1 800 Flowers Com Inc Q2 FY2020 Earnings Call

Good day and welcome to the 1-800-FLOWERS.COM, Inc. Fiscal Year 2020 Second Quarter Results Conference Call. Today's conference is being recorded. I would now like to turn the conference over to Joe Pititto. Please go ahead.

Thank you, Katie. Good morning and thank you all for joining us today to discuss 1-800-FLOWERS.COM, Inc.’s financial results for our fiscal 2020 second quarter. For those of you who have not received a copy of our press release issued earlier this morning, the release can be accessed at the Investor Relations section of our corporate website at www.1800flowersinc.com. Our call today will begin with brief formal remarks, and then we will open the call to your questions. Presenting today will be Chris McCann, CEO and Bill Shea, CFO. Before we begin, I need to remind everyone that some of the statements that we will make today may be forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the applicable statements. For a detailed description of these risks and uncertainties, please refer to our press release issued this morning as well as our SEC filings, including the company’s annual report on Form 10-K and quarterly reports on Form 10-Q. In addition, this morning, we will discuss certain supplemental financial measures that were not prepared in accordance with generally accepted accounting principles. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables accompanying the company’s press release issued this morning. The company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today’s call, any recordings of today’s call, the press release issued earlier today or any of its SEC filings, except as may be otherwise stated by the company. I will now turn the call over to Chris McCann.

Good morning, everyone. Thank you all for joining us this morning. As reported in this morning's press release, we achieved strong top and bottom line results for our fiscal second quarter, reflecting strong operational execution across our company. These results reflect continued revenue growth momentum across all three of our business segments, coupled with the increased operating leverage we've achieved from the investments we've made in our business platform. Revenue growth in the second quarter was primarily driven by Harry & David, the largest brand in our largest segment, Gourmet, Food and Gift Baskets, which represented more than 75% of our total revenue for the quarter. Harry & David continues to benefit from the digital transformation of our marketing programs, complemented by strong merchandising programs. These initiatives continue to enable Harry & David to attract new customers, including a younger demographic, while also deepening engagement with existing customers. Harry & David also continues to benefit from the expansion of its product offering, in particular, unique shareable gifts for both holiday and everyday occasions. As a result, we experienced significant strength in seasonal food gifts and harmony bakery assortments. Everyday occasion collections for birthdays, sympathy, and get well and the expanded Harry & David gourmet line, including award-winning Harry & David Wines, cheese platters, heat and serve prepared foods, all perfect for gifting and entertaining. Other significant contributors to revenue growth in the Gourmet Food segment included strong demand in our wholesale Gift Baskets business, fueled by innovative new product designs and an expanded customer list and the addition of our newest brands, Shari’s Berries, which we acquired this past August. I’m pleased to report that Shari’s Berries performed well during the second quarter and has built nice momentum ahead of its peak demand periods at Valentine's Day and Mother's Day. As such, we anticipate that it will be a modest contributor to our bottom line results during the second half and for the full-year. For our Consumer Floral business segment, we achieved strong results for the quarter with solid top line growth and increasing bottom line contributions. During the quarter, the 1-800-Flowers brand continued to extend its market leadership position, leveraging our investments in marketing and merchandising programs to drive revenue growth and increase its bottom line contribution. Our merchandising programs focused on truly original product designs, resulting in strong demand for such holiday and everyday gifts as holiday theme centerpieces, our exclusive local artisan collection and our expanded line of specialty gifts focused on home décor. And finally in our BloomNet business. The strong results for the quarter reflected our ability to drive sales of our expanded range of products and services, including advertising in our digital directory, hard goods such as vases and glassware and cut flowers and greenery. As a result, BloomNet also continued to grow its market share during the quarter. So in summary, our results for the quarter reflect strong execution and continuing momentum across all our business segments. Before I ask Bill to share some insights on the quarter and our increased guidance for the year, allow me to spend just one moment on execution. The results that we achieved over the past several quarters and the momentum we're carrying into the second half of our fiscal year reflect our focus on building strong sustainable growth while driving higher margins and expanding margins. We have a clear strategy to win across all our business segments. We have a deep and experienced management team and thousands of highly skilled associates who are executing against that strategy every day. We are laser-focused on continuously improving the customer experience. We are investing in innovative technologies as well as marketing and merchandising initiatives designed to attract new customers and deepen our relationship with existing customers. We continue to gain market share across all three of our business segments. Simply stated, we’re firing on all cylinders while simultaneously striving for continuous improvement every day. I’m extremely proud of what our management team has accomplished over the past several years and even more excited about what the future holds for our company and for our shareholders. With that, let me turn the call over to Bill to share his insights on our results and discuss the drivers behind our raised guidance for the year. Bill?

Thanks, Chris. As noted, we’re very pleased with our strong top and bottom line results for fiscal second quarter and for the first half of our fiscal year. Revenue growth for the quarter of 6% and 7% for the first half was driven by solid growth in all three of our business segments. From an operating standpoint, all three business segments performed exceptionally well in the quarter and in the first half, enabling us to more than offset the headwinds we have discussed in the past, including a tight labor market and rising labor costs, tariffs and tariff uncertainty, calendar changes, specifically the six fewer days between Thanksgiving and Christmas and rising transportation costs. As a result, we continue to see improving operating leverage across our business platform. This is illustrated by the contribution margin growth of 10% or more in all three of our business segments through the first half of the year. This increased operating leverage combined with our expectation for revenue to grow approximately 10% during the second half of our fiscal year, is enabling us to reaffirm our revenue growth guidance of 8% to 9% for the year and increase our guidance for EBITDA and EPS growth to ranges in the mid to upper teens. Now breaking down some of the metrics for the second quarter. Our revenue growth of 6% reflected solid growth in all three business segments. Gross profit margin was down slightly at 44.4%, reflecting our ability to manage the cost headwinds I mentioned earlier, as well as the highly promotional nature of the holiday shopping season. Operating expenses as a percent of total revenues, as adjusted, improved by 50 basis points compared with the prior year period. The combination of these factors resulted in adjusted EBITDA growth of 7.4% to $110.7 million, an increase in net income of 8.1% to $74.2 million and an increase in EPS of 7.7% to $1.12 per diluted share. In terms of category results. In our Gourmet Food and Gift Baskets segment, which represents more than 75% of total revenues for the quarter, revenue increased 5.6% or nearly $25 million to $464.6 million. As we previously noted, a solid revenue growth in this segment was driven primarily by Harry & David combined with strong growth in the wholesale baskets business and contributions from our newest brand, Shari’s Berries. Revenue growth in this segment also reflected the impact of the shift of some gift basket shipments for certain wholesale customers into our fiscal first quarter, which we noted back in our October call. Combining the first two quarters of the year, total revenue growth in the segment was 7%. Gross profit margin for the quarter was essentially flat at 45.5%. And importantly, we achieved strong operational execution across our Gourmet Food and Gift brands. As a result, segment contribution margin increased 7.5% to $113.4 million. In Consumer Floral, revenues increased 7% to $115.7 million. Gross profit margin was unchanged at 38.5% and segment contribution margin increased 11% to $10.9 million. As we stated at the start of the fiscal year, we expect segment contribution margin in Consumer Floral will be up year-over-year each quarter this year as we continue to gain leverage on the investments we’ve made to drive strong growth and extend our market-leading position. In our BloomNet segment, revenues for the quarter increased 9.8% to $25.7 million. The acceleration of BloomNet's revenue growth compared with our first quarter reflects our ability to drive sales of our expanded product and service offerings. As we noted in our last call, we expect BloomNet to grow in the upper single digits to low double digits during the second half of the current fiscal year. Gross profit margin in the second quarter was 51.2%, down slightly due to product mix. And segment contribution margin increased 10.6% to $9.1 million. In terms of corporate expense, for the fiscal second quarter, the corporate expense including stock-based compensation was $26 million compared with $20.9 million in the prior year period. This increase is primarily due to higher stock-based compensation attributable to the company's strong performance over the past few years as well as the compensation charge related to our deferred compensation plan, which has an equal offsetting benefit in interest income. Turning to our balance sheet. At the end of the second quarter, our cash and investment position was $295.6 million compared with $173 million at our fiscal 2019 year-end in June and $258 million at the end of the fiscal second quarter last year. Our term debt balance, net of deferred financing costs was $94.7 million and we have zero borrowing outstanding under our working capital line within our revolving credit facility. As a result, total net cash at the end of the quarter was approximately $200 million. Inventory of approximately $68 million was in line with our expectations. Regarding guidance for the full fiscal year, based on our results for the first half of the fiscal year and our outlook for continued strong performance in the next two quarters, including revenue growth of approximately 10%, we are updating our guidance as follows. We are reaffirming our guidance with total consolidated revenue growth for the year of 8% to 9%. We are increasing guidance of EPS growth to a range of 15% to 17% from a previous range of 8% to 10%. We are increasing guidance for adjusted EBITDA growth to a range of 13% to 15% from a previous range of 8% to 10%. And we are also increasing our guidance for free cash flow for the year to a range of $45 million to $50 million from a previous target of approximately $45 million. I will now turn the call back to Chris.

Thanks, Bill. So to sum up, we are very pleased with our results through the first half of the fiscal year. We continue to drive strong revenue growth and expand our market share position across all three of our business segments. We continue to enhance our operating leverage, focusing on constantly improving our execution across all areas of our business platform. We are growing our customer file, attracting increasing numbers of new customers while deepening the relationships we have with existing customers, helping to drive this are our Celebrations Passport Loyalty program, which provides free shipping for members and our initiatives to grow Multi-Brand customers, our best-performing customer cohort through expanded cross-brand merchandising and marketing programs. Throughout the first half of our fiscal year, we saw continued double-digit growth in Passport members as well as strong growth in the creation of new Multi-Brand customers. As a result, we continue to see improvements in the behavior metrics of our customer file, helping to drive increased lifetime value. As we move into our fiscal third quarter, we are well positioned to continue the positive trends we see across our platform. The 1-800-Flowers brand has a commanding position as a leading destination for Valentine's Day. Among the truly original product designs we're unveiling for the upcoming holiday, our new Romantic Medley's collection that elevates the traditional Valentine's Day floral arrangement with striking combinations of different blooms. And our vibrant gerbera daisy, which we’ve named our flower of the year. In terms of marketing innovations, we are introducing numerous new enhancements to our customer experience, including a new augmented reality capability to help customers visualize their selections in their home or office environment, a redesigned mobile app with one-tap buying and a great gift finder tool and our new AI-powered intelligent virtual assistant. Our focus on innovation to enhance customer engagement and customer experience positions us well to deliver continued strong performance in the current quarter and for the full year. Before turning the call over to Katie to begin Q&A, I'd like to thank all of our associates for their hard work, their innovative thinking and their commitment to helping our customers express, connect, celebrate and deliver smiles. With that, Katie, would you please repeat the instructions for Q&A.

Thank you, sir. Our question will come from Alex Furman with Craig-Hallum Group.

Great. Thank you very much for taking my question and congratulations on a really strong quarter here. I wanted to ask about your outlook for Valentine's Day. It's really right around the corner, so I know it's too early to say what you’ve seen so far, but obviously, we've seen nice strength in the Consumer Floral segment over the last couple of quarters. Can you talk a little bit about just what you're seeing in the competitive landscape and what we should expect to see in terms of marketing spend behind the key floral segment here heading into Valentine's Day?

Great. Thank you. Yes, I think as we look at the Valentine holiday, you're right. It's really too early to get a read on things yet, other than the fact that we just said we feel, with the momentum that we’ve built over the past couple of years now in the floral category coming out of a good quarter of 7% growth this past quarter, as we move into the second half of the year now between both the consumer floral side performing well and BloomNet performing well, we feel that the floral business is really set up for a good second half of the year, really helping to drive what we are forecasting as a 10% growth, really for the second half, putting us back into that guidance position that we spoke about earlier. Really as we look at the competitive landscape, now I look at the position that we are in as for 1-800-Flowers and the things that we focus on a regular basis, really making sure that we focus on what’s giving us the momentum we have. We focus on our customers, we focus on our brand strategy, focus on the truly original product designs we have, our category-best customer experience. So we think we're extremely well positioned from a competitive point of view to just keep focusing and doing what we've been doing to gain the market shares that we have over the past couple of years.

Great. That’s really helpful. And then if I could also ask to Shari's Berries, it sounds like that’s going as well or better than you could have hoped for when that transaction first closed. If I heard correctly, it sounds like that brand is now expected to be profitable for the full year. Can you just talk about what has gone right there? And then just thinking about the fact that that obviously your guidance for revenue for Shari's Berries is a fraction of the revenue that that brand had done in years past. What kind of could we expect to see over the years as you look to grow that brand? I know they had a lot of unprofitable revenue streams previously that probably won't be repeated, but if you could just help us think about the potential for that brand over the next couple of years, that would be helpful.

Sure. I will start and then Bill chime in if you have any additional thoughts. But as we look at... Acknowledge that things are going very well with the Shari's Berries integration that we talked about how quickly we integrated on our platform to begin with. And really, what we stated is our intent is to resize and reposition that business, and that’s what we're doing. So we are still working on repositioning the brand and the product and that will take a little bit of time. But the operational integration has gone very well. And as we look to grow that business now, it really has to grow its distribution capabilities along with its revenue growth at the same time, and you balance that. One of the things that we always cautioned and take a cautious approach is that we don't get out in front of our SKUs on the operational capability before demand is there to match it. So it's managing that. So as we grow the business that's really the two-step system that we have to grow the business.

Yes, I think Shari’s performance in the second quarter and the first half of the year kind of in line with what our expectations were from a top line perspective contributed approximately 1% of the revenues in Q2 and for the first half of the year. As we’ve indicated, its peak revenue period around Valentine's Day and Mother's Day. So we expect the majority of the revenue from Shari’s Berries contribution for the year, it's really in the second half of the year. And we continue to expect to see Shari representing about 2 percentage points of our 8% to 9% growth for the year. As Chris mentioned, we are very pleased with how Shari's is performing, which is helping to contribute this year. I think our original guidance with that would be break even and flat on the bottom line from a bottom line standpoint.

Okay, thanks. Thanks very much. That was very helpful. Thanks, both Chris and Bill.

Dan, we didn’t give a specific number to it. We knew going into this year and into the quarter that the six less shopping days would have an impact on us. We knew kind of the revenue growth in this quarter would be lower than our annual guidance and a pickup in the second half of the year, especially with Shari's being a bigger contributor from that. But we have to continue to monitor as we went through the holiday, what promotions worked and didn't work. We wanted to actually demonstrate some of the leverage that we have in the model and obviously what ended up with outperforming on the bottom line. We certainly didn’t reach for revenue, but it was a promotional environment that we are operating in, and obviously that condensed shopping season helped to feed into that.

Yes, and even with the six fewer shopping days and we anticipated those, obviously going in, we’re extremely pleased with the 6% growth that we have for the quarter. And when you really break it down, you look at the revenue growth for the first half of the year of 7%. Then again if you jump into the quarter, you have the Gourmet Food category growing almost 6%, Consumer Floral growing 7%, BloomNet growing 9.8%, looking to grow approximately 10% in the second half of the year. We think from a growth perspective and then the operating leverage that we're getting puts us in a really strong position.

We mentioned in the call back in October that we accelerated over $3 million of wholesale revenues into the first quarter, which contributed to the double-digit growth during that time, but it did shift some growth away from this quarter. Therefore, it's important to note that we experienced 7% growth during the first half of the year.

That's helpful. Regarding the EBITDA guide raise, you're increasing the midpoint by $4 million, which is higher than the consensus of about $3 million for this quarter. Bill, you mentioned that you still expect Shari’s Berries to remain flat, so I'm assuming that the increase is not attributed to Shari’s. What factors are contributing to the additional operating leverage in the second half of the year?

Shari's is expected to be a modest contributor for the year and the second half. It will represent a peak in the overall increase, but it is not the primary driver. I think just continued leverage. I think we're going to get some operating leverage in the second half of the year. You saw 50 basis points improvement in our OpEx in the first half of the year, that’s going to accelerate a little bit in the second half of the year. We are expecting overall OpEx leverage for the year to be about 70 basis points or so.

All right. Fair enough. Thanks, guys. I appreciate the color.

Thank you for taking the question and congratulations on your quarter. I was wondering if you can tell me just on Shari’s Berries just kind of going back to that for a second. Did you already implement your price increases for Shari’s Berries? And then secondly, are you saying that you are putting Shari’s Berries on your infrastructure is actually giving you better benefit than you expected? And that might be the reason for the improved contribution this year? I was wondering if you could just add a little bit more color on that?

Sure. So, Michael, on the Shari’s Berries on the pricing, I would say we’re still in the midst of finding what’s the right price positioning as we look at the product, we look at the brand positioning etcetera. So continuing to test and optimize appropriately there. And yes, I do think that the operating leverage that we’ve been able to bring to the business from putting it on our platform as we have using the distribution resources that we’ve, especially the same-day distribution resources for Shari’s Berries through our BloomNet Gourmet network that we use for food bouquet has certainly helped us to drive some operating improvement. And that's why we do believe it has been a contributory and it will be a modest contributor for the full year.

This is still very much a test year for Shari’s Berries. We are testing different pricing. We are testing the repositioning of the brand. So there are a lot of learnings going on this fiscal year.

And you haven't received any feedback from customers at this point regarding the product and whether their opinions are more favorable or less favorable compared to before?

Not specifically, Michael. That would just be part of our ongoing customer satisfaction program that we have with customer follow-ups. What we’re hearing and seeing there is positive and that’s continuing to guide as we position the brand.

You have really favorable economic conditions right now, and I was curious if you are experiencing strong momentum driven by the economy. Consumer confidence is reaching new highs. It seems like you have an ideal economic situation for your product. What is your view on what is fueling this momentum as we move into the second half of the year? Do you believe the economic conditions are right? You have been successfully increasing your market share. I'm trying to understand the momentum in your business as it relates to the economy.

So, I think the strong economy is always going to drive consumer confidence. As you pointed out, it is very good for our business and our Floral business really performs well in a strong economy for sure. But what we said is that in a strong economy, we don’t participate in the real highs. Of course, we benefit, but we don't perform robustly, but we also don't perform in the real lows of a down economy either. And especially as we look at the potential of the down economy to come, we think we are in a better position than we ever have been in the past, because what we’ve seen is that people will trade off certain products, trade down into our category, whether it would be floral, but even more so the food brands are more stable during a down economy than floral even. And now that more than half of our business, 52% plus of that business is Gourmet Food, we think from a mix point of view, we are well-positioned for both the slowing economy where we are in today as well as a down economy. However, beyond the macro environment, we really think and if you look at what we have done over the past couple of years, especially on the floral side of the business, pages important as we go into the second half of the year now, we really performed well. From a competitive point of view, we really outshined our competition, taking market share from them. And we do that by really focusing on our brands, focusing on our digital marketing capabilities, focusing on the Passport program, the multi-brand customer initiatives that we have going in. I mean, these are the things that have been driving the momentum that has put us in a sustainable competitive position that we are in today.

Thank you for that insight. Following up on Dan's question, how do you view the current M&A environment? Are there strong opportunities available, or are you still in search of potential acquisitions? Can you provide us with an overview of the M&A landscape?

Yes, what we look at is, again, we are in a very strong position with the balance sheet that we have and the flexibility that we have for it and we’re always making sure that we will be good stewards of that balance sheet, utilizing the capital that we have to invest in our current business whether it's to drive more customer acquisition to make the capital investments in technology or distribution capabilities that we have. But at the end of the day, our goal is to put our cash and our under-leveraged balance sheet to work for our shareholders through acquisitions that can help accelerate the top and bottom line. We used $20.5 million this year to buy Shari’s Berries. That’s been a nice tuck-in and we think that’s got nice long-term opportunity for us. We will continue to look for opportunities like that or larger opportunities as well, things that can leverage our operating platform that we built or things that can add to that platform, that can leverage across all of our customer base. So we’re staying active and again our goal is to accelerate the growth through the appropriate acquisitions.

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

Hi. Congratulations.

Thank you.

Could you comment on your discussion about GFGB and the strength in wholesale gift baskets? I believe you mentioned an expanded customer list. Can you clarify if this involves a new channel, perhaps another warehouse club customer, or what you meant by the expanded customer list?

So, thank you, Linda. Yes, as we look especially on the wholesale gift basket side, our wholesale food growth side, we had good results this holiday season. And it's been a combination of really good product design and the team does a fantastic job on product innovation and product design there. That's also helped us just simply to gain new customers that we sell to. So it's not a new channel, but it's a number of new customers in that we sell our wholesale products to.

Great. And then you were talking about your Outlook for Valentine's Day, although it's so early. Can you just comment, in general, the competitive landscape? And I guess, FTD has been owned now for several months by a private equity firm. Are you seeing any changes with regard to how FTD is behaving or anything that is affecting your thinking about the upcoming big holidays?

Yes. Linda, we believe we have a very sustainable competitive advantage that we've earned over the last couple of years. So as we look at the competitive landscape, especially going into Valentine's Day, we expect it to be a highly promotional holiday, it always is in the floral category. But as we do that, and as you have seen us especially in the last couple of holidays, you see us continue to grow, continue to improve our bottom line, continue to improve our market share, by focusing on our customers, focusing on the customer experience, the truly original products, some of which I pointed out the Romantic Medley collection, gerbera daisy etcetera. We think we have a really good merchandising and product development team that's been winning in the category, the different products we've brought to the table. So when we look at the competitive landscape, we expect hard competition, we expect promotional activity. We think we are as well-positioned as we’ve ever been to win that category.

Great. And then, finally, in BloomNet you had really strong revenue growth. Are you in the phase yet where you believe that you're gaining new members in the network? And can you remind us how that works? I thought there was some seasonality where maybe that activity actually takes place more in the summer. Can you just talk about whether that’s occurring yet or is that still to come?

So I think as you look at the revenue, as we pointed out, a lot of the revenue growth that we saw this quarter came from increased sales and products and services through our membership, and that helps tremendously. But you’re right, there's a seasonality aspect to growing membership in that via service. During the big holidays of Valentine's Day or Mother's Day, people aren’t likely to make major changes, but then they will during the summer time period. So sales blitz is for us, an example, to gain more membership, would normally happen during the summer months.

I think, BloomNet is really well-positioned to continue its momentum going forward and continue to take market share.

Okay. That’s all for me. Thank you so much.

Thank you, Linda.

Yes. Hi. Good morning, everybody. Thanks for taking my call. Staying on the balance sheet and the cash here, you mentioned some technology investments. Is there anything on the horizon that would take you off this kind of $33 million, $34 million in CapEx annually down the pipe here?

Yes, from a CapEx perspective, we’ve been in that range for a couple of years, that’s our guidance for this year. Certainly, we expect to continue to invest on the technology side. We’ve always been a leader in innovation and how we are the kind of the front end of our systems and how we reach our customers. But there's also back end and manufacturing and distribution, we’ve made some efforts over the past couple of years and accomplished some automation projects both on the manufacturing side and we’ve plans in place for automation on the distribution side in some of our larger distribution centers. So we’re expecting that range to continue in the foreseeable future.

Yes, and just a clarity on the technology side of the business, as Bill pointed out, that’s something that we are always making sure we are on the forefront of and we will continue to do that, but there is no major hurdle coming up in front of this from a technology point of view.

Okay. That’s what I was looking for. And then I’m kind of new to the story here, but what’s your attitude or approach on dividends?

Well, as we look at the use of our cash, Doug, we want to use our cash for growing the business, whether it be through investment into our organic growth or through acquisition, M&A activity as we just discussed. So that’s our primary use of cash focus. In addition to that, as Bill referenced earlier, we do have a stock buyback program in place. Dividend is something that we don’t see on a short-term horizon for us right now. We feel there's better opportunity to utilize that cash to grow the business and take more market share.

Yes, sure. That makes sense. And then just looking again, the quarter looks like execution was spot on. But just looking at some of the trends here, particularly in the variable expenses, where gross margins ticked down a little bit and your marketing spending ticked up a little bit. And again, not big moves, but just directionally are these going to be sort of ongoing pressures here as I look at through rest of this year and start thinking about fiscal 2021?

Yes, gross margins do fluctuate. We are operating very efficiently, although we face challenges that affect our gross margins. We are pleased with our current gross margins. We have discussed several ongoing challenges, such as increasing labor costs, tariff uncertainty, the promotional nature of the holiday season, and rising transportation costs. We are addressing these through automation initiatives and improving our operational performance. The fluctuations you're observing in some segments can be attributed to product mix. BloomNet is experiencing accelerating growth, but it offers a mix of high and low margin products and services, which varies from quarter to quarter. We are focused on increasing top line growth, gross margin dollars, and bottom line contribution. From an operating expense standpoint, we expect to continue gaining leverage. We aim to invest in marketing to drive top line growth while seeking efficiencies in other areas of our operating structure.

Sure. And on the marketing expenses, should we just look at marketing expenses as basically moving in line with sales or are there any changes on the horizon there?

Yes, I think over the last two years, we’ve actually invested incremental marketing dollars. Now when you look at the marketing and selling line, there's a lot more, of course, and that’s been straight advertising marketing dollars. So we’re offsetting some of the increased marketing spend with savings elsewhere. But that’s been part of the guidance that we’ve provided over the last couple of years. We were investing in kind of new customer acquisition growth, especially within the 1-800-Flowers and Harry & David brands to drive accelerated top line growth and building kind of a sustainable top line growth model.

And that ties back again to the competitive positioning. We feel we’re in a really strong position, so it makes sense for us to accelerate that a little bit.

Yes, just one quick follow-up, guys. It's a good segue, Bill, from that last answer. Just kind of maybe structurally now, do you think that with all of your investments and sort of reaping the benefit to that, do you think we’re back to kind of where you guys used to be and sort of, let's call it 30, 40 basis points of annual margin expansion? I’m not trying to be tongue-in-cheek, but obviously your guide this year and then your Investor Day guide would only imply 10 basis points of expansion next year. So I don’t know, I doubt there's incremental investment and I suspect you were being conservative, but just want to get a sense of where you feel structurally with the company at this point.

Dan, we haven't provided formal guidance for 2021 beyond what we discussed at our last investor conference with the $100 million figure, which did not account for Shari's contribution. Therefore, we expect that number to rise. We plan to continue driving sustainable top-line growth. We have made several incremental investments in marketing over the past few years, which we believe have been effective. While we have not finalized our 2021 plans, we anticipate continuing these successful marketing investments and are looking to leverage other aspects of our platform to enhance operating leverage.

And we are seeing the benefits of that celebratory ecosystem platform that we've built over all of these years, leveraging the technology, leveraging the distribution capabilities, leveraging some of the marketing programs like Passport etcetera, all of that is helping to drive both the top line and the operating leverage.

Yes, got it. I was looking more directional. That's helpful. Obviously, not looking for solid '21, but feels like we’re kind of getting back to where we used to be with sort of consistent leverage and stable to improving top line with what you’ve got. Thanks, guys.

Yes, good morning, gentlemen and thank you for taking the questions. So I just wanted to follow-up as far as new customer growth. Could you perhaps give us some color as far as how much of your revenue came from new customers to the business and also I was wondering about your AOV for the quarter as well?

So on the new customer growth, we continue to look at, as I mentioned a couple of times, increasing new customer acquisition but also deepening the relationship we’ve with existing customers. And I think if you look at the quarter, revenue from repeat customers was, I think 62%. Yes, 66% actually in Q2. So it's showing a benefit of while we are increasing new customers, we are also deepening the relationship with our existing customer base and we’re really happy with that. Again, looking at the programs like Passport, multi-Brand customer initiatives, what they’re doing to drive those healthy metrics for us. So the more we can keep a nice balance like that, Anthony, the better off we are.

From an AOV perspective, most of the revenue growth in the quarter was driven by order growth AOV. AOV was up about 1% and order growth was about 5%.

Got it. Thank you for that. As far as tariffs, just wondering if the Phase 1 trade deal did that have any meaningful impact as far as your tariff hit for this year as far as your guidance change?

The agreement with China appears to eliminate the risk of new tariffs that could affect our business moving forward. However, we are still dealing with the effects of existing tariffs that have not been removed. We are implementing various strategies to reduce the impact of these tariffs, but they still represent a year-over-year concern. This situation has been developing since 2018 when previous tariffs were imposed before the new ones took effect. This year, we incurred an additional $7 million in tariffs compared to last year. We are actively seeking ways to mitigate the financial burden of these tariffs.

Got it. Okay. Well, thanks for that explanation. And looking at the next few quarters, there are some calendar shifts, Valentine's Day is now on a Friday this year, Easter is a little bit earlier. Then Christmas then will fall into, actually will be on a Friday later this year, then the Valentine's Day then moves to a Sunday next year. So as we adjust our models, how should we think about these calendar changes over the next few quarters? Just a high-level perspective would be great.

Yes, we will give you that from a high level. Obviously, as we get into next year, we will be giving a little more guidance on the calendars of next year. But you’re right, Christmas moving to a Friday is a nice benefit.

This year, Easter occurs about a week earlier, but it falls within the fourth quarter. Most of this doesn't significantly affect our revenue because of how accounting rules work and some catalog costs from last year that were recorded in the fourth quarter; these costs were reflected in the third quarter. While we won't be generating revenue from those catalog expenses, we have to account for that expense in the third quarter, which slightly affects the comparison between the third and fourth quarters. We are increasing our marketing expenses, while revenue will primarily be realized in the fourth quarter. Looking ahead to the next fiscal year, on a broader level, this year being a leap year will shift the calendar. During the holiday season, the loss of six shopping days this year will turn into a slight advantage next year. We will gain two additional selling days since Thanksgiving will move from the 28th to the 26th, and Christmas will fall on a Friday, which is beneficial for logistics and shipping. This creates a positive impact in the second quarter as Valentine's Day approaches. When Valentine's Day is towards the end of the week, it tends to yield better sales, especially since customers often order last minute for this holiday. However, when Valentine's Day shifts to a Sunday next year, it will have a negative impact on our sales in the third quarter.

Got it. All right. Thank you very much and best of luck.

Thanks, Anthony.

Thank you. This concludes our question-and-answer session. I will now turn the conference back over to management for closing remarks.

Okay. Thank you, everyone. We appreciate your interest and your time here. Thank you very much. If you have any additional questions, please don’t hesitate to contact us. And, of course, don’t forget Valentine's is coming soon, so don’t wait, visit any of our all-star lineup of brands to express your heartfelt sentiments to capture her heart on Valentine's Day. Thank you very much.

The conference is now concluded. Thank you for attending today’s presentation.