1-800-FLOWERS.COM, Inc. (FLWS) Q1 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the 1-800-FLOWERS.COM Incorporated Fiscal 2016 First Quarter Results Conference Call. At this time all participants are in listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this call will be recorded. I would now like to introduce your host for today’s conference, Mr. Joseph Pititto, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Katherine. Good morning, and thank you all for joining us today to discuss 1-800-FLOWERS.COM’s financial results for our fiscal 2016 first quarter. For those of you who have not received a copy of our press release issued earlier this morning, the release can be accessed at the Investor Relations section of our website at 1800flowers.com, or you can just 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 will 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 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 earlier this morning. The company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today’s call, any recordings of today’s call, the press release issued earlier today or 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, everyone. First let me begin by saying that we’re very pleased with our results for the fiscal first quarter. The positive trends that we saw throughout last year, including solid top line growth and even stronger bottom line performance continued in this year’s first quarter positioning us well to deliver strong results for the upcoming holiday season and for the full-year. It was just a little more than a year ago that we closed on our acquisition of Harry & David, adding another iconic brand to our great family of gifting brands and significantly extending our position as a leader in the growing Gourmet Foods and Gift Baskets segment. At that time we told you that we expected the acquisition to be highly accretive even before any opportunities and indeed, it is proven to be even better than we expected, helping us drive revenues past $1.1 billion and growing EBITDA, EPS, and free cash flow significantly. We expect these trends to continue and accelerate in fiscal 2016, and we’re off to a good start in our first quarter. Worth noting is the fact that we presented our results for the first quarter on a reported and on a comparable basis adjusting for the fact that we did not own Harry & David during last years summer quarter in the first fiscal quarter. We believe that doing our results on a comparable basis is important, because we provide you with a true apples-to-apples comparison of our performance and a clear view of our progress in combining the businesses. Bill will take you through the comparisons in his remarks in a few minutes. But before I turn the call over to him, I’d like to cover a few highlights from this quarter. First on our Harry & David business, we achieved solid year-over-year revenue growth, while significantly reducing the seasonal operating losses for the period. We do this by leveraging our shared services platform, including our IT, human resources, technology and sourcing among other assets to capture operating efficiencies. These efforts, driven by the very talented teams that we have assembled across the enterprise, are doing an excellent job of identifying and aggressively pursuing cost synergies in all areas of our operations. As a result of these efforts, we’re confident in our ability to achieve the $15 million in operating cost synergies that we originally forecast and potentially exceed that they get in the years ahead. In addition to Harry & David, we saw a solid performance across our Gourmet Foods and Gift Baskets segment during the first quarter. We’re growing customer demand in our Cheryl’s and 1-800-Baskets brands in particular. As we noted in our release this morning, some of the revenues associated with this demand was shifted into the current fiscal second quarter, based on when some of our customers requested their deliveries. In our 1-800 FLOWERS.COM Consumer Floral business, we recorded a 5th consecutive quarter of increased contribution margin on revenues that were essentially flat, primarily related to the sale at the end of the last year of some non-core businesses. As we look at the competitive landscape in this category, we continue to see opportunities to expand our market leadership and enhance our profit margins by deepening the relationships we have with our customers to effective and efficient marketing programs. In BloomNet, we achieved strong top line and bottom line growth with revenues up nearly 8% and contribution margin up more than 6% for the quarter. BloomNet continues to extend its market penetration, as well as the competition by levering its better value proposition of Floral and its well earned reputation for innovative products and services. Overall, we believe the positive trends we’re seeing across all of our businesses bode well for the key upcoming holiday season and for the full fiscal year. I’ll now turn the call over to Bill, for a review of the financial and operating metrics for this quarter.

Thank you. As Jim noted in his remarks, we have presented our first quarter results on both on reported and comparable basis. This provides more accurate view of the strong year-over-year performance by comparing this year’s first quarter to a pro forma 2015 first quarter, that has been adjusted to include Harry & David results for that period, as well as excluding one-time transaction and integration related expenses incurred in the prior year and the current year period, respectively. As we have noted in the past, Harry & David results were not included in our reported results for last year’s fiscal first quarter, due to the timing of the close of the acquisition on September 30, 2014. In addition, our first quarter earnings include an after-tax benefit of $10.3 million, or $0.15 per share, which reflects the final settlement of our insurance claim related to the fire at our Fannie May warehouse and distribution center that occurred on Thanksgiving Day last year. Net of cost related to the write down of certain non-core foreign business assets, which I’ll discuss a bit more in a few – in a moment. You’ll also find details and a reconciliation of all these adjustments in the tables attached to this morning’s press release. Now, regarding special financial results and key metrics for the first quarter. Total net revenues increased 23.2% to $156 million compared with $126.7 million in the prior year period. This reflects the contribution from Harry & David, which was not included in last year’s first quarter numbers. On a comparable basis, including the pro forma Harry & David revenues in the prior year period, revenues were essentially flat year-over-year. This reflects the combination of 7.7% revenue growth in BloomNet, which continues to benefit from new product and service offerings, and strong e-commerce growth in our Gourmet Food and Gift Baskets business, offset by slightly lower revenues in our Consumer Floral segment, which primarily reflects the sale of certain non-core businesses completed at the end of last year, and a shift of some mass market customer shipments within the Gourmet Food and Gift Baskets segment into the current fiscal second quarter. Gross margin for the quarter increased to 120 basis points to 43.3%, compared with 42.1% in the prior year period. This was primarily driven by 20 and 30 basis points improvement in our Gourmet Food and Gift Baskets segment and an 80 basis point improvement in our gourmet – in our Consumer Floral segment, which more than offset a 70 basis point decline in BloomNet’s gross margin. Importantly, we see opportunities for continued gross margin improvements to product mix, synergy savings, and our focus on efficient promotional marketing campaigns. Reported operating expense and operating expense ratio, excluding stock-based compensation were higher during the quarter, reflecting the Harry & David operating expenses, which were not included in the prior year period. On a comparable basis, operating expenses, excluding stock-based compensation were down slightly to $87.4 million compared with the pro forma of $87.9 million in the prior year period, and operating expense ratio improved 30 basis points to 56% of total revenues. Adjusted EBITDA on a comparable basis improved 16.9%, or $2.4 million to a loss of $12 million compared with a loss of $14.4 million in the prior year period. Net loss for the quarter was $4.5 million, or $0.07 per share compared with a net loss of $4.3 million, or $0.07 per share in the prior year period. Our net loss and EPS results for the quarter, including the aforementioned one-time after-tax benefit of $10.3 million, which reflects the combination of the following. The final settlement of our insurance claim related to the Fannie May warehouse and distribution center that occurred on Thanksgiving Day, 2014. The final settlement was $55 million, which resulted in a pre-tax gain of $19.6 million in the first quarter. This was slightly offset by an impairment charge of $1.9 million related to the sale in October 2015 of our UK – of UK business and a write down of $1.7 million related to an equity investment we have made in a small flow e-commerce company in Brazil. Net of taxes, the aggregate amount of these three events was $10.3 million. On a comparable basis, adjusted net loss improved $1.2 million, or $0.02 per share to a net loss of $14.3 million, or $0.22 per share compared with a pro forma net loss of about $15.5 million, or $0.24 per share in the prior year period. In terms of customer metrics, during the quarter, our e-commerce orders grew 18.4% to 1,557,000, compared with 1,315,000 in the year-ago period, primarily reflecting the Harry & David contributions. Average order value during the quarter increased 5.2% to $67.26 compared with $63.92 in the prior year period. And during the quarter, we added 500,000 new customers, up 16.9% compared with 427,000 new customers in the prior year period, primarily reflecting the contributions of Harry & David in the quarter. This was achieved while concurrently stimulating repeat orders from existing customers who represented 55.4% of total customers. In terms of category results, in our 1-800-FLOWERS. Inc Consumer Floral segment, revenues were $72.9 million, down 1.9%, compared with $74.4 million in the prior year period, and this primarily reflects the sale of two small non-core businesses that we completed in the – at the end of fiscal 2015. Gross margin increased 80 basis points to 39.4%, compared with 38.6% in the prior year period, reflecting efficient use of promotional marketing campaigns, as well as enhanced product mix. And category contribution margin in this segment increased for the 5th consecutive quarter, up 4.1% to $7.5 million, compared with $7.2 million in the prior year period. The company defines category contribution margin as earnings before interest, taxes, depreciation, and amortization, and before the allocation of corporate overhead expenses. In BloomNet, revenues for the quarter grew 7.7% to $21.5 million compared with $20 million in the prior year period. Gross profit margin was 54.6%, down 70 basis points compared with 55.3% in the prior year period, primarily attributable to product and service mix. And contribution margin increased 6.4% to $6.9 million, compared with $6.5 million in the prior year period. In Gourmet Foods and Gift Baskets, revenue increased 90.3% to $61.6 million, compared with $32.4 million in the prior year period, primarily reflecting the contributions from Harry & David. On a comparable basis, including the pro forma Harry & David contributions in the prior year period, revenues in this segment were essentially flat year-over-year. This reflects the combination of strong e-commerce growth in the segment, offset by the shift of some mass market customer shipments into the current fiscal second quarter. Gross profit margin increased 230 basis points to 43.2% compared with 40.9% in the prior year period, reflecting product and channel mix, as well as the contributions of Harry & David. Contribution margin loss was $8.5 million compared with $2.4 million in the prior year period, reflecting the seasonal operating losses associated with Harry & David. Importantly, we significantly reduced the Harry & David operating losses on a year-over-year basis by successfully leveraging our shared services and operating platform during the quarter. As a result on a comparable basis, contribution margin in the segment improved 14%, or $1.4 million to a loss of $8.5 million compared with the pro forma loss of $9.9 million in the prior year period. In terms of corporate expenses. As I stated earlier, our category contribution margin results exclude cost associated with the company’s enterprise shared services platform, which includes among other services IT, HR, finance, legal and executive. These functions are operating under a centralized management platform providing support services to the entire organization. For the fiscal first quarter, corporate expense from continuing operations, including stock-based compensation, but excluding approximately 800,000 in one-time integration costs was higher compared to the prior year period, due to the incremental operating expenses associated with Harry & David. On a comparable basis, including the Harry & David results in the prior year period, corporate expenses were essentially unchanged at $19.4 million compared with $19.5 million in the prior year period. Turning to our balance sheet. At the end of the first quarter, our cash and investment position was approximately $2 million. Borrowings working capital under our revolving credit facility were approximately $129 million, primarily reflecting investments in inventory to support growth for the upcoming holiday period. This amount is consistent with the combined working capital borrowings of the company, including Harry & David in the prior year period. Inventory of approximately $188 million is within management’s expectations and reflects the seasonal increases to support growth with all of our Gourmet Foods and Gift Baskets brands during the holiday season. Regarding guidance. We’re reiterating the guidance we provided at the beginning of the current fiscal year, which which calls for consolidated revenue growth in a range of 5% to 7%, compared with revenues of $1.12 billion reported for fiscal 2015. In terms of bottom line results, we expect to grow EBITDA approximately 10% and EPS in excess of 20% versus comparable fiscal 2015 adjusted EBITDA of $80.5 million and comparable fiscal 2015 adjusted EPS of $0.32 per diluted share. We anticipate generating approximately $35 million in free cash flow for the full-year, excluding the insurance proceeds received related to Fannie May volume. I’ll now turn the call to our President, Chris McCann.

Thanks, Bill. Fiscal first quarter includes what it sometimes referred to as the slow summer months, but reality period is anything but slow for us. Across all of our businesses and particularly in our gourmet food and gift baskets brands, our team has been working diligently to prepare for what we expect would be a very successful holiday season. For this call, we are excited by the increasing opportunities we see to engage with our customers and deepened our relationships with them through a broad range of cross-brand marketing and merchandising programs, including our multi-brand website, where we’re seeing steady growth in the number of customers who are engaging with multiple brands to solve their gifting needs for an expanding range of celebratory occasions. While this initiative is still in its early stages, we continue to see incremental improvement in customer behavior in terms of enhanced retention, frequency, and lifetime value. During the first quarter, we added boutique tabs for Harry & David and Wolferman’s to the site, giving our customers even more opportunities for new plant discovery, while providing these iconic brands with exposure to millions of potential new customers. In all of our market initiatives, we’re increasingly leveraging our expanded customer database with millions of engaged shoppings, as well as the new CRM tools designed to help us improve our targeting and enhance the relevance of our marketing communications. In our direct marketing programs, we’ve leveraged to create the talents across the company to develop and begin testing innovative multi-brand gift catalogs. We even have a compelling new catalog specifically designed to feature our expanded range of gourmet gift clubs and subscription programs, including everything from Harry & David’s signature Fruit-of-the-Month Club, the Cheryl’s Cookie Clubs, wine and cheese clubs, Fannie May chocolate clubs, and even a Moose Munch Gourmet Popcorn Club. In retail, we’re testing a new multi-brand kiosk model in several locations around the country, expanding brand awareness and reaching customers who like to do, at least, some of their holiday shopping on foot rather than in online. In mobile, we continue to be the leading innovator in our space, recently launching a new native Android app for 1-800 FLOWERS.COM that includes a streamlined checkout process, as well as easy access to our celebrations rewards program and special offers to returning customers. We’ve also launched a new Tablet 5, that’s fully optimized for large touchscreens, including iPad and Kindle devices. And to paraphrase Jim’s quotes from this morning’s press release, these initiatives and many more like them are helping us to position us to be better than any time in the past to solve for our customers celebratory and gifting need, and thereby deliver a strong holiday season and another full-year of growth. I’ll now turn the call back to Jim for a wrap up thing.

Well, thanks, Chris. You can see we’re right where we expected to be and want to be. We’re very pleased with our first quarter results. We continue to see positive trends across our businesses and we plan to build on those going forward. We’re excited by the opportunities we see to deepen our relationships with our customers through our omnichannel focus, which enables us to reach customers wherever, whenever, and however they choose to shop for their gifts. Our multi-brand website featuring our extended offering of great gift brands and unique suite of services, including the Celebrations Passport free shipping program, the Celebrations Gift reminder service, and the Celebration Rewards loyalty program. Our award winning customer service platform and our industry-leading innovations in mobile and social e-commerce also help us. All of these initiatives plus many more underway are helping us become unique, one shop destination for an increasing range to customers gifting and celebratory occasions. They’re also helping us drive enhanced top and bottom line growth and build shareholder value. That concludes our formal remarks. And I’ll ask Kathrine, if you would give the instructions for the question-and-answer portion of our call.

Thank you. [Operator Instructions] Our first question comes from Jeff Stein with Northcoast Research. Your line is open.

Good morning, guys. Just a couple of questions here. First of all, maybe you could help us understand a little bit better the organic revenue growth, excluding Harry & David and some of the noise that was created by the revenue shift and the asset dispositions. So maybe you can talk a little bit about Harry & David’s growth? How much the revenue shift accounted for and then the small asset dispositions?

All right. I’ll ask – this is Jim, and Jeff, I’ll ask Bill to give you the details on it. But overall, we continue to look at the portfolio of brands and services that we have that we go to our customers with. And in case of our, some of our international investments, we decided there was a better way to manage those going forward, so we took some steps there. And then we had one business that really wasn’t growing and didn’t have the growth characteristics of the rest of our business in the flowers business, so we decided to dispose of that. So that’s why you heard Bill say that we would have been a push on the flowers business in terms of growth without that disposition. And on a Harry & David business, he will give you the details, but what we had was our good growth of several million dollars and good savings of several million dollars that were realized in two different places. Bill, a little color on that for Jeff?

Yes, so a few things. Getting back to Consumer Floral, where we disposed of several non-core assets back in June of last year, we reported revenues down 1.9%, or $1.5 million basically all of that was related to those non-core assets and Consumer Floral was essentially flat without on a two apples-to-apples basis. With respect to Harry & David, we saw nice growth several million dollars of growth in the first quarter kind of in a – on a core basis in a mid to upper single-digit growth from that standpoint. But as Jim referenced equally as important, as we were able to take several million dollars of costs out of the Harry & David business. That reports on two different lines within the way we report our financials. One within the Gourmet Food and Gift Baskets contribution, which are kind of direct items related to the Harry & David. And then certain of the costs we were able to take out of the shared services platform like IT, finance, HR, those all set kind of on the corporate line. And then finally on the wholesale revenues that shifted from Q1 to Q2, that’s also in a several millions of dollars that will get in Q2 that were in the prior year in Q1 and what we plan for and budget in Q1, but because of the mass merchant customers wanted them in Q2, we shifted them to Q2.

So, Jeff, there are two situations that suggest that to get it the best comparison, you should look at the first and second quarter combined fiscal quarters, and the third and fourth combined. And the two shifts are increasingly we’re seeing some of our customers want their product later, so they don’t have it on their books at the end of the quarter. So you see that impacting those shipments this year. those are booked. Those are orders now – have now been shipped.

That have now actually shipped.

Yes, but it will be shipped in this quarter sort of revenues recognized in this quarter. And the other factor is, it used to shift between the third and fourth quarter. So to give the best comparisons, it’s good to step back and look at the – our business in two halves first and second.

Got it. Are you expecting to see growth in your – in the wholesale segment of Gourmet Food and Gift Baskets business this year?

Yes.

You’re. Okay. And how should we think about measuring the traction you’re getting from the multi-brand portal at this point. Do you have any metrics you can share with us in terms of cross-brand marketing and number of customers that have signed up for passport and so forth?

Yes, Jeff, what you’re continuing to see from us there is, again, something like this is a long-term strategy as your customer database from one category into another. We’re seeing good steady incremental growth. And then also as I started to point out there, we have a number of tests going on right now, both on cross-merchandising, cross-marketing, whether it would be some of the catalog test that I mentioned, some of the floral and inserts. What we’re seeing really from our first true initiative, which is just putting up the multi-brand website and those tabs out there, simply exposing the brands in front of millions of customers is we’re seeing good cross-brand shopping behavior, and it’s a nice steady increase. So, while it’s still very early in a cycle here, we’re very pleased with our early results.

Okay. And final question. One for Bill, wondering if you could tell us how much Harry & David boosted the gross margin in the Gourmet Food and Gift Baskets category?

Yes. So we saw a 120 basis points improvement in gross margins overall. But even if we had, if we did – if we compare it on a pro forma basis and had Harry & David as of the beginning of last year. So apples-to-apples, it would still be a 100 basis points improvement in gross margin even without Harry & David, I mean, with Harry & David on an apples-to-apples.

And was any of that – how much of that 100 basis points build would be attributable to synergies and how much is just attributable to some of the other things that you’ve done maybe seeing lower commodity prices and so forth?

Yes, I would say, it’s probably split three ways. One is kind of sourcing synergies that we get. Additionally, lower promotional pricing, discounting was very highly conscious of that and anyway some channel mix to it with some of the wholesale revenue shipping to the second quarter, you get some benefit of the mix of revenues that are in the quarter that also contributed to that.

Got it. Okay. Thank you.

Thank you. Our next question comes from Linda Bolton Weiser with B. Riley. Your line is open.

Hi. So I just wanted to just again go to the GFGB segment, the profitability and at the contribution margin line, so it improved $1.4 million year-over-year. I mean, is all of that improvement due to Harry & David, or I’m just trying to figure out like what the base business, excluding Harry & David contribution margin did, did it improve or did it deteriorate a little bit?

This is Bill, I think the answer would be in a general sense Harry & David was a biggest contributor to that. Without Harry & David, we would have been flattish. Of course, you have the expenses of the business that shifted, but not the revenue from it. So if you put it all together and the timing was different, you would have Harry & David improvement and GFGB improvement.

Exactly right. So, again, you had $7 million of wholesale revenues that shifted from Q1 to Q2, if that was back in the first quarter, the spreading within the growth of contribution margin within GFGB would have been much greater than $1.4 million.

Yes. Okay, I understand. And then can I just ask about the Consumer Floral segment, I understand what you said about these businesses that you exited. So that would be in a fact that would continue on for the next few quarters. So we have a negative Valentine’s Day situation placement again coming up, I guess, in the fiscal third quarter. So it seems to be that the Consumer Floral sales for the year absolutely cannot be up, I mean, we’re going to have to project some sort of amount of decline for the full-year, is that – is my thinking correct on that?

Yes. We think so. And then the important thing that we look to do and even Bill mentioned just a moment ago is well on the gross margin improvement across the businesses, where we’re really focused on efficient promotional marketing campaigns, not chasing like we did last year on Valentine’s Day, but not chasing on profitable business, and that’s contributing to how we’ve now just had five consecutive quarters in a row of improving the bottom line in Consumer Floral segment.

And, again, Linda, within the Consumer Floral segment, we’ll give you in each of these quarters, we’ll give you kind of the core, apples-to-apples, year-over-year performance, because we do have non-core businesses that we sold in June of last year, and as we announced it today, we just sold in October a small e-commerce business in the UK that rolled up into that segment as well. So you do have those loss revenues. Those – none of those non-core assets really contributing to our bottom line perspective and obviously our attention is focused on where we can actually grow the business.

Which is why they gone and why we expect to continue that trend of five quarters of steady improvement on the bottom line.

Gotcha. Okay. And then can I just ask you about the cash flow, of course, there’s a lot of weird comparisons here. But your operating cash flow was a little more negative than I would have thought, I would assume that because of the inclusion of Harry & David and the inventory build. So in terms of the second quarter operating cash flow, the $238 million we saw last year which was a big number, but is that normal, I mean, like in other words, would you expect at least as big, if not bigger in the second quarter of 2016?

Yes. Again, Linda, cash flow really I look at it on a – it’s not a great comparison on a quarter-to-quarter basis. It’s going to be – we reported on the straight math of cash flow – of free cash flow like $90 million of free cash flow because of the timing of the Harry & David transaction last year. Our guidance on our normal free cash flow is in the mid-30s, in the $35 million range. But we will drive significant free cash flow in the second quarter. What you saw is that kind of the negative in the first quarter is all the inventory build in support of the holiday, we have over nearly 50% of our overall revenues and significantly more than 50% of our revenues within GFGB or in this quarter we’ve guided having David has 70% of their revenues in this quarter. So while our inventory turns into cash during this quarter and generates significant free cash flow in this quarter.

So, in the second quarter, it will be positive, but not as positive as the $238 million last year?

That’s right that was due to the timing of the Harry & David transaction.

Remember we did have all the inventory build last year, because we didn’t own them in the first quarter.

Right.

Right. Got you. Okay and then so I know you talked about the Harry & David synergies and there’s the two lines where it’s reflected, but if you put it both together of the $5 million that most of us would expect in synergies this year. How much do you think you would see in the first fiscal quarter?

I’ll talk it break it out on a quarterly basis you saw an improvement of a couple of few million dollars in our cost basis towards that $5 million already in the first quarter. But that’s where it’s going to show of the most, because the inventory is – the revenue is the lightest.

Yes, I mean, again with the biggest items are in the shared services platform those platform we’ve taken costs out of IT, finance, human resources, those are, of course, is almost straight line, right? If that – those cost of lines you’re going to get basically a quarter of that each quarter going forward and then obviously with respect to sourcing and those things those are being more heavily weighted towards that other quarters right.

This quarter, because it’s disproportionate share of the revenue for GFGB without Harry & David and certainly we’re.

Okay. And then just one last one on the big holiday quarter coming up…

Linda? We lost it.

Our next question comes – yes, it’s her line, she just dropped.

Okay fine.

So we’ll go ahead to next question.

I hope Linda, dials back in with that question. Go ahead Katherine.

Okay. Our next one comes from Dan Kurnos with Benchmark Company. Your line is open.

Well, I’ll do my best to ask several holiday question so maybe I’ll cover Linda’s question in the process. But just first quickly Bill, just a press on some of the stuff Jeff and I guess Linda to a degree was asking about could you just tell us just for modeling purposes if there’s any seasonality to those divested businesses and if there’s sort of $6 million is it fair or $6 million is kind of a fair annualized run rate?

There’s some seasonality to that, because of slow nature of their businesses they.

Well.

Always they’re lowest in terms of revenue.

The one that we got it up in the flowers business that was disproportionately the second fiscal quarter. And as U.K. business was disproportionately third and fourth quarter, because that’s floral nature of it.

That’s correct.

But I believe it’s $6 million right number.

Yes, it’s actually, it’s bigger between the two between the timing probably close to the $10 million of revenues between what we disposed in the second quarter year and what we disposed.

And keep in mind on the second piece Dan, the floral business when we say we disposed it we traded it for a minority interest in a much bigger company in Europe that we’ve been building and growing a good working relationship company is called Euro Flowers it’s a been European floral company much like our own here in U.S. But we just when we looked at it the scope of our dialogue with them they suggested and we finally agreed that it would make sense for us to contribute those assets to them they’re going to grow bigger and faster on a bigger platform. And as Bill mentioned in his comments earlier when we look at our bandwidth, and our focus there are so many things we have up right here that warrant our time and attention that have outsized growth and outsized profit contribution potential that have made sense for us to contribute those assets and continue all partnership with the larger company by contributing those U.K. assets to Europe or us and therefore maintaining a minority interest. So when we dispose of it it’s just in the form so it’s not going to be in our numbers, but we do have minority interest.

All right good words that’s good clarification anyway so people aren’t taking all that extra revenue. And so couple of other house-keeping quick house-keeping questions on BloomNet can you just give us a sense of how much that new I guess it’s not really new, but it still impact last quarter. The new incentive business center program benefited results and how many more quarters of runway you have there?

Yes, so we had two more quarters in runway with respect to the program that we put in place in the third quarter of last year, but we also had nice contributions from summing of hard goods and wholesale products in there which contributed to that nearly 8% growth in BloomNet.

I was going to ask you about that I assumed it was some wholesale stuff that was maybe pushing margins a little bit down in the quarter although profitability was still healthy so…

That’s correct Daniel.

Okay and then one just last housekeeping question on Harry & David, I’m not trying to ask it this way. But how much of the growth in the quarter that sort of mid to high single-digit as you called out, Bill, was reflective of the fact that obviously prior ownership pulled forward some sales last year out of Q1 ahead of the sale of the business unit?

Yes, probably half of that. So, we still would have had nice growth in Harry & David even without that.

Perfect. All right. Thanks. And then so let me ask the holiday questions and whoever feel free to chime in. So first, I assume you guys are waiting to January to make a decision on essentially profit neutral H&D retail stores?

Well, we’re not going to wait, Dan, it’s Jim. We’re in omnichannel retail, we like retail where it matters and where it pays. We told you during the last call and subsequent dialog, I’m sure that we like some of the retail operations that they have. The team there is testing a seasonal stores. We actually increased the account on our seasonal stores a couple of units this year. We’re also testing our multi-branded kiosk in the Midwest this year featuring several of our Gift Food brands, we’re excited about that. In terms of the existing store footprint for Harry & David, we’re running several different tests during this holiday period. We think we have some real gems in there. And then we’ll assess in January what the results of those tests have been and what our decision is on a go-forward basis in terms of where do we reinvest and double down on our retail growth strategies there and where do we prone like we’ve been doing you see the things we discussed earlier, we’ll continue to improve, but our overall intention is to grow.

And, Dan, remember the leases of all tied to a January date. So that is a natural time, not only do you get the readings of the holiday season, but leases roll-up in January or a portion – some of the store leases are up in January. So that’s the natural time to take a look at that.

Got it. And then second, can you guys talk about maybe the levels of planned promotional activity versus last year when you obviously had the impact of the warehouse fire?

Well, I would say that, let’s isolate the businesses down. On the chocolate side of business, there was a lot of good news about the fire last year. But one of the good new segments we – one of the good new pieces we were able to discern as a result of that experience is that how loyal and steady our customer base is for the Fannie May Harry London products. And so we were obviously a lot less promotional last year after the fire than we would have been under normal circumstances, because we just didn’t have the inventory. And so the lesson learned there is, we didn’t need to be this promotional. So I think you can expect that our choco brands will be less promotional. I’ll tell you, we’re back in terms of our inventories we’ve been replenished, our supplies have been replenished, that was still a temporary warehouse facility, and we’ll stay in that facility, and it’s operating fine through this holiday period. Our original facility is under construction, that would be rebuilt. But we wouldn’t expect we’ll make that move until the new calendar year when we have this holiday well behind us. So we do expect that Fannie May and Harry London brands are – and Fannie Fanny Farmer brands are all back, fully stocked, full inventory with a really strong management team there really show their stuff during this recovery period. In terms of promotional aspects in the Floral business, Chris, would you want to comment on that?

Sure. I’ll just say, Dan, kind of across all of that businesses what you continue to see from us is a very disciplined approach and how we mange our brands and how we position the value offerings of our brands to solve our customers needs. So I think across whether it would be Floral or whether it would be the gourmet food brands, we continue to drive solid efficient promotional activity. We don’t want to chase unprofitable business, then coupled with the fact that we just continue to add such iconic brands like Harry & David and then into the multi-brand strategy, the celebratory ecosystem. It gives us a long-term view of delivering value to our customers with a less dependency on promotional activity.

You heard me referenced, Dan, is celebratory suite of services that help our customers, whether it’s reminder for Celebrations Reminders, Celebrations Passport, which is our frees shipping program. Those programs are where you’re seeing those drive our energy and assets, because they help us expose to our customers to a broader range of our products and give them value for their increased relationship with us and frequency with us. So that’s where we’re shifting our efforts in the database drive, marketing side, the cross-brand promotional things, the celebratory suite of sticky services.

And, Jim, since I was really directing that more on the chocolate side, just to be clear, we might see, since you have the inventory back, we might see some more promotional activity than last year, but clearly scaled significantly down from where you used to have it, is that a fair characteristic?

I think that’s quite fair last year we couldn’t do anything in fact we lost effort, because we had promotions plan that we didn’t have the inventory for. So yes I think it will be between just like you said we certainly won’t be as promotional as we were the year before. We were unpromotional last year, because we didn’t have inventory. So on the chocolate side you’ll see something up land in between we now do we have the inventories we’ll do some promotional things, but it won’t new as aggressive it might have been in the past.

Got it. Just last one from me if I could just can you guys speak any expanded mass market penetration you’re expecting to benefit from and maybe more generically how you broader product offering is either opening doors or allowing you guys to create some new skews this holiday period?

I think it – I think we as Bill, mentioned or an answer to a question from Jeff early on. We expect the wholesale side of our business to grow. We see that it’s a brand extension opportunity or brand building opportunity. I’ll give you a couple of for instance there. In our 1-800 Baskets division our wholesale division 1-800 Baskets where we in fact we design in fact so us and deliver baskets to our wholesale customers. They long as this long holidays that they wanted the Harry & David brand in their stores. They couldn’t get access to it now we can. So we’ll have a few skews of Harry & David product in our Gift Baskets in mass this year. We weren’t able to do a lot, because we didn’t have the company in our hands, back earlier late last year to do that, because this is a we’re selling now for Christmas of 2016. So you would expect those four skews this year will be many more next year. So we see that’s a big opportunity. The other is in Moose Munch, Moose Munch is a terrific brand well-known nationwide it’s a amazingly small in revenue for company that has such great product and great brand recognition. So that’s one way we’re seeing really interesting in incoming calls and response to our dialogue about what we might do regarding the wholesale shelf that’s a great way to extend that brand lever our facilities I’m excited about it, because I think it can be a really big business for us without any CapEx behind it and just create a big brand that’s going to have a big ecommerce capability and opportunity as a result of the exposure we’ll get in our wholesale environment.

All right perfect. Thanks guys I appreciate all the color.

Thank you.

Thank you. Our next question comes from Anthony Lebiedzinski with Sidoti & Company. Your line is open.

Yes, good morning. Thank you for taking a question. So I was just wondering as far as being less promotional is that perhaps the function of just a competitive landscape not being quite as challenging, because one of your major competitors bought out another competitor or just as overall wanted to get your take on the competitive landscape for the holiday quarter?

Actually there’s two different answers to that question Anthony. One is the one we were just talking about on the gift food side of our business particularly on the chocolate side it is as competitive as ever perhaps more competitive. But what we’ve found is the strength of our brands as such. A loyalty of our customers is such as that we were over reaching in years gone by in terms of how promotional we would be. We misinterpreted how promotional we needed to be. Having had the experience we the negative trends with the last year we now know that we don’t have to be as price promotional, promotional in different ways, but not price promotional therefore maintaining our margins. On the floral side you said well, I think your question was is it partially result of the consolidation has happened between our competitors and floral business. I will tell you that FTD having acquired ProFlowers FTD is a good well run company with a great brand. I think ProFlowers the company they acquired was much more promotional. And frankly it was damaging in some ways to the category screaming promotion, cheap flowers all the time it so it diminish the value of the product. I think now having the FTD management run these two is both of those brands I think you see them trying to build their brand value, which is good for them, good for the customer and good for us and the whole category.

Got it. Yes, thanks for that. And earlier there were some questions about inventory levels and I was wondering if you guys could share with us what’s your expectation is where inventories and your debt levels could be at the end of your December quarter?

Bill, do you want to add anything.

Yes, so lot of inventory that we have on the books now we’ll turn this during quarter and turn into and cash I think I mentioned that so inventories will be down significantly and will be comparable versus to where the were at the end of the second quarter last year and maybe even slightly below that.

Quantify that, would that be 80, 90?

In that range Jim.

Yeah.

Okay.

[indiscernible] question…

So, the revolver we’re evolving off that we have mentioned $129 million revolving on the working capital will be all gone. So we’ll turn from into the first quarter where obviously cash is low and we have our revolver borrowings, so the revolver borrowings will be paid off and will be in excess of $100 million in cash at the end of the second quarter.

And shift from the 129 million into the revolver today at the end of the quarter to that being zero at about $100 million on our cash line.

That’s right. In excess of $100 million of cash.

All right, that’s very helpful and lastly Jim, you had mentioned earlier that as far as the synergies that you could potentially exceed the $50 million number, so are we about a quarter away or two quarters or perhaps year away before you could potentially adjust the synergy estimate?

I could say mid-next year when I say that in the second, third quarter we should have much better visibility because we will have had gone through all big revenue quarter, our workstreams will be continuing, so I would say at the end of the third quarter, at the end of the fourth quarter, certainly we’ll give you a renewed outlook on where we are there. What we’re saying is the $15 million looks very accomplishable, if that was a target, if we’re telling you we’re quite comfortable with that and we are hopeful and expecting that workstreams continue the way they are going, the wonderful integration, the great job our management teams are doing that we’d hope to revisit our question just as you suggest in the third or fourth quarter next year–this fiscal year.

Thank you very much.

Thank you, Anthony.

Thank you. [Operator Instructions] Our next question comes from Juan Bejarano with Noble Financial. Your line is open.

Hi, good morning and thank you for taking my questions. So, last year’s holiday season you ran both Harry & David and 1-800-FLOWERS separate so it’s not to disrupt either business now that you’re integrated with Harry & David maybe what’s changed if anything, do you feel everything is running smoothly in fiscal Q2, maybe running even better than you initially expected, just want to get your comments around that.

Sure Juan. Last year, we closed our transaction on September 30. We left everything in place for the fourth calendar quarter, the second fiscal quarter because their inventory build, their promotional plans, their merchandising schemes, their catalog distribution plans were built throughout the year and were all about execution during that quarter. Fast forward a year later, we have a new management team in there. We have taken a lot of cost out of it. The team is working real well together not only as a stand-alone unit but now it’s clearly integrated with the rest of our enterprise sitting on the platform, we call that platform [bulb], which is our logistics capability, our technology, our business operations capability and it’s really come together now to be one enterprise platform. So, from an enterprise integration point of view, good things happening there which essentially are in the platform and getting deeper entrenched every day. We feel really good about the management team both those that have stepped up and have been internally promoted within Harry & David and a couple of few people that we brought in from other parts of our organization or from the outside, so we are happy to see how they gelled as a team. So, we feel very good, but we’ve been retailers for coming up on 40 years and what you never do is tell everybody I’m extremely excited about the quarter because there’s so many things that could go wrong or out of our control but I’m telling you we’re feeling very good about the quarter, we’re feeling very good about the management team and as you can tell from what Joe and Bill and Chris have expressed here, we feel like this quarter went the way it should, the first fiscal quarter the one we’re reporting on and here we are into the second quarter, the all important month for us and we’re feeling confident what we’ve learnt and never be overconfident.

Great. Thank you for that and I know you currently have the multi-tab strategy, but would you ever consider or maybe what are you doing to provide a URL that incorporates all the brands under one URL, may be like an Amazon is that something you would ever consider at all?

Yeah, Juan, right now we’re going down a strategy that we firmly believe and it’s really a multi-brand strategy, especially as we move into the gourmet food category. We really we have great brands that really have authority and relevance in their product categories. So, what’s unique about our strategy as opposed to a single brand strategy is that people come in, they might form a relationship with Harry & David, they might form a relationship of course with Fannie May and then they come into our ecosystem and we are able to expose them to these other powerful relevant brands that then we think is a better mechanism to gain increased retention and increased frequency from those customer relationships.

But Juan, you should always expect that we’re always testing that hypothesis and that plan that Chris just referenced you where we build the sanctity of each brand and it’s a very different strategy to others to go to markets of each of those brands continues to grow and have its specific category relevant, but we’re always testing different ways to go to market so well, that is our answer today, we’re always mindful the world could change and we ought to know what the answers might be if we decide to go in other direction.

Got it. Thank you for that and maybe for Bill, I was just wondering if you have the total amount of e-commerce customers from last year including Harry & David?

Yeah, we have that.

That is the number of customers.

I think that is the number of customers.

Yeah, the 500,000 new customers that we have–that we reported on included Harry & David versus the 427,000 a year ago was..

But that was pro forma that number, or was the incremental [indiscernible].

Got it. That’s right.

Got that Juan?

Yeah, so, no, maybe if you can repeat that I’m sorry.

We reported on 500,000 new customers gained during the quarter that included Harry & David this year to 427,000 of new customers that we gained in the first quarter last year was without having David. So, the lion’s share of the growth was with the Harry & David customer base.

Okay. All right, thank you, that’s it for me.

Thank you.

Thank you. I’m showing no further questions at this time I’d like to turn the call back to Mr. Jim McCann for any closing remarks.

Well, thank you folks. It’s a more difficult story to tell now, one that we understand where we’re trying to get better at being able to give the transparency that helps you to understand our business better, we figured the more that we can do that the better you’re going to see our business, understand our business and feel as good about it as we do. So, I hope that was helpful to you, we welcome any other suggestions you have in terms of how we can do a better job of telling our story because with the addition of Harry & David we go from a company that had three quarters of profitability to a company that has one quarter of enormous profitability and that’s a more difficult story to tell, but we appreciate the input, suggestions and feedback you’ve given us since our last call in terms of how to make the information better and I hope it was helpful for you today. So, we look forward to continuing our dialog with you and wishing you as good and a successful fourth calendar quarter second fiscal quarter as we are planning. Thank you very much.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude today’s program, you may all disconnect, everyone have a great day.