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Valentine's Day Flower Power: My Interview With FTD CEO

Over a million bouquets of flowers will be delivered today by FTD . After all, Valentine's day is to flower and jewelry companies what the Super Bowl is to TV retailers. Competitor 1-800-Flowers and other delivery services including Harry & David are highly affected not only by a consumer cutting back on spending but also by the weather.

I spoke with FTD's CEO Michael Soenen yesterday about the floral industry right now, how his company is fighting for marketshare and what the geopolitical landscape means for the business.

Me: Given the concern about the consumer and weather patterns this year, what are you expecting this Valentine's Day?

MS: For us, we're expecting what always happens at Valentine's day. It's not a terribly economicly sensitive holiday. people don't come home to wives/gf's and say it's been a difficult economic year so we're not goig to send flowers. It just doesn't happen. We expect to have the consumer there for us, we expect the consumer demand, and we expect a good holiday, as usual.

Me: Is there a trade down by consumers?

MS: "What we've historically seen, maybe someone spends a dollar or 2 less on their bouquet than they might in another year, but it's not a material degradation in their spending. It's not a holiday where there's a lot of discounting, not a holiday where you want to come home and tell your spouse you got them on sale. They do tend to spend a little bit less, but in terms of the floral category it's really not a material change in order values from what we've historically seen both in good markets and bad markets. You know, alternatively in a great market, they don't spend a lot more, but in difficutl market, and I would characterize as a difficult market, we don't see them spending alot less either.

Me: While you are more of a flower aggregator than florist per se, you must still see the ticket prices charged by vendors have some link to rising gas prices, etc. What are you seeing there?

MS: It makes it a challenge. Weather, labor, and fuel going up makes it a challenge for our retailers. That said, they've been able to manage it pretty well both through efficiency and better buying. The real price of flowers for most part haven't increased in last 10 years. Through technology, been able to offset a lot of labor costs. For most part, our retailers have been able to absorb it.

Me: What are the biggest growth markets right now?

MS: Both domestically and in Europe. I think Europe has been a huge home run for us. One of which is the Internet is just starting to develop over there in temrs of consumer retail. On surface, it appears to me as if they're circa year 2000 for us where they're just starting to ramp in terms of broadband access and in terms of consumers embracing interent buying. our European investments have performed extremely well as of late. Domestically, bigger challenge. We have more competitors here. And the consumer in tougher mood in terms of getting them to spend money. We still see growth here domestically, but slower growth than we're going to see in our international investments.

Me: Do rising commodity costs affect ticket price of your sales?

MS: They really don't. One reason, massive oversupply of flowers. I talked earlier about how there's been really no price increase in flowers to averge retailer. The reason for that is tremendous oversupply around world of flowers. Way more farms, growers. ability to get fresh product, relaly good product into the US or anywhere around the world is not a challenge for us.

Me: Many analysts have told me that FTD is losing marketshare to 1-800-flowers. How are you battling that?

MS: I'd challenge that question. In our case domestically, we have opportunity on the topline. Question is how much topline growth we want and how much earnings growth. In the case of FTD, imvestors will note we have roughly 15 percent operating margins. We've been growing them. Our competitor 1800 flowers has had roughly 5 percent oprating margin. And so that different, that 10 point difference, translates into a tremendous about of cash flow and earnings growth for our investors. I don't see us making any radical changes in what we're doing. We're very happy with where we are with share. I'd argue that we're very close to holding share. Some quarters we've been down a little bit and some quarters we've taken share, but our ability to drive earnings growth you know this year--25 percent earnings growth - and in the december quarter--40 percent earnings growth in a quarter where most retailers struggled, I think is where we continue to focus our efforts and is one of the reaons we've generated such great returns for investors.

Me: FTD has around $300 million in debt on its books. What are you doing to alleviate that?

MS: Hopefully, nothing. I'm really happy with our debt levels. lowest its been in several years. we pay out almost half our free cash flow in dividend. I think right now, the stock stock has roughly 6% div yield or so. if we were trying to reduce debt, we wouldn't be paying gout such a huge dividend. With our total debt to cash flow at roughly 3x kind of total debt to EBITDA…very low. (talks about EBITDA a bit more here…rambles)…Our debt is at such a low rate, meaning when we finance that debt, very low interest rates. Rather than repay the debt, we'd rather pay out dividends to the shareholders. And right now, having that debt where it is, paying out half my free cash flow on a dividend…I think it's a much better mix for avg investor, rather than have me paying down 7 or 8% in debt, which in this market just doesn't make any sense.

Me: How many orders will go out today?

MS: We will deliver over a million orders just for FTD tomorrow. It's an exciting day to go to that kind of distribution capability in a day. florists have been doing it for years, they are exceptional at it. They do a great job. Our complaint rates..less than 1 percent. To think that we can go to doing avg amount of biz, to million orders a day, keep complaint rate down under 1% is a true testament to what our local florists are doing for us.

Questions? Comments? retaildetail@cnbc.com
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