Looming Danger Ahead for 1-800-Flowers?

1-800-Flowers (NASDAQ: FLWS  ) is the kind of tech stock a value investor could love. Its tech component is minimal and not at risk of displacement from an unforeseen up-and-comer. The brand name is one of the biggest in the highly fragmented floral gift delivery business. Its valuation is well within the realm of reason, and the company generates a healthy amount of cash in a high-margin business. A couple of years ago, the company bottomed out with sales and became a market pariah, but since then it has slowly and quietly regrouped, with sales now growing steadily in the mid-single digits.

Until recently, the company had a great moat with its distribution system -- one that was difficult to mimic for industry newcomers. This last part, unfortunately, has changed, and it may prevent this company from long-term success.

Every rose...
Investor research firms seem to like 1-800-Flowers, citing the company's positive developments in its e-commerce platform, the addition of new, higher-margin goods and growth via acquisition opportunities.

In the company's fiscal first quarter (2014), the flower giant met analyst expectations on the bottom line with a $0.07-per-share loss, but failed to meet top-line revenue estimates. Sales grew just 2.9% to $123 million, but the Street wanted an extra million on top. It wasn't all bad news, though, as the company booked 375,000 new customers on the books, expanded gross margin, and saw its gourmet foods segment grow sales by more than 15%.

For the full year, the company is expecting to do $20 million in free cash flow. Looking out, that should expand further as the company builds out its gourmet food and gifts segment -- a higher-margin business that has room for substantial growth. A bottom-line loss is to be expected for the company's recently ended quarter, as it's the historical low of the year.

In the short term, 1-800-Flowers looks like a sweet-smelling business with a comfortable valuation around 15 times forward earnings and growing cash flow. The thing is, there is a monster lurking in the bushes.

A hidden giant
Enter the e-commerce company that has the ability to disrupt any business it chooses to engage in: Amazon.com (NASDAQ: AMZN  ) . Amazon has entered the flower-delivery business, and while it's not nearly as developed as 1-800-Flowers' current platform, it's a free-shipping alternative that is part of the greatest e-retailing business on the planet. The company will without a doubt refine its user experience, and it could even choose to promote the service, if it wishes.

On the flower front, this is trouble for 1-800-Flowers. Luckily, the company can protect itself with its branded items to insulate it from market-share encroachment.

At the moment, this is an appealing business with strong cash flow generation, lower-end valuation, and a management team making concerted efforts to protect the business via exclusive brands. Over the next couple of years, 1-800-Flowers can continue its upward run, but keep an eye on Amazon's efforts. If its flower business becomes more prevalent, there may be trouble ahead.

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