Why 1-800-Flowers.com Should Quadruple

 |  Includes: FLWS, LB, SBUX, WFM, WSM
by: Jeffrey Walkenhorst, CFA

In case you missed it, Chris McCann, President of 1-800-Flowers.com (NASDAQ:FLWS) was the executive featured on CBS's 'Undercover Boss' on Sunday.

A WSJ article last Friday pointed out that most companies featured on the program subsequently see higher share prices and/or higher Web site traffic:

We're not entirely surprised as increased media exposure for any business is usually a good thing (unless it's a product recall or some other negative news), not to mention that momentum oriented traders might latch onto news of the program to bid shares higher.

The CBS show enables consumer facing companies such as 1-800-Flowers.com to connect with customers and/or potential customers. The goal is to keep building the business and driverepeat business -- recall commentary from the company's last report:
  • "During the fiscal second quarter, the Company attracted 656,000 new customers, of whom 78 percent, or 512,000, came to the Company through its online channels. Approximately 1.7 million customers placed orders during the quarter, of which 60 percent were repeat customers. This reflects the Company's ongoing focus on deepening the relationship with its existing customers as their trusted gift provider for all of their celebratory occasions.
The 60% repeat business is one of the key reasons we like 1-800-Flowers.com and provides evidence of an established franchise.

The WSJ article noted that even before airing the program, Chris McCann's "company's stock already has notched some heady gains." It is true that shares moved from the low 2s to the high 2s (and subsequently to just over $3 on Monday), yet shares continue to trade near a ten-year low despite being a much larger and diverse business than ever before:

Click to enlarge:

By much larger and diverse, we mean the following (from recent presentation):

(Click to enlarge)

The "flowers" segment is less than 60% of total revenue and we believe certain units (chocolate) actually saw stable to slight growth revenue over the past year. These are good businesses with growth potential and significant operating leverage as the economy slowly recovers.

For "heady gains", please see the 3-5x gains of many other mainstream retail companies over the past year: Whole Foods (WFMI), Starbucks (NASDAQ:SBUX), Limited Brands (LTD), Williams-Sonoma (NYSE:WSM) to name a few. Admittedly, improving margins and earnings drove, and are driving, share prices of these companies. 1-800-Flowers.com was at the center of the consumer discretionary storm, yet -- assuming the retail environment continues to improve -- we think the company is capable of mid-single digit operating margins over the medium term. Per our prior posts - where do flowers come from and, Many Funds Simply Can't Buy FLWS Right Now; But, We Can Because We Can Wait, we've been increasing our exposure to the company despite lingering economic/consumer concerns.

We're not in it for a move from $2 to $3, but rather multiples of our average purchase price. A 10% current free cash flow yield implies a fair value of almost $5 today and, on a normalized earnings power basis, shares could garner more than $8.

Disclosure: Long FLWS