Wednesday, November 17, 2010

1-800-Flowers Trades Low

1-800-Flowers (FLWS) sells flowers and other gifts online, over the phone (as you might have garnered from its name) and at bricks and mortar retail locations. As consumers have cut back on superfluous spending, revenues at FLWS have fallen, but not nearly as much as the stock price. The stock is down more than 80% from its 2007 peak, when the company had operating income of $42 million. Today, the entire company trades for just $136 million.

The company does have a few items in its favour that put a floor under its earnings. Repeat business is high for FLWS; more than 60% of its sales are to previous customers, giving the company a good base from which to grow. The consumer portion of its basket business (1-800-Baskets) is also doing well, and management believes this business can grow to the size of its floral business.

Furthermore, management does have a significant stake in the company, so its interests are mostly aligned with those of shareholders. It should be noted, however, that the company does have a dual-class share structure which grants management more power than it actually owns. Also, the company does compensate its employees heavily with options, as there are 7 million options outstanding compared to just 64 million shares. But due to the stock price crash discussed above, many of these options are worthless, as the stock trades for well below some of their exercise prices.

What may be of concern for potential shareholders, however, is that the poor consumer environment does not totally explain some of the company's problems. FLWS has not performed up to potential in some of its businesses, resulting in market share losses that are compounding the losses due to the economy. Management is putting some practices into effect to reverse this trend, but it's far from clear as to whether they will do the trick. Outside of 2007 and 2008, the company has not been that profitable; low margins are the norm for this company (operating margins are well under 3% over the last business cycle), suggesting FLWS operates in a highly competitive business, despite the repeat customers that should serve as an advantage in this area.

Just before the recession, FLWS racked up a couple of blockbuster years that make the current stock price look extremely cheap. However, shareholders must decide whether those years were aberrations or whether the company is likely to be able to get back to those levels.

Disclosure: None

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