1-800-Flowers Stock: Revenue Growth Not Sustainable (NASDAQ: FLWS)

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As the market leader in gourmet foods and floral gifts, we reviewed 1-800-FLOWERS.COM, Inc. (NASDAQ: FLWS) as its revenue growth jumped in 2021 to 42.5% and its investments increased to 14.5% as a % of revenue due to its acquisitions. Of his last earnings briefing, management explained that the company may continue to focus on mergers and acquisitions. Therefore, we analyzed the company to determine if it has the ability to pursue mergers and acquisitions to support its growth.

So I think we are a solid company and will continue to be stronger and better than we have been, as we have been in the past. And mergers and acquisitions will certainly be part of this equation. – Christopher G. McCann, President and CEO

Revenue increase

1-800-FLOWERS ($millions)

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

M&A revenue

21.62

2.5

2.3

236.5

0

0

0

0

38

314.79

Contribution to M&A revenue growth

9%

11%

65%

0%

0%

0%

0%

16%

50%

Increase in revenue not related to mergers and acquisitions

26

19

129

52

21

-42

97

203

318

Contribution to revenue growth excluding M&A

91%

89%

35%

100%

100%

100%

100%

84%

50%

Total income

708

736

756

1,122

1,173

1,194

1,152

1,249

1,490

2,122

% growth in total revenues

seven%

4.0%

2.8%

48.3%

4.6%

1.8%

-3.5%

8.4%

19.3%

42.5%

Source: 1-800-Flowers, D&B, zippia, DatanyzeKhaveen Investments

The company’s average 10-year revenue growth was 13.51%. The company has made a series of acquisitions over the past 10 years, with an estimated average contribution of 16.7% to M&A revenue growth. However, the company did not make any acquisitions between 2016 and 2020. Excluding those years, we estimated its average contribution to M&A revenue growth at 30% of the total revenue increase. In 2021, the company makes its biggest acquisition in the last 10 years with the e-commerce site for personalized products PersonalizationMall.com for a Cost of 245 million dollars with an estimate revenue of $314.8 million by D&B. Based on this, we estimated that its contribution to M&A revenue growth in fiscal 2021 would be 50%.

Going forward, as management explained in its last earnings briefing, it expects future M&A activity. We projected his earnings based on the market provide CAGR of 6.1% and its M&A revenue based on its 10-year average M&A revenue by cost ($1.8 million) and average acquisition cost ($42 million). Recently the company acquired Vital Choice, a purveyor of premium seafood and organic foods, for $20 million.

1-800-Flowers

2021

2022E

2023F

2024F

2025F

2026F

M&A revenue

314.79

76.1

76.1

76.1

76.1

76.1

Revenue

2,122

2,252

2,389

2,535

2,689

2,853

Total income

2,122

2,328

2,465

2,611

2,765

2,929

% growth in total revenue

42.5%

9.7%

5.9%

5.9%

5.9%

5.9%

Source: 1800-Flowers, Khaveen Investments

Overall, we expect total company revenue to grow at a 5-year average of 6.7% through 2026, including M&A revenue of $76.1 million , which is lower than its growth rate of 13.7% over the last 5 years, thanks to its acquisition of PersonalizationMall.com. which drove its revenue growth by 24.5% in 2021.

FCF margins

FCF margins

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Cash flow from operations ($ millions)

40

35

43

126

58

61

58

78

139

173

Capital expenditures ($millions)

-13

-25

-32

-164

-34

78

-42

-33

-56

-308

Free cash flow margin (%)

3.72%

1.34%

1.42%

-3.49%

1.91%

11.57%

1.37%

3.60%

5.54%

-6.40%

Source: 1800 Flowers, Khaveen Investments

Over the past 10 years, the company had a low average FCF margin of 2.06%. Excluding acquisitions, its average FCF margin is 4.8%, which remains considerably low. Despite this, the company’s average capex as a % of revenue is only 2.8% as an e-commerce company with low capex requirements. However, its net margins are low with an average margin of 3.07% over the last 10 years.

1800 flowers (millions $)

2020

2021

2022E

2023F

2024F

2025F

2026F

Acquisition costs

-20.5

-250.9

-42.04

-42.04

-42.04

-42.04

-42.04

Capex

-34.70

-55.20

-63.4

-67.2

-71.1

-75.3

-79.8

Total investments

-55.20

-306.10

-105.5

-109.2

-113.2

-117.4

-121.9

Capex as % of revenue

3.7%

14.4%

4.5%

4.4%

4.3%

4.2%

4.2%

Source: 1800 Flowers, Khaveen Investments

Based on our projections of its M&A revenue, we assumed its acquisition cost based on its 10-year average ($42 million) in addition to its 10-year average investments excluding acquisitions of 2.8 % to derive its investments as % of turnover to predict its margins in FCF. As such, we projected its average FCF margin through 2026 to be just 1.63%, which we believe limits its ability to pursue large acquisitions through cash generation.

1800 flower cash flow

1800 Flowers, Khaveen Investments

Overall, with the exception of 2015 and 2021 when it made significant acquisitions that increased its capex, the company’s FCF margins were positive but at a 10-year average of only 4.8% (excluding acquisitions). Beyond that, we expect its average FCF margin through 2026 to be just 1.63% after accounting for acquisitions, which could limit its ability to close larger deals.

Leverage

Net debt (net cash) ($ millions)

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Debt

83

55

57

251

225

242

215

238

349

510

Cash and cash equivalents

29

0

5

28

28

150

147

173

241

174

Net debt (net cash)

54

54

52

224

197

93

67

65

109

337

Cash-to-debt ratio

0.3x

0.0x

0.1x

0.1x

0.1x

0.6x

0.7x

0.7x

0.7x

0.3x

Source: 1-800-Flowers, Khaveen Investments

With the company’s largest acquisition of PersonalizationMall.com, its net debt ballooned in 2021 to $337 million, or about 55% of its market capitalization, as its debt grew 46% and its cash balance shrank. to finance the acquisition. Additionally, its cash-to-debt ratio had decreased to 0.3x in 2021 from 0.7x in 2020, but is still higher since 2016 as it accumulated cash during the time it made an acquisition.

Credit analysis

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Medium

EBITDA interest coverage

15.2x

37.2x

33.5x

11.5x

11.3x

13.9x

20.6x

26.8x

47.0x

32.5x

25.6x

EBITDA/Net debt

0.7x

0.8x

0.8x

0.3x

0.4x

0.9x

1.1x

1.2x

1.0x

0.6x

0.7x

Source: 1-800-Flowers, Khaveen Investments

Based on the above table of its credit ratios, the company’s EBITDA interest coverage has increased over the past 5 years. Although it declined in 2021, it remained above its 10-year average, indicating its ability to repay debts. Additionally, EBITDA/Net Debt has also improved over the past 5 years, but declined in 2021 below its 10-year average.

1800 flowers net debt

1800 Flowers, Khaveen Investments

Overall, based on our forecast of its net debt, we expect the company’s cash-to-debt ratio to increase through 2026, supported by its cash generation. However, we expect its cash-to-debt ratio to not reach its previous level of 0.7x in 2020 until 2025. Thus, we believe this highlights the risk that the company will pursue larger transactions with its strong leverage.

Risk: Integration of acquisitions

Recent acquisition of Vital Choice highlights company’s capability expansion in seafood, organic foods and supplements. Compared to its previous acquisitions, we believe this transaction is different as it expands into a new market and could present a risk for it to integrate into its core business and derive synergies from it.

Verdict

While the company completed its largest acquisition in 2021, which has spurred its growth, we expect the company’s ability to pursue larger acquisitions to be limited by its low FCF margins at a forecast of 1.63% on 5 years and its high leverage with its net debt at 55%. of its market capitalization. As a result, we expect its revenue growth to slow to an average forecast of 6.7%, from an average of 13.7% over the past five years. As such, we referred to the lower end of the middle consensus target price of $9.25, which represents a decrease of 7%.