1-800-FLOWERS.COM, Inc.

Good day, and welcome to the 1-800-Flowers.com Inc. fiscal year 2025 second quarter 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 star, then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Andy Millivoy, Senior Vice President of Investor Relations. Please go ahead.

Good morning and welcome to our fiscal 2025 second quarter earnings call. Joining us today are Jim McCann, Chairman and CEO, Tom Hartnett, President, and James Langrock, CFO. Before we begin, 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 Jim.

Thanks, Andy, and good morning, everyone. This morning I'll begin with a brief overview of our second quarter performance, and then I'll turn it over to James and Tom, who will provide a context for the results and look ahead. Our second quarter revenue declined 5.7 percent, showing year-over-year improvement, but not at all at the pace that we had been anticipating. There were several factors that contributed to our performance. First, we experienced softer than anticipated consumer demand, and we saw businesses reduce their corporate gifting orders this holiday season. Second, we encountered challenges with the implementation of a new Harry and David order management system, or what we call OMS, that escalated during the peak of the holiday season, impacting revenue and earnings for Harry and David and for other brands. This morning, James and Tom will share more details behind some of these factors, and how we are responding to them. Additionally, we'll discuss our view of the ever-changing post-COVID world of consumer behavior and how we engage with our customers. And now I'll turn the call over to James.

Thanks, Jim, and good morning, everyone. This morning, I will walk you through our second quarter performance and discuss the items that contributed to our performance in further detail. Our consolidated second quarter revenue declined 5.7%, with several factors contributing to this performance. First, we experienced lower consumer demand in a highly competitive and promotional environment, combined with changes in the online marketing environment that had negative impact on our marketing efficiency. As a result, our increased marketing spend did not generate the results we anticipated. In particular, our free and lower-cost marketing channels declined or cost more than anticipated. Second, our corporate business partners became more cautious with their spending, leading to decreases in AOVs, items per order, and total number of orders placed. In total, our AOV declined 1.2% for the quarter. And third, we experienced challenges with the new Harry and David OMS implementation, which escalated during the surge of holiday orders. Our e-commerce business declined 8.3% for the quarter. We estimate the RMS-related issues reduce Q2 e-commerce revenue by approximately $20 million. These trends were slightly offset by an increase in our wholesale gift baskets business. Adjusting for the $20 million impact of lost revenue, Q2 e-commerce revenue would have declined 5.6 percent, and total revenue would have declined 3.2 percent. Before I move on to gross margin, I did want to take a moment to discuss the RMS implementation that affected our performance. As the business began to scale significantly in December, the new Harry and David order management system that we recently implemented presented challenges with certain customer orders that were more complex during the peak of the holiday season. These orders created bottlenecks in the system that hindered our ability to process orders in a timely manner and in other cases, caused order cancellations. We were able to resolve many of these problems manually, but it caused certain order cancellations and additional expenses to correct orders and to make it right for our customers. Although the implementation issues we faced were challenging, it's important to recognize that we successfully delivered over 7 million orders this holiday season on an enterprise level. While the RMS implementation primarily impacted our Harry and David business, we estimate it also had some spillover effect to our other brands, given our centralized customer care function. As Tom will discuss further in just a moment, we are in the process of resolving the new system issues. Now, turn it to gross margin. Our second quarter gross margin was 43.3%, flat with the prior year. The second quarter was highly promotional, as consumers continued to look for and respond to promotional offers. Our gross margin was also affected by the incremental costs associated with the RMS implementation challenges, including expediting shipping fees that we estimate impacted gross profit by approximately 20 basis points. Excluding the RMS-related costs, gross margin would have been 43.5 percent. Adjusted operating expenses declined by $2.9 million to $239 million, as compared with the prior year period, continuing to benefit from our WorkSmarter initiatives. We believe that we're only beginning to tap into the potential to enhance our planned operational efficiencies, and there is much more we can achieve. Through meticulous cost management and strategic investments in technology, we aim to streamline processes and reduce expenses without compromising the quality of our offerings while improving the customer experience. In addition to the impact on revenue, we estimate that the incremental costs associated with the RMS challenges included expedited shipping fees and higher customer care costs impact the Q2 EBITDA by approximately $4.8 million. We also incurred expenses of approximately $1.5 million consisting primarily of redundancy costs as we migrated to our new customer care platform. Altogether, this impacted Q2 results by approximately $6.3 million. Taking this into account, Q2 adjusted EBITDA was $116.3 million as compared with $130.1 million in the prior year period. Just to be clear, our adjusted EBITDA does not reflect the approximately $20 million of estimated lost revenue during the quarter, which equates to lost EBITDA of approximately $8 million. Over the past few years, we have discussed our gross margin returning to its historical average, and we are pleased that, post-pandemic, it has recovered much of the way to our long-term average in the low 40 percent range. Going forward, as you will hear from Tom, we are elevating our focus on all aspects of our sales and marketing spend. We believe there is opportunity for further efficiency gains as we adapt to changing technology and changing consumer preferences for engagement with e-commerce platforms. And now let's turn to our balance sheet. Net cash was $87 million compared with $117 million at the end of last year's second quarter. Our cash balance was $247 million at the end of the second quarter. Inventory declined to $157 million compared with inventory of $161 million at the end of last year's second quarter. In terms of our debt, we had $160 million in term debt and no borrowings under our revolving credit facility as compared with $195 million a year ago. At the end of the quarter, we made a $25 million prepayment through our term loan and amended our credit agreement. Guarding guidance for fiscal 2025. As a result of our Q2 performance, we are updating our fiscal 2025 outlook. We now expect full fiscal year revenue to decline in the mid-single digits. Adjusted EBITDA is expected to be in the range of $65 million to $75 million, and free cash flow is expected to be in the range of $25 million to $35 million. We are disappointed that our Q2 performance did not meet our expectations. Some of the challenges were self-inflicted, and as we resolve these challenges, we remain optimistic about our future performance and the initiatives that we are executing on. We are confident that the strategies and the foundational steps we have implemented will significantly improve our trends and create substantial shareholder value. And now I will turn it over to Tom.

Thanks, James, and good morning, everyone. As James outlined, the second quarter presented us with several unexpected challenges. Changes in online marketing trends impacted our performance, and businesses reduced their corporate gifting orders this holiday season, both in terms of AOV and total orders placed. Furthermore, our results were pressured by challenges that escalated with our new Harry and David OMS implementation. As with any new system implementation, it's difficult to anticipate every issue that might arise. We felt the system was prepared for the holiday rush. The OMS implementation presented mounting challenges during the peak of the holiday season. The order issues were directly related to Harry and David orders, and in particular, more complex orders that needed to be manually corrected, such as certain product bundles, wine gifts, and club orders. It is important to highlight that many of the system challenges were exacerbated due to the significant surge in demand that we experienced during the holiday season. We have resolved many of the issues and prioritized the remaining ones, which we expect to correct in short order. These challenges further reinforce our conviction that in addition to our Work Smarter and Relationship Innovation initiatives, which have improved our company, we need to fundamentally review all aspects of our marketing and sales strategy. We must accelerate our evolution to ensure our platform is both highly effective and efficient in supporting our customers' gift-giving needs. We will accelerate our work smarter initiatives to cut costs and, in turn, increase investment in our growth-oriented relationship innovation initiatives and marketing strategies. As we focus on expanding our customer base, we see significant opportunities to leverage new technology to enhance engagement and build deeper relationships with our customers. These initiatives are designed to inspire our customers to help them connect with the important people in their lives. They are also designed to give them more and better ways to interact with us. Our relationship innovation initiatives are in the process of transforming our organization into a comprehensive celebratory ecosystem. We are continuing our evolution from a transactional company into one that is experiential and personalized, focusing on enhancing customer engagement and satisfaction. This shift reflects a growing expectation for seamless, enjoyable shopping experiences that integrate advanced technologies to deliver tailored content and recommendations based on individual consumer behavior. We are confident that our efforts will enhance our customer experience and yield better results. Now I'll turn the call back to Jim for his closing comments before we open it up for Q&A.

Thanks, Tom. As we reflect on the past 18 months, our company has made progress in our relationship innovation initiatives. that are focused on strengthening our relationships, enhancing our platform, and offering a wider range of gift-giving options. But we also recognize the need to move faster and be more aggressive in certain areas, including our marketing and sales strategy. We must respond quicker and provide better value for our customers that have curtailed their spending the most in the current macro environment. We must become more effective with our advertising spend and invest more in marketing until we can rely less on external channels and more on our existing customer base. AI can significantly help us here. It will provide us with opportunity to accelerate our personalization efforts and present customers with content that is specific and appropriate for the sentiments that they are expressing. Our robust customer data set will enable us to deliver highly personalized marketing experiences ensuring that we are not only attracting new customers, but also nurturing the existing relationships. Leveraging these innovative tools presents an unparalleled opportunity to better serve our customers and forge even deeper, more meaningful relationships with them. The future holds incredible promise for us, and I'm thrilled about the possibilities that lie immediately ahead. Now, we look forward to keeping you appraised on our progress, and now I'll ask the operator to restate the Q&A instructions. Operator?

We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. The first question today comes from Anthony Levodinsky with Sidoti and Company. Please go ahead.

Good morning, everyone. Thank you for taking the question. So first, I guess, you know, sort of a bigger picture type of question here. So, you know, obviously, after the pandemic, we've seen changing patterns in consumer engagement. Do you feel like these shifts in consumer engagement actually accelerated during the quarter, or is it just kind of more of the same that you saw here in the December quarter?

Anthony, thanks for your question. I think what we saw, you know, we have to read through the smoke here, the smoke being the difficulties we had with the implementation of the OMS. But yes, I think we're seeing an end of what we call here the COVID bullwhip, where we had that great acceleration in demand when people were homebound, and that's eased up considerably. So we think that this fiscal year is the end of that for us. We're seeing signs of the consumer responding better. We've introduced some lower price points and some higher, so a broadening of our price ranges. And we've seen good take on the lower end, but we need to be do even more of that. So we have some of those products in the pipeline. So Tom, I would say that we're seeing good response from the customer. You pointed out in your remarks, Tom, that we saw a degradation in our business demand, but the consumer demand was actually making up for some of that until we hit the wall with the OMS system.

Good morning, Anthony. It's Tom. I think we're seeing similar bifurcation on the customer. We are seeing that lower demographic, that lower household income customer, which is continuing to, you know, obviously watch their budget and their pocketbooks. And we have seen some good results with some of the product introductions and the prices that we've brought forth. But as Jim mentioned, we need to do more.

Mm-hmm. Gotcha. Okay. And then... As far as the issues with the order management system, when was this initially put in place? And as far as getting this system to work as it should be, what's the timeframe as to when you would expect to be 100% fully functional as the system was designed to be?

Hi, Anthony. This is James. So, we implemented the system at the end of August into September. We did all of the, you know, necessary user acceptance testing. We did regression analysis, simulation testing to simulate the peak of the busy season. So, like with any system implementation, you know, there's going to be some issues along the way. But what happened as we you know, got into the peak of the busy season after Thanksgiving, the surge of that, and with some of the complex orders in the system that were getting put on hold, and it was creating a real backlog. So, a lot of orders were being put on hold and, you know, or canceled because of that. We had manual workarounds on that. So, really, it kind of showed itself in the peak in December, the issue, We're working through that now.

It really did, the last two weeks, a real impact because, you know, we're doing huge order volumes every day, and anything that had to be done in a manual workaround was just backlogging for us. And because we have a platform customer service system, as Tom mentioned in his remarks, there was contagion from that problem. That is, we were sucking up all of our resources across the enterprise to try and deal with the OMS issues, and that was causing staff shortages or lack of availability across the brands. So it was that last couple of weeks that the small problems that they could work around through those test periods just became overwhelming. So, Tom, where are we on the path to full recovery, as Anthony asked?

Yeah, so many of those challenges were addressed within the quarter. We still have... Some open items, we expect that the majority of those will be resolved in this quarter, or Q3 quarter.

And all 100% to get to the 100% level within these next two quarters. However, I would point out, Anthony, that at these volume levels on the food group particular, it doesn't cause us any systemic issues now because they're all manageable because of the volumes. On the flour side, we didn't change the order management system. And flowers becomes a more dominant part of our business during this quarter and next with Valentine's Day, Easter, Mother's Day, Father's Day. So that order management system wasn't touched. We implemented that a couple of years ago. So that's in and debugged. So while we're doing the fixes on the OMS system for Harry and David and the food group, it doesn't cause the customer any difficulty because we have the bandwidth to deal with those as we fix the last of the issues.

So for the customers that cancel their orders because of these issues, do you plan to do a specific marketing outreach to them to make sure you don't lose those customers permanently? I'm just wondering how you're thinking about that from a marketing perspective.

Dante, absolutely. I mean, we've reached out already to those customers. We plan and we have a win-back program going on. We're extremely focused. That'll go on throughout the year. Yeah, there'll be multiple touch points with those customers throughout the year. You know, it is extremely important to us. In some cases, we did lose the the trust of some of those customers that we fail, we take that very seriously and we're working to regain their trust.

Got it. Okay. Well, thank you very much. I'll pass it on to others and the best of luck going forward.

Okay. Thank you.

The next question comes from Alex Furman with Craig Hallam. Please go ahead.

Hey guys, thanks very much for taking my question. You know, looking out over the next couple of weeks, it looks like a little bit of a better placement. for Valentine's Day relative to the Super Bowl this year. Can you talk about how you're going to go after Valentine's Day this year? I know it's been challenging, you know, the last couple of years since the Super Bowl moved a week later. Are there maybe opportunities to engage with customers before the Super Bowl or maybe, you know, really, really be hyper engaged during that couple days between the Super Bowl and Valentine's Day? Just curious what you've learned and how that's going to impact your strategy this year.

Alex, thanks for your question. And in answer to the day placement question, we're pleased that Valentine's Day moves to a Friday this year. It's the best day placement from a sales point of view for us. And yes, thank you for using your influence to move the Super Bowl date. That's very helpful, too, because last year was two days before Valentine's Day. So that was a crusher for us in terms of attention and distraction. So yes, having five big selling days post-Super Bowl is critical for us for the holiday. So we have a marketing scheme in place to reach out to customers well before, giving them a lot of incentives to place their orders early in the cycle. So we have a two-week selling period, and right in the middle of that is Super Bowl. So, again, that's so much better than last year where Super Bowl was just before Valentine's Day. So good day placement there. I also point out that Easter is a better placement than last year. Easter was at the very beginning of the fourth quarter last year. So a couple of selling days in the third quarter. And when it's early, it retards the appeal and the sales of Easter because it comes up so early on people. So having it later in April, in the 20th of April, I think it is, is a great selling time for us. So not the biggest of holidays, but an important holiday. and one with good margins and a good distribution of customer demand so it's easy for our florists to really delight our customers then. And so those two-day placements help us a lot. Anything more you'd add, Tom, on the marketing plan?

No, just obviously we've been at this Valentine's thing for a long time, and there are different personalities that can be engaged and attracted to Earlier in the season, and those who are more planful, sometimes those who are more price conscious, et cetera, earlier end can engage those customers pre-Super Bowl in this case. And then there's an awful lot of those procrastinators out there that, you know, we will enjoy the extra days of selling this year compared to last year.

And this year in the fourth quarter, that five less selling days between Thanksgiving and Christmas seem to have an impact on us too. So day placement, particularly for those three big holidays, really makes a difference for us. And we're happy to see in the second half of the year we have two good placements around Valentine's Day and Easter.

Okay, that's really helpful. Thanks. And then, you know, if I could just ask quickly on corporate benefits. gifting um you know sounds like the decline there was was a little bit self-inflicted a little bit demand um can you just help to kind of you know give us a little bit more historical context how big is your corporate gifting business today compared to what it was before the pandemic and and what's what's your kind of outlook there for the next couple years so just uh

This year was around $70 million compared to last year of $84 million. So it was down almost $15 million or 17.5% on a year-over-year basis. And it was higher, obviously, you know, coming out of the pandemic. So it was, you know, it was obviously much bigger than the decline in e-commerce was the corporate sales. We did see, you know, our corporate customers, you know, reduce their, you You know, so the AOV was down, and they reduced the item per order, and, you know, and also less orders. So we were obviously looking at that very closely. Some of it was impacted by the OMS. We're trying to kind of, you know, get to the bottom of that, but we definitely did see weakness in the, you know, our corporate consumer more than our, you know, consumer on the corporate side was obviously, you know, much more, you know, significant as a percentage decline.

Just to add, Alex, we are bullish about the corporate business.

We have some hot spots in the corporate business on lower price point items across the enterprise. I think we have to retool some of our offerings. And how we go to market, how we staff our teams on the marketing there and stay engaged more year-round because we have the breadth of product offerings now that can serve year-round.

Okay, guys, that's really helpful. Thank you very much.

Thank you, Alex.

The next question comes from Michael Kapinski with Noble Capital. Please go ahead.

Thank you. Thanks for taking my questions, and good morning. In terms of the marketing strategy you talked about, I was just wondering, and some of the issues that you had with marketing, I was wondering if it was more the content and message or related to maybe some of the channels you were using, and just getting a lower return. I was just wondering, as you kind of look forward in terms of the marketing strategy, what types of changes are you anticipating at this point?

Good morning, Michael, Tom. I think there were some specific changes in some of our bottom of the funnel channels where the search engine results page changes some of the ranking. That really hit us in kind of natural search and branded search where those were are very low cost channels for us, and those decline more than expected. As we go forward, we continue to push more in the middle and upper funnel channels, et cetera. And we think we continue to obviously refine our content and refine our content to be more relevant to individual segments of our customers. So we think we continue to make strong strides there, and we're hopeful, you know, you hear the AI term used a lot, but we're hopeful that, you know, we'll see increased efficiency with our ability to create content at that larger scale.

Michael, what we've seen with the technology deployments that we're, and by the way, we don't fail to notice the irony of we had a technology fail in terms of an implementation, not the technology itself, but the anticipation of how the demand would impact it, yet we're full speed ahead on other technology investments. And that manifests itself in two different ways. One is on the cost side. We're able to operate more efficiently by digitizing so many more of the things that we do. And it impacts us, and we certainly anticipate that it will impact us on the marketing side, too, as we employ more tools and capabilities there. So we expect it will do two things, especially beginning these next two quarters in front of us and then throughout the rest of this calendar year. We see this calendar year as a big, big year for us in terms of changing things we do on the cost side and changing how we do things that will generate more revenue on the top line side. And these new digital tools are really intended to impact us both ways on the growth side and on the cost side.

And just to follow up on that, you know, the margin outlook is actually a little bit better than what I was looking for, especially with the lowered revenue expectations for the year. Can you talk about where you anticipate to see improved adjusted margins? Will it be, you know, a combination or, you know, maybe if you can give me the weighting of reduced commodity costs, transportation costs, or just from your WorkSmarter initiatives? I'm just wondering if you can kind of give us some additional color on that.

This is Jim. I'll ask... James, to give you some color on that, we're not anticipating any savings on the commodity costs. You always have – they've moderated, they've come back close to the mean now, but you get little bubble-up things that impact us. So we're comfortable with cocoa prices, for example, on the commodity side through the rest of this calendar year, which gets us through the Christmas season. But then you have bird flu and – Egg costs go through the roof, and availability is always a question. So those are things we expect to be able to manage day to day. So no real savings there. The savings will be in terms of the Work Smarter initiatives, how we do things, the amount of people we deploy to do them, the automation that we've been constantly installing now in our distribution centers. But those are in place and have shown good, good results. What would you add, James, in terms of?

And, Michael, what I would add is that, you know, we're obviously – we continually look at all the aspects of the business. You know, we're aiming to, you know, streamline processes and reduce costs. But I also want to caution that we, you know, we will – some of that savings from an EBITDA margin standpoint – We plan on investing back in the business and our sales and marketing strategy. So we are taking costs out, but we do have to reinvest some of that savings into marketing and sales.

But having reverted closer to the mean now on gross margin and seeing that actually we would have had a better gross margin except for the OMS issue, that gave us the confidence there.

Gotcha. And typically you guys in periods like this, which has been challenged for some e-commerce type companies and things like that, you kind of stepped on the M&A activity and was just wondering if you can just kind of gauge what the M&A level might be at this point.

Well, I think those of so many of us who are in the consumer facing e-commerce almost exclusive, but not 100% exclusive e-commerce have all felt similar drains. So that creates a strain for us, yes, but because of the good balance sheet we have and the leverageable assets we have, I would tell you that the tenor of people interested in linking up has increased. Whether or not we actually do anything there is to be determined, but I think the opportunities will be quite a bit better than they've been in the last couple of years. So if we find the right opportunity and we think it's accretive to what we do, helps our customer in a better way, I think you'll see us have the potential to be more active in the quarters ahead.

Gotcha. That's all I have. Thank you.

The next question comes from Linda Boltenweiser with DA Davidson. Please go ahead.

Yes, hi. So just a clarification, if you would, on the Valentine's Day placement. Maybe I'm confused, but I always thought that when Valentine's Day is in the middle of the week, it's better because then the guys will be placing orders they have delivered to, you know, women's offices, et cetera. And I thought if it was Friday or Saturday, it's bad because they won't send the flowers. They'll just buy them and take the woman out to dinner or something. So I thought I thought Wednesday was much better than Friday, and Wednesday was last year and Friday is this year. So can you just clarify? Maybe I'm just confused on that. Thank you.

Sure, Linda. No problem on the confusion. Having been doing this now, this is my 48th Valentine's Day. Actually, it should be my 49th Valentine's Day. The trends are unexcapable for us. Wednesday is better than Tuesday. Thursday is the best day all around from my point of view, not from the sales point of view, but from an overall point of view because it gives you the last minute Charlie's will be very accepting. They come online midday on Thursday and see that it's not available. They'll accept a Friday delivery. So it extends your selling ability with the delivery window on Friday. But from a pure sales point of view, not from a delivery point of view, pure sales point of view, Friday is the best day because we like our customer to be at work and busy. And when it's on a weekend, they have other options. They're out shopping. They'll take them out to dinner. They'll pop into a store and pick something up. But when they're working, either at home or in the office, it narrows their field of options and it's a better sales placement for us. So Friday's much better than Wednesday. I would have preferred not to have leap year, take the Thursday out, because next year it does move to a weekend, but this year it's on our best day.

Okay, thanks for that explanation. And then just to be clear, because I'm not – you kind of talked about still some fix-it actions coming in the next few quarters. For Valentine's Day, on the food side – Will the issues be all fixed or not? I mean, I know the flour side is much bigger, but will the issues be completely fixed on the food side for Valentine's Day or not really?

On the food side, we are expecting the majority of those to be fixed. But as Jim had mentioned, if there are still remaining challenges, they will be customer-facing issues. We have the resources internally to make sure anything – that does get, you know, bogged down in the system, if you will, we can address it through manual intervention, and, you know, it will not have any impact on demand.

And, Linda, just, you know, obviously we're extremely disappointed with the challenges from the OMS system, but I just want to remind everyone that we shipped over You delivered over 7 million orders in Q4, so while we did have some issues, we still got the lion's share of all the orders were delivered to our customers in Q2.

Right.

Okay, and then... We wouldn't have that same kind of demand in the food group, so if there are any things that are unresolved, they're unresolved but manageable with our existing processes. So to get to 100% with the new systems working the way we want, that's by the end of the fourth fiscal quarter of the spring quarter. But it won't be – anything that's not resolved will not be noticeable to customers, and that's because while demand is good, it's not nearly as high as those last couple of weeks of December in the food group.

Okay, understood. Thank you. And then finally, I was just curious about – You talked about your efficiency of your marketing cost spend, but I was wondering in general about rates for digital spending, digital marketing costs, rates. They were expected to go lower post-election. Is that what you found general in the more macro marketing environment, that there was a pullback in rates after the election?

I'd say certainly compared to before the election compared to after, rates were more reasonable. I mean, overall, if we compare it to kind of the prior year, we did see increased costs in the lower portion of the funnel. We saw a lower portion. But that was efficiency, right? Yeah, that was more about efficiency. And then on the mid and top, it was kind of a mixed bag, I'd say. I mean, we saw definitely some great – Opportunities with some partners and some tactics we had, and others were a little higher. So I'd say it was mixed across the board. But certainly, as we came out of the election, the costs were down.

Okay. And then just one last one. Just if you could review your tariff exposure. You've probably got some on the PMO side and also some of your baskets and stuff. Could you review what the plan is there?

Well, it's an ever-changing landscape, Linda. This is Jim. We had a little jolt to our cardiac systems earlier in the week when Columbia was threatened with tariffs. Columbia is an important market for us on the floral side of things. They grow a lot of product that we use here in the U.S. So we were very happy a couple of days later to see that resolved, but we'll never get that sleep back. But tariffs are something we watch. James, how do you... Give some context again to Linda about how our sourcing materials, where they come from, and how they'd be exposed to time.

So, Linda, just a little way of context. You know, if you look at our cost of goods sold, you know, approximately a billion dollars, you know, on an annual basis, our cost of goods sold. Within that, roughly 40% of that is comprised of the cost of merchandise. And within that, it's about 10% of that would be China. So we're talking about there's, you know, 40, $45 million of purchases from China. So clearly, you know, the tariff will have an impact, but it's off, you know, it's off of a base, you know, of a billion dollars of cost of goods sold. So, you know, we're looking at it.

We're up. Cost of goods sold a billion dollars, 40, $45 million of exposure to Asia. And so that's what we'd be watching with tariffs. So we don't want to see any increase in costs. but any increasing costs would be off that $40, $45 million.

Correct, but for China specifically, yes.

Okay, thank you. Very helpful.

Okay, thank you. Thanks, Linda.

As a reminder, if you would like to ask a question, please press star and one to join the question queue. The next question comes from Doug Lane with Water Tower Research. Please go ahead.

Good morning, everybody. Just to follow up on Linda's question, what would you have done if tariffs had been enacted in Colombia?

We would have postponed this call to see what the impact would be. That would have been painful because we rely on Colombia and other adjoining markets for a good supply of our product here. So the good news is we don't have to dust off that plan. It seems to have been completely resolved, but it would have been damaging. I don't have a hard answer for you, Doug. We're just glad we don't have to answer that.

In the short term, it would be challenging in weeks, especially leading into Valentine's. our buys, our florist buys that have been, you know, largely in place for a period of time.

Male Speaker 1 Yeah. I assume the tariff, Tom, would have been on top of our, you know, our contracted prices, right? Male Speaker 1 I would assume, yeah, all to be negotiated.

But midterm, we would be able to, not completely, but move product around to different markets throughout the world, et cetera, to mitigate it somewhat.

And we've been conscious of that for a while, so we had a whole program to encourage domestic growing of product in partnership with our grower community and some of it independent with our domestic growers. That program has not produced the results we wanted because, frankly, some of our providers who we spent a long time cultivating decided that cannabis was a more profitable crop. Well, that didn't turn out to be the case, and a few of them have returned to flower production. but not all of them yet. So it's something we're always conscious of, Doug, and we've had 10-year plans in place to increase the breadth of sources for our flower product, a lot of it in partnership with our grower community because they have the same issues and concerns. So it's something we work on all the time.

Is Columbia that important, or could you shift supplies to other countries in case it's just an isolated incident?

No, it's that important to us. When I say us, it's the whole country, the whole industry is dependent on Columbia probably for 50% to 60% of all the fresh flower product grown and sold in this country.

Wow, so everybody would be in the same boat. That's helpful.

It's not helpful to be in the boat. We don't want to be in that boat.

No, that's right. It's not good for anybody. I get that. Just to shift gears on the wholesale business, because you hit it on the first quarter call that wholesale was going to be good this year, and frankly, it was a lot better than I thought it was going to be. So it's a bit of a reversal from recent trends where e-commerce has been outperforming wholesale, and now you have e-commerce down – in the mid to high single digits, depending upon your adjustments, and the wholesale was up strongly in the teens. So that's a big shift. I just wondered if you could talk a little bit more about that shift and whether you think that's something that's going to continue, or will e-commerce revert back down before in wholesale?

Doug, what we think on that is it's counterindicative. In other words, wholesale is up because retail in-store traffic was better. So that's where that product is sold. So that shows you that the customer felt comfortable going out and about and shopping in the retail store, which took away from the shopping on e-commerce. So that's going to be a counterbalance to the e-commerce hit. However, going forward, we expect wholesale to stay stronger because we've cultivated new relationships in the wholesale channels this year. So we'll have a broader base of customers in the years ahead, So we expect that it won't be counterintuitive of the e-commerce pressure we saw. We expect both to go up next year. We're anticipating and I hope we haven't built the plan yet. But on the wholesale side, we have a broader wholesale customer base. So we'd expect that will continue to look good because of the breadth of customers and the products, frankly, that we've introduced there that was so successful in the retail stores this year.

And which particular channels are you talking about?

That's where we manufacture gift products and sell into our retail partners as a wholesale product. So into the big box stores that we sell to all the time.

So it's like the mass merchants or the club stores in particular, or I take it as the large chains and not the mom and pops.

That's right.

Okay. Thank you.

Thank you. Well, thank you all for your time and attention today, for your interest. It's a tough quarter for us. I will tell you that as I look at the big influences that we've experienced during this period, we think three things have happened here. One is that the COVID bullwhip that so many of us in e-commerce have experienced is playing its hand out, so it's coming to a close. So we're hopeful that we won't have that to deal with. We are concerned that the The bigger macro environment is still impacting the paycheck to paycheck customers who for a couple of years there as a result of recovery programs had a great deal of discretionary spending capability. We're still concerned about them. That's why Tom spoke about the work we're doing to broaden our product lines and prices both more attractive and higher end for our higher end customers who seem to be weathering the storm quite well. And frankly, we're disappointed in our own execution this quarter and the first two quarters of the fiscal year for us. The OMS issue should never have happened. We're embarrassed by it. We're very disappointed by it. And as Tom and James both mentioned, we're doing everything we can to make sure it never happens again, that these issues are fixed, and that we do everything we can to do the right thing for the customers that were impacted by this. Yes, we have 7 million very happy customers. But even a few thousand customers that were hurt, negatively impacted by this, bothers the heck out of us and we'll do everything we can to make it right. So thanks for your interest, your attention. We look forward to further discussions with you when you reach out. Thanks so much.

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