The COVID-19 pandemic accelerated the migration from brick-and-mortar shopping to e-commerce and 1-800-Flowers (FLWS) was positioned perfectly to benefit, observes Douglas Gerlach, editor of Investor Advisory Service.
The pandemic gave customers stuck at home desirable gift products to brighten their mood when celebrating holidays and special events remotely. Flowers are one of the best ways to reach out and connect.
Consumer Floral & Gifts, 40% of fiscal 2020 sales, includes the flagship brand 1-800-Flowers.com as well as the August 2020 acquisition of PersonalizationMall.com, a leader in customized gift products. Most of this segment’s sales come through e-commerce.
Gourmet Foods & Gift Baskets, 53% of sales, includes well known brands Harry & David and The Popcorn Factory. About three quarters of sales in this segment come through eCommerce with the balance from wholesale and retail channels.
Finally, BloomNet, 7% of sales, provides wholesale products and outsources support services marketed to independent florists. BloomNet carries a contribution margin more than double the firm’s other two segments as florists pay more for complex offerings such as point of sale systems and website creation and maintenance.
1-800-Flowers’ growth strategy focuses on building customer loyalty; the Celebration Passport loyalty program provides free shipping, membership product previews, and special offers for $19.99 per year. It recently surpassed one million customers and is growing at a double-digit pace.
The company credits the program, along with the spike in demand from the pandemic, for building its customer file to over 12 million. Building this customer file is important for future growth as two-thirds of sales come from repeat orders.
The company has built its local fulfillment capabilities, particularly for flowers, over many years. Further, its BloomNet division has forged close relationships that support cross-selling of non-flower gift products.
The company is particularly bullish about its acquisition of PersonalizationMall given its higher profit margin offerings and customers’ increasing desire to send gifts that more personally resonate with the recipient.
In the short-term, a key risk is the uncertainly of demand now that the economy has fully reopened. Management noted in its third fiscal quarter conference call that it expects fiscal fourth quarter (calendar second quarter) sales to grow 10%-15% on top of the 61% jump for last year’s fourth fiscal quarter.
Further, it believes strong reorder demand will drive double-digit growth for fiscal year 2022. If management is correct in its growth expectations, recent earnings results represent a floor for future performance instead of a short-term peak.
Analysts are bullish that 1-800-Flowers can sustain strong earnings growth of 19% per year. We are more conservative and project 14%. Five years of this growth and an average high P/E of 22.3 could generate a stock price as high as $74.
We use a low price of $21, the product of trailing twelve-month EPS of $1.73 and the average low P/E of 12.3. The upside-to-downside ratio is 3.9 to 1.