Good day, and welcome to the 1-800-FLOWERS.COM Inc. 2023 First Quarter Results Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Andy Milevoj, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us on 1-800-FLOWERS.COM's fiscal 2023 First Quarter Earnings Call. For those of you who have not received a copy of our press release issued this morning, the release can be accessed at the Investors section of our corporate website at www.1800flowersinc.com. We will begin today's call with brief formal remarks, and then we will open the call to your questions. Joining us today are Chris McCann, CEO; Tom Hartnett, President; and Bill Shea, CFO. Before we begin, I need to remind everyone that some of the statements we will make on today's call may be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed description of these risks and uncertainties, please refer to our press release issued this morning as well as our SEC filings, including the company's Form 10-K and Form 10-Q reports. In addition, 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. And now I'll turn the call over to Chris McCann.

Thank you, everyone, and good morning. And before I begin my formal remarks on the quarter, I wanted to take this opportunity to congratulate Joe Pititto on his upcoming retirement this December and to thank him for his more than two decades of tireless commitment to our company during a period of our company's tremendous growth and transformation. Joe has been a tremendous asset to our company and his drive and passion for telling our growth story have been invaluable to us. We wish Joe, all the best upon his retirement and good luck Joseph. I also wanted to take this opportunity to introduce Andy Milevoj, who joined our company as SVP of Investor Relations in September. So thank you again, Joe, and welcome, Andy. And now let's review our results. As we noted in this morning's press release, our first quarter results were slightly better than our expectations. Overall, consumer behavior continues to reflect a significant inflationary pressures in the macro economy that are affecting both discretionary and nondiscretionary spending. This reflects a continuation of the trends that we saw beginning last December. Our first quarter revenues declined 1.9% as we saw consumers purchasing fewer everyday gifts. We experienced softness in our Consumer Floral and Gifts business, which was somewhat offset by the growth of our Gourmet Foods and Gift Baskets business. By adding value and choice to our higher price point gift baskets, we encourage customers to trade up in assortments and we strategically managed pricing. This resulted in an increase in average order value in our Gourmet Foods and Gift Baskets business. We were also encouraged by the year-over-year rebound in our wholesale business. By getting ahead of the supply chain challenges from last year, our team was able to build and deliver gift assortments to our…

Thank you, Chris. As Chris noted, our first quarter performance was slightly better than our expectations. Revenues declined 1.9% as consumers continue to adapt to this inflationary environment. When comparing our first quarter results to the year ago period, it is important to remember that we faced a difficult margin comparison as the year ago results had not yet been affected by the global supply chain challenges and the surge in shipping, commodity costs, labor and fuel, which began to escalate and impact our fiscal second quarter last year. As we head into our fiscal second quarter, we expect our margins will begin to stabilize and then improve during the second half of the fiscal year. This expectation reflects the lower year-over-year ocean freight costs we are already seeing, commodity costs coming off their highs, a more stable labor market as well as the initiatives that we have implemented that Chris highlighted. These initiatives include the increased automation of our warehouses to offset higher labor rates and our logistics optimization initiatives that have enabled us to partially offset higher shipping rates while maintaining delivery speed to customers. As we have described in the past, in response to the unprecedented supply chain disruptions a year ago and to ensure that we had the appropriate inventory on hand for the current fiscal year, we made the strategic decision to invest in working capital and increase our inventories of nonperishable items. As the global supply chain has improved and as we sell through that inventory this year, we expect to bring inventories down and 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. Longer term, benefiting from these strategic initiatives, we believe that we are…

Thank you, Bill. To recap our performance for this quarter, our results were slightly better than our expectations. However, consumers continue to be challenged by inflationary pressures. We believe that the macro environment will remain challenged through the remainder of the fiscal year and are proactively addressing these trends with strategic pricing and compelling high-value bundle assortments that appeal to a wide variety of customers. Our core customer remains loyal, and we continue to deepen our relationship with them through our innovative marketing and engagement efforts. We believe as we enter this holiday season, we are well positioned to engage with our customers and drive sales with our cross category and cross branded merchandise programs. As we look forward, we know that the macro economy remains uncertain, but we have been diligently focused on reducing costs throughout our business. We have reduced our labor requirements by improving efficiency in our facilities, partially mitigating shipping costs by optimizing logistics and strategically building inventory to avoid supply chain issues, particularly for this holiday season. As a result, we are confident that over time, we will see our cost decline further, particularly shipping in commodities, and we expect to see our margins normalize back to historical levels over time. We are proud of what we have built, which is a strong, unique e-commerce business platform supported by a very experienced team. Over the past 10 years, we've tripled our business through organic growth and strategic acquisitions. Today, we have emerged out of the pandemic a bigger, better and stronger company, providing an all-star family of brands and advanced technology stack, strong manufacturing, distribution and logistics capabilities, extensive digital marketing experience and then expanded customer file and loyalty program. We believe our future is bright and that we will grow our business and improve our profitability and build solid shareholder value over the long term. And now I'd like to open the call for questions.

And our first question will come from Michael Kupinski with NOBLE Capital Markets.

We can't hear Michael.

First of all, I wanted to say, Joe, congratulations on your retirement. I've greatly enjoyed working with you over the years. You're going to be greatly missed. So please keep in touch. I've got a couple of questions here. Can you give me the number in terms of what was the contribution from Vital Choice in the quarter? And if you could just give me the same store revenue for the Gourmet Food and Gift.

Sure, Michael. I'll ask Bill to provide that. So it's something Vital small, but what...

Yes. Basically Vital Choice, we really don't break down individual brands. But because Vital Choice, it's the first year, we kind of gave the -- with our guidance, both the revenue kind of with and without computing anyway, but basically around $5 million or so in the quarter. Again, it's a small acquisition. It did about $25 million or so annually prior on the last year prior to the -- our acquisition.

Got you. And I understand that there are floral suppliers that have decided not to plant given the price of energy prices. I was wondering if you've noticed any issues with your suppliers for flowers or any disruptions given issues with energy prices, that sort of thing. If you can just talk a little bit about that?

Tom, do you want to take that?

Tom Hartnett. We have not seen any disruption with our suppliers. We've had supply relationships with for decades and very stable, and we haven't seen any challenges at all with floral supply.

Yes. Michael, I would add, even last year when there was a little bit of challenge, we were fine because of the relationships that Tom referenced and all. But even overall, we have -- we're not aware of any issues in the floral supply chain side of things.

Got you. I appreciate that. And then can you talk a little bit about -- you mentioned $75 million of free cash flow. Can you talk a little bit about capital allocation at this point, what your thoughts are?

I guess as we look at capital allocation and business, we really haven't changed much. I mean it's -- first and foremost, we look to invest in our business to use the capital level, we're raising to invest in the business. We've done that all the time. And I think we've done it very well through strategic acquisitions and how we integrate those to allocate the capital appropriate for integration as well as the cost of the acquisition itself. And you see us doing things like we've done in the last year or 2, and adding automation into the facilities where we can really automating some of our distribution centers and gaining traction there. And then we'll always be looking to see what other opportunities are there for us to return shareholder value to return value to the shareholders. Stock repurchase, we've been doing that to basically mitigate share creep over the past couple of years, and I think that will continue.

Got you. And just on the wholesale business in Gourmet Food. I know that business has kind of been pretty wide fluctuations year-over-year given whether or not the product has been soon enough into the marketplace and whether or not there's been demand for that type of product. Can you just kind of give us a sense of what your thoughts are in terms of wholesale business this year versus last year, maybe the years before, and whether or not and how you see that business shaping up this year versus some of those periods in the past?

Yes. Just a reminder, Michael, wholesale is still a relatively small piece of overall business. It represents only around 5% than 5% of our overall revenues. But we have a good book of business with wholesale we had that going into the year. You saw some of that benefit in Q1 and that the challenges of the global supply chain that we had a year ago, kind of deferred all wholesale into the second quarter and a little bit into the third quarter. Initially, we were able to shift some of that in Q1 this year. But we have a strong book of business on wholesale.

Our next question will come from Anthony Lebiedzinski with Sidoti & Company.

And likewise, Joe, it's been certainly a pleasure to work with you for a long time and the best of luck in your pending retirement here. So I guess, first, just in terms of the bonus payout headwind, Bill, maybe can you quantify that how much do you think that will be for the year?

Yes. So a year ago, basically executives got $0 bonuses, we did limited payouts to nonexecutives. This year, we obviously hope to pay bonuses at 100%. It's probably about a $12 million year-over-year impact. And it's only as we before.

Of course, right. Right, okay. And was any of that accrued in the first quarter or not yet?

No. We accrue it on a straight-line basis. So we're putting that -- right now.

Got it. Okay. Perfect. Okay. And then did you guys quantify how much the wholesale revenue, I may have missed this, but the wholesale revenue was up in the first quarter here. If you did, I apologize for missing that. But if you could just talk about in the second quarter.

But it was the driving force of the growth in the Gourmet Foods and Gift Baskets the 11% growth and that was primarily due to wholesale.

Okay. Got it. Okay. And then in terms of the automation efforts, you guys have done a lot there in terms of upgrading your infrastructure. Is there more to do there in terms of those efforts, should we expect the additional automation initiatives?

Sure. There's always additional automation initiatives that we'll be looking at, Anthony, but Bill, you put a good expectation together on that over the next year or 2, right?

Yes. So we completed the automation of the Atlanta facility this first quarter slightly into the second quarter here. And overall, we're taking our CapEx down around $20 million. So over the last couple of years, we had $55 million that we had $66 million last year, and this year, we're going to be more in the mid-40s. So the big efforts on automation are behind us. Now as we grow into the future, there's always going to be needs for further automation, but we're at a good spot right now.

And again, we continue to look to automate the customer contact center and how we're doing that utilization of AI technologies, IVR voice recognition technologies, et cetera. So we'll continue that type of automation as well.

Got it. Okay. And then lastly, in terms of Passport membership and just overall behavior, are you still seeing Passport members spending more than I think twice as much as the nonmembers?

Yes, this is Tom. We are continuing to see Passport members that purchasing at two to three times the amount of non-passport members were happy with the membership growth we saw in the quarter. It hit grew over the beginning of the year. And on an everyday basis, we're seeing 18% to 20% of our revenue coming from our Passport customers. So good stuff there.

Our next question will come from Alex Fuhrman with Craig-Hallum Capital Group.

I wanted to ask about the big push that you saw last year really across the industry to get orders in early, given a lot of anticipated supply chain problems. Have you seen any sort of repeat of that behavior? Just wondering how you think about that. I'm sure that must be a challenge from a forecasting standpoint given that a lot of orders that might have already come in last year are probably going to be trickling in here over the next couple of weeks.

Sure. Thank you, Alex. I'll start with that answer a little bit, turn it to Bill and Tom. No, I think if we look at coming out of Q1, again, we're pleased that we exceeded the expectations that we had going into Q1. And keep in mind, Q1 is -- as we've been stating, where we've seen softness from the consumer has been in those everyday occasions. And that's all Q1 is. There are no holiday occasions. So we're cautiously optimistic as we move forward into the holiday season that what we saw last year of business being pushed forward, we're not seeing as much of that this year, and we're expecting business to come in more like closer to the holiday, more like consumer behavior from the prepandemic -- excuse me, pre pandemic point of time. So we're expecting that to shift a little bit later. But I think we're in a really good position that what we see from our customer file, what we see from the products that we've added to the position, I think we're in a really good position to handle that, especially with the automation that we're just talking about. Bill and Tom, do you want to add any color to that?

No, I think just the investments that we made in inventory, we have the inventory a year ago, there was challenges with the global supply chain. So created operational challenges from a labor perspective, we've seen a moderation of labor rates and access to labor is much more available this year than it was a year ago plus, as Chris mentioned, the automation efforts -- needing less seasonal labor. So we're in a very good position operationally to execute this holiday season.

Great. That's really good to hear. And then if I could just touch on the $75 million of free cash flow. I think last quarter, you were saying something better than breakeven. So obviously, a huge jump. I don't know if maybe you're just being a little bit conservative before. But is the decline in freight and labor, I mean is that really the bulk of where that free cash flow is coming from over the past couple of months?

I think with respect to last quarter, we really didn't give annual guidance, right? So we just -- we're giving kind of the message that, hey, it's going to be positive. We're coming off a year where we made a big investment in working capital, and that's what created the negative cash flow last year, and we just wanted to make sure the message got out that cash flow would be positive. Now that we've shifted we're a little further along, we have a little more visibility into some of the macro trends we wanted to give annual guidance and state really where we believe at this point in time, where the yield will turn out from both the top and bottom line perspective and where cash flow. The big driver of the cash flow and the $135 million is related to kind of the working capital swings where it was an investment last year and this year, we will be taking inventory down year-over-year. The global supply chain has improved as we sell or we're not going to have to keep it at these type of levels. But certainly, the overall guidance with EBITDA being between $75 million and $80 million. You saw where Q1 was, right? That was the quarter where we took the big where we took the big hit. So our guidance implies that we're relatively flat from an EBITDA year-over-year basis going forward. And the consumer is still tough. So top line is going to be a challenge. We have it guided at down mid-single digits. So we got to get it back on -- from a margin perspective and from an OpEx perspective. And certainly, some of those imports are great coming down, labor stabilizing, all helping to improve our gross margins, and that's why we're we've kind of stated that we think we believe gross margin stabilize in Q2 and then actually improving in the second half of the year.

Our next question will come from Dan Kurnos with The Benchmark Company.

Great. Thanks. Good morning. Joe, best suspenders by far across all of the industry. So I wish you the best in your retirement. Obviously, it's been a pleasure working with you all these years, and your amenity in the industry. Chris, I don't want to frame it this way, but I just -- what gives you the confidence in kind of the return to more normal spending patterns because every single e-comm and had advertising company, we seem to suggest that there's going to be some kind of spending cliff after the election. And I get that there are mixed signals across the space. But Amazon, regardless of the maybe overinflated outlook we all had for them, having early prime days, obviously, is the signal that they think the holiday season is shifting forward again, and we've seen other things out there suggesting that there's probably as much as 5 to 10 points of the season shifting into the front half. So is it around like orders, order volume indications, like what kind of helps inform the way that you're thinking about the consumer specifically spending patterns heading into the holiday period.

Sure, Dan. And there's a couple of things there. So thanks for the question, first of all, and great comments on Joe. So as we look forward, I think, again, we're cautiously optimistic as we look forward. Clearly, as consumers continue to respond to the broader economic pressures, our platform provides us ability to have a wide range of price points. And that's why even what we're seeing is we see weakness, more weakness in the lower tier end of our customer file. But yes, we need to make sure we have a wide range of products to satisfy that customer. Why we're seeing the bundles that we talk about take off with our higher-end customers and helping to drive AOV higher is working for us. I think you're right, we're seeing mixed signals of we're seeing Amazon certainly all these Black Friday events that we're seeing already. So we're seeing promotional activity try to move business earlier. We don't see that happening to the extent that it has -- certainly to the extent that it happened last year. We see UPS and others talking about the business coming closer to the holiday. Other retailers that we talk with are seeing similar trends. But really, what gives us the confidence, again, is the platform, the good, better, best offerings that we have, the health of our customer file, the operation, operating more efficiently, seeing what we -- the benefits of the investments that we made that Bill just spoke about on the automation front. And again, the fact that what we've seen really since last year is the consumer weakness that we're experiencing is in those everyday occasions. We saw the consumer come back at Valentine's Day last year. We saw the consumer come back at Mother's Day last year. We saw it just this quarter really with a decent Halloween business, and we're seeing the customers responding to Halloween. So all of those factors, our capabilities plus our read on the market gives us confidence that we can see the consumer take care of what they need to take care of with their gift-giving needs this holiday season.

Yes. And I think, Dan, also, if you remember back to a year ago, every media story was about the global supply chain challenges and that inventory may not be on the shelf for Christmas. So we kind of forced the consumer to buy early. And we saw a very strong October and November sales last year, and then we saw it drop off in December. This year is just the opposite scenario. Everybody -- it is a promotional environment out there, but everybody has inventory and there's no talk of not of inventory not being on the shelf at Christmas time. So the consumer can wait, try and get their best deal but the consumer can wait and . And that was the trend we saw basically for years leading up to last year because of the global supply chain challenges that could push it forward.

Got it. Yes, that's helpful. Hopefully, the consumer doesn't wait bill until Q1 when they can get really great deals in -- but I think another question is, Chris, you may -- I think I assume you guys are trying to highlight this. You made a lot more positive commentary just around the margin trajectory in general and into the future. I think you guys got the message that's sort of a concern. And you guys have given some good color around sort of the near-term 12-month plus trajectory, which is really helpful. I guess, just to sort of nitpick on your comment or highlight your comment, Chris, just to say getting back to historical margin levels, given everything that you're seeing in the market now, like I mean, are we still aiming -- over time, it was sort of like 10% plus was kind of the goal. With everything that you've put in place and sort of getting a better handle on what you think happens with the labor market and everything else, is that still the target? Is there upside from some of the automation and sort of incremental efficiencies you can take or not to say that high singles is anything to see that? Is that more a realistic target over, say, the medium term, just given everything that's going on in the marketplace?

Sure, Dan. I think that clearly, that is our objective, and I think it is achievable as we look at some of the reductions in the -- starting with the gross margin, right, getting the gross margin back to where it needs to be as we're starting to see some of the input costs on shipping, freight, commodities, et cetera, start to show some signs of recovery certainly in the shipping environment. We're seeing that. In addition to that, as we look to continue to improve our operating efficiencies, that helps us get to the gross margin or to the net margin that we're looking to get to as well. So I think we have all confidence that in time, we'll get back to the historical levels that we've been at.

Yes. Dan, if you look at any year in the last 10 years up until last year, you would see our gross margins in that 42% range. Last year, obviously, we were down 500 basis points on it. But no matter, we've bought and sold companies over the years, but we've always been pretty consistent with that gross margins in that 42% range. So again, over the longer term, and the consumer is a challenge in this macro environment is certainly a challenge. But over the longer term, we expect to get back to historical margins. And if we can get the gross margins back up to those levels, there's no reason we can't get the EBITDA margins back up.

I appreciate all the color, guys. And again, best of luck, Joe.

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

So I'd just like to thank everyone for their time this morning. And clearly, as you see, our business is performing well, and we're well positioned for the upcoming holiday season. Holiday season starts with Thanksgiving. And I urge all of you giving is the gift. So I urge all of you to make sure you're taking care of and thanking the appropriate people in your life for this Thanksgiving season. And certainly, we know a few brands that can help you in a platform that can help you do that. So thank you very much.

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