FLWS

Good day, and welcome to the 1-800-FLOWERS.COM, Inc. fiscal year 2026 third quarter earnings conference call. I would now like to turn the conference over to Andy Milevoj, Senior Vice President, Investor Relations. Please go ahead.

Good morning, and welcome to our fiscal 2026 third quarter earnings call. Joining us on today's call are Adolfo Villagomez, Chief Executive Officer, and James Langrock, Chief Financial Officer. Before we begin, I'd like to remind you that some of the statements we make on today's call are covered by the safe harbor disclaimer contained in our press release and public documents. During this call, we will make forward-looking statements with predictions, projections, and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The company disclaims any obligation to update any of the forward-looking statements that may be made or discussed during this call. Additionally, we will discuss certain supplemental financial measures that were not prepared in accordance with GAAP.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the table of our earnings release. Now, I'll turn the call over to Adolfo.

Thanks, Andy. Good morning, everyone. As we move through fiscal 2026, we remain focused on stabilizing the business and building a stronger foundation for future growth. During the third quarter, we continued to make progress on the key initiatives we outlined earlier this year. We are starting to see early signs that our actions are improving execution and the overall customer experience. I want to start with our Valentine's Day performance, which is an important indicator of that progress. This year, we delivered a significantly improved customer experience with strong gains across our key service metrics. These results reflect better execution, stronger processes, and a clear focus across the organization on delivering a high-quality experience for our customers. Importantly, this progress validates many of the structural and operational changes we have been implementing.

We are now beginning to see tangible evidence that these actions are improving performance across key areas of the business. While there is still work to do, we are encouraged by these results and the direction of the business. From a category perspective, our Gourmet Foods & Gift Baskets segment performed better than our Consumer Floral & Gifts segment. As James will discuss in more detail, this reflects the Easter timing shift and the heavier level of inefficient marketing spend in our Consumer Floral & Gifts segment a year ago, combined with our focus on improving marketing contribution margin. As part of our efforts to broaden our customer reach, we also continue to expand our presence across third-party marketplaces. Ahead of Valentine's Day, we launched a new partnership with Instacart.

This builds on our strategy to meet customers where they are already shopping and to expand access to our floral and gifting value proposition. Through this partnership, our offerings are now available on the Instacart app, supported by our network of local florists. This increases speed and accessibility, particularly during peak occasions, while also supporting our florist partners and introducing our brands to new customers. At the same time, we're strengthening our focus on the customer experience across our digital platforms. During the quarter, we fully implemented AI-powered sorting and ranking on 1-800-Flowers.com. This brings customer-selected best sellers to the top of our product rankings and reflects a more AI-driven customer-first approach. This is an important step in modernizing the business. Historically, product placement was more heavily influenced by merchants.

Today, we are prioritizing the products customers choose, which improves the overall shopping experience and results in higher sales. We are simplifying the shopping experience by reducing choice in certain areas to make it easier for customers to find the right gift. In addition, we are evolving how we operate our floral business, including how we balance florist-fulfilled orders with shipments fulfilled from our distribution centers. We are now operating these areas in a more coordinated way, with our florist-fulfilled orders and direct shipment team working together on assortment decisions. This approach has multiple advantages. It improves the overall value proposition for our customers by simplifying the shopping experience, improving conversion, and better aligning pricing for similar bouquets. Importantly, we made significant progress on our cost savings initiatives, achieving our previously announced $50 million in savings two-year target in less than a year.

This reflects the discipline and execution across the organization and strengthens our ability to reinvest in the business while continuing to improve efficiency. As we realize these savings, we are beginning to thoughtfully reinvest a portion back into the business to support our strategic priorities, including marketing and customer experience. These results are driven by the continued progress we are making on our cost and efficiency initiatives. As part of our transition to a function-driven operating model, we have streamlined the organization, improving alignment, driving synergies, and enabling more efficient decision-making across the business. Since January 2025, we have reduced core headcount by approximately 20% as we align resources with our strategic priorities and improve efficiency across the organization. We're beginning to see cost savings from these actions, although in the short term, they are partially offset by consultant costs, incentive compensation, and tariffs.

Looking ahead, as our strategic initiatives take hold, we're beginning to shift toward a more balanced approach that includes targeted marketing investments to support future growth. Last year, our marketing efforts were heavily focused on bottom of the funnel activities, primarily focused on driving transactions, and we did not have the systems or infrastructure in place to effectively drive customer retention. Over the past nine months, we have made meaningful progress in developing those capabilities. We are now in a position to begin rebuilding our brands. We're also expanding our reach to younger customers through top and mid-funnel initiatives, including influencer marketing on platforms like Instagram and TikTok. At the same time, we're improving our ability to retain customers. As I mentioned earlier, we have significantly enhanced the customer experience by improving areas such as delivery fees and overall customer satisfaction, which are key drivers of long-term retention.

Beginning in the fourth quarter, we're accelerating and testing these targeted marketing investments. While these efforts are expected to take time to translate into revenue, they are an important step in rebuilding demand in a more sustainable way. As part of this shift, we expect marketing spend in the fourth quarter as a percent of sales to be approximately flat compared to the prior year period. In addition to these marketing investments, we're also beginning to invest in building out our martech stack. These investments will begin in the fourth quarter and continue into the next fiscal year as we strengthen the capabilities needed to support long-term growth. More broadly, while cost discipline remains a priority, we believe these actions, combined with our structural improvements, are strengthening the foundation to stabilize the business and enable long-term growth. I will turn the call over to James for the financial review.

Thanks, Adolfo. Good morning, everyone. During the third quarter, revenue came in line with our expectations, reflecting continued execution against our disciplined marketing approach and the ongoing impact of changes in search engine results and pressure on direct traffic. Valentine's Day was consistent with our expectations, particularly given the difficult day placement as the holiday fell on a Saturday and during President's Day weekend. As we progressed into March, we began to see a moderation in the rate of revenue decline in our Consumer Floral & Gifts segment as we anniversaried some of the strategic shifts in our marketing approach. From a category perspective, our Gourmet Foods & Gift Baskets segment performed meaningfully better than our Consumer Floral & Gifts segment during the quarter. Gourmet Foods & Gift Baskets segment benefited from an approximate 5% revenue lift from the timing of Easter.

This performance also reflects the more pronounced impact of prior year inefficient marketing spend in our Consumer Floral & Gifts segment, along with ongoing changes in search engine results and pressure on direct traffic. During the quarter, we recorded a non-cash goodwill and trade name impairment charge related to our Consumer Floral & Gifts segment and the Personalization Mall trade name. While this impacted earnings, it did not affect cash flow. From a profitability standpoint, we saw improvement in our ad to sales ratio and marketing contribution margin compared to last year. Overall, our contribution margin improved year-over-year, reflecting stronger pricing discipline and improved marketing efficiency. Our efforts to streamline operations and manage costs are beginning to have a positive impact on the business.

As of the third quarter, we have achieved a full $50 million in annualized run rate cost savings that we had initially targeted across FY 2026 and FY 2027, ahead of plan. Building on this progress, we are now targeting an incremental $15 million-$20 million in additional run rate cost savings over the next fiscal year. This brings our total identified cost savings opportunity to approximately $65 million-$70 million, spanning both cost of goods sold and operating expense reductions, reflecting continued opportunities to streamline the business and improve efficiency. Importantly, we are being thoughtful about how we deploy these savings. As we move into the fourth quarter and into next fiscal year, we are transitioning from a primary focus on marketing contribution margin toward a more balanced approach that includes strategic investment. This shift is expected to impact our fourth quarter performance.

As part of this shift, we are accelerating and testing targeted marketing investments, including top and mid-funnel initiatives, which are intended to support longer-term demand generation and may take time to translate into revenue. Consistent with this approach, we expect total marketing spend as a percentage of sales in the fourth quarter to be approximately flat compared to the prior year period. In addition, we are beginning to invest in enhancing our digital experience and expanding our martech capabilities, which will support improved customer acquisition, retention, and overall marketing effectiveness over time. These investments will begin in the fourth quarter and continue into the next fiscal year. This approach reflects our focus on building a stronger and more sustainable operating foundation by balancing profitability with the investments needed to stabilize the business and position it for future growth. Now let's review our third quarter performance.

Consolidated revenue for the quarter decreased 11.6%. Our Gourmet Foods & Gift Baskets segment was essentially flat. Our Consumer Floral & Gifts segment declined 18.7%, and our BloomNet segment declined 5.9% for the reasons discussed earlier. Excluding the impact of system-related issues in the prior year period, our gross margin improved 10 basis points to 33.2%, reflecting benefits from our cost reduction initiatives, partially offset by tariffs, commodity costs, and fixed cost absorption. Excluding items affecting period-to-period compatibility and the impact of the company's non-qualified deferred compensation plan in both periods, operating expenses declined $16.4 million as compared to prior year to $144.3 million.

As a result of these factors, our third quarter adjusted EBITDA loss was $31.2 million, compared with an adjusted EBITDA loss of $34.9 million in the prior year period, reflecting a modest year-over-year improvement. Now, turning to our balance sheet. At quarter end, net debt was $94.3 million, compared with $75.3 million a year ago. Our cash balance was $51 million at the end of the third quarter. Inventory was $146 million, compared with $160 million a year ago. In terms of our debt, we had $145 million in term debt and no borrowings under our revolving credit facility as compared with $160 million a year ago.

As we look ahead, we continue to view fiscal 2026 as a foundational year focused on stabilizing the business, improving execution, and building a stronger platform for long-term growth. Our strategic priorities remain centered on enhancing our customer-first approach, expanding third-party distribution, improving marketing efficiency, and driving structural cost savings. We believe these actions are strengthening the foundation for sustainable revenue and profit growth over time. For fiscal year 2026, we expect revenue to decline by approximately 10%-12% as compared with the prior year and adjusted EBITDA to be approximately break even within a range of ±$2 million, which includes approximately $22 million of anticipated incentive compensation and consultant costs incurred during the fiscal year.

These expectations reflect our more disciplined marketing strategy, ongoing changes in search engine results affecting organic traffic, and our transition toward a more efficient demand generation model. Now, we'll open the call for Q&A. Operator, please provide instructions for those interested in asking a question.

Our first question comes from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Yes, good morning. Thank you for taking the questions. You know, good to hear that you had a successful Valentine's Day, even with a adverse calendar day placement. I guess, you know, first on that topic, I guess, can you share, you know, any additional details as far as, you know, the customer experience metrics that improved? And what are some of the learnings from that holiday that you're looking to apply towards Mother's Day, which is coming up in a, in a few days?

Hey, Anthony. Good morning. This is Adolfo.

There are a lot of learnings coming out of Valentine's Day. We're literally transforming the business from a merchandising perspective, a digital perspective on marketing. And by the way, also our post-purchase experience has significantly improved. Before I go to the learnings, I also want to be mindful that between Valentine's Day and Mother's Day, there isn't a lot of room to make a lot of changes. I mean, you need to buy flowers ahead of time, so you can make some changes, but not all of them. Mother's Day, it's going to do better across those metrics, but don't expect the full performance impact just yet. As we think about the changes we're making, let me start with digital.

It used to be that the merchants would place a buy and they decided, "Hey, you're buying roses," or, "You are buying lilies." They would be at the top of the product page, which most customers make a decision on those products. 65% of the sales come above the fold on any website. If you don't have the right product, your conversion declines. As I mentioned, we are now using AI-driven sorting and ranking. Number 1, conversion is improving. Most importantly, we're also finding out what customers really want and what they are willing to pay, not only from a type of stem, but also from delivery method and delivery fees they are willing to pay. We learn a lot from that perspective.

From a marketing perspective, I want to remind everybody that, I mean, the reason Flowers did worse than Food is our marketing spend there last year was heavily unproductive. As an example, we were buying transactions for $40 and making $20 margin on each transaction. You would say, "Well, that's great because we are acquiring a customer." Well, yeah, that's true if you retain the customer, but if you don't retain them, then you are just wasting dollars. We're working on both, is lowering our customer acquisition cost and improving our retention. The second one requires the martech stack. We're making improvements, but we are not 100% there yet. On the first one, the team started experimenting going top of the funnel and mid-funnel.

In the past, the company just wouldn't like that because there was so much focus on the They were so focused on the transactions and the measurement capabilities we had would lead you to believe that buying clicks was the most effective marketing method. What we are finding out as we have more, I would say, better measurement capabilities is that's not true. If you do it right, top of the funnel and mid-funnel investments also drive customer acquisition. By the way, it allows you to acquire younger customers, which also longer term, it's better. The team was experimenting with podcasts, TikTok, Instagram, all of them with huge success and which will be expanded in the future.

From an assortment perspective, one of the things we started testing was just first our mix between florist delivered and direct from our warehouses. In the past, the team, because they had already made the purchase and we own the inventory, using this manual sorting and ranking would favor the direct delivery, which combined with the assortment we were offering there, led to lower conversion. By the way, then at the end of the event, because we had a lot of inventory, they would do heavy discounting. We are managing through that. There were huge learnings during Valentine's Day. Again, some of those are being applied during Mother's Day, and we continue to learn in Mother's Day.

I'm actually super excited about the learnings and the implications for assortment, but it's a process. I think on our operations, this is the type of stuff you don't see in the short term on a balance sheet, but our customer satisfaction post-purchase increased. Our calls to the call center declined on a per order basis. Now that we are also using AI on the call center, we're able to be significantly more productive with a better customer experience. All in all, again, it's, it was one event, one of the multiple businesses we have. A lot of learnings that some of them are being applied during Mother's Day, but certainly they will be fully applied during the upcoming holidays.

Very, very optimistic about the improvements to the overall experience in the future.

Thanks so much for that comprehensive answer. Just switching gears to the cost savings program. You talked about the completing the $50 million cost savings program, but you're also looking to reinvest some of that into the business. How should we think about cost savings on a net basis? Maybe you could just talk about, you know, OpEx versus the cost of goods, how to think about that.

Anthony Lebiedzinski, to answer the second question, right now, the $50 million savings is probably split equally between cost of goods sold and SG&A. That's on that front. As you think of, you know, the cost savings, as we mentioned on the call, some of those savings will be reflected, but not all of those will flow through, you know, this year. You know, near term, we have the consulting costs, you know, for implementing initiatives. Again, we still have some of the headwinds around tariffs and commodity costs. That's offsetting some of those benefits. You know, we'll see the consulting costs starting in FY 2027. We'll no longer have those consulting costs, more of that will flow through. You know, we're being very thoughtful on how we deploy those savings, Anthony Lebiedzinski.

As you look to going into, you know, 2027, those savings give us more flexibility in the model, but we're gonna be very deliberate on how we deploy those and start investing back in the business. It's not gonna be a dollar for dollar flow through EBITDA. We haven't given guidance yet for FY 2027, but think of it in the context, we have the savings, but we are going to deploy those, so it will not be a dollar for dollar flow through on the EBITDA side.

Right. Okay. Can you just remind us about the consultant costs? How much for this fiscal year?

The consultant costs will be, you know, the total, between incentive compensation and the consultant costs, Anthony, it's about $22 million that's in this year's current P&L. The consultant costs are about $12 million-$13 million of that.

Understood. Okay. Thank you so much, and best of luck.

Thank you.

Thank you.

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

Yeah. Thank you for taking the questions. I appreciate it. With your changes in marketing, have you kind of opened the door to competitors? I was just wondering if you can talk a little bit about if whether or not you have seen increased marketing from competitors, especially during Valentine's or certainly around Mother's Day, particularly like if from low-cost providers like Bouqs or any impact from them, for instance.

Short answer is yes. Flowers, it's a very competitive business, especially during those events. I think Google makes it very easy for anybody just to buy other people's brands. Which was, I think, primarily the reason why if you only focus on acquiring, on buying clicks, your customer acquisition cost becomes significantly higher. What we are doing now is leveraging the brand awareness of 1-800-Flowers.com. Anywhere I go and I talk to people, they tell me, say, "Hey, Adolfo, I think your company is the only one that gets, I'm gonna call it natural or direct traffic, and everybody else needs to buy the clicks." The way you do more of that is you need to continue to build the brand, and that's what we are doing.

In general, the bottom of the funnel transactions do not build a brand. They just lead to transactions. Middle and top funnel build a brand, build awareness, so that you're in the subconscious of the customer, and eventually when they have a need, they think about you. We are being, as I mentioned, successful on that. As James mentioned, you need to make investments. Sometimes this top of the funnel, you will invest now, and you won't see the benefits until next month or next quarter. That's why we are being cautious about how we invest, how we learn about the business. The idea is the most important asset we have is our brand. Unfortunately, we had an investor in the brand for a while. We're reversing that. We're reinvesting in the brand.

As I mentioned, we are reinvesting on the digital experience. Our product discoverability in the website is improving. I think every day we have new enhancements, and we are also improving our ability to retain customers. That flywheel is what will allow us to differentiate ourselves versus our competitors. Personalization to the customer, a better experience, AI to drive reminders, to drive recommendations to the customer to increase conversion. As I mentioned, we're modernizing the brand to continue building that brand awareness.

Got you. I know that the business is, you know, heavily correlated to consumer confidence. I was wondering if you can determine whether or not there was an impact by the war in Iran. Then also was just wondering if you can just talk a little bit about your third-party platforms like Amazon, DoorDash. Was wondering if you can just kinda talk a little bit about what % of revenue do you expect to achieve from marketplaces like, let's say, over the next 2 to 3 years.

Got it. Let me start with the first one, impact of the Iran war. Very difficult to see that in the numbers. What we are seeing is I think what this country have seen for a while, which is, higher income spenders are doing okay, lower income are not. You can clearly see that in the numbers, the AOV that it's selling and what's not selling. In all honesty, that hasn't changed much since I joined the company. Whether there was an impact from the war or not is very difficult to see. What was the second one? I'm sorry.

Marketplace.

Marketplace. Marketplace, the way I think about it or the way we are thinking about it as a team is it's a 2-way, it's a twofold strategy. Number 1, by selling to, I would say, professional e-commerce marketplaces, like Amazon, you do learn a lot. You learn a lot about your own operations, you learn a lot about what's working on websites, what drives conversions. That one will have a 2nd level impact on everything we do. It's fascinating what we have learned in the last 6 months since we started selling on Amazon. How much should we expect on that?

I mean, if you are talking about 3 years from now, I think the sales from our sales outside our own e-commerce sites should definitely be double digits of the company. Again, when I think about these, keep in mind we're doing marketplaces, like Amazon, Walmart, and Etsy. We're also doing delivery service providers, especially for our flowers business. We're now in Instacart. We're also doing DoorDash and Uber Eats. The intention here is, we want to be where the customers are shopping. We do have a website. We also have operations. We manufacture product. We represent our florists. I think that was a huge miss from our side not to be in those channels, which we are trying to correct.

It's early days, but it's growing really, really fast from low numbers, but we're optimistic about that.

As we kinda think of the inflection point in coming out of the, you know, to the more of the growth phase of the company, I was just wondering, you know, what would be now the true baseline growth rate of the businesses now? Like historically, we had looked at, you know, 3%-5% revenue growth and about 8% EBITDA growth. I was just wondering if you had any thoughts in terms of the baseline growth rate coming out of this inflection point.

Michael, we're not giving guidance yet for FY 2027. You know, we believe, you know, longer term, you know, further out, we would get back to those growth rates.

Let me build on that, Michael. It's a process, and we are sequencing. I mean, I've been in this role, I think to this day, it's 1 year. When I joined, we were declining at a rate of 20%+. From there, you need to suddenly stop declining. You get to 1 or 2 days of positive comps, then you get to a week on 1 business, and then you want the entire company to drive growth. We are seeing those positive days and those positive weeks in businesses. I mean, it's a process. At some point, we want the company to grow. We're building a very different business model.

The previous one was manually driven, and the new one is going to be AI technology driven. I'm cautiously optimistic about what this company can deliver in the future, but it is a process, and the only thing we can tell you at this point is we are ahead where we thought we would be, but there's still a lot of work in front of us.

Got you. It sounds like you made a lot of progress.

Thank you.

Thank you. That's all I have.

Okay. The next question comes from Douglas Lane with Water Tower Research. Please go ahead.

Good morning, everybody. Just staying on the whole margin cost side of things. It looks like your EBITDA outlook this year improved a little bit despite the fact that you have $10 million more of the incentive comp and consulting costs running through it than you had last quarter. It looks like the underlying margin outlook has improved pretty decently since you last reported results. Where are the 2 or 3 key areas that you're seeing the improved margins on the EBITDA level?

Doug, it's, you know, part of it, as you mentioned, part of it is we are starting to see some of the cost benefits flow through on the gross margin. We're seeing that. As Adolfo mentioned, you know, with, on the floral side, with the florist fulfill versus direct. We're seeing much more pricing discipline, more targeted promotional activity. As you mentioned, you know, better coordination between the florist fulfilled and the direct shipment. We're seeing that, you know, overall improve the gross margin and improve AOV. We're being more, you know, consistent with our pricing decisions. Again, we're reducing discounts, which is improving our overall margin quality. Part that's still being offset, Doug, by the higher tariff and commodity and shipping costs.

Overall, our gross margin, on a year-over-year basis was up about 10 basis points. We are starting to see that flow through and, you know, the strategy is working.

That's what I wanted to probe because, you know, you got the $10 million more of the consultants and incentive comp, you've also got a commodity cost environment that arguably has deteriorated since you last reported results. I don't even know what cocoa price is doing these days, but, you know, are the commodity inputs actually down? Is that another thing that you're having to offset here? I'm just trying to get an order of magnitude of what you're really seeing from your internal cost savings efforts. It sounds like it's a little bit more than is obvious by the numbers on the surface.

I just want to be clear, Douglas Lane, that the, you know, the $22 million is an annualized number, just wasn't for the quarter, right? I want to make sure that I'm clear on that. On a commodity, from a commodity perspective, obviously cocoa prices are still elevated on a year-over-year basis. What we are seeing is, you know, butter, flour, and eggs are down on a year-over-year basis. We're, you know, we're starting to see a little relief on that. As you mentioned, obviously, we are starting to see a little bit of the impact on the fuel surcharges on our outbound shipping because of the increase in the oil prices. Inbound, we, you know, we're not, there's no impact yet on inbound from a fuel standpoint because we have the contracts in place for the remainder of the year.

Yes, we have, you know, commodity headwinds with cocoa, starting to see some relief on the other commodities. You know, still have the impact of tariffs, but we are getting the benefit of, you know, the cost savings as well as I just talked about the, you know, the pricing discipline that we have. That's what's flowing through, and that's why you're seeing gross margin up slightly this year versus last year.

Are we still expecting the consultants to roll off at the end of June, or are they gonna be spilling over into 2027?

The costs roll off at the end of June, so we will not have that starting July first, Doug.

Tariffs as well. You know, you've got some tariff relief here, and then you start to anniversary the implementation of tariffs in 2026, I mean, 2025. The tariff impact should begin to recede in the first part of fiscal 2027 as well, right?

Yes. You know, we still have, you know, right now, you know, there still are tariffs in place, but yes, we will start to anniversary that, and we will start to get the benefit of the lower tariff rates in 2027, Doug.

Okay. Just one last one for me. you know, you raised the flag that marketing spend as a % of sales will be not as a flag, but just to let us know that marketing spend as a % of sales will be flat in the June quarter. Going forward, the base case should be improved marketing spending lowers represented sales because it'll be more efficient. Is that still the base case? I know you're not giving guidance for 2027, but just directionally.

Doug, I would say potentially we're planning with some of the savings that we're getting, you know, in cost of goods sold and SG&A. Part of that savings is gonna be redeployed in marketing. It's not necessarily that you're gonna see marketing, you know, percentage as a percentage of sales going down in FY 2027 as we make strategic investments in marketing.

Let me build on that.

Longer term, though, longer term, Doug. In the short run, as Adolfo mentioned, we need to invest back in the brand and some of the mid, you know, top of the funnel and mid-funnel. In the shorter term, you know, you may not see that, but longer term, absolutely, you will start to see, you know, the improvement in the spend, you know, becoming more efficient.

The other thing I would say, building on that, Douglas, is 1-800-Flowers.com, it's a very different company right now. Every investment we make, it is being evaluated and measured versus a control group. We are making investments and if there is a lift, whether it's sales of margin, it goes through. If it doesn't, if we don't see a lift, we cannot just declare a victory by failing fast and move on. We are not going to make crazy investments, but we are making investments and we are experimenting. I'm convinced, and I think we all are convinced in this company, that really, our future is we need to find a way to drive growth. The investments that I mentioned on marketing, on the martech stack, on digital capabilities, and so on and so forth, are targeted towards that.

Is how do we invest to drive efficiencies on conversion on the website, traffic from a marketing perspective, conversion from an assortment perspective? Every investment we make is being tested, measured, and we decide whether it goes forward or not. The $50 million in run rate that we already have in our pocket, some of that will flow through the bottom line, some of that is going to go through investments. Rest assured that when we invest, it's because we want to see a return on that. That should help the company in the midterm.

Okay. That's very helpful. Thank you.

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

Thank you all once again for joining us today and for your continued support. Fiscal 2026 continues to be a year of stabilization for the company. During the third quarter, we continued to make progress on the initiatives that matter most, and we're beginning to see tangible evidence that these actions are improving execution, strengthening the customer experience, and driving more disciplined performance across the business. We're also taking the next step in our transformation as we begin to balance cost discipline with targeted investments, supported by the progress we have made on our cost savings initiatives. These investments, including marketing and digital capabilities, are beginning in the fourth quarter and will continue into the next fiscal year to support stabilization and future growth. While we recognize that progress will not be linear, we remain focused on executing our strategy with discipline and consistency.

The actions we are taking today are intended to stabilize the business and build a strong and durable foundation to support improved performance over time. We appreciate your continued interest in and support of the company, and we look forward to keeping you updated on our progress. Thank you.

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

Good day, and welcome to the 1-800-FLOWERS.COM Fiscal 2026 Second Quarter Earnings Conference Call. All participants will be in listen-only mode. Please note that 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 welcome to our fiscal 2026 second quarter earnings call. Joining us on today's call are Adolfo Villagomez, Chief Executive Officer, and James Langrock, Chief Financial Officer. Before we begin, I'd like to remind you that some of the statements we make on today's call are covered by the Safe Harbor disclaimer contained in our press release and public documents. During this call, we will make forward-looking statements with predictions, projections, and other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties, including those contained in our press release and public filings with the Securities and Exchange Commission. The company disclaims any obligation to update any of the forward-looking statements that may be made or discussed during this call. Additionally, we will discuss certain supplemental financial measures that were not prepared in accordance with GAAP. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures can be found in the tables of our earnings release. And now, I'll turn the call over to Adolfo.

Thanks, Andy. And good morning, everyone. The holiday season was operationally strong, and most importantly, our operations ran smoothly throughout the period. We addressed the order management system issues that we experienced last year, and the stability of our systems this holiday season represents a clear and substantial improvement. Revenue came in slightly below our expectations, reflecting our continued focus on improving marketing contribution margin and changes in search engine results page, including increased paid placements and AI-driven content, which negatively impacted organic visibility and direct traffic. While direct traffic declined more than we anticipated during the holiday period, this was partially offset by stronger performance in our B2B and wholesale businesses. At the same time, we continue to execute on our marketing strategy, which is focused on improving profitability and efficiency as well as the quality and effectiveness of our paid and earned traffic over time. We believe this approach is important to building a more sustainable and disciplined demand generation model. During the second quarter, we continued to make steady progress on the key initiatives we outlined earlier this year to stabilize the business and support future growth. One of the most important changes this quarter was simplifying our organization and moving to a function-based operating structure. Previously, we were organized by individual brands, which created duplication, limited collaboration, and slow decision-making. The new structure is already driving greater efficiency, clearer ownership, and improved collaboration across the business. As part of this transformation, we'll reduce costs and streamline the organization through workforce reductions and leadership realignments. While these were difficult decisions, they were necessary to improve accountability and better align resources with our strategic priorities. Additionally, we're also reducing layers, applying best practices more consistently, and enabling faster, more effective decision-making across functions. With this structure and recent leadership additions in place, the team is now fully focused on execution. To support this next phase, I am pleased to share that Alex Selikowski joined us as our Chief Information Officer. Alex brings more than 25 years of technology leadership experience and will lead our enterprise-wide technology strategy, including IT applications, data architecture, cybersecurity, and business intelligence, as we modernize our platforms and support our AI and optimization initiatives. We also continue to make progress in improving the efficiency of our marketing investments. During the quarter, we saw improvement in our ad spend to sales ratio as we reduced marketing spend on a dollar basis. Marketing contribution margin in Q2 was impacted by the scale of the holiday quarter and the decline in direct traffic. While this approach can create some pressure on the top line in the near term, we believe it is an important step toward building a more sustainable and profitable demand generation model. As part of this more disciplined approach, we also evaluated our physical retail performance during the holiday season. Our pop-up stores were intentionally designed as short-term pilots during the holiday season and provided valuable insight into customer behavior, product preferences, and how customers engage with our brands in a physical retail environment. Based on the results of these tests, we concluded that the return on invested capital for the temporary pop-up stores was not attractive. As a result, we do not plan to pursue additional pop-up locations. Instead, as part of our testing culture, we are redesigning our retail approach to evaluate a full-year store concept that is better suited for a permanent year-round location. This will allow us to apply what we learned from the holiday tests while taking a more disciplined approach to capital deployment as we look to optimize and selectively grow our multichannel strategy over time. As we move into the Valentine's Day period, our teams are focused on applying this more disciplined marketing approach to a key gifting occasion, with an emphasis on execution, merchandising, and improving the customer experience. Looking ahead, we expect several key initiatives to drive improved performance. Our updated marketing approach is driving a better ad to sales ratio. Enhancements to product discoverability are improving conversion across our online experiences. The elimination of unprofitable initiatives is sharpening our focus on core businesses. And the continued expansion of our third-party marketplace offerings, including Uber, DoorDash, Amazon, and Walmart.com, is growing rapidly and expanding our reach to customers across the channels where they are shopping today. Together, these efforts are helping us build a more stable foundation for future growth over time. With our leadership team now fully in place, we are confident we have the right team executing against a clear and focused strategy. We will continue to improve performance. While there's still meaningful work ahead, the progress we are making gives us confidence that we are moving in the right direction. And now, I will turn the call over to James for the financial review.

Thanks, Adolfo, and good morning, everyone. During the second quarter, revenue came in below our prior view, driven by our continued focus on improving marketing contribution margin and changes in search engine results pages that negatively impacted direct traffic. As a result, our e-commerce revenue declined, which was partially mitigated by growth in our wholesale business. Our gross margin declined due to lower fixed cost absorption, higher commodity costs, and the impact of tariffs. At the same time, our ongoing cost reduction initiatives help mitigate the impact on overall profitability. As Adolfo discussed, we continue to meaningfully improve the efficiency of our operating model. Our cost actions, including organizational simplification, workforce reductions, and tighter expense management, are beginning to benefit the business. While we are executing on our cost reduction actions and realizing savings on a run rate basis, the full benefit of those actions is not yet reflected in our P&L. In the near term, the savings are being partially offset by consulting fees incurred as part of the work to identify, implement, and operationalize these initiatives. These consultant costs are temporary and largely front-loaded. As implementation progresses, we expect a greater portion of the run rate savings to be retained in the business and increasingly reflected in our P&L over time. To date, we have already achieved approximately $15 million in annualized run rate cost savings for fiscal 2026. As previously discussed, we continue to expect to achieve approximately $50 million of total cost savings on a run rate basis across fiscal 2026 and fiscal 2027. Now let's review our performance. Consolidated revenue for the second quarter decreased by 9.5%. This included a 22.7% decline in the Consumer Floral and Gift segment, a 3.8% decline in the BloomNet segment. These results were primarily driven by a strategic shift towards more efficient marketing spending as well as a greater than expected decline in direct traffic. Turning to gross margin, our second quarter gross margin decreased 120 basis points to 42.1% compared with 43.3% in the prior year period. This was primarily due to deleveraging on the sales decline combined with the impact of higher tariff, commodity, and shipping costs. Operating expenses for the second quarter decreased $23.4 million to $221.1 million as compared with the prior year period, primarily due to lower marketing and labor costs. Excluding items affecting period-to-period compatibility and the impact of the company's nonqualified deferred compensation plan in both periods, operating expenses declined $25.9 million as compared with the prior year to $213.2 million. As a result of these factors, our second quarter adjusted EBITDA was $98.1 million compared with adjusted EBITDA of $116.3 million in the prior year period. Now turning to our balance sheet. At quarter end, our net cash position was $42.3 million. Cash balance was $193.3 million, and inventory was $148.9 million. Borrowings under the revolver were fully repaid during the fiscal second quarter. Looking ahead to the second half of the year, we do not expect progress to be linear. However, we remain focused on executing our strategic initiatives and continue to advance our cost reduction efforts. We believe this disciplined approach will allow us to further stabilize the business and position the company for improved performance over time. In addition, it is worth noting that Valentine's Day falls on a Saturday this year, which historically has been a more challenging day placement compared to midweek holidays. As we move forward, our focus remains on strengthening the foundation of the business. This includes improving efficiency, maintaining cost discipline, and ensuring we are positioned to capitalize on future growth opportunities as the turnaround progresses. For 2026, we expect revenue to decline in the low double-digit range, reflecting a continued focus on improving marketing contribution margin, the impact of changes to search engine result pages on direct traffic, and tougher comparisons following higher levels of less efficient marketing spend in the prior year. For 2026, we expect adjusted EBITDA to decline slightly compared to the prior year. On a normalized basis, for 2026, adjusted EBITDA is expected to increase slightly year over year, excluding approximately $12 million of anticipated incentive compensation and consultant costs in the period. Ongoing cost optimization initiatives and organizational streamlining efforts are expected to offset top-line pressure. And now we'll open the call for Q&A. Operator, please provide instructions for those interested in asking a question.

We will now begin the question and answer session. The first question comes from Anthony Lebiedzinski with Sidoti and Company. Please go ahead.

Good morning and thank you for taking the questions. So first on the Consumer Floral and Gifts segment, it was down more than we expected. Was that mostly driven by PMOL? Or can you provide any additional color on that?

Yeah. So Anthony, PMOL was down more than Flowers during the quarter. A lot of it was driven, as we said in our prepared remarks, on the inefficient marketing spend. We were spending heavily on PMOL and pulled down quite a bit of the marketing spend this quarter and improved their ad spend ratio as well as their overall contribution margin percentage. So a lot of that was known, Anthony, but they were impacted the most by the marketing spend, the inefficient marketing spend last year versus this year. So that was a main driver. But yes, PMOL was a big component of the decline than floral than the flowers business.

That's very helpful. Color, James. So just wondering also if you're seeing any different behaviors from your Passport members, whether you've seen still outperformance versus nonmembers. Can you comment on that and whether or not there's been any movement in terms of your Passport membership?

Hi, Anthony. It's Adolfo. Hey. A high level, good morning.

Good morning.

Our passport members performed a lot better than non-passport members. That has been the case. Having said that, we're getting feedback from our customers that the value proposition on our loyalty program needs to improve. And even though the current loyalty program is doing okay, we believe we can do it a lot better. So, the team has already made investments, and we're getting ready to significantly improve our loyalty program over the next few months. But those customers are still our most loyal customers.

Thanks, Adolfo. Okay. And then as we think about the revenue guidance for the back half of the year, which segments do you think will perform better than others? Or do you think it will be kind of consistent more or less across the brands and different segments?

So let me take that and then I'll pass it to James. The way to think about our business, it's so James just shared that the performance of PMOL was slightly behind Flowers. And as you also see, Food was way ahead of the other two businesses. To start with, the main driver was the exposure to incremental spend in fiscal year 2025, which is one of the reasons we wanted to move away from the Brand President role. They were not sharing best practices. So, that order, PMOL, Flowers, and Food, that's how much more marketing spend they used in 2025 to drive growth. So as you know, we implemented marketing contribution margin, and that is actually working quite well. This is why we are able to lower marketing spend while improving marketing contribution margin dollars. Now, over the second half, primarily what you are seeing is just a mix shift. During the first half, Harry and David, our food business, is significantly more important. Second half, the Flowers business is the one that is the most important and represents the majority of our revenues. So the performance is consistent, if not slightly improving versus the first half. It's just a mix shift.

That's very helpful.

And Anthony, as we mentioned, another thing is to take into consideration is Valentine's Day falls on a Saturday this year. So that obviously has an impact on a year-over-year comparison as well.

Got you. Okay. Going to be an impact, but we are preparing for it.

Got it. Okay. So just to follow-up quickly on the Valentine's Day, day placement, obviously, on a Saturday, which is the least favorable time frame. Are you doing are you planning to do anything significantly different from a marketing perspective given the day placement? Just wondering if you could comment on that.

Yes. The merchandising and marketing strategy adjusted for that. And again, we are preparing for it. We are not just assuming it's going to happen. So, we are trying to reverse that trend. So, we are absolutely prepared for that.

Got you. Okay. And last question for me. Just more or less kind of housekeeping. Can you just comment on order volumes and AOV for the quarter?

Yes. So Anthony, for the quarter, our AOV was up 5.2%. And order volume was down about 16%.

Got it. All right. Well, thank you very much. Best of luck.

Thank you.

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

I just kind of wanted to circle back to the floral segment for a second. Given your shift in marketing initiatives, I was just wondering outside of PMOL, can you talk a little bit about the decline you've seen in floral? Do you feel that maybe you're are you still seeing gains in share in consumer floral? And then I was wondering, how do your initiatives change your competitive positioning, not just for floral, but maybe for your other channels as well?

So, at this point, Michael, the focus is on the bottom line. We believe that we have a better marketing approach and honestly, a better merchandising strategy. As we said, this year is a transition year, so we are going to be better positioned for the future. As you know, our Flowers business has two segments. One that depends on the florist and the other that is direct. We are proactively managing the business to minimize the impact on our florist network. So again, it's a transition year. I believe it's going to make us stronger in the future. But we are thinking this transition to be focused on driving profitable traffic versus just driving traffic to drive revenue growth. You're seeing the impact in the short term on the top line.

Got you. And I was hopeful that, I guess, we would start to see a little bit of improvement on the commodity prices, and you indicated that you're still seeing pressure there. I was just wondering if you can talk a little bit about commodity price trends, particularly I know that we are still seeing pressure on chocolate and so forth. But can you just kind of give us your overall feel about commodity trends going forward?

Yes, Michael. As mentioned, cocoa is still on a year-over-year basis is up quite significantly. We're seeing the other commodities, eggs, butter, and sugar starting to come down and stabilize. And at this point, we're seeing that those should no longer be a headwind in the back half of the year, assuming they hold. But we are seeing improvement in the other commodities, but cocoa is still elevated.

And then I guess what are the biggest swing factors that could positively or negatively impact the full-year performance at this point?

One of them is obviously we're working on the cost savings initiatives. We implemented $15 million of cost savings in Q2. We are continuing to implement cost savings initiatives. So to the extent that we could accelerate some of those cost savings, that will help the bottom line. And then, you know, obviously, if we get some, you know, upside on the top line, that always helps as well, Michael. But right now, the thing is what we're controlling what we can control. And the one, you know, the one lever would be, you know, on the cost savings if, you know, we can accelerate some of those savings. So that was kind of the big one that we can control right now.

The other thing building on that, the new functional structure that we have live since November. The whole intention of doing that is to bring best-in-class functional practices. I think the best example right now or the hope that is going to give us a lot of top-line growth is merchandising. We have a new merchandising leader, Nelson Tejada, who has commercial experience. And we completely changed the leadership of the Flowers business to bring more pricing and assortment planning discipline to that business. As we start gathering facts and start gathering data, being more disciplined on our retail practices, comparing our pricing versus competitors, we are finding that we have lots of opportunities for improvement. Little by little, we are going to improve the business over time. So, we believe that what you are going to see is, as these functional leaders start taking action. I mentioned in the prepared remarks also product discoverability. We have tests going right now that significantly improve conversion as we improve our online experience. So those are going to be tailwinds to the business. And so, as we said, I mean, we're very optimistic that bringing best-in-class practices to the functional areas, merchandising, online. And even now, the growth in our external marketplaces, it's I mean, it's from a small base, but it's growing significantly. We believe that all of those will be positive factors on the performance of the business going forward.

Got you. Just a couple of quick ones here. Interestingly, GDP numbers were pretty strong in the third quarter. Interest rates are coming down, albeit modestly. Consumer confidence is super weak. And traditionally, your business followed consumer confidence, and I was just wondering what are you seeing in terms of the consumer at this point? And kind of give us your thoughts on what you're seeing out there?

So on the consumer front, we are still seeing the bifurcation. We still feel that the higher-end household income is holding up better, Michael. And we're still seeing some softness on the lower-end, you know, household income spectrum. So we're kind of still seeing that trend.

Gotcha. I can't think of a period where you've gone through such a big corporate reorganization. In the past, during periods like this, you've kind of looked in or been able to pick up some pretty interesting companies and made some acquisitions. And how are you thinking about capital allocation priorities right now in terms of just reinvestment, shareholder returns, and things like that?

I mean, as Adolfo mentioned and we've been mentioning, Michael, we're looking at fiscal 2026 as like a foundational year for us. So the priority right now is really on stabilizing the performance and building the capabilities, as Adolfo mentioned, within the organization for sustainable profitable growth. So clearly, we're taking a disciplined approach towards and we'll allocate capital toward, you know, operational efficiencies, customer experience improvements, and adding technology capabilities. But clearly, if there's something out there that makes sense, we would look at it. But right now, we're really focused on the turnaround in the foundation setting from a capital allocation standpoint.

Would there be anything that you would sell?

I mean, at this point, the more we strengthen the core, the better we are going to be. So, everything is on the table.

Got you. All right. That's all I have. Thank you.

The next question comes from Doug Lane with Water Tower Research. Please go ahead.

Yes. Hi. Good morning, everybody. James, remind me, do not take consultant costs out of your adjusted profit numbers, right? They're included in there at this point. Is that right?

Correct. Yes, they're in there.

So at some point, they'll roll off. So I don't know if you talked about how long you expect the consultants to be working for you. Is this gonna be a couple of quarters, a couple of years? Just any kind of, you know, characterization there?

Yes. So we know, Doug, what we said is the consultant costs are front-loaded. So we believe right now that the costs will kind of last through this fiscal year through June. And then they'll stop going into fiscal 2027. That doesn't mean if we see an opportunity where we think we may need some help with some initiative that we're working on that they may not come back. But right now, consultant costs will go through the end of the year. And that's going to total roughly about $11 million of consultant costs this year that will be in our but we're not adding back to the adjusted EBITDA.

Got it. And just switching gears here. You talked about Valentine's Day being on a Saturday. Isn't Easter a little earlier this year? Is that going to impact timing between the third quarter and the fourth quarter?

Yes. It's Easter falls, I think, April 4. So that actually a lot of the orders will come in, in March, so that will be a shift in the quarter. And actually, with Easter falling a little further away from Mother's Day, it does help us as well. So that day placement is helpful. So there will be a shift into Q3, but also typically that day placement's a little better. The closer Easter is to Mother's Day, that's not as strong for us. So the day placement we like in early April.

Got it. That makes sense. Also looking at the sales number here, you know, the total number was literally within a million dollars of our forecast, but floral missed by $30 million and food beat by $30 million. So there's a big divergence between floral and food here. And you've touched on it, but what do you think is the real source of the deterioration in the floral and gifts business and the better than expected performance in the food and gift baskets business?

So, I mean, again, I mentioned the impact in 2025 of incremental marketing spend. I think it was significant in Flowers. The Food business was a lot more disciplined, although they also overspend a little. The second factor that is important is food is a lot more exposed to B2B, and that business has been very solid for us. So those are the factors. And there's some other competitive things, but those two are primarily the difference between one and the other.

Is this also where we see that bifurcated consumer since PMOL's in the floral side and, you know, Harry and David's on the food side and they're clearly opposite ends of the economic spectrum?

Probably, yes.

Okay. Fair enough. Lastly, you talk a little bit about what your learnings were in the quarter from your pop-up stores?

So, I mean, again, I said in the prepared remarks, we have a strategic belief that we eventually should become an omnichannel player. Today, we have physical retail stores that are EBITDA positive and have a very attractive return on invested capital. There was a belief on the pop-up stores that, hey, we're going to open them, they will not only drive sales, but they will also drive brand awareness in locations where they are, and probably the sales would increase online. There was a little of that. But if one of the things we're trying to implement, James and I, going forward is capital discipline. If the return on invested capital is not attractive, we are simply not going to do it. And I think it's twice that we tested the pop-ups and twice that were below expectations. So, enough is enough. Having said that, as I said, we're still looking for that physical retail model. You will see us testing things. But again, these tests are with the idea of finding a way to significantly grow the physical retail segment of our business. But definitely, it's not going to be through pop-up stores.

That makes sense. Okay. Thank you.

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

Thank you once again for joining us today and for your continued support. Fiscal 2026 continues to be a year of stabilization for the company. During the second quarter, we continued to make progress on the initiatives that matter most, including simplifying the organization, improving cost efficiency, strengthening our leadership team, and broadening our customer reach. While we recognize that progress will not be linear, we remain focused on executing our strategy with discipline and consistency. The actions we are taking today are intended to stabilize the business and build a strong and durable foundation to support future growth over time. We appreciate your continued interest in and support of the company. And we look forward to keeping you updated on our progress.

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