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

As the market leader in gourmet food and floral gifts, we have reviewed 1-800-FLOWERS.COM, Inc. (NASDAQ: FLWS), as its revenue growth increased in 2021 to 42.5% and its capex increased to 14.5% as a% of revenue due to its acquisitions. From his last earnings briefing, management explained that the company could continue to focus on mergers and acquisitions. Therefore, we have analyzed the company to determine if it has the capacity to make mergers and acquisitions to maintain its growth.

So I think we are a solid company and we will continue to do so much stronger and better than we have done, just as we have done in the past. And M&A will certainly be part of that equation. – Christopher G. McCann, General Manager

Revenue growth

Source: 1800 Flowers, D&B, Zippia, Datanyze, Khaveen Investments

The average revenue growth of the company in 10 years was 13.51%. The company had made a number of acquisitions in the last 10 years with an estimated average contribution to the revenue growth of mergers and acquisitions of 16.7%. However, the company had not made any acquisitions between 2016 and 2020. Excluding these years, we estimated its average contribution to M&A revenue growth at 30% of total revenue growth. In 2021, the company made its largest acquisition in the last 10 years with personalization e-commerce site PersonalizationMall.com at a cost of $ 245 million with an estimated revenue of $ 314.8 million by D&B. From this, we estimated that its contribution to M&A revenue growth in fiscal year 2021 was 50%.

Looking to the future, as management explained in its latest results briefing, it expects future mergers and acquisitions activity. We projected its revenue based on CAGR’s market forecast of 6.1% and its mergers and acquisitions revenues based on its 10-year average cost of mergers and acquisitions ($ 1.8 million). ) and the average acquisition cost ($ 42 million). The company recently acquired Vital Choice, a provider of premium seafood and organic food, for $ 20 million.

Source: 1800 Flowers, Khaveen Investments

Overall, we forecast the company’s total revenue to grow at a 5-year average of 6.7% by 2026, including $ 76.1 million in mergers and acquisitions, which is lower than its growth rate over the last 5 years of 13.7% driven by its acquisition of PersonalMall.com which boosted its revenue growth by 24.5% in 2021.

FCF margins

Source: 1800 Flowers, Khaveen Investments

In the last 10 years, the company had a low average FCF margin of 2.06%. Excluding acquisitions, its average FCF margin is 4.8%, which is still considerably lower. Despite this, the average capex of the company as a% of revenue is only 2.8% as an e-commerce company with low capital requirements. However, its net margins are low with an average margin of 3.07% in the last 10 years.

Source: 1800 Flowers, Khaveen Investments

Based on our projections of its mergers and acquisitions revenue, we assumed its acquisition cost based on its 10-year average ($ 42 million) in addition to its 10-year average investment, excluding acquisitions of 2.8% to obtain its capital as a% of expected revenue. their FCF margins. Thus, we forecast that its average FCF margin until 2026 will be only 1.63%, which we believe limits its ability to make large acquisitions through cash generation.

However, except in 2015 and 2021, when it made large acquisitions that increased its capex, the company’s FCF margins have been positive but with a 10-year average of only 4.8% (excluding acquisitions ). Beyond that, we predicted that its average FCF margin until 2026 would only be 1.63% after taking into account acquisitions that could limit its ability to reach larger deals.

Leverage

Source: 1800 Flowers, Khaveen Investments

With the company’s largest acquisition of PersonalizationMall.com, its net debt had risen in 2021 to $ 337 million, which is about 55% of its market capitalization as its debt increased by 46% and its cash balance decreased to finance the acquisition. In addition, its cash / debt ratio had declined to 0.3x in 2021 from 0.7x in 2020, but is still higher since 2016, as it accumulated cash during the period in which it made no acquisitions. .

Source: 1800 Flowers, Khaveen Investments

According to the above table of its credit ratios, the company’s EBITDA interest coverage had increased in the last 5 years. Although it declined in 2021, it remained above its 10-year average, indicating its ability to pay off its debt obligations. In addition, EBITDA / net debt also improved in the last 5 years, but declined in 2021 below its 10-year average.

Overall, according to our forecast of net debt, we expect the company’s cash / debt ratio to increase by 2026 with the support of its cash generation. However, we anticipate that its cash / debt ratio will reach its previous level of 0.7 times in 2020 only in 2025. Therefore, we believe that this highlights the risk that the company will pursue larger agreements. with its high leverage.

Risk: Integration of the acquisition

The recent acquisition of Vital Choice highlights the company’s expansion in seafood, organic food and supplements. Compared to its previous acquisitions, we believe that this agreement is different, as it expands into a new market and could pose a risk to integrate with its core business and gain synergies.

Verdict

Although the company made its largest acquisition in 2021, which boosted its growth, we expect the company’s ability to make larger acquisitions to be limited by its low FCF margins with a 5-year forecast. from 1.63% and a high leverage with its net debt to 55% of its market capitalization. As a result, we expect revenue growth to slow with a forecast of 6.7% on average compared to its average of the last 5 years of 13.7%. As such, we have referred to the lower end of the average consensus price target of $ 9.25, which represents a 7% disadvantage.