1-800-FLOWERS.COM, Inc. (FLWS) Q2 2017 Earnings Report, Transcript and Summary

Good day and welcome to the 1-800-FLOWERS.COM Incorporated Fiscal Year 2017 Second 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 Investor Relations. Please go ahead.

Thank you, Steven. Good morning and thank you all for joining us today to discuss 1-800 FLOWERS.COM’s financial results for our fiscal 2017 second 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 at the Investor Relations section of our website at 1800flowers.com or you can call Patty Altadonna at 516-237-6113 to receive a copy of the release by 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 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 results 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. Reconciliation 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, or any recordings of today’s call, the press release issued earlier today or in any of the SEC filings, except as maybe otherwise stated by the Company. I’ll now turn the call over to Jim McCann.

Good morning, everyone. We are pleased to report another quarter of strong execution and solid financial results for our Company. As Chris and Bill will discuss in more detail, the second quarter and the first half results are largely in line with our plan for the year, and we continue to see significant opportunities to drive accelerated growth across all of our businesses and brands. During the quarter and throughout the first half, we saw a continuation of the positive top and bottom-line growth trends in our 1-800-Flowers brand; a reacceleration of top-line growth at BloomNet to go along with their consistently strong bottom-line results; and continued ecommerce growth in our Gourmet Food and Gift Baskets brands including Harry & David, Cheryl’s, 1-800-Baskets.com and The Popcorn Factory. With that said, revenue growth in second quarter, specifically in Harry & David, our largest gourmet gifts brand was below our expectations. This reflected a number of factors, in particular, executional issues related to the speed at which we have been transitioning Harry & David to a digital first marketing focus, clearly not fast enough. We are moving quickly to address this area, and Chris will provide more color in his remarks in a few minutes. Most importantly, we remain highly confident that the plans we have in place will enable us to tap the tremendous revenue synergies we see in Harry & David and accelerate its growth going forward. Last quarter, I shared with you some of the exciting opportunities that lay ahead for us, and my view of our business from a broader perspective. I noted that we have more than doubled our top-line over the past several years, and we did this through a combination of solid organic growth combined with the disciplined approach to mergers and acquisitions. We have built a unique business platform that includes our all store line up of gifting brands, our growing customer database with very attractive demographics, our unique operating platform which we call BOLT and a strong balance sheet with growing cash and no debt. In addition, our strong balance sheet and growing cash flows enable us to be proactive in terms of identifying, pursuing appropriate M&A opportunities, which will further accelerate our growth. With this platform in place, we are well-positioned to accelerate our growth both top and bottom-line in the second half of the current fiscal year and going forward. Now, I’ll turn the call over to Chris and Bill to review some of the highlights from our second quarter, as well as our outlook for the second half of fiscal 2017. Chris?

Thank you, Jim. For the second quarter, we achieved consolidated top and bottom-line growth in what was a consumer environment characterized by uneven consumer demand throughout the holiday season. Our year-over-year increases in revenue, gross margin, EBITDA and EPS reflect positive contributions across all three of our business segments. Our total revenue growth for the quarter, while below our expectations, was supported by good growth in our Consumer Floral and BloomNet segments as well as ecommerce growth in most of our Gourmet Food and Gift Baskets brands. However, this was partially offset by slower than anticipated growth at Harry & David, our largest brand in the Gourmet Food and Gift Baskets segment, which accounts for the majority of total revenues during the fiscal second quarter. For the quarter, Harry & David modest growth in ecommerce, its largest channel, good growth in wholesale and lower year-over-year sales in its retail channel, reflecting a combination of a planned reduction in seasonal store accounts, reduction in a number of our year-round stores and decline in traffic. Based on customer feedback, Harry & David’s product offering this holiday was excellent, both in terms of selection and quality, particularly its signature Royal Riviera pears which were truly exceptional. We continue to see significant strong growth opportunities across Harry & David’s product offerings, the Royal Riviera pears to Moose Munch to Wolferman’s and the new Orchard Table collection that was launched during the holiday season. We are intensely focused on accelerating Harry & David’s revenue growth rate. And we have a number of initiatives in place that will help us leverage the assets, experience and expertise we have across the enterprise. While catalog and email marketing underperformed during the quarter, Harry & David saw some good results in its digital marketing efforts including display, paid social, video and affiliate programs, all of which generated year-over-year increases. Going forward, we’ll be increasing our efforts and investments in these areas to accelerate Harry & David’s transition to a more digital marketing focus where we see higher returns and increasing customer engagement. In our floral businesses, we saw a continued strong performance during the quarter. In Consumer Floral, 1800-Flowers continued its trend of solid top-line growth, further expanding its market-leading position and its record of consecutive quarters with increased online contribution. We are continuing to distance ourselves from the competition in the floral gifting space through our relentless focus on enhancing customer experience, our commitment to reaching our customers and engagement with them when, where and how it is most convenient and relevant to them as seen in our innovative mobile and social programs as well as our first mover position in conversational commerce, and our focus on truly regional product designs developed in collaboration with our BloomNet flowers design council and using input we received directly from our customers. The examples of this range from our local artisan program featuring exclusive local arrangements created by the incredibly talented BloomNet professional florists around the country to the new Flirty Feline arrangement for all of the cat people out there and our exclusive Waterford Glass Rose, both just in time to Valentine’s Day. In our BloomNet business during the quarter, we achieved solid revenue growth to go along with BloomNet’s consistently strong bottom-line contribution. As we noted in our last call with you back in November, BloomNet is accelerating its revenue growth in a number of areas including increasing order volumes, both from 1-800-Flowers and shop-to-shop florist orders, increasing product sales to our BloomNet florists and an expanding range of new customers, and a host of new digital marketing and advertising services. As we head into the second half of fiscal 2017, which is typically dominated by floral gifting occasions, we expect the positive trends we are seeing in both 1-800-Flowers and BloomNet to continue. Combined with the number of tailwinds that we will benefit from including better day placement of the Valentine holiday and growing everyday gifting in our Gourmet Food and Gift Baskets brands, we expect to drive accelerated revenue growth in the second half and deliver strong top and bottom-line results for the full fiscal year. Longer term, we are excited by the opportunity we see to achieve sustainable, faster rates of growth through the expansion of our multi-brand customer strategy. In this key focus area, we are continuing to make good progress. The number of multi-brand customers is growing at a strong year-over-year rate and Passport Program signups are growing even faster. Most important, the behavior of these customers continues to bode well for our future growth. Multi-brand customers purchase frequency is nearly three times that of single brand customers, and it continues to increase year-over-year. Passport customers who have a high propensity to become multi-brand are also spending at rates approximately three times that of non-Passport customers. Retention rates, annual spending and customer satisfaction metrics are also strong and getting stronger, leading to significantly enhanced lifetime customer value. And we’ve only scratched the surface with multi-brand customers, still repressing less than 10% of our total customer base, giving us a lot of runway to accelerate growth. And I would like to turn the call to Bill to cover our Q2 metrics in more detail.

Thank you, Chris. As Tim and Chris mentioned, we are pleased to have achieved positive top and bottom-line results across all three of our business segments in the second quarter. While our 1-800-Flowers and BloomNet businesses showed solid revenue gains, total revenue growth for the period was below our expectations due primarily to the slower growth at Harry & David. We have a number of initiatives in place to address this going forward, including speeding up the pace at which we are integrating Harry & David’s marketing programs so that they can better leverage our digital expertise and experience we have across the enterprise. We have also accelerated our initiatives in wholesale to building the solid growth we saw in the first half and expand the list of customers in this channel for Harry & David, Moose Munch and Wolferman’s products with an eye towards growing both everyday gifting and self consumption. We are confident that these efforts combined with the promising, albeit early stage success we are seeing in increasing everyday gifting across all of our Gourmet Food and Gift Baskets brands, for birthday, sympathy, new baby and other non-holiday occasions will enable us to accelerate revenue growth over time. The slower growth in the second quarter, our largest revenue period, offset the strong growth we achieved in the fiscal first quarter, which is our smallest revenue period. As you may recall, part of the strong first quarter growth was related to timing, with the pull forward of some wholesale orders at the request of our customers. As a result, our revenue growth for the first half of fiscal 2017 was 2.3%. Looking at the end of the second half of the fiscal year, we expect our growth rate will accelerate to more than double that of the first half, driven by the positive trends in our floral businesses combined with the tailwind of favorable holiday day placement and growing everyday gifting across our platform. Now, breaking down our second quarter results. In terms of revenues, total consolidated revenues grew 1.1% to $554.6 million compared with $548.4 million in the prior year period. This reflects growth of 0.6% in our Gourmet Food and Gift Baskets segment, which represents nearly 80% of total revenues for the quarter combined with 3.1% and 4.2% growth in the Consumer Floral and BloomNet segments respectively. Second, gross margin for the quarter improved 20 basis points to 46.3% on a consolidated basis. Gross margin benefited from increases in Consumer Floral and BloomNet segments of 90 basis points and 310 basis points, respectively. Gross margin in our Gourmet Food and Gift Baskets segment was consistent with the prior year at 46.7%. This reflects continuing benefits from logistics and operational improvements, which more than offset the impact of what is always a highly promotional holiday season. Operating expenses excluding D&A was 27.3% of total revenues, unchanged compared with the prior year period. This reflects the cost benefits we continue to get from the integration of Harry & David combined with other ongoing cost reduction programs across the enterprise, which has enabled us to absorb some significant cost increases in seasonal labor, insurance and commodity costs. The combination of these factors enabled us to deliver EBITDA for the quarter of a $107.4 million, up 2.5% or $2.6 million compared with the prior year period. As previously noted, this reflects positive contributions from all three of our business segments in the quarter. Our GAAP EPS was $0.93 compared with $0.92 in the prior year period. In terms of category results, in our Gourmet Food and Gift Baskets segment, revenues increased $2.6 million or 0.6% to $436.9 million compared with $434.3 million in the prior year period. This reflects solid growth in our Cheryl’s 1-800-Baskets, The Popcorn Factory and Fannie May brands, which was largely offset by the aforementioned slower growth at Harry & David. Also, as discussed in our first quarter conference call, we pulled forward some wholesale revenues in the first quarter due to customer request. So, revenue growth for the first half of fiscal 2017, which eliminated the timing of wholesale shipments between the quarters was 2.2% for this segment. Gross margin for the quarter was unchanged compared with prior year at 46.7%. And segment contribution margin increased $760,000 or approximately 1% to $104.6 million compared with $103.9 million in the prior year period. In Consumer Floral, revenues increased 3.1% to $97.8 million, compared with $94.8 million in the prior year period. Gross profit margin for the quarter increased 90 basis points to 41.2% compared with 40.3% in the prior year period, reflecting our focus on efficient promotional marketing programs, logistic savings and strong customer satisfaction metrics. As a result, segment contribution margin increased year-over-year for the 10th consecutive quarter, up 11.9% to $13.1 million compared with $11.7 million in the prior year period. As Chris mentioned, 1-800-Flowers has some nice momentum and we expect to build on this going forward, particularly in the second half of the fiscal year, which includes the key Valentine and Mother’s Day floral holidays. In BloomNet, revenues for the quarter increased 4.2% to $20.5 million, compared with $19.7 million in the prior year period. BloomNet’s revenue growth is benefitting from a combination of increased order volumes and an expanded offering of digital marketing and advertising programs. We expect this to continue and build during the second half of the fiscal year. Gross margin for the quarter increased 310 basis points to 60% compared with 56.9% in the prior year period, reflecting strong product mix. Segment contribution margin increased 11.3% to $8.2 million compared with $7.4 million in the prior year period. In terms of corporate expense, our category contribution margin results exclude cost associated with the Company’s enterprise shared services platform which includes among other services IT, HR, finance, legal and executive. These functions are operated under a centralized management platform, providing support services to the entire organization. For the fiscal second quarter, corporate expense including stock-based compensation was $20.2 million compared with $19.8 million in the prior year period. This increase reflects increased medical insurance cost for the quarter. Turning to the balance sheet, at the end of the second quarter, our cash and investment position was $114 million. Our term debt balance net of deferred financing cost was $111 million, and we had zero borrowings outstanding under our working capital line within our revolving credit facility. It should be noted, back in December, we amended our credit facility, extending its term out to 2021 at favorable rates and t terms. Finally, inventory of approximately $93.4 million was down $7 million compared to a year ago and within management’s expectations. Regarding guidance, based on our expectation to accelerate revenue growth in the second half of fiscal 2017, combined with the results of the first half of the year, we are revising our full year revenue growth guidance to a range of 3% to 4% compared with the revenues of $1.17 billion in the prior year. As a reminder, revenues for the second half of the fiscal year will reflect a shift of Easter holiday into the fourth quarter compared with the prior year period when it fell in our fiscal third quarter. In terms of bottom-line metrics, we are reiterating our guidance we provided at the beginning of the current fiscal year, which calls for EBITDA growth in the range of 8% to 10% compared with adjusted EBITDA of $85.8 million reported for fiscal 2016; and EPS growth in the range of 5% to 10% compared with adjusted EPS of $0.43 reported in fiscal 2016. We’re also reiterating our expectation for free cash flow to be approximately $40 million for the full year compared with $24 million in fiscal 2016. I’ll now turn the call back to Chris.

So, to sum up, we feel extremely well-positioned as we enter the second half of the fiscal year. As we’ve discussed, the first half of the year was largely on track with our full year plan. The back half of the year is driven by our Consumer Floral and BloomNet businesses, both of which have strong momentum. We have the incremental benefit of better timing for both Valentine’s Day and somewhat for Easter. We have implemented changes to drive digital marketing and everyday purchasing at Harry & David, and we are seeing traction in our multi-brand customer initiatives. For these reasons, we remain highly confident that we will accelerate revenue growth in the back half and achieve the bottom-line goals that we previously laid out to you for the year. Looking beyond fiscal 2017, we believe the future is even brighter based on the combination of our industry leading multi-brand initiatives, the strength of our growing loyalty programs, our expanding leadership in the floral category, and the enormous opportunity we have in everyday food gifting. These factors give us confidence that we can consistently drive organic revenue growth at a mid-single digit rate, while driving our bottom-line results at double that pace. We are very pleased with the progress which we have made, and we are even more excited about the future. With that, let me turn the call over to our operator, Steven, so we can take any questions that you might have. Steven?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The First question comes from Jeff Stein with Northcoast Research. Please go ahead.

Good morning, guys. Couple of questions, and maybe I’ll start with a comment. One of the things I’ve noticed about your email marketing program, and I don’t know if this shows up with your customers who are -- who do receive your emails. But, every single day, I receive an email from every single one of your brands. And it would seem to me that at some point, perhaps you might begin to see customers either unsubscribe or send your emails into their spam folders. And I’m wondering, could this potentially be one of the reasons why your email marketing is not as effective as it has been in the past. And then, I’ve got a couple of follow-up questions.

Okay. Jeff, it’s Chris; I’ll take that one. So, I think your observation is good, and I think that happens especially in the peak of a holiday season when you’ve seen [Technical Difficulty]. So, a couple of different things there. Overall email marketing in the Company has performed pretty well except at Harry & David; so, just to kind of set that stage. As we have learned over the years, I think the 1-800-Flowers brand has been out on the forefront of this as they kind of ran into some challenges with email marketing two or so years ago for this reason, kind of hitting the file a little bit too much, a little bit too hard, not changing the creativity. We’ve migrated that where the flowers brand has decreased its frequency of email and also I think increased its engagement metrics through a more creative approach to the consumer. So, we’ve begun taking those learnings and driving them across the other brands. Harry & David is probably the one that we’ve gotten to the latest. Again, if we look at -- I spent a lot of time on Harry & David email myself during the holiday season, and that’s an area where we have to be able to figure out the optimal frequency and the optimal creative messaging. So, that’s in the works, because we do worry about email files fatigue. There are other things that we’re doing as well as constant test that we’ve run, some were starting to get some data back already from the holiday and we’ll be looking at it over the next coming weeks actually. Looking at taking similar segments of our customer file and doing email frequency test, doing test with them of some get catalog, some don’t get catalog. So, those tests at the Harry & David file really were probably the most penetrated this holiday season on that brand, and we’ll be applying those learnings going forward. In our other brands, we continue to really monitor customer behavior to make sure we are not over-saturating them.

So, it sounds to me, Chris, like your other brands are doing okay with email. Is there something about the Harry & David customer that makes them different? And in line with that, it seems that you are just not quite getting the traction from their inclusion in the multi-brand portal, which obviously they weren’t on the portal last year, they were this year. Is there something about the way you’ve designed the portal that perhaps customers are just not picking up on the fact that Harry & David is a member of your gifting family?

So, I don’t think it’s anything as far as the customers being very much different. Again, by brand, there is always slight differences in our customer demographics. And Harry & David would be one of those brands where the consumer demographic averages on the higher side. So, I don’t think there is anything really particular to the consumer as much, but we do have to recognize different factors. One of the things I think this holiday we saw is that, keep in mind, we brought the Harry & David website onto the new platform in April. Harry & David is a very seasonal business. So, this was the first holiday season that those customers were really exposed to that website. So, just being exposed to change, I think we struggled with that a little bit during the holiday. Some of our metrics started off slow but really picked up strong, as far as multi-recipient orders as an example, started off slow but finished strong. So, we think there was a little bit of an adjustment phase, not that the customer is any different. But if we go back to our other brands, we saw the same thing. The big holiday season they come to in new environment, it’s a little bit different to take some adjustment. With that said, again, we are always trying to tailor our messaging to the appropriate demographic of each brand’s customer.

Okay. How are you intending to deal with the catalog issue with Harry & David? My understanding is, I think it’s something like 50 million catalogs a year. Catalog fatigue, I would think has also got to be an issue. We’ve seen one of our other companies L Brands just completely eliminate its Victoria’s Secret catalog and go strictly to digital. So, how do you see the evolution of your marketing playing over the next 12 months with Harry & David with respect to its catalog marketing?

I think, with similar approach to what we’ve done with our other brands that we’ve acquired in the food gifting industry that have been predominantly catalog driven, i.e. Cheryl’s is one of the great examples; it takes time. So, I want to set the stage there. I think if we try and force consumer behavior too rapidly, we can endanger the customer relationship there. So, we need to be careful. What we want to do and what we saw is we saw some good early signs of our digital marketing during the holiday season with the Harry & David brand, whether that be in display, paid social, some search marketing, affiliate marketing, channel did well, especially kind of moving into November and December. And then, we break down those channels and look and say which ones are producing the higher percentage of new customers. And those are the ones that we want to invest in the most, those channels that produced a highest percentage of new customers. So there, we are adding new digital focused customers to our file. And then, we’re constantly going to be doing a testing, like I mentioned where we’re different sales, giving them all digital marketing, giving a hold our group digital marketing plus the catalog and seeing how over time we can moderate that balance. I don’t think you’ll see us shifting away from catalog anytime soon; that’s too high risk in my mind. But, we are working to diligently find the right balance between catalog and digital.

Okay. And just one final question, if I may, and this one is for Bill. My understanding is in Q3, you should pick up about $8 million of revenues for Valentine’s Day, due to the more favorable day placement, but at the same time, you are going to lose some revenues from the later Easter this year. So, when you net it all out, how do you see kind of the revenue growth, if you’re looking at mid single-digit revenue growth for the back half of the year; how do you see it kind of stacking up between Q3 and Q4? Is it going to be off where we see -- where we should see the revenue growth or will it -- there would be some shift between quarters?

Yes. Jeff, both quarters will grow but the higher growth will be in Q4. Easter is about $12 million or $13 million holiday on ecommerce and retail channels, which is what gets impacted by those higher margin channels. So, you will see more revenues going out of Q3 into Q4 than when we pick up as a result of the Valentine’s Day, day placement. And your estimate of Valentine’s Day is in line with what our estimates are for the pick-up for the Valentine’s Day.

The next question comes from Dan Kurnos with the Benchmark Company. Please go ahead.

Thanks. Good morning. Let me just follow up on Jeff’s questions on H&D with just sort of a different vein here. My understanding is you guys shifted to more of a promo catalog type event and that was being received favorably. I don’t know how aggressive you were during the holiday season with more of the traditional catalogs, once you got to the ordering season. So, I’d like to sort of get a little bit insight there. And then, on the digital front, obviously, having a background in e-com and advertising here, there is certainly a risk that you guys run into more of a negative ROI situation understanding versus print catalog probably not. But just depending on which paid channels you push, so, I’m curious now since your messaging kind of had maybe some issues, Chris that you were implying. As you push more into the digital arena for Harry & David, just how you think about when you get aggressive and in those paid channels, how you think about ROI, margin considerations and whether or not you think the Harry & David brand can actually resonate with sort of a digital first consumer?

Dan, it’s Jim; I’ll start to clear one point, Dan and let Chris get to media [ph] your question. One of the things that we delayed doing as part of the integration was integrating the digital marketing teams. There is an awful lot of resident talent here in the Company that has existed before the acquisition of Harry & David. We let that digital team operate autonomously throughout this holiday period to close least amount of disruption. That was probably and certainly I would say a mistake. So, one of the things we talk about in terms of our new digital effort is only to take the digital team that’s had Harry & David, nail them in with the enterprise-wide digital team and that they can benefit from that institutional knowledge we’ve developed and our strategies going forward. So, Dan, I’ll let Chris to get to the media question.

So, I’ll stay on the digital marketing. With that we have the ability really of one team advancing [ph] the return on ad spend as main metric we use there in digital channel as well as -- and constantly are looking at which one is working for each brand. And if we see a vein of gold at one brand, we start to try it in the other one. And we can do that faster than we were able to do it just kind of trying to share that knowledge. So, here, we move to a model where we’re leveraging expertise, leveraging toolsets more than we were prior today, prior to holiday change. But, Dan, I think we actually see the -- we see less risk in the digital channels and the opportunity to manage that because we can really react real time. So, if we see a metric start to move out of parameters for any reason, we can pull back on it and shift the spend there. In catalog, we cannot do that. We really get locked into certain spends and we have to ride it throughout the holiday season. So, the flexibility of digital channels give us the visibility we have across all of our brands, the expertise that we have. And then, like I say, when we look at the return on ad spend, we also couple that with return on customer. So, in certain channels where we’re getting a higher percentage of new customers coming through that channel, we’ll ramp up roll ads [ph] on that channel because we know we’re benefitting on a cost per customer. So, we really think it gives us better spending controls and flexibility to drive revenue as we move away from catalog. To the first one, I’m not really too sure on your question, on the comment on the promotional type catalogs. I think really we went into this holiday season from a catalog perspective looking to decrease our promotional activities. So, while there is always offers out there, we were attempting to -- I don’t know -- I don’t think -- we were not as successful as we wanted to be in decreasing the promotional activity around catalogs but that was the intent.

And one final point, Chris mentioned earlier that we were seeing success of the Harry & David customer on a number of the digital offerings that we had in different channels that we had. So, the question really is the timing and the speed at which we can migrate that customer over to the digital, we can’t do it too fast but maybe we were too conservative this past year.

And again, to one of our points of our objectives going forward now, as we’ve been building the capability around moving our food brands more and more on the forefront of everyday gifting, that has to come through digital marketing channels. We do not think you can cost effectively do that in a catalog model, so digital capabilities that will help drive that.

So, two points of clarification, just one, by promotional catalog, I mean a lighter version of the heavy multi-page catalog and sort of the cost reduction efforts. So, that’s more what I was meaning and you sent it out a little bit earlier this year than more around ordering time. That’ all I meant on the promo side. And then, just on the digital side, don’t get me wrong, I think I 100% agree that moving to digital is the right strategy, but I think the questions that a lot of investors are having right now is as you guys do this and you look at the multi-branded portal and integrate all of this, it’s about learnings and analytics on the back end. I think everyone agrees that you can get stickier users by going paid channel, but I guess maybe Chris if you -- or Jim if you have more color just on any metrics you can provide around what you are seeing from the channels you’re pressing, how confident you are that you can get better lifetime customer value out of pushing those channels? Those are the kind of things I think that would give people more confidence that the shift in strategy while granted much more flexible is going to serve you better at least in sort of the immediate term for a revenue acceleration.

I think we’re in agreement -- Dan, this is Jim. One comment I’d make before Bill and Chris add more to your question for color there is that when we -- one of the benefits that we’ve already seen and we point to in terms of the advantages of the multi-branded platform, it’s going to show up first in the smaller brands just because of the size comparisons. So, you saw renewed growth for the first time in a long time in The Popcorn Factory; you saw renewed growth in ecommerce in Fannie May; you saw accelerated growth in ecommerce in 1-800-Baskets. So, the smaller brands, Wolferman’s for example also accelerated ecommerce growth. And I would argue that that’s primarily due to their exposure on the multi-branded platform to the customers that are coming in disproportionately this quarter from Harry & David. So, Harry & David saw 1% growth than we saw overall for the half -- 3% growth for the category. I would say a good part of that growth I would guess, Bill and Chris, this is a question to you too, I would guess we’d assign a good portion of that growth in the smaller brands to their exposure to the Harry & David customer and the 1-800-Flowers customers seeing them as a result of the exposure opportunity to get on the multi-branded platform.

Clearly, as a multi-branded platform, one of the great benefits that you first get is simply brand awareness. And as we move the Harry & David brand on to the portal back in April and this being its first big holiday season, all of those Harry & David customers were now exposed to this family of brands for the first time, and that creates trial of those are the brands. So, we’re seeing that take place. But that as well as other marketing capabilities, and I would say, Dan, this moves more outside of external channel but more into our website, our ability to increase the growth in multi-branded customers through different cross-merchandising programs, increased signups into our royalty programs like Passport is showing us good capabilities in that digital channel. And again, as I referenced, what we do is we look at each of the different channels from -- I don’t want to break out for competitive reasons which ones we’re seeing higher customer acquisitions, new customer rates versus existing customer rates, but those are ones where we are placing our ad dollars. And again, we’re looking at that brand-by-brand to see if there are any anomalies to move that. So, I think we’re in a good position as we’ve demonstrated throughout the migration from the 1-800-Flowers to the other food brands and expertise in digital marketing to now apply that to Harry & David as well.

And Bill, as is the case too that we could point to that the fact that we were able to, in spite of the built in headwinds that a company our size is going to face, lets’ call it $30 million, $35 million worth of natural headwinds in labor and other related costs, the fact that we are able to absorb those, meet those and even though we didn’t have these sales performance we wanted at Harry & David, we saw growth but not the growth we wanted, we’re still able to come quite close on our bottom line projections. That has to be result of the cost effective customer acquisition of the smaller brands as a result of the multi-branded portal and our ability to manage those built-in headwinds of expenses.

Alright.

Based on our operating cost and marketing efficiencies, it’s clearly something that marketing spend is a big piece of our operating expenses. So, we’re continuing to look for how we can drive better marketing efficiency and the multi-branded portal allows us to do that, which allows us to offset some of the headwinds that every company has with regard to rising cost.

No, I don’t think anyone has ever taken issue with your solid execution on the cost side. Last one, I’ll step away, taken enough time here. Just on Q1, calendar Q1, fiscal Q3, it sounds like from what we’ve heard from FTD publicly and from speaking with them that they just, given the transition period they are in right now, they haven’t had a time to really get more aggressive on Valentine’s Day spend. So I don’t know if you’re seeing that in the marketplace or if you can comment on that because if they’re not, then it sounds like you should achieve more share gains in the near term? Thanks.

Yes, it’s too early to say if we are seeing any impact of that for the Valentine’s Day holiday period. We are seeing them active in advertising for the holiday period, happened to see television spot this morning as a matter of fact. But, I think our concern is making sure we are well-positioned, our inventory is well-positioned and our timing of marketing programs we think is well-positioned to take advantage of this day shift. So, as we move into the holiday, that’s our focus, and I think we’re well-positioned to execute.

The next question comes from Eric Beder with Wunderlich. Please go ahead.

Good morning. Could you talk a little bit about the Harry & David stores, what we should be expecting from those? You kind of talked in your press release about how that was a drag. Where is that going?

Eric, this is Jim. I’ll take the first crack at it; you can follow-up in any way appropriate. The Harry & David had a multi-channel strategy, as we did as a Company when we acquired them. The least important aspect of that for us was the retail channel. They had melt it back from 150, 160 stores to around 50 when the acquisition closed couple of years ago. This year, we said it would be a headwind on the top line from the retail, there was. We closed a couple year-round stores; we cut back dramatically on their seasonal store program and the overall traffic. While AOB [ph] was up, the overall traffic was down. So, it was a headwind from retail and general. What our plan going forward is we just changed leadership at the retail level. We think there is some interesting opportunities there. We’ll continue to pair stores where appropriate, [Technical Difficulty] We’ll continue to cut back on stores where appropriate. Our seasonal store campaign is a fraction of the size that it used to be. So, that headwind was substantially absorbed in the fourth quarter on a comparison basis. We think that there are -- some of the stores doing very, very well; we’ll have to see if we can cross-pollinate those efforts in stores that are doing well in the others. But the retail is not an important growth focus for us going forward.

And we have had successes in improving stores. So, there were stores that were in a loss column that are now in the profit column, and we continue to drive towards that. Jim mentioned some of the management changes that we’ve made to really put a better focus on the in-store merchandising, the in-store marketing and sampling programs. One of the things we did this holiday season was introduced the Orchard Table product line in several stores through a nice sampling program, very well-received by the customers. So, we’re focusing more and more the experience in the store which is helping to put all the stores on an improvement track.

So, if you look at the stores, primarily now as an option holder for us, it is something that really aligns our investment and growth very well. We’ve done the pairing on it of the expenses, and we have a platform there that gives us good marketing exposure in communities. But certainly, it is no plans to grow that unless as Chris said, we found some vein of opportunities there that keenly peaked our interest. So, it -- but we’ve essentially taken the bad performing stores out of the system. So, we’re in a pretty good solid place right now.

Great. And when you look at the wholesale opportunities for Harry & David, last year, you really couldn’t affect that; this year, you did. What were the learnings and where do you want the wholesale opportunities to go?

Yes. I think we got good learnings last year. We’ve been able to put the wholesale business on to the growth track. So, we’re very happy with that. We just recently last week had the specialty food show in San Francisco where we got to introduce several -- number of our new product lines, some redesigned, some new products from Harry & David and especially our Moose Munch product line which we’ve begun some rebranding of it, which was very, very well-received at the specialty food show. Also for the first time displayed at the specialty food show was the Wolferman’s product line, which also got some good early indication of interest there. So, based on that, based on the success we’ve had so far putting it onto a growth track, the changes of product development, which takes some time, which is -- introduced just last week, two weeks ago in Fancy Food Show and reception we have, we think we have Harry & David wholesale business in good position.

Great, and last question, in terms of you guys did a fantastic job with the inventories. What should we be thinking about going forward in terms of your ability to continue to have inventories grow at less than the Company is growing?

That’s the plan, Bill, right?

Yes, we’re committed to everybody on this call that we’re going to take inventories down this year. And that is the plan; we are on our plan. There is times that at the end of the fiscal year that to take advantage of building some inventory early to lessen the burden of the seasonal workforce; if we have those opportunities, we will take them. We did that this past year and we’ll probably take advantage of that again this year. But overall, we’re going to continue to drive our inventories down.

So, sales are up, inventories are down, we expect that trend to continue for some time proportionately.

Alright, good luck for the Valentine’s Day season?

Thank you.

The next question comes from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

So, actually, if you take a step back and look at the quarter, obviously there was a lot of noise involved with the election and post-election and everything. So, just wondering if you could comment, maybe give us a sense as how the monthly trends were on a year-over-year basis? I am not sure how specific you want to get but if you could give us some color on that that would be very good.

I would say, it’s hard to give monthly trends necessarily. What we did see and as kind of my comment early on, was we saw the uneven holiday. So, I think as we ran up to the election, we saw some pullback as the consumer was just distracted, and I think that was expected and then kind of seen by many different retailers. Following the elections, a little bit of a boost, quite frankly, not as strong as we expected. Then we had ran into Thanksgiving Cyber Monday where I’ve spoken to many people in the industry where okay, it was a strong weekend and we don’t necessarily participate in that weekend as much as other major prime retailers, more of a secondary gift coming out of that. But the consumer then seemed to take a little bit of a dip coming out of the Cyber Monday, big promotional activities, like everybody took a step back and said okay when is the next round of discount is coming. And then, it started to rise and it started to rise and rose strong right into that second -- sorry, third and fourth week of the holiday. Question then always as we’ve experienced in the case of Harry & David, not enough time to make up for that earlier low that we experienced in the beginning of December. So, it was a little choppy. So, it’s hard to say a monthly trend, but that’s how we saw it come out in an uneven character.

This is consistent what we’ve seen now with the continuous elections we’ve had each of the last four years. It has an impact and we catch up at the end but we sort of run out of days. Overall though, we’re pretty buoyant about where we are. Employment is up, payroll is up, interest rates are low, housing prices are rising. So, hardworking and happy consumers are good for us.

Thank you for that color. And also, just wondering about the Fannie May segment; could you perhaps give us a sense how the same store sales were at the Fannie May stores?

In Fannie May, we’re seeing good steady improvement in trends, both from a cost control point of view and in same store sales. Same store sales of Q2 did not get into the positive range but certainly a better trend than we had last year, and we’ve seen that trend now continue for good six months. Wholesale has recovered even stronger than the retail environment. So, we saw good results in the wholesale channel for Fannie May as well.

And then, your tax rate was a bit lower than what we had expected. I think you had originally said at the beginning of the year 35%. Where do you think that will -- do you still think it will end up at 35% or perhaps lower?

When you see for the year-to-date numbers, it should carry through for the full year. We get the benefit of some research and development credits and some what they call Watsi [ph] credits which are kind of work credits. And as we continue to evaluate those, we take advantage of those. So, we were able to get our effective tax rate lower than what we had originally guided, a little higher than a year ago though, if you will.

Okay, thank you.

That’s within 33.5% range.

The next question comes from Linda Bolton Weiser with B. Riley. Please go ahead.

Hi. So, you’ve done really well in the BloomNet segment, both on the revenue and on the profitability. Can you give us some idea as to like what’s the potential there. It’s a little hard to compare your margins to FTD’s because you include different expense items. But, is a 40% contribution margin possible someday, or do you expect that to slow down or can you continue that pace of like a percentage point a year of margin expansion?

Yes. So, we are pretty happy with BloomNet, the way it’s been performing, its growth rate that we have gone right now, and it’s good to see that growth from back. As you know, we kind of stalled a little bit on the growth. And the growth is always going to be a mixture of different products and services that will affect A, first and foremost the contribution margin, depending on how that mix comes in. If we’re selling some marketing services for example that have a higher margin, that will go up; but if we get strong success, which we are having now on the products side of the business into florists or into other retailers that we are selling into, that will come with a lower gross margin and lower impact to contribution margin. We are very, very pleased with that contribution margin being in the range that it is in, in that low 30% range, which is higher than our competitors to the best of our knowledge. So, we are very comfortable with that, and our focus is growing contribution dollars in that business.

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

Great. Thanks for taking my question. I just wanted to drill down a little bit more on the revenue guidance for this year. It seems like generally speaking, you guys have always talked about the food business growing a little bit faster than the floral business over time. I’m wondering here with Harry & David growing a little bit less than expected here in the second quarter combined with the favorable day placement of Valentine’s Day, is it likely that this year, we are going to see the floral business grow faster than the food business, just given those couple of things that have already happened this year?

Yes. I think so, I’ll ask Bill to give a little bit more color on that. But yes, I think that’s the case, especially Harry & David grew slower than we expected. We look to the second half of the year, floral, BloomNet very well positioned with the momentum that we have going there, again the timing of the holidays, Valentine’s Day, Easter that we covered already. We don’t have some of the headwinds this next quarter that we had last quarter, for example the Harry & David retail reduction, planned reduction seasonal stores and a couple of core stores. We are seeing traction in our multi-brand initiatives that I think will benefit floral in the second half of the year, just because floral occasions pop up.

Just to go to the seasonality where in Q2 nearly 80% of the revenues are GFGB; second half of the revenue year about 65% of the revenues are coming from the kind of the floral businesses, mixture of largely Consumer Floral and then maybe 10% or so from BloomNet. And with the tailwinds that we have in second half of the year with day placement of Valentine’s Day, the momentum that the floral businesses have, this will be a year where we will see the floral side have a higher growth rate than the GFGB side.

The Easter being later also impacts the benefit on the floral business. When Easter is early in the cycle, like it’ll be in 2018, it sort of speaks on people; when it’s in the later in the cycle especially with the late Mother’s Day, it’s beneficial for us.

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

So, thank you all for join us on the call today and for your questions. If you have any additional questions, please don’t hesitate to contact us. And certainly, as a reminder, Valentine’s Day is just around the corner, and I encourage you to visit our multi-branded website, check us out on your mobile device or through any of our stores or social channels to find a perfect gift for all and I do stress all of the Valentines in your life. Thank you.

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