Good day, everyone, and welcome to the 1-800-FLOWERS.COM Inc. Fiscal 2014 Second Quarter Results Conference Call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to the company's Vice President of Investor Relations, Joseph Pititto. Mr. Pititto, please go ahead, sir.

Thank you, Jonathan. Good morning, and thank you, everyone, for joining us today to discuss 1-800-FLOWERS.COM's financial results for our fiscal 2014 second quarter. For those of you who've 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 1800flowers.com, or you can call Patty Altadonna 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'll open the call to your questions. Presenting today will be Jim McCann, CEO; Chris McCann, President; and Bill Shea, CFO. Before we begin, I need to remind everyone that a number of the statements that we will make today may be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed description of these risks and uncertainties, please refer to our press release issued this morning, as well as our SEC filings, including the company's annual report on Form 10-K and our quarterly reports on Form 10-Q. In addition, this morning, we will discuss certain supplemental financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables accompanying the company's press release issued this morning. The company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today's call, in recordings 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 Jim McCann.

Good morning. In our fiscal second quarter, we achieved solid top and bottom line growth. This reflects a continuation of the positive trends that we've been seeing in the key areas of our business for the past 3 years now. Total revenues increased 6% with solid growth across all 3 of our business segments. Importantly, we achieved this growth despite the significant headwinds we saw during the year-end holiday season, including the impact of the federal government shutdown in October and the calendar shift that resulted in 6 fewer shopping days between Thanksgiving and Christmas. We are particularly pleased with the performance of our Gourmet Food and Gift Basket segment where our Gift Basket business in the mass market channel again showed double-digit year-over-year revenue growth and continuing the strong rebound that started last year. Based on early sales reports, sell-throughs were good, which bodes well for continuation of this positive trend for next year's holiday season. In addition, we achieved solid results in our Fannie May Fine Chocolates business, reflecting the effectiveness of the initiatives we implemented to address the operational challenges this business faced a year ago. Fannie May's manufacturing, warehousing and distribution operations ran smoothly throughout the busy holiday season resulting in increases in gross profit margin and contribution margin for the quarter. Overall, the Gourmet Food and Gift Basket segment achieved solid growth in revenues and gross margin while reducing operating expenses as a percent of revenue and thereby driving a significantly enhanced bottom line contribution for what is a most important quarter. In our 1-800-FLOWERS.COM segment, we achieved a 5.8% revenue growth for the quarter, further expanding our market position as the world's leading florist. Results in this segment included the consolidation of our iflorist business in the U.K., which added to revenues but impacted gross profit margin for the quarter. I'll ask Bill to provide a little bit more color on the financial and his financial view on this in a few minutes. In Gourmet we grew revenue 6.3% during the quarter and increased contribution margin by almost 8%. This growth reflects the nice momentum BloomNet has been building as it increases its market penetration for its expanded suite of innovative products and services. As a result of all these factors, we grew our EBITDA and EPS for the quarter compared with the same period last year. In addition, we finished the quarter with no net debt on our balance sheet and we continue to buy back shares in our company, spending approximately $6.5 million on share repurchases since the start of this fiscal year. We have a very strong balance sheet and we anticipate growing our cash position during the second half of the fiscal year. Combined with our very flexible credit line, we are well positioned to invest in our business to drive growth and build shareholder value. I'll now turn the call over to Bill for a review of the financial and operating metrics for the quarter.

Thank you, Jim. During the second quarter, the headwinds that Jim mentioned resulted in uneven sales growth illustrated by sales in October that were essentially flat year-over-year, due, we believe, to the impact of the federal government shutdown; a rebound to double-digit sales growth in November, albeit compared with a year ago Storm Sandy impact in November; and concluding with December sales that were impacted by the compressed shopping season. Despite these challenges, we were able to achieve revenue growth in all 3 of our business segments, overall gross margin improvement despite a very promotional environment and strong top and bottom line results in our Gourmet Food and Gift Basket segment, including the turnaround in the operations of our Fannie May business. Regarding specific financial results and key metrics from continuing operations for the second quarter, total net revenues from continuing operations increased 6% to $266.3 million compared with $251.4 million in the prior year period. During the quarter, our e-commerce orders increased 3.5% to $3,258,000 compared with $3,147,000 in the year-ago period. Average order size during the quarter increased approximately 1% to $55.11 compared with $54.58 in the prior year period. And during the quarter, we added 637,000 new customers. This was achieved while concurrently stimulating repeat orders from existing customers who represented 61% of total revenues, unchanged compared to the prior period. Gross margin for the quarter was 41.7%, up 10 basis points compared with 41.6% in the prior year period. This reflects increased gross margins in our BloomNet, our 1-800-FLOWERS e-commerce and several of our Gourmet Food and Gift Basket brands, including Fannie May, The Popcorn Factory, 1-800-BASKETS and our wholesale Basket business. These increases were somewhat offset by product mix in the period that featured strong growth in our wholesale Gift Baskets. As well as the…

Thanks, Bill. Overall, we are pleased with the results of our second quarter and the first half of our fiscal year. We continue to drive solid revenue growth across all 3 of our business segments in what remained a challenging consumer environment. We addressed the operational issues that impacted Fannie May's performance in last year's second quarter and achieved improved gross margin and contribution in this business. Our Gift Baskets business in the mass market channel continued its rebound, showing double-digit growth for the second year in a row, as well as improved gross margins and contribution margin. Our Gourmet Food and Gift Basket brands continued to show solid e-commerce growth led by our Cheryl's brand. BloomNet is growing its top line and is building momentum as we head into the second half of our fiscal year. Importantly, BloomNet has established itself as the go-to wire service for innovative products and services such as our cloud-based BMS store management system, Floriology's partnership with Udemy's state-of-the-art educational network and our new iPad in-store sales app designed to help florists engage with their customers and drive sales. As a result of these and other innovative offerings, BloomNet continues to grow its market position versus the legacy wire services. As we enter the second half of our fiscal year, which is much more floral in nature due to Valentine's, Easter and Mother's Days holidays in the spring gifting occasions, we're focused on improving performance of our 1-800-FLOWERS.COM business. In this area, during the fiscal second quarter, we were able to maintain the gains we have achieved over the past several years in terms of improved gross margin despite the always highly promotional nature of the holiday season. However, revenue growth for the quarter did not meet our targets resulting in reduced leverage on…

As Chris noted, we are pleased with the results we achieved in our fiscal second quarter and the first half of the year, particularly in light of the various headwinds we've discussed. With that said, we will continue to focus on managing those aspects of our business that we can control and where we can make incremental improvements to drive top and bottom line growth. While the macro economy remains uneven, we believe that we are well positioned to build on the positive trends that we've seen in our business for more than 3 years now. Frankly, we're excited about the many opportunities we see to accelerate growth over this time, as we deepen the relationship with our customers through new product offerings like our food bouquets and Fannie May chocolate-dipped berries, where we are positioned to both take market share as well as participate in growing customer demand for these products. Also through our expanding line of connective gifts featuring a broad range of price points that make it easy to celebrate any occasion big or small such as our Cheryl's $5 Cookie cards. Our multichannel go-to-market strategy that includes retail and wholesale where appropriate but focuses on e-commerce where we have taken a leadership position in the evolution of our social and mobile commerce. And investments in our multibrand platform and enterprise customer database along with new tools designed to help us enhance personalization for all of our marketing messages online, on the phone and in our stores. To wrap up, while we are conscious of continuing -- about the continuing uncertainty in the economy, we believe that the initiatives we are describing to you today and more underway will enable us to build on the positive trends in our business and continue building shareholder value. That concludes our formal remarks. I'll ask Jonathan if you could please tell us the instructions for the Q&A portion.

[Operator Instructions] Our first question comes from the line of Dan Kurnos from Benchmark Company.

Just a couple of housekeeping questions first, maybe, Bill, you could answer this, can you just maybe quantify the impact of the calendar shift on the Gourmet Food side of the business in December due to the shortened holiday period from a monetary standpoint and also the benefit to EBITDA from the iflorist consolidation?

If you'd like to do the second first, Bill.

Yes, I think we mentioned in our release as well that the iflorist consolidation was concluded on December 2 was about $3.5 million in revenues. And no impact on the bottom line. It did impact margins as we discussed, their margins are lower than our -- than the U.S. floral. With regard to kind of the 6 less shopping days in the compressed holiday season, I think from our standpoint, we just -- we saw some very nice days in the month of December, some strong days in the month of December. But we didn't hit, as we got closer to the holiday, we just didn't exceed the peak days that we had planned for high enough to offset those 6 less shopping days. I think it impacted more than just the Gourmet Food and Gift Basket channel, it impacted the 1-800-FLOWERS channel as well.

Great. Thanks for the color there. So then, let me ask a couple broader questions here. First, on the marketing side, I know you guys called out some reasons why Consumer Floral EBITDA was a little bit lower. I'm just wondering if from an environmental standpoint if marketing has gotten more aggressive early or if this is -- we know historically you guys have begun marketing for Valentine's around this time so if this is just more along the normal lines or if you're pressing any additional channels harder than you have in the past?

This is Jim. Dan, I would say that overall we're pleased with how the quarter came out in spite of the issues we had to confront. I would tell you that we're very pleased that over the last several years, we've made the decision to deepen our involvement in the gift food categories. And the reason for that is floral is moving later and later in the holiday cycle for Christmas in particular. And with our baskets, our chocolate-covered berries, our gifting offerings and all of our gift food offerings that we can be more competitive, and so I think you'll see that the growth in the second quarter, the holiday quarter, will move more pronounced -- in a more pronounced fashion to our Gourmet Gift Food Baskets because we have the right product mix that customers want earlier in the selling cycle. So I think the move we made into the Gourmet Food category and as deeply as we've done being vertically integrated where it's appropriate in those categories has served as well, so that's a decision that we made. The floral category has been competitive for as long as we can remember. It continues to be competitive but we don't see anything in particular for the Valentine period that is different than we expected.

And in fact, again, we're very proud of the fact that in a highly promotional environment where floral is not a primary category, we're still able to maintain our average order value and our gross margin percentage points.

Great. That's very helpful. In terms of the website, I know that you guys have been talking about making a few additional back-end changes. Now that we're past our initial holiday period, I know we've got Valentine's Day, so I wouldn't expect anything probably this quarter but maybe if you'd give us an update on the timing of when we might see 100% full functionality front and back end, and I know that we're still maybe testing on 2% of pages here and that we still have full front-end functionality but just an update there would be helpful.

Dan, I think, again, we continue -- we have both brands now on various versions of WebSphere Commerce basically, and you are right, between now and Valentine's Day, you won't see any other migration. And then we'll do a little bit more as we move into the spring holidays but by the summer and by the end of our fiscal year, we expect to be complete and have all sites on the latest version of our new platform and then we'll be able to move forward from there.

Terrific. And then just lastly for me, you did have a nice healthy margin expansion in GFGB. I think that's been key to the story. Could you just give us a sense of how that might continue and where your opportunities are in that segment?

Well, this is Jim. Dan, on the biggest hit that we took in that area last year was in Fannie May where we had operational, warehouse and logistics issues. I'm happy to report that all of those went well this year. With the changes that the management in that area implemented throughout the year, we were able to recover from those mistakes and it performed quite well throughout this holiday season. I'd say further, we continue to enhance management, and we've brought in December or so a new President for the Fannie May division so we're expecting to continue those enhancements and improvements and we're looking over the next year or 2 or 3 to accelerate our growth in our Gourmet Food and Gift Basket businesses.

Our next question comes from the line of Eric Beder from Brean Capital.

Can you talk a little about, I'm looking for more, a little detail, I know you did the Cheryl & Co. Cookie card for about $5, you were rolling that out to other divisions. I'd like to know how that went and did that help you get new customers?

Eric, you'll see us do that, and Chris has initiatives underway in all of our brands to broaden the price ranges, and you've heard both higher and lower because we want to be appropriate and in the consideration set of any of our customers who want to express themselves for holiday occasions, everyday occasions or just because, so you'll continue to see us do that. We like the impact in all of our product categories where we've introduced lower price points. I expect our competition will continue to follow us and mimic us as we do that because we want to be relevant to all of our customers regardless of their price tolerance or regardless of the occasion. So when you have a product that starts at $5 delivered, like we do with the Cheryl's card and other products like that coming online, you're not at all blocked by the filter of can I afford that when they see that they have a friend with a birthday coming up next week. So we're pleased with the progress. We think it helps us grow our list and it's an attractive way to attract new customers.

When you look at -- I know you've done major changes to the net and one of the things you've done is that you can now order across the lines, the multiple tabs, have you seen customers use that to do kind of different occasions now? They can kind of very easily go onto the site and order from the different divisions and see 1 basket?

Eric, kind of part of my answer I gave to Dan really on the pure technology aspect of it, it's still early. But what we are -- have done so far continues to show good progress and good metrics. We continue to see as we move the sites onto the 1 platform that we gain development leverage, right, we are also able to drive some increasing conversion rates. We're driving increase of exposure of our food brands to the national, to the prominent traffic that 1-800-FLOWERS has. So what we're seeing is over time we are increasing our relevancy with our customer base for all of their gifting occasions and moving from -- moving up in the consideration set, right, so when a customer decides they need to send a gift to someone, they make that product choice, they come to one of our destinations. But what our intent is to move up in that consideration set. I need to send a gift to someone, let me go to 1-800-FLOWERS, Fannie May, et cetera, because they have all those solutions and then I'll decide on my gift. So we're beginning to see the early signs of that.

And finally, you have a lot of free cash flow, I know you're buying back stock, what's your thought on potentially doing an acquisition, kind of criteria, what would you look for there?

Thanks for the question, Eric. This is Jim. We have -- we're pleased that we have a really strong balance sheet now. We paid off $130 million in debt since the beginning of the recession. We have a pristine balance sheet, we have great deal of flexibility in our lending facilities with the banks so we have plenty of capacity. We're actively looking as we have been. And if and when we find the right target that will enhance the offering we bring to our customers, we'll certainly pursue it but it has to be at the right price at the right time and lever the assets we already have. So we have the capacity, we're interested, but we won't do something unless we think it's absolutely right.

Our next question comes from the line of Michael Kupinski from Noble Financial.

I know that was a tough quarter and revenues were a little bit lighter than what we were looking for, but I was pleased to see that the margin improvement, even if you -- I guess, despite the fact that you consolidated the U.K. operations there. I was just wondering, is Fannie May now completely behind us? I mean, all the challenges? Or you kind of indicated that there might be some additional investments there. What -- can you just give us a framework of what your thoughts are? Are we out of the woods with Fannie May and just kind of going over the next few quarters?

Phil, you might have some specific color. But as a top line, what I would say is, I think, yes, the issues are behind us, the opportunities, though, are in front of us. So you'll see from an operational point of view, reported at the warehousing, logistics, that all worked out quite well. We're continuing with the good management team we have in place there and the additions we've made there. We're focused now on growth. Operational issues, we feel we have our hands around those, they performed well through the holiday, so yes, the negative issues we hope are behind us, Bill. And we think we'll get more excited about the opportunities there as we look forward. When we look at Fannie May, now that you have the core brand product available there but the introduction of the Fannie May berries with genuine real chocolate, it's an important ingredient there. Introduction of our fruit bouquets program benefits Fannie May going forward and the other products and services that they're developing, particularly those lower and entry-level price points. So the summary that I would give -- Bill, you could add any color to further get after that, but the issues behind us and the opportunities are in front of us.

Yes, I think we're looking to grow that brand across its multiple channels. It plays in the brick-and-mortar retail space, it plays in the wholesale between -- with both Fannie May and Harry London and it plays in the e-commerce channel. We have the operational issues behind us both in the warehouse and distribution end that we talked about the last year, as well as in the operation and the factory, and we're looking to put more throughput through there.

In terms of the increased cost and marketing cost in the floral business, is there anything related to the FTD spinoff or anything that you're seeing there in terms of strategic changes or what they might be doing in terms of the marketplace? And just kind of give us the lay of the land in terms of the competitive landscape?

So I think really what we're specifically referring to is a holiday quarter when we're competing against the world. So we don't really see anything specific to that or any major change from our competition. As we said, our competition has been highly promotional, especially if you just look at FTD as an example. Really hitting it hard on an annual basis with Groupon deals, et cetera, aggressively discounting the consumer business there. But they have been doing that for a while and we're very proud of the fact that our brand and the investments we continue to make in our brand and our truly original products that help our customers express themselves perfectly continue to differentiate ourselves from the price commoditization business. And give us the gross margin that we've been achieving in the average order value. So we don't see any major change and we think we're well positioned to compete.

And so from -- just to clarify, so you haven't seen any changes in behavior with FTD at this point?

No.

No.

Our next question comes from the line of Jeff Stein from Northcoast Research.

So a question for you on the Gourmet Food and Gift brands, what is it going to take in your opinion, to really begin to accelerate the top line and bottom line growth of those brands? You've got such a small slice of the food gift business overall and these are still pretty much, I think, viewed as regional brands. What does it take to get them to the next level and really accelerate the top line?

I think, Jeff, that's the area we're most focused on. As I said, the holiday quarter -- the lessons learned this holiday quarter is that we have a lot more opportunity to grow those brands. They are regional brands. I think the exposure they're getting at the 1-800-FLOWERS level, the increased marketing leverage we put on them, the direct marketing capability we have with all the new enhancements to our database are some of the things that will contribute to our being able to grow those to national brands and accelerate their growth. We think we have the opportunity to do that. Lessons learned this quarter reinforce that. I think the e-commerce area is one that clearly it can grow. Our retail footprint -- our retail -- our stores do very well. And if we're going to look at that as a growth area, I think we can both on a same-store basis and on a new unit basis but no determination there yet on how fast we can go. But we think we can accelerate that growth in e-commerce, in wholesale, on cross-platform sales, on direct-to-the-consumer sales, as we grow our brand. And frankly, the investments we've been making in mobile I think will contribute disproportionately to the growth in our gift food businesses versus our flower business.

Can you just expand on expanding FruitBouquets footprint nationally, what percent of the country now can deliver that product?

I'd expect that this is the calendar year, this calendar year is the year that we can begin to step on the gas on the marketing as our coverage catches up. It's been going steady and deliberate. And I expect that sometime midyear, we'll cross the threshold where we feel comfortable enough that we have sufficient coverage to put a marketing push behind it. The business is going very well. Customer satisfaction is very high, the price points are good, the margins are good, our fulfillment partners are really enjoying the business we bring to them both within our BloomNet network and without, so I would say this is the year -- later in this year where you will see us step on the gas there.

Okay. And final question would be relating to Cheryl's cookies. What is -- I understand that you guys are going to be expanding that business now that the holiday season is over. And are you confident that you can accomplish this without incurring similar problems to what you saw at Fannie May last year?

Well, surely, we have good news there. The good news is that the Cheryl's brand continues to do very well, Jeff. Management there has done a nice job, the broadening of the product range, the introduction of our club programs, the focus that they have on the products that we just have a really differentiated product in and as we make that more and more a national brand versus a regional brand, we get excited about the growth we're already achieving and what we think we can ramp that up to. Now the challenge of that is we're going to -- our forecast is that we will grow through our capacity in the next year or 2 if we hadn't decided to shift some of our capital expenditures toward the development of the capacity there. So we have a good plan in place, we're monitoring it closely, we'll make an announcement in Ohio with the governor about the expansion of that facility in the next few weeks. Our plans are well underway there and no expansion is without risk but we think the management team is proving their ability to manage projects like this. Frankly, the learnings we have, having gone through the issues we did at Fannie May last year help us to really tighten the screws and make sure that we keep our controls on what happens there. But the overall good news is the brand is doing real well, we think it can do even better. And -- but we want to have the capacity in the years ahead to handle what we think is a business that has the opportunity to increase in size substantially.

Our next question comes from the line of Anthony Lebiedzinski from Sidoti & Company.

Just a follow-up on the previous question. So as you look to expand your capacity for Cheryl's, what kind of CapEx is going to be involved with that, please?

Yes, I think the overall guidance that we gave that we would be adding about $5 million in capital for this fiscal year as we build out that business but probably over a 3-year period, about $8 million as we're looking to expand. They have 3 bakery lines now and we'd be able to add 3 additional bakery lines with the expanded facilities. So the overall price tag is $8 million over 3 years, but this year it's $5 million.

All right. And as far as the GFGB segment, can you give us a sense to how this segment did if you exclude the wholesale baskets?

Overall, the top line growth was driven heavily by the wholesale, that performed well. But Cheryl's, as we were discussing before, Cheryl's e-commerce did extremely well and grew nearly double digits from that standpoint.

So all the e-commerce did, wholesale was flattish, except for the basket business, where it really popped.

That's right. And as we discussed before, both on consumer floral and on GFGB, overall sales, both retail and e-commerce, were impacted by the compressed shopping period during the season.

So it's on a personal basis, quite good.

Okay. And also how should we think about the revenue margin contributions from iflorist on a go-forward basis?

Bill, you covered this, but iflorist is a business we started to invest in a few years ago. It's a small business. We're working to support their growth. We got to the point now where we wanted to consolidate it so they could properly draw on the synergies and benefits that 1-800-FLOWERS could bring to the table but it's still, Bill, right, a very small business.

It is, Jim. What we really have done here is we've partnered with kind of a team of young, energetic guys, that I -- we think it's giving them access to a little more capital, as well as our e-commerce expertise can help grow that business. But right now it's still a very small business.

Got it. Okay. And lastly, how much as of now do you have left on your share repurchase authorization?

We have a $20 million authorization. We're about $5 million, $6 million into it, Bill?

Yes, a little more than that, but we still have about 12 left on it, 12, 13 months on it.

[Operator Instructions] And our next question comes from the line of Juan Bejarano from Noble Financial.

Many of them have been asked but just as a follow-up on the iflorist question, how much do you own and do you have plans to expand that to 100%? Maybe also what's the total annual revenue run rate for the company and the cash flow contribution?

This is Jim. In terms of iflorist, we own just over 50%. We have a pathway to go to 100% if that's appropriate, but we'll play the balancing act because we want to keep these young talented fellows at -- that run the business that Bill mentioned to you, we want to keep them engaged, excited and looking to grow the business and accelerate its growth off a small base because of the extra access they have to our assets now. But overall, it's a small business, I think it's about $8 million or so and there is -- there hasn't been any contribution. Well, I wouldn't expect any contribution for the next year or so because they're going to be focused on growing the top line then.

And this does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

Thank you all for your questions and your interest. If you have any additional questions, please get in touch with us. And as a reminder, as Chris mentioned, the Valentine holiday is right around the corner, so don't wait, call, click or come in to see the multitude of ways that we have to help you express yourself for this Valentine's Day and deliver smiles and a wow to your loved ones. Thank you very much.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.