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Thursday, February 11, 2010

Many Funds Simply Can't Buy FLWS Right Now; But, We Can Because We Can Wait

In our post yesterday, we mentioned the best time to buy businesses is when no one wants them. Take 1-800-Flowers.com (FLWS), for instance.

Many mutual and hedge funds are focused on delivering +3%, +5%, +10% next quarter with minimal volatility. Accordingly, these participants are probably not interested in FLWS because no identifiable near-term positive catalysts are present as the business (revenue) is still shrinking amidst the weak economy (management again lowered guidance in its last report). For the same reason, brokerage firms that cover the stock are loathe to recommend the name. These brokers, along with the investment funds, typically want to recommend stocks that "will work" next month, next quarter, and possibly over the next year.

Of course, as soon as fundamentals turn (e.g. Y/Y revenue growth returns and signs of operating leverage arrive), watch out -- we can envision broker upgrades and funds clamoring for a piece of FLWS. By then, the stock is already back at $3-4 on the way to $5-6. We're not sure when the turn will occur, maybe later this year or perhaps in 2011. Yet, we suspect it will come, even as/if consumers grip their wallets tighter than a few years ago.

The good news with FLWS is that we can purchase a business NOW that (1) will generate significant excess cash flow this year (>$30 million per guidance, which we think is reasonable) -- in a depressed economy -- and (2) is capable of generating higher amounts under normalized conditions ($40 million), whenever those arrive. We can purchase FLWS at four times this years' estimate (25% yield) and three times normalized levels.

However, as time marches onward, we'll be surprised if the Market doesn't see the value we see and award a more rational multiple to the business, maybe ten times free cash flow (still an attractive 10% yield). We don't know what happens near-term, but we're willing to wait a few years if necessary to potentially make 100-200% on our investment today and not worry about plus (or minus) 10% next quarter.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long FLWS.
© 2010 Jeffrey Walkenhorst
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  1. FLWS is an epic fail and here's why: They could not deliver Mother's Day flowers as of Saturday afternoon, the day before one of their most important business days of the year. Think about it -- they only really need to be on their game 4-5 days out of the year, and this to me says the company is a massive short.

    How much money did they lose in sales because they could not make the transaction? A million dollars an hour? A million a minute? Those sales will never be recaptured, and those customers will walk away, never to return.

    Would you have faith in FedEx or UPS if they said, sorry, can't do it tomorrow, how's Tuesday work for you?

    As soon as I had this experience I went online to see their stock action -- this company is headed for a major, major fall.

  2. Hello Anonymous,

    Sorry to hear about your experience -- did you call customer service? If yes, did they take care of you?

    Customer service is critical and I know FLWS mgmt understands this.... In my view, the fundamental value of the company's growing portfolio of businesses remains meaningfully higher than current levels (for reasons described in my blog posts).



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