E-commerce florist and gift retailer 1-800-FLOWERS (NASDAQ:FLWS) missed analysts' expectations in Q2 FY2024, with revenue down 8.4% year on year to $822.1 million. It made a GAAP profit of $0.97 per share, down from its profit of $1.27 per share in the same quarter last year.
1-800-FLOWERS (FLWS) Q2 FY2024 Highlights:
- Revenue: $822.1 million vs analyst estimates of $826.5 million (0.5% miss)
- EPS: $0.97 vs analyst expectations of $1.22 (20.3% miss)
- Free Cash Flow of $345.8 million is up from -$150.9 million in the previous quarter
- Gross Margin (GAAP): 43.3%, up from 41% in the same quarter last year
- Market Capitalization: $654.8 million
Founded in 1976, 1-800-FLOWERS (NASDAQ:FLWS) is an online retailer of flowers, gifts, and gourmet foods, serving customers globally.
1-800-FLOWERS began as a single flower shop in 1976. The company's early adoption of a toll-free number and its domain name offered a new method of direct consumer access and convenience in the flower delivery service industry.
Today, 1-800-FLOWERS offers a range of products beyond flowers, including gourmet foods, gift baskets, and unique presents. This expansion reflects the company's desire to become a one-stop shop for thoughtful gifts.
The company's revenue is primarily generated through its e-commerce platform, with seasonal peaks around Valentine’s Day and Mother’s Day, and its business relies on efficient delivery networks and convenience.
Other Specialty Retail
Some consumer discretionary companies don’t fall neatly into a category because their products or services are unique. Although their offerings may be niche, these companies have often found more efficient or technology-enabled ways of doing or selling something that has existed for a while. Those that differentiate themselves and serve consumers well will enjoy brand equity, customer loyalty, and even some pricing power while those who don’t may find themselves in precarious positions due to the discretionary nature of their offerings.Competitors operating in the online retail of flowers and gifts industry include Amazon (NASDAQ:AMZN), Kroger (NYSE:KR), and Walmart (NYSE:WMT).
A company's long-term performance can indicate its business quality. Any business can enjoy short-lived success, but best-in-class ones sustain growth over many years. 1-800-FLOWERS's annualized revenue growth rate of 8.1% over the last 5 years was weak for a consumer discretionary business. Within consumer discretionary, a long-term historical view may miss a company riding a successful new product or emerging trend. That's why we also follow short-term performance. 1-800-FLOWERS's recent history shows a reversal from its 5-year trend, as its revenue has shown annualized declines of 7.2% over the last 2 years.
This quarter, 1-800-FLOWERS missed Wall Street's estimates and reported a rather uninspiring 8.4% year-on-year revenue decline, generating $822.1 million of revenue. Looking ahead, Wall Street expects sales to grow 2.1% over the next 12 months, an acceleration from this quarter.
Operating margin is an important measure of profitability. It’s the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. Operating margin is also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.Although 1-800-FLOWERS was profitable this quarter from an operational perspective, it's generally struggled when zooming out. Its high expenses have contributed to an average operating margin of negative 3.3% over the last two years. This performance isn't ideal as demand in the consumer discretionary sector is volatile. We prefer to invest in companies that can weather industry downturns through consistent profitability.
In Q2, 1-800-FLOWERS generated an operating profit margin of 11.1%, down 1.7 percentage points year on year. This reduction indicates the company was less efficient with its expenses over the last quarter, spending more money in areas like corporate overhead and advertising.Over the next 12 months, Wall Street expects 1-800-FLOWERS to become more profitable. Analysts are expecting the company’s LTM operating margin of 0.5% to rise to 2.2%.
Analyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability and efficiency of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Over the last 5 years, 1-800-FLOWERS's EPS dropped 36.9%, translating into 8.8% annualized declines. We tend to steer our readers away from companies with falling EPS, especially in the consumer discretionary sector, where diminishing earnings could imply changing secular trends or consumer preferences. If there's no earnings growth, it's difficult to build confidence in a business's underlying fundamentals, leaving a low margin of safety around the company's valuation (making the stock susceptible to large downward swings).
In Q2, 1-800-FLOWERS reported EPS at $0.97, down from $1.27 in the same quarter a year ago. This print unfortunately missed analysts' estimates, but we care more about long-term EPS growth rather than short-term movements. Over the next 12 months, Wall Street expects 1-800-FLOWERS to perform well. Analysts are projecting its LTM EPS of negative $0.96 to flip to positive $0.35.
Cash Is King
If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.
While 1-800-FLOWERS posted positive free cash flow this quarter, the broader story hasn't been so clean. Over the last two years, 1-800-FLOWERS's demanding reinvestments to stay relevant with consumers have drained company resources. Its free cash flow margin has been among the worst in the consumer discretionary sector, averaging negative 12.3%.
1-800-FLOWERS's free cash flow came in at $345.8 million in Q2, equivalent to a 42.1% margin, up 5.7% year on year. Over the next year, analysts predict 1-800-FLOWERS's cash profitability will fall. Their consensus estimates imply its LTM free cash flow margin of 5% will decrease to 1.5%.
Return on Invested Capital (ROIC)
EPS and free cash flow tell us whether a company's revenue growth was profitable. But was it capital-efficient? If two companies had equal growth, we’d prefer the one with lower reinvestment requirements.
Enter ROIC, a metric showing how much operating profit a company generates relative to its invested capital (debt and equity). ROIC not only gauges the ability to grow profits but also a management team's ability to allocate limited resources.
Although 1-800-FLOWERS hasn't been the highest-quality company lately, it historically did an excellent job investing in profitable growth initiatives. Its five-year average return on invested capital was 21.3%, impressive for a consumer discretionary company.
The trend in its ROIC, however, is often what surprises the market and drives the stock price. Unfortunately, over the last two years, 1-800-FLOWERS's ROIC has averaged a 34 percentage point decrease each year. We like 1-800-FLOWERS's average ROIC but are concerned it has declined recently, perhaps a symptom of waning opportunities to invest profitably.
Key Takeaways from 1-800-FLOWERS's Q2 Results
We struggled to find many strong positives in these results. Its EPS missed analysts' expectations and its operating margin missed Wall Street's estimates. Overall, the results could have been better. The stock is flat after reporting and currently trades at $10.1 per share.
Is Now The Time?
1-800-FLOWERS may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for all companies serving consumers, but in the case of 1-800-FLOWERS, we'll be cheering from the sidelines. Its revenue growth has been a little slower over the last five years, and analysts expect growth to deteriorate from here. And while its projected EPS growth for the next year implies the company's fundamentals will improve, the downside is its declining EPS over the last five years makes it hard to trust. On top of that, its declining ROIC shows it's failed to grow profitably.
1-800-FLOWERS's price-to-earnings ratio based on the next 12 months is 28.8x. While we've no doubt one can find things to like about 1-800-FLOWERS, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.
Wall Street analysts covering the company had a one-year price target of $13.75 per share right before these results (compared to the current share price of $10.10).
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