Citigroup initiates coverage on FTD with "Hold", $13 price target

Citigroup Internet analyst Mark Mahaney initiated coverage Thursday on online flower retailer FTD (ticker: FTD). Quick comment: Mark is on a roll with humorous report titles, as you'll see from this one and the Fastclick initiation mentioned in a separate post today. Yet this report is hardly rosy; he doesn't shy away from thorny issues, stems the hyperbole common with Internet stocks, addresses every branch of the industry, and gets to the root of the issue without requiring you to leaf through too many pages. Excerpts below.

FTD: Not Yet Spring

SUMMARY

• We are initiating coverage of FTD with a 2S INTERNET (Hold, Speculative) rating and a $13 price target. While we view valuation as reasonably attractive on both a relative and intrinsic basis (9% C2005 FCF yield), we see positives balanced against risks, resulting in a Hold rating.
• Key positives: 1) Robust growth outlook for the online floral/gifts segment (8% current online penetration); 2) Market leadership in both the consumer and professional florist segments; and 3) Highly synergistic business segments. Key risks include: 1) Significant competition; and 2) Ramping marketing costs.
• We reach a $13 price target based on a combination of P/E and EV/EBITDA analysis. Our proforma EPS estimates are in-line with consensus.
• What would make us bullish? Contained marketing costs and material market share gains in Consumer segment. Bearish? Ramping marketing costs and significant share losses in either the Consumer or Florist segment.

FTD INVESTMENT RISKS

1. Significant competition from other online floral providers – In the Consumer segment, FTD faces significant competition from 1-800-Flowers and from ProFlowers.  Yes, there is a 1-800 lb. gorilla in the segment, and it’s not FTD.  Although 1-800-Flowers’ market share has slipped – and material acquisitions make it hard to get at organic growth trends for that company – its consumer revenue is still 2X+ that of FTD -- $623MM vs. $230MM in C2004.  Further, ProFlowers is the clear market share gainer among the three companies – we calculate that ProFlowers’ share of the three companies’ combined revenue increased from 11% in C2003 to 15%.  ProFlowers has taken share in part by targeting a value segment ($29.99 floral orders) that had been overlooked by FTD and 1-800-Flowers.  FTD and 1-800-Flowers have responded by expanding into this segment, but current trends indicate continued market share gains by ProFlowers.  As one recent datapoint, we note that ProFlowers reported a 38% increase in orders this past Mother’s Day, vs. 15% for 1-800Flowers and only 9% for FTD.  Were FTD not able to maintain its market share in the Consumer segment (our working assumption), our segment estimates would be at risk.

In the Florist segment, FTD faces competition from TeleFlora.  We estimate that TeleFlora may be up to 25% larger than FTD in terms of member florists (25,000 vs. 20,000).  Further, 1-800-Flowers has reportedly been seeking to build up its floral wire-service provider (Bloomlink), which currently has only several thousand member florists.  Were 1-800Flowers to get more aggressive in this space – by offering significant rebates to florists to use its service – our Florist segment estimates for FTD could be at risk.  For now, we are assuming that FTD maintains through C2007 its 20,300 Florist members.

FTD chart below:

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