FLWS - 1-800-Flowers: All Eyes On The Holiday Season Ahead

2023-11-16 11:39:57 ET

Summary

• 1-800-Flowers has an important holiday season coming up and based on the messages from its management, it is likely to be at par with last year.
• However, the company's recent decline in its topline and bottom-line financials needs more than at par to backstop the subdued trend.
• In the long term, its thin margin resulting from its high cost structure will hinder its growth and create vulnerability.
• Current market sentiment is on the bearish side, while we are bearish as well.

Investment Thesis

Company Overview

1-800-FLOWERS (FLWS), founded in 1976 and headquarters in Jericho, New York, is an online gifting platform that centers around flowers and floral products. The company has three segments: Gourmet Foods & Gift Baskets, Consumer Floral & Gifts, and BloomNet, which helps the floral wholesale merchandise to grow their business. Including its namesake platform 1-800-Flowers.com , it has a large number of brands mostly domestically with a few international channels as an e-commerce business platform.

Strength & Weakness/Risks

With Thanksgiving coming upon us, it is not too early to start looking at what the holiday season would be like for 1-800-Flowers. As a provider of decorations and celebration additions to millions of customers across the country and internationally, the year-end holidays are the biggest season for the company. With 44% of total annual revenue, it can either make or break its whole year's performance only based on the few months of holiday spending by consumers and some corporations. Although the company is famous for its fresh flower delivery, the gourmet food segment contributes a similar portion to its revenue.

Like a lot of companies that got a surge in consumer demand during the pandemic, 1-800-Flowers experienced a similar boost. Its revenue on a TTM basis has jumped to over 80% of where it was before the pandemic. During the past three decades, the company's revenue has only declined post '08. It actually stayed at a level on average of about half of pre-08 for almost five years before jumping to another higher step.

To look ahead, there is nothing more reliable than hearing from the horse's mouth directly. Every year, the company is set to hire "seasonal associates" to meet its busiest time of year from surging holiday demand. To look at its past few years' seasonal hiring, there is some clue on what the company expects the holiday business would be like. Back in 2020 and 2021 , it hired over 10,000 seasonal associates. Last year , it hired 8000 of them, the same number as in 2018 and 2019 . This year it is also expecting to hire 8000. The holiday surge in revenue is about 90% higher than where it was in 2019. Has the company become more efficient in handling the higher holiday demands with fewer seasonal workers? Not entirely. Back in 2019, it had less than 3000 employees, now it has nearly 5000. Although the seasonal hiring is the same number as pre-pandemic, the total number of workers is about 22% more than in 2019.

In fact, 1-800-Flowers has an increase in its cost of revenue and operating expenses. These two items combined have a higher percentage compared to its revenue this year. Although it is only by a few percentage points, the trend is nonetheless going up instead of down.

Given the higher costs and expense structure, the 8000 seasonal workers hiring does not seem to be in the high numbers in terms of what the company expects of the holiday demand. From this point of view, this holiday season could be at par with last year. To be better positioned for the upcoming holiday season, the company incorporated generative AI to craft holiday messages into the gifting shopping experience, which helps the consumer to come up with better ways to "express themselves". During the latest earnings call, its CEO said

Quite simply, we believe consumers tend to view holiday gifting as being more of a necessity rather than a purely discretionary purchase.

while its CFO gave the following expectations:

As we look out to the holiday period, while the current consumer environment remains complex and discretionary consumer spending remains pressured, we believe that consumers will be more inspired to shop for the holidays.

Our take from these words is that the management expects minimal disruption to its holiday demand. So it echoes our previous interpretation of holiday hiring it could be at par with the previous year's.

Based on that expectation, we take a look at 1-800-Flowers' financials. The company's net income had a 150% decline from its high in 2021. This is comparable with how it was in the post-'08 period, during which its net income declined by over 300%. A holiday season that is similar to last year may not be enough to offset the weakness. But will the decline at least be halted?

Back in the '08 period, its gross profits declined for two years before reaching the bottom. Currently, this decline that started at the end of 2022 has only been less than a year. Although it is not a precise science and has many more moving parts, we can see even though the fall of net income is already on pace to be similar to the depth of '08, the costs that eat up into the net income from gross profits haven't been large, at only negative 5%, mostly due to much higher gross profits. Should gross profits fall further, this decline will be more pronounced.

The quarterly gross margin has fallen to below its level during '08, although most of its other earnings margins have stabilized after a recent decline. It has always been able to pull up its free cash flow margin even during difficult times, but the divergence with the net margin is still likely to occur. In other words, there could be more room to decline for its net margin. A holiday season at par with last year may not be enough to backstop this trend.

To be fair, the company has been making a lot of efforts to drive organic growth, such as a membership program that expands the customer base to multi-brand gifting, more personalization capabilities, and an enterprise B2B platform to interact with corporate customers. The cloud-based e-commerce platform as a whole helps to enhance scalability and flexibility. According to its presentation, 70% of its total revenue growth came from its existing customers. This shows the power of retention of its products and platform, which boasts well for long-term organic growth.

Referring back to our chart of its costs and expenses shown earlier, with almost 98% of its revenue going to paying the costs and expenses. It is current strategy is to improve manufacturing, distribution, and logistics capabilities. It's been doing so with automation and technological improvements along with in-house farming facilities.

There are almost twenty different brands and channels in its product family that have accumulated through a series of acquisitions over the years.

All these brands have inevitably some overlapping product offerings. We think consolidation of these brands and product offerings could streamline its core business and boost profits. The gifting industry by nature is more fragmented and localized than not, so consolidation will give 1-800-Flowers another layer of advantage to lead its competitors, although there hasn't been any indication of this sort from the management. With its net margin this thin, consistently at the range of about 5% in the past twenty years, it is in a vulnerable position to external shocks and hard to initiate major developments in the long term. This is the key reason why its stock prices, even after meteoric growth in revenue, have fallen back down to the average level of where it was more than two decades ago.

Financial Overview & Valuation

Based on our analysis above, we use our proprietary models to assess the fair value of 1-800-Flowers with a ten-year projection ahead. We assume a cost of equity of 8.22% and a WACC of 9.63%. In the base case, the company has a decline in next year's growth, and over time, it reverted back to its financials of pre-pandemic levels without a major change of its current business model; it was priced at $12.8. In the bullish case, there is still weakness in next year's growth, but the company was able to build in higher margins and stronger cash flow by improving the cost structure and securing a more steady growth path; it was priced at $17.39. In the bearish case, both the downside risks are enlarged and the volatility increased; it was priced at $8.86. The current market price is only a tad lower than our bearish estimate, indicating a bearish outlook for the company. We also think the company hasn't staged a strong momentum to weather the recent weakness, and the current bearish view has reasons to play out.

Conclusion

1-800-Flowers has been in its unique fresh flowers and floral product delivery through online platforms for over two decades. The company has accumulated a strong network nationally and overseas. It strives to grow organically and through complementary acquisitions. However, its high-cost structure and thin margin have made it more vulnerable to external shocks, and its current financial states indicate it is not out of the woods yet should growth momentum not pick up more. We believe there is a strong chance that its growth will revert back to a pre-pandemic state based on the current trajectory. Unless there is a blow-out holiday season, it is a hold for us.

For further details see: