1-800-FLOWERS.COM, Inc. (FLWS) Q2 2018 Earnings Report, Transcript and Summary

Good morning. And welcome to the 1-800 Flowers.com Incorporated 2018 Second Quarter Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions]. After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Joe Pititto. Please go ahead.

Thank you, Jay. Good morning and thank you all for joining us today to discuss 1-800 Flowers.com Inc's financial results for our fiscal 2018 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 1800flowersinc.com. Our call today will begin with brief formal remarks and then we will open the call to your questions. Presenting today will be Chris McCann, CEO; and Bill Shea, CFO. Before we begin, I need to remind everyone that some 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 risks and uncertainties, please refer to our press release issued this morning, as well as our SEC filings, including the Company’s annual report on Form 10-K and quarterly reports on Form 10-Q. In addition, this morning, we will discuss certain supplemental financial measures that were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliations of these non-GAAP financial measures to the most direct 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 recording of today’s call, press release issued earlier today or any of its SEC filings, except as may be otherwise stated by the company. I will now turn the call over to Chris McCann.

Good morning everyone thank you all for joining us. As we noted in our press release this morning, we achieved mixed results in the second quarter. On the positive side, consumer demand was good throughout the holiday season. However, we were not able to take full advantage of the demand due primarily to a temporary disruption in operations at our Cheryl's Cookies brand that arose late in the holiday season. So let me address this first. As many of you will recall, Cheryl's Cookies has been a major success story for us since we acquired it more than 10 years ago. In fact it has consistently been one of our best performing brands. We have nearly tripled the revenue, we have had strong double digit contribution margins and our customer loyalties among the highest of all of our brands in terms of retention and frequency. To support our outlook for continued strong growth for Cheryl's, two years ago we invested to expand the production facility more than doubling its capacity. To handle this growth we also needed to invest in technology upgrades for our manufacturing and warehouse management systems. We completed this effort in the fiscal first quarter of this year in anticipation of the strong holiday season. Unfortunately during the holiday push we have ran into challenges adapting to the new system. As a result with consumer demand strong, we found ourselves quickly falling behind in terms of producing what our customers wanted and fulfilling their orders in the timely fashion. To ensure that we do not disappoint our customers, we made a difficult decision to stop taking orders for Cheryl's products for full eight days prior to Christmas. We then directed all of our efforts towards getting the orders that were already placed out and delivering time for the holiday season. As a result we estimated that we had to forgo approximately $4 million in revenue and incurred a similar hit to the bottom-line due to significant incremental cost for labor, expedited shipping and customer credits to ensure that all our customers were satisfied. Following the holiday, we formed a special cross functional team from around the enterprise to resolve the operational issue. I’m pleased to report that the challenge we faced at Cheryl’s has been addressed and that business has returned to the same solid pace we saw prior to the temporary disruption. Clearly, our customers love Cheryl’s unique hand frosted cookies and we are committed to fulfilling that growing demand. As Bill will discussed in more detail in a few minutes, we achieved total comparable revenue growth of 2.6% in the Gourmet Food and Gift Baskets segment. Had we not had the temporary challenges, growth would have been closed at 3.6%. Driving the growth in this segment was Harry & David which grew its e-commerce business by nearly 6%. As we have discussed in past calls accelerating growth at Harry & David is a key strategic initiative for us and we are very pleased with our progress in this area. In addition to the accelerated revenue growth Harry & David also saw its customer file grow nearly 5% during the quarter along with growth in existing customers new to file customers increased a double digit rate and importantly reflected the younger demographic that has been attracted to the modernization of the Harry & David brand from our expanded digital marketing initiatives through innovative new product categories such as Gourmet Food, specialty food and wine. We believe this bodes well for the continued robust growth at Harry & David. During the quarter, we also saw strong demand in 1-800 Baskets which achieved double digit growth in its consumer business and high single-digit growth in wholesale. In terms of innovation within this segment we are also pleased with the introduction of our newest brand Simply Chocolate. A destination for chocolate lovers that features a curated collection of top brands and trending our seasonal Chocolaters from around the world. We launched Simply Chocolate in November and we are extremely pleased with a great reaction we have received from our customers. Revenue for the holiday season exceeded our expectations despite limited marketing other than cross brand introductory messaging and exposure to the customers on our platform. We are excited by the opportunity re-see the Simply Chocolate for both the upcoming valentine holiday and for everyday gifting occasions. In our Consumer Floral segment, revenue grew 2.3% and we continue to extend our market leading position by focusing on leveraging the strength of 1-800 Flowers brand, focusing on truly original products and delivering a customer experience that is second to none. During the quarter, we made the decision to step up investments in several initiatives to take advantage of the opportunity we saw in the competitive landscape to further extend our market leading position as we move forward. While this affected gross margin in contribution for the quarter, these investments will help us to deliver stronger top and bottom-line results in the second half of this fiscal year. Also during the quarter, 1-800 Flowers continue to build its reputation as a leading innovator with the launch of voice enabled ordering capabilities on Google Express and on Google Assistance making us one of the first brands to provide this transactional feature. Lastly, our BloomNet segment while revenue for the quarter was essentially flat, Flowers demand for BloomNet unique suite of products and services accelerated during December and has continue to be strong since the start of the current fiscal third quarter. BloomNet has already begun to build the book of business for the second half of our fiscal year and we expect floral demand in our third and fourth quarters will enable us to achieve solid revenue growth for the full fiscal year. So to sum up our second quarter. We saw a good customer demand, but we are not able to take full advantage primarily because of the operational interruption in shows. We have addressed this issue and we anticipate a quick return to the solid top and bottom-line performance that we have come to expect from these brands. We successfully launched our Simply Chocolate brand, which performed well right out of the gate. We had solid growth in our 1-800 Baskets consumer and wholesale businesses; in most important we saw the positive return and customer growth trends in Harry & David that began in our third quarter last year accelerate culminating and strong e-commerce performance for the key holiday season. I would now like to turn the call over to Bill for a more detailed review of our results for the quarter. Bill.

Thank you, Chris. Breaking down our second quarter results. In terms of revenues, comparable consolidated revenues adjusted for the sale of Fannie May grew 2.4% to $526.1 million. The growth was driven by our Gourmet Food and Gift Baskets, and Consumer Floral segments, which more than offset the essentially flat revenues in our BloomNet business. Now to the impact to the operational issuance sales. Total revenue growth for the quarter would have been approximately 3.2%. Comparable gross profit margin for the quarter declined 220 basis points to 44.7%, compared with 46.9% in the prior year period. Comparable operating expenses as a percentage of total revenues improved 40 basis points to 28.7% compared with 29.1% in the prior year period. A combination of these factors resulted in adjusted EBITDA of $94.5 million compared with the comparable adjusted EBITDA of $101.7 million in the prior year period. The lower comparable gross profit margin and adjusted EBITDA primarily reflect the combination of the impact of the Cheryl's operational issue, higher transportation costs, primarily in trucking and expedited shipping and Harry & David and Wholesale Baskets and lower contribution margin in our Consumer Floral segment. Net income was $70.7 million or $1.06 per diluted share. On a comparable basis, net income was $58.5 million or $0.88 per diluted share, unchanged compared with the prior year period. Regarding the impact of the Tax Cuts and Jobs Act, which among other things lowered the federal corporate rate from 35% to 21%. This affects our results in the second quarter as follows. Because the new legislation was signed into effect at the end of December and because our company has a June fiscal year-end, our federal tax rate for fiscal 2018 will be a transitional rate of 28%. As a result, we have recorded a tax benefit of $3.7 million or $0.06 per diluted share reflecting this transitional rate. Additionally, we have received a one-time net tax benefit of $12.2 million or $0.18 per share associated with deferred tax liabilities that were carried on our books at a higher effective rate due to the previous federal corporate tax rate of 35%. These have now been revalued using the new lower federal tax rate. In the combination of these items, our net income for the second quarter include the total tax benefit of $15.9 million or $0.24 per diluted share. Finally, in fiscal 2019 and subsequent years, based on the new lower federal tax rate combined with state and local taxes and other factors, we anticipate having an effective tax rate of approximately 26%. Now in terms of category results and our Gourmet Food and Gift Baskets segment. Comparable revenues adjusted to a sale of Fannie May, increased $10.3 million or 2.6% to $406 million. This reflects total revenue growth of approximately 4% at Harry & David, which achieved e-commerce growth of 5.7% partially offset by lower wholesale business. Additionally, we achieved nearly double-digit growth in 1-800 Basket consumer and wholesale business combined. However, total comparable growth for the segment was impacted by the lower revenues of Cheryl’s. While demand of Cheryl’s was strong throughout the holiday season as previously mentioned, we incurred an operational issue with a newly implemented manufacturing and warehouse management system that causes to fall behind on production and order fulfillment during the quarter. This led to decision to stop taking customer orders immediately prior to the key final week leading up to Christmas resulting in a loss of approximately $4 million in revenues. Were not for this issue, revenue of the segment would have been up approximately 3.6%. As Chris noted in his comments, we have addressed the issue at Cheryl’s. Production and inventory management are stable and operating well, and Cheryl’s is on-track to the upcoming Valentine’s holiday. We anticipate that Cheryl’s along with the rest of the Gourmet Food and Gift Baskets brands, we will continue to see increasing growth in the everyday gifting business and drive solid year-over-year revenue growth and improve bottom-line contributions during the second half of the year. In addition, we have enhanced the wholesale management team of Harry & David and see good results for the glowing book of business for the second half of the year. Comparable gross profit margin for the quarter was down 220 basis points to 45.4% compared with 47.6% with the prior year period, primarily reflecting operational issue at Cheryl’s, but we also incurred higher transportation cost primarily for trucking following the hurricanes that hit Texas and Florida during the first quarter. This impacted Harry & David and a wholesale basket business. As a result of these factors, comparable segment contribution was $93.5 million, down 5.1% compared with $98.5 million in the prior year period. In Consumer Floral, revenues grew 2.3% to $100.1 million, compared with $97.8 million in the prior year period. Gross profit margin for the quarter declined 240 basis points to 38.8%, compared with 41.2% in the prior year period. This reflected increased costs and investments associated with the initiative that Chris mentioned earlier designed to expand our market leadership for the 1-800 Flowers brand. While these initiatives impacted segment contribution for the second quarter, which was $10.8 million compared with $13.1 million in the prior year period, we believe they helped positioning the 1-800 Flowers brand to accelerate its top-line growth and deliver segment contribution margin increases in both the third and fourth quarter and for the full fiscal year. In BloomNet, revenues for the quarter were $20.4 million essentially flat compared with $20.5 million in the prior year period. Gross margin for the quarter was 57.4% compared with 60% in the prior year period primarily reflecting product mix. Segment contribution margin was $7.7 million down 6.1%, compared with $8.2 million in the prior year period. Similar to outlook for Consumer Floral, we expect BloomNet’s revenue growth to accelerate during the second half of the year and of course segment contribution to increase as well. In terms of corporate expense, our segment contribution margin results exclude costs 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, comparable corporate expense including stock based compensation was $18.8 million compared with $19.9 million in the prior year period. Turning to our balance sheet. At the end of the second quarter, our cash and investment position was $232.6 million. Our term debt balance net of deferred financing costs was $106.2 million and we had zero borrowings outstanding under our working capital line within our revolving credit facility. As a result, total cash net of debt at the end of the quarter was $126.4 million up $123.4 million, compared with the end of the second quarter of last year. Inventory of approximately $60.6 million was down $32.8 million compared with the year ago period primarily reflecting the sale of Fannie May. Regarding guidance, the Company's revised guidance for the fiscal 2018 includes the following factors. The results of the first half of the fiscal year, the impact of the Tax Cuts and Jobs Act legislation and the Company's expectation that its comparable revenue growth rate will accelerate the more than 5% during the second half of the fiscal year. Based on these factors, the Company is providing revised guidance for fiscal 2018 as follows. Consolidated comparable revenue in the range of $1.13 billion to $1.15 billion, EPS in the range of $0.62 to $0.64 per diluted share, comparable adjusted EBITDA in the range of $82 million to $85 million and free cash flow for the year in the range of $30 million to $40 million. As a reminder, results for the second half of the fiscal year will reflect the shift of the Easter Holiday which is on April 1st this year into our fiscal third quarter compared with the prior year when it fell on our fiscal fourth quarter. I will now turn the call back to Chris.

Thank you Bill. As we enter the second half of our fiscal year, we have several tailwinds that will help drive accelerated revenue and enhanced bottom-line results across all three of our business segments. The second half is dominated by our Floral businesses. In both the 1-800 Flowers brand and BloomNet are well positioned to accelerate top and bottom-line performance going forward. We have the benefit of the Valentine holiday, moving to a Wednesday this year compared with falling on a Tuesday last year providing an additional day for sales and for fulfillment. We are already seeing some leading indicators with strong performance in our BloomNet business in December and a solid book of wholesale orders from florists for the second half. We also continue to see strong growth in everyday gifting not just in our Floral brands, but also in our Gourmet Food and Gift Baskets brands. In particular Harry & David Cheryl's and 1-800 Baskets are growing their businesses for birthday anniversary, sympathy and other everyday occasions. As I mentioned earlier, our Simply Chocolate businesses off to a strong start with consumers discovering our exciting and expanding new offerings such as Norman Love, Neuhaus, Max Brenner among others all uniquely available in one curated collection. And our digital marketing strategies continue to attract new customers, accelerate and achieve cross brand adoption and increase customer loyalty. When you add these factors together, we are confident that we will achieve top-line growth of more than 5% in the back half of this fiscal year. And as Bill discussed, we expect improvements in our year-over-year profitability in all three of our business segments during the second half of the year. So in summary, we see expanding market positions in all three of our business segments. We see growth in everyday gifting particularly in our Gourmet Food brands. We see good early indications of wholesale growth across our brands and we see good continued progress in Harry & David modernization and growth acceleration. So I thank you and I would now turn the call back to Chad, our operator to open the call for any questions you may have.

Thank you. [Operator Instructions] Our first question comes from Kara Szafraniec with Northcoast Research. Please go ahead.

Hi. Good morning, everyone. I had a couple of questions on the Consumer Floral segment performance this quarter. Just want to start out with the heightened level of investments that you guys made. Is there any other drive of the lower than expected gross margin in the segment in the quarter? And then how should we think about your investment cadence or promotional activity heading into the third quarter and the Valentine’s Day period?

Sure Kara. Thank you for the questions. As if we look at the Floral business during Q2, I think you guys step back and keep in mind that during the holiday season, it’s a very big competitive season and Floral was really is secondary gift during the holiday season. So we lead with our Gourmet Food category which as you know is more than half of our business and that’s a strong season. And when you compare the two businesses. Gourmet Food revenue was probably four times out of Floral during that time period and it’s probably nine times that of Floral on the contribution margin side so just to put in scale. So therefore as we are going through the holiday and spring season the next two quarters, we made the decision to do some investing and some testing and really falls into three areas; pricing, promotion and Passport for us. So if we look at some of the pricing things, we did I wanted to test around pricing elasticity a little bit, see what would happen to conversion rates if we were to change pricing some products either lower or higher, get some good readings on that and looked at testing different promotions. What kind of promotions in a very competitive environment like a holiday season, what kind of promotions might help us attract more new customers, what kind of promotions might help us to stimulate our existing customer base and more frequency. So we looking at those types of things and putting some money behind that. And then I think you look at Passport, Passport had an impacted gross margin, because Passport continues to grow. It really impact gross margin percentage, but clearly there is a long-term benefit for that based on the results that we are seeing of increased usage of Passport and the continued behavioral metrics that we see with Passport members. So all of these combined, I think really help us to make sure that help give us confidence that we moving into the second half of the season, we will get the benefits of this testing and continue to grow. What we are expecting is that the 1-800 Flowers brand will achieve year-over-year increases in both top and bottom-line during the fiscal third quarter and quite frankly for the full-year.

Great. Thanks. And then just kind of touching on that promotion and the Passport elements of those investments, can you provide us with some color maybe on the customers that you are acquiring through those promotions? Do you have any rates quantify your maybe giving us some commentary on how loyal are - packable those customers that are acquired through promotion, kind of end up being in the long term? And then maybe any sort of commentary on growth that you saw in Passport subscribers or cross brand penetration as a result of those promotions will be great? Thank you so much.

So on the first part of that is you know the analysis around the types of customers we acquire different types - it really does, it's hard for me to give me a specific answer, because it really does differ by whether different promotional locker or promotional partner that we work with. So we are always looking at that balance, which ones give us a higher percentage of new customers and then we look at a behavior metrics of those new customers to determine all those repeat relationships, repeat marketing partnerships we want to go back to. So it really varies by partner and by promotional type, and that's why we continue to test the different types. So the only thing I can really say is that as we go through that testing process, we weed out the ones that we don't think are productive and profitable on a long-term basis, and therefore put our dollars towards the ones that are and thus our confidence as we go forward so we get that learning go forward. So to your second part of the question, as we look at our customer file, we are very happy that we will continue to see good growth in the customer file. This year we grew new customers to file by about 5% keeping in mind on the Harry & David business, we grew new to file customers at double-digit percentage, and as we look at these new customers especially in the case of Harry & David, I have a lot of specifics there. We are seeing the new customers acquired a large percentage of them via the younger demographics. I think being really attractive to the modernization of the Harry & David brand that we are seeing. And those are being attracted to the new product categories that we are developing and offering in the areas of specialty food, wine, kind of food, antipasto offerings things like that. So we are seeing good results there. And underlying all this really is the continued growth in Passport and continued growth in multi-brand customers, where we are seeing that. So for example, Passport just had an impact on the gross margin percentage of the Floral brand this quarter. But we are very confident that the behavior metrics bode well for the long-term.

Thank you so much for the color.

Great. Thank you, Kara.

The next question will come from Dan Kurnos of Benchmark. Please go ahead.

Yes. Good morning. So let me focus a little bit on Harry & David just to start. I don’t know Bill maybe just since you mentioned wholesale down just a little bit. I'm assuming Harry & David though was still up maybe a little north of 4% in the quarter. Is that accurate when you factor in the wholesale?

Yes, Dan. We mentioned in the release that e-commerce growth was about 5.7%, but overall the brand was up around 4%.

Yes, okay. So just two things then. One can you just talk about the margin profile of Harry & David. You didn't talk a lot about that obviously, would like to hear a sense - Chris; you get a lot of color on reinvigorating the brands, especially the demographic changes the benefits in multi-branded portal. Are you guys seeing some organic leverage in the business model? I know that was some of the thought process clearly you are seeing in the corporate line, but there was also some of the thought process probably when you acquired this thing for dirt-cheap way back in the day. And then on the non-Harry & David if I strip out Cheryl's and Fannie, it seems like kind of the remaining brands even with some of the upside you saw in Baskets was up low single and kind of like three-ish% or so. That's been a pretty consistent trend lately. There have been puts and takes. I know Cheryl was all start up until this most recent unfortunate event. Is there any way to kind of reaccelerate your core brand even if they are not really more scalable and without making an acquisition?

Well, the first part on gross margins with Harry & David and leveraging overall. Harry & David obviously has been a focus of ours and getting that accelerated growth and with that top-line growth we clearly get in bottom-line contribution margin improvement. Specifically, on the gross margin line in addition to the operational issues we had at Cheryl’s, we did see the impact of certain transportation costs. We talked a little bit about this at the end of the first quarter last year that right after the hurricanes, we saw the trucking industry head down to both the states of Florida and Texas to help the government with the cleanup and get paid handsomely to do that, it probably costs a couple of hundred thousand dollars in the first quarter. Prices never normalized, there were shortages of trucking because of that, the trucking industry took advantage of that and so both for Harry & David brand, which impacts their margin and also Basket brand, which both rely on the trucking industry. Harry & David uses long haul to move product from Medford, Oregon to its main distribution center in Southern Ohio and to its seasonal distribution centers around the country as well as moving product to the FedEx hubs and wholesale Basket business because of the nature of their product and the bulk products that they ship out use the trucking industry. It probably costs about $1.5 million in the quarter and increased trucking cost above what the increase we had built into our plan. We also saw with the movement of the day placement of Christmas moving from Sunday to Monday. While I gave us a little bump in late demand, it really there wasn’t an extra shipping day. So we had a more concentration of shipments going out that last week leading up to Christmas and thus we have to expedite some shipping. So that caused us on the margin side, but getting back to the original Harry & David clearly great to see the top-line growth that we are experiencing, we are clearly leveraging that and driving significant bottom-line improvement for Harry & David.

Let me address the wholesale aspect specifically, because there was a little bit of a drag on the Harry & David business. As we came out of last year, we looked at our wholesale business that hadn’t grown the way we really wanted it to and we made a determination to make some changes to the wholesale business. We made some changes to some personnel in our wholesale business, but also how we go to market, and we have really stepped back and evaluated the channels we were in as well as the accounts we were in and a number of accounts where we made a decision to walk away from because that they just were not profitable so we did that. So we hired a new person to lead that business and strategically what we are doing now is starting to turn our focus more towards first and foremost taking care of our core traditional retailers, but making sure those where we can be profitable. So making those changes there. When we see opportunity for growth now in both - and this is new for us in the sea store category as well as in the grocery category, especially with our Moose Munch product line. So in wholesale while wholesale was down, Moose Munch is the product line within that was actually up. So we are seeing some good signs there and we think we can get behind that. So, we are pretty happy with what we see, we have some good early books of again, smaller levels in this upcoming spring season, but more business than we have had in the past in the spring season for our wholesale food businesses especially Harry & David. So, we are pretty comfortable with that. And as we look at the sales revenue overall Dan, I look at and we are very happy with the acceleration of growth in that core business of Harry & David. I mean that's something that we work hard at this year and really happy to see that. We were looking for that 4% and 5% growth in e-commerce and to get it up close to 6% we are pretty happy with that. And the underlying factors there, the double digit new customer growth that I talked about. The response we saw to gifts list functionality that we have. In response to some of the counter categories that I just mentioned a minute ago. So just seen a lot of good things B2B sales up nicely especially during the holiday season up nicely but first half of the year we have got really strong for the holiday season will gives us a lot of encouragement. So we are looking at continuing that acceleration. Cheryl's we had that hit, Cheryl's will be back too, that’s one of our best performing brands. Again from a growth rate profile, it has a wonderful contribution margin for us. Our 1-800 Basket's business performed well on both the consumer and on the wholesale side and we expect that to continue for a while. Now we move into the Floral side of the business. 1-800 Flowers we expect good holiday season from keep in mind the tailwind. I mean last year when business moved from a Sunday to a Tuesday they produced like 15%, 16% growth for us in the holiday. We will get that same bump now moving from a Tuesday and Wednesday, but we get a bump and that will help things. And again BloomNet looks like its positioned well. So I think we got the brands in a good spot, seen good early signs of the accelerated growth in a couple of them. We have to get over this bump we have with Cheryl's as far as we are concerned we are over it, as far as the consumer is concerned, it seems they are over it. Even though we are going to go out with a little bit more of a win back program to the customers that we know did get impacted during this and thank them for their patients, thank for them for their business, give them a little incentive to come back in order. So that could gives even little bit more a bump in sales as we move into the Valentine holiday at Cheryl's.

Okay yes that's helpful. I'm not trying to be net picky Chris. I'm just trying to understand based on the guidance revision. And I know your price is being conservative just kind on the outlook how it all plays in. and clearly you have jump that hurdle for Harry & David and then holiday period that you don't think anybody really expected from an overall growth number. Just quickly let me ask just real two quick ones and not beat the horse on the Consumer Floral side. And you have kind a skirted it as best you can. So I don't know how you will say specifically. So I'll just say FTD is a complete mess right now and clearly you are going to try to take share from them. On the loyalty question, have you guys thought a things I'm assuming you have a basically giving away a years’ worth of passport to FTD customers or trying to be overly aggressive and pushing that channel I don't know if you launch of that. And then just which channels are you particularly pressing from an advertising perspective. Are you going in the channels where they have advertised they have been pretty heavy SEO. So I'm just curious how you are trying to attack that opportunity. How big that window is?

So Dan, I think that's a great question and it does speak some of the things I spoke about even some of the testing we were doing in the second quarter to influence now as we move into the third quarter. So we see opportunities in the competitive landscape to gain more share. Again, we have some of those tailwinds in place. We think our loyalty program specifically the Passport program is resonating well. We do different promotional testing with Passport from time-to-time. So Passport is generally 29.99 a year product sometimes we will post that down to 19.99, sometimes we will give it at as a three months program for 999 to incent more usage in the send more trial. So we are doing that with loyalty program. We will promote people with our celebration rewards points based program. And always as we do this thing, we are always looking at how it’s positioned in the competitive marketplace. So we are always taking a look at that. When you talk about different channels that we will be pressing, I mean the channel that’s been doing really well for us for example on the Flowers band specifically is mobile. Now mobile is growing for all of our brands. But when they come to 1-800 Flowers, has been the leader in the brand and was recently recognized by Google as a Mobile First Website. Now what that means is that more than half of our traffic now on an everyday basis, we have crested this number in holiday times in that past, but on an everyday basis now more than half of 1-800 Flowers traffic is going to its mobile site. So what that means is that we are focused on AMP accelerated mobile pages, our progressive web pages, really making the experience a richer mobile experience for our customers. And by being designated Mobile First by Google, which means we will be showing up higher in the rankings on their search rankings because they want to serve up the best mobile experience to the Google customers. So that’s one of the channels that we are really looking at. And its continuing to be an early innovator in making sure that we are moving into a world of conversational commerce. Again, early stage but making sure that we are following our process that we call ELAC, Engage, Learn, Adapt, Commercialize. So we just launched new ones I mentioned on Google Assistance and Google Express enabled capabilities. We introduced a new enhanced skill set on Alexa. We have just reintroduced a new enhanced version of GWYN. So constantly taking the learnings and adapting into those products. But as we look at it I think the marketing plan, our focus on the mobile channel where our competitors, overall competitors are still a step behind is a good area for us to pay attention to.

Got it. Alright, thanks for all the color. I will let other people ask some questions.

The next question comes from Alex Fuhrman of Craig Hallum Capital Group. Please go ahead.

Great. Thank you very much for taking my question. I was wondering if you could share a little bit of what you learned from some of the different testing you were doing around pricing if there were perhaps opportunities to raise price or lower prices or if there were any kind of consistent learnings or curious if it was more of a sort of item-by-item or category-by-category response? And then would also love as a follow up to ask a little bit more color around the younger customers, you mentioned you are getting at Harry & David, if you could give us a little sense of the age of the Harry & David customer compared to some of your other brands going into this year’s holiday season and then how that might have changed and whether specifics items. I mean I think you mentioned wine and some of the other more entertainment type items that the younger customers were grabbing, gravitating towards, was it more that sort of merchandising that brought the younger customers in or was there also a consorted marketing effort to go after younger customers?

Okay. So let’s try and jump in first on what we have learned from some of the testing, obviously for competitive reasons we have to be some more careful here. But as we look at price testing whether it would be price elasticity testing, looking at where we can move our price for certain product and still maintain the appropriate conversion rate and pull through. Those are things that we naturally would apply on a go forward basis. We look at testing into higher price points as well, especially as we move into a holiday season like a Valentine it can very often be a price competitive holiday like we have seen in the past in the floral category, and that’s not in the beginning that we want to play in. Yes, we will have promotional products to have some attraction, but again we want to play in is moving more up the line. So we have a whole bunch of different rose offerings for example that moved from $39.99 up to $59 to $99 $400 or really if you want to go to our ultimate WOW gift, a year of more for $10,000, you can get a gift that comes with 50 roses in this diamond studded vase from water fit to start with a 70 piece of our seasonal chocolates out of the Simply Chocolate brand. And then twice a month for the remainder of the year get all these different gifts from our family of brands. So really bringing that capability to the table, so we will sign you up with three or four of those $10,000 gifts just to make sure you are taken care. Then, I will look at different promotional testing and what we did there was what kind of promotional pricing helps to attract new customers in a very competitive environment like Christmas. So, we will take the learning there and apply that to the Valentine Holiday, again looking to grab share, looking to grow our customer file, looking to set our business up for good future growth. As we look at some of the things on the younger demographics that we bring in kind of both I would say, both at the Flowers' brand, but really this quarter was highlighted after Harry & David Brand, again more than double-digit new to file growth rate and a good majority of them being a younger demographic than our core base. We are seeing them attracted to first of all, attracted by the increase in digital marketing that we put in place this past year. So I don't think they have sent this by coincidence. We are going where they are and we have reduced our catalogs a little bit, but put more and more money into the digital marketing effort, search, social, display marketing, video marketing et cetera. And I think you can just attract new customers with marketing you have to have good products that they're going to want to buy. So if you remember a year or so ago we have really started developing this whole Gourmet product line and this Gourmet Specialty Food product line. So it uses our some of our core products like food. When you combined it with the fruit and cheese platter or cheese and antipasto platter or else you get into certain other products like prepared meals, things that you used for entertainment. What we find at the younger demographics, likes to do a lot of in-house entertaining, and these products are wonderful for that, and nothing helps with a little entertaining like a good bottle with Harry & David cabinet. But I will tell you that I think I bought the last case of that 2014. So, we will have to wait till next year.

Great, that’s very helpful. Thank you very much.

Thank you.

The next question comes from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.

Hi. So at FTD's analyst meeting recently, they kind of talked about the idea that they see a lot of market share opportunity. And it's not necessarily from you and them combating each other, it's more from these smaller upstarts. So, I was wondering if you could kind of update us on how you perceive the market share trends are going for all those smaller upstarts like moves.com and some of these other ones. And also can you just refresh us on what you are doing with the Amazon, because I do see like FTD's ProFlowers will have bouquets on Amazon. But I don't think I see much from you guys on Amazon. So, can you just refresh us on kind of what you are doing with them? Thanks.

Sure, Linda. I'll take both; this is Chris and thanks for the question. I think as we looked at the market share, we see good opportunity for us to continue to grow market share. We have been extending our leadership position and whether it be against the larger competitors or whether it be against some of the start-ups that we have seen. I think as you look at some of the start-up community, most of them have disappeared by now I think or we are not hearing as much of them anymore. So that’s kind of dissipated to some degree that will always be out of the class of 10. I think that will always be one or two that makes it to the next level. And the way we always focus on the number one product, our customer experience, focus on enhancing our brand, focus on delivering truly original products to the table, focus on driving digital innovation on how we access our customers. So we used to be it in the world with start-ups kind of could move faster than the bigger entrenched competitors, I don’t think that’s the case with us and our other larger competitors. We are moving pretty fast and we have the ability to come out with the product development and product designs like we do. We are very confident that we can maintain and continue to gain in our leadership position in this category. As far as Amazon is concerned, Amazon is a wonderful, wonderful company and many of us work with Amazon in different ways. As you know, we work with them in a number of ways over the years when we used to supply flowers to the Amazon Fresh program way back when. We sell flowers on their marketplace from time-to-time. It’s not a big business for us, but we go in and go out of the marketplace on Floral. Some of our food brands are starting to establish a bigger relationship on the Amazon marketplace as they see opportunities to put a differentiated product line out there. Again, we are going to work on a third-party marketplace like that. I don’t want it to be our core products that get discounted over there and under cut out our cost side. So it’s really how we manage those third-party marketplaces is extremely important. But then again with Amazon, there are other ways for us to work with them. We work with the money with extra platform. I just mentioned we continue to develop that recently enhanced the skill on Alexa. We are working their advertising platform with display ads. So, Amazon is a beast for certain and it’s in many ways, a beast that presents lots of opportunities for us to work with.

Thank you. And then can I also ask FTD also announced at their meeting that they are looking at strategic actions for their personal creations business. So I assume that - imagine a sale possible. You didn’t really comment on your new Personalization website, you may comment on the Chocolate side. How is your new Personalization site going so far in the early days and then would you be interested in acquiring personal creations?

So, Personalization Universe is off to a good start. I didn’t highlight it so much just because we are talking mainly about the Gourmet Food category, but we are very pleased with the results we have seen there and I think if you look at our business what we have been building is the celebratory ecosystem. It has really started with the leadership position in Floral category. Now, we have built the leadership position in the Gourmet Food category and if you look on the celebratory umbrella of where we can go to help our customers with all of the celebratory occasions to help them deliver smiles in their lives, what are the product categories make sense for us to go into. So Personalized products was one of those categories we have clearly recognized as one for us to be in and we have personalization capabilities in all of our brands, but then also launched Personalization Universe. So we are happy with the early launch of that and that’s a product category we will continue to grow into as well as add other categories as we round out our assortment and go deeper into the celebratory ecosystem to help our customers solve more and more of their gifting needs, not just their Floral needs.

Okay. Thanks.

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

Yes. Good morning. And thank you for taking the questions. So kind of switching gears, you did mention that you have had good success with the sales everyday gifting type of products. Can you give us sense as to what percentage of your sales are now coming from those everyday gifting occasions and may be give us some perspective how that’s trended over the last of couple of years please?

I don’t think we could answer your question specifically. So I don’t think we have that data or actually across the brands. Bill, if you have got any color on that, but first if we look at some of the brands or some of the data points I’m familiar with. In the food brand, the everyday occasion start with small, but we have been seeing nice growth. In the Harry & David business is example I think for the first half of year we are growing about 30% on our everyday gifting occasions. But on a small base so it will take some time for it to be meaningful. Now if you flip over to the flowers business, since a much larger percentages.

Yes, I think what we said Anthony is that while a little bit more of mind with the flowers brand at Valentine’s Day and Mother’s Day, everyday gifting is really the core of 1-800 Flowers. Serving birthdays, anniversaries, sympathy. That’s why we felt with the multi branded portal we would successful because we had leveraged that everyday traffic the ability that - the fact that 1-800 Flowers makes money every single day of the year and drive significant traffic to its site every single day of the year, that we did leverage that traffic to drive the everyday business of our food brands. Both have discussed over the years that the Gourmet Food and Gift Baskets segment and the food side of our business is heavily, heavily weighted and you saw Chris made some reference to some numbers that the Gourmet Food is segment is four times the size of our floral brand in terms of revenue and nine times size on a contribution margin in the second quarter. That’s where we are today. Our goal and we now have the channel to do that with the multi brand portal is to grow that everyday gifting. It’s growing within all of our food brands, but the examples we gave and we tracked Harry & David last year, it’s all about the specific events of everyday gifting but when we talk about overall consumer demand growth. We talk about last year coming off of the holiday season last year that the first quarter last year to Easter we were up a little over about 2% 2.5% with Harry & David and it grew to 4% for the second half of the year and it grew to mid single-digits in our first quarter of this year and that continued through the holiday season. And Chris has referenced to everyday gifting of 30% was during the month of December. Everyday gifting was up 30%. The small percent of the overall Harry & David business because of the holiday gifting happened at that point in time, but we are seeing significant growth and opportunity and expansion of our food brands on an everyday occasion basis.

Alright. Thank you. It’s very helpful color. And also just wondering if you could provide us with an update as far as your outlook for acquisitions. Obviously you have a very strong balance sheet and some of these folks Fannie Mae added cash. So just wondering if you could give us an update and any color on that, that would be very helpful? Thank you.

Sure. I think we are always in a very - thank you for recognizing the enviable position that we have with our balance sheet right now, it’s something that we take a lot of pride in. And we look first and foremost to allocate our capital to help drive organic growth across our business whether it would enhanced marketing programs in digital or in mobile like I just spoke about or introducing new product categories like with Simply Chocolate or Personalization Universe. And historically we want to make sure and we have been very good stewards of our brands of our balance sheet. We have made investments in areas that are highly complementary to our business to our core business. The most recent transaction a couple of years ago now was the Iconic Harry & David brand. We also are always looking at the portfolio to say what fits, what doesn't, what is changed and last year we divested Fannie May, because we felt that there was a change that took place there. So what we are looking to do, our goal is to put our cash in our underleveraged balance sheet to really work for our shareholders through acquisitions that can help us accelerate our top-line and accelerate our bottom-line, but really focused on the top-line there. And I think as again if you came back to look at it, are there opportunities in the Floral categories for us? There might be but there hasn't been really anything significance for us there. We have done a good job and I think there is more opportunity for us in the Gourmet Food category as we build the leading position there and we can continue to add that and leverage that position. And then I think as we continue to round out the celebratory ecosystem. So Personalization Universe is one of our first moves into kind of non-Floral, non-Gourmet Food product categories, but I think you will see us looking at that category more and more. Again, we step back and look at our customers. What are our customers utilizing in everyday celebratory lives, what are they utilizing to deliver smiles to customers. They will lead our strategy as far as product expansion is concerned. So that's what we are trying to build out.

And Anthony just a few other comments on the balance sheet. Yes we are very pleased with the strength of our balance sheet. Our increased cash position of $118 million over a year ago at this point in time our increased net cash position cash plus debt of $123 million over a year ago at this point in time. Got that from combination the proceeds from the Fannie May sales that Chris mentioned as well our growing free cash flows. That would be net of the debt payback and stock buybacks. Back in September, you saw we released a press release on the new authorization from our board that increased our buyback capabilities of the $30 million. We spent about $11 million in the first half the first half of this year and buying back $1.1 million shares of stock. We have the flexibility to continue to be aggressive in our stock buyback program going forward. So we are very pleased with the health of our balance sheet, it gives us a lot of opportunity to help build shareholders value in the future.

Alright, thank you for all the color. Best of luck.

Thank you Anthony.

[Operator Instructions]. The next question comes from Michael Kupinski with Noble Capital Markets. Please go ahead.

Thank you and congrats on the accelerated revenue growth at Harry & David. First of all, how much of variance in revenues and wholesale was from the corporate decision not to have products distribute into lights of Macy to other third-party distributors. I'm just trying to determine how significant that decision may have been in terms of revenue contribution?

Michael actually Macy's program was very successful this year. While their store counts were down the sell through was great and amazing. I fact they sold out of our Moose Munch product line at Macy's. Really more of the decision was - certain other retailers that as we evaluated the programs, we wanted making enough contribution on and we decided to move away from those customers. We have made some investments into our wholesale infrastructure and the management team of wholesale out at Harry & David. We have a renewed focus on some new channels whether it be a supermarket channel or kind of some specialty retail channel, and we think we have some momentum going into the second half of the year that we will be able to drive increase growth in wholesale for the second half of the year.

Got you. In terms of the operations issues at Cheryl’s I think that you center around this, but typically in the past when you had some disruptions in business whether it’s on the fire or whatever it’s taking a couple of quarters to get things back on-track. You indicated that Cheryl’s looks like it’s bouncing back pretty nicely, but you are putting some marketing dollars behind that. Can you give us some color on how receptive these efforts so far had been received and your thoughts in terms of how we should model the revenue opportunity in coming quarters for Cheryl’s?

Yes, Michael. I think as we look at the challenges of Cheryl’s again, it had to deal with the implementation of the major technology project and while the technology worked, we all know that when you are doing major technology implementations, nothing ever since had worked as planned and there’s always some challenges that you run into. In our case, when we implemented this product back in early August, we knew right away, we made some changes, but then as I mentioned we thought we had it under control and we used operating it through the Halloween holiday. As we went into the rest of the holiday though, the volume showed some other challenges that we had and it really was just a matter of the team they are getting used to working with the new system. So that was the challenge and a couple of customizations that we needed to make to it. So coming out of the Halloween through that process making the notes of it, but coming out of the holiday, bringing in some people from elsewhere in the team that really worked with these types of systems in the past. Cheryl’s was not, Cheryl’s used to run their production, run it efficiently, but it was a manual process. So implementing a new system today is really far and we probably didn’t good enough job of putting the right coaching and the right support staff behind them. We have done that now. Things are really working well. The inventory management is where it supposed to be on a day in and day out basis right now. We are really confident with the position we have going into Valentine’s Day and we think it’s behind us. So I think as far as forecasting Cheryl’s out now going in the second half of the year, you can get right back to what we previously would deliver.

Got you. Going back to the M&A question I was just wondering, can you score for us the likelihood of a possible transaction in the near-term and are you looking at more tuck-in acquisitions or more transformational acquisitions like Harry & David?

I certainly couldn’t score it, because you never know what happens at the conversations that we are always having placed. We are always trying to build a pipeline and I don’t even think we are good enough of scoring that to share with you. But I would say we look at a combination of both where we really would like another Harry & David type transformational acquisition that’s what we move the needle the most. However, if the appropriate tuck-in comes along and it is a real tuck-in and it’s easy enough acquisition, we will do that. There has been several that we said no to, because we didn’t realized tuck-in just gets a little too complex to pay for the value that you can potentially get out of the process, but we will evaluate both. I think it’s healthy to evaluate it from both perspectives.

Okay. Thank you so much.

Ladies and gentleman, this concludes our question-and-answer session. I would like to turn the conference back over to Chris McCann for any closing remarks.

So thank you all for joining us today for your questions and answers. I urge you all to consider that $10,000 a year of more a Valentine gift. I’m sure your loved one will absolutely be thrilled with it, and it will be there all year along twice a month. So, don’t forget to love all your loved ones this Valentine’s Day. Thank you again for joining us on the call.

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