Budding Growth at 1-800-Flowers?

I'm just not sure what to think of 1-800-Flowers (Nasdaq: FLWS  ) . On the one hand, this is a company that thoroughly disappointed investors last year and dealt in more than its share of silly hype at the beginning of this year. On the other, there's the engaging management team and business model that appears designed to deliver outstanding returns to shareholders. Unfortunately, it's been a lot more of the former and a lot less of the latter recently.

So which is it: hype artist or clever business model? Read the tea leaves from this morning's earnings report, and you might be inclined to think better times are ahead for this mega-flower peddler. Management was positively glowing about how sales have accelerated recently.

And it's right. For the quarter, the company booked $186 million in revenue -- a better than 15% increase from the same period a year ago. Full-year 2005 revenue was up 11% to $671 million. Both totals bested analyst projections.

The problem is that not enough of this increased revenue is paying off on the bottom line. Part of the problem is an unfair comparison: Last year's fourth quarter included a one-time net tax gain of $19.5 million. But even on a pre-tax basis, earnings were lower by $0.06 for the quarter and $0.12 for the year.

And then there's cash flow. Here's where it gets ugly, Fools. Follow along. The press release says that we ought to expect $40 million in cash from operations, waaay up from roughly $10 million during 2005. There's just one problem: Management said changes to its annual reporting period and deferred taxes created unusual fluctuations in working capital items, such as accounts payable. That means cash from operations projections don't mean much.

But there is an alternative: owner earnings (otherwise known as net income, plus depreciation and amortization, plus or minus one-time items, minus capital expenditures). My calculations peg 2005 owner earnings at $9 million. It'll grow in 2006, but it certainly will not quadruple.

Consider: 1-800-Flowers' guidance calls for earnings to rise by roughly 75%. That means we're probably talking about $13 to $14 million in 2006 income. Add in $14 million in depreciation -- as it's been the last two fiscal years -- and take the mid-point of 1-800-Flowers' guidance on capital expenditures, or $15 million, and you end up at $12 to $13 million in owner earnings next year.

Got that? 1-800-Flowers could end up growing owner earnings anywhere between 30% and 45%. That's strong, but nothing to write home about for a company already trading at 54 times 2005 owner earnings as of publication.

Look, I like 1-800-Flowers. I use the service myself. But even with heady top line and cash flow growth, the business appears fairly valued at best. And that takes more than a little bloom off the stock for this Fool.

Give yourself the gift of Foolishness with this bouquet of blossoming tidbits:

  • First, get the numbers for the quarter and fiscal year.
  • Check out David Gardner's three-part interview with 1-800-Flowers CEO Jim McCann. (Read them in order: part 1, part 2, and part 3.)
  • The third quarter probably couldn't have been more underwhelming.
  • 1-800-Flowers might be a decent investment, if only it would trim the hype from its press releases.

Do you go to the mall and shop only in the bargain aisle? Do garage sales actually appeal to you? If so,Motley Fool Inside Valuewas made for you. Learn how Philip Durell and his Foolish band of value-investing analysts buy stocks on sale by taking a risk-free trial today. Your portfolio will thank you.

Fool contributor Tim Beyers probably owes his wife flowers. Again. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what's in his portfolio by checking Tim's Fool profile here. The Motley Fool has an ironclad disclosure policy.


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