1-800-FLOWERS.COM, Inc. Class A Aktie

Good day, and welcome to the 1-800-FLOWERS.COM, Inc. Fiscal Year 2026 Third Quarter Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Andy Milevoj, Senior Vice President of Investor Relations. Please go ahead.

Good morning, and 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. And now I'll turn the call over to Adolfo.

Thanks, Andy, and 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 continue to make progress on the key initiatives we outlined earlier this year, and 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 and Gift Baskets segment performed better than our Consumer Floral and 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 and 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 product team 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 2-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 are 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 are 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 9 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 and 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. Now I will turn the call over to James for the financial review.

Thanks, Adolfo, and 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 and Gift segment as we anniversaried some of the strategic shifts in our marketing approach. From a category perspective, our Gourmet Foods and Gift Baskets segment performed meaningfully better than our Consumer Floral and Gift segment during the quarter.

Gourmet Foods and 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 and Gift segment, along with ongoing changes in search engine results and pressure on direct traffic. During the quarter, we recorded a noncash goodwill and trade name impairment charge related to our Consumer Floral and Gift 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 the full $50 million in annualized run rate cost savings that we had initially targeted across fiscal year 2026 and fiscal year 2027, ahead of plan. Building on this progress, we are now targeting an incremental $15 million to $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 to $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. 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 and Gift Baskets segment was essentially flat. Our Consumer Floral and 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 nonqualified 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. Fiscal year 2026, we expect revenue to decline by approximately 10% to 12% as compared with the prior year and adjusted EBITDA to be approximately breakeven within a range of plus or minus $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.

[Operator Instructions] Our first question comes from Anthony Lebiedzinski with Sidoti & Company. Please go ahead.

Good to hear that you had a successful Valentine's Day even with an adverse calendar day placement. So I guess, first on that topic, I guess, can you share any additional details as far as 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 few days?

Anthony, this is Adolfo. So 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 and marketing. So let me -- 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 is not 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. So Mother's Day, it's going to do better across those metrics, but don't expect the full performance impact just yet. But 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."

And 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. So if you don't have the right product, your conversion declines. As I mentioned, we are now using AI-driven sorting and ranking. So number one, conversion is improving. But most importantly, we are also finding out what customers really want and what they are willing to pay, not only from a type of spend, but also from delivery method and delivery fees they are willing to pay. So we learned 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, then you would say, well, that's great because we are acquiring a customer.

Well, yes, that's true if you retain the customer. But if you don't retain them, then you are just wasting dollars. So 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. But 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 transaction and the measurement capabilities we have 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. So 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. And 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 on 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. The other thing we -- I think on our operations, this is the type of stuff you don't see in the short term on the balance sheet. But our customer satisfaction post-purchase increased. Our calls to the call center declined on a per order basis. And now that we're also using AI on the call center, we're able to be significantly more productive with a better customer experience. So all in all, again, it was one event, one of the multiple businesses we have. But 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. So very optimistic about the improvements to the overall experience in the future.

Just switching gears to the cost savings program. So you talked about completing the $50 million cost savings program, but you're also looking to reinvest some of that into the business. So how should we think about cost savings on a net basis? And maybe you could just talk about OpEx versus the cost of goods, how to think about that?

So Anthony, to answer the second question, right now, the $50 million savings is probably split equally between cost of goods sold and SG&A. So that's on that front. As we -- as you think of the cost savings, as we mentioned on the call, some of those savings will be reflected, but not all of those will flow through this year. Near term, we have the consulting costs for implementing initiatives. And again, we still have some of the headwinds around tariffs and commodity costs. So that's offsetting some of those benefits. So we'll see the consulting costs starting in FY '27. We'll no longer have those consulting costs. So more of that will flow through. But we're being very thoughtful on how we deploy those savings, Anthony.

So as you look to going into '27, those savings give us more flexibility in the model, but we're going to be very deliberate on how we deploy those and start investing back in the business. So it's not going to be a dollar-for-dollar flow-through through EBITDA. So we're not -- we haven't given guidance yet for FY '27, 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. And can you just remind us about the consultant costs, how much for this fiscal year?

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

And the next question comes from Michael Kupinski with NOBLE Capital Markets.

With your changes in marketing, have you kind of opened the door to competitors? And I was just wondering if you can talk a little bit about whether or not you have seen increased marketing from competitors, especially during Valentine's or certainly around Mother's Day, particularly like 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. And I think Google makes it very easy for anybody just to buy other people's brands. So which was, I think, primarily the reason why if you only focus 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 going to 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. And in general, the bottom-of-the-funnel transactions do not build a brand. They just lead to transactions.

Middle and top funnel build the 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 have been, as I mentioned, successful on that. But as James mentioned, you need to make investments. And 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. But the idea is that the most important asset we have, it's our brand. And unfortunately, we hadn't invested in the brand for a while. We are reversing that. We're reinvesting in the brand. And 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. And as I mentioned, we're modernizing the brand to continue building that brand awareness.

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

Got it. So 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 has 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. honestly, that hasn't changed much since I joined the company. So whether there was an impact from the war or not, it is very difficult to say. What was the second one? I'm sorry. Marketplace. So marketplace, the way I think about it or the way we are thinking about it as a team is it's a way -- it's a twofold strategy. Number one, 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 conversion. So that one will have a second level impact on everything we do. It's fascinating what we have learned in the last 6 months since we started selling on Amazon.

Now to -- okay, 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 site should definitely be double digits of the company. And again, when I think about these, keep in mind, we are doing marketplaces like Amazon, Walmart and Etsy. And we're also doing delivery service providers, especially for our flowers business. We announced Instacart, but 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, but we also have operations. We manufacture product and we represent our florists. So I think there was a huge miss from our side not to be in those channels, which we are trying to correct. It's early days, but we are -- it's growing really, really fast from low numbers, but we're optimistic about that.

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

So Michael, we're not giving guidance yet for FY '27. So we believe longer term, further out, we would get back to those growth rates.

And let me build on that, Michael. It's a process and we are sequencing. I think -- I mean, I've been in this role, I think to this day, it's a year. When I joined, we were declining at a rate of 20-plus percent. From there, you need to suddenly stop declining, you get to 1 or 2 days of positive comps, then you get to a week in one business and then you want the entire company to drive growth. We are seeing those positive days and those positive weeks in businesses. But I mean, it's a process. We -- at some point, we want the company to grow. And then it's going to be or 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. So 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 of where we thought we would be, but there's still a lot of work in front of us.

It sounds like you made a lot of progress.

Okay. The next question comes from Doug Lane with Water Tower Research.

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. So it looks like the underlying margin outlook has improved pretty decently since you last reported results. So where are the 2 or 3 key areas that you're seeing the improved margins on the EBITDA level?

So Doug, it's -- 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. So we're seeing that. And as Adolfo mentioned, with -- on the floral side, with the florist-fulfilled versus direct, we're seeing much more pricing discipline, more targeted promotional activity, as we mentioned, a better coordination between the florist-fulfilled and the direct shipment. So we're seeing that overall improve the gross margin and improved AOV. So we're being more consistent with our pricing decisions and again, reducing discounts, which is improving our overall margin quality. Now part of that's still being offset, Doug, by the higher tariff and commodity and shipping costs. But overall, our gross margin on a year-over-year basis was up about 10 basis points. So we are starting to see that flow through and the strategy is working.

Well, that's what I wanted to probe because you got the $10 million more of the consultants and incentive comp, and you've also got a commodity cost environment that arguably has deteriorated since you last reported results. And then I don't even know what cocoa prices are doing these days, but are the commodity inputs actually down? Is that another thing that you're trying -- 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. And it sounds like it's a little bit more than it's obvious by the numbers on the surface.

So I just want to be clear, Doug, that the $22 million is an annualized number, just wasn't for the quarter, right? So I want to make sure that I'm clear on that. So on a -- from a commodity perspective, obviously, cocoa prices are still elevated on a year-over-year basis. What we are seeing is butter, flour and eggs are down on a year-over-year basis. So 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'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. So yes, we have commodity headwinds with cocoa starting to see some relief on the other commodities, still have the impact of tariffs, but we are getting the benefit of the cost savings as well as I just talked about the pricing discipline that we have. So that's what's flowing through. And that's why you're seeing gross margin up slightly this year versus last year.

And are you still expecting the consultants to roll off at the end of June? Or are they going to be spilling over into '27?

The costs roll off at the end of June. So we will not have that starting July 1, Doug.

And then tariffs as well, you've got some tariff relief here and then you start to anniversary the implementation of tariffs in 2025. So the tariff impact should begin to recede in the first part of fiscal '27 as well, right?

Yes. We still have -- right now, there still are tariffs in place. But yes, we will start to anniversary that, and we'll start to get the benefit of the lower tariff rates in 2027, Doug.

Okay. And just one last one for me. You raised the flag that marketing spend as a percent of sales -- not a flag, but just to let us know that marketing spend as a percent of sales will be flat in the June quarter. But going forward, the base case should be improved marketing spending lowers as a percent of sales because it will be more efficient. Is that still the base case? I know you're not giving guidance for '27, but just directionally.

Doug, I would say, potentially, we're planning with some of the savings that we're getting in cost of goods sold and SG&A. Part of that savings is going to be redeployed in marketing. So it's not necessarily that you're going to see marketing percentage as a percentage of sales going down in FY '27 as we make strategic investments in marketing.

Let me build on that.

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

The other thing I would say, building on that, Doug, is 1-800-FLOWERS.com, it's a very different company right now because every investment we make, it's being evaluated and measured versus a control group. So 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 can just declare a victory by failing fast and move on. So 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. So 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.

And every investment we make is being tested, measured and we decide whether it goes forward or not. So 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. But rest assured that when we invest, it's because we want to see a return on that. So that should help the company in the midterm.

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 has 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. [Operator Instructions] 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 reduced costs and streamlined 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 Zelikovsky 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 that will continue to improve performance. While there is 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 helped 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 Consumer Floral and Gifts segment, a 3.8% decline in the Gourmet Foods and Gift Baskets segment, and a 3.1% decline in the BloomNet segment. These results were primarily driven by a strategic shift towards more efficient marketing spending as well as 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 (sic) [ comparability ] and the impact of the company's nonqualified deferred compensation plan in both periods, operating expenses declined $25.9 million as compared to 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 continuing 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 the second half of fiscal 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 the second half of fiscal year 2026, we expect adjusted EBITDA to decline slightly compared to the prior year. On a normalized basis, for the second half of fiscal 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.

[Operator Instructions] The first question comes from Anthony Lebiedzinski with Sidoti & Company.

So first on the Consumer Floral and Gifts segment, it was down more than we expected. Was that mostly driven by Pmall? Or -- can you provide any additional color on that?

Yes. So Anthony, Pmall 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 Pmall 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 the main driver. But yes, Pmall was a bigger component of the decline 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?

Anthony, it's Adolfo. At a high level, our Passport members perform 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 our most loyal customers.

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 is, so James just shared that the performance of Pmall was slightly behind Flowers. And as you also see, Food was way ahead of the other 2 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 of best practices. So in that order, Pmall, 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. And 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 & David, our food business, is significantly more important. The 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 you mentioned, another thing 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.

Well, there's 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 placement, obviously, on a Saturday, which is the least favorable time frame. 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 the 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%.

The next question comes from Michael Kupinski with NOBLE Capital Markets.

I just kind of want to circle back to the Floral segment for a second. Given your shift in marketing initiatives, I was just wondering outside of Pmall, can you talk a little bit about the decline you've seen in Floral? Do you feel that maybe -- 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 in the bottom line. We believe that with 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 2 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, and I believe it's going to make us stronger in the future. But I think this transition to being 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 begin 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 you mentioned, cocoa is still, on a year-over-year basis, is up quite significantly. But 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 obviously, if we get some upside on the top line, that always helps as well, Michael. But right now, we're controlling what we can control. And the one lever would be on the cost savings if we can accelerate some of those savings. So that's kind of the big one that we can control right now.

Yes. 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 that little by little are going to improve the business over time. So we believe that what you are going to see is as these functional levers 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, 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. And just a couple of quick ones here. Interestingly, GDP numbers were pretty strong in the third quarter. Interest rates are coming down, albeit modestly. The consumer confidence is super weak. And traditionally, your business follows 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 of 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 household income spectrum. So we're kind of still seeing that trend.

Got you. 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 and we were 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 the 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, and we'll allocate capital towards 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 and 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.

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

James, remind me, you 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 are in there.

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

Yes. So 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 initiatives that we're working on that they may not come back. But right now, the 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 the timing between the third quarter and the fourth quarter?

Yes. Easter falls, I think, April 4. So that actually -- a lot of the orders will come in, in the end of 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 is 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. And also looking at the sales number here, the total number was literally within $1 million 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 overspent 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. There's some other competitive things, but those 2 are primarily the difference between one and the other.

Is this also where we see that bifurcated consumers since Pmall's in the Floral side and Harry & David's on the Food side, and they're clearly opposite ends of the economic spectrum?

Probably, yes.

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

So I mean, again, as 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 the locations where they are and probably the sales would increase online. There was a little of that. But 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 we're below expectations. So enough is enough.

Having said that, as I said, we're still looking for that physical retail model. So you will see us testing things. But again, these tests are with the idea to find a way to significantly grow the physical retail segment of our business. But definitely, it's not going to be through pop-up stores.

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 and 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.

Good morning, and welcome to the 1-800-FLOWERS.COM Fiscal 2026 First Quarter Earnings Call. [Operator Instructions] Please note, this event is being recorded.

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 first 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 and 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. I am excited to share some of the early progress that we have made on the strategic initiatives that we discussed in our last call. As I mentioned in our last call, we view fiscal 2026 as a year of stabilization for the company, focused on building a foundation for long-term sustainable growth. We are only one quarter into our turnaround strategy, but we have already begun to move from identifying problems to taking actions. As James will discuss in more detail, our underlying profitability has begun to show a clear positive trend when we adjust for timing-related items. While there is much more work to be done and inevitably, there will be some challenges we are beginning to see some benefits from the changes we have made.

Before I share some updates, let me begin by quickly reviewing the strategic initiatives we outlined on our last call. These include 4 key areas: strengthening our customer focus, enhancing talent and accountability, achieving cost savings and organizational efficiency and expanding our reach beyond e-commerce into new channels.

Let's begin with strengthening our customer focus. We began to make major changes in our customer acquisition and marketing strategy during the first quarter. Historically, our company relied too heavily on bottom of the funnel marketing activities, that focus on driving revenues without fully taking into account the overall impact on profitability.

This was highly inefficient and negatively impacted our financial performance. In Q1, we made a fundamental shift to focus on marketing contribution margin, which allows us to better allocate resources and optimize spending, ensuring that our marketing dollars drive measurable returns.

As James will discuss further, we are already seeing positive results from this change. In the short term, we could see additional pressure on the top line as we recalibrate our approach towards a positive marketing contribution margin on paid traffic. As we pivot toward a greater focus on contribution margin, we are placing a stronger emphasis on optimizing our marketing spend to drive profitable growth, not just higher sales. This optimization delivers a twofold financial benefit that improves both efficiency and effectiveness.

Efficiency ensures we are maximizing our marketing dollars, reducing waste and aligning spend with our highest return channels. Effectiveness, on the other hand, ensures our investments are more precisely targeted driving stronger engagement and results. Together, these improvements directly impact our top and bottom lines by increasing awareness, accelerating customer acquisition and improving retention. At the end of the day, this strategy positions us for stronger and more sustainable growth and profitability.

Additionally, this quarter, we began testing a paid traffic consolidation strategy by redirecting visitors from our lower traffic websites to our main platforms, landing them on the same categories they were originally seeking. This approach is intended to improve productivity and maximize return on investment by increasing conversion and average order value as customers attach other categories merchandise on our primary platforms. Early results are promising, and we are confident that these efforts will help create a more scalable and efficient digital ecosystem.

Expanding into new channels has been another key focus area for us. Historically, as a consumer products company with many selling options, we became too dependent on our own websites and on traffic coming directly from web browsers. The company didn't adjust its strategy as customer preferences shifted toward beginning their shopping journeys on third-party marketplaces. I'm excited to announce that we are now selling our products through third-party marketplaces including Amazon and walmart.com, making our offerings more accessible to a broader audience.

Additionally, we have successfully opened our holiday pop-up shops which have been well received by customers. These pop-ups will help us test and refine a physical retail concept that we can expand to multiple locations, leveraging our broad range of product categories. Having the right talent in the right roles is foundational to our transformation. Recently, we made a key hire to strengthen our leadership team. I am thrilled to welcome Melanie Babcock to our company as Chief Marketing and Growth Officer. This is a pivotal moment for our company, and Melanie is just the right leader to help us accelerate our transformation, with a proven track record of building teams and businesses that deliver outsized sustainable returns.

She was key in leveraging AI to transform the Home Depot marketing platforms from product focus to a customer-centric experience. Her proven ability to scale brands, build high-performing businesses and create customer-centric growth strategies make her the perfect partner for this new chapter of our journey. In this newly created role, she will lead our marketing evolution across the enterprise and will be focused on building a full funnel marketing approach that drives awareness, acquisition and retention, modernizing our digital experience to improve product discoverability, enhancing our merchandising strategy through stronger data infrastructure and AI and streamlining our brand architecture to create a more intuitive and connected customer journey.

This customer first approach will help us build a customer lifetime value flywheel, where efficient acquisition and strong retention reinforce each other to drive profitable growth.

As part of our effort to drive greater efficiency and agility across the organization, we have made great progress partnering with our external consultants to identify and prioritize additional efficiency opportunities. We have already started to implement targeted organizational changes including centralizing our marketing team and improving coordination between customer service and website development. These adjustments are designed to streamline operations, eliminate unnecessary complexity and better align our teams with strategic priorities. We have also taken steps to increase accountability at all levels of our organization, ensuring that decision-making is faster and more closely tied to bottom line results. We believe these changes position us to execute with greater focus and deliver improved results over the long term.

As we enter the critical holiday period, our primary focus is on providing an exceptional experience for our customers during this important season. While we remain committed to driving organizational change, continuously refining our marketing approach, and improving agility and efficiency, we recognize the importance of maintaining stability and delivering a seamless customer experience through the holiday rush. Therefore, we are prioritizing our turnaround road map accordingly. We look forward to keeping you updated on our progress.

And now I will turn it over to James for the financial review.

Thanks, Adolfo, and good morning, everyone. This morning, I will review our fiscal 2026 first quarter performance. Please note that all comparisons are made to the prior year period and represent adjusted results unless otherwise stated. During the first quarter of fiscal 2026, we saw a clear and immediate benefit from our strategic shift in marketing spend toward a marketing contribution margin focus. This metric is calculated as gross profit less credit card fees and marketing fees expressed as a percentage of sales.

Both the first and second months of the quarter experienced profitability improvements as our marketing resources were more efficiently allocated, driving higher returns on investment. Third month of the quarter also benefited from this approach. The results were impacted by timing items, including the shift of certain wholesale orders from Q1 in the prior fiscal year into Q2 of this fiscal year.

After adjusting for timing-related items, the trend in adjusted EBITDA was slightly positive for the quarter. Notably, this represents the first year-over-year improvement in adjusted EBITDA trends over the past 7 quarters. By focusing on marketing contribution margin, optimizing spend and streamlining operations, we were able to partially mitigate the effects of softer sales.

As is the case of many companies, a portion of our cost of goods sold is fixed which creates some gross margin pressure due to sales deleveraging. We believe the changes we are implementing provide a strong foundation for stabilization as we progress through the remainder of the fiscal year and positions us for future growth.

Looking ahead, we will remain disciplined in our marketing investments while becoming more effective. We will continue to partner with our external consultants to explore additional opportunities for operational efficiency. We are encouraged by the early positive momentum generated by our new approach and are confident that these efforts will drive sustainable financial performance as we progress through fiscal 2026.

Now let's review our performance. Consolidated revenue for the first quarter decreased by 11.1%. This included a 14.6% decline in the Consumer Floral and Gift segment and an 8.6% decline in the Gourmet Foods and Gift Baskets segment. Revenues in our BloomNet segment were essentially flat with the prior year period. These results were primarily driven by a strategic shift toward emphasizing positive marketing contribution margin and to a lesser extent, changes in wholesale order timing, which shifted from the first quarter of the previous year to the second quarter of this fiscal year.

Now turning to gross margin. Our first quarter gross margin decreased 240 basis points to 35.7% compared with 38.1% in the prior year period. This was primarily due to deleveraging on the sales decline combined with the impact of higher tariffs. Operating expenses decreased $12 million to $127.3 million, primarily due to lower marketing and labor costs. Excluding nonrecurring charges and the impact of the company's nonqualified deferred compensation plan in both periods, operating expenses declined $10.9 million as compared to prior year to $124.9 million.

As a result of these factors, our first quarter adjusted EBITDA loss was $32.9 million as compared with a loss of $27.9 million in the prior year period. Before I review our balance sheet, I want to briefly update you on our cost reduction efforts. We continue to collaborate with external consultants to streamline operations and drive greater efficiency across the business.

As we shared last quarter, we have already implemented $17 million in annualized cost reductions. We are beginning to see the early benefits of our cost reduction initiatives flow through the P&L. However, those savings are currently being offset by the impact of tariffs, investments in people and higher transportation costs.

Based on the analysis we have done in collaboration with our external consultants, we anticipate we can achieve an incremental $50 million in cost savings over the next 2 years on a run rate basis. Please note this figure excludes onetime expenses such as consultant fees and severance costs. Additionally, this amount does not account for savings associated with improvements in marketing spend efficiency.

Now turning to our balance sheet. At quarter end, net debt was $259.3 million compared with $224.1 million a year ago. Our cash balance was $7.7 million. Inventory was $269.8 million compared with $275.3 million a year ago. In terms of our debt, we have $157 million in term debt and borrowings of $110 million under our revolving credit facility in preparation for the upcoming holiday season. We expect borrowings under the revolver to be fully repaid during fiscal second quarter.

And now we'll open the call for Q&A. Operator, please provide instructions for those interested in asking a question.

[Operator Instructions] And the first question comes from Michael Kupinski with NOBLE Capital Markets.

I have quite a few questions here. First of all, I know last year, you were talking a little bit about gas prices. They have seemed to come down a little bit from last year. I was wondering if you're still dealing with price surcharges on gas prices? Or have they gone away?

So Michael, this is James. So the fuel surcharge is always part of the FedEx charges. So they've moderated. They haven't gone away, but they haven't increased.

Okay. And in terms of your marketing efforts, I know you made changes there, but have you also included changes in products and price points on your products?

Michael, this is Adolfo. Yes, the merchandising organization continuously review their assortment strategy and pricing strategy to adjust their costs accordingly.

Okay. And then in terms of -- in the last call, you mentioned that consumer floral had become very price competitive. And I was wondering if you can just give us an update on the competitive environment on the consumer floral space?

So the way I would characterize that is there are more competitors emerging in the space. And what that is doing is not so much on the pricing side of the product. It's on the cost of buying clicks. Sometimes we are competing to buy the same search terms and that increases the marketing costs and therefore, reduces the marketing productivity.

Got you. And then it has always been said that how back-to-school goes, so does Christmas. Can you just provide your thoughts on how back-to-school looked for you and how Christmas is looking? Any thoughts on your -- and then maybe if you could just kind of give us some thoughts on how the wholesale business is looking as you go into the holiday season?

Yes. So Michael, on the back-to-school, that's obviously not -- for the PMall, it's part of the business, but it's a smaller part of the business. The real holiday peak for us, as you know, is the Christmas holiday season. So -- and as you know, it's still early -- it's early days in the holiday season. So that's sort on that front. As it relates to wholesale, we did have a shift, as you know, timing of wholesale orders between the end of September and early October always kind of impacts us historically. So we did have a shift from Q1 into Q2 of this year, but we are seeing really strong wholesale sales and anticipate that will be up on a year-over-year basis for this holiday season.

Michael, let me build on that. The team recently was analyzing the sales per week throughout the quarter and the fiscal year. Basically, all the way from the beginning of Q1, so July through, I would say, October, we sell per week about the same. You see the significant increases that what really matters to us, as James was suggesting, it's the holiday season. And that will start in the next week or in the next couple of weeks. That's when the season really starts for us, and that's what really moves the needle.

I got you. Okay. I was just wondering in terms of the tone of the environment right now. Are you seeing any particular changes in the tone? We saw some Fed rate action and whether or not you're starting to see the benefits from that. I'm just wondering how you're seeing what the consumer is feeling right now and just the general environment for the consumer.

I don't think nothing meaningful to comment on.

And the next question comes from Anthony Lebiedzinski with Sidoti & Company.

So just wanted to follow up on the wholesale piece. Is there any way you guys could quantify what you think the revenue impact was of the shift between first quarter and second quarter?

Yes, it was several million dollars, $3 million, $4 million, Anthony.

All right. That's very helpful, James. And then just thinking about the -- in terms of the $50 million in gross savings, how should we think about the timing of those savings? And is there any way you could say what the savings will be on a net basis?

So let me just first take the first question, Anthony. So of the $50 million we believe, on a run rate basis, that will get half of it in fiscal '26 and half of it remaining in fiscal '27. We've started already to take actions -- immediate actions, but there's certain areas like, say, supply chain and procurement that take a little longer to get implemented. So again, half this year, half next year, started to implement some of those actions as we speak. Quantifying the cost of that is a little difficult right now as we work through it, Anthony, but we believe that we'll probably -- this year, we'll have more of the cost than in next year. But at this point, it's hard to quantify. I don't want to give you a number until we have more finalized numbers.

Understood. Okay. And then for the quarter, you guys had a small tax expense. Normally, you guys have a tax benefit in the quarter. Can you talk about what happened there? And what should we expect for the tax rate for the fiscal year?

Yes. So Anthony, what's happened is we've had 3 years of cumulative losses. So typically, we would have a tax benefit in Q1. But being that we've had 3 years of cumulative losses, we are now setting up a valuation allowance for those deferred tax assets. So it's more of an accounting thing. Obviously, as we return to profitability, we'll be able to start using those benefits, but it was a -- due to -- we had to set up a valuation allowance this quarter because of the 3 years of cumulative losses.

Understood. And then as far as your move into Amazon and walmart.com. I know it's recent, but can you give us any early read on what you're seeing in terms of sales coming through those sites?

So what I would say, it's early days, but it is going quite well. I see the benefit of selling on Amazon and Walmart, not only incremental top and bottom line, which -- I mean, it's a small number, but it is growing very nicely. But the other thing is the best practices that those websites have -- the team is learning those. And as we are learning, we are also -- you are going to see us adjust our websites to better align with best practices these days. So I'm very optimistic about where that is going. We haven't even started to optimize our value proposition, pricing offering. All the team is working on right now is our top sellers are being sold on those websites. And we are seeing early traction. It's actually quite positive from the traffic that those websites have, which is why we're doing this. They already have the traffic. We're putting our value proposition in front of them and conversion happens. So far, so good.

All right. That's good to hear. And my last question before I pass it on to others. Can you also just on the increased commodity costs, what was the impact of that? And how do you see that going forward?

So Anthony, on the commodities, as I mentioned, on a year-over-year basis for the quarter, chocolate is up year-over-year. We also have -- eggs are up slightly on a year-over-year basis. And then the other major commodities are either flat or down with the prior year. So it's a little bit of a mixed bag. So it didn't have a significant impact on our Q1. Obviously, it had more of an impact was the tariffs, but the commodities kind of almost netted themselves out.

And the next question comes from Doug Lane with Water Tower Research.

I want to talk about tariffs and recently, President Trump threatened Colombia with very stiff tariffs because of the drug trade. Can you comment on how that would impact your business? And what would be the workaround if you didn't enact those tariffs?

So as you know, Colombia represents about 60%, 70% of the fresh flowers coming into the country. So it would clearly have a significant impact on the U.S. floral industry. So with that, it would have a significant impact in creating higher prices across the ecosystem. So it does happen, hopefully, it hasn't and he hasn't given a number yet. So -- but clearly would have an impact and most likely would just be an increase because so many of the flowers do come in from Colombia. We would try to offset that with other areas, but it would be very difficult to do that. So it would have an impact on the overall industry, not just 1-800-FLOWERS.

No, clearly, on the overall industry, but what is the practicality of moving your sourcing from Colombia to say, Ecuador or somewhere else in the area?

You can -- we would absolutely try, but everyone would be doing the same thing, right? So I mean there's -- we can move some of it. Obviously, you could try to change arrangements and the flowers that are in it, but -- like I said, it would definitely put price pressure on the overall industry.

Yes, clearly. No question. Shifting gears to your pop-up stores. Can you remind us what the -- what you're doing this holiday season with regards to pop-up stores and how that relates to what you did last season -- last holiday season?

So short answer is, this season we are doing 9 different locations, 8 of those for Harry & David and 1 for Things, remember. Last year, we did about the same. The way to think about these pop-ups, it's twofold. One is a nice way to -- yes, drive some sales, but really, I think we would do it for the awareness of the brand and the categories we carry. But the second more valuable reason we are doing this is I have challenged the team to identify a physical retail concept that we can roll out across the country to multiple stores. We have stores that are profitable, our Cheryl's Cookies stores in Ohio are highly profitable. They take in half have the space, I think it's 80%, 90% of the sales.

We have so many categories that I do believe that you can find the right combination of categories that we already -- products that we already manufacture and we have with the right combination of branding to truly create a physical retail concept that you can just roll out across the country. So again, it's a few samples, see it as a test. It's only 9 pop-ups. But the real benefit is longer term identifying this physical retail concept that would allow us to profitably grow into physical retail.

No, that makes sense. And you're selling now on amazon.com and walmart.com. And I get what you're doing here, but then the name of the company is 1-800-FLOWERS.COM. So I wonder if there's a rebranding that needs to happen here so that you can expand so you can really be able to benefit from this expanded distribution into multiple retail channels or multiple distribution channels.

I'll say great question. We hire an external marketing and brand consultant to help us answer that question. And as everything you will see us do going forward. We are customer back. So we are going to do whatever resonates better with the customer.

No, that makes sense. And so far, Adolfo I have to say I like what you're doing. And everything seems to be on the table and look forward to tracking your progress over the next several quarters and years.

And this concludes the question-and-answer session. I would like to turn the conference to Adolfo Villagomez for any closing comments.

Thank you all once again for taking the time to join us on today's call and for your continued support on 1-800-FLOWERS.COM. Fiscal 2026 marks a pivotal year of stabilization for 1-800-FLOWERS.COM, during which we are establishing the foundation for sustainable long-term growth.

While we are in the early stages of our turnaround, we had 2 significant achievements this quarter. First, we shifted towards prioritizing marketing contribution margin, which is already producing positive results. And second, we identified an additional $50 million in cost savings. We are seeing some early benefits of our turnaround strategy, and I am encouraged by the momentum that is building across the enterprise. We look forward to keeping you updated on our progress. Thank you.

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

Good morning, and welcome to the 1-800-FLOWERS.COM Fiscal 2025 Fourth Quarter Earnings Call [Operator Instructions] Please note this event is being recorded. 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 2025 fourth quarter and year-end 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 in our earnings release. And now I'll turn the call over to Adolfo.

Thanks, Andy, and good morning, everyone. I'm honored to step into the CEO role at such an important time for our company, and I am very optimistic about our future. I want to start by thanking Jim for his support and the autonomy he has given me during this transition. Since joining in May, I have focused on gaining a deep understanding of our business by engaging with employees at every level and listening closely to customer feedback.

These conversations have given me valuable insight into where we stand today, what's working and what we need to change. They have helped us stabilize the business and identify both the immediate and long-term actions needed to set us on the right path. 1-800-FLOWERS.COM is an iconic brand, and we have the privilege of being part of our customers' most meaningful moments. But customer expectations are evolving, technology is advancing quickly and competition is intensifying. We didn't fully keep pace with this environment, and as a result, we haven't reached our full potential.

As we discussed on our last call, our celebration strategy is designed to change that. It represents a fundamental shift in how we engage with customers and run our business. By leaning into this approach, we intend to address the factors that matter most to our growth and financial performance and position the company for long-term success. Looking ahead, I see significant opportunities to improve our performance by becoming a leaner, more agile, customer-centric and data-driven organization.

To return to revenue growth, we are modernizing the customer experience, sharpening how we acquire and retain customers and expanding our reach beyond our e-commerce sites. At the same time, we are building greater operational discipline, driving efficiency and enhancing accountability. I will share more of my thoughts in just a moment. But first, I would like to turn it over to James to review our fiscal 2025 fourth quarter and year-end financial results. James?

Thanks, Adolfo, and good morning, everyone. This morning, I will review our fiscal 2025 fourth quarter and year-end performance. Please note that all comparisons are made to the prior year period and represent adjusted results unless otherwise stated. Challenges we experienced throughout fiscal 2025 persisted during the fourth quarter. Our top line remained pressured, and we continue to navigate an evolving customer acquisition landscape. Traditional SEO continued to decline and our bottom-of-the-funnel marketing investments did not yield their expected results.

As a result, our consolidated fourth quarter revenue declined 6.7%. This was comprised of an 8.8% decline in our Consumer Floral and Gift segment, a 3.6% decline in our Gourmet Foods and Gift Baskets segment and a 0.6% decline in our BloomNet segment. This was primarily due to a 5.6% decrease in transactions and to a lesser extent, a 1.6% decrease in AOV. This was partly mitigated by the Easter shift from Q3 a year ago into Q4 this year.

For the fiscal year-end, our consolidated revenue declined 8%. This included an 8.2% decline in transactions and a 1.1% decline in AOV, which was partially offset by gains in our wholesale business. At the end of fiscal 2025, we had 9.5 million customers, over 900,000 Passport members and 74% of our revenue came from existing customers. As compared to the prior year, our customer count declined in line with our revenue decline while our Passport membership declined at a greater rate.

Multi-branded customers and Passport members continue to represent our best-performing customers. During fiscal '25, multi-branded customers represented 13% of our customers and 29% of our revenues, while Passport members represented 9% of our customer base and 19% of our revenues. As Adolfo will touch on in just a few moments, we clearly recognize the affinity of these customers. We are reviewing opportunities to improve our loyalty program, along with the overall shopping experience to increase membership and promote multi-branded selling.

Turning to gross margin. Our fourth quarter gross margin declined 290 basis points to 35.5% compared with 38.4% in the prior year period. This decline was primarily due to a highly promotional sales environment and deleveraging on the sales decline. On a full year basis, excluding costs associated with the OMS system implementation challenges, our gross margin declined 100 basis points to 39.1%.

Now let's review our fourth quarter operating margins. Excluding nonrecurring charges and the impact of the company's nonqualified deferred compensation plan in both periods, operating expenses declined $3.7 million to $159.7 million. On a full year basis, our adjusted operating expenses declined $10.9 million to $695.2 million. During fiscal '25, we invested in marketing that did not yield the top line results we were targeting. We've begun to optimize our marketing spend during the fourth quarter, and as Adolfo will discuss in more detail, we see significant opportunities to become more efficient and effective with our marketing efforts going forward.

Based on these factors, our fourth quarter adjusted EBITDA loss was $24.2 million as compared with a loss of $8.8 million in the prior year period. On a full year basis, adjusted EBITDA was $29.2 million compared with $93.1 million in the prior year period. On our last call, we reported the initiation of a cost reduction plan aimed at achieving approximately $40 million in annualized savings, which included $17 million in reductions that already have been implemented. As Adolfo will expand on, we recently engaged an external consultant to assist in identifying and prioritizing additional efficiency opportunities.

Now turning to our balance sheet. At fiscal year-end, net debt was $114 million compared with $31 million a year ago. Our cash balance was $47 million. Inventory was $177 million, in line with a year ago. In terms of our debt, we had $160 million in term debt and no borrowings under our revolving credit facility as compared with $190 million in term debt a year ago. Looking ahead to fiscal 2026, we are approaching the year as a pivotal period of foundation setting. As we discussed on our last call, our celebration strategy is a multiyear strategy, and our strategic priorities are focused on positioning the company for long-term growth.

These priorities include driving cost savings and organizational efficiencies, building a customer-centric and data-driven organization, broadening our reach beyond our e-commerce sites into new channels and strengthening our team through enhanced talent and accountability. With a renewed commitment to agility and customer centricity, we believe these foundational steps will set the stage for sustainable revenue and profit growth in the years to come. Now I'll turn the call back to Adolfo.

Thank you, James. Our performance this quarter is disappointing, and it is clear that we need to fundamentally transform our strategy in order to return to sales and profit growth. When I accepted this role, I did so with the belief that 1-800-FLOWERS.COM is an iconic company with products customers love and with a unique place in their most meaningful celebrations. That belief has only grown stronger in my first few months as CEO. At the same time, I have identified several areas that require real change. Some issues can be addressed quickly, while others will take more time.

This morning, I want to share my early observations and highlight the areas where the leadership team and I are focused. Over the past 5 years, our company experienced rapid revenue growth, followed by significant declines. While macroeconomic headwinds played a role, internal challenges also contributed. Our customer retention approach was ineffective. Our marketing spend was inefficient and expenses did not come down in line with revenues. So where do we go from here?

We are transforming 1-800-FLOWERS.COM into a customer-centric, data-driven organization with clear priorities and ROI-driven decision-making. Our plan centers on 4 key areas: achieving cost savings and organizational efficiency, strengthening our customer focus, expanding our reach beyond e-commerce into new channels and enhancing talent and accountability. On our cost structure, the company has not sufficiently adjusted expenses to reflect lower revenues. We have launched a comprehensive review of our structure, supply chain, procurement and IT costs to simplify how we work, eliminate redundancy and build greater agility.

We have also engaged an external consultant to help us accelerate time to impact. Procurement is one clear example of improvement. Today, sourcing is fragmented across brands. By centralizing it, we can leverage scale, lower costs and improve consistency. Similarly, we are reviewing level planning and our end-to-end supply chain to drive further efficiencies. On the customer side, our focus is to simplify and modernize the digital experience, enhance our data infrastructure and transform marketing into a full funnel engine that balances awareness, acquisition and retention.

Historically, our brands operated independently, but by aligning merchandising to categories and streamlining our brand architecture, we can capture synergies and present a more unified, intuitive experience. We will also use algorithm-driven merchandising to personalize the journey and respond to customer needs in real time. Improving marketing efficiency and retention is central to this effort. Our prior approach spread dollars across too many brands, compete against ourselves in key channels, and it was primarily focused on bottom of funnel spend. We are shifting towards smarter, more efficient marketing that builds brand awareness and demand while creating a flywheel around acquisition, retention and lifetime value. Our marketing framework will also shift from a focus on gross margin to emphasizing variable contribution margin and its direct impact on the bottom line.

Enhancing our loyalty program is also a major opportunity. Today, it functions primarily as a free shipping program. By improving the value proposition, we can drive more frequent purchases and increase awareness of our broader product categories. We also see a significant opportunity in broadening our reach. While gifting will always remain at the heart of our business, many of our products also lend themselves to self-consumption. Expanding into occasions where customers purchase for themselves opens the door to new growth. Beyond our e-commerce sites, we will look to diversify our distribution, making our products more accessible in the places customers already shop and creating new entry points to experience our brands. Together, these initiatives will allow us to reach new audiences, deepen engagement and drive incremental growth.

Finally, talent and accountability are critical. We're aligning our team with the company's strategic goals and strengthening how we hire, develop and retain talent. We are building a culture that values agility, accountability and execution. This is essential to ensure that our strategy translates into results. As we said on our last call, our celebration strategy represents the next phase of our company's evolution. Many of the areas I have outlined today are central to that multiyear transformation, expanding into other channels, improving frequency and conversion, broadening in price points, improving marketing efficiency, leveraging technology to create a better customer experience and strengthening loyalty.

These priorities will guide us as we work towards long-term success. Based on what I have seen and learned so far, I am energized and optimistic about our company's future. While the transformation will take time, I'm confident that the actions we're taking will return 1-800-FLOWERS.COM to growth and create meaningful long-term value for our shareholders. I look forward to sharing more in the quarters ahead. With that, we'll now open the call for Q&A. Operator, please provide instructions.

[Operator Instructions] Our first question will come from Michael Kupinski with NOBLE Capital Markets.

A couple of questions. Regarding your marketing, I know that you said that some of it has been ineffective. And I was just wondering, is it a change in like the use of technology that's causing that? For instance, I know that there's been a decline in search traffic on the likes of Google and so forth. And I was just wondering if there was a dynamic shift in the use of the way that people use technology, given AI-driven and voice type search use. And I was just wondering if that's what you're referring to in terms of the ineffective marketing.

Michael, this is Adolfo. Let me put it like this. It's -- it's 2 things. Number one, and in the short term, in the past, we would spend marketing to drive revenues, and we were not fully conscious of the variable contribution margin that, that transaction would generate. So the cost of acquiring customers, in some cases, was higher than the margin that, that transaction was generating. That led to very -- I mean, instead of increasing bottom line, you actually were decreasing the more you spend marketing. So in the short term, we are focusing on variable contribution margin at the expense of revenues to focus on bottom line increases.

To your second question, I mean, as technology shifts, I think overall, what you see, I mean, these days is all about AI and LLMs. But really, I think you need to step back and think about where customers are buying products today. And let's just say that not everybody goes into the search engines to look for product. Our strategy historically has been focused on bottom of the funnel, and it has led us to spend a significant amount of our marketing spend on search engines and in a way we didn't spend in other areas. We're also changing that. So to summarize, it's the focus on variable contribution margin dollars for every transaction we have. And as I mentioned in the call, expanding our marketing strategy from bottom of the funnel into a full funnel approach where we actually generate awareness and drive demand.

Got you. And can you talk a little bit about the competitive dynamic in Consumer Floral? Is there like a bad actor there? Or is it just general competition? Just wondering if you could just kind of add some color there.

I wouldn't say there is a bad actor. I think I would go towards more general competition. We need to become more agile. And as I mentioned in the call, I think today, we are in an environment in which we manage products, and we are trying to sell them on our website -- on our e-commerce property. And as I mentioned before, everything starts with the customer, and the customers are buying now in different channels. So you need to have your products where the customers are, and that is impacting our business in the short term because we were not agile to go into these other channels. But as we speak, we're expanding into other channels to actually drive sales.

We're in the process of expanding our products to other delivery platforms to marketplaces and other opportunity areas. You're talking about flowers, but if I expand into Harry & David and some of our other brands, physical retail is also important, and we are moving there and other retailers. We are trying to drive the company to separate product, brand from channels. It doesn't mean that they need to be the same, but you have products that can be sold using different brands and products that can be sold through different channels. So we're looking at this end-to-end. And as I said, I think the #1 focus here is let's offer our products wherever the customers are already buying them.

Got you. And my final question, I know I'm going to let others ask questions. To what degree have commodity prices normalized? I mean, I know that in the past, you talked a little bit about where we are in that journey towards -- getting towards more normalized commodity prices. And I know that cocoa prices have been exceptionally high. I was just wondering if you see the prospect for continued improvement, at least on the commodity price side.

So Michael, this is James. Yes, as you mentioned, the cocoa remains elevated, but a lot of our other commodities have started to kind of revert closer to their mean. But the one headwind that we're still dealing with, it's obviously a lot better when we spoke 3 months ago, the tariffs, right? We have a $15 million headwind with tariffs based on the current tariff structure that is out there. Now that's down significantly from the $55 million when tariffs first came out back in -- when we spoke in May. But again, we have that headwind. But overall, the commodities are starting to revert to their mean.

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

So first question just in terms of the quarter here. Can you comment on sales for the major holidays like Easter and Mother's Day versus everyday gifting? Did you see the same kind of bifurcation between the 2? Just wondering if you can comment on that.

So on the Mother's Day holiday, that came in line with what we were forecasting. It was obviously down on a year-over-year basis. But that -- one of the things that we did, as you recall, back in Valentine's Day, Anthony, we were investing heavily in marketing to try to drive top line. So from a Mother's Day perspective, we pulled back on getting back to what Adolfo mentioned on the variable contribution margin we're more focused on variable contribution margin and not driving unprofitable sales. So Mother's Day was down year-over-year and came in line with our expectations.

Okay. And then thinking about the different strategies, Adolfo, that you mentioned, can you give us maybe a sense as to the timing of some of these initiatives? And what's kind of like the low-hanging fruit, so to speak, and which of these strategies that you talked about will take more time to come to fruition?

Thank you, Anthony. As James said, we are seeing this year as a pivotal year to set the foundation for future growth. If you step back for a moment and just say, hey, what was driving the EBITDA decline on this company? I can point you to 3 factors. Volume decline combined with fixed overhead, the OMS issue we had back during the holidays and then unproductive increases in marketing spend. In the short term, we're addressing those issues to change the trajectory of the business where we start planting seeds to drive future growth.

And the future growth will come from 2 sources: fixing the core business and as we have been talking about it, is everything starts with product, so you need to make sure that you have the right value proposition. We were talking a lot about the customer. And I want to emphasize that the marketing strategy related to the customer, it is going to be less about the initial transaction and just capturing these customers at the bottom of the funnel, and it's more about how we are capturing these customers, what is the retention strategy to minimize the marketing fee as we acquire these customers and therefore, increase the customer lifetime value over time. That's what we are calling the customer flywheel.

And the third component is related to, I call it the product discoverability, but it's helping the customer find our product. It's a combination of bringing AI to our websites, modernizing the navigation, search, product recommendations. So the way to think about it is, in the short term, we're stabilizing the business, trying to change the trajectory, focus on the 3 things I mentioned is, okay, if your volume is declining, then your cost needs to change, and we're working on that. The OMS issue I think we are -- the way to think about it is it's a combination of 2 things. The systems performance with -- then once the customers were not receiving the products, they would call customer care, and we were not ready for those calls.

We are quite confident that we solved all of the systems performance issues that we know of. Actually, the system today is performing better than before we implemented versus the previous system. And from a customer care perspective, we are building redundancies just in case something happens. So we are very confident about that. And then marketing, as I said, in the short term, is focusing on the variable contribution margin.

Parallel to that, we are planting seeds and making targeted investments on the future growth, which, as I mentioned, is the product assortment value proposition, the customer flywheel and the product discoverability on our platforms. So it's a transition year followed with -- coupled with investments to drive future growth, Anthony.

Got you. And so I guess my last question before I pass it on to others. So as you look to execute your strategy, how do we think about CapEx spending for this year? It does sound like you are also looking to perhaps bring back some physical retail stores. I know a few years ago, you guys closed pretty much all of your Harry & David stores. I don't know if you would be looking to reconsider that decision. And -- but just maybe help us understand how do you guys think about CapEx spending as you look to execute this strategy here?

So Anthony, this is James. So from a CapEx perspective, we had the big implementation of OMS last year. So right now, we're not giving guidance, but we believe CapEx will be slightly down this year from last year. But included in that is our investment in some of the physical retail locations. So that's already included in that. So we do have CapEx set aside for the expansion into some Harry & David and Things Remembered locations.

[Operator Instructions] Your next question will come from Doug Lane with Water Tower Research.

Staying on the retail stores, you did open that Long Island store earlier this year. Can you give us an update on what you've learned there and how that's going to impact your strategy going forward and maybe opening additional retail stores?

So let me separate the question from 2 perspectives. Like number one, as I mentioned, I think in the midterm, we believe that expanding our channels is fundamental to our strategy, and that includes physical retail. This year, as you probably saw in the announcement, we are going to have 3 pop-up stores at Macy's, 5 in malls and for Harry & David and 1 for Things Remembered.

The way to think about those is we are experimenting and trying to find out what is the right assortment for those stores. The Huntington store combines, I would say, the best assortment we have within our brands. Harry & David goes beyond baskets into a lot of products that are of everyday consumption. And if you were to walk that store, you find those products there. And those products actually drive conversion when you get the traffic and drive transactions. That store, given our expectations, is doing quite well. Now keep in mind, it's a lower traffic store. It's not located in a shopping mall.

In general, you want to locate where traffic is located. But we are learning a lot from that store, and we are leveraging those learnings for our pop-up stores. If things go well, our intention is to continue expanding and not only exploring pop-up stores, but actually permanent physical stores. But as I said, next year is all about experimentation, we are learning and preparing for growth.

So the way I understand it then there could be 2 paths here as you expand beyond e-commerce. One is Harry and David and Things Remembered branded stores, whether they're stand-alone like in Long Island or whether they're in the mall? Or would you also pursue on a parallel track, permanent placement in Macy's and other department stores? Would you go to mass merchants? Just a little bit more granularity on where in retail you think the brand can go.

I would say all of the above, and that's what we are experimenting. And I would go beyond physical retail into also digital, including marketplaces and on-demand delivery. The way we're thinking about it is wherever the customer is, we have products for them. We -- as I mentioned, it's -- I think beyond gifting, we're also focusing on self-consumption, and we have a lot of products for self-consumption.

So we're experimenting our way to grow. So all of the things you mentioned, Doug, are options. We are fact-based. We are data-driven. So whatever delivers the best performance, that's where we are going to invest our capital. I think #1 priority for me and for the team is let's make sure that we drive profitable growth and the return on invested capital we provide to our shareholders, it's above their expectations.

Your comment about self-consumption makes a lot of sense to me. I know that you are positioned as a gifting platform, but certainly, a lot of that product will be ripe for self-consumption. Do you have any data yet on what you think your current percentage of sales are that go to self-consumption versus gifting?

I would say it varies by brand. It's a lot higher on Harry & David, lower in Flowers and lower in Tmall. Honestly, though, part of this is self-inflicted. One of the things that merchants are working on, on 1-800-FLOWERS is to tailor the assortment for self-consumption, e.g. something as simple as selling flowers without the vase. If you're buying flowers for your house, you are not buying vases, you just want the flowers. Launching a subscription model, we're experimenting with all of these things.

But today, naturally, the products and the brands that we have acquired over the years that are sitting under the umbrella of Harry & David are tailored for self-consumption. We have cookies, we have coffee, we have chocolate. We're about to launch olive oil and vinegar. I mean we have a lot of things that you can find on your average retail store. And as I said also, we are planning to have our own stores. So that's what we are unlocking here. I think in the past, we had this approach of, oh, it's our brand and it needs to be sold on our website.

We're basically saying no, separate the brand from the product on our website. I'll give you an example, cookies. I can sell cookies on the Cheryl's brand. I can sell cookies under Harry & David. I can sell private label cookies. I can sell all of those on the Harry & David website. I can sell all of that on the 1-800-FLOWERS website. I can sell that on marketplaces. I can sell that on physical retail. The sky is the limit, and we experiment -- we're testing our way to find out what drives the most profitable growth for the company in the short term.

With no further questions, this will conclude 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 taking the time to join us on today's call and for your continued support of 1-800-FLOWERS.COM. I am very excited to lead this company during such a transformational period in its history, and I look forward to keeping you updated on our progress in the quarters ahead. Thank you.

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