As one of the last men standing from the dot-com IPO era, 1-800-Flowers.com (FLWS: Charts, News, Offers), an online gift shop specializing in flowers, gift baskets, cookies, candy and wine, ambled along listlessly in a depressed range of $2-3 for most of 2011, far removed from its 2007 highs of nearly $13 a share. The company’s operating margins last quarter were disappointing, at -7.9%, down from last year’s 0.51%.
While it is easy to blame the financial crises of 2008-2009 on the company’s decline, evidence suggests that the company had been attempting to distance itself from the rest of its dot-com brethren as part of the post dot-com bubble era with expansion and diversification. As the recession ends, the company is struggling to improve its revenue and margins. However, the company is much more expansive and diverse than before, and a closer look at its earnings signal the possibility of a turnaround off its 10-year lows.
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The company’s revenue growth throughout 2007-2008 was solid, with operating income and operating margins rising slightly above its 2006 earnings, but when the financial crises of 2009 hit, both of these metrics fell deep into the red. Throughout fiscal 2008, the company grew its EPS by 23%, EBITDA by 9.3% ($61.6 million), Free Cash Flow by 166% ($38 million), and reduced its Operating Expense Ratio by 70 points to 36.5%. It also acquired DesignPac Gifts for $38 million to expand its gourmet gift basket business. These were all healthy signs of a growth stock and investors then had no reason to think the company would sink.
The company, which once held a market leading 20% share in the online floral gifts business, was struck hard by intensifying competition during the recession. However, its flowers.com website still funnels heavy traffic into its other branded cookie and chocolate businesses – Cheryl’s Cookies, Fannie May and Harry London, which were acquired in March 2005 and May 2006. These small companies, which comprise its cookie and chocolate segments, may be a life raft for the company, due to higher margins and growth to throughout the recession in contrast to the opposite direction for its floral segment.
The floral segment’s BloomNet floral wire network, which extends its floral products and wholesale services to outside florists, has been well received since its launch in 2005. The company’s aforementioned acquisition of DesignPac is now being aggressively used to compete with Harry & David, which suffered -13% revenue last quarter, in the gift market business through its 1-800-Baskets.com site. DesignPac integrates very well with the Flowers.com site and BloomNet network, and together form the heart of the business. The gift markets business has been under pressure from large superstores, such as Wal-Mart (WMT: Charts, News, Offers) and Target (TGT: Charts, News, Offers), which offer their own cheaper varieties, but as the economy improves and the Internet evolves even further, online flowers and gift basket stores, with better prices and more convenience than their brick and mortar counterparts, will flourish. The company has now shifted its businesses around, with 55% in 1-800-Flowers consumer floral, 36% in Gourmet Food and Gift Baskets and 9% in BloomNet. This new mix offers more safety in diversification. For Fiscal 2010, the company increased Free Cash Flow by $25 million and reduced debt by $32 million. It is currently selling its Home and Children Gift Business, which will reduce inventory by 1/3, and achieved an adjusted ETIBDA of $28.6 million; not as impressive as its 2008 earnings, but hardly signs of a dead company walking.
The company has several competitive advantages against its industry peers – a durable business model suited for long-term cash generation, strong brand loyalty (50-60% repeat business per quarter), a leading market share across various segments, and timely repayment of debt through a capital-light business model and the shedding of unprofitable business units. While the stock may be stuck in the $2-3 range for the near term, there are catalysts on the horizon which may save this stock and push it up into the $4-5 range. Look for seasonal boosts – such as Valentine’s Day and Christmas, as well as regular occasions such as birthdays and parties, to pad the company’s bottom line.
Other News About FLWS
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Hoping that social networking can boost its visibility.
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
