1-800-Flowers Looks Fresh And Ready For Picking

Summary

• 1-800-Flowers has seen tremendous growth over the past year due to nationwide shutdowns and the stock still has room for upside as the market fears new customer loyalty.
• A recent pullback in tech as a whole opens up a buying opportunity with likely limited downside.
• A diverse line of brands makes FLWS an industry-leading name in this niche e-commerce sector.

Roses Are Red, Violets Are Blue, 1-800-Flowers May Be The Next Big Stock For You

1-800-Flowers.com, Inc. (NASDAQ:FLWS) has seen terrific growth due to the COVID-19 pandemic forcing many customers to order flowers from home rather than heading into stores to do their gift shopping. The company's diverse variety of brands (Figure 1) allows them to perform well beyond just the traditional holiday season unlocking deep value relative to their recent growth.

(Figure 1) 1-800-Flowers Has Some Well-Known Brands In Their Portfolio Such As Moose Munch And Harry & David

Investors are beginning to take notice, with the stock pushing to 52-week highs in January before pulling back to the upper $20 range. Wall Street Analysts are well behind FLWS as well giving the stock an average price target of just above $40, signaling nearly 55% upside at current prices. This is a very reachable number especially with the market's current obsession with heavily shorted stocks, as FLWS has an approximately 25% short interest. This being a potential catalyst along with strong growth and a moderate undervaluation in comparison to competitors are all indicators that 1-800-Flowers' stock could very well approach new 52-week highs in mid to late 2021, signaling a conservative 45% upside at current prices in our opinion along with low downside risk.

Valuation

Valuing FLWS can be a difficult task as there are almost no direct competitors/peers trading publicly within the e-commerce gift space. Therefore, one must look at both the holiday, brick & mortar retail companies as well as specialized e-commerce businesses to try to get an idea of a good valuation for 1-800-Flowers.com's stock. FLWS looks drastically undervalued as an e-commerce play trading at less than half the price of Groupon (GRPN) and Overstock.com (OSTK). The stock even appears undervalued when looking at the slower-growing Kirkland's (Figure 2) which is known for their holiday & décor selection and Stamps.com (STMP) which is also a specialized e-commerce name.

Data by YCharts

(Figure 2) 1-800-Flowers.com Trades At A Huge Discount To Other Specialized & Diversified E-commerce Businesses & Relatively Fairly Valued Compared To Slower Growing Brick & Mortar Peers

This undervaluation is likely the result of multiple earnings beats due to the coronavirus shutdowns acting as a catalyst for the online flower & gift delivery business. The market has not kept up with FLWS's earnings growth and likely expects this growth to falter when the nation begins to open back up. This is also likely the reason for a fairly high short interest (~25%) in the stock. Only time and forward projections can tell whether this potential pullback in growth will come true or whether FLWS will be able to hold onto these new customers that have come about in recent quarters.

Bouquets and holiday gifts will likely never go out of style and FLWS is a leader in this niche. Earnings next month should be strong yet again with shutdowns still present in many states over the Valentine's day season. Investors will need to watch forward-looking forecasts to get an idea of whether this undervaluation will continue. A P/E ratio of 25x is a much more reasonable value in our opinion in comparison to peers which would project around 45% upside from current prices.

Risks

1-800-Flowers' growth could potentially hurt the stock in the future as states reopen, expectations will remain high, despite potentially less demand for online gift & flower delivery. Customer loyalty will be an important metric to look at going forward to gauge this.

The company has a small amount of debt as well (~$170 million), but this should not be a huge issue with large increases in cash flows over the past year. There appears to be a pretty solid floor set around the lower $26, upper $25 range, so we believe there is very little long-term risk with this investment.

Investment Summary

1-800-Flowers presents one of the best risk-rewards in the market at the current valuation and growth rates in our opinion. A recent pullback due to macroeconomic headwinds opens up a nice buying opportunity for investors. Same day-delivery options are hard to beat, and if pandemic customers can be kept for future quarters, this could easily be an upper $30 stock, currently trading at just a $1.8 billion market cap despite having around $1.5 billion in 2020 revenues. Wall Street stands behind FLWS as well with multiple bullish ratings (Figure 3).

(Figure 3) Wall St. Analysts Signal 55% Upside For FLWS Stock

Brand acquisitions such as Shari’s Berries in 2019 offer potential catalysts to maintain this growth and may become more common in the future with new cash reserves. 1-800-Flowers is a mature company being valued below faltering brick-and-mortar competitors so it is only a matter of time before the market picks up on this discrepancy.

Analyst’s Disclosure: I am/we are long FLWS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[SmallCapKing]

I can't express how disappointed I am in this article. I'm a small-cap fund manager and have had tons of analysts pitch me ideas, so I know how to scrutinize them. I've been interested in analyzing $FLWS now that I'm on my own, so I was excited to see this write-up. Unfortunately, the article is clearly avoiding the key point!

I don't know whether the stock is a buy or sell - thus the reason for me reading it - but I do know that $FLWS has been a COVID beneficiary as the article points out (no debate there). However, flaw #1 is ignoring that fact that pre-COVID, $FLWS had put up these EPS for the prior 5 years - 34c, 44c, 44c, 44c, 52c. Sales growth was minimal, averaging low single-digits. SO WHAT'S DIFFERENT POST-COVID v. PRE-COVID??? How can this not be much more directly addressed? It's the whole freakin' buy thesis! Note that pre-COVID, on the numbers I mentioned, the stock traded pretty regularly around $10, until a spike to $20 in early FY19 before reverting to $12. Then COVID came, the numbers surged, and the stock took off. Therefore, if there's no significant change post-COVID (permanently higher sales, much improved margins), it's a fair bet that the stock at $27.30 now (down from close to $40) is still too high by probably 50%. I confess to having no idea why this stock has earned a 25x P/E in the past, but let's assume that makes sense. To justify that current price, $FLWS has to maintain $1 in EPS (twice it's pre-COVID norm). And to hit the $40 mentioned in this article, they have to maintain the current rate of around $1.60. But I see no evidence or deep comments to suggest any of this is possible. What I do see is a thinly-veiled attempt to try to get people to create a Reddit-like short squeeze. (Hey, I don't short and I don't like them either, but give me a break. That's hardly a thesis.)

I would also tell everyone who is not a professional that sell-side "analysts" have no credibility in the professional world. They are not incentivized to make us money. They make money by pleasing management so they can get the next deal, and by generating trades in stocks. Thus, their price targets mean nothing. They put price targets in place with modest upside and then just increase them again... and again... and again as they're hit. There's no thought. They use the logic in this article - let's find another company we can create a comparison too that will justify a higher price. Or they use an asinine metric like price-to-sales. Speaking of poor comparisons, since I'm a large owner of $KIRK, I can't begin to fathom why this article tried to compare $FLWS and $KIRK. I guess one could say that $KIRK benefited from COVID, but the $KIRK story is about permanent margins expansion that began pre-COVID. The difference is that post-COVID, $KIRK is a much, much better company than before (with operating margins of 4-5% v. about 0% before) while $FLWS... well, we don't know - that wasn't addressed. Anyway, the use of the comparisons here were poorly chosen. And since we don't want to compare $FLWS against its anticipated growth, since it's likely negative short-term given the COVID bump, we have to rely on either prior multiples (which gets you that 25x) or normalized growth (which would probably justify only 15x).

I'm curious if there's anything sustainably better about $FLWS post-COVID v. pre-. Guess I'm starting from scratch.

I'd apologize for my tone, but making money in stocks demands solid 360-degree research. To post less here by not spending at least 50% of the article (let alone not 10%) on THE most critical aspect of the story is a disservice to readers who might invest on this recommendation in my obviously not so humble opinion.

I share real research, insights, and advice from decades of professional small cap money management experience on my Twitter feed at @SmallCapKing2 (don't forget the '2'). Follow me there.

[gamesetmatch]

@SmallCapKing u missing point. this story is like home depot knocking out all the little hardware stores. less and less floral stores and big upside for flws if they can execute.

[SmallCapKing]

@gamesetmatch So when did that start? They certainly weren't doing it during their 5-year stretch of flat earnings. And $FLWS has been around a long, long time. In fact, if I understand their business correctly, they can't even operate without the mom-and-pop florists.

[gamesetmatch]

@SmallCapKing that is a good point. i do not understand there model exactly and do not know if there have there own greenhouses and distribution . If my theme holds it could be a buy from here. Not a lot of competition and could be a big winner long term. I do need to learn more about there model for sure.

[Robin Heiderscheit]

40x pre covid eps with mid single digit long term revenue growth

I guess this is what value investing has been reduced to these days . . sigh

At this price you are betting that flower buying habits have mostly changed forever . . . not sure

[Buyandhold 2012]

Who sends flowers on Valentine's Day?

Not me.

On Valentine's Day I just cut a few flowers from my yard, stick them in a vase, and leave them on the kitchen table for my wife.

Then she spends half an hour rearranging them and adding baby's breath.