1-800-FLOWERS.COM: The Gift Of Alpha
Summary
- 1-800-FLOWERS.COM is making smart acquisitions and product expansions to further grow the company.
- The upcoming winter holidays and rise in disposable income will increase demand for the company's products.
- COVID-19 caused the company's products to have inflated demand, and rising labor costs may contract margins.
Tegan Thorneycroft/iStock via Getty Images
1-800-FLOWERS.COM (NASDAQ:FLWS) is the largest online flower shop and is still growing rapidly. The company has both short-term and long-term catalysts, including new expansion efforts, the holiday season, and a rise in disposable income. However, the COVID-19 pandemic caused the demand for the company's products to soar due to lockdowns, and rising labor costs may cause margins to contract.
Business Overview
1-800-FLOWERS.COM is the largest provider of gourmet food and floral gifts, with a market share of approximately 26.5%. The company "offers a gift for every occasion" and its products include flowers, plants, gift baskets, gourmet foods, confections, candles, balloons, and stuffed animals.
The company operates in three business segments, which include Consumer Floral, Gourmet Food and Gift Baskets, and BloomNet. The Consumer Floral segment includes the operations of the company's flagship website, as well as all of the company's other websites that sell flowers. The Gourmet Food and Gift Baskets segment includes the operations of Harry & David (Wolferman's, Moose Munch, Cheryl's, etc.). The BloomNet segment is a business solutions provider that gives florists technology and education, as well as delivery capabilities to reach other florists.
The Company is Growing Quickly and has Little Debt, but Cash Flows Struggled Until Recently
FLWS has been growing at a quick rate and has maintained a steady net income margin. Furthermore, the company has a great balance sheet and little debt. However, the company struggled to generate free cash flow until recent years.
The Company's Revenue and Earnings are Expanding
From 2015-2020, the company increased revenue from $1.17 billion to $2.12 billion, representing an average annual growth rate of 13.71%. However, it is important to note that FLWS experienced a jump in sales of 42.28% in 2020 due to lockdowns. If this was excluded, FLWS's revenue still grew by an average annual rate of 6.56% from 2015-2019.
The company has a strong gross margin, consistently hovering around 42.44%. This drops drastically for the net income margin, which averages to 3.92% because of large SG&A costs. This expense is made up mainly of labor-related costs, which could be a risk that we will cover later.
FLWS has a Strong Balance Sheet with Little Debt
The company's latest statement had a current ratio of 1.5. The majority of the company's $400 million in current assets were comprised of $174 million in cash and $154 million in inventory. However, the company's cash position dropped massively in the most recent quarter to about $4 million due to the company increasing its inventory from $154 million to $282 million. This is likely due to the upcoming winter holidays and an expected large demand.
FLWS also has low debt. In the last twelve months, the company had $301 million in total debt. With an EBITDA of $187 million, this calculates a Debt/EBITDA of 1.61. Since the industry's median ratio is 2.45, it is appropriate to say that FLWS does not have much debt.
Cash Flows Were an Issue, But Not Anymore
From 2015-2020, the company's operating cash flows increased from $57.67 million to $173.29 million. This seems impressive at first, but the company struggled to grow its cash flows until 2019. From 2015-2018, the company was only able to increase cash flows to $78.1 million. This increased massively to $139.42 million in 2019 because of a $33.92 million add-in from a change in working capital. This increased even further to $173.29 million in 2020 because of a huge jump in net income to $118.65 million.
Prior to the company's recent rise in operating cash flows, the capital expenditures were very large compared to operating cash flows. From 2015-2019, FLWS's capex hovered around $33 million per year. In 2020, this increased to $55.22 million because the company invested more into IT infrastructure.
The Company is Expanding by Making Acquisitions and Launching New Products
Recently, FLWS acquired healthy food company Vital Choice. This acquisition adds over 400 "better for you" food items into the company's list of products. The purpose of this acquisition is to further expand FLWS's Gourmet Foods and Gift Baskets segment. In the most recent 10-Q, this segment accounted for 31.51% of revenue, which is the second largest segment behind the Consumer Floral segment. This acquisition will allow FLWS to further diversify its income and become a safer company to invest into.
Source: Company's Website, Author's Chart
The company is also expanding its products to attain more sales. The newest product is called Hero and is a corporate gifting platform. The platform also allows for users to have direct access to purchase more of FLWS's products, such as food or flowers. The purpose of this product is to capitalize on the shift to remote work and the high percentage of workers who will remain remote even after the pandemic. This platform is possible because of a partnership with a corporate gifting company named SmartGift.
Overall, the company is making strategic acquisitions and product expansions to generate more revenue and capitalize on recent events and trends.
The Upcoming Holidays and Rising Disposable Income Could Lead to Higher Sales
The winter holidays have always been a great season for 1-800-FLOWERS.COM. Demand for gifts and gourmet foods is at its highest during the end of the year. Since this is the time that people start to buy more gifts for loved ones, FLWS will directly benefit from this.
As mentioned in any of my other articles, consumers are expected to see a rise in disposable income. From 2021-2026, per capita disposable income is expected to rise at an annual rate of 2.5%. This will even further increase the demand for the company's products and drive sales higher.
The Exit from the Pandemic and Higher Labor Costs Pose as Risks for the Company
As mentioned previously, the lockdowns caused by the COVID-19 pandemic inflated the demand for e-commerce products. Since FLWS is primarily an e-commerce company and many consumers were unable to celebrate occasions in person, many relied on FLWS's products. This caused the demand, revenue, and earnings for the company to increase dramatically. However, as the pandemic starts to subside, brick and mortar stores are going to become more popular again. As e-commerce starts to lose customers, FLWS may need to find a way to retain online shoppers or expand its brick and mortar efforts.
Another risk is the increase in labor costs. U.S. labor costs have increased by the most since 2001 and this could cause much higher expenses for the company. As stated earlier, the company's largest expense is its SG&A costs. This is largely comprised of labor-related expenses. If labor costs continue to rise in the United States, FLWS could see a major increase to SG&A costs and, therefore, a drop in its net income margin.
Valuation
Valuing 1-800-FLOWERS.COM's stock was interesting because not many public companies are truly comparable, as well as the recent large rise in free cash flow making it difficult to perform a DCF. However, I decided to do both. To find a relative value, a comparable company analysis was created.
Source: Created by Author
Due to FLWS not having many true comparable companies, I used companies of a similar size in the Internet and Direct Marketing Retail industry. By utilizing 2022 consensus estimates and the industry's median ratios, a price target of $38.39 was calculated by averaging EV/Revenue, EV/EBITDA, P/E, and P/S price targets. This implies an upside of 21.14%.
Source: Created by Author
When creating a DCF, a conservative projection of future free cash flow was calculated. A discount rate of 7.55% was used, which calculated a total DCF value of $2318 million. After dividing this by the number of shares outstanding, a price target of $35.60 was reached.
Overall, it appears that FLWS seems to be undervalued for both a relative valuation and a conservative DCF.
What Should Investors Do?
Overall, 1-800-FLOWERS.COM appears to be in a strong position with great catalysts. Since I believe that the rise in labor costs will be generally transitory and that e-commerce will still stay relatively popular, I am Bullish on the company's stock. The probable rise in sales that will be caused by the winter holidays and rise in disposable income may offset the contraction in the net income margin caused by increased labor costs, leaving the recent acquisitions and product expansions to possibly push the stock higher.
This article was written by
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in FLWS over the next 72 hours. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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