While recently released fiscal first-quarter results for flowers and gifts retailer 1-800-Flowers.com (Nasdaq:FLWS) did somewhat better than analysts' expectations, a closer look at how the company's core business performed suggests that investors should expect disappointing results during Q2 - a period that covers the all-important Christmas holiday season when Flowers makes the bulk of its earnings.
Results Reveal Weaker Flower Sales
For fiscal Q1 ending September 28, Flowers reported a modest improvement in the net loss that it normally reports during the slow summer selling season. The reported loss for the period was 8 cents per share, compared to 9 cents for the same period a year earlier. Analysts had expected a loss of about 11 cents per share.
However, a closer look at the numbers reveals some troubling trends. For starters, the company's floral sales were down 4.7%, and gross margins for this business slipped to 38% from 38.9%. The combined effect was a 10.1% drop in this segment's contribution margin. Floral sales are responsible for about 90% of the segment EBITDA contribution, so this decline is definitely worth noting. (For more reading on EBITDA, check out A Clear Look At EBITDA.)
Floral Sales Slump Accelerating
These latest data suggest that the downward trend in floral sales, which industry watchers began cautioning about earlier this year, appears to be accelerating. The sales slump began last Christmas and continued through Valentine's and Mother's Day.
Analysts now expect industry revenue growth in the 1-3% range this year, compared to the high single digits previously enjoyed by Flowers and rival FTD, which was recently acquired by Internet service provider United Online (Nasdaq:UNTD).
Around the same time, Flowers declared its own alliance when it announced a deal with Martha Stewart Living Omnimedia (NYSE:MSO) to exclusively offer Martha Stewart-branded arrangements. Costing about $10 more than regular bouquets, the Stewart-branded flowers could be a tough sell as consumers cut spending in the face of tough times.
Shares Look Pricey
In the acquisition deal, FTD shareholders realized about $15 per share in cash and stock, valuing the company at a price/earnings ratio of 11.4 at the time. Applying the same multiple to Flowers' expected earnings of 36 cents per share for this fiscal year yields up a price of $4.10. That's about 15% under the market price at the time of writing. Plus, it's based on a valuation assigned before it was fully apparent that a serious recession was ahead. In July, Goldman Sachs (NYSE:GS) issued a “sell” recommendation on the stock, cutting fiscal 2009 and 2010 earnings estimates by 15% and slashing its target price. (For more reading on P/E Ratios, don't miss Is The P/E Ratio A Good Market-Timing Indicator?)
The Final Word
The recent warning from online retailer Amazon (Nasdaq:AMZN) that holiday season sales would be coming in below expectations doesn't bode well for other retailers that trade off a largely web-based presence, and that definitely includes the likes of 1-800-Flowers.com.
