Recent pick Analysis

One of my friends recommended me to start writing  detailed analysis on my picks so that one understand my thought process. Here is the analysis of a recent pick

Nobody likes discretionary income retailers these days in this tough economy. How much would you pay for a company that does online retailing who earns close to $30MM EBITDA and $25MM free cash flow? I would say 7 times EBITDA on a conservative basis which is $210MM. Here is a simple stat for conservativeness – At the end of Aug, the average digital ecommerce retailer is traded at 17.3X times EBITDA


If I say that this is a market leader in that category, One of the major three major players, taking market share from others with strong brand/moat (good share of mind) , has very low cap-ex requirement compared to other retailers, how much would you pay conservatively pay? 10-12 times EBITDA -$300- $360MM.

The best part is they made $58MM EBIDTA when the economy was doing well with bloated expense line. Even if the economy picks up slightly they could make $40MM conservatively. With a 10 multiple they could easily be $400MM market cap. Additionally they have launched another category and this could exceed the major category in next few years, could potentially launch new products using this great platform

Will this be a deal if this whole company is selling for less than $120MM and an enterprise value of close to $155MM, 5xEBITDA? I am talking about 1-800-Flowers. 1-800-Flowers is the leading flower gift shop. This provides flowers, plants, gift baskets, gourmet foods, confections, balloons and plush animals perfect for every occasion. It offers best of both worlds - exquisite arrangements from top floral artists and hand delivered same day and flowers shipped overnight from its Fresh Growers collection. It also has another line of business Bloomnet - international floral service which provides a broad range of quality products and value added services designed to help professional florists grow their business profitably.

"Gift Shop" also includes gourmet gifts such as popcorn and specialty treats from the Popcorn Factory; cookies and baked gifts from Cheryl Co; premium chocolates and confections from Fannie May(r) confections brands and Harry London; wine gifts from Ambrosia(r) and Geerlings&WadeSM; gift baskets from 1-800-BASKETS.CO M(r) (www.1800baskets.com) and DesignPac(r) gifts as well as Celebrations(r) (www.celebrations.com), a new premier online destination for fabulous party ideas and planning tips

The company grew its revenue from $498.4MM to $668.0MM from FY05 to FY10. The revenues are divided by consumer floral (54%), Gourmet Food and Gift Baskets (36%), BloomNet Wire Service (9%).

Historically management has made some bad decisions but they are getting their act together in the last two years. They divested noncore business and paid off $70MM of debt in the last two years. It still has $45MM in long term debt. It has recently launched 1-800-BASKETS, which is picking up lot of pace. It has also reduced its operating expenses by $50MM. Reduced salaries by 15%, Consolidated its IT infrastructure, moved to Virtualized customer platform. This company is not perfect. It takes bonuses based on its EBITDA, not the metric I like to take it on. It took a good will charge of $85MM in 2009 which implies historically made bad acquisitions. This year, management was granted 257,500 options at a strike price of $3.5.

Very few times Mr. Market will provide a market leader with a decent moat, which has a potential to expand, launch new categories with low capex selling at cigarbutt price. Can you imagine how tough for someone to start something like 1-800-Flowers. How much capital one needs to spend on branding to get the share of the mind. Can you provide value to these intangibles? Look beyond the numbers. 50% of the customers are repeat customers and they attract more 9MM customers per year. How many businesses have this kind of stickiness?

Do you think one of the competitors like FTD or Tele Flora would like to buy this at 10-15 times EBITDA? I am sure they would love to. Not the least we have couple of value investors who could put them on the line if necessary which include Royce & Associates, Tocqueville Asset Mgmt.


To statistically minded friends, here are some numbers

Revenues ($MM)
2005 - 498.4
2006 - 584.8
2007 - 725.7
2008 - 739.2
2009 - 714
2010 - 668

Adjusted EBITDA ($MM)
2005 - 21.7
2006 - 18.1
2007 - 57.2
2008 - 57.1
2009 - 36.5
2010 - 29

Bought FLWS @1.85

1-800-FLOWERS.COM, Inc. (1-800-FLOWERS.COM) is engaged in providing flowers and plants, gift baskets, gourmet foods, confections, balloons and plush stuffed animals. Its BloomNet (www.mybloomnet.net) international floral wire service provides a range of products and value-added services designed to help professional florists. The 1-800-FLOWERS.COM, Inc. Gift Shop also includes gourmet gifts, such as popcorn and specialty treats from The Popcorn Factory (www.thepopcornfactory.com); cookies and baked gifts from Cheryl&Co. (www.cherylandco.com); chocolates and confections from Fannie May Confections Brands (www.fanniemay.com and www.harrylondon.com); gourmet foods from Greatfood.com (www.greatfood.com); wine gifts from Ambrosia (www.ambrosia.com or www.winetasting.com or www.Geerwade.com), and DesignPac Gifts (www.designpac.com). In January 2010, the Company announced that it has completed the sale of its Home and Children's Gifts business to PH International, LLC.




Negative: What can go wrong on this stock

- Double dip will drop the stock prices by 50%. This is not an essential commodity

- Slightly higher debt than a typical

- History of bad acquisitions and bad corporate management

Positive:

- Valuation: Cheap, Industry leader selling for less than 5 times depressed EBITDA.

- Paid of $60MM debt in last two years

- Started 1-800-baskets



Purchase Price: $1.85

Fair Value: $3.50

Nice Interview from Charlie

http://www.fool.com/investing/general/2010/09/24/charlie-munger-on-communism-botox-and-goldbug-jerk.aspx?source=ihpdspmra0000001&lidx=3

Sold DLIA

Sold DLIA for 2.10. Not bad for a 30% annualized return. The reason why I sold DLIA is it could become a value trap. It continues to bleed and the only end game for this is some one else to buy. The more I read about retail industry, the more it is clearer that it is very tough to invest in this with chaning fashions.