1-800-FLOWERS.COM, Inc. (FLWS) Q1 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to the Fiscal Year 2017 First Quarter Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Joseph Pititto, Senior Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, Aaronson. Good morning and thank you all for joining us today to discuss 1-800 FLOWERS.COM's financial results for our fiscal 2017 first quarter. For those of you who have not yet received a copy of our press release issued earlier this morning, the release can be accessed with the Investor Relations section of our website at 1800flowers.com or you can call Patty Altadonna 516-237-6113 to receive a copy of release by email. In terms of structure, our call today will begin with brief formal remarks and then we will open up the call to your questions. Presenting today will be Jim McCann, Chairman; Chris McCann, CEO; 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 included in 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 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 in any of its SEC filings, except as may be otherwise stated by the Company. I'll now turn the call over to Jim McCann.

Good morning everyone. We are pleased to report that fiscal 2017 is off to a very good start. During the first quarter, we saw a continuation of the positive trends we have been seeing in our business for some time now. As we head into this key holiday season, we are well positioned frankly better than ever to build on these positive trends and deliver strong top and bottom-line results for the first half and for the full fiscal year. Before I turn the call over to Chris and Bill for highlights of the first quarter, I think it's worthwhile I take a step back and view our business and the tremendous opportunities we see ahead of us from a broader perspective. Over the past several years, we have nearly doubled out top-line through a combination of solid organic growth and our disciplined approach to M&A. We have also concurrently more than doubled our bottom-line in terms of EBITDA, EPS and free cash flow. We have done this while facing a number of headwinds including among others, rising labor cost and a tightening market for seasonal labor, increases in commodity prices and unfavorable day placements for the Valentine holiday in the floral business. As we look ahead, there always be headwinds that we need to manage through and we are now seeing more nice tailwinds in our business in the form of the successful integration of Harry & David which is generating both operating synergies as well as significant revenue growth opportunities. We see strong momentum in our 1-800 FLOWERS business where we are extending our market-leading position while enhancing our profit margins and where we now have favorable day placements for Valentine's Day for the next several years. And the integration of our brands onto the multi-branded platform, which is only recently being completed enabling us to drive more cross-brand marketing and merchandising programs and create more multi-brand customers. Our entire management team lead by Chris is intensively focused on executing the business plans and building on the positive trends we see in our business. To do this, we will leverage the strong business platform that we have built, which includes our all-star collection of brands, our growing customer base with very attractive demographics and deepening relationships, our unique operating platform, we call that BOLT, our Business Operations Logistics and Technology platform, and our strong balance sheet which allows us to invest in key growth areas such as we have in mobile, social and now in the fast-evolving conversational commerce space, while we also continue to look at new business partnerships and potential acquisitions that can help us to accelerate our growth. As you can tell, I am very excited about the current fiscal year and the opportunities that we see for the years ahead. Now I'll turn the call over to Chris and Bill to review some of the highlights from our first quarter, as well as the outlook for this key holiday season. Chris?

Thanks. As Jim mentioned, our first quarter results reflect a continuation of the positive trends we have been seeing across our business. We are particularly pleased with the strong revenue growth we achieved in Gourmet Food and Gift Baskets segment for us. This was driven primarily by double digit growth in our wholesale gift baskets business, as well as in our Cheryl's and The Popcorn Factory brands. In addition, Fannie May recorded positive same store sales for the quarter as the initiatives we put in place to enhance the brands performance, have begun to take hold. In our Harry & David business we saw an increase in wholesale orders, reflecting some early success in introducing Harry & David products and its Moose Munch and Wolferman's brands to growing list of customers in this channel. Our Floral business segments also continued to see positive trends during the quarter. The 1-800-Flowers brand continued a solid top and bottom line growth trends, with revenues gross margin and contribution margin all rising in what is traditionally a seasonally slow quarter. Following our strong performance in this area last year, we've now built some excellent moment in 1-800-Flowers through a combination of our category leading initiatives in mobile and social, where we are reaching our customers when, where and how is most convenient and relevant. This extends to our recent foray into exciting new world of AI-driven conversational commerce where we have also staked down an early mover position. Our relentless focus on enhancing the customer experience and driving exemplary customer satisfaction metrics and our truly original product offerings from our signature Floral Birthday Cake to our brand new Fabulous Feline floral arrangement for all the cat lovers out there, droving on the tremendous success we've had with our DOG-able product line. We are confident that these initiatives among others will enable us to extend out market leaderships for 1-800-Flowers, while continuing to deliver a strong bottom-line contribution. In our BloomNet Wire Service we drove very strong bottom-line results during the quarter, increasing its contribution margin to nearly 35% despite slightly lower revenues, which primarily reflected the timing of some wholesale orders that shifted into the second and third quarter of the year. We are confident that BloomNet is well positioned to achieve both top and bottom-line growth in the current fiscal second quarter and for the full-year. This will come from a combination of areas including, increasing order volumes particularly in the second half of the fiscal year. From growing 1-800-Flowers and flower shop-to-shop orders in everyday occasion such as sympathy as well as on the favorable Valentine's Day placement, increased product sales to an extended range of wholesale customers and new web marketing services and digital directory advertising offerings that will be rolled out across the year. Overall, we are pleased with the solid execution and performance in all of our businesses. Our consolidated top and bottom-line results for the first quarter are in line and in some cases ahead of our expectations. As we move into the key holiday period, we're laser-focus on executing our plans to enhance customer engagement and become our customer's destination for all of their gifting needs. Now, let me turn the call over to Bill to cover Q1 metrics in more detail. Bill?

Thank you, Chris. As you have just heard, we are off to a good start for fiscal 2017. Our top and bottom line results for the quarter are in line with our plan for the year and we are well positioned as we head into the key holiday season. Breaking down our first quarter, first in terms of revenues, total consolidated revenues grew 6.3% to $165.8 million compared with $156 million in the prior year period. This was driven by 13.3% growth in Gourmet Food and Gift Baskets, combined the 3.1% growth in Consumer Floral which more than offset the 2.7% decline in revenues in BloomNet during the quarter. As we alluded in our press release, the growth in Gourmet Food and Gift Baskets includes, the pull forward of some gift basket shipments into the first quarter at the request of some of our wholesale customers. Adjusted for this growth, growth in segment would have been approximately 6% for the quarter, ahead of our expectations for the period. In Consumer Floral, while the reported revenue growth was 3.1%, actual comparable growth was 4.2% for the quarter. Adjusted for the loss of revenues associated with the sale of the iFlorist U.K. business which closed in October last year. So combined with BloomNet's results, total adjusted revenue for the quarter would have been approximately 4% in line with our plan and in line with our guidance for the year. Second, in terms of EBITDA and EPS, the increase year-over-year loss primarily reflects the anticipated increases in labor and insurance as well as the planned marketing investments in preparation for the upcoming holiday season. As a result, our bottom-line results for the period were in line with our plan and we are well positioned to drive strong top and bottom-line growth in accordance with our guidance for the full year. Regarding gross margin and operating expenses. Gross margin for the quarter was 43%, down 30 basis points compared with 43.3% in the prior year period. With gross margin up 110 basis points in Consumer Floral and plus 170 basis points in BloomNet, the decline in consolidated gross margin is directly attributable to the performance and pull forward of wholesale basket revenues into the quarter, which resulted an decrease of 200 basis points in Gourmet Food and Gift Baskets. Adjusted for this, consolidated gross margin would have been up modestly for the quarter. Operating expenses as a percent of total revenues was 57% unchanged compared with the prior year period adjusted to exclude prior year and duration cost. This primarily reflected the increased revenue in the period which more than offset higher labor and insurance cost as well as an increased marketing spending in preparation for the upcoming holiday season. In terms of category results, our Gourmet Food and Gift Baskets segment, revenue for the quarter increased 13.3% to $69.8 million, compared with $61.6 million in the prior year period. In addition to the aforementioned wholesale basket revenues, revenue growth for the period also benefited from double-digit increases at Cheryl's and The Popcorn Factory as well as positive same store sales at Fannie May. While it's still early particularly with the holiday season in front of us, we are pleased with the positive trends we are seeing in our Fannie May business, which reflects success of some of the initiatives we put in place to improve brand performance. Gross profit margin was 41.2%, compared with 43.2% in the prior year period, primarily reflecting product mix associated with the aforementioned increase in wholesale gift basket shipments. Contribution margin loss was $9.3 million compared with $8.5 million in the prior year period, this reflect the performance and increases in labor and insurance costs as well as the marketing investments in preparation for the upcoming holiday season. In Consumer Floral, revenues increased 3.1% to $75.2 million, compared with $72.9 million in the prior year period. As I mentioned earlier, on a comparable basis, revenues increased 4.2%, adjusted for the lost revenues associated with the sale of the iFlorist U.K. business last year. Gross margin increased 110 basis points to 40.5% compared with 39.4% in the prior year period, primarily reflecting improved shipping cost as well as efficient use of promotional marketing programs. Category contribution margin increased for the ninth consecutive quarter, up 8.4% to $8.2 million compared with $7.5 million in the prior year period. As Chris mentioned, 1-800-Flowers has built some nice movement and we expect to build on this going forward particularly in the second half of the fiscal year, which includes the key Valentine's and Mother's day floral holidays. In BloomNet, revenues for the quarter were $21 million, compared with $21.5 million in the prior year period. A slight decline reflects the timing of some product shipments to wholesale accounts, which we expect to get back in the fiscal second and third quarters. Based on the number initiatives underway, including new product and technology offerings, we are confident that BloomNet will see improved top line results beginning in the second quarter and for the full year. Gross margin for the quarter was 56.3%, an increase of 170 basis points compared with 54.6% in the prior year period, primarily attributable to product mix. The increased gross margin combined with efficient cost management resulted in a contribution margin increase of 5.3% to $7.3 million compared with $6.9 million in the prior year period. In terms of corporate expense, 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 including stock based compensation was $21.3 million compared with $20.2 million in the prior year. This primarily reflects the increased labor and health insurance cost. Turning to our balance sheet, at the end of the first quarter, our cash and investment position was approximately $6.8 million. Going to – for working capital under our revolving credit facility were $125 million, down slightly from a year ago and reflects investment and inventory to support growth for the upcoming holiday period. Inventory of $191.4 million was within management's expectations and reflects the seasonal increases to support growth, was all of Gourmet Food and Gift Baskets brands during the holiday season. Regarding guidance, we are reiterating the guidance we provided at the beginning of the current fiscal year, which calls for consolidated revenue growth in the range of 4% to 5%, compared with revenues of $1.17 billion reported in fiscal 2016. In terms of bottom-line results, we continue to expect to grow EBITDA in the range of 8% to 10% compared with adjusted EBITDA of $85.8 million reported for fiscal 2016 and EPS to grow in the range of 5% to 10% compared with adjusted EPS of 0.43 reported in fiscal 2016. Finally, we anticipated generating approximately $40 million in free cash flow for the full year compared with $24 million in fiscal 2016. I'll turn the call back to Chris.

Thank you, Bill. So, to sum up, we've had a good start to fiscal 2017. During the first quarter, we saw a continuation of deposit trends in our business. In our Gourmet Food business, we saw a strong revenue growth in Gift Baskets, Cheryl's cookies and The Popcorn Factory as well as encouraging early signs of the rebound in our Fannie May business. The 1-800-FLOWERS brand continue to extend its market leading position delivering strong, top and bottom-line results. And BloomNet continued to drive a very strong contribution margin. As we look ahead into the key holiday season, we are well positioned to expand and build on these positive trends. In addition, we'll benefit from a number of key developments including having all of our brands now on the multi-brand website, growing customer adoption of our Celebrations suite of services including Celebrations Passport, Rewards and Reminders, the launch of innovative new products including new packaging designs and personalization capabilities across all of our brands and our continued focus on being an early move in terms of technology innovation and social trends to help shape consumer behavior. As we've told you in the past, this is something that really is in the DNA of our culture. We are excited about our industry leading initiatives in conversational commerce, including being one of the first commerce spots launched on Facebook Messenger where they have more than 1 billion monthly active users; being one of the first external commerce brands on Amazon's Alexa voice-enabled platform and having our brand featured in their recent TV commercials; and our launch of GWYN our AI based gift concierge service powered by IBM's Watson platform. Just last week we had the pleasure of being featured at the IBM World of Watson conference as one of the first companies to embrace AI top enhance the customer experience. We're also very pleased to be featured in IBM's national print and TV advertising campaign for Watson that started back in September and will run through the holiday season. By executing against all of the opportunities we see across our business, we are confident that we will achieve accelerated organic revenue growth and enhanced profitability. With that, I'd like to open the call to any questions there might be. So Aaronson, would you please repeat the instructions for Q&A.

[Operator Instructions]. Our first question comes from Jeff Stein of Northcoast Research. Please go ahead.

Good morning guys. Got a number of questions. First of all wondering if you could tell us how Harry & David performed during first quarter. There was no mention of that I guess in the prepared remarks.

Sure Jeff. I'll address that first. First quarter for Harry & David start offs with a small quarter especially relative to the second quarter. With that said, we were very pleased that we saw increased demand in both our consumer and our wholesale businesses there. So, we're very happy with that. And you can put that in the context of the momentum that we're building there when we first acquired, the business, they not had growth in several years, so then we took it to 1% growth in year one, 2% plus growth in the next year and now we expect to continue to build on that and we're seeing that trends move in that direction.

Okay, so last year I think you were up about 3% at Harry & David, so for the first quarter was it in that range?

Hey, Jeff, we really don't break it down by quarter, but our anticipation for the years is that Harry & David will grow in excess of 3% this year.

And Bill, you usually give some consumer metrics such as percent of repeat customers, ecommerce orders, number of new customers, do you have that data available?

Hey Jeff, I think it was more of a customer metrics, you know separately. I mean what I can say, new customers were up year-over-year, existing customers were up year-over-year. The repeat book rate was in the mid-50s.

So consistent with what we've seeing.

Great okay. And how about cross brand penetration. Are you beginning to see the kind of movements that you have expected now that you have all your brands on the portal?

Yes. We're very pleased. We continue to see good steady growth there in cross-brand shopping that we're seeing from our customers. We are continuing to see good steady growth in the multi-brand customers, and then of course that takes with it increased retention and frequency. So, again we just continue to see the trends that we've been talking about for a while moving in the right direction, so very, very happy.

Jeff, this is Jim. It's an important question you asked, because it's so important to our growth thesis here, that as, if you look at the floral category, not a category known for our outlandish growth opportunities. Obviously we're growing and growing well. And what we find, a whole premise here is that, with the flowers category, we still find it very cost effective acquisition vehicle to attract really attractive demographic, demos on customers who come to us gifting need in floral. And now that we have all of our brands on the multi-branded platform including Harry & David, our expectation is that their second and third and fourth purchase might be a cross-over brands giving us an opportunity to leverage the spend to capture the customer in the floral space and very cost efficiently introducing them to other products and services that they're already spending on, but now they have an opportunity to spend within our ecosystem. So it's an important question and the trend lines as Chris said are very positive in the early stages.

The trend lines continue to be positive and we just continue to enhance the capabilities. If you just look in the past, six months, past year whatever, you know as we look at moving everybody on to the multi-brand website, adding in new search capabilities, launching a new global head, launching multi-brand confirmation emails, adding the dynamics, pricing services check-out to help us promote Passport, new Rewards functionality, enable the new multi-brand Remind programs. So, frankly, we're just beginning to scratch the surface here as we've been taking about this, when all of this continued added functionality, it's continuing to drive the trends that we see.

And then final question, I've not heard Popcorn Factory name mentioned on the conference call in years, and it's double digit increase there kind of was – is interesting. What's going on there that has changed the direction of that business?

I think there is a couple of things, you know just whether it be Cheryl's, which we continue to see good positive momentum and we've been saying Cheryl's has a fastest-growing business unit right now. And the capabilities and benefits there also being seen in Fannie May's ecommerce, The Popcorn Factory. It really is a combination of a number of things. It's a combination of all businesses leveraging the customer data base, leveraging our digital marketing capabilities, leveraging the multi-brand customer initiatives that I just talked about. So, clearly there's no silver bullet, otherwise we would have found that a long time ago, but I think we're benefiting from just a combination of all the initiative and all the innovations that we're bringing to the table.

Got it. Okay, thank you very much.

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

Think you. First, I wanted to congratulate you on the quarter, but I had a couple of housekeeping things. G&A expense was a little higher than expected, I was wondering is that a good run rate number for the balance of the year or where the some issues that would have accounted for a higher G&A expense?

Michael, I think whether you look at G&A expense or whether you look at it on segment basis and you talked about our corporate expense, we expected to be up about 3% for the year. If you look at actually corporate expense, you'll see it's actually down from fourth quarter of last year. So in certain cases we have increased of course our infrastructure that we built through our last fiscal year that laps in Q1 of this year and it didn't exist in Q1 of last year, but it should be up about 3% year-over-year.

I got you. And in terms of Consumer Floral that was about a little bit above my expectations there as well. What was the big key driver to the growth there? Can you give us a little update about competitive nature of the business that sort of thing?

Well Chris, I'll answer that. Michael, before he starts, I just want to point out that we've had nine quarters of that kind of performance now in a row for the Flowers brands. Teams are doing a really good job there. I think Chris would said that the answer there is similar to your answer to The Popcorn Factory, it's a confluence of different activities in the Celebration suite, in our data mining capabilities, what else would you add?

That's clearly, Jim, similar. And then I'd say our digital marketing expertise and first mover initiatives in mobile and social are really coming to fruition and paying off now as we see the consumer migrate to that channel across all the retail, right. Our early moves into conversational commerce will certainly pay you off in a similar fashion in the future. It's our relentless focus on the customer experience in driving those customer satisfaction metrics, and most importantly, truly original product offerings, Fresh Flower Pumpkin and the Shocktail Martini Bouquet that we had up in the Halloween holiday. And clearly I mentioned in my remarks that, you know this launch of its kind of fun product Fabulous Feline, which really picks up on the DOG-able – the collection of these DOG-able collection and just we're really happy with a lot of the social media presence that we've gotten since launching the Fabulous Feline, generating hundreds of thousands of impressions in social media. So, it always begins and starts with putting out product that the consumer wants.

And Michael, I'd add an underlying to what Chris said on the mobile side. We've talked about our investment in mobile, that's been an eight or nine year effort for us now. So I think we were glad that we were early there and I think the way we feel right now is our investments in augmented or artificial intelligence remind us of the very early days, eight-nine years ago of investing in mobile when it wasn't quite in fashion. I think in a mature brand like 1-800-Flowers we are seeing that type of disproportionately.

Thank you for that color. The largest variant in the numbers obviously came from the gourmet gifts and you talked a little bit about the wholesale pull forward and you had enough of wholesale initiatives I think in the gourmet gift. Can you quantify first of all, you mentioned the growth rate, but what was dollar amount for the pull forward in the quarter related to the wholesale business? And did that contribute to the lower gross margin as well because of the wholesale maybe lower margins for the wholesale business? And would gross margins would have been up a little bit higher if that pull forward didn't happen, I mean can you just give us a little color there?

The answer Michael is yes, and Bill will give you some color.

Michael, as we mentioned in the kind of formal remark about half of the growth of Gourmet Food and Gift Baskets really was attributable to the pull forward. So it's nearly $5 million kind of pull forward of wholesale revenues into the first quarter. You really got to look at our overall – I think year, we talked a lot about Q3 and Q4 looking at them on a combined basis because of Easter. But you really almost need to look at Q1 and Q2 in a similar fashion, because our wholesale business is growing. A lot of wholesale business happens for the holiday season and September and October was the key months for shipments to our wholesale customer. So, in some years they requested early into September, another years we've seen it later into October. So we did have about $5 million to quantify the number of $5 million got pull forward that is lower margin business, so that did impact the Gourmet Food and Gift Baskets overall margin. So, while our margins were down 30 basis points on a consolidated basis. It would have been up if not for the pull forward of that revenues, you saw the very strong margins in Consumer Floral and within BloomNet.

Got it. Those are my major questions. Thank you.

Thank you, Michael.

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

Great, Thanks. Good morning. So, we all asked the same sort of foreign questions every call. So let me start with the fun one for you guys. You got Fannie May in Chicago, you've got Cheryl in Ohio, any benefit from the World Series and any way to leverage brand recognition?

Well, I'll have to take a look. First, we are very interested to see which one of our teams has to take the polar plunge because that's the bet between the teams in Chicago and the teams in Ohio that the looser has to take a plunge in their respective lakes, so we are looking to see that. We are the chocolate sponsor of the Chicago Cubs, so we expect to get a little bit of lift from our Cubby bars. I don't think it's anything impactful, but it's good to have and it's nice to be there and clearly we were rooting for seven game series.

We have a good brand exposure in the stadium. We have a Cubby bars that we sold there. So it's a very good branding event for Fannie May in a market that's pretty excited about tonight's game.

Great. And then now for the boring questions. On Harry & David to go back to the wholesale side, can you just talk about – I know we talked about what Harry & David used to do historically in wholesale and you guys talked about some success with Wolferman and Moose Munch on the call. So can you just help us think about how does the success that you're seeing now is either addressing what used to be the historical market opportunity versus what you would be with incremental channels and or add on to what used to be that opportunity?

So as Chris pointed out early with Harry & David, it was a company that had a decade of decline. We're pleased that in our stewardship it's seen 1% growth in the first year where we had little influence over the operating plan, second year is 2% plus, we're budgeting 3% plus this year. On the wholesale side it's a different story, the emphasis in the first year or so of our operating has been on the direct to the consumer side where we do have some leverageable expertise. We think that the third-party sales or wholesale opportunities are strong for us and right now we are still in the mode of recapturing what had been a neglected business under prior ownership. So we've not yet, even got close to what they had historically been. We do however feel that with the mix in product with the Moose Munch brand as you suggest that we can grow over the next few years, through what had been their historical levels and go a great deal higher than that. Bill, anything you'd want to add from a color perspective?

I think what we are seeing growth within Harry & David wholesale as we are seeing with wholesale of course our business, we think it's a significant opportunity for us, but a lot of isn't front of us.

The only thing I would add to that is keep in mind as we've said previously, from the timing point of view, this is really the first season we could affect in the wholesale cycle because of a one year sale cycle and we're seeing some early benefits of that focus.

And we've invested in talent there in the wholesale side of business and our interactions with our team give us opportunity for excitement in terms of their plans not only for this year where we're seeing improvement as Bill and Chris have talked about, but real excitement for the future that we can really – it's a long cycle business and the bricks that they're putting in place now give us excitement in terms of what it can be, which is way beyond what it has historically been at Harry & David.

Thanks for that color and just a follow-up on that. It's all promising. Are you guys getting any pushed back so, it doesn't sounds like, but are you getting any push back given the challenges that we're seeing at the department store level?

No. We haven't seen that, in fact, talking about long cycle business, demand from the department stores as they change their mix to be less dependent I think on software, on apparel, and more focused on the things that customers want like our gourmet gift products, I think it's actually in the near-term quite an opportunity for us.

Great. Then if I can just shift to Fannie May for a second. Could you just – understanding that the seasonality, if you took kind of seasonality equation, are the comp sales, the same store sales getting better sequentially and pacing better into the holiday period? And then on the promotional side of a ledger, you know marketing expense is up. I know you guys talked about it on the call. I know you guys have slimmed down the catalog and done sort of like a preview rather than a kind of the general thick booklet you used to do. I know costs are down there, but how do you feel about the promotional environment that you're going to need to put in place in terms of sustained marketing expense now versus how much of that was already spent in this quarter?

So, from a Fannie May perspective, Dan, I think again we're seeing we're seeing early signs and similar to my comments on Harry & David Q1 is very small related to Q2. But with that said, we're seeing early signs and benefits from the operating costs that we've pulled out of the business, focused on enhanced marketing first product merchandising, then marketing programs to generate to customers into our stores, it's helping to increase these comp sales we're seeing with less promotional activity, which we're very happy to see. So that's kind of specific to the Fannie May brand. But from an overall point of view, it's something we manage diligently, clearly as we move into the holiday season. The retail environment will become more and more promotional, but I will rest on the history of our business, we've been able to manage through that and continue to grow our gross margins, while generating increased revenue cycle. So, we're pretty confident we'll be able to manage to do that again.

Alright, great. Thanks for all the color guys. Appreciate it.

Thanks Dan.

Our next question comes from Eric Beder of Wunderlich Securities. Please go ahead.

Good morning, perhaps a nice start to the year. This $5 million shift, now in terms of the wholesale. Now, should we think – is that, do you consider that a potential there might be more demand here given that they've moved it forward for the holiday season? And if there is more demand for wholesale than you have budgeted, can you respond quickly to that order or that demand?

Bill, is there a great more opportunity?

Not in this particular case, Eric. The $5 million this is a gift basket order from, I'll say from Sam's Club that actually shifted from October to November. It's in preparation for the holiday season. There is no real re-order on this particular item. We are encouraged with trend lines across the business, but this particular pull forward does not present an opportunity.

So we don't have inventory exposure there, which is good news. The bad news is, if we have good sell-throughs earlier than expected which is a real possibility with the product being merchandised in the store, we don't have the inventory to help them with re-orders. So, it's a one-time thing. Good news is, better sell through opportunity, bad news is we can't replenish.

In terms of the change in you website now at all, the tabs are on one site. What are you seeing in terms of behavior of the customers who are – are you seeing more customers use multiple brands and are the ones who are doing that spending more money? How is the behaviors of people that are doing this? I know this is a small quarter, but could you tell us where that's going? A - Jim McCann And Eric, I think it's – to answer that question, I'd say first of the multi-brand website is but one of the tools that we utilize. And within that website, I think we continue to learn how to introduce new customers that may come to the website one brand into opportunities with the other brands, and then really follow on with our marketing capabilities, Celebrations, Rewards, Passport, Reminder programs, others just package inserts, catalogue inserts, everywhere they ago about continue to introduce that to our customers. So, we continue to see good steady growth. You know as we said from the beginning, this is a long-term and we're seeing good early signs of it, so we're positive about the future there, which is trending in the right direction. Just to give you one quick little anecdotal story, I was in one our Harry & David stores on Sunday over the weekend, and we just recently introduced the Celebrations Rewards program as replacing the loyalty program that used to be in the Harry & David stores. And I was thrilled to see as customers came up to the counter, and the team, the manager and the team, the sales people helped the customers and they went to use their existing rewards program which I was thrilled. As they introduced the new program, customers were very receptive, and what I loved also very aware of the family of brands that we have out there. So, that's just another example of how we continue to permeate all of our communication points with this multi-brand strategy.

In terms of the debt, you've done a great job of reducing the debt. It's down I think about $20 million year-over-year. You are going to do more free cash flow this year. I'm assuming next year is somewhere around $40 million you said. What's the goal in terms of the debt or will you be – and what's the potential you want to do another acquisition?

As we've stated before Eric, we're pleased with the nice increase in free cash flow that we're generating at $40 million level this year. That gives us the opportunity to pay down debt. But the real question I think there is, what is our intent in terms of the free cash, the excess free cash flow that we are generating every year. And what we've said there is, we're going to be shareholder friendly and right now the best determination is that how we can do that is to continue the pace of our buyback program. In fact, at the last meeting just approved a replenishment of our buyback program back to the $25 million. So, we've used up $12 million to $13 million and they've replenished that back to a $25 million opportunity there. So, we'll continue that. We also have our eyes on ways that we can enhance our customer experience through different products and different services, so they will always be the M&A opportunities out there. We tend to be – intended to be judicious about these, a very plain balance sheet. We know that we have a lot of debt capacity and we think that a prudent use of debt in this environment or a smart acquisitions make sense should we find those. So, you'd expect customer friendly in term of buybacks, you could expect us to have a very sound and pristine balance sheet like we do, where we have excess free cash flow as we are generating, we'll pay down debt, we'll maybe invest in some of our business and are verifying those strategy and we'll look for the appropriate acquisitions. If you look back over the last five years or so, more than double the top-line through organic growth and smart M&A activities and more than double the bottom-layer. That's our plan going forward, that five and 10 strategy of organic growth rate of 5% or so, bottom-line growth rate of 10% or so based on organic growth rate, and when we find the opportunities for good strategic M&A activities, we'll use our very fine balance sheet to achieve that.

Great. Good luck in the holiday season.

Thank you, Eric.

Our next question comes from Anthony Lebiedzinski of Sidoti & Co. Please go ahead.

Good morning. Thank you for taking the questions. So, back in July, you partnered with SCI, just wondering how that relationship is going, is it up to your exceptions, any comments on that.

On the SCI relationship, is one we're very proud of. It's a long-term relationship that we've just begun. I wouldn't tell you we're fully able to speak, but we're delighted with the results so far. We're delighted with our ability to partner with SCI and their operating funeral homes around the country around the northern hemisphere here. It is terrific for us, but we have so much more in our – so yes, meeting our expectation probably exceeding them a little bit in the near term, but our expectations for this partnership which involves a much broader go-to-market strategy to help the breadth of our customers to express themselves and connect around those importance of the occasions, we're at very, very early stage of that, because way beyond the relationship with cornerstone of our efforts is our partnership with SCI.

Thanks for that color. And also, just switching gears, as far as the quarter that you just reported, you cited increased marketing spending for the upcoming holiday season. So, obviously we still have the holiday season ahead of us. So, just if you could give us more color as to how are you approaching marketing spending for the second fiscal quarter, should we see more of the same as far as the growth and expenses there, or any sort of color that you could give us that would be very helpful?

Anthony, I think the way, sorry to talk about this before, because you got to look at the first half of the year in combination. So, we do sometimes incur cost, I mean have in preparation for the holiday season. In the callout, all the noise of the wholesale orders basically are organic growth that we grew in the first quarter is about 4%, which was in line with our plan and in line with the guidance you know going forward. So, we reiterated guidance and we plan to spend to support that growth in the second quarter and second half of the year.

The only other thing I would add to that, especially as we move into the holiday season which is so big for our food businesses and part of our – big part of our marketing strategy for our food business is catalogs. So, some of that is kind of baked in and we have to plan that well in advance. As we move the food businesses to a greater percentage of their marketing spend, which takes time, being in the digital channel like the Flowers brand is, it gives us a little more flexibility to kind of pull back or spend into opportunities. So that's where we have so more flexibility as we go into the holiday season.

And we do think – we do think Anthony that we have sufficient dry powder to chase those opportunities that Chris just talked about especially in digital and broadcast world.

Got it. Okay. And I think Chris, you mentioned in your, in one of the Harry & David stores, so can you talk as far as what you're thinking about longer term for the retail store base for Harry & David? And separately also, I think you guys have done some seasonal kiosks in the past, do you expect to replicate that this year?

Overall, in Harry & David stores as we've been saying for a while, we think there is a good viable strategy there and I was very happy to see in a couple of stores, recently the merchandising changes that we've made in there, I think are resonating well. The one particular store I was in on Sunday told me to how to kill a day on Saturday, so I was certainly happy to see that, and we're continuing to look at watch the right optimal merchandise mix model, but also what's the right size of store model as we go forward. So we'll continue to work that and evaluate as we go. We're still going to do some seasonal stores. We're doing less kiosks this year than we did in last year. We found the pop-up stores worked a little bit better, so that's a little bit more of the mix this year, but seasonal opportunities all things that we look to go after.

Just to point out to you, Anthony. As we talked about headwinds that this management team is charged to managing those that are anticipated and those that are unanticipated. In the anticipated column would be, we have two fewer Harry & David stores this year than we did last year. Chris just mentioned we are doing fewer kiosks this year, so that's a several million dollar headwind that's already baked into our numbers with our 3% plus growth forecast to Harry & David. That's overcoming those millions of dollars and revenue loss from closed stores and reduction of what was less than optimum kiosk program that we inherited last year.

Thank you very much.

Our next question comes from Linda Bolton Weiser of B. Riley. Please go ahead. Linda, please go ahead.

Yes. Hi. So, one of the things you talked about in Harry & David was the opportunity to take Moose Munch into more wholesale retail channel. Can you talk about whether you've been able to work on that for this holiday and if you have any new wholesale customer there?

Yes. Linda, this is Jim. Moose Munch is one of the success stories for the wholesale group this holiday season. The big opportunities are in front of us. It's a small brand, but take rates have been very good. They've opened up some new channels that we'll report on after the holiday as we see what success we've had there. So interesting new third-party marketing opportunities we have for the Moose Munch brand, which we're very excited about, but isn't going to impact the total sales number of our third-party wholesale sales in Harry & David or in Moose Munch for this holiday period, but very encouraging for the long-term.

I would say, yes. Linda Moose Munch is part of the first season encouraging wholesale signs that we talked about before for the Harry & David brands, Harry & David, Moose Munch and Wolferman. And yes, we've been able to gain both new customers, but also new maybe to Moose Munch from across our nation of customers. As we look at customers that maybe 1-800 baskets was selling into a Fannie May and introducing both customers who are existing to the Company to a new product line has worked as well.

There you'd be referring to some of our gift basket businesses that included Moose Munch in those club channels for example.

Correct.

Okay. Can I just ask a little bit more about the BloomNet? You had mentioned that there were some sales that would be occurring in future quarters. Can you just give us a little more color what's the nature of their sales and why you're confident that you will see that in a future period?

Bill, do you want to take that?

Yeah. Linda, we have some wholesale customers within – some of the hard goods that we sell with BloomNet and they've actually already ordered and it's just that the delivery of that did not happen in Q1, it's going to happen in Q2 and we have some of that actually shifted to Q3. So, really its orders in-house that just didn't ship.

Okay. Got it. Then finally, when we toured your facilities in Ohio, you talked about how you were managing through the labor issues for the period for the holiday. So it sounds like you've done a good job there. Can you talk about if there is any cost increases in your other types of input costs, like some of the key raw materials, like the egg, sugar, cocoa, et cetera?

I'll take the first part, Linda, this is Jim, and then Bill and Chris will jump in on the second part. On a labor side, the management is charged as I said managing through headwinds, known and unknown. And the known last year was that – the good news is from a macro point of view, the employment number, unemployment numbers is going down. The macro trends are looking good. Order sales we just saw were better than expected. Housing costs are increasing better than expected, so all of the macro trends look awfully good. The Consumer Confidence Index is still lagging that, which has a direct bearing on any of us in a consumer facing business. So we think that there is a lot more opportunity in front of us, as the macro trends look good. One of the macro trends we look at and we're obviously immediately impacted by is labor cost. So, labor markets are tightening up, our costs were tightening up. We planned on a several million dollars increase in labor cost last year, frankly it wasn't enough. That's good news in that the labor markets are firming up and of course you have minimum wage increases in different markets where we do business. We obviously pay more than a minimum wage, but that puts different kind of pressure on our labor costs. So we underestimated the impact last year. We thought it would be an impact. We underestimated it. This year, I think we've done two things. We better forecast and plan for the increased labor costs and that's baked into our numbers. And the HR team across all brands have done a terrific job of anticipating tighter labor markets and taking corrective steps to be earlier in their recruitment efforts, to be better in retaining people who came to us last year. Keep in mind, with 4,000 people day-to-day and in holiday time we jumped to 12,000 people, so it's enormous ramp up, but they've done a really good job. Bill, Chris and I were just looking yesterday that our fill rates and every brand has really done a good job of fulfilling all the job openings. We still have the service platform hiring in front of us that's taking place now, so we can't confirm if that's as good as we hope, we think it is, but it's still in front of us. So overall, the management teams, the HR teams, the hiring teams have done a terrific job of anticipating that, and Bill we've also anticipated of trying not to hire as many people by pre-making product where we can, maybe a little color on that?

Yeah. Two points, one, Jim on that. We did pull forward and you saw our inventory a little bit at the end of the fiscal year or year end. As we start the pull forward and do production of Halloween product and Floral product during the springtime. With our regular workforce, this would put less pressure on the seasonal workforce as we saw it will ramp for the holiday season. So, that put less pressure on it and so that helped with those fill rates that Jim was now talking about. Linda on your other point, some of the other costs inputs, while we've locked in our contracts on cocoa and we're paying below market prices for cocoa today. Cocoa is still more expensive today and we're spending more today than we did a year ago. There are other commodity costs that kind of go up and down, actually even oil, even though we're all benefiting from some continued low oil, the way the third-party carriers charges back for surcharges, they've changed that around a little bit and our surcharges are higher than they were a year ago. So there is incremental cost associated with that. With that said, as Jim referenced, with respect to the labor, we've built all this into our models and our guidance that we have provided, so we're not expecting any surprises.

Great. Thanks and congratulations.

Thank you, Linda.

[Operator Instructions] Our next question comes from Alex Fuhrman from Craig-Hallum Capital Group. Please go ahead.

Hi guys. Just a quick one here on Passport, it sounds like you guys are pretty happy with the customer behavior metrics. Just trying to get a sense, I mean if this program ends up being a homerun in terms of getting people to really consistently shop across the brands and increase their total spend. If you keep acquiring customers into the program at the pace you've been doing, at what point would this really move the needle? And obviously, you guys are building this for the long term, but at the current growth rate of membership, I mean could this be a needle mover in 2017 or 2018 or is this really more of a five ten-year strategy.

Chris without giving specific guidance in the upcoming years, just add some color on the overall impact.

Yeah. So I mean, as I said, we are very pleased with the continued growth and it's one of the items Passport specific, as one of the several items that we use to help drive multi-brand customers. All of those initiatives and all those innovations are really to helping drive the results we talked about, whether it be the 1-800-Flowers growth over the last quarter almost 5%, 4.2% this quarter. The Fanny May ecommerce growth we're seeing, the Cheryl's growth even Popcorn Factory as Jeff pointed out, we hadn't really talked about that for a while. So, we're seeing it start to permeate across the business. With that said, it is more of a multi-year strategy. So, I don't think, it wouldn't be necessarily a large needle move this year, but we're seeing it start to impact the business and we're very hopeful going forward.

Keep in mind, to help you, the way we think about this Alex. Right now if we get a couple of orders out of our customer here, it's very good and the economics are great on it. But over the course of the next several years, as these programs take route an really shape the consumers behavior and their spending pattern, if we get one more order from our customer on the same acquisition cost, you could imagine the leverage that gives us with the gross margin that we enjoy in terms of the impact on our business. So, from a moonshot point of view, that's our dream and that's what we're focused on.

That's great. Thank you very much and good luck.

Thanks Alex.

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

Thank you Aaronson and thank you all for joining us on the call today and for you questions. If you have any additional questions, of course please don't hesitate to contact us. I also encourage you to visit our multi-brand website and check out any of our great brands on your mobile device. And please start a conversation with GYWN. She will be happy to help you find the perfect gift for everyone on your holiday shopping list. Thank you. Good bye.

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