FLWS is one of those companies that we simply had to bet against after we looked closely at the firm's 10Q. The stock is down 23% since we told readers to quickly dump it.
You can read the entire article, but here's the gist of the bear case we made back on April 27th:
A) 1-800-Flowers has been dead money for the last 2 years. The most exciting treat shareholders have received were the 3 acquisitions the company made inside the last 18 months. 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 supercede the company's cost of capital. 1-800-Flowers is indeed a young child playing in a fiercely competitive milieu.
B) At the time of our report, FLWS looked priced for perfection -- or an atom bomb, depending on your definition of pain. Analysts were looking for a 93% jump in 1-800-Flowers' 06 to 07 EPS. FLWS was trading at 25 x 2007 EPS at the time. On the surface, FLWS looked like a steal. Then we looked at rival FTD Group. FTD was expected to grow its bottom line by only 12% and was trading at 13 x 2007 estimates. We decided to pass on FTD, which spat out 2 x the EBITDA (proxy for cash flow from operations) 1-800-Flowers did and generated 7 x the free cash flow 1800Flowers could muster. In short, paying up for FLWS required some nerve, which we were glad not to have.
C) We concluded our dismal report by saying: "...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 intensely competitive 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 peddling flowers -- this is a stock we'll gladly pass on."
D) To play Monday morning quarterback: the play here was deceptively simple -- go neutral FTD for lack of a material catalyst and aggressively short FLWS due to operational uncertainty and company failure to return value to shareholders. Based on our DCF valuation model, 1-800-Flowers was nowhere near returning money to investors above its high WACC, or cost of capital.
FLWS 1-yr chart: