Dial P for Pain: 1-800-Flowers
The floral business is one tough cookie. Dot-com remnant 1-800-Flowers (FLWS) will report earnings later today, so we thought we'd take a quick look under the hood of this capital-intensive company.1-800-Flowers (FLWS) 1-800-Flowers markets gifts such as flowers, plants, gourmet foods, candies and gift baskets via the Internet, telephone, catalogs and retail stores. Through its subsidiaries, it also markets home decor and garden merchandise, popcorn, specialty food gifts and children's toys and games.
The company miraculously made its way out of the tech boom detritus and tasted profitability in 2003 after 3 straight years of losses. For the most part, its stock has been dead money for the last 2 years. The most exciting treat shareholders have gotten is the 3 acquisitions the company's made inside the last 18 months. Don't get us wrong, market share is great -- but it can generate redundancy for companies like 1-800-Flowers, who've bought their sales at the cost of adding services they already provided beforehand. How many different types of chocolates does your customer need anyway? Silly us, all this time we thought the whole raison d'etre of M&A was to axe overlap.
Margins in the flower business are ugly, not a surprise considering that a flower is the commodity par excellence. In order to de-commoditize its goods, flower companies have to spend a boatload on SG&A, which crushes margins and profitability. We view the lack of differentiation in the floral business as a dangerous detriment to shareholder value. For a young company, it can mean years of tears until investors see returns that supersede the company's cost of capital.
Just to be fair, we like how 1-800-Flowers has increased customer count as well as its repeat order rate. Furthermore, the business has been doing a decent job cross-selling goods to its customers. Insiders own a truckload of stock, which is always nice to see (as long as execs don't treat a company like their personal piggy bank). Lastly, FLWS still has about $60M in cash on the books (roughly $1 a share), so if the firm sees a specialized rival it'd like to snap up, it probably will.
Valuation FLWS looks priced for perfection -- or an atom bomb, depending on how you like your migraines. Analysts are looking for a 93% jump in 1800Flowers' 06 to 07 EPS. Right now, FLWS trades at 25 x 07 EPS. Sweet deal, right? Wrong. Close rival FTD Group, although it's only going to grow its bottom line by 12%, trades at 13 x 2007 estimates. Here's the monkey wrench: FTD cranks out 2 x the EBITDA (proxy for cash flow from operations) 1800Flowers does. On top of that, FTD's free cash flow/share is 7 x that of 1800Flowers. In other words, paying up for FLWS takes a good amount of guts. Unfortunately, we don't have them.
The Bottom Line FLWS has generated some substantial top line growth since the bubble went pop, but we're not happy campers unless a company can attain profitability alongside augmented sales. The intensive nature of the floral business does a great job at dissuading investors like us from touching the stock. Until FLWS gets big enough to enjoy some operating leverage -- or megastores, supermarkets, and e-retailers stop pushing flowers (ummm, like that's gonna happen) -- this is a stock we'll gladly say "next" on. For those with a bit more risk tolerance, the best flower play is ultimately FTD Group (FTD), which has 9% margins, enough surplus cash to buy back its stock, and higher brand awareness in the marketplace.
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