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spk06: Good morning and welcome to the 1-800-Flowers.com Inc. fiscal 2023 second quarter results conference call. All participants will be in a 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 the star then one on your telephone keypad. And please note that this event is being recorded. I would now like to turn the conference over to Andy Miliband, Senior Vice President of Investor Relations. Please go ahead.
spk02: Good morning and welcome to our fiscal 2023 second quarter earnings call. Joining us today are Chris McCann, CEO, Tom Hartnett, President, and Bill Shea, CFO. Before we begin the call, I'd like to remind you that some of the statements we make on today's call are covered by the Safe Harbor disclaimer contained in our press release and public documents. During this call, we will make forward looking statements with predictions, projections, and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The company disclaims any obligation to update any of the forward looking statements that may be made or discussed during this call. Additionally, we will discuss certain supplemental financial measures that were not prepared in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables of our earnings release. And now, I'll turn the call over to Chris.
spk03: Thank you, everyone, and good morning. Our second quarter results reflect a successful holiday season and benefited from the strength of our food brands and improving gross margins. We did a good job projecting consumer demand for the quarter, particularly related to trends and sales curves. On a consolidated basis, revenue declined 4.8%. Our gourmet foods and gift baskets business had a solid quarter, with revenue being relatively flat, while revenue within our consumer floral and gift segment decreased 12%. This is in keeping with past trends in which consumers gravitate towards food gifting options from floral arrangements in challenging macroeconomic environments. Unlike a year ago when there was an unprecedented pull forward in holiday demand due to the global supply chain challenges, we had anticipated that customers would revert to their historical shopping patterns and shop much closer to the holidays. And that is what we experienced. Beginning in October, we witnessed a very promotional retail environment and those trends continued throughout the holiday period. Additionally, with some of our brands that offer a lower price point and appeal to a lower income customer, we noticed that customers appeared to be more price sensitive and were waiting for deals. We strategically utilized promotional pricing throughout the holiday period to entice customers while simultaneously reducing other offers, such as free shipping, that were not as impactful in the current economic environment. Moving forward to November, Black Friday and Cyber Monday were once again big days for us and represented the kickoff to the holiday shopping season. In fact, Personalization Mall had its biggest revenue day ever on Cyber Monday. From there, we continued to see demand build throughout the month of December with some of our greatest volume days coming during the two weeks before Christmas. Customers traded up to higher value, higher price point assortments within our food business. with the largest gains coming in at price points that were over $100. We also saw customers gravitate towards our prepared meal offerings that make their lives and entertaining easier. Our heat and serve meals, appetizers, and side dishes allow customers to spend less time in the kitchen and more time with family and friends. And our charcuterie and cheese assortments also saw a nice growth as more customers began to entertain for the holidays once again as compared to the past couple of years. All told, Harry & David set new records for this holiday season, including its biggest sale day ever in December, breaking a record that was set in the pandemic year of 2020, its first $3 million mobile day, as more customers shifted from desktop and tablet into mobile, and record sales of our award-winning wines, all resulting in a record sales quarter for the brand, sustaining the growth that we have seen over the past few years. Cheryl saw strong performance from the holiday assortment, which included the introduction of candy cane, maple syrup, and cinnamon swirl cookies, helping offset softer everyday sales earlier in the quarter. And Wolfram & Screw, its e-commerce business, in part benefiting buyers from a 6% increase in new customers. Turning to our floral business, We continue to leverage our strong assortment of products and brands to meet our customers' needs. We saw strong growth in holiday plants that grew 10% over the prior year period. And various floral and sweets pairings that include offerings from 1-800-Flowers and Sherry's Berries saw strong double-digit growth. However, as the floral business does not have the large spike at holiday, these successes were unable to offset the lower demand for everyday gifting throughout the quarter. Additionally, while our direct-to-consumer business across the enterprise remained fairly resilient to macroeconomic pressures this quarter, our B2B business was not immune. Our corporate gifting business saw demand soften as companies began looking for more opportunities to cut expenses. And as more employers shifted to hybrid work environments over the past year, companies began hosting holiday parties once again in lieu of corporate gifting. While corporate gifting remains under pressure today, It is a focus of ours, and we see growth opportunities and market share gains in the future. Our second quarter performance also benefited from our marketing efforts. We are transforming our company from being a purely transactional e-commerce company toward developing deeper relationships with customers through content and community. Our focus is on inspiring our customers to give more and to build better and more meaningful relationships in their lives. We built a company on knowing that people are naturally compelled to give, and it's no coincidence that we found our best customers to be the ones who enjoy giving the most. Our initiatives include our weekly celebrations pulse email newsletters, our experiential programs such as floral design classes, and expanded content development across multiple social channels. Through these initiatives, we are focused on nurturing our relationship with existing customers, growing our multi-category customer cohort to increase their purchase frequency, and defining our company as the preferred destination for all of our customers' gifting needs. As could be expected, net sales per customer are highest amongst our multi-category customers, followed by our 1.4 million celebrations passport members. Turning to our margins, during the second quarter, as we anticipated, our margins improved on lower inbound freight costs and strategic pricing initiatives. As Bill will discuss further, we expect this trend to continue in the second half of this year and into next year. As these costs continue to moderate, we anticipate that our margins will return to their historical levels over the next few years. As such, we expect to see a substantial recovery in EBITDA. In summary, we anticipate that certain macro trends would help us, and indeed they have. While they have not reverted to that pre-COVID levels, certain cost inputs continue to be favorable, which gives us confidence in our ability to improve margins in the future. Based on our second quarter performance, and in particular, our gross margin improvement and reduction in operating expenses, we are increasing our fiscal 23 adjusted EBITDA guidance to be in a range of 80 million to 85 million. As we look to the balance of the year, we are focused on executing for the upcoming holiday period. We expect the consumer to remain cautious in this environment and reduce their spend on everyday gifting occasions while continuing to spend for the major holidays. Even in an uncertain environment, we are confident that customers see value in our unique and one-of-a-kind gifts that make the perfect solution no matter who you are shopping for. As we look beyond Valentine's Day to the spring, we're focused on our Giving is the Gift campaign. From friends, family, teachers, and caregivers, this is a great time to remind those in your life that you appreciate all that they do for you and your family or business. Before I turn it over to Bill for the financial review, I wanted to take a moment to highlight the newest addition to our family of brands. We are excited to welcome things remembered to our all-star roster. This is a perfect example of a tuck-in acquisition That enables us to further expand our leadership position and product offerings in the personalization category. Things Remembered is very complimentary to Personalization Mall and significantly grows the number and variety of personalized products that we can offer to our customers to help celebrate every occasion with personalized masterpieces. We acquired a Things Remembered brand and related IP, including their customer list and certain assets for approximately $5 million. shortly after the second quarter ended. This edition perfectly illustrates how our e-commerce platform was built for rapid growth as we seamlessly incorporate complimentary brands onto our platform and grow them profitably. Now I'll turn the call over to Bill for his financial review.
spk04: Thank you, Chris. As Chris highlighted, our second quarter performance was solid, benefiting from the resiliency of our gourmet foods and gift basket business. we were able to generate adjusted EBITDA of $131.4 million and offset the 4.8% revenue decline by improving gross margins by managing our cost structure. Gross margin improvement was led by 170 basis point increase within our gourmet food and gift basket business, which benefited from our strategic pricing initiatives, lower year-over-year ocean freight costs that continue to trend favorably, a more stable labor market, which enabled us to reduce overtime pay, and our logistics optimization efforts that leverages our full distribution network to reduce shipping zones and deliver products closer to the recipients. Furthermore, our warehouse automation efforts have enabled us to meaningfully improve efficiencies. Our Hebron, Ohio facility is in the second year since we installed automation, and we processed over 1.8 million packages in December increasing throughput by 8% over last year while reducing expenses. And we completed our next phase of automation in our Atlanta, Georgia facility that enabled us to fulfill orders for multiple food brands and increase throughput by 42% for the month of December over last year. Longer term, we believe that we will gradually restore our gross margins to their historical levels and leveraged the significant top line growth of the past few years to drive bottom line results. You may recall that the gourmet food and gift basket business was the most impacted by the negative macro cost inputs for the past 18 months. Our consumer flaw and gift segment was less impacted and thus its recovery is subject to certain macro trends that have not yet improved. Now let's review our key metrics for the second quarter. Total net revenues declined 4.8% to $897.9 million as compared to revenues of $943 million in the prior year. Post-profit margin for the quarter improved 90 basis points from 40.1% to 41%, driven by the aforementioned improvements in our gourmet food and gift basket business. Operating expenses were 28.1% of total sales as compared to 27.9% in the prior year period. On a dollar basis, operating expenses declined 10.1 million, primarily reflecting lower marketing costs as we shifted our advertising investments to lower cost, higher return on investment areas of the marketing funnel. As a result, our second quarter adjusted EBITDA was 131.4 million as compared with adjusted EBITDA of 133.1 million a year ago. Net income was 82.5 million. or $1.27 per share, and adjusted net income was $82.7 million, or $1.28 per share, compared with net income of $88.5 million, or $1.34 per share, and adjusted net income of $88.6 million, or $1.34 per share in the prior year period. Regarding our segment results, our gourmet food and gift basket segment revenues decreased 0.4 percent to $588.4 million, compared with $590.9 million in the prior year. Revenue benefited from the resiliency of our consumer food gifting businesses, which helped mitigate some of the softness in our corporate gift business. This segment's gross profit margin increased 170 basis points to 41% from 39.3%, benefiting from our strategic pricing initiatives, lower inbound transportation costs, improved labor availability, and our automation efforts. This segment's contribution margin was $123.5 million, compared with $110.5 million a year ago. In our consumer floral and gift segment, revenue decreased 12.1% to $277 million compared with $315.1 million in the prior year period. This decline is reflective of the softness we have been experiencing in everyday gifting and the shift by our customers from floral gifts towards our gourmet food gifts during the holiday period. As profit margin decreased to 40.5% compared with 41.3% in the prior year period, primarily due to higher fulfillment costs and outbound transportation costs. Segment contribution margin was $27.9 million compared with $38.2 million in the prior year period. Now, blue net segment revenues for the quarter decreased 13.4% to $32.9 million compared with $37.9 million in the prior year period. Profit margin of 42.2% was flat with the prior year. Segment contribution margin was $9.3 million, with $11.9 million in the prior year period. Turning to our balance sheet, our cash and investment position was $189.7 million at the end of the second quarter. Inventory was $201.1 million, with inventory of $191.1 million at the end of last year's second quarter. In terms of debt, We had $152.8 million in term debt and no borrowings under our revolving credit facility. Starting guidance for fiscal 2023. This morning, we increased our fiscal 2023 guidance based on our second quarter performance. Before I share our views, it's important to note that the current macro economy is still highly unpredictable, making it difficult to forecast consumer behavior with any certainty in this environment. After growing revenues 77% over the last three fiscal years, we expect revenues to decline in the mid-single-digit range in fiscal 2023 on cautious consumer behavior. We expect to mitigate the impact of the revenue decline on our earnings through our strategic pricing programs, a moderation of certain cost inputs, and the investments we have and continue to make in our business platforms. As a result, we expect to continue to gradually improve gross margins and bottom line results during the latter half of the current fiscal year. Based on these assumptions and our year-to-date performance, we now expect adjusted EBITDA to be in the range of 80 to 85 million. We expect to generate more than 75 million in free cash flow in the current year, representing an improvement of more than 135 million as compared to a year ago. as we continue to sell through our inventory balance. I will now turn the call back to Chris.
spk03: Thanks, Bill. To recap our performance this quarter, we had a successful holiday season. However, consumers continue to be challenged by inflationary pressures. We believe that the macro environment will remain challenging throughout the remainder of our fiscal year and are proactively addressing these trends with compelling high-value bundle assortments that appeal to a wide variety of customers. Nonetheless, we remain very bullish about our long-term prospects. Our foundation, built on our all-star family of brands, is strong and positions us to perform well as the macro environment improves. The diversification of our portfolio helps mitigate and provides resiliency to seasonality. Our core customer remains loyal, and we continue to deepen our relationships with them through our innovative marketing and engagement efforts. This is what distinguishes us in the marketplace because we care about nurturing our relationships with our customers. As I noted earlier, we built a company on knowing that people are naturally compelled to give, and it's no coincidence that we found our best customers to be the ones who enjoy giving the most. A single thread runs through all the giving. It brings joy to everyone involved, and that's why we say giving is the gift. Now I'd like to open the call for any questions that you may have. Thank you.
spk06: We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your hand simply for pressing the key. To withdraw your question, please press star then two. And our first question today will come from Dan Kurnos with The Benchmark Company. Please go ahead.
spk09: Great, thanks. Good morning. Nice job on the bottom line, guys, in the quarter. A couple things for me, maybe just on some of the noise around mix here. You did talk about PMAL having a strong Cyber Monday. Can you just talk how it did overall in the quarter? And I think in the past we've kind of talked about some pricing inelasticity within PMAL. On the gifting side, which we can keep separate for now, you know, you've got some price uplift. But just in general, like either consumer floral or PMAL, How are you thinking about pricing and promotional activity given the consumer backdrop right now as we go into Q1 with a bunch of excess inventory built up all throughout e-commerce? How are you thinking about that backdrop?
spk03: Sure. Thanks, Dan. Good to hear from you. We're very happy with the quarter and the performance that we had, especially on how we managed the cost structure of the company throughout the quarter. So thank you for that. As we look forward, you know, from a PMOL perspective, we were thrilled to see that Cyber Monday be a record day for PMOL. And, Bill, overall, PMOL performance?
spk04: Yeah, PMOL was, you know, down, you know, that mid-single-digit, you know, kind of range from a top-line perspective. Again, it's seeing the same kind of trends we're seeing throughout the business in that every day is soft. It had a strong Cyber Monday performance. you know, a little softness in the early part of December, and then a very strong finish. Male Speaker 1 Yeah.
spk03: And, Tom, what are we looking at, really, from a pricing initiatives, from a P-Mall and consumer floral point of view as we look forward now?
spk07: Male Speaker 2 Yeah, I mean, I think, more to Dan, Tom, you know, certainly we talked about our strategic pricing initiatives on some of the, our lower or price point products, whether it be personalization mall, Sherry's, Cheryl's cookies those consumers where their household incomes are a little bit more challenged in this environment we have seen the need to be promotional but as Chris mentioned in his remarks we've been able to pull away from some of the shipping discounts we've done in the past so we've been able to maintain margins pretty well on that I mean and with with flowers and we're you know certainly blessed with our largest brands, Harry and David and Flowers, where we have a broad range of consumers. So many of them are in higher household demographic incomes, and that allows us to move customers up on value and pricing and take advantage of the bundles and create your own products that we have to increase prices to those consumers.
spk03: And I think when you look at this past quarter, I think it's a good example there where through pricing initiatives, strategic pricing initiatives, as well as just merchandising mix and featuring more bundles and higher price point items, we were able to lift ALV by 6%.
spk04: So our average order was about $90 up around 6%. Probably half of that was due to the strategic pricing initiatives that we put in place and about half of it is due to, you know, kind of mix and seeing the more affluent consumer, you know, buying up and, you know, some of our bundles and higher priced items being very attractive.
spk09: Got it. That's really helpful. Funny, isn't it? How we're going into a recession and consumers now willing to pay for shipping and returns, whereas those were the things they wanted most free when things were better. Alternatively, you guys talked about records for hairy and dated, and I think that that is really important. Obviously, it's been a great brand for you guys, and the vast majority of the upside and quarter team from GFGB. So, you know, Bill, does any incremental color on sort of hairy and dated outperformance relative to the rest of GFGB? And then, you know, you guys did this kind of exercise before, and, Bill, you touched on it a little bit in your prepared remarks, but it would be really helpful to kind of understand How much of the early action you guys took to avoid sort of the repeat of last year drove the margin upside versus how much was sort of your organic improvement from whether it's optimization or what have you versus kind of the lower input costs that are out of your control like shipping? If you could kind of parse that out for us, I think that would be super helpful.
spk04: Well, first off, what drove the quarter certainly was the performance of our food brands, relatively flat from a top-line perspective. Harry and David is the biggest brand, and Harry and David performed the best of all, certainly from a top-line perspective and kind of low single-digit growth year over year. We did make the investments in inventory to offset the supply chain challenges that we experienced last year. It certainly made for more operational efficiencies that we had because both having the inventory on hand and having access to labor, labor availability was there, allowed us to, you know, a much more efficient, you know, operation. So that helped, certainly helped, was a component of the 170 basis point improvement in gross margins that we saw on the food grants.
spk09: Okay, I'll follow up with you more on that offline. The last one for me, and I'll step away because I always ask you this, Chris, you know, just kind of looking out ahead, you know, understanding that there's consumer uncertainty. But the way that you've oriented everything, the pricing initiatives, it's good to get confidence on the margin side just from a revenue perspective. You know, if things were more stable, I mean, how would you kind of view potential for top-line progress? Do you want to parse it out between sort of consumer floral versus food? That would be helpful too. Thanks.
spk03: Sure, Dan. I think, you know, we have a lot of confidence as we look forward with our business. You know, as I mentioned in our remarks, With the platform that we've built, providing the operating leverage that we're showing, the benefits and the improvement we're seeing in OPEX spend, coupled with the gross margin improvement, really gives us some confidence as we go forward. And what we're doing is we're building off of the strength that we've built over the last couple of years. Bill mentioned in his comments that over the last two or three years, we've grown like 77 percent. We've doubled the size of our customer base. So we're leveraging that capability to product catalog that we continue to expand and certainly with our newest acquisition moving deeper into the personalization category. So as we look even in a challenging environment going forward, we see a customer, as we stated, we see softness still in the everyday business and that's where customers are, you know, still pulling back a bit. But we have Valentine's Day holiday, you know, next week, week, 10 days, whatever it might be at this point. And, you know, so we're seeing the consumers still come back for the holiday periods like that, and then we move into the spring holidays of graduations and Mother's Day, et cetera. So we think we're in a really good position to finish out the year where we anticipated we would.
spk09: All right, great. Thanks for all the color. I appreciate it, and congrats again. Thank you.
spk06: And our next question will come from Michael Kupinski with Noble Capital Markets.
spk05: Yeah, thanks. Thank you and congrats on your solid quarter. A couple of questions. Can you talk about the tone of the market for Valentine's Day? Is it more competitive than years past? Are your competitors being more rational, less promotional? Or has the economic conditions warranted being promotional at this time? Can you just kind of give me a tone of the market?
spk03: I'll turn this to Tom to see if he can give you a tone of the market. Keep in mind that You know, Valentine's is a last-minute holiday, and just as we saw customers revert back in during the Christmas holiday to pre-pandemic shopping trends and curves, we expect to see the same thing. So the holiday is still in front of us. But, Tom, what are we seeing in the marketplace?
spk07: Yeah, I mean, it is early. I think, you know, in some cases we are seeing – I'd say it's always a competitive environment, but it's the same players, so it's, you know, I think the same rules apply. And, you know, we've been playing this out for many years. I'd say, you know, just the uncertainty of the consumer, I'd say there's more focus on, you know, bottom of the funnel tactics. That's what we would have, you know, expected. et cetera. So, uh, you know, obviously our overall marketing strategies and taking that into account.
spk05: Gotcha. And can you talk a little bit about things remembered? I know it's a relatively small acquisition, but it seems reminiscent of Sherry's berries and, um, in that acquisition, which was very successful. Can you talk about the revenue opportunity you have there and what type of margins you anticipate going forward?
spk03: Well, we'll give you as much color as we can there, Michael. And you're right, it's a relatively small acquisition, but one that really demonstrates, you know, how we have the leverage of the platform that we've built and can bring acquisitions like that that maybe weren't working as a standalone business. We could put them on our platform, inject some growth into them, and manage them appropriately with the gross margin capabilities that we have, as well as our OpEx capabilities. So it's a good example of how we can do these tuck-in acquisitions as we move along. Tom, let me talk a little bit just about the market positioning of Things Remembered versus Personalization Mall.
spk07: Yes, certainly from a product price point, Things Remembered is at a different tier of pricing than Personalization Mall. And I think it is focused right now, we're looking at brand positioning very closely around so many of life's important occasions. whether it be weddings, anniversaries, religious milestones, graduations. So the whole product catalog, as we bring this to bear, will benefit our personalization space. It also fits really well in our overall enterprise assortment and our customers. So we feel good about that. And we have such a strong operations team at Personalization Mall to be able to take their – all the operations that existed and things remembered and bring that into their facilities and lever that up. I guess just some color. With the transaction, we're getting over 1 million active e-commerce customers, so we think that's going to be very leverageable. It's early days, but we're bullish that we're going to be able to grow this revenue nicely. As we're starting, we're creating a brand new e-commerce site, which will be leveraging, obviously, our platforms. So we're looking in the next couple of months to launch the brand again.
spk03: Yeah, and the key factor here, Michael, is, you know, as I mentioned, you know, similar to what we did with, as you pointed out, similar to what we did with Sherry's Berries, similar to what we did with, you know, staying in the food space with Vital Choice. This gives us the ability to kind of land and expand in the personalization category. So as we built and appended the personalization capabilities to our platform, now we're able to leverage that part of the platform and expand as well. And I think it's just consistent with our overall growth strategy. Continue to get, you know, organic growth where we can at affordable cost and complemented with good M&A opportunities as we see these tuck-in opportunities. when we see a larger opportunity like we did last with personalization mall we're in position to do that as well based on the strength of the business and the strength of the balance sheet that we have thanks for the color on the automation of their distribution facilities is that all behind the company now or is that fully reflected in this last quarter michael there will always be automation opportunities for us but the you know the big spend um you know is behind us you know as we've discussed
spk04: In the past, with our capital, two years ago, we were at about $55 million. Last year, we were at $65 million. And those were higher than our historical averages. This year, we're bringing it back down to about $45 million. In that $45 million, during the first half of this year, there was still the completion of our Atlanta, Georgia major phase of automation there. But there will always be projects that we have to continue to automate and improve our operations, whether it be in our distribution centers, whether it be in our service center, but just ways to improve our operations.
spk05: Gotcha. And then just regarding capital allocation, will we see share buybacks or is the focus still debt reduction or both? Or can you give us a flavor of what the capital allocation is there? Sure.
spk04: I think first and foremost, you know, we always look how we can bring, you know, the best of, you know, shareholder value. But, you know, as we've been discussing and we've had just the smaller acquisitions in the last couple of years, but, you know, strategic M&A is our first priority. We think the best way to bring shareholder value is to, you know, is to grow this, you know, is to grow this business. So M&A, you know, CapEx where we see investments in the business that we believe can either drive up, you know, operating performance or help judge drive performance, debt repayments, and then stock buybacks are always a component of our capital application.
spk05: Great. Thanks. That's all I have. Thank you.
spk06: Thank you, Michael. And our next question will come from Alex Furman with Craig Hallam. Please go ahead.
spk08: Great. Thanks very much for taking my question, and congratulations on a nice holiday season. Yeah, I wanted to ask about the trajectory of getting gross margin back to historical levels over the longer term. As you think about kind of what your gross margin will be in the future, how is that going to compare to historical levels in terms of the components within that, things like product margin, freight, labor? Do you anticipate it being a similar mix to what you had historically, or is there going to be kind of a different way to get to the same number when things start to normalize for you?
spk04: Alex, thanks for the question. First off, I do think we've hit an inflection point with respect to gross margins. We anticipated that we would see stabilization of our margins in the second quarter, and we achieved that. You know, we got the 90 basis points improvement overall, 170 basis points improvement from our food brands. You know, that was a combination of, you know, strategic pricing initiatives, you know, the reduction in inbound, you know, freight costs, which continues to trend favorably for us, the improvement in labor availability. And as I mentioned before, you know, to Dan, that just allowed for operating efficiency and certainly automation, you know, that we have. I think over the, you know, we expect the second half of this year, we're going to continue to show improvement in gross margins year over year. Certainly, that's going to continue into, you know, fiscal 24 and, you know, and beyond. As you point out, you know, I think over the long term, we expect to get back to our gross margins. If you look over, you know, the 10 years prior to last year, give or take 50 basis points, and we were in that 42% gross margin, you know, range, and we anticipate getting, you know, getting back to that. You know, that's going to be, you know, a combination of commodity costs coming back into their more normalized range. They're still very high. You know, inbound freight, we are already seeing, you know, significant, you know, drops in inbound freight. We haven't gotten the full benefit of that yet because, you know, we bought at higher levels. That still has to flush through, you know, the P&L, but we got some benefit, you know, on that. pricing initiatives. We have certain pricing initiatives that we've been able to put through, but as the economy improves, you know, and as the consumer comes back, you know, we'll be able to do some of that. Labor, you know, we're driving, we're spending capital to drive labor out of our, you know, labor hours out of our model, but labor rates are high and they're not coming back. So there will be a little bit of a mix shift because I think, you know, labor is high and and labor rates are just 50 percent higher than they were a few years ago. Commodity costs are high today. Those will come back down. Inbound freight will come back down. Outbound freight will not come back down. Outbound freight will still be high. So we have to drive other efficiencies through our operations to drive margins and as well as some pricing initiatives to offset some of the components that will not come back down to historical levels.
spk03: All right. So as you can see, we expect our gross margin, as Bill just said, we expect our gross margin to improve all the time back to historical levels. And then that coupled with our OpEx management puts us in a strong position going forward.
spk08: Great. That's really helpful. Thank you both.
spk06: And our next question will come from Linda Bolden-Weiser with DA Davidson. Please go ahead.
spk01: Yes. Hi. Thank you. Um, just on that point with the freight, um, can you just, I think you had said that freight costs were lower in the food business, but hotter in floral and gifts. So I guess that's the difference between inbound and outbound freight. Can you just clarify that? And also just with gasoline oil and gasoline prices being cost being lower. Why wouldn't that kind of make the outbound freight lower as well?
spk03: Let me see if you can break that down a little bit.
spk04: Inbound freight is down dramatically, and what we're paying on containers today is significantly below what we were paying a year ago. That hasn't fully flushed through. You know, the P&L, yeah, we certainly saw some benefit of that in Q2. We'll see more of that in a second here. And certainly as we head into fiscal 24, as we replenish inventory, it will be even lower. It just impacts the food side of the business more, inbound freight, because on floor, it's not as impacted as much by inbound freight as the food brands are. Outbound freight affects everybody. You know, it affects, you know, the food brands. it affects a personalization mall and it affects the 1-800 flowers. From a fuel perspective, we're still paying a higher, you know, fuel is off its high, but fuel surcharges in the second quarter were still higher than they were a year ago. You know, so again, off their highs of maybe March, April, but certainly still significantly higher than where they were in December of, you know, November and December of a year ago. So that was still a headwind as we went through the second quarter.
spk01: Okay, thank you. That's helpful. And then I'm just curious about, like, some of these competitors that have been out there, and I know they're all small, but some of these small up-and-coming, I guess mostly in the floral side, the venture capital bank type operations, Have you seen any of them kind of go away because of the softness and just everyday gifting? Like, what have you seen in that kind of competitive landscape out there?
spk03: Sure, Linda. I think, you know, over time, as you've seen with us in the floral industry over time, if we go back a number of years, there seems to always be a few new entries that come in and, you know, wind up fading away. And we've seen that with a couple of businesses recently. uh some of the startups out there now i i don't know their current status but i want you know any business that's out there right now that needs to raise cash i think is in trouble uh and if you're going to need to raise cash right now you're going to pay dearly for it so i think that could that could i'm not saying we have seen it yet but that could hamper some of the competition we see on the floral side or on the food side as well and even in the personalization space for that matter it's just kind of a cross-category for us. So we're not seeing, as Tom said, Valentine's Day continues to be a competitive scenario. It's the same players we've seen in the last year. Nobody's come or gone really new in the past year, so no real change on the competitive landscape. But I question that go-forward viability in this environment.
spk01: Okay. Thank you very much. I appreciate it.
spk03: Thank you, Linda.
spk06: And this will conclude our question and answer session. I'd like to turn the conference back over to Chris McCann for any closing remarks.
spk03: Cole, thank you, and thank you all for your time and participation this morning. As we stated, we had a very successful holiday season, and we're well positioned, as we've been saying, well positioned. We're a bigger, better, stronger company than we were pre-pandemic, and we're very bullish on the future outlook of the company. So I thank you for your time. And again, a reminder, it's not too early to order your Valentine's orders. And we all have many Valentines in our lives. So we're here to help you if you need it. Thank you.
spk06: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.
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