1-800-Flowers.com Stock: Some Caution Warranted (NASDAQ:FLWS)

From April 2020 until November 2021, 1-800-FLOWERS.COM (NASDAQ:FLWS) had been on fire, trading from a little over $12.00 per share to as high as approximately $38.50 before starting its deep descent to a low of $5.82 on September 22, 2022. It tested that mark again in early October 2022. Since that time it has rebounded nicely to trade at $8.00 per share as I write.

As we enter into the holiday season, the question is whether or not the company will experience similar results as it has in the past, where people open up their wallets to buy the type of products FLWS offers.

In this article we’ll look at the latest earnings report and what the holiday shopping season may bring for FLWS in the near term, and how fiscal 2023 looks beyond that.

Latest earnings

Revenue in the quarter was at $303.6 million, a decline of 1.9 percent from $309.4 million generated last year in the same quarter. When taking into account added revenue from Vital Choice® and Alice’s Table®, which the company acquired in October 2021 and December 2021, revenue in the reporting period dropped 3.6 percent from last year in Q1. That’s important to know because it reveals organic growth was slowing down.

Net loss came in at $33.7 million, or $(0.52) per share. That was significantly above the net loss of $13.2 million, or $(0.20) per share the company recorded year-over-year in the first fiscal quarter of 2021.

Adjusted EBITDA dropped from $5.3 million last year in the first quarter, to $28.0 million this year.

Gross margin shrunk from 40.6 percent in last year’s first quarter to 33.4 percent in quarter one of 2022. Reasons for the decline were increase in “costs for labor, shipping and commodities in the current year period.” Operating expenses were basically flat, representing 47 percent of overall sales, against the 47.1 percent last year in the same reporting period. The slight improvement came from the company shifting marketing dollars to lower cost avenues with potentially higher upside results.

The company guided for 2023 Adjusted EBITDA to be in a range of $75 million to $80 million. Consequently, FLWS expects to generate free cash flow of $75 million, a huge increase of $135 million year-over-year. Later in the article we’ll look at company guidance.

Performance by segment

Consumer Floral and Gifts

While revenue in its Consumer Floral and Gifts was down 10.5 percent for the quarter, dropping to $162.2 million, it easily remains the top revenue-generator for the company. In Q1 of 2021, the segment generated $181.2 million in revenue. Gross margin fell to 38.2 percent in comparison to 41.9 percent year-over-year. Most of that was attributed to transportation and commodity inflation.

Gourmet Foods and Gift Baskets

Its Gourmet Foods and Gift Baskets had an increase in revenues by 11 percent to $108.2 million, up from $97.5 million in Q1 of 2021. The bulk of that came from stronger wholesale demand and the aforementioned contribution from Vital Choice.

Gross profit margin plunged from 35 percent last year in Q1 to 23.2 percent this year. Along with transportation and commodity inflation, higher demand for lower-margin wholesale products contributed to the sharp decline in gross margin.

That brought about a loss of $18.7 million for the segment, against the loss of $7.7 million last year in the same quarter.

BloomNet

Revenue for its BloomNet segment was $33.4 million, up 8.2 percent compared to the $30.8 million in Q1 of 2021. Gross profit margin fell from 50 percent last year in the same reporting period to 43.4 percent in Q1 of 2022.

Unsurprisingly, the company has been doing okay with revenue, but at a cost to its margins.

What the future may hold

In the near term, CEO Chris McCann says FLWS is “cautiously optimistic” concerning customer spending during the holiday season and the remainder of its fiscal year. He may be correct on that because consumers, while lowering spending on non-discretionary items, still have been opening their wallets on products and services they deem important to their lives. Most are associated with needs and not wants, but there still appears to be demand for some specialty items like FLWS offers that don’t break the bank.

With the recession word being used more in the media and ongoing aggressive moves by the Federal Reserve to raise interest rates to combat inflation, consumer sentiment is definitely at risk of changing more negatively.

McCann is right to use the phrase “cautiously optimistic” because there’s definitely a reasonable chance consumers could start tightening up their wallets, which would have a significant impact on the performance of FLWS if that’s how it turns out.

My view is that McCann has a better chance of being right over the next couple of months, but further out things could get more challenging depending on the inflation numbers and the Fed’s likely response to them.

McCann noted in the press release that consumers were already starting to cut back some on buying everyday gifts, so it’s no surety the season will be a happy one for FLWS, but I think, how things stand today, it has a better chance of performing decently over the next couple of months, rather than the market quickly collapsing.

For fiscal 2023 as a whole, management sees Q1 as one that will be challenging in regard to the economic environment the company will be operating in. After that, he thinks the company will “stabilize” more in the second quarter, and start to improve in the second half of fiscal 2023. Citing revenue growth of 77 percent since fiscal 2019, McCann said revenues for full-year fiscal 2023 are likely to be “slightly” down. As for the impact on earnings, improved efficiencies and lower ocean freight costs will help mitigate some of the impact of lower sales on the bottom line. He sees an improvement of margins for fiscal 2023, and an even better improvement for fiscal 2024.

As for efficiencies, some of that comes from the company deciding to lower its exposure to perishable items while increasing its non-perishable product inventory.

As for guidance for fiscal 2023, the company sees a drop in revenue in the mid-single-digit range in comparison to fiscal 2022. Nonetheless, the company noted that the volatility of the economy at the macro level makes it hard to provide guidance in that environment.

Conclusion

Taking the information above, it looks like FLWS is going to go through a short-term period of slowing revenue growth while it works on improving margins to offset the loss in earnings.

I do think within the products that FLWS offers that customers are more likely than not to spend fairly liberally during the holiday season. I don’t see it being robust, but I do think it’ll keep the company from vastly underperforming expectations.

As to the impact of inflation and higher interest rates, they do represent a serious threat to the company’s performance. I tend to believe consumers may give one more spending push over the holidays, and then probably tighten up their spending.

That’s of course already happening, but not at the levels that are likely to emerge after Christmas. A lot of FLWS’s performance will be not only determined by spending in the last two months of calendar 2022, but how consumers respond afterwards when the Fed once again raises interest rates in December 2022, and almost certainly, again in January 2023.

The key to FLWS meeting performance expectations to me is how long it takes the Fed to pivot. If it surprises and goes beyond what I think the interest rate cap should be, which is a little on either side of 5 percent, then it could be a rough 2023 and 2024 for FLWS.