin business. I will now turn the call over to Bill.

Thank you Jim. During the Q4 achieved total revenue growth of 13.4% or $25 million. This growth, like several factors including the results of our strategy to increase spending on expanded marketing and selling programs particularly in the floral category. Revenues associated with the acquisitions we made during the year and the inclusion in the quarter of Easter, which was in the Q3 last year. However, this was essentially offset by one less week of sales in this year’s Q4 compare to fiscal 2005 in accordance by retail calendar. Regarding matrix for the Q4. Total net revenues for the quarter reached $211.1 million an increase of 13.4% or $25 million, compared with a $186.1 million in a year ago period. Online revenues grew 14.6% or $15.9 million for $124.4 million compared with $108.5 million in the Q4 last year. These online revenues equals 67.2% of combined online and telephonic revenues for the Q4 of fiscal 2006 compared with 64.3% in the same period last year. Telephonic revenues with $60.7 million compared with $60.3 million in the prior year period. Our retail fulfillment revenues increased 51% to $26.1 million compared with $17.3 million in the Q4 last year. This increase primarily reflects continued growth in our Bloomnet business and revenues from the Fannie May confection brand business. During the quarter, our combined online telephonic orders totaled 2,883,000 compared with 2,704,000 orders in the year ago period. Average order value during the quarter was $64.19 up 2.8%compared to $62.44 in the prior year period. During the quarter we attracted 887,000 new customers compared with 835,000 in the year ago period. 624,000 or 70.3% came to us online compared with 563,000 or 67.4% last year. Existing customers represented 58% of combined online telephonic revenues compared with 59% in the prior year period. In terms of product mix, the breakdown between floral and non-floral gifts was 61% floral and 39% non-floral compared with 62% and 38% in the prior year period. Gross margin for the quarter was 40% flat compared with last year’s Q4. The combination of promotional pricing and higher shipping costs due to fuel price increases offset other initiative designed to improve margins During Q4 our operating expense ratio increased to 38.7% of total revenues compared with 36.7% in the prior year period. This increase however reflects several factors including higher marketing and selling spending as a percent of revenues but lower than planned revenue growth. The impact of stoppage compensation expense and costs related to our acquisition of Fannie May including losses associated with seasonality of that business. As a result to these factors, adjusting to exclude the affect of stock based compensation, pro forma net income for the quarter was $2 million $0.03 per each share compared with $3.9 million or $0.06 cents per share in the prior year period. The company believes pro forma earnings provides a meaningful measure of year to year period comparative performance while reducing cost finding per share results do not lessen the importance of comparable GAAP results. Including the net effect of stock based compensation the company’s GAAP net income with the quarter was a million dollar or $0.02 per share. Importantly, earnings per share for the quarter on a comparable basis will be essentially flat with last year’s fiscal Q4 when we add back the seasonal operating losses, financing costs and tangible amortization related to our recent acquisitions. Regarding full year matrix, total net revenues reached $781.7 million, an increase of 16.6% or $111.1 million compared with $670.7 million in fiscal 2005. Online revenues grew at 19.2% or $69.4 million to $430.3 million compared with $360.9 million last year. It may present a 61% of combined online telephonic revenues up from 58.1% of fiscal 2005. Telephonic revenues with $275.7 million up 6.1% compared with $216 million last year. Our retail fulfillment revenues increased 51.9% or $25.9 million to $75.7 million compared with $49.8 million last year. Combined online and telephonic orders totaled $11.315 compared with $10.213 orders in fiscal 2005. Average order size was $62.39 up 2.6% compared with $60.79 last year. During the year we attracted 3.6 million new customers, compared with 3.3 million last year. BP customers accounted for approximately 46% of combined online and telephonic sales unchanged compared with fiscal 2005. Gross was margin for the year increased 60 basis points to 41.7% compared with 41.1% fiscal 2005. Operating expense ratio including the impact of stock based compensation was 40.8% of total revenues up 150 basis points compared with 39.3% last year. This increase was related primarily to the aforementioned stock based compensation as well as the increased marketing and selling expanding investments made in the company’s fast growing Bloomnet operations and the operating losses associated with the seasonality of the 1146Fannie May acquisition. As a result of these factors adjusting to exclude the affect of stock based compensation, pro forma net income for the year was $6.4 million or $0.10 per diluted share compared with $7.8 or $0.12 per share in the prior year. Including stock based compensation to company’s GAAP net income for fiscal year 2006 was $3.2 million and $0.05 per share. Again, on a comparable basis EPS for the year was essentially flat with the prior year at $0.12. If we add back to stock based compensation any impact of the Fannie May acquisition including the seasonal operating losses financing of course and intangible acquisition. Regarding our balance sheet, of cash and investments position at the end of the year with approximately $25 million, this reflects several factors. Total net cash provided by operations was $14.4 million, after the networking capital investment of $9 million primarily related to the growth of inventory. This is all set by investment in several areas including approximately $13 million due to our acquisitions, approximately $20 million for capital expenditures and approximately $3.5 million for other items, including scheduled repayment of debt and treasury stock repurchases. At the end of the quarter with $88.8 million primarily reflecting our bank power of $85 million related to the financing of the Fannie May acquisition. Inventory at year end was in line with management’s expectations at $53 million and largely reflects additional inventory approximately $15 million associated with our acquisitions as well as our expanded fresh from the grower product line and several products initiatives in the specially branded businesses. Turning to guidance, as noted in this morning’s press release to reflect the evolution of our business we will be changing the way we report results and a way we provide guidance. Beginning with the release of our current fiscal 2007 Q1 results in October, we will provide results for our four business categories, consumer floral, Bloomnet and our specialty gift brand category including the Home and Children Gifts and Food, Wine and Gift Basket. Each of these categories will provide revenues gross profit margin and a contribution margin excluding profit allocations. This new reporting format will enable us to provide more visibility for a specific growth and provide characteristics of each category and there by a better understanding of how we will reach our own company goals. To provide you with the baseline for these business categories and our consumer floral business we are by far the largest florists in the world. Importantly we are expanding our market even position by growing in the range of 7% to 10% annually on the largest based of business in the industry. Fiscal 2006 revenues in this category were approximately $450 million. Our Bloomnet business has emerged from its investment rollout phase, and we’re now beginning to generate increasing profitability. Bloomnet revenues in fiscal 2006 were nearly $30 million and we expect compound revenue growth over the next three years will be in access of 50%. Our home and children’s gift category achieved revenues in excess of $190 million in fiscal 2006. Going forward, we are managing this category to achieve sustainable mid single digit growth. Food, wine and gift basket category includes Showroom Company to Popcorn Factory, 1-800 Baskets, and Fannie May Confections. In fiscal 2006 these businesses provide more than $100 million in revenues. Pro forma, including the Fanny May operation for the full fiscal year revenues would have been more than $175 million. We expect growth in this category to be in the teens going forward. On a consolidated basis, these four categories will leverage the asset and infrastructure of our enterprise services platform. Our goal is to improve this leverage throughout the company and enhance not only revenue growth but also profitability for the enterprise. In terms of overall guidance going forward as indicated in our press release we are also changing the format of the guidance we plan to provide, we plan to provide -- to place an emphasis on long-term growth objectives for both revenue and profitability. However, the current fiscal year will include the first significant contributions of Bloomnet operations and the Fannie May acquisition. We are providing the following guidance for fiscal 2007. For the year we anticipate achieving revenue growth including the incremental contributions from our recent acquisitions in the range of 17% to 20%, and EBITDA and EPS growth of more than 100%. Quarterly revenues will be in the following ranges: Q1, 12 to 14 of total revenues, Q2, 36 to 39% of total revenues, Q2, 2o to 22% of total revenues, in Q4, 25 to 27% of total revenues. Longer term for fiscal years 2008 and 2009, we anticipate achieving annual growth rates for revenue in the range of 7% to 10% before acquisitions and EBITDA and EPS in the range of 20% to 25%. I will now turn the call back to Jim.

In conclusion as we begin fiscal 2007, we are very focused on improving our bottom line performance. As I mentioned earlier we have put in place a number of initiatives designed specifically to enhance gross margins and reduce cost across all of our businesses. For example, in terms of gross margin improvement, we are expanding our products sourcing efforts in Asia while concurrently consolidating our sourcing agents. This will enable us to concentrate on large order volumes and thereby improve pricing. We are also consolidating raw material vendors across all of our brands to similarly improve pricing as well as enhance quality. And we have underway a number of pricing initiatives including develop new higher margin signature products, such as our Happy Hour Collection, programs to increase quarter add on rates and an aggressive SKU rationalization effort to eliminate low margin products throughout the company. Among the programs we have put in place to achieve operating expense reductions. As I mentioned earlier we have hired new management talent who are tasked solely with extracting cost savings around the organization by designing and implementing process improvements and spin mining our operations. We have consolidated our catalog printing across all branch enabling us to negotiate more favorable long-term rates. We’ve also consolidated our non-catalog printing utilizing especially sourcing agent whose compensation is tied directly to the level of cost savings that are going to be cheap for us. With email an important element of our marketing efforts, we are consolidating all of our email programs onto a uniform platform where we expect -- which we expect will yield significant cost savings. And we continue to optimize our service center operations most recently expanding our home agent program to provide maximum coverage, flexibility, and reduction of recruiting a trainee expenses. In addition to these as I stated earlier we are also expecting significant bottom line contributions from our news business development efforts. The Fannie May acquisition combined with our great gourmet gifts positions us a leading player and a fast-growing food line and gift basket category. This is an area where we see significant multi-channel growth opportunities as well as strong operating margins. Our Bloomnet membership is growing dramatically, tripling in size evidencing the strong demand in the marketplace as a florist community embraces our compelling value proposition. Overall we believe we are well positioned to achieve our goals solid top line and significantly enhance bottom line growth in fiscal 2007 and beyond and thereby build long-term shareholder value. That concludes your formal remarks, we’ll open the call for your questions. Cheryl, please restate the instructions for the Q&A.

Thank you. [Operator instruction] Our first question will come from the line Jeff Stein from KeyBanc Capital Markets, please proceed.

Sure. Jim, first question, I’m wondering if you might expand on why you think you missed your revenue forecast in the floral category in Q4 and what measures you are taking to get back on track there?

Jeff, a couple of things, the miss in Q4 on revenue is primarily in floral and was primarily rather than that the Mother’s Day period -- the last few days of the Mother’s day period and frankly it was aggressive marketing time by everyone in the category. There are lots of well-funded competitors who were very aggressive, and the mix of advertising vehicles we use particularly in the online world left us in a position where we had a continuing bets on categories that were under performing, like the portal growth, and we’re insufficiently betting on the categories that have emerged as the new leadership categories are the list programs, the search categories. And so from all point of few a combination of aggressive competition, deep discounting on pricing, we did not participate into the extend perhaps we should have, and misplaced resources in terms of under performing online vehicles versus the newer more recently emerged the news like the search and affiliate programs.

We’ll, it seem that last year you were backing away from search because of the high cost and I’m wondering given the fact that those vehicles continue to seem to produce costumers. Are you prepared to move back into those, and how is that going to weigh against the cost reduction efforts that you are intending to initiate? In other words, nets, are you really going to be reducing your expenses if you have to invest more in search and affiliate advertising?

Jeff, this is Chris. As we look at you know, all our advertising specifically search. Searches continues to be a very expensive propagation as we mentioned in the past, it always spikes at holidays, there has been some more rationale pricing on search -- you know, most of the holiday season this year was -- it was aggressive -- holiday period. We do find it, however, to be effective. We do still find it to be effective in new customer acquisition as well. So you know, the overall -- I would say, yes we probably step up our aggressiveness more than -- Q4 anyway, and still working very well for us so we’ll step up our aggressiveness there. I’m not concerned that limiting our ability to reduce our operating cost, however, as the focus on operating cost reductions mainly into non-marketing areas, Jim gave you the examples that he did and again, utilizing the collection of assets that we acquired across our businesses we’re able to drive those operating cost reductions. At the same we will always stay focused on improving marketing efficiencies.

Okay. The last couple of years, 1-800-FLOWERS underestimated the impact that an increased promotional environment over -- specifically over the holiday season it’s had on its business and I am wondering and why it is effective, we are facing a very challenging consumer expanding environment moving ahead here, are you guys building enough conservatism into your plan on the consumer side of your business to take these factors into considerations?

It’s a good question, Jeff, and I think that -- the one we have -- we asked ourselves many times in the last few weeks. And the answer to the question is yes I think we have. I think the portfolio of products, brands, services that we’ve accumulated gives us a little bit of protection there in terms of being able to properly balance our business, have the right margins, have a variety of areas that consumers are turning to, I think the portfolio helps us a little bit there. And I think some of the areas that we have invested in new marketing areas they were not under but increased emphasis in marketing areas are showing such promise for us that we feel confident that we can reduce our marking cost at the same time which obviously has an impact when you look at the promotional efforts. For example, the introduction of our chocolate gift lines gives us an opportunity for add-on sale on our floral purchases, also gives us the opportunity for existing standalone sales of a higher margin product than is our floral business. It also gives us an opportunity for search and for leveraging across our basket business and our Bloomnet businesses, that same high margin product capability which actually bring a benefit to our Bloomnet partners as well. So from a portfolio point of view we think we have done it and from a marketing perspective I would also add that if you look at our emphases on new marketing techniques -- our introduction of the CBS Out of Home, Happy Hour Collection introduction -- a terrific benefit for us. Relatively speaking, a small effort in its first introductory stages, but one that you’ll see us step on the gas. But based on results we saw in the last five months of this fiscal year with our test introduction. In addition, our loyalty efforts, we have a loyalty program for about 20 years, which has been only focus on our retail activities, which we essentially sold off to our franchise operators. Twice the learning from that program and what it does to your customer’s relationship besides that they cause us to -- over the last year, spend heavily to develop an online and you know, a non-place based loyalty program. It’s called Fresh Rewards, it’s been staying for a long time. And we are so excited about the early results of our rolling out that loyalty program to the whole of our customer base that we feel confident that will have their protection and their conservatism built in because that’s a none competitive arena. When you have more 70% of your florist customers coming directly to your URL you look to build the relationship with them, have signature products that protects because customers are coming specifically for those products and then having a loyalty means to have them not yet approach by all the other online competitors gives us -- collectively those things gives us the assurance that we are forecasting properly.

Jim final question, any concern -- given the fact that you’ve got this loyalty program you’ve acquired additional non-floral brand. It seems that your repeated rate with your existing customers seems to be leveling of and even declining of that. Anyway thoughts on that in terms of what might be causing that?

Jeff this is Chris, no we are not concern there, again if we look at the level in this past quarter that’s what an increase step up, the customer acquisition or even -- we said as we increase our customer acquisition efforts up would effect the rate, as we dig down deeper into our customer matrix we are very encouraged that all the matrix we got were retention free loyalty instead of -- still moving in the right direction and as Jim mentioned with the early results of our loyalty program with every customer.

Okay, thank you.

Thank you.

Representing Credit Suisse, he is Terry please proceed.

Thank you in terms of the increasing marketing expense, can you give us an idea what the breakdown -- that was between higher cost or unit of marketing done and then the higher volume that you are spending?

This is Will Shea, these are overall new acquisition costs, with respect to our customer acquisition cost we are up this year and that’s you know dwells some of the higher marketing and selling expenses, the percent you know our revenues we did not achieved as we have stated you know the revenue that, you know, that we hope -- you know, hope to achieve. As we you know as we look you know forward we have to at the various business categories that we have and then -- some categories where we’ve spend for higher growth. We are going to take, you know, take a look at such as the you know our popcorn factory products or chosen gift, but we did not achieve what we had hoping to during you know during the fiscal year and we are going to you know take a growth down and investment less dollars, moving dollars in those areas and put those moving dollars nearer to what we think of, you know, our high growth areas.

You’re right, I guess what I’m trying to get at is of the increase in marketing that we saw this quarter. How of that came from buying more advertising so you know where you are buying 50 keywords before now you are buying a 100 or you are buying 1000 radio spots, now you are buying 2000 versus an increase in the cost of those individual units you are advertising?

I will say a couple of things. Bill will give you more detail on purchases of the purposes. One of the things that he touched on there and his remarks, he said that those companies are primarily catalog it was branded primary growth with catalog distribution. The yield is not there as compared to the online world, both in those products in the floral category. So you will see as divert dollars from catalog prospecting, it was branded they have traditionally relying on that more than online search. The unit cost of advertising I would say in the online world it’s probably still more attractive, although up than the traditional broadcast advertising. Cost on the traditional broadcast advertising world were about the same but their effectiveness in obviously declining on the -- online world it has more effect.

Great thank you.

With Goldman Sachs is Anthony Noto, please proceed.

I sort of -- if you could elaborate a little bit on the revenue EBITDA group and organic basis and then as we think 2007, if we go into the year and profitability turns out to be lower your had anticipated. What would be the one or two things that, as you look out today you worry about contingency planning? What would those one or two things will be? Thanks.

From the organic world, you know standpoint we have the Fannie May acquisition, you know during the quarter and it approximately $5 millions of, you know, revenue during the quarter. So, you know for the quarter and for the, you know for the fiscal year, organic growth which, you know, in the range of around 10%. With respect to profitability, what we alluded to I guess in a script was that because of this, you know, the seasonality of Fannie May really of our acquisition this year is the Fannie May and the financing cost associated with, you know, with that. If we were to do it on a kind of a comp basis or bring it back to kind of the organic business you know year-over-year you know EBITDA and profitability would be basically flat year over year, so that, you know $0.12 of EPS that we had last year you know on a pro forma basis to add back, you know this year’s acquisition could be about $0.12 this year as well.

I’ll answer the second part of Anthony’s question in terms of what kinds of things. I think our produced overall going forward would be at this point, you know could change, but our produce overall will be to maintain profitability to accelerate profitability’s are our first course of action this year. The kinds of thing we are concern ed of course is our -- things like they are in the news today and what impact they have on overall business trying to get some of the programs that we introduced in terms of streamlining our operations are all about trying to give us flexible operating cost, so that if business on a top line were impacted that we have flexibility in controlling our course to maintain profitability, that will -- overall be our -- Chris is indicating he like to -- this one as well.

Yeah that sort of, there is going to be a kind of, going back just question or comments as well regarding, you know our forecasting going forward, I think -- as we look at, the plan is going on forward we’re intending to be much less reliant on improved revenue with improve gross margin and taking some of the risk out of the plan -- with the focus on the operating cost. So we are achieving that, specific contingency is I think go to -- James just mentioned focused of streamlining operations at every year we are possible that allows to -- planning is needed and then you know with other areas as well you know -- competitive reason I don’t want to go into too much flexibility in the marketing spend also. So, again looking at the plan that we put in place in there for example in the home and children’s gift business. We are not looking to aggressive their in the growth, we’re keeping that as -- I mean single digit numbers you know we can adjust that. You know we have the operating cost in place that does not affect the profitability.

Yeah Anthony and if you are -- you know if you are looking at fiscal ‘07, you know we getting guidance for 17% to 20% growth, probably about half of that growth, you know like to be acquisition that, you know that we made and -- have a bit, you know, is organic and as we -- when we press release the, you know, the Fannie May, you know acquisition, you know we gave some details that they you know generating $12.5 million with EBITDA for the year ended April 30th, you know ‘05 we hope to improve that and you know under our ownership and we think going forward in ‘07 and Bloomnet will be a significant contributor. So we start looking at -- we are taking the, you know the numbers next years. Those are two big components of our improved profitability next year. And finally even with those two faster growing newer component, Bloomnet and Fannie May you will still see in our guidance so we are forecasting a lower than historical organic growth rate.

Great, thank you.

Yeah.

With CJS Securities Robert Labick, please proceed.

Good morning this is Casey Fagan here, nearest competitor recently announce the acquisition of a European provider and looking over it -- look at this opportunity and if not why?

Our business is amazingly consistent -- similar business globally. Clearly we had mentioned in previous conversations like this, that we fully intended at some point to have global capabilities. We said that be modest to begin with because it wasn’t the best use of our investment dollar to do anything large externally. Clearly you could assume this is a small industry when things are available we tend to look at them, if there are no other reason we make sure we understand what’s going on in the broader market place. So I rather comment it specifically and I think the investors shows they were pretty aware of everything that’s going on in our market place. About 5% of our business now is international, clearly we intend to be an international player and will so in terms of don’t (inaudible) so to speak from our point of view we don’t think we need to. Our brokers pretty good here, you know the 17% to 20% growth we are forecasting financially and something we are comfortable with and we have a good impact. Bloomnet is already international in the sense we have correspond relationships in about 40 different countries and sub-relationships, but as Bloomnet matures you can bet that it will have an international component beyond what we already had. We don’t count that in our numbers today because it’s a correspond relationships. But clearly Bloomnet has to potential to be global and it will -- likely it will be.

Okay. Can you give us an update on the roll out schedule of Bloomnet products? Thank you.

Well, Joe, if you would touch on the -- what we are doing is Bloomnet the products and services.

Sure, you know, we talked about this before you know currently that the primary revenues screens on Bloomnet are membership fees, fees associated with our Bloomnet technology, transaction for the product sales, purchase net, Bill mentioned and of course as Jim mentioned before which is doing very well for us. All these things will grow as grow with membership and the total volume of orders that go to our system. In addition, as state of the past we will offer many of the same products and services that currently offered to the florist industry such as web hosting, 24/7 telephony answering, appointment sale system, things like that well of which are under development. They will be rolled out over the next 12 to 24 months we are not going to put a specific timetable on anyone of those items. But we are excited about the acceptance of the products we built up thus far.

I think you can see that with the accordance so many new products this part of the Bloomnet network so rapidly that the primary offices will get the coverage to begin, to the pick critical mass we have the coverage we need, you’ll see an increased emphasis now on introducing new products and services. Frankly we are amazed at the receptivity in the market place, all those price and services so we are certainly to enough to bring it in the market in a quick and orderly fashion.

Right, thank you.

You got it.

Next question (inaudible) Company, please proceed sir.

Good morning few questions I heard some comments earlier that you guys are doing a revise compensation program I was wondering if that means any salary reductions or what is that in deal specifically?

I would say everything about the competition program has gone through some adjustments. The primarily emphasis of the competition program is that any intend of compensation short and long-term intend competition is by primarily, two people achieving a profitably goals for the quarter. Clearly, to do that they have to achieve their modest growth goals across each of the brand, but the primarily focus is to get everybody focused on delivering the profitability numbers, growth and profitably. But underlying the profitability numbers in this quarter so it’s all about their intent of the competition. Now it concerns the other programs so we mentioned in terms of the management team members that we have included in the last several months and there efforts it’s all about optimizing the organization. We are very fortunate that and we have accumulated over the last several years, the company quickly approaching billion dollars in sales. That’s primarily organic efforts, but there is also been some -- actually reported and discuss talking to strategic acquisitions along the way. We have wonderful portfolio products and services and now we have the mass and the size enough to really justify having bought these people in without increasing our budget lines. So obviously this been reallocation of resources to bring in this very specialized management team members who are primarily and almost exclusively focused on streamlining organization, buying capability. We spend four, five -- $400 plus million just on product. Clearly there are in efficiencies that can be achieved there. We have this wonderful serve at the price wide service platform. We’ll shift over the last six months expanded our at home 18 program. So clearly every aspect of our business is under reviewed and their plans already outline that will achieve great efficiencies and everyone’s compensation is tied towards meeting those goals. No one will make a nickel if we don’t meet our goals.

Okay and then as far as direct sourcing from Asia. How much do you that currently and what is the goal going forward?

You know it varies by brand.

Say in aggregate.

Just tell in aggregate yeah.

Yeah there is a lot of -- from Asia a lot probably only by 15% you know in the aggregate right now.

10 is okay.

You know from Asia we are looking to take that up significant, again a lot of the (inaudible) side of the business but you know this is not a fact so there is you know the big of our business is that -– you know that is not impact although the component parts likes boxes and things of that nature would you know wouldn’t be influence by that. But the main emphasis on this are kind of a, you know the home and guidance points of our business -- you know the performance like that.

So overall 25% to 30%.

And during your comments you mentioned that you actually give a break down of how much your consumer floral Bloomnet by revenue, I was wondering if you will include this information plus anything else in your 10-K when you file it later.

That -- 10-K is looking retrospectively, prospectively certainly we will.

Okay and as far as the revenues guidance, I think in your comments Bill, the numbers by quarter was slightly different than the press release -- but I just wanted to clarify whether we should go within the press release or whether if you go by what you said in your commentary?

No I think -- If I miss spoke I apologize but I don’t think I did it and the numbers mirror each other.

Okay

Within the press release is the percentage breakdown by quarter.

Okay and as far as you know the -- it seems like you are shying away from providing bottom line guidance by quarter but you know directionally speaking because of the acquisitions should we expect a larger lose in the September quarter than last year and if any color you can provide will be very helpful.

Bill will give you the specifics on it but we have never provided -- that I can recall at least specific bottom line guidance by the quarter. What we are trying do is give our investors the visibility to be able to really take a apart a business and seek the profitability characteristics and the growth characteristics and the contribution characteristics of each of the three components of our business with the third having the breakout of the two consumer pieces of floral and the assuming that the specially branched business including the Food, Wine and Gift Basket the Home and Children’s segment categories. So you have four specific break out of revenue profitability contribution gross margin to help our investments really have the visibility that they have been requesting. Last year we just saw the Bloomnet effort so we were reluctant to do that, but clearly have full visibility coming into this fiscal year of exactly how our business builds up and as concerns the question about the --

Yeah, I think -- we don’t give specific you know guidance by Q1 you know on profitability that has to be fasted in is. The seasonality of the acquisitions that we have made of late and that we’re planning to enforce so that you know, the July to September you know time frame for our Fannie May business is a slow period. The October to December period of Fannie May is significant contributed as -- and that’s will be alluded to with the significant amount of that profitability, being in the Q4. So it does -- count the Q4, so the seasonality, so you do want to take into account the seasonality of that.

I think you have two other factors that you need factoring as you go forward. When you’re only doing 12% of your business in a quarter at the same time each of the brands we required and build baskets, our chocolate business, our basic business, all are build quarters in the summer. All are preparing for that holiday quarter of the fourth calendar, our second physical quarter. All those have an impact on the seasonality business making the second physical and the fourth physical our biggest quarters obviously. In additional as Bloomnet becomes a bigger component and as we do more things in those arenas it tends to have a stabilizing influence on our revenue not especially because its so new but in the years ahead I think you could expect that that will begin to balance out a little bit some of that seasonality because its not quite seasonality affected. As you can see you should look at other people in our category who have large efforts.

And my last question is regards to the tax rate that was up a little more than I expected in the quarter. What’s the right assumption for fiscal ‘07 as far as the tax rate?

No -- again the tax rates for the quarter and that will give -- back out the deal, you know stock compensational. Our tax rate is pretty -- down year over year slightly at about 40.2 % and get influenced by stock based compensation, that’s not tax but they ideal, at the same rate. So, in stock based compensation or the 123 Are, improved about a penny or you know a quarter, but that’s an important deal --

Penny a share a quarter?

Any of share quarter.

Right and the tax rate for the next year?

Yeah, about the same as this year.

Okay thank you

Representing Brean Murray & Co., Eric Beder please proceed.

Good morning, could you talk a little about you know your 9,000 florists and Bloomnet. What is kind of the ideal number that you are looking for in terms of -- where would you like -- you know your competitors has about 18,000 and 19,000 and sinking in terms of florists where would you want to be?

While, yeah -- be careful not to compare apples and oranges here in terms of florist -- we are delighted that we have achieved what we have so quickly. I am not certain Eric, what the optimum number is? Clearly there is still lot of demand in the pipeline of florists who have approached us, expressed their interest they will qualify and let into the system. We don’t need any more from our coverage point of view, our quality point of view, so we will examine two things as going in remote place. How the demand is coming to us, which says this florist is struggling really needs business, looking for ways to grow their business, looking for the right people to partner with. So that’s all positive. The negatives for the category are that they still are relishing in the category in terms of the number of shops. If you look at the competitive set of -- there are two big competitors out there in the B2B space providing generically wire service business. Their numbers all down, both of them are down considerably over the last several years. We see the number of flower shops continuing to grow in both domestically and internationally. Just visiting with some of our international partners in relationships in the last 30-60 days, each of the year countries that we have had conversation with around the globe our experience in the same phenomena on then and I don’t think that’s peculiar to the floral industry but that’s a one frankly that we are most concerned about. So our number will continue to growth. Those with--I think our focus is more on building relationships, so many of those members have recently come into the network, so you are not seeing the revenue from them, they do see now in calendar, in fiscal ‘07. So, yes, we will continue to grow. But not likely the tripled insight (inaudible) florists in the country. But clearly are there opportunities beyond the country so they were able to continue to growth the emphasis is on building relationship with those shops, with the right products and services, building the revenue and profitability of each of those memberships. And when I said you got to careful not to compare apples and oranges because the other competitors have supermarkets and other mass kind of relationships in their number. We do not at this point have that but clearly its another revenue, clearly it’s a place we have been involved of but we have into anything to that we care on this call about better all involvement in those other categories.

Okay, and in terms of margins, you have I believe increased patients given and where you think longer term margins would be, where should the breakout -- what is the long-term, I guess you do operate our EBITDA margin that you believe should this company achieve?

Eric, we didn’t near the whole question but, you talked about long-term operating an EBITDA?

You talked before I think in presentation that’s actually about what’s long term operating margins, I'm curious what do you believe it could be now and with basic business man you have right now?

Eric, what we have done is changed the way we are guidance for our forward and I think provided now with three year picture what we said is that, we kind of got back to providing a little bit more information in terms of talking by EBITDA, so we didn’t guidance on top line growth on EBITDA at EPS essentially for the next few years think out ’07, ’08, ’09 and yeah, we have seem significant growth sale those are -- that’s the guidance points that we’re going to work with.

And so in terms of the guidance what we said there is without any acquisitions, we are going to grow organically at 7% to 10%, that will give us a first year -- three years, we are trying to give this look out now 100% growth on EBITDA and we are anticipating on the sub components the things like do Bloomnet for example, a top line growth of over 50% compounded each the next three years and our bottom line growth rate is being to 20% or 25%, overall (inaudible) to provide.

Okay, I think okay, thank you.

JMP Security - Kristine Koerber, please proceed.

Hi, its just the follow up on Eric a question on the operating margin, I know you’ve given guidance of their achieving operating margins some of 8% over the long-term and that was several years ago that is round that number out and I think you are talking near three to five year range and here we are still looking at low single digit up margin. And it just seems kind of hard to hit that mid high single digit operating margin on the goals you put out today, the longer-term goal. I guess I am just sort of figure out, I mean is it durable, I mean can you -- can we see operating margin get to that level at some point?

Kristine, I think you know, we have moved away from having, you know that targeted margin out there and providing guidance, this way, which you know that targeted margin our there and providing guidance this way, obviously you’ve got to run through your model to get to a number where you believe you know, we will be somewhere where we believe we are going to be in fiscal ‘09 but we are not setting a specific target out there.

Okay, and then as far as the streamlining the expense side of the business. Can you -- in a bulk purchase how much cost savings potential, the risk down the road?

That would be additional guidance but I guess Chris to give some color in terms of what we’re looking at.

Yeah, and I think, Jim gave is the way we are approaching this, and I would say at this point probably working on, we evaluate and identify beyond the (inaudible) opportunities. We have identified some opportunities, we are going after them, and we give an example of now we are going after that. But again I’ll also go back to those pointing out at this point in time I think that is reflected in the guidance to the bottom line performance improvement that we have -- that we provide the guides.

Okay. And then, Jim, maybe you can talk about the competitive environment and who use to gaining share out there, especially in the recent quarter -- past quarter. What is going on competitively? Is there any significant changes?

I think it depends on the category if are looking at Christine, but if you look at the floral category, the emerging floral gift category was all about. All of our floral competitors are offering the same range of products perhaps not with the depth or perhaps not with the success of introducing other products and brands. But if you look over the past year we grew $111 million in revenue. That was probably four times the growth of our nearest competitor. So I think our share, our leadership position is increasing. Clearly we are not the leader in the B2B space, we’re the third disruptive entrant into that marketplace but clearly we are very, very pleased with having in only a year invested $10 million, this one already have a business (inaudible) that is having fund and model expenses of trailing a revenue possibilities $30 million of revenue right out of the gate with that projecting near 50% top line growth net. So even though we are not the leader in that category and on a short term not likely to be, although that could happen because their shop trends are coming down. I think that we are positioned to -- pretty well to have a good solid core business in Bloomnet and continue increase our lead in all the consumer categories. We are not the leader of course in the fruit gift categories. There where couple of hundred million dollar business this year, but clearly that’s growing into mid teens and we are emerging as a serious player in that business so I think that’s the business has -- rather more growth potential on a percentage basis.

Okay, and then first on marketing thing I know you’ve been investing aggressively over the past year or so in marketing to drive the top line and it turn to be pretty rational about it. And it was my understanding that you know, you -- I think you put off the accelerator on that and there would be a lasting effect but it doesn’t seem to be the case since it’s as though you need to continue to expand to get double-digit growth, is that a fair assumption?

I don’t think it’s -- I think it’s fair to say though, Christine, that you know, we are growing at 16% or a $111 million is growth, but we expect to grow and when we tried that a couple before particularly in Chris’ answer to some earlier question about where we are allocating marketing dollars going forward, why we still have confidence that our percentage of marketing spend will go down this year, even though we are going to spend more than we did last year, how we’re reallocating those marketing dollars away from areas that we’ve learned have less yield than others. So we are obviously putting on money where the fish are to attract --.

Okay, and then just lastly, I don’t if you commented on inventory. Inventories of over 18% seems pretty high, can you give me a little more color on what’s going on with the inventory level? Thank you.

Sure, I’ll ask Bill to cover inventory.

Sure. Christine, the big -- you know, the biggest part of the increase in inventory (inaudible) of the product line in the Wind & Weather category as well as the Fannie May you know, acquisition, so you know that’s the lion’s share of you know, of the increased. In addition we talked about you know, our increased, you know sourcing capabilities and buying more product from Asia. So this in our Home & Garden category and Bloomnet category where you know, we’re buying plants for flowers, which -- you know of buying in that area. So that -- those are inventory growth.

All right. Thank you.

Next question comes from (inaudible) please proceed.

Hi, yes following up on that, so can you talk about what the expectations are for free cash flow for this year -- the free cash flow the company has been rather poor over the past couple of years. So if you could go through that that would be helpful. And then also touch on the B2B initiative in terms what that actually caused this past year and in terms of its losses profitability, thanks.

I will cover the -- Jim, I’ll cover the second part first and Bill will come back. In terms of Bloomnet what we said is we’ve spent approximately $10 million on launching on that during the last fiscal year, which we did. It turned into profitability during the fiscal years so it would be profitable all of this year. And I’ll ask Bill if he would cover first part of your question.

Thank you. With respect to you know the guidance you know we dealing with, we are focused on EBITDA and --if we stop you know EBITDA we give guidance to it until that end so our calculation -- well the calculation of free cash flow would be really EBITDA changing you know, changing working capital that’s you know, that’s CapEx.

Would you touch on CapEx?

And with respect to you know CapEx where we have -- you know, from this year where we envision going forward -- kind of reach you know a critical mass and we you know, believe our CapEx total will be about 2% of our revenues on a go-forward basis -- $19 million to $20 million range so we take our EBITDA you know -- changes the working capital you know, CapEx that would be --____

Can you help us at on the working capital going this year?

Well obviously they still would be you know, going into next year -- a net investment in you know, in working capital but probably in that you know $5 million to $6 million range -- okay. And I guess you know, the underlying issue here is you know, to what extent can you guys travel back or adjust your marketing in advertising spend as you see changes in the marketplace you know, more aggressive discounting you know changes in the underlying environment. It seems like you know, every quarter there is issues with respect to you know not getting operating leverage and it seems like it’s coming down to advertising marketing. So maybe you can talk through what changes are you making and how you analyze your marketing, advertising and your ability to kind of adjust things on the fly.

Sure, I think again as we look at the -- we reference some of the points earlier is constantly looking at the results we get in optimizing the mix. So as we look at this year going forward certainly on the prospecting of catalog and the results were not as strong as last year, we would like. So pulling backing on that if we look at the overall in the online market place again we can see where we’re getting returns and making the adjustments. Clearly the portal game has changed right there is no longer much of the direct marketing model it really isn’t network mass media value and how you would make those adjustments and therefore where allocation of dollars comes from. Did that come from television or radio etc. So we are constantly looking at that mix, constantly making the adjustments based on where we’re seeing the performance and things do change through out the fiscal year. So it was constantly adjustment, constant management on the ROI just as it is in the **5841 (inaudible) point of view, was in search looking at which keyword are giving the right return, which brands are getting the right returns on the search itself.

Yeah and one you know one other point that Jim -- this morning and looking in those category how can we get you know do we get a pricing with respect to you know our marketing dollar. So you know we are consolidating our catalog print of -- negotiating better pricing with out print -- and the same thing with emailing and consolidating all email onto a common platform to get a better pricing analysis. So every step we you know that we make getting better pricing with respect to those marketing efforts.

So those are all marketing dollars expense, but that -- more capital to be spend on the areas of -- over the most new term sort of figure.

Good, last question just Fannie’s contribution to pre-tax losses this quarter excluding financing?

There is about $5 million to $6 million

$5 million to $6 millions thank a lot guys.

Yeah, I think the question was Fannie made contribution --

To the loss

To the loss you know for the quarter what we basically said was you know that the Fannie May which approximately you know $0.03 per share, you know the financing and the -- of the intangibles followed by 2/3rd operating loss probably by the penny of that.

Next question from CIBC World Markets, Paul Keung, please proceed. Paul Keung your line is on. Next question comes from the line of Jeff Stein with KeyBanc Capital Markets please proceed.

Jim I’m wondering if you could talk a little about the productivity in B2B with $30 million revenues in fiscal 2006. I would guess for most -- over the year you probably had 5,000 or 6,000 florist. Would it be appropriate for us just to do simple math and say, okay you generated $30 million across the 5,000 florist on an average and therefore you are producing about $6,000 per florist per year and if that or if it is or is not a reasonable way to look at and I’m wondering if you could point us in the right direction and tell us approximately what kind of growth we should expect in productivity per florist.

Hi Jeff its, you know it’s been like you know with the macro guidance that we’ve provided is you know, without breaking down the, you know, the membership growth you know by month or you know quarter that’s not an unreasonable way of looking at, you know, looking at the business.

Okay and if you look at FTDs performance in what would, be their Bloomnet business they earn up almost 31% operating margin on roughly $190 million of revenues last year. What kind of ramp do you guys believe that is possible in your Bloomnet business and is their a kind of margin approachable in your model? I say, what we would characterize their Jeff is that we are expecting that, some near term maturity next year it should have worth 25% operating margin in that business, that’s what we think is sustainable.

Okay, thank you.

Operator Instructions. Our next question is a follow up from the line of Eric Beder from Brean Murray & Co. please proceed.

Sorry, I forgot the last time. Acquisitions, you know is the pipeline of acquisition is basically close now in terms of focusing on profitability and kind of where -- if it’s not, what you are looking out for is -– isn’t close down in short-term.

We don’t characterize our -- efforts we can’t be predicted -- forecast them. Clearly we are active in the environment we have -- in fact, they have accumulated a portfolio part we don’t need to do any others. We have only done -- this is the largest acquisition we ever did with Fannie May with real -- we are happy with all of the components of it. The management team, the brands, the -- our service, our customers bringing a high quality product. It helps us in margin in terms of each general margin, helps us in margin in terms of being able to air that product on. It helps our relationship with the Bloomnet florists because now we have another good margin product that we can bring to them. So in everyway, they allow with our largest acquisition, we are -- company acquisition well over a year ago with some terrific florists. But we have and we experiment with other products all the time, we don’t necessarily have to answer. We do have a very-very strong balance sheet and we will consider others, that where strategic force, I would say we don’t need it the others.

Okay, and just regenerate your first part of comment of what, well you can see by, you know by Jim’s comments who throughout, you know the script that there is clearly a focus of profitability and driving profitability --

Okay, thank you.

I show no further questions at this time, I would now like to turn the call over to your host for any closing remark.

Thank you Cheryl, and thank you all of you for time and attention today and if you have questions we will be happy to follow up with anyone as you think of other questions or comments or thoughts you would like to explore and you are free to contact us and this is in keeping with tradition I mentioned in the course of my comments, we introduced a terrific new product in the second half of this last fiscal year, called our Happy Hour collection and we did it with a very creative media launch in partnership with CBS out of home, and it’s clearly going to be one of the best products introduced in the floral category and I encourage you do some more research on us by experimenting and buying one of these Happy Hour selection and send it to someone you care about and see what kind of reaction you get. It’s a terrific product and we would be happy for you to sample it. So we look forward to your thoughts, comments, and questions as we go forward. Thanks for today.

Thank you for your attendance in today’s conference, this concludes the presentation. You may now disconnect, have a wonderful day.