Foolish Forecast: 1-800-Flowers Calls It Good

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After missing Wall Street's consensus earnings estimates four quarters in a row, 1-800-Flowers (Nasdaq: FLWS) pulled a rabbit out of its hat last quarter and "beat by a penny." Might this be the beginning of a new trend for the flower hawker? Well, it'll take at least one repeat to get a trend started -- let's hope Wednesday's fiscal Q2 2007 report marks that repeat.

What analysts say:

• Buy, sell, or waffle? Eight analysts follow 1-800-Flowers today. Two of them rate the company a buy, and the rest say hold.
• Revenues. Analysts will be looking for news of a 21% year-over-year increase in sales, with a target of $336.8 million.
• Earnings. Profits are predicted to rocket 56% to $0.25 per share.

What management says:
People say that actions speak louder than words. If that's true, then listen up, people, and hear what 1-800-Flowers said late last month: "1-800-FLOWERS ... has completed its previously announced repurchase of 3,010,740 shares of the Company's Class A Common Stock from JPMorgan (NYSE: JPM) Partners. The purchase price was $5.21 per share or a total of $15,688,966. The repurchase was funded with cash generated during the Company's current fiscal 2007 second quarter, and was in addition to the Company's existing stock repurchase authorization of $20 million, of which approximately $8 million remains authorized but unused."

What management does:
$15.7 million down? $8 million more to go? That's an awful lot of scratch for a firm with less than $10 million to its name, and nearly $78 million in long-term debt, to be putting together on short notice. It makes this investor wonder whether management sees brighter days ahead than the generally weakening operating and net margins shown below would suggest.

Margins %	7/05	10/05	1/06	4/06	7/06	10/06
Gross	41.1	41.1	41.5	41.7	41.7	41.5
Op.	1.8	1.0	1.5	1.7	1.3	1.3
Net	1.2	0.6	0.8	0.8	0.4	0.3

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Even more interesting, though, considering the firm's history of burning cash (it hasn't generated positive annual free cash flow since 2004) is the assertion that 1-800-Flowers funded its stock purchase from operating cash flow. Surprising? Maybe. But it looks to me like 1-800-Flowers was just getting while the getting was good. Historically, the firm generates positive free cash flow only in fiscal quarters two and four. And fiscal Q2 is by far the cash-richer of the two. If 1-800-Flowers was ever going to make a purchase like this, this was certainly the quarter to do it.

With cash burning a hole in the firm's wallet, and JPMorgan willing to give up the shares at a 7% discount to their then-current market price, I can see why 1-800-Flowers jumped at the chance. But perhaps the question that should be nagging investors is: Why did JPMorgan think $5.21 per stub was a good price to exit this position?

We'll see if the trend gets going and management made the right call.

Competitors:

• RedEnvelope (Nasdaq: REDE)
• FTD Group (NYSE: FTD)

Suppliers:

• Yankee Candle (NYSE: YCC)
• Hershey (NYSE: HSY)

Does financial prose by any other name still read as sweet? Find out in:

• Always Smell the Roses
• 1-800-Flowers Smells Sweeter: Fool by Numbers

Fool contributor Rich Smith does not own shares of any company named above. Red Envelope is a Hidden Gems pick, and you can find out why with a 30-day free trial. JPMorgan Chase is an Income Investor selection. The Fool's disclosure policy thinks it's a good year for the roses.