1-800-FLOWERS.COM, Inc. Price & Performance (FLWS)

Joining us today are Jim McCann, Chairman and CEO Tom Hartnett [indiscernible] and James Langrock, CFO. 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 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 Jim. Thanks, Andy, and good morning, everyone. This morning, I'll begin with a brief overview of our 2nd quarter performance and then I'll turn it over to James and Tom who will provide a context for the results and look ahead.

Our 2nd quarter revenue decline 5.7% showing year over year improvement but not at all at the pace that we have been anticipating. There were several factors that contributed to our First, we experienced softer than anticipated consumer demand and we saw businesses reduce their corporate gifting orders this holiday season. 2nd, we encountered challenges with the implementation of a new Harry and David order management system or we call OMS, that escalated during the peak of the holiday season impacting revenue and earnings for Harry and David, and for all other brands. This morning, James and Tom will share more details and how we are responding to them. Additionally, we'll discuss our view of the ever changing post COVID world consumer behavior and how we engage with our customers. And now I'll turn the call over to James.

Thanks, Jim, and good morning, everyone. This morning, I will walk you through our Q2 performance and discuss the items that contributed to our performance in further detail.

Our consolidated 2nd quarter revenue declined 5.7% with several factors contributing to this performance. First, we experienced lower consumer demand in a highly competitive and promotional environment. Combined with changes in the online marketing environment, that had negative impact on our marketing efficiency. As a result, our increased marketing spend did not generate the results we anticipated. In particular our free and lower cost marketing channels declined or cost more than anticipated. 2nd, our corporate business partners became more cautious with their spending. Leading to decreases in AOVs items per order and total number of orders placed. In total, our AOV declined 1.2% for the quarter. And third, we experienced challenges with the new Harry and David OMS implementation which escalated during the surge, holiday orders. Our e commerce business declined 8.3% for the quarter. We estimate the RMS related issues reduced Q2 e commerce revenue by approximately $20,000,000 These trends were slightly offset by an increase in our wholesale gift baskets business. Adjusting for the $20,000,000 impact of lost revenue, Q2 e commerce revenue would have declined 5.6% and total revenue would have declined 3.2%. Before I move on to gross margin, I did want to take a moment to discuss the RMS implementation that affected our performance.

As the business began to scale significantly in December, the new Harry and David order management system that we recently implemented present the challenges with certain customer orders during the peak of the holiday season. These orders created bottlenecks in the system that hindered our ability to process orders in a timely manner and in other cases caused order cancellations. We're able to resolve many of these problems manually but it caused certain order cancellations and additional and to make it right for our customers. Although the implementation issues we faced were challenging, it's important to recognize that we successfully delivered over 7,000,000 orders this holiday season on an enterprise level. While the OMS implementation primarily impacted our Harry and David business, we estimate it also had some spillover effect to our other brands given our centralized customer care function. [indiscernible] some issues. Now turning to gross margin. Our 2nd quarter gross margin was 43.3 percent flat with the prior year. The 2nd quarter was highly promotional as consumers continue to look for and respond to promotional offers. Our gross margin was also affected by the incremental cost associated with the RMS implementation challenges, including expediting shipping fees, that we estimate impacted gross profit by approximately 20 basis points.

Excluding the RMS related costs, gross margin would have have been 43.5 percent Adjusted operating expenses declined by $2,900,000 dollars to 239,000,000 dollars as compared with the prior year period continuing to benefit from our work smarter initiatives We believe that we're only beginning to tap into the potentials enhance our planned operational efficiencies and there is much more we can achieve. Through meticulous cost management, and strategic investments in technology, we aim to streamline processes and reduce expenses without compromising the quality of our offerings. While improving the customer experience. In addition to the impact on revenue, we estimate that the incremental costs associated with the OMS challenges included expedited shipping fees, and higher customer care costs impacted Q2 EBITDA by approximately $4,800,000 We also incurred expenses of approximately 1,500,000 dollars consisting primarily of redundancy costs as we migrated to our new customer care platform. Altogether, this impacted Q2 results by approximately $6,300,000 Taking this into account, Q2 adjusted EBITDA was 116,300,000 dollars as compared with $130,100,000 in the prior year period.

Just to be clear, our adjusted EBITDA does not reflect the approximately $20,000,000 of estimated loss revenue during the quarter. Which equates to lost EBITDA of approximately 8,000,000 dollars Over the past few years, we have discussed our gross margin returning to its historical average. And we are pleased that post pandemic it has recovered much of the way to our long term average in the low 40% range. Going forward, as you will hear from Tom, we are elevating our focus on all aspects of our sales and marketing spend. We believe there is opportunity for further efficiency gains as we adapt to changing technology and changing consumer preferences for engagement with e commerce platforms. And now let's turn to our balance sheet. Net cash was 87,000,000 compared with 117,000,000 at the end of last year's Q2. Our cash balance was $247,000,000 at the end of the second quarter. Inventory declined to 157,000,000 compared with inventory of 161,000,000 at the end of last year's Q2. In terms of our debt, had $160,000,000 in term debt and no borrowings under our revolving credit facility as compared with $195,000,000 a year ago. At the end of the quarter, we made a $25,000,000 prepayment through our term loan and amended our credit agreement.

Guarding guidance for fiscal 2025, as a result of our Q2 performance, are updating our fiscal 2025 [indiscernible] We now expect full fiscal year revenue Adjusted EBITDA is expected to be in the range of $65,000,000 to 75,000,000 dollars and free cash flow is expected to be in the range of 25,000,000 dollars to 35,000,000 dollars We are disappointed that our Q2 performance did not meet our Some of the challenges was self inflicted and as we resolve these challenges, we remain optimistic about our future performance and the initiatives that we are executing on. We are confident that the strategies and the foundational steps we have implemented will significantly improve our trends and create substantial shareholder value. And now I will turn it over to Tom. Thanks, James, and good morning, everyone. As James outlined, the 2nd quarter presented us with several unexpected challenges. Changes in online marketing trends impacted our performance and businesses reduced their corporate gifting orders this holiday season. Both in terms of AOV and total orders placed. Furthermore, our results were pressured by 2 challenges that escalated with our new Harry and David OMS implementation As with any new system implementation, it's difficult to anticipate every issue that might arise.

We felt the system was prepared for the holiday rush. The OMS implementation presented mounting challenges of the holiday season. The order issues were directly related to Harry and David orders and in particular more complex orders that needed to be manually corrected such as certain product bundles wine gifts, and club orders It is important to highlight that many of the system challenges were exacerbated due to the significant surge in demand that we experienced during the holiday season, We have resolved many of the issues and prioritized the remaining ones which we expect to correct in short order. These challenges further reinforce our conviction that addition to our work smarter and relationship innovation initiatives, which have improved our company we need to fundamentally review all aspects of our marketing and sales strategy. We must accelerate our evolution to ensure our platform is both highly effective and efficient in supporting our customers' gift giving needs. We will accelerate our work smarter initiatives to cut costs [indiscernible] [indiscernible] and our growth oriented relationship innovation initiatives and marketing strategies. As we focus on expanding our customer base, We see significant opportunities to leverage new technology to enhance engagement and build deeper relationships with our customers.

These initiatives are designed to inspire They are also designed to give them more and better ways to interact with us. Our relationship innovation initiatives are in the process of We are continuing our evolution from a transactional company and one that is experiential and personalized focusing on enhancing customer engagement and satisfaction. This shift reflects a growing expectation for seamless enjoyable shopping experiences that integrate advanced technologies to deliver tailored content and recommendations based on individual consumer behavior We are confident that our efforts will enhance our customer experience and yield better results. Now I'll turn the call back to Jim for his closing comments before we open it up for Q and A. Thanks, Tom. As we reflect on the past 18 months, our company has made progress in our relationship innovation initiatives that are focused on strengthening our relationships enhancing our platform and offering a wider range of gift giving options. But we also recognize the need to move faster and be more aggressive in certain areas, including our marketing and sales strategy. We must respond quicker and provide better value for our customers that have curtailed their spending the most in the current macro environment. We must become more effective we can rely less on external channels, and more on our existing customer base.

AI can significantly help us here. It will provide us with opportunity to accelerate our personalization efforts and present customers with content that is specific and appropriate for the sentiments that they are expressing. Our robust customer data set will enable us to deliver highly personalized marketing experiences ensuring that we are not only attracting new customers but also nurturing the existing relationships. Leveraging these innovative tools presents an unparalleled opportunity to better serve our customers and forge even deeper more meaningful relationships with them. The future holds incredible promise for us and I'm thrilled about the possibilities that lie immediately ahead. Now we look forward to keeping you appraised on our progress and And now I'll ask the operator to reinstate the Q and A instructions.

We will now begin the question and answer session. The first question today comes from Anthony Lebiedzinski Please go ahead. Good morning, everyone.

Thank you for taking the questions. So first, I guess, sort of a bigger picture type of question here. So obviously after the pandemic, we've seen changing patterns in consumer engagement. Do you feel like these shifts [indiscernible] consumer engagement actually accelerated during the quarter or is it just kind of more of the same that you saw here in the December quarter, Anthony, thanks for your question. I think what we saw, we have to read through the smoke here, the smoke being difficulties we had with the implementation of the OMS But yes, I think we're seeing an end of where we had a great acceleration in demand when homebound and and that's eased up considerably. So we think that this fiscal year is the end of that for us. We're seeing signs that the consumer is responding better We've introduced some lower price points and some high. So broadening above price ranges. We've seen good take on the lower end, but we need to be to do even more of that. So we have some of those products in the pipeline. So Tom, I would say that We're seeing good response from the customer. You pointed out in your remarks Tom, that we saw a degradation in our business demand the consumer demand was actually making up to some of that until we until we hit the wall with the OMS is to Good morning, Anthony.

It's Tom. I think we're seeing similar bifurcation on the customer. We are seeing that lower demographic that lower household income customer, which is continuing to obviously watch their budget and their pocketbooks. And we have seen Some good results would some of the the product introductions and the prices that we've brought forth. But as Jim mentioned, we need to do more Got you. Okay. And then as far as the issues with the order of management system, when was this initially put in place? And as far as getting this system to work, as it should be, what's the time frame as to when you would expect to be 100% fully functional as the system was designed to be?

Hi, Anthony. This is James. So we implemented the system at the end of [indiscernible] into September We did all of the necessary user acceptance testing We did regression analysis, simulation testing to simulate the the peak of the busy season. So like with any system implementation, there's going to be some issues along the way. But what happened as we got into the peak of the busy season after Thanksgiving, the surge of that and with some more of the complex orders in the system that were getting put on hold and it was creating a real backlog So a lot of orders were being put on hold. [indiscernible] because of that. We had manual workarounds on that. So really kind of showed itself in the peak in December the issue. We working through that now. It really did [indiscernible] they're doing huge order volumes every day and anything that had to be was done in a manual workaround [indiscernible] And because we have a platform customer service system, as Tom mentioned in his remarks, there was contagion from that problem. That is we were sucking up all of our resources across the enterprise to try and deal with the OMS issues that was causing staff shortages or lack of availability across the brands. [indiscernible] So it was that last couple of weeks that that the small problems that they could work around through those test periods just became overwhelming.

So Tom, where are we on the path to to full recovery as Anthony asked?

Yes. So many of those challenges were addressed within the quarter. We still have some open items. We expect that the majority of those will be resolved in this quarter. Or Q3 quarter and 100% to get to the 100% level within the these next two quarters. However, I would point out, Anthony, [indiscernible] It doesn't cause us any any system systemic issues now. Because they're all manageable because of the volumes. On the flower side, we didn't change the order management system. And flowers becomes a more dominant part of our business during these next this quarter and next with Valentine's Day, Easter, Mother's Day, Father's Day, So that order management system wasn't touched. That would implemented that a couple of years ago. So that's in and debugged. [indiscernible] While we're doing the fixes, on the OMS system for Harry and David and the Food Group, The It doesn't cause the customer any difficulty because we have the bandwidth to deal with those as we fix the last of the issues.

So for the customers that canceled their orders because of these issues, you plan to do a specific marketing outreach to them to make sure you don't lose those customers permanently? Just wondering how you're thinking about that? From a marketing perspective, Yes, Anthony, absolutely. I mean, we've reached out already to those customers. We plan on we have a win back program going on. We're extremely focused That are going throughout the year.

Yes. There'll be much multiple touch points with those customers throughout the year. It is extremely important to us in some cases. We did lose the trust of some of those customers that we fail. We take that very seriously and we're working to regain their trust.

Got it. Okay. Well, thanks very much. I'll pass it on to others and the best of luck going forward.

Thank you.

The next question comes from Alex Fuhrman with Craig Hallum.

Hey, guys. Thanks very much for taking my question. Looking out over the next couple of weeks, it looks like a little bit of a better placement for Valentine's Day relative to the Super Bowl this year. Can you talk about how you're going to go after Valentine's Day this year? I know it's been challenging the last couple of years since the Super Bowl moved. A week later, are there maybe opportunities to engage with customers before the Super Bowl or maybe really be hyper engaged during that couple of days between the Super Bowl and Valentine's Day. Just curious what you've learned and how that's going to impact your strategy this year?

Alex, thanks for your question and in answer to the day placement question, we're pleased that Valentine's Day moves to a Friday this year. It's the best day placement from a sales point the Super Bowl date. That's very helpful too because last year was 2 days before Valentine's Day. So that was a crusher for us. In terms of attention and distraction. So yes, having 5 big selling days post Super Bowl is critical for us for the holiday. So we have a marketing scheme in place to reach out to customers well before giving them a lot of incentives to place their orders early in the cycle. So we have a 2 week selling period and right in the middle of that is Super Bowl.

So again, that's so much better than last year where it was just before it was just before Valentine's Day. So good day placement there. I'd also point out that Easter is a better placement than last year. Easter was at the very beginning of the Q4 last year. A couple of selling days in the Q3 when it's early, it retards the appeal and the sales of Easter because it comes up so early on people. So having it later in April in 20th April, I think it is.

Is a great selling time for us. So not the biggest of holidays, an important holiday. And one with good margins and a good distribution of customer demand. So it's easy to really delight our customers. And so those 2 DayPlace help us a lot. Anything more you'd add Tom, on the marketing plan?

No, just obviously, We've been at this Valentine's thing for a long time and there are different person earlier in the season and those who are more planful, sometimes those who are more price conscious, etcetera, [indiscernible] engage those customers pre Super Bowl in this case and then there's an awful lot of those procrastinators out there that we will enjoy the extra days of selling this year compared to last year.

And this year in the Q4, that 5 less selling days between Thanksgiving and Christmas seem to have an impact on us too.

So, day placement for those particularly for those 3 big holidays, really makes a difference for us. And we're happy to see in the second half of the year, we have 2 good placements around Valentine's Day and and Easter.

Okay. That's really helpful. Thanks. And then if I could just ask quickly on corporate. Gifting. It sounds like the decline there was a little bit self inflicted, a little bit demand. Can you just help to kind of give us a little bit more historical context? How big is your corporate gifting business today compared to what it was before the pandemic? And then what's your kind of outlook there for the next couple of years? So just this year it was around $70,000,000 compared to last year of 84,000,000 dollars So it was down almost $15,000,000 or 17 point [indiscernible] On a year over year basis and it was higher obviously coming out of the pandemic. So it was obviously much bigger than the decline in e commerce was the corporate [indiscernible] [indiscernible] did see the our corporate customers reduce their spend So the AOV was down and they reduced the item per order and also less orders. So we were obviously looking at that very closely. Some of it was impacted by the OMS. We're trying to get to the bottom of that, but we definitely did see weakness in the our corporate more than our consumer on the corporate side was obviously much more significant as a percentage.

Decline. Just to add, Alex, we are bullish about the core We We have some hotspots in the corporate business on lower price items across the enterprise.

I think we have to retool some of our offerings, but And how we go market, how we how we staff our teams on marketing their stay engaged more year round. Because we have the breadth of product offerings now that we're serving year round.

Okay, guys. That's really helpful. Thank you very much.

Thank you, Alex.

The next question comes from Michael Kupinski with Noble Capital.

Thank you. Thanks for taking my questions and good morning. In terms of the marketing strategy, you talked about I was just wondering and some of the issues that you had with marketing. I was wondering if it was more the content and message or related to maybe some of the channels you were using just getting a lower return. I was just wondering as you kind of look forward in terms of the marketing strategy, what what types of changes are you anticipating at this point?

Good morning, Michael. It's Tom. There were some specific changes in some of our bottom of the funnel channels where our the search engine results page changes some of the ranking that really hit us in kind of natural search and branded search where those were are very low cost channels for us and those more than than expected As we go forward, we continue to to push more in the mid and upper funnel channels, etcetera. And we think we continue to obviously refine our content to be more relevant to individual segments of our customers. So We think we continue to make strong strides there and we're we're hopeful you hear the AI term used a lot, but we're hopeful that we'll see in increased efficiency with our ability to create content at larger scale.

Michael, what we're seeing with the technology deployments that we're And by the way, we don't fail notice the irony of we had a technology fail in terms of technology itself, but the anticipation of how the demand would impact it. Yet we're full speed ahead on other technology investments. And that manifests itself in 2 different ways. 1 is on the cost side. We're able to operate more efficiently by digitizing so many more of the things that we do. And it impacts us and we certainly anticipate that it will impact us on the marketing side too as we employ more tools and capabilities there. So we expect it will do 2 things. Especially beginning this these next two quarters in front of us and then throughout the rest of this calendar year. We see this calendar year as a big, big year for us in terms of changing things we do on the cost side changing how we do things that will generate more revenue on the on the top line side. And these new digital tools are really really intended to impact us both ways. On the growth side and on the cost side.

And just to follow-up on that, the margin outlook is actually a little bit better than what I was looking for, especially the lowered revenue expectations for the year. Can you talk about where you anticipate to see improved adjusted EBITDA margins it be combination or maybe if you can give me the weighting of reduced commodity costs, transportation costs or just from your work smarter I'm just wondering if you can kind of give us some additional color on that.

This is Jim. I'll ask James to give you some color on that. We're not anticipating on the any savings on the commodity costs. You always have they've moderated, they've come back close to the mean now. You get little bubble up things that impact us. So we're comfortable with cocoa prices, for example. On a commodity side through the rest of this calendar year. Which gets us through the Christmas season but then you have a bird flu and eggs cost go through the roof and availability is always a question. So those are things we're we expect to be able to manage day to day. So no real savings there. The savings will be in terms of how the work smarter initiatives how we do things, the amount of people we deploy to do them, the automation that we've been constantly installing now in our distribution centers, those are in place and have shown good, good results What would you add James in terms of And Mike, what I would add is that we're obviously we continually look at all the aspects of the business. We're aiming to streamline processes and reduce costs, but also want to caution that we will some of that savings from an EBITDA margin standpoint where you plan on investing back in the business and our sales and marketing strategy So I, you know, so we are taking costs out, but we do have to reinvest some of that savings into marketing and sales.

But having referred to closer to the mean now on gross margin, and seeing that actually we cut out of the would add better gross margin except for the OMS issue. That gave us the confidence there.

Got you. And typically you guys in periods like this, which has been challenged for some e commerce type companies and things like that, You kind of stepped on the M and A activity and was just wondering wondering if you can just kind of gauge what the M and A level might be at this point? Well, I think those are so many of us who are in the consumer facing e commerce almost exclusive, but not not 100% exclusive of e commerce have all felt similar drains. So that creates a strain for us, yes, but because of good balance sheet we have and leverageable assets we have, I would tell you that the the tenor of people interested in linking up has increased. Whether or not we actually do anything there is to be determined. I think the opportunities will be quite a bit better than they've been in the last couple of years. So if we find the right opportunity, and we think it's accretive to what we do helps our customer in a better way I think you'll see us have a potential to be more active in the quarters ahead.

The next question comes from Linda Bolton Weiser with D. A. Davidson. Yes, hi. So just a clarification, if you would, on the Valentine's Day placement, Maybe I'm confused, but I always thought that when Valentine's Day in the middle of the week, it's better because then the guys be placing orders. They have delivered to women's offices, etcetera. And I thought if it was Friday or Saturday, it's bad because they won't send the flowers, they'll just buy them and take the woman out to dinner or something. So I thought I thought Wednesday was much better than Friday and Wednesday was last year and Friday this year. So can you just clarify, maybe I'm just confused on that? Thank you.

Sure Linda. No problem on the confusion. The Having been doing this now This is my 48th Valentine's Day Actually, it should be my 49th Valentine's Day. The trends are Unescapable for us. Wednesday is is better than Thursday is the best day all around from my point of view, not from the sales point of view, but from an old boy of view. Because it gives you the last minute Charlie's will be very accepting of a delivery they call they come online midday on Thursday and see that it's not available, they'll accept the Friday delivery. So it extends your selling ability with the delivery window on Friday. So but from a pure sales point of view, not from a delivery point of view, pure sales point of view, Friday is the best day because we like our customer to be at work, and busy and when it's on a weekend to have other options. They're out shopping, they'll take them out to dinner, they'll pop into a store and pick something up. But when they're working either at home or in the office, it narrows their field of options and it's a better sales placement [indiscernible] take the Thursday out because next year it does move to a weekend.

This year it's on a best day.

Okay. Thanks for that explanation. And then just to be clear, because I'm not you kind of talked about stills some fix it actions coming in the next few quarters. For Valentine's Day, on the food side, will the issues be all fixed or not? I mean, I know the flower side is much bigger, but will the issues be completely fixed on the food side for Valentin's Day or not? Or not really.

On the food side, we are expecting the majority of those to be fixed. But as Jim had mentioned, there will not if there are still remaining challenges, they won't be customer facing issues. We have the resources internally to to make sure anything that does get bogged down in the system, if you will, we can address the 2 manual intervention and And we will not have any impact on demand. And Landa just Obviously, we're extremely disappointed with the challenges from the OMS system, but I just want to remind everyone that we shipped over we delivered over 7,000,000 orders in Q1 So while we did have some issues we still got the lion's share of all the orders were delivered to our customer. Thank you, Joe.

Right. Okay.

And then We won't have that same kind of demand in the food group. So if there are any things that are unresolved, they're unresolved but manageable with our existing processes. So to get to 100% where the new systems working the way we want, that's by the end of the 4th fiscal quarter or the spring quarter, but it won't be anything that's not resolved will not be noticeable to customers while demand is good, it's not nearly as high as those couple of last couple of weeks of December in the food group.

Okay, understood. Thank you. And then finally, I was just curious about You talked about your efficiency of your marketing costs but I was wondering in general about about rates for digital spending digital marketing costs, rates, they were expected to go lower post election. Is that what you found general in the more macro marketing environment? That there was a pullback in rates after the election?

I'd say certainly compared to before the election compared to after there was rates were more reasonable I mean overall if we compare it to kind of the the prior year, we did see increased costs in the lower portion of the funnel that we're advertising, so a lower portion So that was efficiency, right?

Yes, that was more about efficiency. And then on the the mid and top it was kind of a mixed bag, I'd say. I mean, we saw definitely some park some great opportunities with some partners and some tactics we had and others were a little higher. [indiscernible] I'd say it was mixed across the board. But certainly, as we came out of the election, The costs were [indiscernible] Okay. And then just one last one, Just if you could review your tariff exposure, you've probably got some on the on the PMO side and also some of your baskets and stuff, Could you review what the plan is there?

Well, it's an ever changing landscape, Linda. This is Jim. We had a little jolt to our cardiac systems earlier in the week. When Columbia was threatened with tariffs. Columbia is an important for us on the floral side of things. They grow a lot of product that we use here in the U. S. So we were very happy a couple of days later see that resolved, but we'll never get that sleep back But TAPS is something we watch. James, how do you give some context again to Linda about how how our sourcing materials where they come from and how they be exposed to current.

So Linda, just a little way of context, if you you look at our cost of goods sold, approximately $1,000,000,000 on an annual basis, our cost of goods sold Within that roughly 40% of that is comprised of the cost of merchant merchandise and within that is about 10% of that would be China. So we're talking about there's $40,000,000 $45,000,000 of purchases from China. So clearly, tariff will have an impact, but it's off of a base of $1,000,000,000 of cost of goods sold. So we're looking at it. We're up Cost of goods sold $1,000,000,000 $40,000,000 $45,000,000 of exposure to Asia And so that's what we'd be watching with tariffs. So don't want to see any increase in cost but any increase in cost would be off that $40,000,000 $45,000,000 Correct. For China, specifically, yes.

Okay. Thank you. Very helpful.

Okay. Thank you.

Excellent.

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

Hi. Good morning, everybody. Just a follow-up on Linda's question. What would you have done if tariffs have been enacted in Colombia?

We would have postponed this call to see what the impact would be. That would have been painful because we rely on Columbia and other adjoining markets for a good supply of our product here. So the good news is we don't have to dust off that plan. And it seems to be has been completely resolved. [indiscernible] it would have been damaging. So I don't don't have a hard answer for you, Doug. We're just glad we don't have to answer that.

In the short term, it would be challenging in weeks, especially leading into Valentine's Obviously, [indiscernible] been largely in place for a period of time.

Assume the tariff, Tom, would have been on top of our contracted prices, right?

I would assume, yes, all to be negotiated, but midterm, we would be able to not completely, but move product around to different markets throughout the world. Etcetera, to mitigate it somewhat.

And we've been conscious of that for a while. So we had whole program to encourage domestic growing of product in partnership with our our grower community and some bit independent with our domestic growers. Program is not producing results we wanted because frankly some of our providers who we spent a long time cultivating decided that cannabis was a more profitable well, that didn't turn out to be the case. And a few of them have returned to flower production but not all of them yet. So it's something we're always conscious of, Doug, and we've had 10 year plans in place to increase the breadth of sources for our flower product. A lot of it in partnership with our growth community because they have the same issues and concerns. So it's something we work on all the time.

Is Colombia that important or could you shift supplies to other other countries in case it's just an isolated incident?

No, it's not important to us. It's when I say us, it's the whole country, the whole industry. Is dependent on Columbia probably for 50% to 60% of all the fresh flower product grown and sold in this country.

Well, so everybody would be in the same boat. That's helpful. I just want to be in the boat because We don't want to be in that boat.

No, but that's right. It's not good for anybody. [indiscernible] Just to shift gears on the wholesale business, could you hit it on the Q1 call that wholesale is going to be good this year and frankly there's a lot better than I thought it was going to be. So it's a bit of a reversal from recent trend where e commerce has been outperforming wholesale and now you have e commerce down in the mid to high single digits depending upon your adjustments and the wholesale was up strongly in the teens. So that's a big shift. I just wondered if you could talk a little bit more about that shift and whether you think that's something that's going to continue or will e commerce revert back down before we wholesale?

Doug, what we think on that is it's counter indicative In other words, wholesale is up because retail in store traffic was better So that's where that product is sold. So that shows you that the customer felt comfortable going out and about and shopping in the retail store, which So that's going to be a counterbalance to the e commerce hit. However, going forward, we expect wholesale to stay stronger because we've cultivated new relationships in the wholesale channels this year. We'll have a broader base of customers in the years ahead. So we expect that it won't be counter indicative of the e commerce pressure we saw we expect both to go up next year. We're anticipating and I hope we haven't built the plan yet, But on the wholesale side, we have a broader wholesale customer base So we'd expect that will continue to look good because of the breadth of customers and the product frankly that we've introduced there that was so successful in the retail stores this year.

And which particular channels are you talking about?

That's where we manufacture give products. And sell into our retail partners as a wholesale [indiscernible] [indiscernible] the big box stores. That we sell to all the time. [indiscernible] mass merchants or the club stores in particular or I would take it as the large chains and not the mom and pops?

That's right.

Okay.

Thank you.

Thank you.

Well, thank you all for for your time and attention today for your interest. It's a tough quarter for us. I will tell you that as I look at the big influences that we've experienced during this period. We think 3 things have happened here. 1 is that the the COVID bullwhip that so many of us in e commerce have experienced has is playing its hand out, so it's coming to a close. So we won't have that we're hopeful that we won't have that to do are concerned that the the macro environment is still impacting the paycheck to paycheck customers. Who for a couple of years there is a result of recovery programs had a great deal of discretionary spending capability We're still concerned about them. That's why Tom spoke about work we're doing to broaden our product lines and prices, both more attractive and higher end for our higher end customers who seem to be weathering this storm quite well. Frankly, we're disappointed in our own execution this quarter and the first two quarters of the fiscal year for us the OMS issue should never have happened We're embarrassed by it. We're very disappointed by it.

As Tom and James both mentioned, we're doing everything we can to make sure it never happens again. That these issues are fixed and that we do everything we can to do the right thing for the customers that were impacted by this. Yes, we have 7,000,000 very happy customers. But even a few thousand customers that were hurt negatively impacted by this bothers the heck out of us and we'll do everything we can to make it right. Thanks for your interest, your attention. We look forward to further discussions with you when you reach out.

Thanks so much.

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