What's in the Future for Flowers?

David Gardner: Who is your No. 1 competition for your business, 1-800-Flowers (Nasdaq: FLWS  ) ?

Jim McCann: Well, in the flower category, there are probably half a dozen large competitors. The two largest would be FTD (NYSE: FTD  ) and Teleflora.

David Gardner: What about the Vermont Teddy Bear (Nasdaq: BEAR  ) people?

Jim McCann: Nice people. They sell an interesting product, and they don't really compete with us, although they would like to. Oh, excuse me. They now have a flower brand as well.

David Gardner: Well, speaking of prospective competitors, online jeweler Blue Nile (Nasdaq: NILE  ) recently conducted a survey. Maybe you saw this, Jim, on the worst Valentine's Day gift, and in the top five of their worst Valentine's Day gifts were listed vacuum cleaners and flowers. Would you like to speak to that?

Jim McCann: These people have to get real in life. Good company. Sell an interesting product. Got a great business model. They just need to go back to school on market research 101.

David Gardner: Jim McCann, do you ever get sick of flowers?

Jim McCann: I really don't. I started as a florist 28 years ago, opened our first flower shop in Manhattan. It is a product I like. I consider myself a good floral designer. In fact, I am the only person in the company who thinks I am a good floral designer. I have a sister that is an extremely talented, world-class floral designer, and we were working on a party for a family member recently, and so I knew where she was working and which shop of ours she was in, so I went over and was giving her a hard time, but I love to stand next to someone, and I am a mimic. So if I am working with someone talented who has a great eye for color, I find myself mimicking them, and I just wish I had the natural creativity of someone like Julie, who is one of our guest floral designers (and) does all of our big design work for us. So yeah, I love to do it, but I know that I am basically copying someone else's great work.

David Gardner: Jim, let's talk about the flower business as a whole. How is it going?

Jim McCann: Well, interesting. We are seeing some different trends going on in the flower business, David. You are seeing people who are trying to establish themselves as these network kinds of florists, shipping product direct from farms, like we have long done, but some only do that. We will get five or 10 or 20 of those pop up every year, and one or two will make it, and the rest will go out of business because of poor planning and stuff.

A big concern I have, though, is I mentioned the plush industry, that gift stuffed animal industry. As an industry as a whole, they are struggling a little bit, and I am seeing that pedestrian traffic patterns for those gift shops, and I would say for retail florists, those downtown kind of shops, pedestrian traffic seems to have changed dramatically in the last five or six years, and it doesn't seem to be coming back. So those little shops are in trouble.

So I am seeing my fellow florists struggling for top-line growth. So we only work with a very select network of the 30,000 retail florists out there. So our florists are doing quite well, but I do have a concern about the health of the category when, I think, we have seen something in the neighborhood of 5,000 retail flower shops close in the last 36 months, and that is not a harbinger of good things to come. I have been, as I said, 28 years as a florist; never saw a decline until the last 36 months, and that doesn't seem to be abating at all.

So the companies out there that are dependent on new flower shops and selling more and more things to all of the flower shops out there are starting to struggle a little bit, in terms of "How much more can we milk from this? If our underlying customer is doing poorly, how can we do well?" So that is why we focus on a much smaller network, so we are very important to them and they are very important to us, and they are doing quite well, but the other 90% of the industry that we don't work with day in and day out, I see struggling.

David Gardner: Why do you think they are struggling? What is the reason?

Jim McCann: I think two things. One is the natural, the evolutionary change in traffic patterns and the lack of marketing that they represent, versus companies like ours who have discipline in terms of spending increasing amounts on marketing. People say, "Well, once you have a brand name, you don't have to market." I did notice that Coca-Cola (NYSE: KO  ) , which spends $500 million on marketing, is increasing it this year fairly dramatically toward $600 million, and who has a better brand name than Coca-Cola in terms of worldwide recognition?

So it is clear that marketing is a constant reinvestment, and if you take your foot off that marketing gas pedal, it has a long-term consequence that frankly creates sort of a death spiral. So I think companies like ours who have been fortunate enough and lucky enough to be able to increase their marketing spend each year are continuing to grow, when maybe three times the rate is the underlying industry.

David Gardner: Jim, shares of your company, 1-800-Flowers, are down around 25% over the last 12 months. I am not expecting you to be a market mind-reader, but what do you think is going on there?

Jim McCann: David, a couple of things, I would guess. One is, earlier in the year, we suffered from an overhang position from one of our large funds who was looking to get out of their stock. That put some depression on our stock. People are concerned now: "Where is the growth rate here? What is the natural growth rate?" And, frankly, we had said that, in all candor, we would be a company that would try and grow in that 15% to 22% range, between our organic, same-store growth, which is pretty impressive at 8% to 10%.

But we have been a little shy on our investment in the infrastructure to find the right plug-in acquisition things, like The Popcorn Factory and our candy company and the other companies that we plugged in over the last couple of years. In the last few years, we haven't done any, but I think you will see us ramp that up and we will be right back to that growth rate with our over 30% increase in our bottom line projection for this year and for each of the next several years with our low use of capital, with our low investment in inventory and high inventory turns, with what I would call a 10% free cash flow return on our enterprise value that we year in and year out produce. I think you will see people come to our store this year, especially if they see us gain traction this second half of our fiscal year, which we are very confident we will.

Stay tuned for Part 3 tomorrow. Did you miss yesterday's installment? Catch up here.

David Gardner is co-founder of The Motley Fool and is the advisor of Motley Fool Rule Breakers. The Motley Fool isinvestors writing forinvestors.


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