1-800-Flowers.com: What You Need To Know For 2014

1-800-Flowers.com (FLWS) reported quarterly earnings yesterday, and I thought it was a very good call. On the positive side, the company saw market share gains in the BloomNet business and strong growth out of the gift business (the most attractive segment when considering an investment in FLWS). On the negative side, analysts were concerned about increased costs associated with mobile/social investment, but I think these concerns were overblown. Additionally, when we exclude the benefit of the consolidation of iFlorist, the floral business was slightly weaker than expected. Coming out of this earnings call, I wanted to provide my opinion on what to look for out of the business in 2014 to make sure that the movement online/integration of the company's multiples business are working.

Floral Segment

For the floral segment, revenues grew 5.8 percent to $97.1 million compared with $91.8 million in the prior year period. But, 3.5% of this growth was attributable to the consolidation of the operating results of iFlorist, a UK floral gift provider in which the company increased its investment to a majority position. So organically, growth was only 2.3%, which is lower than projected for the holiday season. Overall, margins contracted in the business due to higher marketing expense associated with investments in social and mobile programs designed to engage directly with customers and help drive demand for the upcoming spring floral holiday season. Analyst really questioned these investments on the Q&A, but I think this is overblown. The company had already stated that it was going to make investments to drive traffic and integration on e-commerce. This is the main investment thesis in FLWS; the company is becoming an integrated e-commerce gift business, which will help it command a higher multiple in the future. This is not to say that there are no risks associated with this move, but as we will talk about later in this article, I think there are metrics we can monitor to make sure the investments are working. For now, I am giving the company the benefit of believing that these are the right investments until I see metrics that state otherwise.

BloomNet

BloomNet revenues increased 6.3 percent to $19.9 million compared with $18.7 million in the prior year period, reflecting continued gains in market penetration for the company's expanded suite of products and services for professional florists. I consider this great news, as it equates to market share gains. Remember, BloomNet provides a variable-rate business model, as compared to its competitors' fixed-pricing model. The company is banking on the fact that its better value proposition will gain further acceptance and take share. This performance signals the strategy is working. Gross margins for the quarter increased 180 basis points to 54.1 percent compared with 52.3 percent in the prior year period due to increased add-on sales. This is exactly what FLWS thought would happen, and it's working. Overall, I am very impressed.

Gift Business

This segment's revenues increased 6.1 percent to $149.6 million compared with $141.1 million in the prior year period. This was driven primarily by the continued rebound in gift baskets sales into the Mass Market channel as well as solid e-commerce growth in the company's Cheryl's bakery gifts business. Though I would have liked to see better growth, this is exactly what you want to see - penetration on e-commerce and growth in the company's owned brands. It's a very solid start, which gives me confidence in 2014 as the integration takes place. Gross margins increased 20 basis points to 41.7 percent reflecting revenue growth operating leverage as well as operational improvements in the company's Fannie May business. This is also exactly what should happen - the company has operational leverage when it grows the company-owned gift businesses.

On a side note, this holiday season I was able to try the Cheryl's cookies. I thought they were some of the best cookies I have ever eaten. I know this isn't a great data point for investment, but I feel more comfortable with my investment since I like the product.

Short-Term Outlook

On the low-end, even if the initiatives don't work, the company will do at least $50MM in EBITDA in 2014. At a 5x EV/EBITDA multiple, we get a price target of $4, or about 20% downside. On the high-end, if these initiatives kick in we could see $60-65MM in EBITDA. If the initiatives kick in, we will see at least some multiple expansion. At 6-7x EV/EBITDA (still below the FTD valuation) we get a price range of $6.00-$7.50, which could represent up to 50% upside in the short term. As I have said before, I believe the initiatives will work and that EBITDA will land closer to $60MM than $50MM. I think the risk reward is there for an investment, especially considering that the long-term potential is much higher, yet the downside is still around $4.00.

Long-Term Outlook

Let's quickly review what the company's operating performance could look like by 2017 if the initiatives the company has put into place work out:

1. Floral Business - The company should grow at 3-5% annually and basically maintain margins. That would get us to $480MM in revenue and about $53MM in EBITDA


2. BloomNet - The business should grow to at least $100MM in revenue and about $30MM in EBITDA. We'll use this low-end estimate in order to be conservative.


3. Gift Business - This business should double though organic initiatives and an acquisition. Look for $480MM in revenues and $58MM in EBITDA.


4. Total Opex will be about $40MM annually going forward


5. This gets us just over $1B in sales and about $100MM in EBITDA, which comes in line with the company's stated goal to grow EBITDA margins to +10%

As you can see, we should see EBITDA double over the next 4 years.

What I'll Be Following

After the recent earnings call, there are some key metrics I will be following in the coming year:

1. Repeat User Percentage - The initiatives being put in place are designed to driven loyalty and integration between the company's brands, which should drive the repeat usage percent higher. Right now, this metric is stuck at 61%, but if the initiatives start to work, this number should go higher next year.


2. Revenue Growth - Again, the initiatives are designed to drive traffic and deliver sales. More than anything else, I want to see the top line move, which would signal to me that the initiatives are working.


3. Market Share Gains in BloomNet - I was happy with the numbers this quarter, but increased share gain would signal that the differentiated pricing strategy is working. So far it's good, but I want to see this success continue.


4. A Rebound in Floral - I would like to see at least 3% organic growth out of this business

If we see strong results in these metrics, I will become more bullish on the name. It's all about the online integration.

Risks

Risks for the company include:

1. Increased e-commerce competition - FTD is currently trying to grow a gift business. It is not as big as FLWS and relies on other company's brands (unlike FLWS). Amazon.com (AMZN) also has a flower business, but actually works in partnership with 1-800-flowers so I don't see AMZN trying to directly compete with FLWS in the near term.


2. Increased shipping costs could impair margins.


3. The company must continue to maintain its network of florists. Considering FLWS keeps a smaller network (on purpose), this becomes a bigger risk as volumes grow.


4. The company could have problems executing the initiatives for 2014, which would impact performance.

Catalysts

Catalysts for the company include:

1. Completed integration of the e-commerce website and rewards programs, creating more brand loyalty and higher sales for the gift business.


2. An acquisition of a chocolate gift brand, allowing the company to expand sale and margins by using the excess capacity at the Ohio plant.


3. Market share gains in the B2B business as the company provides a superior value proposition.


4. Continued growth at the fruit bouquet business.


5. Market share gains in the chocolate-covered strawberries category.

Conclusion

Although it wasn't all positive (I was disappointed in the floral business and wish there was a little more growth out of gifts), and I think all in all it was a very good quarter. I think the costs concerns were overblown as this should have been expected, and I was very happy with the start at the more attractive gift business. I added to my position on the sell-off, and would do so again under the $4.50 price level. My valuation range is still intact ($9 price target and $4 downside target). I will be monitoring the company over the next year, with increased focus on the metrics I mentioned above.

Source: 1-800-Flowers.com: What You Need To Know For 2014

Disclosure: I am long FLWS. 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. (More...)

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