1-800-FLOWERS’s 20.2% return over the past six months has outpaced the S&P 500 by 7%, and its stock price has climbed to $3.97 per share. This run-up might have investors contemplating their next move.
Is there a buying opportunity in 1-800-FLOWERS, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think 1-800-FLOWERS Will Underperform?
Despite the momentum, we’re sitting this one out for now. Here are three reasons why there are better opportunities than FLWS, plus one stock we’d rather own.
1. Revenue Spiraling Downwards
Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. 1-800-FLOWERS struggled to consistently generate demand over the last five years as its sales dropped at a 5.5% annual rate. This wasn’t a great result and is a sign of poor business quality.
2. New Investments Fail to Bear Fruit as ROIC Declines
We like to invest in businesses with high returns, but the trend in a company’s ROIC can also be an early indicator of future business quality.
Over the last few years, 1-800-FLOWERS’s ROIC has unfortunately decreased significantly. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
1-800-FLOWERS’s $252.2 million of debt exceeds the $50.7 million of cash on its balance sheet. Furthermore, its 21× net-debt-to-EBITDA ratio (based on its EBITDA of $9.70 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. 1-800-FLOWERS could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope 1-800-FLOWERS can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We cheer for all companies serving everyday consumers, but in the case of 1-800-FLOWERS, we’ll be cheering from the sidelines. With its shares outperforming the market lately, the stock trades at $3.97 per share (or a forward price-to-sales ratio of 0.2×). The market typically values companies like 1-800-FLOWERS based on their anticipated profits for the next 12 months, but it expects the business to lose money. We also think the upside isn’t great compared to the potential downside here - there are more exciting stocks to buy. We’d suggest looking at the most dominant software business in the world.
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