1-800-FLOWERS.COM: An underappreciated e-commerce investment?
Opdateret: 3. maj
If you are living outside of the United States, you have probably never heard of 1-800-flowers.com. The reason it got to my attention, is because of their numbers that I will present later in this analysis. It has been on my watchlist for quite some time, and I thought it was it was time share my thoughts with my followers and copiers.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
For full disclosure, I should mention that I have never owned shares in 1-800-flowers, and I don't have any personal experience with the company. I have browsed their website and looked at the products but with no personal experience, I cannot say of the products are good or bad. I have been looking at reviews, and while they have an average score of 2,9 at Trustpilot, they score better at consumeraffairs with a score of 3,6. It is always difficult to invest in a company you don't have firsthand experience with but later in this analysis, you will see why it could be an intriguing option. I will also try to make this analysis a bit shorter than usual, as it seems like my shorter analysis are preferred by the readers.
1-800-flowers describes themselves as a leading provider of gifts designed to help customers express, connect, and celebrate. It was founded in 1976 by James McCann, who is now the executive chairman of the board. They are among the most recognized brands in the floral and gift industry and operates in three business segments. They are the largest provider of gourmet food and floral products, with a market share of 26,5 %. They are among the most recognized brands in the floral and gift industry, which gives them a brand moat. The company has seen a large growth lately and has doubled their size of business over the past three years, and has transformed their company from being a collection of specially brands into a unique e-commerce platform.
Their CEO is Chris McCann. He joined the organization in 1984 and became the CEO in 2016. He is the brother of founder James McCann. He has played a large part in transforming the company into the e-commerce company that it is today. He is known for embracing technology innovations that enhance customer engagement and goes by the mantra that is "the best product is the customer experience". He has a Bachelor of Arts in political science from Marist College. Besides being the CEO of 1-800-flowers, he is also the co-founder of Smile Farms Inc, which is a non-profit organization dedicated to providing meaningful job opportunities for individuals with development disabilities. It is hard to find much information on Chris McCann but being able to double the size of the company in the last three years combined with the numbers we see later in the analysis, I feel confident with him moving forward. According to comparably, employees rate the management team in the top 20 % of similar sized companies, while Chris McCann himself has a score that place him in top 10 % of similar sized companies.
I believe that 1-800-flowers has a brand moat. I'm also quite confident in the management. Now, let us investigate the big five numbers to see if 1-800-flowers lives up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first and most important number we will investigate is the return on investment capital, also known as ROIC. We want to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. 1-800-flowers does live up to our requirement. Each of the benchmarks are above 10 % and is growing from benchmark to benchmark. It is exactly what I like to see before investing in a company.
The next numbers we will investigate are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. While the numbers are not increasing from each benchmark to benchmark, the numbers are above the 10 % requirement in each of the benchmark.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. Once again, we see numbers well above the requirement. The worst benchmark has a growth rate of 26,3 %! You don't see that very often.
The Equity Growth Rate is the most important growth rate, at least according to Phil Town. Once again, 1-800-flowers performs, as each benchmark is above the required 10 %. Besides that, we see the growth rate is growing nicely from benchmark to benchmark. I really appreciate numbers like these.
Finally, we investigate the Cash Growth Rates. Once again, 1-800-flowers delivers. Each of the benchmarks are well above the required 10 %. They might not grow from each benchmark to benchmark but when you have numbers like these, it doesn't really matter.
To shortly summarize the five numbers from 1-800-flowers. The numbers are well above the requirements in each benchmark, both in ROIC and all the growth rates. It isn't something you see often, and it is also why the company ended up on my watchlist to begin with. One thing that should be noted is that 1-800-flowers performed exceptionally well during the pandemic, which is also reflected in the 1-year benchmark. Growth like we see in the 1-year benchmark is not sustainable, which the management also noted in their latest earnings call. Nevertheless, they also mentioned that in the latest quarter (July to September), they did manage to grow revenue by 9 % in quarter over quarter. You might also notice that the cash growth rate is lower than in the 1-year benchmark that in the 3-year benchmark. It is mainly due to the acquisition of Personalization Mall, which 1-800-flowers bought for $245 million.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Having done the calculations on 1-800-flowers, they show that 1-800-flowers can pay off their debt in 1,36 years. It is below the requirement of 3 years, which means that debt in my opinion isn't an issue if I should choose to invest in the company.
Like with all other companies, there are some risks if you choose to invest in 1-800-flowers. They mentioned one of their largest risks to be a challenging labor market. By that they mean limited availability, as it is hard to find people to hire. But also rising wage rates, which would affect their margins (profit margins are good but operating margins leave something to desire). Another risk is increasing shipping rates. 1-800-flowers are dependent on both inbound and outbound shipping, and as rates continue to rise, it will once again hurt margins. Higher prices on raw materials are also a risk. However, management have said that they are able to pass the higher prices to their customers, which is also why the company previously has performed rather well during inflation. Competition is also a risk, as increased competition could result in price reductions, decreased revenues, lower profit margins, loss of market share and increased marketing expenditures.
There are also lots of potential for 1-800-flowers to grow their business moving forward. The company is still growing. During the fiscal 2021, 1-800-flowers added 6,5 million new customers, and one of the largest growths was in millennials, which now represents almost 25 % of their customers' base. These customers will hopefully be a long for a long time. Higher automation. They continue to deploy automation in their manufacturing, warehouse, and distribution facilities, which should reduce their reliance on seasonal labor, which would cut labor costs. Higher growth through acquisitions. They have made several acquisitions, such as Personalization Mall, Shari's Berries and Vital Choice, which expands their products offering. Growing their Celebrations Passport loyalty program. Their Celebrations Passport loyalty program is driving increased frequency, retention, and cross-category/cross-brand purchases.
All right, we have gone through the numbers, risks, and potential regarding 1-800-flowers and now it is time for us to calculate a price. To calculate price, we will need numbers that I have explained in the "MY STRATEGY" section of the website. I do not want to go through the whole calculation here. I chose to use an EPS of 1, which is a lower than the current one of 1,78 but higher than the one from 2020 of 0,91. I chose an Estimated future EPS growth rate of 10 (management believes they will grow in double digits between 10-12 %), Estimated future PE 20 (which the double of the growth rate, as the historically PE for 1-800-flowers has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY", we come up with the sticker price (some call it fair value or intrinsic value) of $12,82, and we want to have a margin of safety on 50 % , so we will divide it by 2 meaning that we want to buy 1-800-flowers at price of $6,41 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The operating Cash Flow last year was 173,29. The Capital Expenditures was 56,22. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 39,35 in our further calculations. The Tax Provision was 30,46. We have 65,09 outstanding shares. Hence, the calculation will be like this: (173,29 - 39,35 + 30,46) / 65,09 x 10 = $25,25 in TEN CAP price.
The last calculation is the PAYBACK TIME. It is also described in "MY STRATEGY". With the Free Cash Flow Per Share at 1,21 and a growth rate of 10 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $15,22.
I believe that 1-800-flowers is an interesting company. If you look at their historical numbers, it is hard to find any company that has delivered numbers like the ones 1-800-flowers has. I haven't been able to find much about the management, but the results pretty much speak for themselves, and I like that the founder is still the executive chairman of the board, while the CEO also has a long history in the company. The company did have an exceptional time during the pandemic, which is mirrored in the 1-year benchmarks. Management is confident though that they can continue to deliver double digit growth, as they believe the shift to e-commerce will continue moving forward. There are some short-term risks with freight prices and labor shortages, which could hurt their margins short-term. Personally, I would like to see a bit higher operating margin but with a solid margin of safety, I would probably buy a smaller position. By a solid margin of safety, I mean the PAYBACK TIME price of $15,22, as the TEN CAP price reflects an exceptional good year for the company.
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