Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 26, 2010

___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___ to ___

Commission File No. 0-26841

1-800-FLOWERS.COM, Inc.

(Exact name of registrant as specified in its charter)

DELAWARE	11-3117311
(State of	(I.R.S. Employer
incorporation)	Identification No.)

One Old Country Road, Carle Place, New York 11514

(Address of principal executive offices)(Zip code)

(516) 237-6000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes (X) No ( )

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).

Yes ( ) No ( )

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ( ) Accelerated filer þ

Non-accelerated filer ( ) Do not check if a smaller reporting company) Smaller reporting company 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ( ) No (X)

The number of shares outstanding of each of the Registrant’s classes of common stock:

27,129,491

(Number of shares of Class A common stock outstanding as of January 31, 2010 )

36,858,465

(Number of shares of Class B common stock outstanding as of January 31, 2010 )

1-800-FLOWERS.COM, Inc.

TABLE OF CONTENTS

INDEX

Page

Part I.	FiFinancial Information
Item 1.	Consolidated Financial Statements: Consolidated Balance Sheets – December 26, 2010 (Unaudited) and June 27, 2010 Consolidated Statements of Operations (Unaudited) – Three and Six Months Ended December 26, 2010 and December 27, 2009 Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended December 26, 2010 and December 27, 2009 Notes to Consolidated Financial Statements (Unaudited)	1 2 3 4
Item 2. Item 3. Item 4.	Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Controls and Procedures	13 24 24
Part II.	Other Information
Item 1. Item 1A. Item 2. Item 3. Item 4. Item 5. Item 6. Signatures	Legal Proceedings Risk Factors Unregistered Sales of Equity Securities and Use of Proceeds Defaults upon Senior Securities (Removed and Reserved) Other Information Exhibits	25 25 25 25 25 25 25 26

PART I. – FINANCIAL INFORMATION

ITEM 1. – CONSOLIDATED FINANCIAL STATEMENTS

1-800-FLOWERS.COM, Inc. and Subsidiaries

Consolidated Balance Sheets

(in thousands, except share data)

	December 26, 2010			June 27, 2010

	(unaudited)

Assets
Current assets:
Cash and equivalents	$	17,708		$	27,843
Receivables, net		40,168			13,943
Inventories		50,389			45,121
Deferred tax assets		5,711			5,109
Prepaid and other		7,313			5,662
Total current assets		121,289			97,678

Property, plant and equipment, net		49,776			51,324
Goodwill		41,211			41,211
Other intangibles, net		40,111			41,042
Deferred tax assets		13,159			19,265
Other assets		5,262			5,566
Total assets	$	270,808		$	256,086

Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses	$	71,509		$	59,914
Current maturities of long-term debt and obligations under capital leases		16,326			14,801

Total current liabilities		87,835			74,715
Long-term debt and obligations capital leases		37,220			45,707
Other liabilities		2,961			3,038
Total liabilities		128,016			123,460
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued		-			-
Class A common stock, $.01 par value, 200,000,000 shares authorized 32,649,798 and 32,492,266 shares issued at December 26, 2010 and June 27, 2010, respectively		326			325
Class B common stock, $.01 par value, 200,000,000 shares authorized 42,138,465 shares issued at December 26, 2010 and June 27, 2010		421			421
Additional paid-in capital		287,271			285,515
Retained deficit		(112,071	)		(120,477	)
Accumulated other comprehensive loss, net of tax		(233	)		(334	)
Treasury stock, at cost – 5,520,307 and 5,465,046 Class A shares at December 26, 2010 and June 27, 2010, respectively and 5,280,000 Class B shares		(39,922	)		(32,824	)
Total stockholders' equity		142,792			132,626
Total liabilities and stockholders' equity	$	270,808		$	256,086

See accompanying Notes to Consolidated Financial Statements.

1-800-FLOWERS.COM, Inc. and Subsidiaries

Consolidated Statements of Operations

(in thousands, except per share data)

(unaudited)

	Three Months Ended						Six Months Ended
	December 26, 2010			December 27, 2009			December 26, 2010			December 27, 2009

Net revenues	$	235,402		$	238,454		$	339,923		$	346,770
Cost of revenues		136,570			138,791			197,510			203,353
Gross profit		98,832			99,663			142,413			143,417
Operating expenses:
Marketing and sales		50,848			51,976			80,766			81,452
Technology and development		4,786			4,525			9,667			9,081
General and administrative		12,831			14,673			24,711			27,207
Depreciation and amortization		5,286			5,343			10,421			10,289
Total operating expenses		73,751			76,517			125,565			128,029
Operating income		25,081			23,146			16,848			15,388
Other income (expense):
Interest income		10			11			39			25
Interest expense		(1,310	)		(1,985	)		(2,509	)		(3,531	)
Other		2			13			3			15
Total other income (expense), net		(1,298	)		(1,961	)		(2,467	)		(3,491	)
Income from continuing operations before income taxes		23,783			21,185			14,381			11,897
Income tax expense from continuing operations		10,253			8,452			5,975			4,830
Income from continuing operations		13,530			12,733			8,406			7,067
Income from discontinued operations before income taxes		-			3,795			-			1,157
Income tax expense from discontinued operations		-			1,225			-			196
Income from discontinued operations		-			2,570			-			961
Net income	$	13,530		$	15,303		$	8,406		$	8,028


Basic and diluted net income per common share:
From continuing operations	$	0.21		$	0.20		$	0.13		$	0.11
From discontinued operations		-			0.04			-			0.02
Net income per common share	$	0.21		$	0.24		$	0.13		$	0.13

Weighted average shares used in the calculation of net income per common share
Basic		63,966			63,555			63,930			63,514
Diluted		64,801			64,070			64,692			63,969

See accompanying Notes to Consolidated Financial Statements.

1-800-FLOWERS.COM, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Six Months Ended
	December 26, 2010			December 27, 2009

Operating activities:
Net income	$	8,406		$	8,028
Reconciliation of net income to net cash provided by operating activities:
Operating activities of discontinued operations		-			12,668
Depreciation and amortization		10,421			10,118
Amortization of deferred financing costs		246			171
Deferred taxes		5,475			4,251
Loss on disposal of assets		-			3,289
Bad debt expense		974			984
Stock-based compensation		1,757			2,216
Other non-cash items		-			180
Changes in operating items, excluding the effects of acquisitions:
Receivables		(27,199	)		(25,116	)
Inventories		(5,268	)		2,213
Prepaid and other		(1,651	)		(2,230	)
Accounts payable and accrued expenses		11,595			19,816
Other assets		(259	)		(115	)
Other liabilities		52			12
Net cash provided by operating activities		4,549			36,485

Investing activities:
Capital expenditures		(7,680	)		(6,070	)
Purchase of investment		-			(598	)
Other, net		73			(1,091	)
Investing activities of discontinued operations		-			(509	)
Net cash used in investing activities		(7,607	)		(8,268	)

Financing activities:
Acquisition of treasury stock		(98	)		(338	)
Proceeds from bank borrowings		40,000			49,000
Repayment of notes payable and bank borrowings		(46,000	)		(59,175	)
Debt issuance costs		(17	)		-
Repayment of capital lease obligations		(962	)		(877	)
Net cash used in financing activities		(7,077	)		(11,390	)
Net change in cash and equivalents		(10,135	)		16,827
Cash and equivalents:
Beginning of period		27,843			29,562
End of period	$	17,708		$	46,389

See accompanying Notes to Consolidated Financial Statements.

1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1 – Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by 1-800-FLOWERS.COM, Inc. and subsidiaries (the “Company”) in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended December 26, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending July 3, 2011.

The balance sheet information at June 27, 2010 has been derived from the audited financial statements at that date, but doesn’t include all information or notes necessary for a complete presentation.

Accordingly, the information in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 27, 2010.

References in this Quarterly Report on Form 10-Q to “authoritative guidance” are to the Accounting Standards Codification issued by the Financial Accounting Standards Board (“FASB”) in June 2009.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Comprehensive Income (Loss)

For the three and six months ended December 26, 2010 and December 27, 2009, the Company’s comprehensive income was as follows:

	Three Months Ended					Six Months Ended
	December 26, 2010			December 27, 2009		December 26, 2010		December 27, 2009

			(in thousands)

Net income	$	13,530		$	15,303	$	8,406	$	8,028
Change in fair value of cash flow hedge, net of tax		84			3		101		(276	)
Comprehensive income	$	13,614		$	15,306	$	8,507	$	7,752

Recent Accounting Pronouncements

No new accounting pronouncement issued or effective during the fiscal year have had or are expected to have a material impact on the Company’s financial position, results of operations or cash flows.

1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Reclassifications

Certain balances in the prior fiscal years have been reclassified to conform with the presentation in the current fiscal year. During the second quarter of fiscal 2010, the Company launched its 1-800-Baskets brand. Products within this business are now being managed within the Gourmet Food & Gift Baskets segment. Gift basket products, formerly included in the Consumer Floral reportable segment are now included in the Gourmet Food & Gift Baskets segment. These changes have been reflected in the Company’s segment reporting for all periods presented.

Note 2 – Net Income Per Common Share

The following table sets forth the computation of basic and diluted net income per common share from continuing operations:

	Three Months Ended				Six Months Ended
	December 26, 2010		December 27, 2009		December 26, 2010		December 27, 2009

			(in thousands, except per share data)
Numerator:
Income from continuing operations	$	13,530	$	12,733	$	8,406	$	7,067

Denominator:
Weighted average shares outstanding		63,966		63,555		63,930		63,514
Effect of dilutive securities:
Employee stock options (1)		-		6		-		3
Employee restricted stock awards		835		509		762		452
		835		515		762		455

Adjusted weighted-average shares and assumed conversions		64,801		64,070		64,692		63,969

Basic and diluted net income from continuing operations per common share	$	0.21	$	0.20	$	0.13	$	0.11

Basic net income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common and dilutive common equivalent shares (consisting of employee stock options and unvested restricted stock awards) outstanding during the period.

(1)

The effect of options to purchase 7.4 million and 7.1 million shares during the three and six months ended December 26, 2010 and 8.5 million and 8.4 million shares during the three and six months ended December 27, 2009, respectively, were excluded from the calculation of net income per share on a diluted basis as their effect is anti-dilutive.

Note 3 – Stock-Based Compensation

The Company has a Long Term Incentive and Share Award Plan, which is more fully described in Note 12 to the consolidated financial statements included in the Company’s 2010 Annual Report on Form 10-K, that provides for the grant to eligible employees, consultants and directors of stock options, share appreciation rights (SARs), restricted shares, restricted share units, performance shares, performance units, dividend equivalents, and other stock-based awards.

1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

The amounts of stock-based compensation expense recognized in the periods presented are as follows:

	Three Months Ended				Six Months Ended
	December 26, 2010		December 27, 2009		December 26, 2010		December 27, 2009
			(in thousands)

Stock options	$	296	$	551	$	585	$	1,046
Restricted stock awards		806		612		1,172		1,170
Total		1,102		1,163		1,757		2,216
Deferred income tax benefit		388		380		604		702
Stock-based compensation expense, net	$	714	$	783	$	1,153	$	1,514

Stock-based compensation is recorded within the following line items of operating expenses:

	Three Months Ended				Six Months Ended
	December 26, 2010		December 27, 2009		December 26, 2010		December 27, 2009
			(in thousands)

Marketing and sales	$	430	$	465	$	692	$	923
Technology and development		205		233		336		462
General and administrative		467		465		729		831
Total	$	1,102	$	1,163	$	1,757	$	2,216

The weighted average fair value of stock options on the date of grant, and the assumptions used to estimate the fair value of the stock options using the Black-Scholes option valuation model granted during the respective periods were as follows:

	Three Months Ended				Six Months Ended
	December 26, 2010		December 27, 2009		December 26, 2010		December 27, 2009

Weighted average fair value of options granted	$	1.19	$	1.89	$	1.19	$	1.75
Expected volatility		68.0%		63.0%		68.0%		62.0%
Expected life	7.6 yrs		5.6 yrs		7.6 yrs		5.6 yrs
Risk-free interest rate		1.27%		2.41%		1.27%		2.45%
Expected dividend yield		0.0%		0.0%		0.0%		0.0%

The following table summarizes stock option activity during the three and six months ended December 26, 2010:

	Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value (000s)

Outstanding at June 27, 2010		6,890,089		$	6.50
Granted		1,267,000		$	1.79
Exercised		-			-
Forfeited		(1,184,233	)	$	3.96
Outstanding at December 26, 2010		6,972,856		$	6.07	4.7 years	$	1,257

Options vested or expected to vest at December 26, 2010		6,559,752		$	6.33	4.4 years	$	924
Exercisable at December 26, 2010		4,605,587		$	7.85	2.9 years	$	22

1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

As of December 26, 2010, the total future compensation cost related to nonvested options, not yet recognized in the statement of income, was $2.3 million and the weighted average period over which these awards are expected to be recognized was 4.7 years.

The Company grants shares of common stock to its employees that are subject to restrictions on transfer and risk of forfeiture until fulfillment of applicable service conditions (Restricted Stock Awards). The following table summarizes the activity of non-vested restricted stock awards during the three and six months ended December 26, 2010:

	Shares			Weighted Average Grant Date Fair Value

Non-vested at June 27, 2010		1,661,811		$	4.35
Granted		2,593,464		$	1.80
Vested		(157,532	)	$	8.05
Forfeited		(157,305	)	$	4.29
Non-vested at December 26, 2010		3,940,938		$	2.52

The fair value of nonvested shares is determined based on the closing stock price on the grant date. As of December 26, 2010, there was $6.2 million of total unrecognized compensation cost related to non-vested restricted stock-based compensation to be recognized over the weighted-average remaining period of 2.6 years.

Note 4 – Inventory

The Company’s inventory, stated at cost, which is not in excess of market, includes purchased and manufactured finished goods for resale, packaging supplies, raw material ingredients for manufactured products and associated manufacturing labor, and is classified as follows:

	December 26, 2010		June 27, 2010
	(in thousands)
Finished goods	$	25,535	$	23,611
Work-in-Process		15,320		13,390
Raw materials		9,534		8,120
	$	50,389	$	45,121

Note 5 – Goodwill and Intangible Assets

The carrying amount of goodwill is as follows:

	1-800-Flowers.com Consumer Floral		BloomNet Wire Service		Gourmet Food and Gift Baskets		Total
					(in thousands)

Balance at June 27, 2010	$	5,728	$	-	$	35,483	$	41,211
Other		-		-		-		-
Balance at December 26, 2010	$	5,728	$	-	$	35,483	$	41,211

1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. Goodwill and other indefinite lived intangibles are subject to an assessment for impairment, which must be performed annually, or more frequently if events or circumstances indicate that goodwill or other indefinite lived intangibles might be impaired. Goodwill impairment testing involves a two-step process. Step 1 compares the fair value of the Company’s reporting units to their carrying values. If the fair value of the reporting unit exceeds its carrying value, no further analysis is necessary. If the carrying amount of the reporting unit exceeds its fair value, Step 2 must be completed to quantify the amount of impairment, if any. Step 2 calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible assets, excluding goodwill, of the reporting unit, from the fair value of the reporting unit as determined in Step 1. The implied fair value of goodwill determined in this step is compared to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, an impairment loss, equal to the difference, is recognized.

The Company’s other intangible assets consist of the following:

			December 26, 2010						June 27, 2010
	Amortization Period		Gross Carrying Amount		Accumulated Amortization		Net		Gross Carrying Amount		Accumulated Amortization		Net
					(in thousands)

Intangible assets with determinable lives
Investment in licenses	14 - 16 years		$	5,314	$	5,314	$	-	$	5,314	$	5,314	$	-
Customer lists	3 - 10 years			15,695		7,747		7,948		15,695		6,758		8,937
Other	5 - 8 years			2,388		1,555		833		2,388		1,351		1,037
				23,397		14,616		8,781		23,397		13,423		9,974

Trademarks with indefinite lives		-		31,330		-		31,330		31,068		-		31,068
Total identifiable intangible assets			$	54,727	$	14,616	$	40,111	$	54,465	$	13,423	$	41,042

Future estimated amortization expense is as follows: remainder of fiscal 2011 - $1.1 million, fiscal 2012 - $1.6 million, fiscal 2013 - $1.5 million, fiscal 2014 - $1.2 million, fiscal 2015 - $1.2 million, and thereafter - $2.2 million.

Note 6 – Long-Term Debt

The Company’s long-term debt and obligations under capital leases consist of the following:

	December 26, 2010		June 27, 2010
	(in thousands)
Term loan (1)	$	51,000	$	57,000
Revolving line of credit (1)		-		-
Obligations under capital leases (2)		2,546		3,508
		53,546		60,508
Less current maturities of long-term debt and obligations under capital leases		16,326		14,801
	$	37,220	$	45,707

1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

(1)

On April 14, 2009, the Company amended its 2008 Credit Facility with JPMorgan Chase Bank N.A., as administrative agent, and a group of lenders (the “Amended 2008 Credit Facility”). The Amended 2008 Credit Facility provided for term loan debt of $92.4 million and a seasonally adjusted revolving credit line ranging from $75.0 to $125.0 million. The Amended 2008 Credit Facility, effective March 28, 2009, also revised certain financial and non-financial covenants.

On April 16, 2010, the Company entered into a Second Amended and Restated Credit Agreement (the “2010 Credit Facility”). The 2010 Credit Facility included a prepayment of approximately $12.1 million, comprised primarily of the proceeds from the sale of the Home & Children’s Gifts segment in January 2010, and thereby reducing the Company’s outstanding term loan under the facility to $60 million upon closing. The term loan, which matures on March 30, 2014, is payable in sixteen quarterly installments of principal and interest beginning in June 2010, with escalating principal payments at the rate of 20% in year one, 25% in years two and three and 30% in year four.

In addition, the 2010 Credit Facility extended the Company’s revolving credit line through April 16, 2014, and reduced available borrowings from a seasonally adjusted limit which ranged from $75.0 million to $125.0 million to a seasonally adjusted limit ranging from $40.0 to $75.0 million. The 2010 Credit Facility, effective for covenant calculations as of March 28, 2010, also revised certain financial and non-financial covenants, including maintenance of certain financial ratios. The obligations of the Company and its subsidiaries under the 2010 Credit Facility are secured by liens on all personal property of the Company and its domestic subsidiaries.

Outstanding amounts under the 2010 Credit Facility will bear interest at the Company’s option of either: (i) LIBOR plus a defined margin, or (ii) the agent bank’s prime rate plus a margin. The applicable margins for the Company’s term loans and revolving credit facility will range from 3.00% to 3.75% for LIBOR loans and 2.00% to 2.75% for ABR loans with pricing based upon the Company’s leverage ratio.

The Company does not enter into derivative transactions for trading purposes, but rather to hedge its exposure to interest rate fluctuations. The Company manages its floating rate debt using interest rate swaps in order to reduce its exposure to the impact of changing interest rates on its consolidated results of operations and future cash outflows for interest.

In July 2009, the Company entered into a $45.0 million notional amount swap agreement that exchanges a variable interest rate (LIBOR) for a 1.92% fixed rate of interest over the term of the agreement. This swap matures on July 25, 2012. The Company has designated this swap as a cash flow hedge of the interest rate risk attributable to forecasted variable interest (LIBOR) payments. The effective portion of the after tax fair value gains or losses on this swap is included as a component of accumulated other comprehensive loss. The ineffective portion, if any, is recorded within interest expense in the consolidated statement of operations.

(2)

During March 2009, the Company obtained a $5.0 million equipment lease line of credit with a bank and a $5.0 million equipment lease line of credit with a vendor. Interest under these lines, which both mature in April 2012, range from 2.99% to 7.48%. Borrowings under the bank line are collateralized by the underlying equipment purchased, while the equipment lease line with the vendor is unsecured. The borrowings are payable in 36 monthly installments of principal and interest commencing in April 2009.

Note 7-Fair Value Measurements

The Company’s non-financial assets, such as definite-lived intangible assets, and property, plant and equipment, are recorded at cost and are assessed for impairment when impairment indicators are present. Goodwill and indefinite lived intangibles are tested for impairment annually, or more frequently if impairment indicators are present, as required under the accounting standards.

1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Cash and cash equivalents, receivables, accounts payable and accrued expenses are reflected in the consolidated balance sheets at carrying value, which approximates fair value due to the short-term nature of these instruments. The Company believes that the carrying amount of its debt approximates fair value as no trading market exists.

The authoritative guidance for fair value measurements establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under the guidance are described below:


Level 1		Valuations based on quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

Level 2		Valuations based on quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable data for substantially the full term of the assets or liabilities.

Level 3		Valuations based on inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In accordance with the fair value hierarchy described above, the following table shows the fair value of the Company’s interest rate swap, which is included in other liabilities in the consolidated balance sheet. The fair value is based on forward looking interest rate curves:

		Fair Value Measurements Assets (Liabilities)
	Total as of December 26, 2010	Level 1			Level 2	Level 3
				(in thousands)
Interest rate swap (1)	($428)		-		($428)		-

(1)	Included in other long-term liabilities on the consolidated balance sheet.

Note 8 – Income Taxes

At the end of each interim reporting period, the Company estimates its effective income tax rate expected to be applicable for the full year. This estimate is used in providing for income taxes on a year-to-date basis and may change in subsequent interim periods. The Company’s effective tax rates from continuing operations for the three and six months ended December 26, 2010 was 43.1% and 41.5%, respectively, compared to 39.9% and 40.6% in the prior year periods. The effective rates for fiscal 2011 differed from the U.S. federal statutory rate of 35% primarily due to state income taxes and other permanent non-deductible items.

The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The Internal Revenue Service has completed its examination of the Company’s federal income tax returns through fiscal 2009. Certain state returns remain subject to examination where the statute remains open from fiscal 2004. The Company does not believe there will be any material changes in its unrecognized tax positions over the next twelve months.

The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The Company does not have any material accrued interest or penalties associated with any unrecognized tax benefits, nor was any material interest expense recognized during the year.

1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

Note 9 – Business Segments

The Company’s management reviews the results of the Company’s operations by the following three business categories:

·	1-800-Flowers.com Consumer Floral;

·	BloomNet Wire Service; and

·	Gourmet Food and Gift Baskets

During the fourth quarter of fiscal 2009, the Company made the strategic decision to divest its Home & Children’s Gifts business segment to focus on its core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets categories. On January 25, 2010, the Company completed the sale of these businesses; refer to “Discontinued Operations” below for a further discussion. Consequently, the Company has classified the results of operations of its Home & Children’s Gifts segment as discontinued operations for all periods presented.

Category performance is measured based on contribution margin, which includes only the direct controllable revenue and operating expenses of the categories. As such, management’s measure of profitability for these categories does not include the effect of corporate overhead (see footnote (**) below), which are operated under a centralized management platform, providing services throughout the organization, nor does it include depreciation and amortization, other income, income taxes, stock-based compensation and litigation costs, all of which are included within corporate overhead. Assets and liabilities are reviewed at the consolidated level by management and not accounted for by category.

	Three Months Ended						Six Months Ended
Net revenues	December 26, 2010			December 27, 2009			December 26, 2010			December 27, 2009
				(in thousands)

Net revenues:
1-800-Flowers.com Consumer Floral (*)	$	82,574		$	85,890		$	145,177		$	153,924
BloomNet Wire Service		16,219			14,753			31,178			28,538
Gourmet Food & Gift Baskets (*)		136,668			138,207			163,577			164,914
Corporate (**)		339			126			554			252
Intercompany eliminations		(398	)		(522	)		(563	)		(858	)
Total net revenues	$	235,402		$	238,454		$	339,923		$	346,770

	Three Months Ended						Six Months Ended
Operating Income	December 26, 2010			December 27, 2009			December 26, 2010			December 27, 2009
				(in thousands)

Category Contribution Margin:
1-800-Flowers.com Consumer Floral (*)	$	8,180		$	7,578		$	13,533		$	14,922
Bloomnet Wire Service		5,363			4,691			9,662			8,796
Gourmet Food & Gift Baskets (*)		28,652			28,616			26,578			25,735
Category Contribution Margin Subtotal		42,195			40,885			49,773			49,453
Corporate (**)		(11,828	)		(12,396	)		(22,504	)		(23,776	)
Depreciation and amortization		(5,286	)		(5,343	)		(10,421	)		(10,289	)
Operating income	$	25,081		$	23,146		$	16,848		$	15,388

(*) Certain balances in the prior fiscal year have been reclassified to conform to the presentation in the current fiscal year. During the second quarter of fiscal 2010, the Company launched its 1-800-Baskets brand. Products within this business are now being managed within the Gourmet Food & Gift Baskets segment. Gift basket products, formerly included in the Consumer Floral reportable segment are now included in the Gourmet Food & Gift Baskets segment. These changes have been reflected in the Company’s segment reporting for all periods presented.

1-800-FLOWERS.COM, Inc. and Subsidiaries

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

(unaudited)

(**) Corporate expenses consist of the Company’s enterprise shared service cost centers, and include, among others, Information Technology, Human Resources, Accounting and Finance, Legal, Executive and Customer Service Center functions, as well as Stock-Based Compensation. In order to leverage the Company’s infrastructure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions, other than those of the Customer Service Center which are allocated directly to the above categories based upon usage, are included within corporate expenses, as they are not directly allocable to a specific category.

Note 10. Discontinued Operations

During the fourth quarter of fiscal 2009, the Company made the strategic decision to divest its Home & Children’s Gifts business segment to focus on its core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets categories. On January 25, 2010, the Company completed the sale of the assets and certain related liabilities of its Home & Children’s Gifts businesses. The Company has classified the results of operations of its Home & Children’s Gifts segment as discontinued operations for all periods presented.

Results for discontinued operations are as follows:

	Three Months Ended				Six Months Ended
	December 26, 2010		December 27, 2009		December 26, 2010		December 27, 2009
			(in thousands)

Net revenues from discontinued operations	$	-	$	64,334	$	-	$	81,688

Operating income from discontinued operations	$	-	$	3,795	$	-	$	1,157

Income tax expense from discontinued operations	$	-	$	1,225	$	-	$	196

Income from discontinued operations	$	-	$	2,570	$	-	$	961

Note 11 – Commitments and Contingencies

Legal Proceedings

From time to time, the Company is subject to legal proceedings and claims arising in the ordinary course of business.

On November 10, 2010, a purported class action complaint was filed in the United States District Court for the Eastern District of New York naming the Company (along with Trilegiant Corporation, Inc., Affinion, Inc. and Chase Bank USA, N.A.) as defendants in an action purporting to assert claims against the Company alleging violations arising under the Connecticut Unfair Trade Practices Act among other statutes, and for breach of contract and unjust enrichment in connection with certain post-transaction marketing practices in which certain of the Company’s subsidiaries previously engaged in with certain third-party vendors. Plaintiffs seek to have this case certified as a class action and seek restitution and other damages, all in an amount in excess of $5 million. The Company intends to defend this action vigorously.

In 2009, the United States Senate Committee on Commerce, Science and Transportation commenced an investigation of post-transaction marketing practices and the Company was one of many involved in that investigation. The Company fully complied with all requests from the committee. In addition, the Company received a civil investigative demand from the Attorney General of the State of New York regarding the same activities. The Company fully complied with that investigation, supplied the information sought and voluntarily entered into an Assurance of Discontinuance with the Attorney General’s Office in December 2010. As part of the resolution of that matter, the Company paid the sum of $325,000 to a fund to be used for consumer education, consumer redress and costs and fees of the investigation.

There are no assurances that additional legal actions will not be instituted in connection with the Company’s former post-transaction marketing practices involving third party vendors nor can we predict the outcome of any such legal action.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Forward Looking Statements

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A) is intended to provide an understanding of our financial condition, change in financial condition, cash flow, liquidity and results of operations. The following MD&A discussion should be read in conjunction with the consolidated financial statements and notes to those statements that appear elsewhere in this Form 10-Q and in the Company’s Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs. The Company’s actual results could differ materially from those discussed or referred to in the forward-looking statements. Factors that could cause or contribute to any differences include, but are not limited to, those discussed under the caption “Forward-Looking Information and Factors That May Affect Future Results” and under Part I, Item 1A, of the Company's Annual Report on Form 10-K under the heading“Risk Factors”.

Overview

1-800-FLOWERS.COM, is the world’s leading florist and gift shop. For more than 30 years, 1-800-FLOWERS® (1-800-356-9377 or www.1800flowers.com) has been helping deliver smiles for our customers with gifts for every occasion, including fresh flowers and the finest selection of plants, gift baskets, gourmet foods, confections, candles, balloons and plush stuffed animals. As always, our 100% Smile Guarantee backs every gift. 1-800-FLOWERS.COM’s Mobile Flower & Gift Center was named winner of the 2010 “Best Mobile App for E-commerce” by DPAC (Digiday’s Publishing & Advertising Awards) and RIS (Retail Info Systems) 2010 Mobile App of the Year Award in the “Best Shopping” category. 1-800-FLOWERS.COM was also rated number one vs. competitors for customer satisfaction by STELLAService and named by the E-Tailing Group as one of only nine online retailers out of 100 benchmarked to meet the criteria for Excellence in Online Customer Service. 1-800-FLOWERS.COM has been honored in Internet Retailer’s “Hot 100: America’s Best Retail Web Sites” for 2011. The Company’s BloomNet® international floral wire service (www.mybloomnet.net) provides a broad range of quality products and value-added services designed to help professional florists grow their businesses profitably.

The 1-800-FLOWERS.COM, Inc. “Gift Shop” also includes gourmet gifts such as popcorn and specialty treats from The Popcorn Factory® (1-800-541-2676 or www.thepopcornfactory.com ); cookies and baked gifts from Cheryl’s® (1-800-443-8124 or www.cheryls.com ); premium chocolates and confections from Fannie May® confections brands (www.fanniemay.com and www.harrylondon.com); gift baskets and towers from 1-800-Baskets.com® (www.1800baskets.com); and wine gifts from Winetasting.com® (www.winetasting.com). The Company’s Celebrations® brand (www.celebrations.com) is a new premier online destination for fabulous party ideas and planning tips. 1-800-FLOWERS.COM, Inc. is involved in a broad range of corporate social responsibility initiatives including continuous expansion and enhancement of its environmentally-friendly “green” programs as well as various philanthropic and charitable efforts.

During the fourth quarter of fiscal 2009, the Company made the strategic decision to divest its Home & Children’s Gifts business segment to focus on its core Consumer Floral, BloomNet Wire Service and Gourmet Foods & Gift Baskets categories. On January 25, 2010, the Company completed the sale of these businesses. Consequently, the Company has classified the results of operations of its Home & Children’s Gifts segment as discontinued operations for all periods presented.

Shares in 1-800-FLOWERS.COM, Inc. are traded on the NASDAQ Global Select Market, ticker symbol: FLWS.

Category Information

The following table presents the contribution of net revenues, gross profit and category contribution margin or category “EBITDA” (earnings before interest, taxes, depreciation and amortization) from each of the Company’s business categories. Additionally, the table adjusts Category Contribution Margin to EBITDA and Adjusted EBITDA (adjusted for litigation settlements and the impact of the post sale 3rd party marketing agreement) and reconciles Net Income from continuing operations to EBITDA and Adjusted EBITDA, and reconciles Net Income from continuing operations to Adjusted Net Income. As noted previously, the Company’s Home & Children’s Gifts segment has been classified as discontinued operations and therefore excluded from category information below.

	Three Months Ended								Six Months Ended
	December 26, 2010			December 27, 2009			% Change		December 26, 2010			December 27, 2009			% Change
							(in thousands)
Net revenues from continuing operations:
1-800-Flowers.com Consumer Floral (*)	$	82,574		$	85,890			(3.9%)	$	145,177		$	153,924			(5.7%)
BloomNet Wire Service		16,219			14,753			9.9%		31,178			28,538			9.3%
Gourmet Food & Gift Baskets (*)		136,668			138,207			(1.1%)		163,577			164,914			(0.8%)
Corporate (**)		339			126			169.0%		554			252			119.8%
Intercompany eliminations		(398	)		(522	)		(23.8%)		(563	)		(858	)		34.4%
Total net revenues from continuing operations	$	235,402		$	238,454			(1.3%)	$	339,923		$	346,770			(2.0%)

	Three Months Ended						Six Months Ended
	December 26, 2010		December 27, 2009		% Change		December 26, 2010		December 27, 2009		% Change
					(in thousands)
Gross profit from continuing operations:
1-800-Flowers.com Consumer Floral (*)	$	31,854	$	32,856		(3.0%)	$	55,693	$	57,977		(3.9%)
		38.6%		38.3%				38.4%		37.7%

BloomNet Wire Service		9,086		8,569		6.0%		17,549		16,591		5.8%
		56.0%		58.1%				56.3%		58.1%

Gourmet Food & Gift Baskets (*)		57,679		58,132		(0.8%)		68,883		68,649		0.3%
		42.2%		42.1%				42.1%		41.6%

Corporate (**)		213		106		100.9%		288		200		44.0%
		62.8%		84.1%				52.0%		79.4%

Intercompany eliminations		-		-				-		-
Total gross profit from continuing operations	$	98,832	$	99,663		(0.8%)	$	142,413	$	143,417		(0.7%)
		42.0%		41.8%				41.9%		41.4%

	Three Months Ended								Six Months Ended
	December 26, 2010			December 27, 2009			% Change		December 26, 2010			December 27, 2009			% Change
							(in thousands)
Category Contribution Margin and Adjusted EBITDA from continuing operations:
1-800-Flowers.com Consumer Floral (*)	$	8,180		$	7,578			7.9%	$	13,533		$	14,922			(9.3%)
BloomNet Wire Service		5,363			4,691			14.3%		9,662			8,796			9.8%
Gourmet Food & Gift Baskets (*)		28,652			28,616			0.1%		26,578			25,735			3.3%
Category Contribution Margin Subtotal		42,195			40,885			3.2%		49,773			49,453			0.6%
Corporate (**)		(11,828	)		(12,396	)		4.6%		(22,504	)		(23,776	)		5.4%
EBITDA		30,367			28,489			6.6%	$	27,269		$	25,677			6.2%
Litigation settlement		-			898			-		-			898			-
Post sale 3rd party marketing agreement		-			(1,425	)		-		-			(2,180	)		-
Adjusted EBITDA (***)	$	30,367		$	27,962			8.6%	$	27,269		$	24,395			11.8%

	Three Months Ended						Six Months Ended
	December 26, 2010		December 27, 2009		% Change		December 26, 2010		December 27, 2009		% Change
					(in thousands)
Discontinued Operations:
Net revenues		-	$	64,334		-		-	$	81,688		-
Gross profit		-	$	31,158		-		-	$	38,706		-
Contribution margin		-	$	7,581		-		-	$	5,462		-

	Three Months Ended					Six Months Ended
	December 26, 2010		December 27, 2009			December 26, 2010		December 27, 2009
			(in thousands)
Reconciliation of Income from Continuing Operations to EBITDA and Adjusted EBITDA from Continuing Operations:
Net income from continuing operations	$	13,530	$	12,733		$	8,406	$	7,067
Add:
Interest expense		1,310		1,985			2,509		3,531
Depreciation and amortization		5,286		5,343			10,421		10,289
Income tax expense		10,253		8,452			5,975		4,830
Less:
Interest income		10		11			39		25
Other income (expense)		2		13			3		15
EBITDA	$	30,367	$	28,489		$	27,269	$	25,677
Litigation settlement		-		898			-		898
Post sale 3rd party marketing agreement		-		(1,425	)		-		(2,180	)
Adjusted EBITDA (***)	$	30,367	$	27,962		$	27,269	$	24,395


	December 26, 2010		December 27, 2009			December 26, 2010		December 27, 2009
			(in thousands)
Reconciliation of Income from Continuing Operations to Adjusted Income from Continuing Operations:
Income from continuing operations	$	13,530	$	12,733		$	8,406	$	7,067
Add:
Litigation settlement		-		898			-		898
Post sale 3rd party marketing agreement		-		(1,425	)		-		(2,180	)
Income tax expense associated with litigation settlement and post sale 3 rd party marketing agreement		-		210			-		519
Adjusted net income from continuing operations	$	13,530	$	12,416		$	8,406	$	6,304

Adjusted net income per basic and diluted common share from continuing operations:
Basic	$	0.21	$	0.20		$	0.13	$	0.10
Diluted	$	0.21	$	0.19		$	0.13	$	0.10

Weighted average shares used in the calculation of net income per share from continuing operations:
Basic		63,966		63,555			63,930		63,514
Diluted		64,801		64,070			64,692		63,969

(*) During the second quarter of fiscal 2010 the Company launched the 1-800-Baskets.com brand which is included within the results of the Gourmet Food & Gift Baskets category. Prior period results, which had previously been included within the 1-800-Flowers Consumer Floral category, have been reclassified accordingly.

(**) Corporate expenses consist of the Company’s enterprise shared service cost centers, and include, among other items, Information Technology, Human Resources, Accounting and Finance, Legal, Executive and Customer Service Center functions, as well as Share-Based Compensation. In order to leverage the Company’s infrastructure, these functions are operated under a centralized management platform, providing support services throughout the organization. The costs of these functions, other than those of the Customer Service Center, which are allocated directly to the above categories based upon usage, are included within corporate expenses as they are not directly allocable to a specific category.

(***) Performance is measured based on category contribution margin or category Adjusted EBITDA, reflecting only the direct controllable revenue and operating expenses of the categories. As such, management’s measure of profitability for these categories does not include the effect of corporate overhead, described above, depreciation and amortization, other income (net), income taxes, nor does it include litigation settlements and the impact of the post sale 3rd party marketing agreement. Management utilizes EBITDA, and adjusted financial information, as a performance measurement tool because it considers such information a meaningful supplemental measure of its performance and believes it is frequently used by the investment community in the evaluation of companies with comparable market capitalization. The Company also uses EBITDA and adjusted financial information as one of the factors used to determine the total amount of bonuses available to be awarded to executive officers and other employees. The Company’s credit agreement uses EBITDA and adjusted financial information to measure compliance with covenants such as interest coverage and debt incurrence. EBITDA and adjusted financial information is also used by the Company to evaluate and price potential acquisition candidates. EBITDA and adjusted financial information have limitations as an analytical tool, and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP. Some of these limitations are: (a) EBITDA does not reflect changes in, or cash requirements for, the Company's working capital needs; (b) EBITDA does not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Company's debts; and (c) although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and EBITDA does not reflect any cash requirements for such capital expenditures. Because of these limitations, EBITDA should only be used on a supplemental basis combined with GAAP results when evaluating the Company's performance.

Results of Operations

Net Revenues

	Three Months Ended						Six Months Ended
	December 26, 2010		December 27, 2009		% Change		December 26, 2010		December 27, 2009		% Change
					(in thousands)
Net revenues:
E-Commerce	$	154,599	$	151,660		1.9%	$	225,812	$	226,500		(0.3%)
Other		80,803		86,794		(6.9%)		114,111		120,270		(5.1%)
Total net revenues	$	235,402	$	238,454		(1.3%)	$	339,923	$	346,770		(2.0%)

During the