1-800-FLOWERS’s stock price has taken a beating over the past six months, shedding 28.4% of its value and falling to $3.16 per share. This may have investors wondering how to approach the situation.

Is now the time to buy 1-800-FLOWERS, or should you be careful about including it in 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?

Even with the cheaper entry price, we're sitting this one out for now. Here are three reasons you should be careful with FLWS and a stock we'd rather own.

1. Revenue Spiraling Downwards

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years. Over the last five years, 1-800-FLOWERS’s demand was weak and its revenue declined by 3.1% per year. This was below our standards and signals it’s a low quality business.

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 is what often surprises the market and moves the stock price. Unfortunately, 1-800-FLOWERS’s ROIC has decreased significantly over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

1-800-FLOWERS’s $257.7 million of debt exceeds the $193.3 million of cash on its balance sheet. Furthermore, its 11× net-debt-to-EBITDA ratio (based on its EBITDA of $6.01 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. Following the recent decline, the stock trades at 28.9× forward EV-to-EBITDA (or $3.16 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.

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