Q2 2025 1-800-FLOWERS.COM Inc Earnings Call
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The
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 1 on a touchtone phone. To withdraw your question, please press star, then 2.
Please note, this event is being recorded.
Speaker Change: I would now like to turn the conference over to Andy Milevoj, Senior Vice President of Investor Relations. Please go ahead.
Speaker Change: Good morning and welcome to our fiscal 2025 second quarter earnings call.
Speaker Change: Joining us today are Jim McCann, Chairman and CEO, Tom Hartnett, President, and James Langrock, CFO.
Speaker Change: During this call, we will make forward-looking statements with predictions, projections, and other statements about future events.
Speaker Change: 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.
Speaker Change: The company disclaims any obligation to update any of the forward-looking statements that may be made or discussed during this call.
Speaker Change: Additionally, we will discuss certain supplemental financial measures that were not prepared in accordance with GAAP.
Speaker Change: 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.
Jim McCann: 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.
Jim McCann: Our second quarter revenue declined 5.7 percent, showing year-over-year improvement, but not at all at the pace that we have been anticipating.
There were several factors that contributed to our performance.
Jim McCann: First, we experienced softer than anticipated consumer demand, and we saw businesses reduce their corporate gifting orders this holiday season.
Jim McCann: Second, we encountered challenges with the implementation of a new Harry & David order management system, or what we call OMS, that escalated during the peak of the holiday season, impacting revenue and earnings for Harry & David and for other brands.
Speaker Change: This morning, James and Tom will share more details behind some of these factors and how we are responding to them.
Speaker Change: 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.
James Langrock: 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.
James Langrock: Our consolidated second quarter revenue declined 5.7% with several factors contributing to this performance.
James Langrock: combined with changes in the online marketing environment that had negative impact on our marketing efficiency.
James Langrock: As a result, our increased marketing spend did not generate the results we anticipated.
James Langrock: In particular, are free and lower cost marketing channels declined or cost more than anticipated?
James Langrock: 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.
James Langrock: 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.
James Langrock: We estimate the RMS-related issues reduce Q2 e-commerce revenue by approximately $20 million.
James Langrock: These trends were slightly offset by an increase in our wholesale gift baskets business.
James Langrock: Adjusting for the $20 million impact of lost revenue, Q2 e-commerce revenue would have declined 5.6%.
and total revenue would have declined 3.2 percent.
James Langrock: Before I move on to gross margin, I did want to take a moment to discuss the RMS implementation that affected our performance.
James Langrock: As the business began to scale significantly in December, the new Harry and David order management system that were recently implemented presented challenges with certain customer orders that were more complex during the peak of the holiday season.
James Langrock: 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.
James Langrock: 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.
James Langrock: 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.
James Langrock: We estimate it also had some spillover effect to our other brands given our centralized customer care function.
James Langrock: 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.
James Langrock: Our second quarter gross margin was 43.3 percent, flat with the prior year.
James Langrock: The second quarter was highly promotional as consumers continued to look for and respond to promotional offers.
James Langrock: Our gross margin was also affected by the incremental costs associated with the RMS implementation challenges, including expediting shipping fees.
James Langrock: that we estimate impacted gross profit by approximately 20 basis points.
James Langrock: Excluding the RMS related costs, gross margin would have been 43.5%.
James Langrock: Adjusted operating expenses declined by $2.9 million to $239 million as compared with the prior year period, continuing to benefit from our Work Smarter initiatives.
James Langrock: We believe that we are only beginning to tap into the potential to enhance our planned operational efficiencies, and there is much more we can achieve.
for Meticulous Cost Management and Strategic Investments in Technology.
James Langrock: We aim to streamline processes and reduce expenses without compromising the quality of our offerings.
while improving the customer experience.
James Langrock: In addition to the impact on revenue, we estimate that the incremental cost associated with the RMS challenges
James Langrock: 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.
James Langrock: 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.
James Langrock: 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% range.
James Langrock: Going forward, as you will hear from Tom, we are elevating our focus on all aspects of our sales and marketing spend.
And now let's turn to our balance sheet.
James Langrock: That cash was $87 million compared with $117 million at the end of last year's second quarter.
James Langrock: Our cash balance was $247 million at the end of the second quarter.
James Langrock: Inventory declined to $157 million, compared with inventory of $161 million at the end of last year's second quarter.
James Langrock: 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.
James Langrock: At the end of the quarter, we made a $25 million prepayment through our term loan and amended our credit agreement.
Guiding Guidance for Fiscal 2025
James Langrock: As a result of our Q2 performance, we are updating our fiscal 2025 outlook.
James Langrock: We now expect full fiscal year revenue to decline in the mid-single digits.
James Langrock: Adjusted EBITDA is expected to be in the range of $65 million to $75 million.
James Langrock: and free cash flow is expected to be in the range of $25 million to $35 million.
James Langrock: We are disappointed that our Q2 performance did not meet our expectations.
James Langrock: Some of the challenges are self-inflicted, and as we resolve these challenges, we remain optimistic about our future performance and the initiatives that we are executing on.
James Langrock: 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.
Thank you.
Tom Hartnett: 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.
Tom Hartnett: and businesses reduce their corporate gifting orders this holiday season, both in terms of AOV and total orders placed.
Tom Hartnett: Furthermore, our results were pressured by challenges that escalated with our new Harry and David OMS implementation.
Tom Hartnett: 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.
Tom Hartnett: The OMAS implementation presented mounting challenges during the peak of the holiday season.
Tom Hartnett: 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.
For more information, visit www.FEMA.gov
Tom Hartnett: We have resolved many of the issues and prioritized the remaining ones.
which we expect to correct in short order.
Tom Hartnett: These challenges further reinforce our conviction that in addition to our work smarter and relationship innovation initiatives which have improved our company
Tom Hartnett: We need to fundamentally review all aspects of our marketing and sales strategy.
Tom Hartnett: We must accelerate our evolution to ensure our platform is both highly effective and efficient.
and supporting our customers' gift-giving needs.
and our growth-oriented relationship innovation initiatives and marketing strategies.
as we focus on expanding our customer base.
Tom Hartnett: We see significant opportunities to leverage new technology to enhance engagement and build deeper relationships with our customers.
Tom Hartnett: These initiatives are designed to inspire our customers to help them connect with the important people in their lives.
Tom Hartnett: They are also designed to give them more and better ways to interact with us.
Tom Hartnett: Our relationship innovation initiatives are in the process of transforming our organization into a comprehensive celebratory ecosystem.
Tom Hartnett: We are continuing our evolution from a transactional company into one that is experiential and personalized, focusing on enhancing customer engagement and satisfaction.
Tom Hartnett: We are confident that our efforts will enhance our customer experience and yield better results.
Jim McCann: Now I'll turn the call back to Jim for his closing comments before we open it up for Q&A.
For more information, visit www.fema.gov
Jim McCann: Thanks Tom. You know, 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.
Jim McCann: But we also recognize the need to move faster and be more aggressive in certain areas, including our marketing and sales strategy.
Jim McCann: We must respond quicker and provide better value for our customers that have curtailed their spending the most in the current macro environment.
Jim McCann: 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.
Jim McCann: 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.
Jim McCann: Our robust customer data set will enable us to deliver highly personalized marketing experiences
Jim McCann: ensuring that we are not only attracting new customers but also nurturing the existing relationships.
Jim McCann: Leveraging these innovative tools presents an unparalleled opportunity to better serve our customers and forge even deeper, more meaningful relationships with them.
Jim McCann: The future holds incredible promise for us, and I'm thrilled about the possibilities that lie immediately ahead.
Jim McCann: 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.
Speaker Change: To ask a question, you may press star then 1 on your touchtone phone.
Speaker Change: If you are using a speakerphone, please pick up your handset before pressing the keys.
Speaker Change: If at any time your question has been addressed and you would like to withdraw your question, please press star then two.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
The End
Speaker Change: The first question today comes from Anthony Lebedinsky with Sidoti & Company. Please go ahead.
Good morning, everyone.
Speaker Change: Thank you for taking the question. So, 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 and consumer engagement.
Speaker Change: 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?
Speaker Change: 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
Speaker Change: implementation of the OMS. But yes, I think we're seeing an end of the what we call here the COVID bullwhip, you know, where we had the great acceleration of demand when when people were homebound and
Speaker Change: And that's eased up considerably. So we think that this fiscal year is the end of that for us.
Speaker Change: 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
Speaker Change: to do even more of that. So we have some of those products in the pipeline. So Tom, I would say that
Good morning, Anthony. It's Tom. Yeah, I think we're seeing
Anthony Lebedinsky: Lower demographic that lower household income customer, which is continuing to, you know, have obviously watched their their budget and their pocketbooks and we have seen.
Speaker Change: 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.
Got you. Okay. And then
Speaker Change: 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?
Speaker Change: 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.
Speaker Change: You know got into the peak of the busy season after Thanksgiving the surge of that and with some more of the complex orders
Speaker Change: In the system, they 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.
Speaker Change: They're doing huge order volumes every day, and anything that had to be done in a manual workaround was just backlogging for us.
Speaker Change: 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.
Speaker Change: 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?
Speaker Change: 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.
Speaker Change: and all 100% to get that 100% level within these next two quarters. However, I would point out Anthony.
Speaker Change: It doesn't cause us any systemic issues now because they're all manageable because of the volumes.
Speaker Change: On the Flowers 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Yeah, absolutely. I mean, we've we're we've reached out already to those customers. We plan on we have a wind back program going on. We're extremely focused that will go on throughout the year. There'll be much multiple touch points with with those customers throughout the year. Um
Speaker Change: It is extremely important to us. In some cases, we did lose the trust of some of those customers that we failed. We take that very seriously and we're working to regain their trust.
Speaker Change: Okay, well, thank you very much. I'll pass it on to others and the best of luck going forward. Thank you.
Speaker Change: The next question comes from Alex Furman with Craig Hallam. Please go ahead.
Alex Furman: 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.
Alex Furman: 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 that couple days between the Super Bowl and Valentine's Day? Just curious what you what you've learned. And
how that's going to impact your strategy this year.
Alex, thanks for your question and
Alex Furman: 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.
Speaker Change: 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 that was a crusher for us.
in terms of attention and distraction.
Speaker Change: So yes, having five big selling days post Super Bowl is critical for us for the holiday.
Speaker Change: 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
Speaker Change: early in the cycle. So we have a two-week selling period and right in the middle of that is Super Bowl.
Speaker Change: So, again, that's so much better than last year where it was just before Super Bowl was just before Valentine's Day.
Speaker Change: So, good day placement. 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.
Speaker Change: It's easy for our florist 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?
Speaker Change: We've been at this Valentine's thing for a long time and there are there are different personalities that can be engaged in attracted
Speaker Change: earlier in the season and those who are more planful, sometimes those who are more price conscious, etc. earlier on can engage those customers, pre-Super Bowl in this case.
Speaker Change: There's an awful lot of those procrastinators out there that, you know, we, we will enjoy the extra days of selling.
Speaker Change: 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.
Speaker Change: So day placement for those, 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.
Speaker Change: 5% on a year-over-year basis and it was higher obviously, you know, 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
Speaker Change: Our corporate customers reduced their spend, so the AOV was down, and they reduced the item per order, and also less orders. So we were obviously looking at that very closely. Some of it was impacted by the OMS.
Speaker Change: 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 significant as a percentage.
decline.
Alex Furman: Just to add, Alex, we are bullish about the corporate business.
Alex Furman: We have some hot spots in the corporate business on lower price point items across the enterprise.
Okay, guys, that's really helpful. Thank you very much.
Thank you very much.
Speaker Change: The next question comes from Michael Kapinski with Noble Capital. Please go ahead.
Michael Kapinski: Thank you, thanks for taking my questions and good morning. In terms of the marketing strategy you talked about, I was just wondering in some of the issues that you had with marketing, I was wondering
Michael Kapinski: 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?
Speaker Change: Good morning, Michael, Tom, there were some some specific changes in some of our bottom of the funnel Channels where are the search engine results page? Changes some of the ranking that really hit us in kind of natural search in branded search where those were are very low cost channels for us and and those those decline more than than expected and
Speaker Change: We continue to obviously refine our content and refine our content to be more relevant to individual segments of our customers. So
Speaker Change: increased efficiency with our ability to create content that larger scale.
Speaker Change: Michael, what we've seen with the technology deployments that were, 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.
Speaker Change: 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 this
Speaker Change: these next two quarters in front of us and then throughout the rest of this calendar year. We say this calendar year is a big, big year for us in terms of
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Can you talk about where you anticipate to see improved adjustment of 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 Work Smarter initiatives. I'm just wondering if you can kind of give us some additional color on that.
This is Jim, I'll ask...
James Langrock: James to give you some color on that. We're not anticipating on the any savings on the commodity cost
You always have
James Langrock: They've moderated, they've come back close to the mean now, but you get little bubble up things that impact us.
James Langrock: So we're comfortable with COCO prices, for example, on a commodity side through the rest of this calendar year, which gets us through the
Christmas season
James Langrock: But having reverted closer to the mean now on gross margin and seeing that Actually, we could have we would have better gross margin except for the LMS issue That gave us a confidence there
Speaker Change: 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?
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Whether or not we actually do anything there is to be determined, but I think the opportunities will be
Speaker Change: 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.
Thank you for joining us. Thank you.
Speaker Change: The next question comes from Linda Boltenweiser with DA Davidson. Please go ahead.
Speaker Change: 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.
be placing orders they have delivered to
Speaker Change: you know, women's offices, etc. And I thought if it was Friday or Saturday, it's bad because they won't send the flowers, they'll just
Speaker Change: 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's this year. So can you just clarify? Maybe I'm just confused on that. Thank you.
Speaker Change: No problem under confusion, having been doing this now, this is my 48th Valentine's Day. Actually, it would be my 49th Valentine's Day.
The trends are
Speaker Change: Unescapable 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.
Delivery window on Friday
Speaker Change: So, but from a pure sales point of view, not from a delivery point of view, from a sales point of view, Friday is the best day because we like our customer to be at work.
Speaker Change: 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.
Speaker Change: It narrows the field of options and it's a better sales placement for us. So Friday's much better than Wednesday. I would prefer not to have leap year, take the Thursday out, because next year it does move to a week, but this year it's on our best day.
Okay, thanks for that explanation. And then...
Speaker Change: 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 flower side is much bigger, but will the issues be completely fixed on the food side for Valentine's Day or not? Or not really?
Speaker Change: On the food side, we are expecting the majority of those to be fixed, but as Jim had mentioned, there will not, if there are still remaining challenges, they won't be customer facing issues. We have the resources internally to.
Speaker Change: bogged down in the system, if you will, we can address it through manual intervention and we will not have any...
Speaker Change: impact on on demand and Yeah, and Linda just you know, you know, obviously we're extremely disappointed with the challenges from the OMS system, but I just want to
Speaker Change: remind everyone that we shipped over, we delivered over seven 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.
Thank you. Ciao.
Right.
Speaker Change: 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.
Speaker Change: So to get to 100% where the new system is working the way we want, that's about the end of the report.
Speaker Change: Well, demand is good. It's not nearly as high as those last couple of weeks of December in the food group.
Speaker Change: Okay, understood, thank you. And then finally, I was just curious about...
Thank you.
Speaker Change: You talk about your efficiency of your marketing cost spend, but I was wondering in general about rates for digital spending, digital marketing costs, rates.
Speaker Change: 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?
Speaker Change: I'd say certainly compared to before the election, compared to after, there was rates were
Speaker Change: 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 that we're advertising. So our lower portion. So that was efficiency, right?
Speaker Change: Opportunities with some partners and some tactics we had and others were a little higher so I'd say it was it was mixed across the board but certainly as we came out of the election the costs were costs were down.
Speaker Change: Okay, and then just one last one. Just if you could review your tariff exposure. You've probably got some on the on the PMO side and also some of your baskets and stuff. Could you review what the tariff, what the plan is there?
Well, it's an ever-changing landscape, but Linda, this is Jim
Speaker Change: When 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 US 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 to watch. James, how do you give some context again to Linda about
Speaker Change: Within that, roughly 40% of that is comprised of the cost of merchandise.
James Langrock: 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. Cost of goods sold, a billion dollars, 40, 45 million dollars of exposure to Asia.
Speaker Change: And so that's what we'd be watching with tariffs. So we don't want to see any increase in cost, but any increase in cost would be off that $40, $45 million. Correct, but for China specifically, yes.
Okay, thank you. Very helpful. Okay, thank you. Thanks, Linda.
Speaker Change: As a reminder, if you would like to ask a question, please press star and 1 to join the question queue.
Operator: The next question comes from Doug Lane with Water Tower Research. Please go ahead.
Speaker Change: Good morning everybody. Just to follow up on Linda's question, what would you have done if terrorism had been enacted in Colombia?
Speaker Change: We would have postponed this call to see what the impact would be. That would have been painful because we rely on Columbia and other adjoining markets for a good supply of our product here. So the good news is...
Speaker Change: We don't have to dust off that plan, and it seems to have been completely resolved, but it would have been damaging, so I don't have a hard answer for you, Doug. We're just glad we don't have to answer that.
Speaker Change: In the short term, it would be challenging, you know, in weeks, especially leading into Valentine's. I mean, obviously,
Speaker Change: Our buys, our florist buys have been, you know, largely in place for a period of time. Yeah, I assume the tariff, Tom, would have been on top of our, you know, our contracted prices, right?
Speaker Change: negotiated. But midterm, we would be able to, not completely, but
Speaker Change: We've been conscious of that for a while, so we had a whole program to encourage
Speaker Change: 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
Speaker Change: 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...
Speaker Change: increase the breadth of sources for our flower product a lot of it in partnership with our growth community because they have the same issues and concerns so it's something we work on all the time.
Speaker Change: Is Columbia that important or could you shift supplies to other other countries in case it's just an isolated incident?
Speaker Change: No, it's that important to us. It's when I say us, it's the whole country, the whole industry is dependent on Columbia probably for.
Speaker Change: 50-60% of all the fresh flower product grown and sold in this country.
Speaker Change: Well, 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.
Speaker Change: No, but that's right. It's not good for anybody like that.
Speaker Change: just to shift gears on the wholesale business. Could you hit it on the first quarter call that wholesale was gonna be good this year? And frankly, there's a lot better than I thought it was gonna be.
Speaker Change: 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.
Speaker Change: 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 to outperforming wholesale.
Speaker Change: Doug, what we think on that is, it's counter-indicative. In other words...
Speaker Change: However, going forward, we expect Wholesale to stay stronger because we've cultivated new relationships.
Speaker Change: in the wholesale channels this year. So we'll have a broader base of customers.
Speaker Change: In the years ahead, so we expect that it won't be counter Indicative 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 a plan yet
Speaker Change: 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?
Speaker Change: That's where we manufacture gift products and sell them to our retail partners as a wholesale product, so into the big box stores that we sell to all the time.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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 won't we won't have that we were hopeful that we won't have that to do it
Speaker Change: We are concerned that 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
Speaker Change: More attractive and higher-end for our higher-end customers who seem to be weathering this storm quite well
Speaker Change: 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,
Speaker Change: that these issues are fixed and that we do everything we can.
Speaker Change: to do the right thing for the customers that were impacted by this.
Yes, we have 7 million very happy customers.
Thanks so much.
The End
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