I wasn't bullish on 1-800 Contacts (NASDAQ:CTAC) when I took a look at the company's annual earnings report. Has anything changed now that first-quarter data is available? The company's cash flow and international situations make me doubtful.

Net sales increased 5.3% to $63.5 million. Operating income more than doubled to $4.4 million, and the bottom line increased to $1.2 million, or $0.09 per diluted share. This far, the numbers looked promising and represented a stark contrast between this quarter and last. There was both an operating loss and a net loss for Q4, and the full year saw a net loss as well. So far, so good.

Hold on, though. We don't have a cash-flow statement attached to the release, but that won't stop us from checking out the latest 10-K filing, which I didn't have at the time of my last take on 1-800 Contacts. From this resource, I see that net cash derived from operations has been on the decline the past few years. Capital expenditures, on the other hand, have been rising. This means that free cash flow is decreasing.

Metric

FY 2003

FY 2004

FY 2005

Net Cash From Operating Activities

$18.6M

$13.3M

$6.5M

Capital Expenditures

$2.8M

$8.4M

$15.5M

Free Cash Flow

$15.8M

$4.9M

($9M)

Free cash flow is really the key to long-term shareholder value. Without increasing cash flow, 1-800 Contacts will find it very difficult to buy back shares, initiate dividends, or plow money back into the business.

In addition, there is a clear dichotomy between the U.S. and the international operating segments. The U.S. segment saw operating income of $7 million compared with the previous timeframe's $4.4 million, while the ClearLab international business experienced a widening of its operating loss, going from $2 million in red ink last year to almost $2.9 million in losses this year.

I won't dispute that 1-800 Contacts is a premier brand in its space or that it has effectively garnered mindshare equity, even in the face of competition from Bausch & Lomb (NYSE:BOL), Johnson & Johnson (NYSE:JNJ), Wal-Mart (NYSE:WMT), and Costco (NASDAQ:COST). Yet I haven't changed my thesis yet, even with the improved GAAP statistics this quarter. The declining cash flow spooks me too much, and the international operation seems too much of a drag. In my mind, the list of competitors might offer better investing ideas.

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Fool contributor Steven Mallas owns none of the companies mentioned. The Fool has a disclosure policy.