1-800-FLOWERS.COM, Inc. (FLWS) Q2 2016 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the 1-800-FLOWERS.COM Fiscal 2016 Second 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, today’s conference call is being recorded. I would now like to turn the conference over to Joseph Pititto, Senior Vice President of Investor Relations. Please go ahead.

Thank you, [Candice]. Good morning everyone. Thank you for joining us today to discuss 1-800-FLOWERS.COM’s financial results for our fiscal 2016 second quarter. For those of you who have not received a copy of our press release issued earlier this morning, the release can be accessed at the Investor Relations section of our website at 1800flowers.com. Our call today will being with a 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 are very pleased to report another quarter of strong execution and earnings momentum. By many accounts the recent holiday season was a challenging one and our top-line growth was not as strong as we would have liked. Nevertheless, we achieved strong bottom line results with more than 20% growth in EBITDA and more than 35% growth in EPS. In addition, we continued to execute our integration initiatives for Harry & David and we are now ahead of our forecast of capturing operating synergies across our platform. These efforts are helping us to keep on track to hit our full year EBITDA and EPS guidance, which we reiterated in this morning's press release. Chris and Bill will both provide more details in their comments in a few minutes. As most of you know, the acquisition of Harry & David last year marked a significant step in our strategy to expand our offerings so that we can solve for our broader range of customers gifting and celebratory needs. The addition of Harry & David, Wolferman's and Moose Munch to our familiar of brands has helped to catapult us into a leadership position in the growing gourmet food and gift basket category, which now represents more than half of our annual revenue. This category is predominantly a holiday season business, representing more than 75% of our total sales for this past quarter. As such the year-over-year growth in this area on both the reported and comparable basis was the primary driver of our overall growth for the quarter. During the period, in our gourmet food and gift basket segment, we grew revenues in Fannie May, Harry & David's Cheryl's and had strong growth in our 1-800 baskets business. Our comparable basis, our Fannie May business did not recover all of the sales lost in the prior-year period related to Thanksgiving prior warehouse, at our warehouse at severely limited inventories last year. This primarily reflected the widely reported weak customer traffic in malls and other retail locations. In our consumer floral category the 1-800-FLOWERS.COM brand grew 1.11% on a comparable basis adjusting for nearly $6 million in lost revenues related to the sale of two small non-core businesses that occurred in this period. In this area the strength of the 1-800-FLOWERS.COM brand combined with our focus on efficient marketing and merchandising programs enabled us to deliver another quarter of strong contribution margin growth. In BloomNet, while revenues were down slightly we’re reflecting the timing of some wholesale product orders we were able to generate higher gross margins and operational efficiencies resulting in double-digit increase in its segment contribution margin. The key take-away from the December quarter is that we continue to successfully execute and produce long bottom line results in what was a challenging environment. Before Chris and Bill cover one or more - a few more of the details let me sum up the quarter. It was a solid quarter and a solid first half. We would have liked to have more top-line growth, but we did have growth, but it was modest. We delivered strong EBITDA and EPS and the Harry & David integration is ahead of plan which enabled us to reiterate our bottom line guidance. The first phase of the integration was focused on cost and operations. Now as that continues we are excited about growth on an organic basis that we see coming from our ability to leverage three things I would point out to you. Our multi-branded portal and note that Harry & David and the Harry & David brands will be coming on to that portal in the Spring of this year. Our consolidated database now that it's fully consolidated, we have a terrific database of really attractive customers from a demographic and income point of view and we now have the CRM tools that we’ve invested into our CapEx efforts over the past few years to properly mine those databases for growth and we have the celebration suite of services, passport, rewards, and reminders that go into the efforts that will drive organic growth for us. We have an all star collection of brands and we have now able to focus with those brands and with those services an platforms and database that I mentioned above now we're focused on purchase frequency, increasing that amount of customers, and driving every increasing lifetime value from that customer database. Candice, will come to you for questions in a minute, but first let me turn now to Chris who has some more detail on the quarter.

Thanks, Jim. As Jim just mentioned, we had solid execution in the second quarter and I’m very proud of teams across all of our brands whose focus and hard work enabled us to achieve strong bottom line results by expanding margins and reducing operating expenses. In the gourmet food and gift basket category, we not only successfully completed the first phase of our integration of Harry & David, we also achieved the best quarterly top and bottom line results that that brand has seen in nearly a decade. As Jim mentioned, our integration synergy savings are above and ahead of plan. As noted in today's press release, we are revising upward our total synergy savings from the integration over three years to $20 million from $15 million. Importantly, the success we’ve had in merging our corporate cultures and showing best practices across the enterprise has poised us to drive accelerated growth as has poised to drive accelerated growth for Harry & David in years ahead. During the quarter, our 1-800-Baskets, Cheryl's and Fannie May brands also notched year-over-year revenue increases. However, Fannie May's growth on a comparable basis was not sufficient to recover all of the sales lost in the prior-year period due to the aforementioned Thanksgiving day fire. The Fannie May team is intensely focused on developing and implementing initiatives to recapture customer traffic while concurrently protecting and expanding margins. As we look out over the balance of the year, we have a number of exciting initiatives to expand our leadership positions in our businesses. First, Harry & David will become fully integrated into our multi-brand portal this spring. Having the opportunity to introduce the loyal customers of each of our individual brands to Harry & David and vice versa will better enable us to meet all of our customers' gifting needs and deepen our relationship with them. Second, this allows us to expand the reach and benefits of our loyalty initiatives, Celebrations Passport, Rewards, and Reminders across all of our brands. These programs have many benefits including, as an example, the option to lock in free shipping across all of our brands for a full year for one low price. Third, the initiative we have underway to consolidate all of our customer data will yield insights and intelligence on both customers and gift recipients which can be leveraged by the marketing teams across all of our brands. Fourth, given the strong sell-through of our products in the mass channel over the holidays, we are confident that we can successfully expand the range of product offerings in this channel, particularly with the Harry & David and Moose Munch brands. Last, we will glean insight and intelligence from the multiple tests that we ran during the holiday period. Tests that cut across cross-brand merchandising, retail and marketing programs. Things like cross-brand email campaigns, multi-brand catalog and catalog inserts, multi-brand corporate gifting initiatives, multi-brand store-within-a-store test. We are currently evaluating the results and information gleaned from all of these tests and many more and we are excited by the opportunities this data will provide. With that, let me turn things over to Bill for the key financial highlights. Bill?

Good morning, everyone. The second quarter of fiscal 2016 represents the first time that we have had the Harry & David business in both periods. As you recall, we acquired the business at the end of the first quarter last year. However, as you may also recall, we had to report adjusted numbers in the fiscal second quarter with the prior year for two reasons. First, we adjusted for the lost sales of Fannie May business as a results of the warehouse fire in November 2014; and second, we adjusted for acquisition-related items such as purchase accounting adjustments and transaction costs. So to provide enhanced visibility, I will speak to this year's Q2 results compared with both the report numbers and for comparability purposes to the adjusted numbers from last year. In terms of revenue total revenues for the quarter rose 2.6% on a reported basis and grew approximately 1% on a comparable basis. As previously mentioned, our continued focus on leveraging our business platform to reduce operating costs combined with the above plan synergy savings from our integration of Harry & David enabled us to translate modest revenue growth into strong earnings growth. Gross margin for the second quarter increased 110 basis points to 46.11% compared with 45% in the prior-year period. Operating expenses as a percent of total revenue decreased 220 basis points to 28.8% compared with 31% in the prior year. As a result, EBITDA excluding stock-based compensation was $104.8 million representing an increase of 23.3% on a reported basis and up 4% compared with adjusted EBITDA in last year's fiscal second quarter. EPS for the quarter was $0.92. Looks like a growth of 35.3% on a reported basis and 10.8% versus the adjusted EPS in Q2 a year-ago of $0.83. EPS initiative in Q2 also benefited from a lower effective tax rate due to several discrete tax credits. All-in-all we are very pleased with the consolidated bottom line performance. Now I will touch on some highlights of each of the three business segments as well as corporate expenses. First, the Gourmet Foods and Gift Baskets segment. Revenue in this segment rose 4.7% on a reported basis and approximately 1% on an adjusted basis. During the quarter, on a reported basis, we achieved a 70 basis point improvement in gross margin and a 14.8% increase in segment contribution margin. On an adjusted basis, contribution margin in the segment improved 1.5%. This was achieved while absorbing higher labor rates associated with a tighter employment market and increased commodity costs particularly in cocoa and eggs. In the Consumer Floral segment, revenues decreased 4.8% on a reported basis, but increased 1.1% adjusting for the aforementioned sale of the two small non-core businesses. We achieved 160 basis point improvement in gross margin and a 23.3% increase in segment contribution margin due to a combination of reduced promotional pricing, shipping savings, and more efficient marketing spending. In BloomNet, revenues decreased 2.2% reflecting the timing of orders for wholesale products with Q1. If you recall, BloomNet grew nearly 8% in Q1. However, we again achieved substantially better margins with a 180 basis point improvement in gross margin and a 10.5% increase in segment contribution margin. Corporate expenses were $19.8 million, which includes stock-based compensation and was down $3.3 million compared with the prior-year period primarily due to the acquisition costs included in last year's second quarter. On an adjusted basis, corporate expenses increased 2.2%. Turning to our balance sheet. At the end of the second quarter, our cash and investment position was approximately $108.4 million wrapping [ph] the completion of the seasonally strong holiday quarter. Our term debt was $124.7 million and we had zero volumes outstanding under our working capital line within our revolving credit facility. And inventory at the end of the quarter was $95 million. Regarding guidance. Reflecting the results of the first half of the fiscal year, we have adjusted our revenue guidance for fiscal 2016 to be an increase of 4% to 5% compared with the revenues of $1.12 billion reported in fiscal 2015. In terms of bottom line results, we continue to expect to grow EBITDA approximately 10% and EPS in excess of 20% compared with the pro forma fiscal 2015 adjusted EBITDA of $80.5 million and a pro forma fiscal 2015 adjusted EPS of $0.33 per diluted share. As Jim and Chris have mentioned, we’ve been able to offset the impact of the competitive environment and rising input costs by effectively managing product, marketing and distribution costs. We are also above plan on integration synergy savings. Of the synergy savings expectation of $20 million, approximately $10 million is reflected in the current year guidance and we expect an incremental $5 million benefit in each of the next fiscal years – each of the next two fiscal years. Lastly, we are also reiterating our guidance for free cash flow in 2016 of approximately $35 million. I will now turn the call back to Jim for his wrap-up.

All right. We'll come to you in a minute for your questions, but just a quick summary of what you’ve heard from Chris and Bill here this morning. What we have in total is a very solid team. We have a great operating platform. Our acronym for the operating platform, we call it, Bolt. We have an enviable customer base. We have the tools to work with our customer base on our multi-branded platform, our CRM capabilities, our celebration suite of services. We have an all star brand portfolio and you’ve seen us to continue – you can expect to continue to watch us focus on our costs and our operations and now you will see us as we’ve digested the biggest chunk of that, you will see us now turn our attention increasingly to efforts around growth and we’ve outlined to you some of the many tools we have available to us to pursue that growth. So now I will turn to you for your questions and I will Candice to restate the instructions.

Thank you. [Operator Instructions] And our first question comes Jeff Stein of Northcoast Research. Your line is now open.

Good morning, guys.

Good morning.

Nice bottom line results. Clearly, though, for this company to perform in the future, you’ve got to accelerate the top line. So I'm wondering first of all if you can talk about what are the key top line accelerators that you see in the back half of the year because you have got to take it up a notch if you're going to get to the 4% to 5% growth, and – now that also includes the fact that you’ve got the Sunday Valentine's Day placement this year, so maybe you can address your second half. And then looking perhaps over the next 12 months what do you see as being the key top line drivers for the company?

Jeff, I think we have – I will look back and look forward. Looking back over the last five years, we're proud of the fact that through a combination of organic and acquired growth. On the organic side, over the last five years, we’ve grown about 3% average top line organic growth rate. If you look back over that period with the acquisitions particularly to Harry & David acquisition, we’ve almost doubled the top line of the company and more than doubled the bottom line of the company and we’ve done that without any growth in our share count and with I think a very prudent use of our balance sheet, we have a very modest debt position and good free cash flow. So that also brought with it the opportunity to increase our bottom line by more than double because of the synergies we have realized in the acquisitions we have done and those that we have yet to realize. So going forward, looking at the next second half of this year and the next year or so, the key drivers for our growth are the things we said we already have. On the bottom line side, clearly, we'll continue to have a focus on our operations and on our costs and we have every confidence that we'll hit the numbers that we’ve projected and we're happy that we're able to raise our targets for our integration savings from the Harry & David acquisition from $15 million to $20 million over that three year period. And if you look at the things in our tool bag with those brands as an omnichannel provider to customers of products and services, we have wholesale growth opportunities, we have direct to the consumer growth opportunities, we have club opportunities that enhance our lifetime value of our customers and we have the three key tools that I mentioned to you in my remarks, which were A, the multi branded platform with Harry & David and its other brands coming on fully integrated this year in the spring, we have our suite of Celebration services and we have now the integrated database, which we’ve long sought and now have with the appropriate CRM tools. So we intend to and expect to rev up our organic growth rate and yes, we have the flexibility to do things on an acquisition basis, but I would in fact [indiscernible], but it's not necessary for us to achieve those growth rates. Bill, is there anything that you would want to add?

No. I mean I think that what we saw during this quarter, you know, Fannie May not recovering fully we're continuing to work on that and get more and more of the traffic back into the stores and to have some recovery in the second half of the year on that. So if you back out that the rest of the brands really did grow during the first half of the year and the second half. So we do expect growth within GFGB in the second half of the year, we do expect growth within BloomNet and growth within 1-800-FLOWERS.COM on an everyday basis. So we have already kind of brought our guidance the fact that the day placement of – the Sunday day placement of Valentine’s Day.

Yeah, and that's what I would add, Bill. Just looking at things from a shorter term and longer term perspective. We talk about moving, as we said before, gaining more of the share of the everyday gifting business. And I think if you just look at the results we had with Harry & David, having operated Harry & David now for two holiday seasons, this past quarter growing 2%, but year-to-date we're growing Harry & David about 3%. So it's showing some pickup in the everyday business there.

So we don't have to change the trend lines to achieve what you're asking there. The trend lines – the only negative trend line we really had was in Fannie May and that it didn't pick backup enough. It was only half of what we expected in growth. We expect to pick up – we continue that trends line and accelerate it, so that we get it all back and more.

Do you think that perhaps you dialed back the level of promotional activity too much at Fannie May?

It's possible.

And are you making some adjustments to wrap that up a bit?

Yeah, certainly we're making adjustments. I don't think – I think we were severely impacted by the fact that we didn't have inventory in the stores last year. I think we had a lighter promotional schedule for those – for that brand this year because we didn't know that it was necessary to step on the pedal harder, but I think the things we’ve done in the stores, the stores that we’ve revamped, are outperforming all the others by quite a bit. So I don't think we have to be more promotional. I think the campaign that we already put in place is taking a hold now, but I don't think we have to ramp-up our promotional efforts to get all of those sales back and more.

Okay. Question maybe for Bill. Stock buyback. I mean your stock is getting hammered pretty well today and if you look at the cash flow multiple on forward-looking earnings probably under 5 depending upon what kind of forecast you are using. Why not to be more aggressive in buying back your stock?

Well, Jeff, we have and I think we’ve disclosed – we have a $25 million authorization from our Board of Directors. We have been in the market the first half of the year and we will be in the market the second half of the year.

Maybe that’s a good point. We will take it under advisement.

Okay. All right. Thanks, guys.

Thank you.

Thank you. And our next question comes from the line of Eric Beder of Wunderlich. Your line is now open.

Good morning.

Hi, Eric.

Hi. Could you talk a little bit about competitive environment you're seeing in the floral industry? Obviously, this quarter has Valentine’s Day and it’s always promotional. Do you expect kind of the limited or lower levels of promotions as you can see to continue?

Eric, this is Jim. Two things I would say there. One is I think you’ve seen with our growth is now that more than half of our sales are in the Gift Food category that we’ve sort of grown into a much bigger competitive arena. The competitive arena I would say two ways bigger. One is the Gift Food categories are much bigger category and we're a significant player in there although yet small. So our arena is much bigger. And the second thing is the Floral category. We don't see it as nearly as competitive as it was. It's much more rational and appropriate. But for us, we don't think that it matters that much to us anymore as it did in the past when we were so heavily floral as we have Floral and Gourmet Gifts and Gift Baskets now, it's a broader category and the competitiveness I think it's abated and it's not as important both at the same time.

Okay. And in terms of the gifting category is multi – you’ve had this multi-tabbed website for all the different categories except for Harry & David for a while. What are you seeing from the customers who use the different tabs throughout and who kind of integrated and do use all the different pieces of the website?

So a couple things, Eric. You know, the multi-brand website is one component really of our multi-brand customer strategy. And the multi brand website, I would say, really we've had every brand except Harry & David on there for one year now. It was this past January when we moved the Flowers brand onto that multi-branded platform. We continue to see good steady increases in our cross-brands – or cross-brand shopping activity between the customers thus giving new exposure. So, for example, this holiday period while we had the boutique tabs of Harry & David and Wolferman's up on site, we saw the benefits of exposing those brands to the customer traffic from 1-800-FLOWERS and Cheryl's and Fannie May, et cetera and saw some good activity and engagement there. Then you couple that with the capability that we brought to the table with the Passport program that you can now use across all brands, including utilizing that on the Harry & David and Wolferman's tax and we're seeing good fraction with the passport program out Celebrations, Rewards, and our Reminders program, which the Reminders program just became multi-branded really this past quarter, maybe even this past December. So what we're really excited about is that in the early stages of this multi-brand customer strategy, the early metrics we see are encouraging and we're just continuing to add new features and functionality to our multi-brand customer capability. Example, this past quarter, we just introduced – we just introduced a new shopping – I'm sorry a new search capability where when customers come to the site, they can now search by the brand they came to or they can search multi-brand. We did some testing with the different header layout and changed the header layout that we currently have live because we saw it from the test that that was getting even greater cross-brand experiment expectation and shopping. So you will continue to see us add features and functionality either to the site, to our loyalty capabilities and more and more to our overall marketing capabilities to drive that multi-brand customer engagement because what we see there is a significantly enhanced lifetime value and it's, again, it's an early stage part of our strategy, but one we're very, very excited about.

How should we think about the Harry & David brands in terms of the catalogs? Obviously, they're a significant catalog player. Your other brands have kind of downplayed the catalogs a little bit. How is that going to go forward? How are we going to see that change?

Yes. I think the catalog is an important piece of our marketing arsenal whether it’d be for the Harry & David brands or even for our other food brands. And what you all can see is that evolve really as we get deeper and deeper into our CRM capabilities that Jim referenced before. Really getting in segmenting and understanding, which customers are still really stimulated by a catalog versus which customers are more stimulated by digital marketing. So that's an evolutionary process of just finding out what's the best contact strategy for each customer segment, but they will continue to play an important role in our marketing arsenal.

And then finally, Bill, what is the tax break going to be for the back half the year?

Well, overall for the – you know, for the full year our guidance for capital was about $32 million. You saw us spend a little less than half of that in the first half of the year.

He said tax rate.

I'm sorry. I thought he said cap. The effective tax rate for this year is lower than it is than it historically has been so we've come down to post Harry & David acquisition to about 36% this year and this quarter we got some benefits of some discreet credits of that brought it down to about 33%. So for the overall year, we'll be in that 33% rate, but that's because of the tax credits that we get this full – that we get this full year.

Great. Congrats and good luck.

Great, thank you.

Thank you, Eric.

Thank you. And our next question comes from Linda Bolton Weiser of B. Riley. Your line is now open.

Hi. Just on the Fannie May side, could you remind us how big Fannie May is for the sales roughly as a percentage for the whole year and for the quarter? And then you mentioned that the revamped stores are actually performing quite well. Can you just remind us like what percentage of the stores has been revamped and what's the plan going forward for doing more of those if there is a plan? Thanks.

Linda, I'll ask Bill to cover the first part of that and Chris the second on the Fannie May stores.

Yeah. So with respect to Fannie May overall as – it's about a $90 million brand, for us about half of that within the retail – within the retail stores. What we saw a year-ago with the impact of the fire that we lost $13.8 million. We estimated $13.8 million of lost revenues last year. So on a reported basis Fannie May got about half that back. So on a reported basis, Fannie May was up over 25%. However, when you compare it to the adjusted numbers from last year by not getting – by only getting half of it back, it was down double-digits or down $6 million to $7 million on an adjusted basis.

And as far as kind of our focus on the stores and revamping the stores going forwards, we're really excited really about the repositioning of the product line that we put in place this last year. Really coming out of the fire then rebuilding – rebuilding and redesigning the packaging, really focusing on enhancing the brand image, which I think goes to the point also how we plan on playing in the market to the question of did we get too aggressive in pulling back our promotional activity. Probably not. Really we have a high value product there, a very well respected brand, and we want to make sure we're deliver our customers great value, which will hopefully also and what we're seeing will enable us to enhance the gross margin and ultimately the profit margin of that business unit as well. So we're excited about that. Clearly, we have to figure out how to utilize our product to attract the customer base a bit more and stimulate top-line growth, but we think we're on track to achieving that.

And sorry, if you said it on Harry & David, but did you indicate how much in synergies you inspect in FY16 and then how much have been achieved year-to-date?

Yes, Linda. What Bill said was that for this fiscal year, we’ve revved up the expectation from $5 million to now $10 million, which helped us to offset some of the headwinds we haven’t budgeted, higher labor costs, which is a double edged sword there. We had higher labor costs on our seasonal workforce particularly in the Harry & David brand, which says A, more people are working, which is good in the long-term for us, but B, it was a headwind we didn't expect. The other headwind was particularly on the commodity side, I would point to eggs. It's great news that McDonald’s went to an all day breakfast and it certainly did impact their sales, but it impacted our egg cost dramatically so that was a headwind we didn't anticipate. So increased savings and accelerated savings from the Harry & David integration plan which, of course, isn't just Harry & David, but is across the enterprise. Move that savings this year from $5 million to $10 million and that more than offset the headwinds that we had from the labor and the commodity and still enabled us to improve the bottom line performance. So what he said next was that you could expect of the $20 million total targeted now that $5 million would come in fiscal 2017 and $5 million would come in fiscal 2018.

Great. Thanks. I'm curious on the cost inflation items. Are you able to take pricing anywhere? You know, are there certain parts of your business where that pricing might be a little easier to achieve or – not? I mean is that something you're looking at?

It really isn't, Linda. We think we have the appropriate pricing across our portfolio. We experiment from time to time, but mostly it's a broadening of the range of products and price points. So we'll continue to introduce some higher price points particularly you saw that this holiday season in our 1-800-Baskets business. They had some really nice, more expensive, bigger gift baskets and gift items that did really well and then in other brands like in 1-800-FLOWERS that we tested in some novelty items in the $10 and $12 range just to see what that would do to traffic. So not changing price points, but broadening price ranges.

Okay. Thanks very much.

You bet.

Thank you. And our next question comes from Jeff Stein of Northcoast Research. Your line is now open.

Sure. A couple of follow-up questions. First of all, Valentine’s Day. I think Bill in the past you’ve mentioned that's going to be about a $10 million hit because of the Sunday placement and I know that the prior year you had roughly the same dollar hit. I think roughly $10 million. So if Valentine’s Day is on Tuesday, the following year, do you get back theoretically $20 million or how do you kind of see it looking ahead? I know that's a long way out, but that has been a big headwind for the last two years.

Yeah, Jeff, you're absolutely right about the last two years with it falling on a Saturday. It was about a $10 million impact last year and we have guided to about a $10 million decline this year. We will get a nice chunk of that back next year when it moves to a Tuesday. We’ve discussed how a Valentine's Day during the week is much better than it is when it's on the week and as it gets later in the week, it gets better and better. So the $20 million is coming – the $20 million decline in the last two years is coming off of Friday and the Thursday, Friday are probably the best days, so we'll get a lot of it back next year. We won't probably get all of it back next year, but as Valentine's Day goes on roll over the next four years of Tuesday, Wednesday, Thursday, Friday, we get that all back and hopefully that will move on.

Great. And where is the incremental expense savings coming from this year? Because that's almost double what you had thought originally?

Yeah. So Jeff when we first gave it, it's actually a little bit more than double, Jeff, because, remember, we had to back out the unanticipated expense increases, too.

That's right. With regard to the integration savings and coming for $10 million from the $5 million, we’ve [indiscernible] kind of the accelerated benefits we got there were just the kind of the increase in benefits that we got from combining vendor contracts that now kind of kicked in this year. So whether it was IT, areas like – you know, like health insurance where we combined everybody onto to one from one provider and we're getting better benefits in the marketplace as a result of that and eliminating healthcare brokers, email providers having the entire enterprise on the same email provider, paper buying, buying all that and really on in-bound and outbound shipping rates and getting better savings than that than we originally anticipated.

And in the next couple of years, Jeff, what we'll see that there is contracts that we couldn't get to this year that are coming up next year an year after will help us there. A lot of re redundancy in terms of elimination in positions that were redundant as we combined as a company, so we're very confident about what we'll be able to do in the next two years based on what we have done this year.

Okay. And in terms of looking at the repeat rate, customer retention, can you talk a little bit about that for your core brands and Harry & David as well? Was the repeat rate for example the same, better or below year-ago for each of the brands?

Yes. I think overall the same or better. You know, our core - if you break it out by brand, our core customer metrics continue to say very healthy. Whether that's from a repeat rate, a frequency rate, etcetera. And then as I mentioned, you know, clearly small, but a growing percent be coming into that multi brands customer strategy where we see an increase in the retention and an increase in the average per year spend plus an increase in the LTV. So we're very encouraged by where we stand today and with the increasing capabilities that we brought to the table and the ability to look at the - all of the data that we get from the combined customer data base and recipient database that we can now look to mine and convert those recipients into good value customers really, Jeff is, is what drivers us in our final about that long-term multi brands customer strategy.

Got it, thank you.

Thanks Geff.

Thank you. And our next question comes from Dan Kurnos of the Benchmark Company. Your line is now open.

Alright. Thanks. Good morning. Let me start off, Bill, maybe you can start to clarify a few things because I think there's a lot of confusion out there. Just on - on the one hand let's just go over some housekeeping items first in terms of the impacts of the divestitures, I'm assuming that's all Consumer Floral and if you can just remind us the impact that we should expect to see over the balance of the year because clearly this full impact was not embedded in numbers already.

Yes. So about $6 million during the quarter and the second half of the year probably in the $2 million to $3 million range.

Per quarter or for the balance of the year?

For the balance of the year.

Okay. And then separately on GFGB just to see if I'm - to make sure my math is right here if Harry & David is up about 2-ish% on an adjusted pro forma basis that implies the GFGB is flattish to slightly down [core ex] Harry & David?

Yes. Again the biggest on an adjusted basis because you have the decline in Fannie May by not being able to recapture all of those lost sales so we saw -.

Of the adjusted revenue.

Or the adjusted numbers, so we saw nice growth within the baskets - within the baskets business we saw nice growth within - within [indiscernible], we had the 2% growth that Chris mentioned within Harry & David for the second quarter and 3% year-to-date, but Fannie May again on a reported basis grew 25% plus, but it only recaptured about half of the 13.8 million that we identified as lost revenues last year. So, that was down 15%.

Right. So that's what I'm getting at. I mean the whole point is the numbers do indicate that the balance of the GFGB segments are in fact growing if you're only flattish GFGB Ex-Harry & David, if Fannie May is down 15%. So, I guess really, you know to follow up on this from a higher level then and I guess for Jim and Chris look obviously the stock reaction today is indicating that the investment community doesn’t believe you can reaccelerate sales and a lot of it has to do with some of these one-time items that I think people are missing whereas, I think just talking if you kind of do the math here, consumer floral is on a normalized basis maybe even up this year, if you pull out the divestitures and the Sunday day placement. So I guess really maybe going back to Jeff's initial line of questioning, you know, how do you kind of restore investor faith that you guys can re-accelerate this thing understanding that you have some tailwinds just from migrating the Harry & David platform alone and in conjunction with that you’ve had two quarters now of upside to EBITDA and not raise guidance and I understand why how that would look in this particular quarter, but does that imply that you guys are going to get maybe more aggressive on spend to re-accelerate the topline or is it just you're going to remain conservative and just continue to go about what you guys have kind of outlined and not - and still try to expand margins which could leave room for further upside over the balance of the year?

Dan, I think we can do both and I think that's our intention. I think we can both accelerate our efforts on the top-line growth by deploying the tools we talked about earlier that we now have in place that we didn't have before, and I think on the other side of the coin, I think you can expect us to continue to be vigilant in approving the operations in finding those cost synergies that we’ve identified and gone beyond that. So we feel very good about this and I appreciate your help and efforts to point out the true performance. If you look at it, it's confusing, but if you look at it flower business continues to grow and be a good producing business with good margins. The growth is not huge, but it's good and it's solid in a market that otherwise is not doing - seeing a lot of growth. The areas that we’ve invested in over the last several years are growing nicely. We do have the confusion of the noise around the fire episode and the new company and brands with Harry & David and its other brands, but it - we had a company that hadn't grown in years and gone backwards and now it is like two years of good organic growth and the headwinds - the additional headwinds there that we didn't mention as we close stores there and we closed a couple last year, we'll close a couple more this year that comes off the top line growth number. So, it disguises the fact that all of our businesses are healthy and growing, so that gives us the confidence on the bottom line and we freed up enough excess through our synergies programs that we can over-deliver on the bottom line at the same time we turn our attention to much more aggressive organic growth rates.

So to that since you did bring up the Harry & David stores, I just wanted to double check. It sounds like you still have plans to kind of rationalize the store footprint based on the underperforming stores regardless of what happens this quarter and the impact on revenue it will have in the next - in the March quarter?

Yes. And that's - it's a sometimes confusing because this year we gave up the $2 million worth of topline there which impacts the look of the overall growth rate, but all we did was shed a couple of stores that weren't going to make money, didn’t make money and we’re not going to make money. As we get each, beginning of each year and we look at our lease contingencies, we have an opportunity to examine the stores in our portfolio. We have a lot of really well - really good producers, we have some that are in the middle and we have some are at the end. At the bottom of that those that aren't producing well, right now we're looking through that portfolio, we think we have fixes for most of them that will turn them into nice producers. We have opportunities for really good growth in some of those stores and then the two or three that we don't think we have the right fix or the right location we'll exit them early this year.

Can you maybe build and just kind of quantify that potential impact just so people are expecting and it doesn't look like another revenue shortfall if it happens?

Yes. Each store, on average is about $750,000 so as we shed each store - you know, to Jim's point of before we closed two stores last January so year-over-year on that was about a million and a half dollars. You know, here looking to close probably in the neighborhood of two to three stores this year so that will have a similar impact of maybe upwards of $2 million annually on - on GFGB - on the GFGB results.

Great. And then another just quick housekeeping question just on Harry & David. I know you guys may not want to go into this much granularity, but can you just quantify or at least directionally give us a sense of what the year-over-year improvement was in contribution margin at Harry & David?

Well we’ve taken obviously a lot of the questioning, they go across the enterprise but Harry & David does benefit from that as well. So, we gave you the topline 2% growth in the quarter, 3%, you know, year-to-date and contribution margin is up nicely both in the quarter and year-to-date.

Okay. I'll follow up with you on that offline. Last question for me then just Jim, just going back to my first question. One of the kind of big NOx on the story I think has always been the inability to sort of scale these regional brands and, you know, I know that there was certainly a lot of mitigating circumstances in this particular holiday period, but as you look at Fannie May and obviously Cheryl’s has been performing very well and continues to perform well. Fannie May had had its struggles a couple years ago, looked like it was back on track. I guess how do you address kind of sort of what you think the addressable market opportunity is there and so that people don't get concerned that there's either a saturation point at Fannie and that this thing can continue to grow at - and return to sort of a double-digit pace once you get things kind of fixed from a testing standpoint.

Well, I think there's a couple of avenues for growth at Fannie May. I think you're right, we certainly did struggle with it a few years ago, brought in a - changed the management team, changed the operations, changed the store configuration, merchandising schemes all of which are taking place now. So, we had good growth not as good as we thought we would have it at this time, but our growth in the future are from a more macro look at Fannie May is, it's a good brand, it is a growing brand, it is a brand that you will see us emphasis growth in terms of its third party provider outlets those we would call wholesale and our ecommerce businesses. Wholesale business was terrific this year. Small because of just being getting into it in a serious kind of way, but the sell-throughs were really, really good and e-commerce business grew this year too. So you are not going our see us spend a lot of money on store roll out. We experimented around with some seasonal stores that didn’t get us terribly excited because as we look at the ways we can growth that brand, the ways it's most beneficial and has the most leverage are the things that we did well at this season. That is the e-commerce growth and improving the stores that we already have and the merchandising mix in those and then finally the third-party sales opportunities with wholesale relationships that did terrific this year.

Okay. Great. Thanks for all the color, guys. Appreciate it.

You bet.

Thank you. And our next question comes from Juan Bejarano of Noble Financial. Your line is now open.

Good morning. Thanks for taking my questions. Most of the questions has been asked, but as far as the celebration suite, I think it can really help the frequency of people ordering more items and such. Just wanted to ask you on celebration passport, would you ever consider providing metrics surrounding this maybe how many new customers joined up in celebration passport in the quarter and such? But aside from that can you also discuss overall how the program is doing, are you seeing the clients kind of - the clients that have joined have you seen them ordering more frequently?

Yes. So we're very pleased with the progress we're making with passport and to your last points there what we see is, when customers join passport their frequency increases and their multi-brand usage increases, right? And that's another key factor that we point to that really increases lifetime value of that customer. So, the passport we view as an important program. Again it's still such early stages in its growth and its influence on the overall business this is why we don't report metrics on that specifically. We think it needs to get to be much more sizable so that we can point to the impact on a go-forward basis and we look forward to doing that, Juan, but you're right the celebration suite are just other tools as part of the whole multi brand customer strategy like the multi-brand portal, the celebration suite of capabilities, et cetera. So, we're very happy with the progress we're making on all of those fronts and especially on passport.

Great. Thank you. And just a follow-up on the stores. If I'm not mistaken you guys were testing pop-up stores at the malls and other areas. Was this the case? How did that perform?

Yes. We had a combination of pop-up stores and kiosks and this is something that Fannie May has been involved for a while and we continue just as the overall store strategy we're continuing to evaluate that. You know, I would say we had some stores that were successful and some locations that were not successful.

Very small numbers, Juan.

But that's parts of the overall testing and learning that we will apply going forward.

Great. Thank you.

Thank you. [Operator Instructions] And our next question comes from Anthony Lebiedzinski of Sidoti. Your line is now open.

Yes. Good morning. Thank you for taking the questions.

Sure.

So, you know, you were able to attract 1 million new customers during the quarter. Are most of those customers coming directly to your website or are you seeing perhaps more of them coming through Google advertising? If you could just shed us some light how are you actually specifically able to drive new customer growth?

It's a tough one, Anthony. It really is across-the-board. You know, it's from some of our direct mail [indiscernible] and then certainly in the online world we have a good percent because of the strength of our brands a good percent that do continue would come to our URL directly. With that said, over the years clearly consumer behavior is shifted to where people utilize search, utilize Google really that they factor [indiscernible] URL bar, they factor browser so that drives where we see, therefore, increases in search and a natural search or page search and maybe those are customers that previously would have come to the site directly. So, it's a mix, right? And we're looking at constantly working with our affiliate networks, our display advertising has been strong lately. So, it's really hard to say. Where we deploy our dollars is where we see a good return on both new customer acquisitions, as well as of course as repeat. But we look to deploy more and more dollars where we see a higher percentage of new customers coming through that particular channel.

And Bill, I think it would be fair to say that as evidenced that are marketing is becoming more efficient and less search dependent, our overall operating costs and margins are improving.

[indiscernible] percent of revenues is down?

Yes.

Got it. Got it. Okay. And then at the Analyst Day in Oregon you guys had mentioned about Moose Munch being something that you were particularly excited about. Could we see at one point that you would separate that out and highlight that brand specifically on your multi-branded portal?

Yes. I think from a long he were term perspective that is something we're looking at doing. I think the Moose Munch because of where it was to begin with, which is mainly in the wholesale channel where we saw some really good sell throughs this season, I referenced that earlier where are excitement is, so that's where the shorter-term benefit comes from, where it is really Moose Munch more to the wholesale while we are concurrently developing the direct-to-consumer strategy behind Moose Munch, but that is a direction that we're going, Anthony.

It will take some work Anthony in terms of the packaging product and product assortment before we could make that a destination e-commerce brand on its own.

Got it, got it. Okay and as far as the BloomNet, can you remind us the extent of the timing of the orders for the quarter?

Well, yes I think if you could look I think what Bill mentioned, if you look at BloomNet, he is expecting 3% growth across the year. In the first two quarters of this year between down two and the second fiscal quarter, up 8% in the first fiscal quarter. It was right around that 3% growth rate and so it is projecting that throughout the rest of the year. So, he said yes, it was definitely a timing issue in these first two quarters.

Got it, okay. Thank you very much.

Thank you.

Thank you. Our next question comes from Jeff Stein of Northcoast Research. Your line is now open.

Yes. Just a quick one, Bill. In the past you sited average order value for the business and I know it is probably getting a little bit confusing with Harry & David and that would tend to raise it, but can you talk about the average order value for the core and the average order value for Harry & David and how it changed for each of those segments year-on-year?

It's actually pretty consistent across a lot of our brands. AOV was up slightly during, probably about 1%, during the second quarter and the larger brands like 1-800 FLOWERS is up 1% and Harry & David is in a similar amount.

Okay. Alright. Thank you. And how about popcorn factory? That was not mentioned. What's going on there? It seems like that business has been kind of in a slump for – like a better description for a while. What are you doing to kind of revitalize that business?

I think it needs a refresher. The product is good, but the whole brands needs a refresher so we're taking steps now in terms of giving it more attention and integrating it more into the overall mix of products and expanding its product line. So you will see it get a big refresher this next couple of quarters.

Thank you.

Thank you. And I'm showing no further questions at this time. I would like to turn the conference back over to Mr. McCann for closing remarks.

Thank you and thank you for your time and interest today. I think you see that as I look at it we have quite a solid team. We have a really good and ever improving operating platform. We have enviable customer base, we have tools to mine that customer base like our CRM assets our multi-branded platform, our celebration suite of services, which we spoke quite a bit about today. You couple that with our all star brand portfolio, you will see us continue to focus on our cost and operational efficiencies in this second half of the fiscal year and next, but you will also see us increase our efforts now on growth stories that will develop our organic growth rate because now we have the opportunity to do that having completed the integration, the big phase of it, and now we can leverage the tools and assets that I just mentioned. So we feel good about the quarter, we just delivered we feel good about the first half. We feel good about the assets we have in front of us and now we have two quarters in front of us that are much more predictable because it’s much more [indiscernible] to what we look like before we were fortunate enough to append to Harry & David and its brands to our portfolio. So, nothing but what we see is blue skies ahead. Thanks for your interest today and for your questions and we look forward to interacting with you as you have time in the days and weeks ahead.

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