Trading at $5.77 on May 7, 2001
Dear Mom:
In recent years, finding good gifts for you has become increasingly tough. Let's face it, you have everything, and your taste in clothes and household furnishings is impossible to predict. And yet I find it too boring to give you a gift certificate -- blah!
My solution? Flowers -- sweet, elegant, affordable (but not "cheap"), and, most importantly, always happily received. But did you know I've been ordering those lovely floral arrangements online from FTD.com
FTD.com provides same-day delivery of floral orders to 98% of the U.S. population through a network of independent FTD florists. Whereas most florists operate on a local basis, FTD offers a single method for buying flowers anywhere. This is a great convenience, because finding a quality florist in a distant city can be a nightmare. And unlike local florists, the FTD brand has 96% consumer awareness, making it the default solution for many flower buyers -- including myself.
The floral business is better suited to the Web than to any other medium. While FTD.com accepts orders via its website or a toll-free phone number, the vast majority of customers are ordering online. In fact, over the past eight quarters, FTD.com's percentage of Internet orders relative to total orders has steadily increased from 59.7% to 86.4%. This is entirely logical -- guys like me need to look at photos of the available flower arrangements in order to have any clue whatsoever in making a decision. (Without the Web, I'd be confined to ordering roses every time because, well, I never learned all those other types of flowers that you tried so hard to teach me.)
As a business that's natural for the Web, FTD.com has been attracting customers like crazy. Over the past eight quarters, the number of total customers has increased from 1.5 million to 3.1 million. Even more impressive is that FTD.com's cost of acquiring each customer has declined from $43 a year ago to just $14 in the most recent quarter. To give you a sense of how truly outstanding this number is, consider that FTD.com's $14 customer acquisition cost is about the same as that of online auction leader and Web business model extraordinaire eBay
This brings us to the superb economics of FTD.com's business. (Stick with me here, Mom, because I'm going to throw a few numbers at you.) FTD.com is a masterfully lean business, operating on a very small base of only $1.5 million in non-cash assets. On this base of $1.5 million in what we might call "operating assets," the company is generating $144 million in run-rate annual revenues (current quarter revenues times four). You'd be hard-pressed to find many other businesses of any size with such amazing asset productivity.
One of the keys to FTD.com's lightweight business is that it doesn't have to carry any inventory. All of the flowers and other products are stored and paid for by the distributing florists. Since flowers are highly perishable, FTD.com benefits greatly by being able to avoid holding this inventory.
The end result of FTD.com's asset efficiency can be seen in its incredible return on equity of 72% -- and this is without any debt. FTD.com's net profit margin is only 6.6% (most recent quarter), but its high volume of revenue means that the company is earning that small profit over and over again -- which adds up to a high overall return on investment.
While many young companies these days are having to focus on profitability at the expense of growth, FTD.com is showing both strong profitability and strong growth. Revenue in the most recent quarter was up 35.7% year-over-year and total customers grew even faster at 50.6% year-over-year. The customer growth is especially telling as new customers tend to be a leading indicator of future revenue growth. While growth in this business is slowing from its former hyper-growth rates, I think 20%-30% revenue growth should be realistic for the next few years.
Finally, we come to price. I'm not alone in recognizing FTD.com's growing profit potential. The stock is up 400% since the end of last year when it bottomed out at $1.06. Over the past 12 months, numerous company insiders purchased shares of the company between $2 and $3 per share. That type of insider buying is always a bullish sign.
At a recent $5.80, the company now has a market capitalization of $274 million. Even with the shares up so much recently, the valuation is still not at all unreasonable. The stock trades at about 28.5 times the annualized net income from the most recent quarter. Over the next few years, I expect FTD.com to generate strong free cash flow, which will most likely exceed net income due to the company's negative working capital. For a company with a strong brand name and superb economics, I think the current valuation offers a solid investment opportunity.
Matt Richey is co-manager of the Rule Maker Portfolio. When it comes to flowers, he knows only one thing: When giving roses, you should either give one or a dozen, but never six. One rose is "sweet," but six means that you were too cheap to buy a dozen. At the time of publication, Matt owned shares of FTD.com and eBay. The Motley Fool is investors writing for investors.
A Stock for Mom represents the opinion of one Fool and should in no way be taken as the opinion of either The Motley Fool, Inc. or the company in question, or as representative of anyone or anything other than that specific Fool's thoughts.
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