Description

(Note: FLWS Fiscal Year Ends June 30^th)

THESIS SUMMARY

1-800-Flowers (“FLWS”) trades near an all-time high share price and P/E multiple despite being a cyclical business facing significant secular headwinds.  Prior to COVID and just seven months ago, FLWS share price was ~45% lower at ~$12.  I estimate that is FLWS fair value in an optimistic scenario, but I expect more downside to FLWS share price in a more-likely recession scenario as described below.

A VERY CYCLICAL BUSINESS

FLWS has three reportable segments: Consumer Floral (28% TTM EBITDA), BloomNet Wire Service (21% TTM EBITDA), and Gourmet Food & Gift Baskets (51% TTM EBITDA).  Consumer Floral sells flowers through 1800flowers.com and then primarily fulfills orders through local florists, who are part of BloomNet.  BloomNet collects fees from its florist members and sells wholesales products (like vases) to florists.  In this report, I will often refer to Consumer Floral + BloomNet segments as “FLWS Floral”.  The non-floral segment, Gourmet Food & Gift Baskets (“GFGB”), manufactures and sells gift baskets full of various gourmet foods.  In sum, FLWS EBITDA is split ~50/50 between its floral and gift baskets businesses.

FLWS is ultimately selling highly-discretionary products: flowers and gourmet gift baskets.  Due to high fixed costs such as manufacturing at GFGB and advertising necessary to attract customers, FLWS profits typically fall faster than its revenue during recessions. 

As evidence, FLWS Floral revenue declined 17% while EBITDA dropped 47% from FY08 to FY10.  Similarly, FLWS GFGB revenue decreased 17% and EBITDA fell 25% from FY08 to FY10 (based on my estimates on an organic basis).   Consolidated after overhead, I estimate the Great Financial Crisis reduced FLWS EBITDA by ~65% on an organic basis. 

Back then, FLWS GFGB did not own Harry & David (“H&D”) but I don’t think this business will help in the next recession.  H&D sells high-priced food and gift baskets and went bankrupt in 2011.

SECULAR HEADWINDS

After deploying ~$215mm into acquisitions (net of divestitures) & CapEx over the past five years, FLWS EBITDA is expected to grow by < $15mm from FY15 (pro forma for a full year of H&D) to FY20 (using guidance).  This implies a paltry ~5% pre-tax return on capital deployed despite a roaring economy and its top competitor (FTD) filing bankruptcy.  Even worse, EBITDA growth and PT ROIC was ~nil from FY15 to FY19. 

In FY20, FLWS has benefited from the acquisition of Shari’s Berries and COVID.  People have been unable to visit loved ones to celebrate and mourn, so have been sending flowers and gift baskets instead.  I think COVID will quickly reverse from a benefit to becoming a cyclical pressure on FLWS earnings, which will compound secular headwinds outlined below.

Florist sales peaked at $8.2b in 2000 and were only $5.8b in 2018, which was a 5% decline from 2017 (source: US Census Bureau).  The number of florist shops is ~13k today, which is down 40% from 2005 (source: Dun & Bradstreet).  The number of jobs in the floral industry is expected to decline by 14% from 2018 to 2028 (source: US Bureau of Labor Statistics).  The floral industry has clearly been in secular decline.  One reason is more and more grocers and warehouse clubs are offering same-day or next-day delivery of flowers.  Another reason is today’s consumer has many more gifting options (aside from flowers) through Amazon, Etsy, etc.  Fewer florist sales lowers revenue for FLWS Consumer Floral segment, while fewer florist locations reduces member fees collected by BloomNet.

In addition to a decline in the number of florists and florist sales, FLWS Floral is being hurt by increased competition for florist sales.  More specifically, order gatherers, such as FromYouFlowers and Avas Flowers, are bidding up AdWords (such as “flowers”) to capture orders from consumers and then reselling that volume to FLWS.  As a result, order gatherers are increasing FLWS advertising costs (for AdWords) and reducing FLWS gross margin (by reselling at a market up).  These dynamics have impacted FLWS Consumer Floral segment.

FLWS BloomNet segment is also being harmed by more competition.  For example, BloomNation is another floral network that charges florists lower fixed fees to be a member, allows florists to source wholesale product (such as vases) elsewhere instead of charging a large markup (like FLWS), and enables florists to create custom arrangements (while FLWS forces florists to follow its templates).  From speaking to florists, it seems that many of them struggle to earn a profit as a member of BloomNet due to high fees and are also unhappy because BloomNet limits their creativity (because florists must follow BloomNet’s arrangement templates).

Despite high fixed costs and revenue rising at a ~6% CAGR from FY16 to FY19, FLWS Floral failed to show any operating leverage as its margins declined each year due to the headwinds described above.  If not for the struggles of FLWS largest floral competitor (FTD), I doubt FLWS Floral would have grown much, if at all. 

FTD acquired ProFlowers in 2014 and then immediately ran into operational issues coupled with too much debt.  As a result, FTD/ProFlowers revenue dropped by 17% or > $200mm from 2015 to 2018.  Yet, FLWS Floral grew revenue by < $75mm during this period.  FTD then filed bankruptcy in 2019, which enabled FLWS to capture even more market share in recent years.

Unfortunately for FLWS, FTD assets were acquired by a private equity firm out of bankruptcy in Aug’19.  FTD is now debt-free, led by a revamped & experienced team, and owned by an incentivized firm, so I think FTD should be a more formidable competitor to FLWS going forward.

Similar to FLWS Floral, FLWS GFGB segment has been hurt by more online competition and consumers having far more gifting choices.  From FY15 (pro forma for a full year of H&D) to FY19, GFGB’s EBITDA was ~flat as margin compression offset rising revenue.  As mentioned above, GFGB is benefiting from an acquisition and likely COVID sympathy in FY20 but now faces a recession.

SUBSTANTIAL POTENTIAL DOWNSIDE IN FLWS SHARE PRICE

FLWS share price hit an all-time high a few weeks ago (in May’20) and is currently only < 15% below that record.  The company now trades for ~35x FY20 EPS guidance, which is a ~40% premium to its 5-year average of ~25x EPS.  Assuming the COVID recession is only half as devastating to FLWS as the Great Financial Crisis, I estimate EBITDA will decline > 30% and EPS will be cut in half to ~$0.30 in FY21.  Applying FLWS 5-year average of 25x EPS then implies a < $8 stock and > 65% downside.

Not mentioned above, FLWS agreed to acquire Personalization Mall (“PM”) from Bed, Bath & Beyond (“BBBY”) in Feb’20 for ~$250mm or ~11x EBITDA (vs. FLWS 10-year avg EV/EBITDA of only ~8.5x).  FLWS has delayed this closing and may be trying to cancel the acquisition all-together.  FLWS has a court date with BBBY in September (per FLWS recent 10Q).  If the acquisition is consummated, PM would likely add more cyclicality to FLWS business.  If not consummated, FLWS may be on the hook for legal bills or other liabilities.  For conservatism, I assume PM has no impact on FLWS valuation.

OVERLY-OPTIMISTIC FLWS LEADERSHIP

Though FLWS share price recently reached an all-time high, that was also the first time FLWS had exceeded its 1999 IPO price of $21.75.  Clearly, FLWS was overvalued during the dot-com bubble.  But, the founding Chairman and his son as CEO needed 20 years to return its first shareholders their initial investment.  To state the obvious, that is a very long-time.

On FLWS recent 3Q20 earnings call, mgmt sounded optimistic about the future.  But, don’t be fooled by this optimism.  In Oct’08 and in the depths of the GFC, this same mgmt team (including the CFO who joined in 1996) maintained FY09 EBITDA guidance of 15% growth.  Four months later, they reduced guidance and forecasted FY09 EBITDA would be lower Y/Y.  By Aug’09, they reported a 36% Y/Y drop in FY09 EBITDA.  Not learning their lesson, mgmt guided to 20% growth for FY10 EBITDA in Aug’09.  They ultimately reported the opposite in Aug’10: a 20% Y/Y decline in FY10 EBITDA.

Catalyst

If not FY21 guidance, then the results that follow if history is a guide.