War of the Roses

The online flower powerhouses are going head-to-head this Valentine's Day. Here's why 1-800-Flowers may deserve a closer look from investors

If you've been searching for a forget-me-not this Valentine's Day, odds are that you've been in touch with 1-800-Flowers.com. It's usually the first name that pops up in the nonsponsored area when you search for "flowers" on Google (GOOG ). Lately, it's also the only name that pops up in the sponsored spot for "Valentine's Day" searches. The 29-year-old outfit, based in Westbury, N.Y., has been pushing rivals such as FTD Group far back in the flower box.

And yet, as the competition in gifts and flowers drives down margins for 1-800-Flowers (FLWS ) and its competitors, investors are not exactly flocking to pluck these outfits for their portfolios. The stock price for 1-800-Flowers, at about $6.30 a share, is down $1.30 since early February, 2005.

For FTD Group (FTD ), which debuted as a publicly held company early last year, the slide has been from $13.60 a year ago to around $9 now. Looking even further back, 1-800-Flowers has been a bigger disappointment, since its shares have never returned to the dizzying $20 heights they reached during the Internet bubble of 1999.

BEYOND THE GARDEN. Still, investors may have reason to take a closer look at 1-800-Flowers this year. Its net income is expected to rise by 40%, to $11 million, in the year ending in July, as sales increase by 15%, to $771 million. Thanks to those numbers, it's impressing analysts far more than rival FTD. The catalyst: its diversification moves.

Chief Executive Officer James F. McCann, who founded 1-800-Flowers in a New York City storefront in 1976, has been forging tight ties with florists across the country through Bloomnet, a 6,500-shop network that launched in early 2005. Analyst Eric Beder of Brean Murray Carret expects Bloomnet will undercut FTD's pricing by as much as 30% in 2006, giving more florists a reason to jump from FTD's 20,000-plus member network.

Other analysts say Bloomnet poses a big competitive challenge to the entire industry. Along with privately held Teleflora, FTD has ruled the greenhouse by providing florists nationwide with such services as a credit-card clearinghouse, national advertising, and an electronic network to process orders and transmit messages. Now, 1-800-Flowers will be doing the same things.

McCann is also looking beyond his florist network -- and well beyond flowers. Last year he acquired Cheryl & Co., an online provider of cookies and desserts, in a step toward reaching his goal of becoming the leading supplier of gourmet food, wine, and gift baskets.

LONG-TERM DEBT. The nonfloral area is surging: Nearly 70% of 1-800-Flowers revenues for the fiscal second quarter, ended in January, came from nonfloral specialty gifts. McCann says the challenge for his company is to introduce exciting, high-end products for its customers. "Our strategy is continuing what we've always done -- innovation," he says.

Of course, FTD isn't standing still. It offers nonfloral items through strategic partnerships with strong brand names, such as Godiva and Mrs. Fields. The problem, says Beder, is that FTD doesn't have the same financial flexibility to acquire brands as 1-800-Flowers does.

Downers Grove (Ill.)-based FTD is burdened by a long-term debt that now totals about $233.1 million, vs. a paltry $2.3 million debt for 1-800-Flowers. And FTD is using its cash to shore up the stock price with repurchases and paydowns on that debt. By contrast, 1-800-Flowers can use its cash on expansions or acquisitions.

BIG SEARCH BUCKS. FTD, which is smaller than 1-800-Flowers with about $438 million in annual revenues, has been puzzling analysts lately with some of its retrenchments. The outfit suffered a 4% year-over-year decrease in sales volume in the 2005 holiday season.

FTD CEO Michael Soenen, in a recent earnings call with analysts, blamed the decline on a decision to cut back on search-engine marketing due to skyrocketing costs associated with Google sponsored-site ads. Soenen said FTD pulled back on such ads during the holidays because competitors were bidding up costs. Analyst Beder says 1-800-Flowers managed to handle the headache more effectively. "It's hard to understand why FTD had these problems and no one else did," says Beder.

There's no doubt that search advertising is getting pricier -- especially during peak seasons. An analysis by online marketing firm SEMphonic for BusinessWeek found that cost-per-click rates for flower-related keywords are among the priciest of all terms in its Valentine's Day index, with the five most expensive flower-related words at or near $3 per click as of Jan. 30.

Those prices show that companies are willing to dish out big bucks to capture online search volumes. "It may tell you that competitors are monetizing those customers better than [FTD]," says Troy Mastin, an analyst at William Blair & Co.

FLORAL GROWTH. Even if prices were to rise, a January, 2005, study by the Search Engine Marketing Professional Organization found that most companies who use search marketing would try to improve the efficiency of their programs rather than curtail spending. The report also found that 80% of companies could tolerate further increases in search costs before pulling back.

Whether on the Net or elsewhere, FTD does plan to give 1-800-Flowers a run for its money with pumped-up marketing. Soenen, who declined to detail his game plan for BusinessWeek Online, told analysts in the quarterly earnings call that the company has been pressing for edgier and more aggressive advertising to burnish its name.

Certainly, FTD needs to do something to translate the growth that is forecast for the floral industry into plumper profits. Forrester Research predicts online flower sales will grow yearly at 21% through 2010. For now, it looks like 1-800-Flowers may be in the best spot to pick up a lot more of that blooming business than FTD or its other rivals. And that could be a valentine for shareholders.

READER COMMENTS

Moiduddin is an intern in BusinessWeek's Chicago bureau
Edited by Joseph Weber

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