Focused on Innovation and Acquisitions

Why Margins Can Continue To Improve

Things Remembered; Shari’s Berries

Margin Outlook Improves

Michael Kupinski

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Consumer Cyclical

Retail - Cyclical

1-800 FLOWERS.COM Inc.

Investment Appraisal
The fiscal second quarter was a noticeable improvement from the fiscal first quarter, which was impacted by inflationary pressures, higher inbound and outbound shipping costs, and labor wage pressure. Some of those cost pressures abated in the latest quarter, particularly inbound freight costs. As such, while the consumer spending on everyday gift items continues to be soft, the company&#8217;s margins improved nicely. Revenues were in line with expectations, but the company meaningfully beat our Adj. EBITDA estimate.
Total company Q2 revenue was $897.9 million, which was in line with our estimate of $897.1 million, illustrated in Figure #1 Q2 Variance. Gross profit, while down 2.8%, margins were 170 basis point improvement. Operating expenses were less than expected as well. As a result, Adj. EBITDA was $131.4 million, better than our $112.2 million estimate.&nbsp;
On a segment basis, the favorable results were driven by its Gourmet Food &amp; Gift Baskets segment, which beat our revenue estimate by 3.2%.&nbsp;Segment results are illustrated in Figures #2-#4. Management attributed the modest revenue decline of 0.4% in this segment to consumer trends to gift food items during difficult economic times. In spite of the better than expected revenue, costs were contained, which led to a 150 basis point improvement in gross profit margins to 41%. As a result, the segment delivered $123.5 million in Adj. EBITDA versus our $104.0 million estimate.&nbsp;
Given the favorable fiscal second quarter and sanguine outlook for improved margins, management raised guidance for the fiscal year 2023.&nbsp;Management raised adj. EBITDA guidance from a range of $75 million to $80 million to a range of $80 to $85 million. Additionally, management stated that its previous free cash flow guidance of $75 million will be exceeded, but did specify by what amount.
 Looking forward, we believe that the company will be adversely affected by weak consumer, everyday gifting, a function of the current challenged macro economy. This will manifest itself in the upcoming fiscal third quarter, which does not have any major Holidays other than Valentine&#8217;s Day. In addition, the quarter tends to skew toward its floral business, which seems to be more adversely affected by a weak consumer. As a result, we believe that revenues likely will further weaken in coming quarters from the latest quarter&#8217;s 4.8% decline. We estimate that total company revenues will decline 9.3% in the upcoming fiscal Q3 and decline 9.1% in Q4. Revisions for fiscal Q3 and Q4 are illustrated in figures #5 and #6, respectively. We anticipate that margins will continue to improve in the second half of the year as costs moderate, particularly inbound shipping costs. We anticipate that commodity prices may decline as well, but this is not fully baked into our fiscal 2023 estimates, but is baked into our fiscal 2024 outlook. In our view, the prospect that commodity prices will decline in a weakening economy provides the opportunity for continued progress on improved margins. Revisions for full year fiscal 2023 and 2024 are illustrated in Figures #7 and #8, respectively. Given the nice Q2 upside surprise, we are raising our fiscal 2023 Adj. EBITDA estimate from $68.9 million to $81.1 million, flowing through a portion of the Q2 upside. We are also raising our fiscal 2023 Adj. EBITDA estimate from $79.8 million to $82.9 million to reflect the prospect of further margin improvement.
The company improved its balance sheet over the quarter by increasing its cash position from $9.4 million to $189.7 million and paring down debt from $138.2 million to $132.8 million. The company is in a net positive cash position of $56.9 million. With the improved fundamental outlook, the company&#8217;s free cash flow in fiscal 2023 is expected to exceed $75 million. Given the ample cash on hand and sizable cash flow generation, we believe the company is well positioned to make additional tuck-in acquisitions, opportunistic share buy backs, and pare down debt.&nbsp;
Near current levels, the shares trade near 9.5 times Enterprise Value to our fiscal 2024 Adj. EBITDA estimate and 0.4 times our 2024 revenue estimate, well below peers.&nbsp;We are adjusting our price target from $11 to $21 to&nbsp;reflect our upwardly revised Adj. EBITDA estimates.&nbsp; In addition, we raised our target multiple from 10.2 times EV to Adj. EBITDA to reflect a target multiple more in line with its peers, illustrated in Figure #9 E-Commerce Comparables. We are assuming an upwardly revised target multiple of&nbsp;15.7 times Enterprise Value to our 2024 Adj. EBITDA estimate and 0.6 times Enterprise value to our 2024 revenue estimate, reflective of a multiple in line with its peer group average and based on 2024 estimates. The shares appear to be trading near recessionary type valuations and on depressed estimates. In our view, the shares&nbsp; do not fully reflect the power of its revenue and cash flow growth in an economic recovery. Given the prospect for positive upside surprise potential in an economic recovery and compelling stock valuations, we reiterate our Outperform rating.&#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-
Figure #1 Q2 Variance
<img decoding="async" src="https://noblelinx.com/x/research/images/reports/FLWS_20230203_25577-01.jpg" style="width: 338px;height: 698px" /> 

 Source: Company filings and Noble estimates
 &#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;- 
 
Figure #2 Consumer Floral Segment&nbsp;
<img decoding="async" src="https://noblelinx.com/x/research/images/reports/FLWS_20230203_25577-02.jpg" style="width: 341px;height: 290px" />
Source: Company filings and Noble estimates&nbsp;

 
Figure #3 BloomNet Segment&nbsp;
<img decoding="async" src="https://noblelinx.com/x/research/images/reports/FLWS_20230203_25577-03.jpg" style="width: 347px;height: 295px" />
Source: Company filings and Noble estimates&nbsp;
 &#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-

 
Figure #4 Gourmet Food &amp; Gift Basket Segment&nbsp;
<img decoding="async" src="https://noblelinx.com/x/research/images/reports/FLWS_20230203_25577-04.jpg" style="width: 355px;height: 310px" /> 

Source: Company filings and Noble estimates
 &#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-
 
Figure #5 Q3 Revisions&nbsp;
<img decoding="async" src="https://noblelinx.com/x/research/images/reports/FLWS_20230203_25577-05.jpg" style="width: 361px;height: 725px" />
 Source: Noble estimates&nbsp;
 &#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-

 
Figure #6 Q4 Revisions
<img decoding="async" src="https://noblelinx.com/x/research/images/reports/FLWS_20230203_25577-06.jpg" style="width: 363px;height: 736px" />
 Source: Noble estimates&nbsp;
 &#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-

 
Figure #7 Fiscal Year 2023 Revisions&nbsp;
<img decoding="async" src="https://noblelinx.com/x/research/images/reports/FLWS_20230203_25577-07.jpg" style="width: 366px;height: 716px" />
 Source: Noble estimates
 &#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-

 
Figure #8 Fiscal Year 2024 Revisions
<img decoding="async" src="https://noblelinx.com/x/research/images/reports/FLWS_20230203_25577-08.jpg" style="width: 370px;height: 762px" />
Source: Noble estimates 
&#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-
 
Figure #9 E-Commerce Comparables
<img decoding="async" src="https://noblelinx.com/x/research/images/reports/FLWS_20230203_25577-09.jpg" style="width: 726px;height: 185px" />

1-800 FLOWERS.COM Inc. (FLWS)

Why Margins Can Continue To Improve

Fundamental Analysis:

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Focused on Innovation and Acquisitions (FLWS)

Why Margins Can Continue To Improve (FLWS)

Things Remembered; Shari’s Berries (FLWS)

Margin Outlook Improves (FLWS)

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