1-800-FLOWERS.COM, Inc.

Good morning and welcome to the 1-800-Flowers.com Inc. fiscal year 2022 third quarter conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw from the question queue, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Joseph Petito, SVP, Investor Relations. Please go ahead.

Good morning. Thank you for joining us today to discuss 1-800-Flowers.com's financial results for our fiscal 2022 third 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 1-800-Flowers-Inc.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, Tom Hartnett, President, and Bill Shea, CFO. Before we begin, I need to remind everyone that some of the statements that we will be making 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 earlier 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 as may be otherwise stated by the company. I'll now turn the call over to Chris McCann.

Thank you, everyone, for joining our call this morning. Before we jump into the results for the third quarter, I'd like to take a moment to level set our view of the significant changes or stages that our company has seen over the past several years. Essentially, we see our business and the macroeconomy that we operate in in four stages, pre-COVID, during COVID, the current environment, which I will optimistically call late COVID, and the fourth stage, our outlook for the future. Prior to COVID, our company had set a goal to accelerate revenue growth while continuing to grow EBITDA and free cash flow. For the second half of fiscal 2018 through the first three quarters of fiscal 20, we significantly accelerated our growth rate from low single digits to high single digits, with our forward-looking guidance at the time calling for double-digit growth. We did this by leveraging the strength of our all-star family of brands and evolving our business platform into a highly scalable and leverageable e-commerce platform that is built for growth. The world's changed dramatically in the spring of 2020 with the advent of the COVID pandemic, and we all had to adapt to lockdowns, work from home, social distancing, masks, and so much more that we've all had to live through. From a business standpoint, we had to pivot quickly to address dramatically increasing demand from consumers stuck at home, while being sure to protect our associates across the company. Once again, the resourcefulness and dedication of our team helped our customers stay connected with the important people in their lives, and we saw our revenues, our bottom line results, and our customer file accelerate significantly. Today, as we are entering what we hope the late last stages of the pandemic our world in the macro economy has changed dramatically once again disruptions in the global supply chain geopolitical turmoil and an unprecedented rapid rise in price inflation have combined to deliver a broad range of challenges to the macroeconomic environment from rising costs to slowing consumer demand as we look ahead to the future We know that we need to address the challenges we face in the near term while continuing to invest in our business in the long term. That has been our business philosophy from day one, and it has enabled us with the talented team and experienced team that we've assembled and the unique business platform that we've built to weather the challenging periods in the past and emerge as a bigger, stronger, and better company that we are today. With that said, let's turn our attention to the most recent quarter's results. which, as we stated in this morning's press release, were below our expectations. During the quarter, we saw solid growth for the Valentine's Day holiday in our 1-800-Flowers brand, and, based on the industry data that we've seen, we continue to extend our market-leading position in the floral category. However, the holiday period strength was offset during the quarter by the slower consumer demand across all categories for everyday gifting occasions. reflecting growing consumer concerns with rapidly rising inflation and geopolitical unrest. In terms of the bottom line, our results of the quarter reflected a continuation and in some areas, such as fuel prices, an escalation of the inflationary pressures that we discussed back in January. While we expect these challenges to persist in the near term, we are beginning to see early improvements in certain areas, including some softening in ocean freight rates, and port disruption, and improved outbound shipping efficiency, trends that we certainly hope will continue. More importantly, we're taking proactive steps to address these issues, and we are well positioned because of the scale of our business and the strength of our unique business platform to weather the current macroeconomic environment and as we emerge, as we have in the past, a bigger, stronger, and better company. To provide some perspective on our scale, our revenue in the third quarter, while essentially flat with the prior year period, was up more than 68% compared with our fiscal 2020 third quarter. In fact, over the past three years, we have essentially doubled the size of our company, with revenues now exceeding $2 billion. While macro market conditions have slowed consumer demand in the near term, we anticipate driving growth on top of last year's more than 42% increase for our full fiscal 22-year. We'll continue to leverage the unique assets that we've assembled on our platform, including our all-star lineup of market-leading brands in floral, gourmet foods, and personalized gifts, and we continue to expand our product offerings through accretive acquisitions that our customers are embracing, such as Sherry's Berries Personalization Mall, and our most recent acquisition, Vital Choice. Our large customer base, which also has more than doubled in size over the past few years, and includes extensive and increasingly valuable first-party data. Here, we are combining behavioral and demographic data with machine learning technology to create highly personalized campaigns and experience for our customers on our sites and throughout our communications touchpoints. Our Celebrations Passport Loyalty Program, which continues to grow at a strong pace with membership up more than 40% year over year. Importantly, as we always point out, the behavior of our Passport customer continues to be strong in terms of frequency retention and average spending, all well above non-Passport customers. And Passport continues to feed our very best customer cohort, those who purchase from multiple product categories or brands, and those that have our highest frequency, retention, and average spend. We've also been improving the user experience on the new Celebrations Passport app that we launched in January. Some of the new features we've added include the ability to search for any product across our family of brands on the app, including wine, and we've deployed new ways to connect with our customers directly through the app. We provide help finding gifts and advice on how to celebrate. We present custom app-specific promotions and events. And we push tailored notifications based on past experiences. Along with the Passport app, we continue to view the overall Celebrations Passport loyalty program as a key element in our strategic focus on customer engagement and enhancing the total customer experience. Along that line, we also continue to expand our initiatives to create a true community through a broad range of non-transactional engagement experiences and content. Through the third quarter, we reached more than 80 million consumer engagements driven by our content and social campaigns and a growing number of influencer campaigns. We are now fast approaching our target of more than 120 million consumer engagements for the full fiscal 22 year. Now these engagements really help us to build relationships with our customers beyond the transaction and give us the opportunity to really deepen that relationship. We believe the combination of these unique assets and initiatives position us well to manage our business and drive long-term revenue growth. In terms of bottom line results, while we anticipate facing continued cost headwinds in the near term, our strong balance sheet enables us to invest in our operating platform to address these issues and build for the future. These investments include initiatives to automate our warehouse and distribution facilities, which reduces our exposure on the labor front, to utilize our strong balance sheet to build and bring in inventory early to get ahead of the ongoing global supply chain issues, and to optimize programs to enhance our outbound shipping operations and manage rising third-party shipping costs. Over the long term, we anticipate these initiatives will enable us to improve our gross margins and drive enhanced bottom line performance. Now I'd like to turn the call over to Bill for his review of some of the key metrics from the third quarter.

Thank you, Chris. Our results for the fiscal third quarter, both top and bottom line, were below our expectations. Revenue in the quarter were down 1 percent compared with the prior year period, reflecting solid growth of approximately 5% for the Valentine's Day holiday in our consumer floral business, and contributions from Vital Choice, which we acquired back in October. These positives were offset by the shift of Easter to later in our fiscal fourth quarter this year compared with last year when most of the holiday sales fell in our third quarter. Lower deferred revenues coming into the quarter compared with the prior year when customers, particularly in our Harry and David brand, were willing to accept delivery of holiday season gifts well into January. And slow e-commerce demand for everyday occasions throughout the quarter, reflecting growing consumer concerns with rising inflation and geopolitical unrest. But as a reminder, Q3 revenues were up 68% over Q3 of fiscal 2020, the final quarter prior to the pandemic, and up 52% on an organic basis if we exclude PMOL and vital choice revenues. In terms of our bottom line results, gross margins in the quarter were impacted by several factors, including the continued disruptions in the global supply chain, the escalation of commodity costs, increased costs for inbound and outbound shipping, including an acceleration in fuel surcharges related to rising oil prices, increased year-over-year labor rates across the company, and the write-off of certain inventories of expired perishable products reflecting softer than anticipated demand levels. In addition, during the quarter, we continued to see digital marketing rates up more than 30% compared with the prior year period levels, which impacted effectiveness in driving traffic to our sites. As Chris noted, we do not expect these headwinds to go away in the near term. However, As we enter our fiscal fourth quarter, we do see some opportunities for improved performance, including the benefits of the Easter shift into the period, our strong inventory position, and the spring season's key holidays, including Mother's Day, Father's Day, graduations, and wedding season, where we anticipate stronger consumer demand as we saw in the past two quarters for key holiday occasions. In addition, we are continuing to work diligently to mitigate higher costs through the investments in our business platform that Chris described, as well as through our strategic pricing initiatives. Now breaking down some key metrics from our third quarter. As we have already noted, total consolidated revenues were $469.6 million, down 1% compared with $474.2 million in the prior year period. Consolidated gross profit margin for the period was 32.8%, a decline of 610 basis points compared with the prior year period, reflecting the aforementioned cost headwinds. Operating expenses as a percent of total revenues improved 60 basis points to 38.4% of total sales compared with 39% in the prior year period. Operating expenses excluding stock-based compensation, the costs associated with the one-time employee class action legal settlement, and the appreciation or depreciation of investments in the company's non-qualified compensation plan improved 10 basis points to 38.1% of total sales compared with 38.2% in the prior year period. A combination of these factors resulted in a net loss for the quarter of $23.4 million, or $0.36 per share, compared with net income of $1.4 million, or $0.02 per diluted share, in the prior year period. Adjusted net loss for the quarter was $21 million, or $0.32 per share, compared with adjusted net income of $1.5 million, or $0.02 per diluted share, in the prior year period. Adjusted EBITDA for the quarter was a loss of $12 million, compared with adjusted EBITDA of $15.4 million in the prior year period. Regarding our segment results, in our Gourmet Food and Gift Basket segment, Revenues for the quarter were $167.4 million, down 4.5%, compared with $175.2 million in the prior year period. This primarily reflected softer consumer demand throughout the quarter, combined with the shift of the Easter holiday and lower deferred revenue entering the quarter compared with the prior year period. This was partially offset by higher year-over-year wholesale revenues and revenues associated with Vital Choice. Gross profit margin was 25.3%, a decline of 1,410 basis points compared with 39.4% in the prior year period. This primarily reflected increased cost of labor, inbound and outbound shipping, fuel, and charges associated with the write-off of expiring inventories. Segment contribution margin was a loss of $17.1 million compared with segment contribution margin of $12.1 million in the prior year period. reflecting the reduced revenues and gross margin, as well as the higher year-over-year digital marketing costs. Adjusted segment contribution margin for the quarter was a loss of $14.2 million, excluding one-time costs associated with the settlement of an employee class action, compared with segment contribution margin of $12.1 million in the prior year period. In consumer flow and gifts, total revenues were $264.2 million, an increase of 1.5%, compared with $260.4 million in the prior year period, primarily reflecting solid growth for the Valentine's Day holiday, partly offset by softer everyday gifting sales. Gross profit margin was 36.7%, down 110 basis points, compared with 37.8% in the prior year period, primarily reflecting increased shipping costs. and segment contribution margin was $20.5 million, down 8.9%, compared with $22.5 million in the prior year period, primarily reflecting the reduced gross margin and higher year-over-year digital marketing costs. In our BloomNet business, revenues for the quarter were $38.4 million, down 1%, compared with $38.8 million in the prior year period. Profit margin was 38.7%, down 560 basis points compared with 44.3% in the prior year period, primarily reflecting product mix and higher inbound shipping costs. As a result, segment contribution margin was $9.8 million, down 18.8% compared with $12 million in the prior year period. Turning to our balance sheet, our cash and investment position was $93 million at the end of the third quarter, compared with $173.6 million at the end of fiscal 2021. Lower cash balance primarily reflects our investments in inventory to help offset the headwinds associated with supply chain and labor, combined with our higher capex spend, primarily related to automation efforts and our investments in our orchards, an increase in our stock repurchases, amounting to $35 million year-to-date, and repayment of term debt. Inventory was $214.4 million, up $60 million compared with the end of fiscal 2021, primarily reflecting our decision to use our strong balance sheet to invest in inventory and help mitigate the continuing challenges in the supply chain. In terms of debt, we had $167.2 million in term debt and zero borrowings under our revolving credit facility. Regarding guidance. We are updating our guidance for fiscal 2022, full year, based on the results we have reported for the first three quarters of the year, as well as our outlook for our current fiscal fourth quarter. We anticipate achieving total revenue growth in a range of 3% to 5% compared with the prior year. Adjusted EBITDA in a range of $110 million to $115 million, and adjusted EPS in a range of $0.55 to $0.60 per diluted share. We anticipate that free cash flow for the year will be down significantly compared with the prior year, based on our updated guidance and our efforts to use our strong balance sheet to invest in inventory, support our growth plans, and to address the continuing headwinds we see in the macro economy. I'll now turn the call back to Chris.

Thanks, Bill. To sum up, our results for the fiscal third quarter were below our expectations, despite the solid growth that we saw for the Valentine's Day holidays. We continue to see significant cost increases as well as softer consumer demands for everyday occasions, reflecting the macroeconomic conditions. We are proactively addressing these challenges by using our strong balance sheet to invest in initiatives that will help us mitigate rising costs and implementing innovative marketing and merchandising programs designed to engage and build deeper relationships with our customers to help drive improved growth. During the quarter, we attracted nearly 1.5 million new customers and added more than 225,000 new members to our celebrations passport loyalty program. And we continue to expand our cross category and cross branded merchandise programs, fully integrating our new Vital Choice brand onto our platform. As we enter our fiscal fourth quarter, we have several innovative marketing and merchandising initiatives that we are very excited about. including our new partnership with global superstar Dolly Parton, which we kicked off to celebrate International Women's Day in April. Dolly collaborated with our team to curate several exclusive floral arrangements, and she dropped her newest album, Run Rose Run, along with a companion novel that was available for our customers to buy digitally on the 1-800-Flowers site. She also promoted her collaboration with us on her social channels, reaching millions of her loyal fans. And we have a new partnership with famed Iron Chef Jeffrey Zakarian, who is now serving as our culinary ambassador for Harry and David. Zakarian worked with our team to create a special collection of Harry and David products, including items from our Wolfman's Bakery and new Vital Choice brands. And just in time for Mother's Day, staying at the forefront of innovation, we've launched two exclusive collections of NFTs featuring unique artwork that celebrate moms. Looking ahead, the current macro economy is highly unpredictable. With that said, it's important to note that we have faced challenging macro market conditions in the past. And because of the strength of our unique business platform, combined with our talent and experience team, we have emerged a bigger, better, and stronger company. As a company, we are continuously evolving. Through compelling messaging and unique gift offerings for every emotion, we are dedicated to helping inspire our community of customers to give more, connect more, and build more and better relationships. We are confident that we will continue to grow our company and build shareholder value over the long term. In closing, as in my past calls, I'd like to give a shout out to all of our associates across the company. We have a tremendously talented team that continues to work diligently to address the challenges that we are seeing in the macro environment and drive long-term growth. I thank them for their hard work, their innovative thinking, and their laser focus on our community of customers. Now, I'd like to introduce you to Tom Hartnett. Tom was promoted to president of the company earlier this week, having previously served as group president for our consumer floral and gift segment. Since joining our company in 1991, Tom has held a number of positions of increasing responsibility and made many significant contributions to our business, not the least of which has been the tremendous growth and expanded market leadership in our 1-800-Flowers brand, which he has overseen. Tom has also been instrumental in building our company's digital marketing expertise, championing cross-brand, cross-category product innovation to provide more gifting solutions for our customers and driving initiatives that further our commitment to customer service excellence. Tom and I have worked very closely over the years, and I look forward to many, many more years of partnership as he takes on this new role. I am confident that his appointment will serve our stakeholders well as we further integrate our brands and our operating platforms. Kate, if we can now open the call for questions, please. Thank you.

We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the key. To withdraw from the question queue, please press star then two. Our first question comes from Anthony Lebedzinski of Sedoti. Please go ahead.

Yes, good morning, and thank you for taking the questions. I guess, you know, first, just a quick housekeeping item. Can you give us a sense of pricing versus volume, just for the quarter, if you have that available?

Sure. Good morning, Anthony. Thanks for the question. Bill, you want to take that?

Sure. Anthony, AOV was up, you know, 10 plus percent, you know, offset by a decline in, you know, in units. It's kind of combination of both the strategic pricing initiatives that we've put in place, but also product mix as we're selling more and more bundled products and kind of featuring more higher-priced items on the site.

Yeah, and I think it's important to note, we always look, as I think you're familiar, Anthony, to make sure we have a broad range of products at all price points. So as Bill points out, when we see the higher-priced point items growing, we'll push those a little bit more. But especially in this macro environment that we're working in, it's important to have a good selection of entry-level price points as well.

Got it. Thanks for that. And then, yeah, just in terms of the gross margin pressure that you guys saw in the quarter, so quite a bit more than what we had expected. I think this is the first time you guys called out specifically right off of expiring inventories. What was the magnitude of that?

Yeah, so there was a number of factors that impacted, you know, gross margins. We mentioned them in our formal remarks, both, you know, kind of inbound and outbound shipping and the outbound shipping being influenced by fuel surcharges, certainly labor, commodity cost increases with inflationary, as well as just availability of, you know, of some, you know, some supply such as wheat and eggs with a shortage of, you know, with a shortage of hens. But additionally, the write-off of some perishable inventory. The large majority of investments we've made in inventory is in non-perishable items. However, coming out of the holiday season, we did expect stronger consumer demand. We maintained some of the labor, some of the seasonal labor that we had at the holiday time. Once you let go of that labor, you don't get it back. and we built some inventory with some perishable products in there expecting higher demand. When that did not come, we did have some write-offs. Probably amounted to about $5 million to $6 million during the quarter, which is probably 130 basis points of the 600 or so points that were down in margin.

Got it. Okay. And then you guys talked about the Easter shift. Just wondering how significant that was and – And then as far as the lower deferred revenue, just wanted to get a sense of what the impact of that was and have one more question after that.

Bill covered that, and that's important to hit that lower deferred income point as well.

Yeah, so we went into the quarter with about $10 million of lower deferred revenue. Again, you know, from Harry and David a year ago, you know, customers were willing to accept, you know, order in December but accept in January when we were light on it, you know, light on inventory. That's one of the reasons we've been making investments in, in inventory. So we went into the quarter about $10 million less in deferred revenue. The Easter shift on the other side, probably about $6 million or so, $6 million plus moving out of Q3 into Q4. Overall, the Easter holiday was up slightly year over year between March and April, the combination, but about $6 million moved into the month of the fourth quarter.

Gotcha. Okay. And then just kind of a bigger picture. So a Chris, you talked about some of the initiatives that you're working on to improve the cost issues, whether it's automation or other things. What's the timing of that, and when could we see some tangible improvements in terms of your cost? I know you don't have a crystal ball exactly, but can you give us a sense as to when we could actually see some potential improvements from these initiatives to try to offset the cost headwinds that you guys are seeing?

Sure, Anthony. Thank you. You know, again, as we look at it, the biggest challenge that we've been having and we're getting our hands around is the gross margin impact. With that said, we did show improvements in our OPEX ratio. As we look at some of the investments that we're making, automation of our warehouse and distribution centers is an example. And we talked about the benefit and the impact we're seeing from that early on. Again, the example we gave from back in the Christmas holiday was You know, last year out of our largest DC in Ohio, we were able to ship 80,000 packages at peak day. This year we were able to do several days, I think like six days, over 100,000 peak day with 30% less staff. So we're seeing the benefits of that, and that's continuing to roll through. And we're automating more of our facilities in Medford, automating our facilities in Atlanta, et cetera. Another more recent example of where we're seeing the benefits of that start to come in is from Valentine's Day, where On our peak day, we were able to handle 30,000 customer interactions completely automated because of our AI engine powering our IVR and our chatbot capabilities. So it was 30,000 customer interactions completely automated. We would have needed 1,000 more people just for that one day to handle that if we weren't investing in this automation capabilities. So you're starting to see that roll in. It's hard for me to put a timeline on it because it's an iterative process and it's happening every day.

Yeah, I think, Anthony, if we break down the components of, you know, where the cost, you know, pressures are and where the margin pressures are, you know, you have inbound ocean freight, you know, that obviously is up dramatically over, you know, 12 months ago, you know, 18 months ago. You know, if you look, you know, the, you you know, do believe that that's going to, over time, you know, self-correct. Probably not for this holiday season, but over the longer term will self-correct, maybe not back to, you know, 18 months ago rates, but certainly significantly drop off of what, you know, current rates are. When you look at outbound freight, you know, those rates are, the rates are going to, you know, continue to be high, but they're influenced by fuel, and fuel has spiked during the quarter. So probably, if Our outbound rates, we're probably paying 15% more per package right now than we were a year ago. Probably 40% of that is just tied to fuel. And ultimately, fuel, that's cyclical, and fuel will self-correct. The ride-off of perishable products, we've got to readjust that. So that's an item that we can self-correct. Labor rates probably are... are going to remain high. We're not expecting relief from that standpoint, but as Chris mentioned, that's where a lot of the automation projects we have, both on the warehouse distribution, where a lot of our employees are, as well as the service center. On outbound rates, what our initiatives are is that while rates are higher, we're working with FedEx and our internal logistics teams to just kind of improve, and our manufacturing just to improve our operations so that we can get products out the door faster, that we can forward deploy product and inventory closer to the consumer. So we can ultimately almost skip down a level of service with FedEx so you can move overnight deliveries to ground deliveries. You can move standard ground deliveries to ground economy deliveries. So it's a cheaper service from FedEx yet cheaper. still meeting customers' expectations. So I think the two areas that won't self-correct by themselves, labor and outbound shipping, we have initiatives in place to help offset those costs going forward.

Yeah, and Bill, on the last point that you just hit, working with FedEx is an example to optimize our capabilities. We've seen good results recently in our on-time delivery rates with FedEx, which then improves the customer experience, cuts down on customer service, contacts, etc., So it really improves the whole operating capability and our operating costs.

It's a good point, Chris. I mean, what we used to see prior to the pandemic was 98% on-time delivery. Throughout the pandemic, we were seeing deliveries that were in the mid-80s, in some cases low 80s. We've seen a rebound back over 90% in on-time deliveries, and we continue to work with FedEx and fresh FedEx to continue to get those on-time deliveries back up to historical levels.

Yep, it's an important factor.

Got it. Well, thank you. That's definitely a very helpful caller. Well, thanks a lot, and best of luck going forward.

Thanks, Anthony.

The next question is from Alex Furman of Craig Hallam. Please go ahead.

Great. Thanks very much for taking my question here. You know, it sounds like Valentine's Day was pretty strong, whereas everyday gifting is really where the company struggled. Can you unpack that a little bit more for us? I mean, can we interpret that as January and early February were a little bit stronger before some of these macroeconomic headwinds really started to weigh on consumer demand? Or is it really more, you know, the story of consumers are continuing to spend around key events like Valentine's Day and Mother's Day and really just pulling back on self-consumption and everyday occasions?

Thank you, Alex. I think, you know, first off, we just step back and look at the quarter to your point. I mean, what we've seen during the quarter is rising inflation, the geopolitical unrest, all of that, you know, certainly the price of gas going up impacting the consumer. With all of that said, and the points that you made, we continue to see us growing market share in the environment. Tom, why don't you speak a little bit towards what we saw for Valentine's Day and and what that portends for us as we go forward into the spring holiday season of Mother's Day, et cetera.

Mr. Yeah, hi, Alex. Yeah, as was mentioned in our former remarks, we grew Valentine's by 5 percent. And, you know, we are continuing to think and see from our data that we're taking market share in the category. As we've said, it does look like the everyday occasions are getting a little softer for us, but we have seen, as Bill mentioned, good response for Easter, and we're expecting a solid Mother's Day.

Mr. Yeah, and I think also as we look at everyday motions, Alex, you know, keep in mind, last year, you know, what we're comping against, you know, those everyday occasions last year, we're seeing significant growth. And that's why it's important, as Bill pointed out, that during the, you know, during the quarter, which grew 68 percent over two years ago, the Flowers brand grew over 50 percent to two years ago. And Harry and David grew at about 75% a two-year ago. And most of that growth that we've seen, you know, last year was really the majority of the accelerated growth was in those everyday occasions. So we're seeing that come back to more pre-COVID levels, I would say.

Yeah, and I think Harry and David was a proxy for the entire food group. It was also up around 75% over two years ago. Yep.

Okay, that's really helpful. Thanks. And it sounds like the Passport program continues to show nice growth year to date. The slowdown you've seen in demand over the past couple weeks and months, I mean, has that been seen more or less equally amongst your Passport members and your multi-brand customers as well as your maybe just kind of once and twice a year type customers?

Yeah, go ahead, Tom.

Why don't you cover some of that? Yeah, I mean, we're still – We remain very pleased with our passport results and how we've grown. We said we've grown membership for the quarter 40% plus. We've added 225,000 passport members in the quarter. And so we continue to see good resonance there. And we've also continued to make strides in our checkout flow and how we market to customers in order to make our our existing customers or our new customers more aware. We're also seeing good growth in converting new customers to the Passport program. So we have continued to see good results there, and obviously that portends well for us on these customers are great for multi-brand customer buying, which is our strongest cohort.

Yeah, and Alex, as we look at our customer file, you know, as Tom points out, we're continuing to see strength in our multi-brand, multi-category customers, our passport customers. The softness year over year, and I want to point out because it's not exactly soft, but year over year is more in new customer acquisition than it is in what we're seeing from our existing file. So with that said, even with digital advertising rates increasing about 30%, as we said earlier, uh and the market's increasing we still acquired 1.5 million new customers during the quarter so that shouldn't be understated you know so so we're looking at that opportunity and you know one of the things we've talked about in the past you know i double checked this recently just to make sure this data is holding up the new customers that we've been acquiring since the pandemic are actually still performing better than the new customers acquired pre-pandemic we're seeing slightly still higher retention rates during that so You know, that's the thing, one of the components that really gives us confidence as we look forward to say we'll get back to normal growth rates here is the size of our customer file, which, again, has doubled over the last couple of years as we've doubled the size of our business over the last three years or so, the brands, the platform we built. So the core that you're getting to are those customer metrics, and that's what really drives our confidence going forward.

Great. Thank you very much.

The next question is from Linda Bolton-Weiser of DA Davidson. Please go ahead.

Hi. Thank you. So I was just curious about, you know, looking ahead. I know you don't want to get into giving guidance yet for the next fiscal year, but I guess initially maybe analysts would have thought you would have some cost comparison relief a little bit in the upcoming December 2022 quarter. because you had such a hard time with costs this past year. But now I'm thinking that even if costs and fuel and labor just stay where they are, that you may have unfavorable comparisons coming up on the cost side on surcharges and things like that this holiday. Can you kind of just generally comment on whether that's a correct assumption? Thanks.

I mean, Linda, Our policy is not to give guidance on fiscal 23. We'll do that in the August call. I think what we'll see by generally speaking with this holiday season, we have efforts to help offset some of these costs, and we're going to continue to invest behind those efforts to help offset some of these costs. As I mentioned in my earlier comments, You know, some of these cost pressures that we have will ultimately will self-correct by themselves, the timing of which is tough to predict and it's hard to, you know, some of these will not go away by, you know, by the holiday time. But I think we have certain initiatives in place that we're going to continue to effort to try and offset these costs to mitigate some of these cost increases and we continue to test strategic pricing initiatives to help offset some of these costs as well.

Yeah, I think that's an important factor, Bill. So I think that assumption isn't exactly accurate, Linda, because I would assume that we're not getting any benefits from the efforts that we're putting in, and I think we're getting tremendous benefits from the efforts we're putting in to make sure that we get our hands around the cost. So if the external pressures remain the same, I think our internal mitigation efforts will give us improvements. And I think as we look forward, you know, overall, you know, what we're seeing is, again, the benefits that we'll get as we come out to some better comps as we see going forward, the growth rates that we're seeing from the customer file. Again, seeing that earned growth from our customer file is giving us extreme confidence. You couple that with what we've done with the platform that we continue to expand on, the M&A capabilities we've done with businesses like Shari's Berries, like Personalization Mall, our newest acquisition, Vital Choice, which we just integrated onto our platform. All of this has been successful for us and will continue to be successful as we get our hands around the cost structure.

Okay. And just your comment about using the strength of your balance sheet to kind of continue to build inventory, to me that seems odd because at the same time you're making a statement about consumers being pinched more because of you know, price inflation. So I'm just kind of wondering, like, are you building inventory in the, the T-Mall type items, which you need to have ready for the holiday or what is it specifically that you feel like you need to build more inventory in?

Well, a lot of it is addressing kind of the supply chain issues. So to make sure we have the inventory, you know, what we, what we faced, uh, you know, uh, holiday plus ago was a lack of inventory. What we faced this past year, was the timing of inventory with all the supply chain challenges that we had. So we didn't have the inventory in play when we needed it. So inventory delays were happening. We had labor that we hired that we couldn't produce on time. So it was very disruptive to the operations. So having the inventory in play you know, so that we can build and plan our operations is clearly a benefit, you know, in the upcoming year versus the past.

Build, plan the operations, and manage the labor appropriately.

Okay. And then, finally, I was just curious – In terms of Tom Hartnett's experience within the company, has he spent all of his years pretty much on the floral side, or has he ever had a stint kind of working or managing within the GFGB business?

Tom's been involved in just about every area of the business in the 30 years that he's been with the company. So he's been involved in the food businesses, the Sherry's Berries business most recently. He quarterbacked that acquisition. and oversees the Sherry's Berries business, the fruit bouquet business. He oversees personalization malls when he moved to the non-food category. This is a guy who started sitting here looking at Tom, giving him his praises here. Started in finance for us and has basically had every role you could conceive in the company over time. And what this change does really for us is really brings all the operating business units under one leader. It really helps us drive the enterprise growth and the cross-brand capabilities that we've been looking at and moving forward on. And it allows for more dynamic P&L management, being able to quickly adjust on the fly where we're putting investments, where we're seeing opportunities. For me, it allows me more time, Linda, to spend more focused on it, as I have throughout my career, on innovation, on customer centricity, our strategy work, our M&A development capabilities, and overall growth focus for the companies. So Tom is extremely well deserving this position. I couldn't think of anybody more better suited for it.

Okay. Sounds good. Thank you very much.

Excellent.

The next question is from Michael Kapinski of noble capital markets. Please go ahead. Hello, Michael, your line is open. All right, we'll move on to Dan Kernos of the Benchmark Company. Please go ahead.

Thanks. Good morning. Two short-term questions. Chris, can we go back to your comments around marketing? We know that performance marketing and digital channels, and social in particular, are A, converting less, and B, rates are extremely high right now. Yes, you added a lot of new customers you did talk about a little bit more challenge coming from those new customers rather than from your existing base so how do we think about you know is there any contemplation in the near term on either a pullback in spend or how are you thinking uh you know in terms of ltv given this environment i know you're trying to think you know several years out but just maybe help us think through the way that you're assessing your marketing or customer acquisition strategy right now.

Great. Thank you, Dan. That's a great question. I think as we look at the environment and as we look at really from an LTV perspective and looking at the long term, as you pointed out, it really helps guide our decisions day to day. We pointed out in our last quarter how once we hit the more challenging consumer period of the month of December, and the advertising costs going up, we intentionally pulled back on some of our customer acquisition efforts as it was just getting too expensive. Even in this quarter, when I talk about the softness, again, the 1.5 million new customers is a great number. It's less than we acquired last year where we saw more opportunity. So we turned our dial back where we saw the customer acquisition costs being effective for us from the long-term LTV. I can tell you we know our competitors are not able to compete in this market at this CAC level that we're working at. So again, a big part of that is because of the platform and the brands that we have and the ability to drive LTV as we drive this passport capability and the multi-brand capability. So we're really looking at what's the CAC we're willing to spend on the long-term scenario for us as we continue to see the development of the file and the cohorts.

Yeah, Dan, the only other thing I'd add is we, as you mentioned, we continue to see performance marketing costs rise. We're aware of that. I mean, it has forced us and just be better marketers around better targeting opportunities. So we're doing better in targeting those new customers that we believe have the right LTV or CLV for the future. And, you know, that allows us – you know, to spend our dollars more effectively.

Got it. That's helpful. I'll get back to sort of the tangential question to that in a second and just ask a side one here on PMOL. Obviously, this is not really a great environment for PMOL. I know you guys have been looking to potentially beef up your personalization vertical, you know, perhaps This market, if it continues to be messy, will offer some more opportunities out there for multiple compression in your competitors. But just curious, A, how that process is going, and B, how you're evaluating sort of PMOL under the current environment or landscape.

Okay, well, you know, if I'll ask Tom, he's been closer to PMOL certainly, but You know, I look at, you know, we're still extremely pleased with how PMOL has fit into the platform and how it's performing in its future. Tom, specific comments on what we're seeing at PMOL now, especially for the upcoming season that we see.

Yeah, I mean, you know, again, it's similar to what we're seeing for the rest of the organization. We are seeing a little softness on the everyday occasions, you know, good performance on the major holidays. We are focused on the PMOL customer. It's a little bit lower household income, generally speaking, so we're taking a lot of steps to attract a higher household demographic and add to our product assortment there, as well as look at other potential targets in the marketplace.

And PMOL, keep in mind, as I mentioned, upcoming holidays, the wedding season, Father's Day, June is PMOL's strongest month. So we see a good opportunity there as we look forward. To your point on potential M&A targets, whether in the personalization category, Dan, or actually we look at it as kind of across the board in any of our categories or adjacencies, we do think we're in a strong position as a company right now to watch what happens during the market, what happens to valuations. We do think that the M&A market could present opportunities for us as we go through this sloppiness that we're seeing in the market today.

Got it. That's helpful. And then just lastly for me, you know, we've seen this before. You guys have been through this before. Always difficult to predict, you know, how the economy is going to react. You know, you've seen lots of wide-ranging recession calls, what have you, even though we're at record low unemployment and there's still two years' worth of savings out there. But regardless, Not to ask about, you know, specifically 23, but just in general, you guys are going to, you know, post a more modest, albeit still really strong two-year stack growth. So you'll have technically easier comps as you go into next year. I'm just wondering if you have any altered views on the longer-term sustainable growth outlook for the business based on what you're seeing now.

I think, Dan, our long-term outlook stays consistent. We're extremely proud of what we've built with the capabilities we have. We have high confidence in our abilities to return to the growth rates that we want as we move forward here. We have the right products. We have the right brands. We have an extended customer file. We have a great experience team in place. As you pointed out, we've done this before. We've been in business for 46 years now. We've been through some ups and downs. One of the key things about our category, it never really participates in the high highs of a robust economy, but nor do we participate in the very lows of a recessionary economy either. And then as we've expanded our product categories, food generally tends to do better in a tougher economy as consumers put more value on something you can eat. But with all the things that we look at, the platform, the customer file, the brands that we have that improvements in CX that we've made. Our outlook, our confidence in the future is not diminished at all.

Yeah, Dan, just, you know, go back to, you know, two years ago or even four years ago, you know, we started to, you know, initiate, you know, a higher growth rate, you know, from the second half of fiscal 18, you know, through the start of the pandemic, we were, you know, increasing our organic growth rate. We had gotten it up to high single digits. We had guided Prior to the pandemic, the double-digit growth in the third quarter of our fiscal 20, and for the second half of fiscal 20, for the fourth quarter, we achieved that in the March quarter of fiscal 20, where we posted 12% growth rate. And we are, again, guided for the fourth quarter to be at double digits. We are a bigger, better, stronger company today based on a lot of the initiatives that Chris has outlined. So, you know, we view this as, you know, the consumer certainly has pulled back for, you know, due to the, you know, geopolitical unrest and some of the macro economy issues that have happened. But, you know, we're there to take advantage of the opportunities going forward.

And in this current year, we're still growing over last year, which was a 42 percent growth rate.

I tend to agree with all of that, especially what you said, Bill. The only thing that's missing now is Chris. Go push your brother for a name change. Thanks, everyone. Appreciate your color.

Thank you, Dan.

Again, if you have a question, please press star, then 1. The next question comes from Michael Kopinski of Noble Capital Markets. Please go ahead.

Thank you. And I got dropped right when they introduced me. Sorry about that. I just got a couple of clarifications. One is, did you say that the Easter shift accounted for roughly $6 million revenue in the quarter? I just wanted to clarify that.

The question was, did you say $6 million shift in quarter? Yes.

Yeah, for the Easter impact, yes, from Q3 to Q4.

Yeah. And is there any way to quantify for us the amount of savings that you might be able to get from the heightened capex spend you plan, you know, through automation or reduced costs and so forth? Is there any way to quantify that?

Michael, I mean, this is a long-term investment that we have. We've automated the Hopewell facility. I think we've described this in the past that we did 30-plus percent more volume out of that facility on peak days with 30 to 40 percent less labor. That's clearly being offset by labor rates at this point, so it's hard to put just a straight dollar amount. We're investing in our Atlanta facility to do many of the similar things to automate that facility and to significantly increase the amount of capacity that we have with less labor and then a number of the initiatives that we have with our service center platform. So hard to quantify that at the current time, but I think all these initiatives are – they had to basically help offset the higher labor rates that we're seeing, the significantly higher labor rates, which we don't believe the hourly labor rates are going to go down much.

And I guess, you know, obviously you have these seasonal things going on every quarter, but were there any standouts in terms of performance among your brands? You know, Wolfram and the Top Conf, anything in particular that stood out to you that performed better than what you thought?

I think most importantly because of the holiday, Valentine's Day, Flowers brand was really the standout brand during the quarter. Again, because it's stimulated by the Valentine's holiday. And that's why, again, it really has us very optimistic as we now move in, as we are in the middle of Mother's Day currently and the spring holiday seasons, and then moving into the Father's Day capabilities that we have of personalization, more of the wedding season, etc., So for this quarter, it was really the floral business at Valentine's Day that really encouraged us, as well as now as we look going forward, some of the other product lines coming into play.

The only one I'd add to that would be Sherry's Berries. That kind of aligned itself with the floral holidays as well. The chocolate-covered strawberries are a good product for Valentine's Day and Mother's Day.

In both for last year and this year, the date placement of Valentine's was not exactly great. Being on a Monday doesn't help things. We're looking forward to just date placement help in the next four to five years.

Gotcha. And I sound a little like Dan may have asked a portion of this question, and I apologize if I am asking you the same question. The company has been opportunistic in making acquisitions, and typically the And during periods where you had to be looking forward, obviously. And so is it too early at this point for you to be making acquisitions, given that maybe some of the sellers aren't inclined to sell currently just because they haven't received enough pain, so to speak, of pressure and headwinds like you might be seeing? Do you think that you would still look at acquisitions even in this environment, given that you're probably maybe more focused on managing the business and kind of offsetting some of the headwinds you're seeing yourself?

Thank you, Michael. I think we're always looking in the market where there's the right opportunity from an M&A point of view. I think we've proven over time to be very diligent and very deliberate in our decision-making there. I do think we're starting to see the beginnings of people really kind of realize they're not going to sell their business off the COVID bump and, you know, valuations are maybe starting to come into play a little bit. We might need a little bit more time, but I think we're seeing the beginning of that. I think it's important to just step back and look again at what we've done from an M&A point of view. You know, again, if you look at what we've done with Shari's Berries, we took a business that was failing there. know kind of resize that business when we when we integrated it into our platform which complete integration all we took was the url and the customer file were really the only assets we took there and completely had it put it on our operating platform and have grown that business significantly i think you could expect we're looking to do the same thing with the small acquisition we did this past year with vital choice where we just now just recently integrated that onto our platform And now we'll begin the capabilities to grow that business, similar to how we've grown Shari's Berries. And then in between those two, we acquired Personalization Mall, which was an appendage to the platform, giving us all the capabilities in the personalization space that we didn't have. And as Dan pointed out, we've mentioned in the past, that's an area we think is a separate part of our platform that we can look to grow, again, through organic business development capabilities or through M&A. I think, you know, we're a strong company, and we will continue to come at it as stronger and better than we have, just like we have in the past. And M&A will be part of that equation, for sure.

Yeah, your timing on acquisitions has been great. I mean, going back to even Harry and David. But that's all I have. Thank you.

Thanks, Michael.

The next question is from Doug Lane of Lane Research. Please go ahead.

Yes, hi. Good morning, everybody. I think, you know, we talked about a lot here, so I just like to focus on the gross margin in the gourmet food and gift basket segment. The 25% gross margin is well below anything I've seen quarterly going back at least five years. So there's something going on there. So I want to try to drill down on is this reset of the gross margin in gourmet food and gift baskets permanent? Or are there sort of cross-currents going on here that will go away in the next quarter or two?

Yeah, Doug, this is clearly the lowest margin we've seen. And most of the items that we talked about with regard to the overall gross margins, all of those impact the food brands far greater than it does on the floor side of the business. So, again, inbound shipping is high, and it's not going to go away in the next quarter or two, but I think eventually it will self-correct to some degree. It's not going to go back to $3,000 a container, but it's not going to be at $25,000 a container. We're seeing a little bit of relief on that right now in the off-season, and we hope that that continues. It's hard to predict what the spot market will be. and whether the carriers will honor contractual rates. But right now we are seeing a little softness over where we spent and what we incurred last year. Outbound shipping, yeah, rates are up and there's a lot of surcharges associated. The biggest surcharge right now is fuel. So as I mentioned, probably 40% of our increase in our outbound shipping rates is related to is related to fuel. Eventually, that will correct. I mean, fuel is not going to always be at $5 a gallon. So that will self-correct, but the timing of which is tough. Labor, we are seeing higher labor. We've talked about that last quarter and this quarter, that our labor rates are significantly up year over year. They probably are not going to go down significantly. We have seen a little bit of a leap in one of our markets, in the Chicago market, but where we have a bulk of our hourly labor in Ohio and in Oregon, we have not seen much relief there. So our efforts are focused there on automation and basically doing more with less. We need to utilize less labor in our manufacturing and distribution.

Reconfiguring how we do some of our product development, et cetera. So all of these capabilities focused on How do we mitigate the labor?

Right. You know, commodity cost increases are cyclical. You know, we're seeing it right now. You know, we're seeing, you know, double digits, you know, mid-teen increases in a lot of the commodities. We know there's a wheat shortage. You know, part of that is the geopolitical issues that we have. We know there's an egg shortage because of a shortage of hens. We see other commodities that are up. But those will, over time, self-correct. Again, not necessarily in the next decade. Quarter or two, timing is hard to predict, but those will self-correct. And again, back to even the outbound shipping, and I mentioned this earlier, yeah, while rates will be higher on a same-level service, we are working with FedEx, we are working internally on our operations. so that we can utilize less expensive services from FedEx to still meet customer expectations but lower, you know, lower our rates. So there are correctable actions. You know, clearly our focus is on the ones that, you know, with outbound rates and with labor rates that we don't think will self-correct so that we need initiatives in play to mitigate those, you know, those costs. Other ones will self-correct. It's just a matter of the timing.

Okay, that's very helpful. Thank you. And lastly, on inventories, they're up 75% year over year, and your sales are down 1%. So where are you building inventories, and what is the risk of future inventory write-offs because you have such a big perishable component of your business?

Yeah, so most of the inventory that we're investing are up about $60 million over where our year-end number was. We're about $150-something million at June last year. We're about $214 right now. in inventory. So most of the investments are really in hard goods, non-perishable items. I think the write-off that we took on inventory on the perishable items was kind of coming out of the holiday, thinking demand was going to be stronger than it was and maintaining some of the seasonal labor because we were concerned if we lost the labor, we would not get it back. So we built some products using some of the perishable products that we – the inventory that we had, and the demand wasn't there on that. So I think that is correctable from our standpoint. But I think the investment in inventory really is to address – there are going to continue to be supply chain challenges and disruptions you know, in the market. We all felt, you know, many companies felt it. We felt it, you know, last year. We want to have the inventory in play so we can manage our operations and manage our labor better.

Our inventory strategy, along with many others, has moved from a just-in-time inventory to kind of a just-in-case inventory.

Okay, that's helpful. Thank you, guys.

Thanks, Doug.

Okay, Doug.

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

Thank you, Kate, and thank you, everyone, for joining us today. As you can see, we have a lot of opportunity and a lot of optimism in the future of our business. Right now, our focus is on the Mother's Day holiday, as all of our focus should be. Moms rule the world, and I urge you to place your Mother's Day orders early. Thank you.

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