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1-800-Flowers Stays Fresh Amid Big Competition

By Michael Lewis – Feb 1, 2014 at 12:05PM

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With e-commerce's juggernaut having entered the garden, many thought 1-800 Flowers was on its way out. Recent results show a different story. (FLWS -2.74%) jumps out immediately as an appealing business based on its asset-light, cash-generating business model. Working with a network of local florists along with larger shops, the company has recovered from darker days to consistently deliver sales growth, if not quite as appealing as that of other dot-coms. In its niche of the Web-based retailing world, 1-800-Flowers is a dominant force and holds one of the stronger brand names of any national florist. Of course, there remains the looming shadow of, the one-stop kill-the-competition shop. It's doing great at the moment, but can 1-800-Flowers fend off the shark in the water?

Short-term smells sweet
Amazon has been in the flower market for a little while now. Its offering is not nearly as comprehensive as 1-800-Flowers', but it's Amazon -- a click of a few buttons and a couple of extra marketing dollars, and it could become the Internet's florist, in addition to everything else.

At the moment, though, 1-800-Flowers doesn't seem to be feeling the pressure. In its recently reported earnings, the company brought in 637,000 new customers. In its fiscal fourth quarter (two quarters ago), the company added more than 300,000. It's a very promotion-heavy business, and that can certainly weigh on the bottom line if the marketing doesn't translate to sales, but the company appears to be reaching more and more people as the months go by. Sales reflect it, too, as 1-800-Flowers tacked on 6% over the year-ago quarter to $266.3 million. EBITDA grew 7%, while EPS grew the most at 8.2%, equaling $0.27 per share.

The market was charmed by the flower company and sent shares up more than 7% in Thursday's trading.

Wilting future?
The thing about flowers and the gift basket business is that it takes an element of finesse and personalization to create the sense of kindness desired when people purchase these items. Amazon, for all of its glory and world dominance, is not in the business of personalization. A respect for said quality and taste is likely part of the reason that 1-800-Flowers boasts 61% of its orders sourced from repeat customers. There is an element of loyalty here that Amazon likely can't easily shake.

1-800-Flowers' fastest-growing segment is gift baskets and gourmet food. Mass-market channel sales were up in the double digits, while overall the segment grew sales 6.1% and improved its segment contribution margin by 12.5%.

The threat of disruption from an e-commerce giant remains, but the small-cap 1-800-Flowers is proving resilient. Management has guided for steady-as-she-goes growth from the top of the income statement down, along with free cash flow of $20 million for the full current year. The stock isn't quite the bargain it was, and thus there is greater downside risk, but 1-800-Flowers gives investors little reason to fear the Man, at least in the foreseeable future.

Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends and owns shares of We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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