Hello and welcome to the Fiscal 2007 First Quarter Financial Results Conference Call for 1-800-Flowers.com. My name is Arnica and I'll be the operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded for replay purposes. At this time, I would now like to turn the call over to Mr. Joe Pititto. Please proceed, sir.

Thank you, Arnica. Good morning. Thank you all for joining us today to discuss 1-800-Flowers.com's financial results for our fiscal 2007 first quarter. My name is Joe Pititto, and I'm Vice president of Investor Relations. Those of you who have not yet received a copy of our press release issued early this morning, the release can be accessed in the Investor Relations section of our website at 1-800-Flowers.com, or you can call Patty Altodama at 516-237-6113 to receive a copy of the release by email or fax. In terms of structure, our call today will begin with brief formal remarks, and then we'll open the call to your questions. Presenting today will be Jim McCann, CEO; and Bill Shea, CFO. Also joining us today for the Q&A section of our call is Chris McCann, our President. Before we begin, I need to remind everyone that a number of the statements that we will make today may be forward-looking within the meeting of 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 there were not prepared in accordance with Generally Accepted Accounting Principles. Reconciliation of these non-GAAP financial measures to most direct comparable GAAP measures can be found in the tables of company's press release earlier this morning. The company expressly disclaims any intent or obligation to update any of the forward-looking statements made in today’s call and recording of today’s call, the press release issued earlier today or in any of the SEC filings, except as may be otherwise stated by the company. I’ll now turn the call over to Jim McCann.

Good morning. For the first quarter, we achieved strong revenue growth of 21.6% to a record of $137.1 million. This growth was aided by business we added last year, particularly the acquisition of Fannie May Confections and our Gourmet Foods and Gift Basket category. Excluding the Fannie May contribution, our organic revenue growth was approximately 10%. Importantly, we achieved this solid revenue growth in what is our lowest revenue quarter due to the lack of any gifting occasions during the summer months. Over the past several years we've assembled the pieces of our business to achieve our long-term strategic vision, which we have done this and -- which we have done through this combination of organic growth, both in new businesses and our complementary acquisitions. We have demonstrated a consistent ability to grow revenues at double-digit rates and are fast approaching $1 billion of revenue. We are the clear leader in the consumer floral business, where we believe we are winding -- widening the competitive gap. Leveraging our leadership position, we successfully launched our BloomNet wire service business last year and we are seeing tremendous early success. We have also significantly expanded our gift offerings, and become -- to become a leading player in the gourmet food and gift basket business. Based on this scale, we have now increased our focus on enhancing operating leverage throughout all of our businesses. In the first quarter, we achieved 320 basis point improvement in our operating expense ratio, illustrating the initial benefits of this effort. This enhanced operating leverage resulted in EBITDA improvement for the quarter of 20.3%, or $1.5 million. We expect to build on these results during the current fiscal second quarter, which will also benefit from anticipated higher revenue and gross profit margin contributions, primarily related to our specialty brands business. These categories, Gourmet Food and Gifts, and Home & Children's Gifts generate a majority of their annual revenues and profits during the year-end holiday period we are now in. Before I turn the call over to Bill, for his review of specific results and metrics for the quarter, I would like to highlight a few additional achievements. First in the floral category, our core 1-800-FLOWERS.COM consumer floral business grew more than 8%, to $83 million. We grew more than 9% in the e-commerce segment of this business, which represents a majority of the 1-800-FLOWERS.COM brand. We believe this growth on the largest base in the category further extended our market leadership position. We also improved our operating leverage in this area, resulting in a 33%, or $1.9 million improvement in Category EBITDA to 7.8 million compared with 5.9 million in the year ago quarter. In our BloomNet wire service business, we achieved revenue growth of almost 60%, to 7.2 million compared with 4.5 million in the first quarter of last year. Increased operating leverage has resulted in a 150% increase in EBITDA to 1.7 million, compared with 700,000 in the year ago period. These results illustrate the enthusiastic response that BloomNet's superior value proposition continues to receive from our florists. Second, on the customer front, we attracted 548,000 new customers with 67% of them coming to us online during the quarter. We also achieved a repeat order rate of more than 55%, illustrating the continued success of our efforts to deepen the relationships we have with our existing customers. We continue to evolve and introduce new marketing and merchandising programs designed to enhance and engage our customers. Such as the categories first loyalty program, our Fresh Rewards offerings. These efforts enable us to deepen the relationships we have with our customers and expand what we call our Enterprise Customer Value, or ECV. Increasing ECV is evidenced in the results we are seeing from our expanded cross brand marketing programs, including increased average order volume and improved response rates from our marketing programs, both online and off. We anticipate further improvements in this area during the current quarter with the key year-end holiday period -- our key year-end period. I will now turn the call over to Bill, so he can take you through the details of our financial results and the key metrics for the quarter.

Thank you, Jim. In fiscal first quarter we achieved both strong revenue growth and enhanced operating leverage. As a result, we improved our EBITDA for the period by more than 20%, to 1.5 million. This was achieved despite the seasonally lower revenues associated with our Gourmet Food and Gift Basket category, particularly Fannie May, related to their fixed operating overhead during the summer months. We anticipate that this category will have its strongest results in terms of revenues and profitability during the current fiscal second quarter. In terms of EPS for the period, the financing and tangible amortization costs associated with our prior year acquisitions were approximately $0.03 per share in the quarter. As a result, our EBITDA improved 1.5 million, GAAP net loss for the first quarter was 7.4 million, or $0.11 per share, compared with a loss of 6.6 million, or $0.10 per share, in the prior period. Pro forma net loss for the quarter, excluding impact of stock-based compensation expense, was 6.7 million, or $0.10 per share, compared with 5.9 million, or $0.09 per share in the prior year period. Regarding specific financial results and key metrics for the first quarter, total net revenues reached 137.1 million, an increase of 21.6%, to 24.4 million, compared with the 112.7 million in the same period last year. This includes organic growth of approximately 10% combined with the contributions of our prior year acquisitions. During the quarter, our e-commerce orders combined with online and telephonic orders totaled 1,637,000, compared with 1,596,000 orders in the year ago period. Average order size during the quarter increased to $66.74, compared with $63.06 in the prior year period. This increase primarily reflects a combination of product mix, increased add-on sales and pricing initiatives. During the quarter, we added 548,000 new customers, with 365,000, or 67%, coming to us online. This was achieved while concurrently stimulating repeat orders from our existing customers, who represented approximately 59% of total revenues, compared with 61% in the prior year period. The year-over-year change reflects a strong growth we achieved in new customers during the year's first quarter. Gross profit margin for the quarter declined 80 basis points, 40%, compared with the same period last year, primarily reflecting the seasonality of our new Fannie May business as well as (inaudible). Operating expenses as a percent of revenue, excluding depreciation and amortization, improved 320 basis points to 44.4%, compared with 47.6% in the prior year period. This reflects the improved operating leverage we achieved during the quarter. As we previously stated this is a key area of focus and we expect to continue to drive year-over-year improvements in operating leverage. For the quarter, depreciation and amortization increased 1.2 million, to 4.7 million, compared with the prior year, primarily as a result of the incremental depreciation and amortization of intangibles acquired as part of the Fannie May acquisition. The company also incurred financing costs associated with Fannie May, of approximately 1.7 million during the quarter. As a result, GAAP net loss for the quarter was 7.4 million, or $0.11 per share, compared with the loss of 6.6 million, or $0.10 per share, in the prior year period. Pro forma net loss for the quarter was 6.7 million, or $0.10 per share, compared with 5.9 million, or $0.09 per share, in the year ago period. For the quarter, non-cash stock-based compensation was approximately $1 million pre-tax, $700,000 net effect, or approximately $0.01 per share consisting -- consistent with the prior year period. In terms of category results, as we discussed in our August 10 press release and conference call, beginning with this quarter we will provide selected financial results for our floral and specialty brands business categories as follows. In our 1-800-FLOWERS.COM consumer floral business, during the first quarter revenues increased 8.2% to 82.5 million, compared with 76.3 million in the prior year period. Gross profit margin for the quarter in this category was 38%, compared with 38.3% in last year's first quarter. Reflecting improved operating leverage, Category EBITDA improved 32.5%, or 1.9 million, to 7.8 million, compared with 5.9 million in the prior year period. We define Category EBITDA as earnings before interest, taxes, depreciation and amortization and before the allocation of corporate overhead expenses. In our BloomNet wire service business, revenues increased 58.7% to 7.2 million, compared with 4.5 million in the year ago period. Gross profit margin was 57.2%, compared with 57.9% in the prior year period. Category EBITDA increased 152.8% to 1.7 million, compared with 673,000 in last year’s first quarter. This reflects the growth in florists' membership, and products and service offerings compared with the prior year. In our specialty brand businesses, Home & Children's Gifts category, revenue increased 8.5% to 24.6 million, compared with 22.7 million in the prior period. Gross margin was 41.3%, compared with 42.7% in the same period last year. This primarily reflects fuel surcharges, both inbound and outbound shipping. We anticipate improved gross profit margin for this category during the current fiscal second quarter, its largest period. Category EBITDA loss was 2.1 million, compared with a loss of 1.9 million in the prior year period reflecting the lower gross profit margin. And our Gourmet Food and Gift Baskets category, revenues increased 158.3% to 22.2 million, compared with 8.6 million in the prior year period. Gross margin was 38.3% compared with 43.9% in the year ago first quarter. This primarily reflects the seasonally low margin associated with the Fannie May brands during the summer months. We anticipate significantly higher gross margins from Fannie May during the current fiscal second quarter, also with (inaudible) period . Category EBITDA loss was 1.6 million, compared with a loss of 1.4 million in the prior year period, that reflecting the aforementioned seasonality in this category. As I stated earlier, the Category EBITDA results excludes costs associated with the company’s enterprise shared services platform, which includes among other services, IT, HR, finance, legal and executive. These functions have operated under centralized management platform, providing support services to the entire organization. For the fiscal first quarter corporate expenses were 11.9 million, compared to 10.8 million in a year ago period. Turning to our balance sheet. Our cash and investment position at the end of the quarter was approximately 10 million and filings under our revolving credit lines were approximately 37 million. This reflects the seasonality of our business, specifically the increased investments in inventory for our specific brands and BloomNet businesses for the upcoming holiday period. Inventory of approximately 75 million was inline with management's expectations and reflects the aforementioned buildup for the year-end holiday season, including approximately 21 million related to Fannie May. Regarding guidance, as we stated in this morning's press release, we have reiterated our guidance for fiscal 2007, which calls for revenue growth of 17% to 20%, and EBITDA and EPS growth of more than 100%. Regarding the current fiscal second quarter, which includes the calendar year-end holiday period, we expect the period will represent approximately 36% to 38% of our full year revenues. In summary, as we enter our key fiscal second quarter, we are focused on driving continued strong revenue growth and improving both our operating leverage and gross profit margin toward enhancing our bottom line performance. I'll now turn the call back to Jim.

Well, to sum up, during the first fiscal quarter we made significant progress toward our stated goals of solid revenue growth and improving our operating leverage to enhance our full year bottom line performance. We achieved strong revenue growth of approximately 22% or more than 24 million aided by Fannie May. We significantly improved our operating leverage achieving a 320 basis point improvement in our operating expense ratio. Also during this quarter, we began to see some early benefits from Our Business Process Improvement program. The first phase of this effort is well under way, and we anticipate achieving substantial cost savings beginning this year from such programs as vendor consolidation, product and service sourcing initiatives, and optimization of internal operations. Looking ahead, our outlook for the current fiscal second quarter, including the key year-end holiday period, is very positive. On the marketing and merchandising front, we believe we have a broad range of programs, including our online and offline advertising campaign, customer engagement initiatives and new product development efforts. These will enable us to both, deepen the relationships we have with our millions of existing customers, as well as attract a significant number of new customers to our collection of our great gift brands. We expect to drive higher gross profit margins in our -- all of our gifts brands through a combination of sourcing, process improvements and focused merchandising programs. Our BloomNet wire services continues to attract the very best florists in the business, who are attracted to the strength of our superior value proposition that we offer them. We believe these factors, combined with our focus on achieving increased operating leverage, will enable us to enhance our results for the current fiscal second quarter and beyond, and thereby build long-term shareholder value. Now that’s concludes our formal remarks. I will now open the call for your questions. Arnica, would you restate the instructions for the Q&A portion please.

(Operator Instructions). Your first question comes from the line of Eric Beder with Brean Murray. Please proceed sir.

Good morning.

Hi, Eric.

Congratulations.

Thank you.

I came in a little late in the call, so I apologize if this is repetitive. Could you talk a little bit about -- you talked about the business improvement, the process improvement, how long a process is in terms of should we be thinking about in terms of -- in terms of better consolidation of facilities. How long is that process going to take to think -- to kind of reach kind of maximum level of where you want to be in terms of margin?

Well, I think the way you should look at it, it's a permanent program for us. These are the retiring people who were formerly consultants that we have known in and worked with on projects in the past, making the commitment to bring them on and make them a part of our management team demonstrates that we will stay focused as a growth company on always being able to maximize any growth that we get, whether that growth comes from our organic growth efforts, whether it comes from the new business building efforts we have of businesses that we launch from birth or whether it comes from the acquisitions we already have or perhaps some new ones sometime in the future. We will always want to have the ability to make sure they were maximizing our efforts through our human resources, through our vendor relationships, through our purchasing and product procurement efforts, as well as our operating system. So, I think you should expect to see and anticipate that this has become a part of our DNA.

In terms of BloomNet --

Let me finish the first part of that before I go to BloomNet, Eric, and I want Chris to comment on the specific. But what we introduced to you in the last conference call, Eric, is a continuing of projects, some of what we called the near term quick hits, others that were more in the vendor category in terms of how we purchased products, how we procured services and then the biggest category was a whole realignment of our company in terms of how we reengineer, how we do business. So, we began the effort. In the first few months you are seeing quick hit things start to take effect, which will have a continuing yield this fiscal year and a much greater yield next fiscal year. Some of the procurements efforts will have an impact especially in the second half of this fiscal year, but especially next fiscal year, and those system reengineering kind of efforts of bigger carrier efforts which are already identified and begun, will take longer to realize. So, Chris, if you could provide some color to it in terms of the kinds of things that Eric and the investment team can expect to see from those efforts this year and next.

Again, the way we have specifically broken it out at this point in time. Our plan is really a three phased approach. Phase one is what we are calling more of a short term initiatives like you say, Jim; vendor contract renegotiations, consolidation with the different pieces we pull together, any kind of buying opportunities, catalog, and telecom, shipping, etcetera. They will all come into place really over the next -- first 18 months. So, some of those things will start hitting next year, full annualized savings should start to hit in the following fiscal year is when we should realize most of the full annualized savings there. Phase two starts again -- phase three starts to get into more looking at the company differently and how we can consolidate assets and get that utilization and maximization out of those assets. As Jim pointed, this is an ongoing sustainable part of our DNA as a company at this point in time.

And then you had some questions on BloomNet, Eric?

Yes. Where are you -- we have talked before, you are rolling out new services and kind of matching your competitors in all those services. Where are you -- what kind of -- what services are still left kind of the fill-ins, to fill-in kind of offer the complete service here, so a florist can use you entirely as opposed to one of the competitor.

From -- and that's what we are finding right now. Our BloomNet shops really are utilizing us instead of competitors and that continues to be enhanced. Again, as we look at the metrics we have provided now, as we look to enhance the revenue of BloomNet, we will continually add new products and services. From a competitive point of view, we will not lay out when and what services and at what time point will introduce those services. But, what we see in the market right now is clearly the membership, the sending capabilities the florist has, the directories that they use, product sales through BloomNet product, different product capabilities that they have from BloomNet technologies, we will continue to enhance these programs as we move on. We are a full service wire service today.

Okay. Final question, there is lot of synergy is obviously in selling some of your gifting products to the -- around BloomNet. What do you think is one of the best products for that, kind of, how do you see that rolling out in terms of selling complimentary products to the florists from your line of branded items?

Well, I think as you see, without giving you a roadmap to the introduction of the specific products and services, and giving timelines for the competitive reasons Chris mentioned, but I think you are right. To identify a lot of our florists to sell our products. There is a real, real tough situation in the market place domestically, and frankly in every market around the world where the number of flower shops decreasing, and decreasing at alarming rates. They have been now for seven years. Just anecdotally, I don’t have data to back it up, but just anecdotally, communities that I visited around the country, I still see an alarming number of shops closing and, of course, we are in contact with the flower shops on a regular basis. But, we know what's going on in those community, so we are concerned by that. So the programs that we are focused on, what programs can we introduce that will help them to compete, and the not competing with just like the flower shops, that's almost the least of their competition, help them to compete with all the other gift providers, all the other service providers in that community; supermarket, the big stocks retailers, the drug stores, the green grocers, everyone who is competing with them for some share of the gift dollar. So, that's why the Fannie May acquisition is so important to us. To help out florists, for example, if we are able to have the second most important gift category in a line after our standard flowers and plants, etcetera, is the chocolate category, to gift chocolate. And now to be able to bring a branded product on a national basis to our participating BloomNet florists, so they can market and sell and market nationally, and say this product is available for same and next day delivery in a branded great quality good brand product, is an example of the kinds of products we want to allow our florists to be able to sell back to us. We have to give them the tools that they can be competitive in a marketplace so we can help them to sustain themselves and provide us with a profit opportunity as well.

Great.

Thank you.

(Operator Instructions). Your next question comes from the line of Jeff Stein with KeyBanc Capital Markets. Please proceed, sir.

Jim, just wondering, you talked about some low hanging fruit on this cost cutting initiative, but if you look at where most of the leverage was achieved in the first quarter was on the sales and marketing line. And I am wondering, are you realizing any the savings there or is there something else going on, on that line that caused you to see such dramatic improvement?

No, I don’t think that you can expect that's where you will see it. In fact, all of our metrics internally all the ways that we aligned the compensation of our management team is not geared around -- in fact, it excludes the marketing line completely. Our goal is to reduce our non-marketing expenses so that we have more powder there to help grow our business even faster. So I think, the programs that we have introduced which lever the assets we already have to reduce our operating expenses in real dollars and percentage terms, will be focused primarily on the non-marketing line and the kind of things. Now that we have a Fannie May, instead of them having a very small direct-to-consumer business. We are putting a lot of efforts to help them grow their direct-to-consumer business, like we did Cheryl this past year, Cheryl & Company helping them grow their direct-to-consumer business. But in each case now, we have been able to go back in with the scale we have of approaching nearly $1 billion in sales, we have many more packages we ship. So we will renegotiate contract to consolidate our vendor relationships on the shipping side. So, we have negotiated that, say, this current fiscal second quarter, you will start to see the yield of that next quarter and the quarter after that, so the second half of the fiscal year. If we renegotiate on telecom contracts because of our new scale there, with this new pieces, you begin to see those impacts right away and little bit already in this second fiscal quarter. So, I think the emphasis of our expense reduction is not on the marketing spend line, will be primarily on all expenses other than marketing.

And can you help us understand what happened in the first quarter on the marketing line and is that sustainable?

I think it was -- a combination of both, labor efficiencies. What runs through that marketing and selling line, is not just marketing costs sits within the sales and marketing, which shift with the sales and marketing line, like --

Things like telecom.

Things like telecom, things like labor, service center organization. And we do get while --we are not looking to reduce marketing dollars per se, in what we are presenting to our marketing efforts. We are looking at within marketing things like getting -- consolidating our print and postage, and driving efficiencies within that source. So there is a sustainable savings within our catalog costs, and with our email providers and things of that nature. So we are seeing some leverage on those lines as well.

Okay. So, again, is it a -- maybe you could drill down a little bit. If you just would isolate marketing, did you see leverage? If you just would isolate marketing spending as a percent of sales, and if that’s the case, what should we expect going forward?

Yes, there was leverage on the marketing line and we would expect to see some leverage going forward with respect to the cost of providing those marketing efforts.

And so your customer acquisition costs came down during the quarter.

We don't provide that metric on a quarterly basis but, yes, it would.

Okay. And just real quickly. Fannie May, can we assume it diluted earnings by about $0.03 a share?

Yes.

Okay. And just the integration of Fannie May itself. Is it going as expected?

Yes. We are very pleased with the integration of Fannie May at this point and, again, as we stated in the past, the integration of Fannie May is more on the growth side than on the operational side in its initial phase.

Okay, thanks.

Your next question comes from the line of Anthony Noto with Goldman Sachs. Please proceed sir.

Hi, good morning. This is actually Aaron McCann for Anthony. I guess the first question we have is related-- you noted that gross margins for the Fannie May business were seasonally low this year. And I'm wondering if you could help give us kind of a range of gross margins we could expect or how gross margins have progressed through the year in a more seasonally beneficial quarter?

First, Aaron, I think, it's important that we disclose that we are not related in anyway.

That is sure.

I have a daughter named Aaron, but no longer McCann. She got married last month, she left the flock.

That's too bad.

It's good for her father.

I think what you could expect, Aaron, in terms of Fannie May, they are on exactly where we expect them to be for this quarter, because of the seasonal mix they are going to have a lower gross margin, which would have a negative impact on the overall corporate gross margin this quarter. We said and we expect and it's very much likely to be the case that their gross margins for the year will be in the mid-40s and in fact north of that in this current fiscal second quarter, it being the Christmas holiday quarter.

Okay, great. And then, I guess, would you also expect the Home & Children's Gift segment to be profitable from an EBITDA margin perspective in the second quarter?

Certainly the Home & Children's Gift category has their big quarter now, so you'll see like our mix of product. For the year we are roughly 50-05 between floral gift and non-floral gifts. But this current second fiscal quarter, the holiday quarter, will be about a third floral gifts and two-thirds non-floral gifts. A big contributor will be, of course, Fannie May and our Home & Children's Gift having a big quarter this year, and big quarter not only in terms of revenue, a big quarter also in terms of gross margin.

Okay.

And remember, the overall seasonality of our business, we do about 14% of our business in Q1. We do 36% to 38% of our business in Q2. So, obviously the revenues in Q2 are significant and it's driven primarily from the Home & Children Gift category and basically specialty brands categories, non-floral categories.

Okay, great. And I guess one of the other things we have been looking at and thinking about is the potential for fiscal '07, the coming year in which you return to kind of being free cash flow positive, and that would be an important milestone given significant level of investment over the last couple of years. What is your expectation as earliest for free cash flow for fiscal '07?

Fiscal '07, we -- I think we have given is this guidance in the $25 million range of free cash flow.

Okay. And then are there any trends so far, I guess, quarterly data as it relates to marketing costs in the holiday season that you can give us any insight on, I guess, particularly related to (inaudible).

Specifically related to (inaudible), no specific trends yet. Clearly we expect -- in the area of -- you just mentioned as it gets closer and closer to holiday, we expect that to become more competitive. But we are well positioned because of the length of marketing we need to take advantage of.

Okay, great. Thank you guys.

Your next question comes from the line of Paul Keung with CIBC World Markets. Please proceed, sir.

Hi, good morning, gentlemen.

Hi Paul.

Hi. Just kind of a follow-up and just put it, I guess, now that you are going to report your first quarter now without a segment reporting, can you just walk through again what targets you set for yourselves or goals -- ranges for revenue growth, gross profit and EBITDA for those different segments on our full year basis?

Paul, we really didn’t give that level of breakdown. We gave detail for what we expect in the guidance for the year, which was 17 to 20% top line growth, and that EPS and EBITDA growth of over 100%. And then we kind of gave a level set or an idea to where these categories were as kind of the start -- but we didn’t give specific guidance by -- on a category basis.

How about just giving us idea of the gross margins, what these ranges would be on an annual basis that may be a little better range?

What Paul?

Gross margins on a segment level. What ranges will gross margins be in each business and have a little different cost structure?

Sure. What we have -- traditionally what we have seen there is that our floral business runs in the high 30s on gross margin, our specialty brands business runs in the mid to high 40s, giving us a blend and our target for the year for gross margin of anything in the 42 to 43% range.

Okay. All right. And then, again, kind of same question of free cash flow, I am trying to get a little more meat to it. If you look at the, I guess, your working capital obviously you have been building out inventories a bit, staying selection, part of it is related with the integration with some of the acquisitions you have done. Can you give me an idea at this point kind of the working capital needs this fiscal year and is that sort of a healthy level to think about, is there a reason for that to change if the [similar portfolio] doesn’t change?

Obviously our working capital needs fluctuate quarter to quarter. Obviously at the end of the first quarter you see the significant increase in inventory and other items as we prepare for our holiday -- the important holiday season. That obviously comes back down during the second quarter, and then for the rest of the year where the specialty brand businesses, which are working capital intense, are less of component and we shift back to what Jim was talking about before it kind of shift back where in two-thirds plus of the year of the business becomes full, which has less working capital needs. So we think our working capital year-over-year when you look at June to June will still be slight uptake as we continues to outsource or more inventory from overseas there will be some buildup in inventory year-over -year, but will be at a much less level than we have seen in the last couple of years, and probably in the $5 to $6 million range of overall for working capital increase.

Got it. And, Jim, what do you think, I guess, a healthy turns number for your business, given how the -- that there's so much in terms of the growth in the inventory level.

Inventory turns, Paul.

Yes.

The inventory turns now, I mean, obviously with the businesses that we have acquired, have increased. Our average inventory now is in the $55 to $60 million range. So inventory turns on an overall basis would probably be about 6.5 times.

Got it, okay. All right. And then the last question has to do, I guess, the facility -- just trying to understand some on these covenants here. On the facility, when has that test occurred and is that -- is the EBITDA definition on the covenant the same as the one that you are reporting here, is it a little different?

EBITDA covenants for --

The line of credit, right for some of the liquidity issues.

(inaudible).

Okay. If you look at the covenants on your line of credit. I was curious if the EBITDA definition is the same as the one it's in this that you report in the press release.

Yes, I said this. Everything is on a pro forma basis (inaudible) pro forma basis is acquisitions and everything else.

Got it, okay. I appreciate it, thanks a lot.

Your next question is a follow-up question from the line of Jeff Stein with KeyBanc Capital Markets. Please proceed sir.

Jim, I'm wondering, when you put your initial plan together and you guided this to over 100% EBITDA growth. Were you contemplating this business process improvement program using breakdown, or is that upside to any guidance that you have provided?

I think the answer is yet to be determined in the sense that clearly we anticipated when we put our budget together we knew what our plans were. The effect of those programs, the timing of those programs are within our budget already in terms of what we anticipated. So, no change, no upside from the initial programs in this year. But as we develop new programs, as we get more and more excited about the opportunity, clearly the upside there is clearly in place for next fiscal year, yet to be determined about this fiscal year.

Do you have any thoughts in terms of quantifying the savings that you hope to effect from this program, let's say, this year and then incrementally in fiscal 2008?

I would say just an unfair answer to you, over the next couple of years we see tens of millions of dollars.

Okay. And just one question on your loyalty program. I'm wondering if you can just talk a little bit about that in terms of do you believe its increasing repeat visitation to your site and purchases, and how many members have signed to your loyalty program?

We clearly -- we'd be hard pressed to give out specific details now. We introduced the program in a test phase in April. We increased the intensity of our introduction throughout the summer. We're very, very happy with the impact of Fresh Rewards, our loyalty program. Remember, Jeff, we had the loyalty program in place on a retail level for over 20 years now. We've been testing how we can introduce it into what we become, which is the e-commerce platform, which is the only platform of any consequence for us now. So, we know how it worked with retail, we know how it worked in other venues for us before. So then we engineered the back end to mimic what we've been doing for a long time. So, we have a significant number of clients who have signed up. We're happy with how they perform. I'll tell you that one of the surprises here -- yes, the repeat rate goes up; yes, their overall spend goes up with us. But it gives us the opportunity to do some cross brand marketing, because they earn petals or points, and they can us those redeemed for a variety of gifts from us, and that's what our customers told us. They don't want flowers, they don't want other branded credit cards. They want the ability to use more of our products. These are people who are very active in terms of how they express themselves and connect with the important people in their lives, which is our mission. And they wanted others of our products to do that. We're very excited about the early test in allowing them to use those points to redeem other families of products, products that we currently own. But in the future, those will include products we don't own. So right now we'll expose them to our Fannie May Confections; we'll expose them to our Cheryl & Company products. So, a nice way to do a cross brand integration, or ECV, Enterprise Customer Value Enhancement. So, no, we can't give you specific references, but we're delighted with the program. We know that it's likely to be mimicked quite quickly, but we're reticent to give out the results because we don't want to spur our competitors to move any quicker.

Okay. Have you guys seen any competitive response yet on the BloomNet side from the early success you've had?

I think yes. The answer across the board is, I think that our competitors are keenly aware of what we're doing. They try and put bounties out to try and get members of BloomNet to quit our service. They offer -- they have different tiered pricing structures to try and distant this (inaudible) people to be a member of our program. They try and hire away our staff. Pretty much all of our staff in that area has been contacted by our competitors. So, they're following the prescripted -- the scripted response that we would have anticipated, and the impact is evidenced by our performance.

Okay. Thank you.

(Operator Instructions). Your next question comes from the line of Greg Hartley with Kalmar Investments. Please proceed, sir.

Thank you. Thanks for taking my question. I just want to make sure we clarify something. Earlier, Jim, you made a comment relative to possibly Jeff's comment about the initiatives to lower cost, and you said that the goal was to reduce the non-marketing costs. And then you made another comment regarding having dry powder to possibly reinvest some of these dollars into marketing, and I just want to make it clear that if we look at these cost reduction efforts, how much of that's going to be reinvested such that estimates don't become overly optimistic? And I have a quick follow-on. Thank you.

We're planning on tripling our marketing -- no, hold it, that's not on the script here. Greg, the answer to that question is, I think, Bill gave some better clarification to it in his follow-up comments. Clearly, our primary focus and where -- what we wanted to avoid was a situation where people would say, well, I can't cut any expenses in my area, but let's go cut marketing. That's clearly what we wanted to avoid, and so that's why we tied our plans and our incentives for achieving those plans not to marketing dollars. But Bill did illustrate how clearly there's been a save on the marketing line as well. Remember, our marketing and sales line includes direct marketing expenses and selling related expenses. So, if because of our increasing size we're able to get a, for example, a better discount from our credit card companies, that will reduce our marketing and sales line expense, but clearly not diminish any of our marketing activities. If we -- another example would be the one that Bill pointed out. If because of -- if we're able to reduce Fannie May's cost of producing and marketing materials because of scale and our platform and our corporate printing contracts, that will reduce our marketing spend, but it might also give us the opportunity to mail many more direct marketing pieces to their customers within the same dollar parameters. So, those are the kinds of efficiencies we want to achieve, but give us that dry powder to spend within those budgets much more effectively.

Have you -- just as an additional follow-on, have you incorporated in terms of the revenue hope the increased efficiency of the marketing you just mentioned?

I think what Bill said earlier on is that we've reaffirmed our guidance for the year, and so we're not changing any guidance in terms of marketing, our cost of acquiring a customer, or what I would expect our revenues to be.

Okay. And then finally, in the last year, in the December quarter, when all was said and done, the phenomenon of people buying closer to holiday as well as what ended up, I guess, being a -- characterized as a competitive retail environment, I'm firmly of the view that people will probably continue to buy closer to holiday and will also be a competitive retail environment. Is it fair to assume that relative to the way you're looking at this current December quarter, you've incorporated a similar kind of mindset relative to consumer behavior?

Greg, I think that would be absolutely the case. I'll ask Chris to give you some more color it from an operations point of view, but clearly our plan for this quarter anticipates that that is not a phenomenon any longer; it is reality. There are some companies that we've talked to throughout the years who have approached us because of some of the good complementary acquisitions we've done and said, well, don't buy us -- consider buying us, but don't think about what we did last year because we had this one-time phenomenon of people calling and ordering late, which drove up our freight costs, which savaged our EBITDA line. And our response always to them was, that is not a one-time phenomenon. It's been the case in our businesses, all our brands, for as long as I can remember, but certainly for the last five or six years. So, Chris and his team have that in their plan, it's their anticipation that it will continue to be the case again this quarter and I would ask him to give you some -- his thoughts on that.

Again, as I think you pointed out, Jim, especially coming from our floral heritage, that's always been the case. We're kind of used to that from an operating model and we're applying that model to the other businesses as well. Both in gearing the marketing spend and in the marketing plans to be -- to maximize the top of mind awareness that moves closer and closer to a holiday, and then from an operational point of view, making sure that our distribution capabilities, our shipping capabilities, are geared for that peak moving later in the holiday season. And, again, we just adjust learning from one holiday to the next, that is, how a customer responds today.

All right. Well, thank you very much. We applaud your efforts.

Thanks Greg.

At this time, there are no questions in queue. I would now like to turn the call back over to management for closing remarks.

Well, thank you all. I appreciate your participation this morning and your questions. If you have any additional questions, please get in touch with us. In closing, I'd like to remind you that Halloween is only a few days away, and it's not too late to send some delicious treats to those special trick-or-treaters in your life. We have everything from a spooky cauldron of chocolate sweets from Fannie May, to orange butter cream frosted pumpkin cookies, which are one of our personal favorites from Cheryl & Company, to ghostly printed tins of fresh popcorn from the Popcorn Factory, and much, much more. Halloween is now a holiday we can really, really enjoy; and we hope to help you to do so, too. So, thanks for your questions, and I look forward to any follow-up.

Thank you for your participation in today's conference. This concludes the presentation. You may now all disconnect. Thank you and have a good day.