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spk06: Good morning and welcome to the 1-800-Flowers.com fiscal 2022 second quarter conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero on your telephone keypad. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Joe Petitto, Senior Vice President, Investor Relations and Corporate Communications. Please go ahead.
spk03: Good morning and thank you for joining us today to discuss 1800flowers.com's financial results for our fiscal 2022 second quarter. For those of you who have not received a copy of our press release issued earlier this morning, The release can be accessed at the investor relations section of our corporate website at www.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 directly comparable GAAP measures can be found in the tables accompanying the company's press release issued this morning. The company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today's call, any recordings of today's call, the press release issued earlier today or in any of its SEC filings, except this may be otherwise stated by the company. I will now turn the call over to Chris McCann.
spk04: Chris McCann Thank you to everyone for joining our call this morning. As we reported in this morning's press release, we achieved solid revenue growth of 7.5 percent for our fiscal second quarter. This was on top of the 45 percent growth we reported in last year's fiscal second quarter and represents growth of more than 55% compared with the fiscal 2020 second quarter. For the quarter, we achieved top-line growth across our three business segments, highlighted by an increase of approximately 10% in our gourmet food and gift basket segment, driven by double-digit growth in our Harry and David brand. As we noted in our press release and comments at the end of October, we saw solid double-digit growth in September that carried through October. This continued into mid-November, driven by the success of our initiatives to drive everyday gifting, as well as early ordering by customers for the holiday season. Consumer demand slowed, however, after the Thanksgiving holiday and did not pick up again until late in the quarter. As a result, our total revenue growth for the quarter was below the double-digit pace that we had anticipated heading into the period. Nonetheless, our solid revenue growth on top of last year's tremendous increase reflects our continued focus on engaging with our customers to deepen our relationships with them, the continued expansion of our product offering, our ability to attract a significant number of new customers, the growth of our Celebrations Passport loyalty program, and our increasing ability to personalize our customers' experience using AI and machine learning. I'll come back to these topics in just a moment. But first, turning to our bottom line results for the quarter, Bill will provide more detail in his remarks in a few minutes. But as an overview, the macroeconomy headwinds that we had discussed back in October persisted and escalated significantly throughout the quarter. These headwinds include an unprecedented disruption to the global supply chain, limited availability and higher costs for labor, and increased costs from third-party shippers. As a result, our gross margins were impacted and our bottom line results came in below our expectations. While we anticipate that these headwinds will moderate over time, we expect they will not disappear in the quarters ahead. So, we will continue to invest in initiatives to mitigate their impact, such as the further automation of our warehouse and distribution facilities, bringing in inventory of products and components that we import earlier, pre-building inventory of non-perishable items, and implementing programs that can help us optimize our outbound shipping. Over the longer term, we anticipate these initiatives will enable us to improve our gross margins and drive enhanced bottom-line performance. Jumping back to a few of the customer-centric and top-line growth initiatives that I touched on earlier, we continue to lean into our initiatives focused on engaging with our customers to deepen our relationships and create a true community. As I've said in the past, we are a company that aims to inspire people to express themselves, connect with each other, and celebrate life's most important moments. One way we measure engagement is with the specific touch points that we have with customers through social channels, content, influencers, and video. Through the first half of fiscal 22, such programs created more than 55 million engagements. two times the number that we created in the same period last year. Throughout the holiday season, we work to integrate content into our shopping experiences, launching programs like What I Love About the Season and Our Favorite Holiday Memories that use video and storytelling to reinforce the importance of the holidays as a time to connect, express, and celebrate. We also launched a fun holiday recipe series featuring both celebrity chefs and influencers culminating with our holiday bake-off program that attracted more than a million views on Facebook. And as we announced earlier this month, we added Alice's Table to our platform, featuring fully digital interactive classes for designing floral arrangements, creating charcuterie boards, hosting wine tastings, and other unique experiences. Since we began offering these classes, more than 80,000 people have enjoyed the opportunity to celebrate their creative capabilities and have some fun doing so, perfectly illustrating our engagement strategy. During the second quarter, we also continued to expand our product offerings with our newest acquisition, Vital Choice, further expanding our offerings in our highly on-trend, better-for-you gourmet food category. With the holiday behind us now, we will work to fully integrate Vital Choice into our platform. We continue to expand our collection of bundled products, putting together some of our great brands to create truly unique gifts such as Harry and David's signature Royal Riviera pears with Cheryl's Cookies and Sherry's Berries with beautiful holiday bouquets from 1-800-Flowers. And we expanded our 1-800-Flowers and Sherry's Berries subscription programs providing the ability for customers to tailor their subscription to their needs. Now, the combination of these initiatives in engagement and product expansion helped us add more than 1.8 million new customers during the quarter. And importantly, existing customers represented more than 66 percent of total revenues in the quarter, up more than 400 basis points compared with the prior year period. And we saw double-digit growth in our best-performing customer cohort, those that buy from multiple product categories and multiple brands. This reflects the benefits of our cross-merchandising programs and our initiatives using AI and machine learning to provide more personalized experience for customers when they shop on our platform. We also continue to see strong growth in our Celebrations Passport loyalty program, which added more than 350,000 new members during the quarter, and continues to be a key driver of purchase frequency retention and lifetime value. As we recently announced, we've significantly enhanced the Celebrations Passport program, adding a tiered points-based system that enables members to unlock additional perks and benefits beyond standard free shipping. Some of these perks include invitations to exclusive special events, early access to new products and collections, complimentary birthday gifts and order upgrades, and discounted membership renewal. These enhancements are designed to reward our best customers with our thoughtfulness, develop a sense of community among Passport members, and capture more first-party data to help us offer our customers a more personalized experience. In addition to these enhancements, we have also launched the Celebrations Passport app, our first multi-brand app that is designed as a destination for members to manage membership details, as well as access trending products, engaging content, helpful tools, and much more. The Celebrations app will serve as a single entryway to our brands, and we are very excited about its ability to significantly enhance customer experience. Now I'd like to turn the call to Bill.
spk05: Thank you, Chris. Before I get into the details for the quarter, I think it is important to reiterate what Chris said about our revenue growth. Our 7.5 percent consolidated growth on top of the prior year's 44.8 percent illustrates our ability to drive solid growth on top of the more than $2 billion revenue level that we reached last year. For the quarter, we were pleased to achieve solid growth across all three of our business segments. with our gourmet food and gift basket segment at nearly 10 percent for the key holiday season. We faced several challenges in the macro environment that impacted top-line growth, including the reopening of some brick-and-mortar retail stores, the widely reported lack of seasonal labor, which impacted our ability to assemble certain labor-intensive product offerings, marketing rates that escalated during the quarter and were significantly higher than planned which impacted effectiveness in driving traffic to our sites and the unprecedented disruptions to the global supply chain. On this last point, one example of the impact was late delivery of some imported products and components that led to canceled orders from several of our large wholesale customers totaling upwards of $8 million. Another example was product shortages from some of our domestic suppliers due to their inability to find sufficient labor resulted in more than $4 million in sales left on the table. While revenues could have been even stronger, the biggest challenge we faced in the quarter was clearly on the cost side and primarily within the components of gross margin. The reduction in consolidated gross margin percentage reflected several factors, including ocean freight. As was widely reported, the spot market for ocean freight rates increased five to ten times historical levels. We were certainly not immune to this despite having contracted rates. As a result, our costs in this area during the first half of the year increased more than five times the prior year level, representing an increase of approximately $28 million, much of which was incurred in the holiday quarter, our largest quarter. Labor, both the lack of availability and the cost, with hourly rates increasing more than 25 percent compared with the year-ago period. And outbound shipping, including short and long hauled trucking and surcharges from third-party shippers associated with holiday deliveries and fuel costs, which escalated beyond what we were able to pass along to consumers. As Chris noted, we do not expect these headwinds to go away in the near term. However, we do anticipate that they will moderate over time, and we are working diligently to mitigate the higher costs through initiatives including automation of our manufacturing warehouse and distribution facilities, with our new Atlanta, D.C., next up for full automation, using the strength of our balance sheet and strong cash position to rebuild nonperishable inventory, as well as bringing imported products and components early, and expansion of our strategic pricing programs. Breaking down some highlights from our second quarter. As we have already noted, total consolidated revenues increased 7.5 percent, or $65.8 million, to $943 million, compared with $877.3 million in the prior year period. This included growth across all three of our business segments. Salary gross profit margin for the period was 40.1 percent, a decline of 530 basis points compared with the prior year period, reflecting the aforementioned headwinds. Operating expenses as a percent of total revenues improved 70 basis points to 27.9 percent, compared with 28.6 percent in the prior year period. As a result of these factors, adjusted EBITDA for the quarter was $133.1 million, down 19 percent, compared with adjusted EBITDA of $164.3 million in the prior year period. Net income for the quarter was $88.5 million, or $1.34 per diluted share, compared with net income of $113.7 million, or $1.71 per diluted share, in the prior year period. primarily reflecting significant year-over-year cost increases for inbound and outbound shipping, labor, and digital marketing. Adjusted debt income for the quarter was $88.6 million, or $1.34 per diluted share, compared with adjusted debt income of $114.2 million, or $1.72 per diluted share in the prior year period. Regarding our segment results, in our homemade food and gift basket segment, Revenues for the quarter increased 9.8 percent to 590.9 million, with 538.3 million in the prior year period. Growth in this segment was primarily driven by Harry & David, our largest gourmet brand, which increased more than 10 percent for the period. Its profit margin was 39.3 percent, a decline of 660 basis points compared with 45.9 percent in the prior year period, primarily reflecting increased costs for inbound and outbound shipping, as well as limited availability and higher costs for labor. Segment contribution margin was 110.5 million, down 18.5 percent, compared with 135.6 million in the prior year period, reflecting a reduced gross margin as well as higher year-over-year digital marketing rates. In our consumer flow and gift segment, revenues increased 3.2 percent to 315.1 million, compared with 305.5 million in the prior year period. with the 1-800-Flowers brand and personalization mall growing at 2.8 percent and 4.6 percent, respectively. Gross profit margin was 41.3 percent, down 270 basis points, compared with 44 percent in the prior year period, primarily reflecting increased costs for inbound and outbound shipping, as well as labor. Segment contribution margin was 38.2 million, down 16.4 percent, we averaged $45.7 million in the prior year period, primarily reflecting reduced gross margin combined with increased digital marketing rates. BlueNet revenues for the quarter increased 11.4 percent to $37.9 million compared with $34.1 million in the prior year period, primarily reflecting increased wholesale shipments of hard goods. Gross profit margin was 42.2 percent, down 720 basis points compared with 49.4% in the prior year period, primarily reflecting higher inbound shipping costs and product mix, which offset the strong top-line growth. Segment contribution margin was $11.9 million, down 2.1%, compared with $12.1 million in the prior year period, primarily reflecting increased inbound and outbound shipping costs with reduced gross margin. Turning to our balance sheet. Our cash and investment position was $271.1 million at the end of the second quarter, seasonally up compared with $173.6 million at the end of fiscal 2021, but down nearly $100 million compared with our cash balance at the end of last year's fiscal second quarter. This primarily reflects our investments in inventory to help offset the headwinds associated with supply chain and labor, combined with our stepped-up stock repurchases repayment of term debt, and our recent acquisition of Vital Choice. Inventory was $191.1 million, up approximately $90 million compared with the end of last year's second quarter, reflecting the investments to help mitigate the headwinds we have discussed. It is worth noting that the vast majority of our inventory position is in non-perishable ambient product and components that can be used during the second half of the current fiscal year. In terms of debt, We had $171.8 million in term debt and zero borrowings under our revolving credit facility. Regarding guidance, we are updating our guidance for the fiscal 2022 full year based on the results we have reported for the first half of the year, as well as our outlook for continued revenue growth and continued cost headwinds. We anticipate achieving revenue growth in the range of 7% to 9% compared with the prior year. adjusted EBITDA in the range of $140 million to $150 million, and EPS in the range of $0.90 to $1.00 per diluted share. We anticipate free cash flow for the year will be down significantly compared with the prior year based on our bottom line guidance for the year and our plans to use our strong balance sheet to continue to invest in inventory to support our growth plans and address the headwinds we have described. I will now turn the call back to Chris.
spk04: Thanks, Bill. So to sum up, we achieved 7.5% revenue growth in our second quarter, on top of the nearly 45% growth we had in the prior year period, and up more than 55% compared with our fiscal 2020 second quarter prior to the pandemic. We drove adjusted EBITDA of $133 million, despite unprecedented cost headwinds in the macro economy. We attracted more than 1.8 million new customers and added more than 350,000 new members to our Celebrations Passport loyalty program. We expanded our engagement initiatives, creating millions of touchpoints that help us deepen our relationships and build a true community. And we continue to expand our product offering, organically and through acquisition, adding hundreds of truly original products designed to help our customers solve for all their connective and expressive needs. While we are clearly operating in a challenging macro environment, we are well positioned to address these challenges and over the longer term to build on the success that we have achieved over the past several years, during which we have doubled the size of our business and significantly transformed our company, becoming a unique e-commerce platform that inspires and enables our customers to express, connect, and celebrate. This is reflected in the unique platform that we've built, which includes our all-star family of brands, our advanced technology stack, our manufacturing, distribution, and logistics capabilities, our digital marketing expertise, and our expanded customer file. In closing, I'd like to note how very proud I am of all of our associates across the company who have worked together as a team to address the challenges that we have seen and continue to see in the macro environment and drive sustainable revenue growth and solid bottom line performance. Now I'd like to turn the call back to the operator so we can take your questions. Thank you.
spk06: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Dan Kumos with the Benchmark Company. Please go ahead. Good morning. I haven't gotten that one in a while.
spk10: Top line, two questions. First question, when did you guys start trying to pass through pricing and how much do you think price and elasticity was an issue from the consumer demand perspective?
spk04: Sure, Dan. Thank you. Good morning. I think we started fairly early in the season looking at where we could get strategic price increases. And again, if you just keep in mind that As we went through the holiday season, you know, and as we talked about in our October call, we were seeing strong demand in September that took into October, continued into November, and it was really right up until the Black Friday, Cyber Monday weekend where we were strong going into it, and then we saw some slowness come in after that. The dynamic pricing was, you know, throughout that time period, and we saw you know, the ability to do dynamic pricing gives us the capability to turn it on and turn it off, depending on what we're seeing on consumer demand. Bill, you want to?
spk05: Yeah, Dan, the overall growth, you know, during the quarter really was all driven by, you know, average order comprised of really two components. One, the dynamic pricing and the price increases that we did put through, you know, as well as, you know, really a kind of a shift in product mix. We were featuring more higher-priced items. Some of the labor challenges that we had, we knew the number of packages we could process was going to be limited, so we kind of suppressed some of the lower-priced point items and featured some of the higher-priced items. Some of this would have impacted our overall conversion and impacted our top line.
spk10: The reason I ask the question is, you know, understanding that there are a lot of dynamics in the holiday quarter, but the out-two-quarter guidance is now for basically an average, blended average of 8% growth versus double-digit growth. And, you know, I think the obvious question that everyone's asking today is you guys have been pretty confident in a long-term double-digit growth outlook. Now, I know that your comps are rather difficult, but this has been the issue with all the e-commerce companies, right? So why are we looking at reduced revenue guide in the out-to quarters, and what gives you guys confidence in sort of your longer-term sustainable double-digit forecasts?
spk04: So I think as we look at the guidance, I think we're taking into consideration what we saw during the holiday period. We saw that slow down late in the quarter where the consumer pulled back a bit. We saw a retail sales report come out recently of down 2%. So recognizing that and looking forward, it's still the cost challenges that we had, gives us the comfort level to provide the guidance of the 7% to 9% growth that we're seeing. Go ahead.
spk05: Dan, basically the first half of the year we grew just around 8%, and our guidance implies that we're going to have a similar growth rate in the second half of the year. We do believe it's going to skew a little bit more towards Q4. We have the Easter shift, which favors Q4 versus Q3, and we had a decrease in our deferred revenue at the end of Q2, which is going to impact a little bit of the growth rate in January. But we do believe that with all the challenges in the macro environment with the consumer, when the consumer comes back, we will rebound back to that double-digit growth. And we think overall kind of that high single-digit growth in this environment is still pretty positive.
spk04: And I think that as we look beyond that, Dan, the things that continue to give us optimism, we took some challenges this quarter. We still delivered good growth, as Bill just pointed out. And so many things are still going positive in the company that does not reduce our optimism going forward, whether we look at the celebrations, passport, customer cohort growth. We added 350,000 new members there, continuing to see the performance of those customers at, you know, purchase frequency of two to three times out of the average customer. We grew our multi-brand, multi-category customers double digits during the quarter. We're enhancing our personalization capabilities. We just enhanced the Celebrations Passport program with the new tiered points-based membership system, the new app that we laid out. So all of these things really continue and give us the optimism going forward. What we see is some short-term challenges, as Bill pointed out, with the consumer, the inflationary costs, et cetera, and our ability to manage through that and get back to where we were.
spk05: Dan, we also saw a little unexpected the sharp rise in digital marketing rates that happened as we got further and further into the quarter. If you recall, we've talked about marketing rates that we knew we had a challenge in the June quarter and the September quarter because a year ago marketing rates were at historic lows because so many companies were not in the market. We saw them self-correct a year ago. in October, you know, when the national campaigns came on around the presidential elections. And so we had a more normalized comp, you know, against our marketing rates this year. Yet what we ultimately saw as we got well into the, you know, the holiday season in the month of December, digital marketing rates, you know, rising at 25 to 30%. That caught us, you know, a little bit by surprise and, you know, caused us to kind of pull back on some of the marketing and some of the new customer acquisition, you know, targets that we had.
spk04: Yeah, so that's why our new customer acquisition of 1.8 million, a great number, was down compared to prior year. So some of the softness that we saw late in the quarter was on the new customer front. And then, you know, it just got the cost per acquisition just got beyond the point where we felt it was prudent to invest, especially considering the pressures we had on gross margin.
spk10: Got it. That's helpful, additional color. Last one then, just on margin, you know, the guide at the midpoint, is 400, you know, it was 40 basis points year over year lower. Now it's 400 basis points year over year lower on EBITDA. I'm just trying to get a sense of how much, how much of that is incremental investment on your part to future proof against these things, understanding that you can't address things like digital marketing rates, but, You know, how much is incremental investment versus how much is just unexpected, you know, costs just kind of running out the December cost levels through the balance of the year?
spk05: Yeah, a lot of it is the continuation of the headwinds that, you know, we saw. You know, ocean, you know, freight, while I think the, you know, the experts believe that over time they're going to kind of moderate, they'll probably never go back to where they were, you know, two years ago. But I think they're going to moderate over time. But the timing of that is still very much unknown, and we're still seeing the spot markets at very high rates. Labor and some of the challenges with access to labor and labor rates, I think we're at a new normal. So it's $18 an hour. That's up 25% over what we paid last year and probably up you know, 30 to 40 percent over what we paid, you know, pre-pandemic. So, there are some ongoing, you know, challenges that we have. We have initiatives in place to help offset these. You know, we've talked about, you know, the automation of our Hopewell, you know, facility. You know, we did 30 percent more volume on peak days out of that facility with 40 percent less labor in that facility. We're continuing to invest in our other facilities to continue to automate manufacturing and, you know, and distribution. We're going to continue to use our strong balance sheet, you know, to bring in inventory early, and we're going to use that. You see some of the investments we've made in working capital. We're going to continue that as we, you know, as we sell through that inventory. We're going to replenish inventory to have that to make sure we're ahead of the supply, you know, the supply chain. We're going to rebuild some inventory to use our core staff and be less reliant on that, you know, on the seasonal labor. And as Chris mentioned, we're going to continue to, play with our dynamic pricing. During the holiday period, it was a very competitive market. As we get into everyday occasions and maybe the back half of the year, some of the fall holidays, we're going to continue to test dynamic pricing within those categories to help offset some of those challenges. But we know in the short term anyway, some of the margin pressures are still going to continue to exist.
spk10: Okay, we've taken up enough of your guys' time. I appreciate it. Chris, I'll leave you with, just to be clear, there's no change in your long-term messaging here, but the short-term is really where most of the issues are. Is that fair?
spk04: Yes, that's fair, Dan. Long-term optimism remains the same.
spk10: Great. Thanks, guys.
spk04: Thank you.
spk06: The next question comes from Michael Kapinski with Noble Capital Markets. Please go ahead.
spk07: Thank you. I know Dan asked most of my questions, but I have a couple of questions on the marketing side. You mentioned that the marketing was less effective, and I was just, you know, obviously you talked about the digital. I know that you have an omni-channel approach to marketing, but I did notice that it seems like maybe you stepped up a little bit of the television advertising with your everyday gifting. Could you just talk a little bit about the effectiveness of the channels that you're using in marketing and whether or not you feel that maybe the shift in marketing was ineffective, and maybe if you could just give us a sense of how you plan to look at your marketing going forward, whether it's content or whether it's different types of content or maybe a shift in how you look at marketing.
spk04: Sure, Michael. Thank you for that question. As we looked at the marketing spend during the quarter, one of the strategies we had going in was to spend more, especially on the food brands, especially Harry and David, to spend more on top of funnel marketing. We did spend and allocate some more into television, both OTT and linear capabilities, linear TV there. We were pleased with the return there, but as we said, as we got deeper into the holiday season, marketing costs overall, even in those channels, increased, but also the As the consumer started to pull back and as we saw industry-wide during December, the consumer got softer, right, following Black Friday weekend. So, therefore, some of the effectiveness of that television weakened as well. I think, though you're hitting on the point, as we look going forward in our go-to-market strategy, so much is about how we engage with our customers differently. It's how we really use content, and that's why in my formal remarks I highlighted the how we're measuring engagement and how we had two times, 55 million engagement contacts during the first half of this year, utilizing content, videos, classes, workshops, redefining how we go to market. This is a program that we had started, but as we've been pointing out for the past two years, accelerated our capabilities as we really moved into the pandemic, sending out the Celebrations Pulse newsletter that we send out on the weekends, which is not about selling. It's just about engaging with our customers and how we build relationships with them. So going forward, while we really will have a multichannel, as you pointed out, an omnichannel approach to marketing, at the core, at its basis, is how do we deepen the engagement we have with our customers? Because as we deepen the engagement, they become those customer cohorts that we often speak about, the multi-product category purchases. They join Celebration's Passport. and then we get that use of frequency and retention that we're looking for. So that all comes together, and I think you hit the nail on the head. We're a company that looks to inspire expression, connection, and celebration. How we do that is through more engaging ways with our customer and not simply just product and promotional pricing advertising.
spk07: Thank you. Dan, you answered most of my questions, so that's all I have. Thanks.
spk06: The next question comes from Linda Bolton-Weiser with DA Davidson. Please go ahead.
spk01: Yes, hi. Good morning. So can we just go back to the pricing? Because I'm not sure I understood. You kind of mentioned that you kind of highlighted higher price point items. That points to me that that was like an intentional mixed driver toward higher average price point. But did you actually raise price on a like-for-like item? So just an apples-to-apples item, did you raise price? And can you give us some idea as if you did that, what the average percentage increase in price or what percentage of the SKUs? Or just give us some idea about what kind of pricing did take place. Thanks.
spk04: Yes, Linda, I think you're right on both accounts. We did position in merchandise higher price orders, higher price items to drive the AOV. as we knew certain capacity constraints would be there. We wanted to make sure we optimized the AOV. In addition, we did raise prices on certain items. Bill?
spk05: Bill Walsh- Yeah, I would say it's pretty evenly split, that our 7.5 percent growth was pretty evenly split between higher pricing and the repositioning of higher priced items. What we saw is, and again, we can monitor this real time, you know, with our dynamic pricing. And we saw on some of the food brands, and in particular Harry and David, that, you know, some of that pricing stuck. In other areas, we did have to pull back. As we saw the consumer and as the, you know, the holiday went on, as the consumer pulled back, you know, we did have to play with pricing and reduce pricing back to make sure, you know, we were getting the orders and the conversion right. So we saw it in particular, a big example was Personalization Mall. You know, it was a very, you know, competitive marketplace, you know, out there and very promotional marketplace, you know, out there. So while we tried to increase pricing, you know, we wound up having to pull back pricing in the month of December because we weren't getting the conversion rates that we wanted.
spk04: And another example there kind of on the flip side of that, Linda, is in the Harry and David business, for example. One of the lessons learned coming out of the holiday for us is we clearly have an ability to expand our product offerings into $149 to $500 price point items. what we merchandise there sold and sold very well. And it tells us we have the ability to scale that at that price point category up higher.
spk01: Okay. I mean, I guess kind of just following that thread, I kind of wonder, you know, a lot of us consumer analysts are a little bit concerned about, um, you know, the consumer, you know, less stimulus, et cetera, versus comparisons last year. So, I mean, how do you kind of marry that higher idea of higher price points, more expensive items, and hundreds of dollars with this idea that the consumer is not getting the stimulus benefits that they did?
spk05: Yeah, I think what we did during the holiday season, though, the other factor was some of the labor challenges we had with access to labor. So we knew we had – the capacity is only funneled through X number of units. So we scaled back on more labor-intensive product offerings. So some of the create-your-own products that we have that are very popular, but they're labor-intensive. So we pulled back on those, and we pulled back on the lower price points because we were featuring the higher price points because we knew we only had capacity for X number of units. So we know some of the things we did would have held back on the overall demand that we were achieving. But we think we optimized, we tried to optimize what we could get from both a throughput perspective, which would drive the best top and bottom line results for us.
spk04: And our strategy remains the same. We want to make sure we have a broad enough offering and with broad enough price points to attract a large demographic of the customer base. You know, there's always the old adage, there's always 10% of your customers who don't care about price. but there's 90% of your customers who do, and we're making sure that we have offerings for all of our customers.
spk05: And as we move away from the holiday season and have less constraints on that, we will have a broad offering of price points for the consumer.
spk01: Okay. And then just another question kind of on the cost side. You know, you were very well aware, and you've been talking for many months about all these cost pressures, and you've been giving a quantification of the increase in labor, and you even said the FedEx surcharges were known in something like September or October, so you could actually plan to kind of try to offset. So when you think about what came in different than what you had in your plan, like what was the one area that was most different? Was it the FedEx surcharges? Was it the labor? Was it the shipping? Because your gross margin is really very, very significantly different from what the street expected.
spk05: Yeah. So, Linda, I wish I could point to one, but there are certainly several impacts. There are significant headwinds, and we're talking about ocean freight, outbound shipping, labor, all of which we built in buffers into our plans. You know, on ocean, we had contracted, you know, contracted rates. We were choking on the increases that we had the contracted rates for, and they were basically ignored, and everything had to go to the spot market. Spot market wound up being five to ten times what, you know, historical rates were, and it escalated throughout the holiday season. So even in our October call, you know, we had one set of costs in mind, and it exceeded that dramatically. Fuel kept going up. So, yes, we have contracted rates with our third-party, you know, carriers that are, you know, relatively low single-digit increases year over year. But between, yes, the holiday surcharges we knew about, fuel surcharges, residential surcharges, all these surcharges added up so that we wound up paying, you know, double-digit increase in, you know, cost per, you know, cost per package. And labor, you know, and access to labor and the cost of labor just kept rising. I mean, we went from, you know, You know, a few years ago, we were concerned about the federal minimum wage going up to $15 because we were well below that, right? Now we're paying $18. And going into this, and a year ago, we were paying well under $15. So those numbers just escalated, you know, significantly. And with some of the delays in the supply, you know, supply chain, you know, we mentioned in our, you know, our formal remarks that had an impact. You know, we got inventory in after the due dates for some of the big box guys that we deliver wholesale products to. We had to write that inventory off. You know, so we had, you know, about a $6 million incremental write-off, you know, on inventory because we got the inventory in after, you know, the deadlines for the big box guys, and they canceled orders on us. So it both impacted both top line and margins. So we had built in a number of these buffers. We were very confident at the end of October with where the trend lines were from a top line perspective. You know, and obviously greater top line would absorb some of these, you know, some of these costs. But we had just come off of, you know, two consecutive months of double digit, you know, double digit growth. And we were feeling good about, you know, where the, you know, you know, where the holiday would end up from a top line perspective. And our cost levels were at certain levels, and they just escalated dramatically from November into December.
spk04: And as Bill mentioned, some of that also impacted the top line of business. As we said, we saw good, strong double-digit growth right up to Black Friday, Cyber Monday, and then it tailed off after that. But during that time period, because of some of the inventory challenges, the labor challenges, we had to pull back on revenue as well. We had canceled orders. I mean, we probably left a significant amount of demand on the table. I'm going to guess, Bill, probably at least two percentage points. So that caused challenges on the top line as well.
spk01: Okay. Just one more, just kind of a housekeeping thing. Just on the Easter shift, I actually thought it was, fairly big i don't know so i'm thinking revenue might even be down a bit sort of organic at least in the third quarter and then double digit or i don't know pretty strong in the fourth quarter can you quantify the shift at all so we can get it right in our model yeah i mean easter holiday is a you know um you know is an incremental 15 million dollars or so of you know of you know of revenue it doesn't you know fully go into from q3 to q4 uh because some of the
spk05: You know, some of the food brands will still capture some of that revenue in Q3, but a bigger piece of the Easter ship goes into Q4. I mean, we do think it is, you know, the growth in the second half of the year, again, as we've, you know, the guidance implies, you know, kind of similar to what we have in the first half of the year, will be more heavily weighted towards Q4 than Q3. But we will grow in Q3 as well.
spk01: Okay, and just one last one, I promise. Is it possible free... I didn't run my model through yet, but is it possible free cash flow for the year could be negative, slightly negative?
spk05: The revised guidance we gave on free cash flow, that's going to be down significantly year over year. Obviously, from a top-line perspective, I mean, from a bottom-line perspective, and the revised guidance there will impact free cash flow. The big unknown is... Our investment in working capital, we want to use our strong balance sheet. We want to use our strong cash position to put us in the best possible position for next year. So where we see opportunities to get inventory early, we're going to take advantage of that. And obviously, to the extent that we're investing in working capital, that impacts free cash flow. So it really does depend on where the inventory is. you know, where the inventory ends up. But any sort of decrement as associated with that is really a positive for us because it puts us in a better position for next year.
spk01: Yeah. Okay. Well, thanks a lot, guys.
spk04: Thanks, Linda.
spk06: The next question comes from Alex Furman with Craig Hallam Capital Group. Please go ahead.
spk02: Hey, guys, thanks for taking my question. I wanted to talk about what you're seeing in terms of labor and supply chain pressures as you start gearing up for the big Valentine's Day and Mother's Day holidays. Obviously, from a big picture, it sounds like these headwinds aren't really going away, but at least for Valentine's Day and Mother's Day, you're not necessarily competing against every other holiday. e-commerce company for seasonal workers and for shipping capacity. Just curious, you know, how you think about the major holiday season versus, you know, all of your other important holidays. And then, you know, as you get more towards just, you know, kind of the everyday gifting component, you know, do those pressures ease up a little bit? Just kind of wondering how we think about those pressures during the holiday season versus the rest of the year.
spk05: Well, you know, Alex, the second half of the year is more floral-centric, you know, than obviously the first half of the year. You know, while flora is not immune to these, you know, to the cost pressures that we've discussed, you know, the distribution model that we have for flora with the flora, you know, with the flora fulfilling a large part of the flora product, they're not as susceptible, or at least it doesn't impact us as much from that standpoint. So, some of the challenges with ocean freight, you know, higher labor, while it will continue into the second half of the year, our sales mix changes in the second half of the year. So the impacts on gross margin, consolidated gross margin, will not be as great. I think from a standpoint of access to floral supply, we feel, based upon our size and the contacts that we've made over the many years in this industry, that we're in a good position from a floral supply standpoint as we head into the significant floral holidays in the second half of the year.
spk02: That's great. Thanks, Bill.
spk06: The next question comes from Doug Lane with Lane Research. Please go ahead. Yes, hi.
spk09: Good morning, everybody. Can you talk forward-looking on what specific price increases you have in the works? You know, maybe go through the businesses and give us a feel with some granularity on where you can and can't really take pricing in the March and June quarters.
spk04: I think, Doug, thank you for the question. As we look at the pricing, I think really it is a dynamic environment that we move into. As Bill pointed out earlier, we're able to be more successful with price increases on some of the higher-priced items, Harry and David, for example, than we were with personalization mall where you get into a lower price point. but really the dynamic point of view and where we see price elasticity opportunity for us as we move into the second half of the year, which is driven more by everyday business. It's a less competitive environment. But the way we manage it really is by, you know, constant A-B testing, and we have tests going throughout the day. And if we see a price increase decrementing conversion rate and thus decrementing gross margin dollars, we'll pull that back. So it's a real-time effort that we're working with the customers on our pricing initiatives as opposed to set it and forget it and see what happens to it.
spk09: Well, that makes sense. And I'm sorry if I missed this, but I think you talked about your pricing actions at Personalization Mall. Did I hear you that you implemented pricing and then ended up pulling them back at the end of the quarter? Can you just go over that again for me?
spk05: Yes, we did. You know, just like we were doing throughout the all of our business segments, we were playing with pricing and trying to optimize pricing versus conversion to optimize revenue from that perspective. So in that category, it was a very competitive and promotional environment, especially in the month of December. So some pricing that we were playing with and putting in, we did have to pull back.
spk09: Okay, and then there are other businesses you have where you have catalogs. Doesn't that make it difficult to raise prices, and is there an opportunity there when you reprint catalogs to take some pricing?
spk04: So what we've done with the catalog marketing specifically is we've been able to adjust the pricing mechanism so that we can still have dynamic pricing on the web, but we have the ability to note if you're calling from a catalog or accessing us from a catalog and you give us the catalog number, The published price will always be honored, no matter what we're testing on the web, so to make sure that we're in compliance and being fair with our customers. So as we look forward, we'll take the learnings that we saw from the dynamic online pricing and apply that into our catalog pricing as we plan the next holiday season.
spk09: Okay, great.
spk06: Thank you.
spk04: Thank you, Doug.
spk06: The next question comes from Tim Verengel with North Coast Research. Please go ahead.
spk08: Thank you for taking my question. Most have already been answered, but I was wondering if you could, Bill, specifically, if you could spend just a little bit more time explaining some of the supply chain pressures, specifically coming from ADI or your ocean freight You called out some delays for the garment through gift tax excitement. I was wondering if anything specific also impacted the PMAL or, you know, the consumer floral segment. I think that was the biggest surprise in terms of revenue. So just wondering if there's any kind of unforeseen delays there that would have caused a shortfall in that segment. Thank you.
spk05: Yeah, so from an ocean freight standpoint, there are two aspects of it. One, the tremendous increase in price that we had. Normally, when you contract for ocean freight, it's door-to-door. You get it from Asia right to your facilities. So those rates went up dramatically. The spot markets went up dramatically. But then, as you still see today, and if you follow it, You know, there's like 140 tankers outside of, you know, the port of L.A. So a lot of the delays that have been created because of, you know, the port congestion, we wound up having, in a number of cases, having to bring our own trucks in and grab the product, you know, at the dock and incur those incremental costs, you know, as well. And that's why we saw this, you know, unexpected significant increase in our costs where we're spending $20 million, $30 million more on that component of the business than we did in prior years. But delays did cause us problems. Because we got the product in late, you know, that had an impact on our ability to, you know, assemble, you know, products. So with the labor challenges that we had and everything got kind of pushed back to, you know, to later in the year, so we had to pick and choose the type of products we wanted to, you know, we wanted to build on the consumer side. And on the wholesale side, we talked about, and Chris mentioned, you know, in the formal remarks, you know, that we wound up having canceled, you know, canceled orders on the wholesale side. That really was all within you know, the food side of our business. On the floor and PMOL side, we didn't really have – we had delays in getting product, you know, in getting product in, but it didn't impact – ultimately impact the demand like it did on the food side of the business.
spk08: Okay. So, yeah, just to clarify, I guess I was just looking at, you know, is it true – clean kind of demand fall off in the PMOL consumer floral segment as opposed to maybe some noise with, you know, kind of capacity and fulfillment in the foods, correct?
spk05: Yeah, I think on PMOL it was a very competitive environment. They have a tough comp. They grew over 50%, you know, in the year-ago period, and they were comping against that, and they grew just under 5%. you know, in this, you know, in this holiday, you know, this holiday time in a very competitive and promotional, you know, market for that product category, that kind of lower price point product category.
spk04: And I think it's important to point out, Bill, whether it be in the personalization category, whether it be the floral, or quite frankly across all of our product categories, from the data that we see and our best estimates is we gain share in our major categories. Even with the challenging environment that we operated in, the macro environment and the headwinds that we faced, it's our best view that we still gain shares in our key product categories, including personalization, and remain very optimistic and very bullish on the future growth of PMOL.
spk09: All right, thank you. I guess lastly, do you see – are there new competitors that maybe just haven't caught our eye yet that are driving that increased competition?
spk08: Or is it really just the established players being more promotional? Thank you.
spk04: Yeah, certainly a lot of more of the established players being more promotional. I think a lot of retailers and e-tailers went into this holiday season expecting that we would not have to be as promotional as it turned out to be because I think we saw some pull forward early, consumers purchasing early. So as we hit the key holiday season, It became a very competitive environment, and as Bill pointed out, in the personalization category for us especially.
spk08: All right. Thank you, Chris and Bill.
spk06: This concludes our question and answer session. I would like to turn the conference back over to Chris McCann for any closing remarks.
spk04: Great. Well, thank you all for joining us this morning. We appreciate the opportunity, as you can see. We remain extremely optimistic on the future of the business, the accomplishments that we've had, the platform that we have to inspire people to express, connect, and celebrate, and the opportunity that gives us going forward. Right around the corner is Valentine's Day, so I urge you all to remember to please place your orders early for Valentine's. Thank you very much.
spk06: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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