Always Smell the Roses

"Company X, a leader in something sounding either cool or important, today announced record revenues."

Sound familiar? Of course it does. Dozens, if not hundreds, of companies use that line every earnings season. Most of the time, it's utterly meaningless, as was the case with yesterday's blustery Q1 2007 report from 1-800-Flowers (Nasdaq: FLWS  ) .

Don't get me wrong. I'm a fan of the site and the service, which I've used dozens of times, but the language used in the press release to explain away accelerating losses is just silly. I'll explain in a moment. First, let's review the numbers: Flowers' loss of $0.11 per stub on a "record" $137.1 million in sales beat Street estimates.

Margins weren't half bad, either. Gross margin took a small hit, but operating margin improved by nearly two points, thanks to cost controls.

But then, on the balance sheet, the report begins to go bad. Both inventories and receivables rose at more than double the pace of sales, for example. Debt, too, spiked thanks to the acquisition of the Fannie May confectionary business earlier this year.

Meanwhile, both of 1-800-Flowers' specialty brands booked losses on what the company called a "category EBITDA" basis, which is essentially shorthand for earnings before common expenses such as taxes and interest. Of the other two, it was the primary floral business that drove most of the before-tax profit, though the BloomNet wire delivery service grew pre-tax profits by 152.9% year over year.

Finally, free cash flow remained in the red as cash used to fund business operations expanded by roughly $18 million. That blunted the effect of a sharp reduction in capital expenditures.

Ready to buy shares? I didn't think so. But then again, management didn't let the numbers prevent a modicum of chest-thumping. And why not? These are record sales we're talking about, people! They were earned during the seasonally weak summer quarter, when there's a "lack of gifting occasions"!

Of course, that's the way it was last year, too. From the 2006 first-quarter press release:

"1-800-FLOWERS.COM, Inc., a leading florist and multi-channel retailer of thoughtful gifts for all occasions, today reported record revenues..."

Color me skeptical, but two years of the same story leaves me less than enthusiastic about Flowers' business. What's more, Fannie May contributed 10 points of this so-called "record" growth while wreaking havoc on the balance sheet.

That's why I think Foolish friend Rich Smith has it right. He's one of a handful of stock pickers who believe the shares will underperform the S&P 500. Here's his explanation, which is easily accessed through the free Motley Fool CAPS service:

"Healthy projected sales growth doesn't balance out this firm's negative free cash flow and Enron-like margins. 1-800-Flowers has thorns -- handle with care."

Foolish words, indeed. They offer a lesson worth remembering when investigating any stock: Always smell the roses before you pick them. What looks good at first glance may become repugnant once in your living room, or your portfolio.

Fresh-cut Foolishness awaits:

Motley Fool CAPSis a new community intelligence stock-picking service provided by The Motley Fool. Get in the game now and make it smarter.

Fool contributor Tim Beyers needs to get his wife some flowers. She deserves it. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. Get the skinny on everything Tim is invested in by checking his Fool profile. The Motley Fool's disclosure policy is always coming up roses.

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10/28/2016 3:29 PM
FLWS $9.49 Up +0.05 +0.53% CAPS Rating: **