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Tuesday, August 17, 2010

What's Going on with 1-800-Flowers.com (FLWS)? Regardless of Tough Environment, Still Offered at Meaningful Discount

In recent weeks, several friends asked: "Curious what your thoughts are on FLWS these days?"

Our general response:

No changes to our 1-800-Flowers.com (FLWS) view: we believe the company is under-priced by a wide margin given the cash generation of the business, established brand, diversified product portfolio, etc. We actually ordered flowers from the company the other week for family members and the product was excellent.

The risk/challenge remains the weak consumer economy. It's possible that shares of the company could languish as long as the American consumer is ailing, which could be one, two, three years, who knows (although we're a tad slightly more optimistic than the consensus view). AND, since we don't get a dividend from FLWS, we get zero compensation during the interim. HOWEVER, more likely than not, since volatility is a friend to the patient investor, the stock could well bounce between $2 and $4, maybe $5, even if the American consumer remains challenged.

We always think of what the late Sir John Templeton said: "very rarely is any share valued for it's true price... it's true value. In a single year's time, they go 50% too high, 50% too low...."

Recall that the company is trading at approximately five times current trailing twelve months (TTM) free cash flow for a 20% FCF yield. This is crazy. Before long, the company will be debt free and cash will begin piling up on the balance sheet. The business arguably should be at least $5-6 today, but investors shove it aside because of ongoing macro concerns. Also, recall that shares were in the mid $3s as recent as April. Our downside seems limited to around $2 (supported by strengthening balance sheet and cash flow), while our upside potential is 2-3x (possibly near-term, depending upon results and manic market), or even 4-5x looking out over time (3-5 years).

The company should be reporting FY end results in the next week or two [this Thursday]. Revenue could/should be stabilizing on Y/Y basis. If we see an uptick, investor sentiment could shift to positive and we'd see a lift in the share price. If otherwise, we may move sideways until fundamentals improve.

ONE IMPORTANT ADDENDUM: management's forecast for more than $30 million of free cash flow this year is an 18% yield on the company's current market capitalization of $163 million. The truth is, we really care about owner free cash flow: net income plus depreciation and amortization less capex and the change in working capital. Fiscal 2010 free cash flow will be boosted by favorable working capital movement. If instead we assume working capital is a wash and ongoing capex equally offsets D&A, free cash flow would be a relatively small figure for the trailing twelve months. However, based on the more diverse business mix -- largely established over the last five years -- we believe the company is reasonably capable of normalized net income of approximately $20 million. Using this estimate, 1-800-Flowers.com is currently trading at a still attractive normalized earnings and free cash flow yield of 12%. We may provide more insight into our calculations in a future post.

In this TV commercial from 1998, Jim McCann talks about how to properly cut stems on flowers and about the 10 Step Freshness Care System, a concept 1-800-Flowers pioneered and still practices to this day.

We learned something new today.

Happy investing,

Jeffrey Walkenhorst

Disclosure: long FLWS.
© 2010 Jeffrey Walkenhorst
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