This is a recommendation to short FTD Companies, Inc. common stock (FTD - $23.66).
FTD’s business model has come under recent attack by online/cloud based upstarts that are undercutting FTD’s fees by a wide margin. This won’t change business overnight, but customers are so fed up with FTD, that competitor advances may be much faster than the market expects.
Aggressive accounting inflated results.
As a result, I believe earnings estimates are too high and the company will likely disappoint over the next few quarters. FTD reports tomorrow after the market close.
There is negative tangible equity and debt/EBITDA of 3x will accelerate the downside if competition erodes earnings as expected. Return on net operating assets is declining and is far less than cost of capital. I think the stock is worth no more than $12-15.
There has been no insider buying despite the stock’s weakness.
Business Model Under Attack
FTD is fond of its brands. In the investment highlights section of its investor presentation, the first bullet is “Premier Brands”.
This is what customers think about FTD’s Premier Brands:
100% of the 49 reviewers on bbb.org are unlikely to recommend this business
96% had a negative experience
This quote from this Forbes article probably explains what is happening.
“They are generally aggregators, says Kori, like 1800Flowers.com or FTD. He says they create the flower arrangements in their studios and post photos on their site. When you order based on a photo, the order then goes to your local florist, who has to recreate whatever is in the photo. “The biggest problem is that these local florists get paid less for these kinds of deliveries than they would if the customer had come directly to them,” says Kori. “And worse, the flowers are branded as 1800Flowers or FTD—not from the local florist. So there is no chance of a repeat customer on that order and they are being paid less for it.” That means there is less incentive for the florist to do a great job.”
This Times article does a good job painting the backdrop, including customer and florist frustration and noting how if an order goes through an FTD website, FTD’s cut is 27%, whereas new competitor BloomNation only charges 10%:
Earnings face increasing downward pressure due to the mounting competition noted above.
Revenue grew only 2% in 2014 and 2013. Business declined in the first 9 months of 2015. Proforma for the Provide Commerce acquisition and removing $4.1m of one-time breakage revenue from 3Q15 results, revenue was down 4% y/y in the Sept15 quarter and 5% y/y for the 9 months ended September 2015. The decline was driven by an 8 to 9% decline in Provide revenue and the strong dollar. Analysts expect revenues to be flat in 2016 vs 2015, but considering recent trends and increasing competition, this looks overly optimistic.
This idea is from my screen that identifies short candidates based mostly on various accounting factors. As is common with a company facing increasing competition and pressure to make numbers, it appears that the company has recently used aggressive accounting to boost results. This will pressure earnings in the future.
Doubtful accounts and sales allowances down 50% y/y vs Sep14 and vs Dec, while AR UP 15% vs Sep14 and down only 10% vs Dec. Provide should not have materially changed the ratio of allowances to AR. Sign of aggressive revenue recognition.
$4m negative swing in deferred revenue change YTD vs prior period suggests more aggressive revenue recognition.
Massive decrease in accounts payable, accrued expenses and other liabilities suggests that the company is under-accruing expenses.
The Company has financing receivables related to equipment sales to its floral network members. The allowance dropped from 18% of gross financing receivables to 5% due to the write-off of 20% of the gross receivables balance. When a company is taking 20% hits to its receivables, a 5% allowance seems too low to me (one cockroach…).
One way to sum it up is this: while the company reported $93m of adjusted EBITDA in the first 9 months, looking at the cash flow statement tells a different story. The company burned $14m of cash excluding acquisitions during the same time. Adding back $27m of cash paid for taxes and interest, $12m of “one-time” costs and subtracting $4m of one-time breakage, gets you to EBITDA from the cash flow statement of $21m (-14+27+12-4=21), 77% lower than reported adjusted EBITDA. This isn’t a foolproof comparison obviously, but for a declining/low growth business these two metrics should track much closer, even considering the seasonality of the business where cash flow may improve in the Dec quarter relative to EBITDA.
Valuation and Financial Performance
This is a low return business by the numbers. Return on net operating assets (operating income / net debt + equity) was 6% in 2014 and 7% in 2013. I estimate that it will decline to 3% in 2015.
2015 will mark the fourth year in a row of declining adj EBITDA margins.
As noted above, proforma revenues are declining 4 to 5% y/y.
The company is burning cash this year whereas it generated cash last year. Even though business is worse now, let’s be generous and assume that 2013 and 2014 are representative years for cash generation without Provide. Average free cash flow for those two years was $30m. Applying a 10x multiple (generous considering low ROIC, increasing competition and no to very slow growth?) means the FTD business excluding Provide is worth $300m. FTD paid $430m of consideration for Provide. Provide revenue has declined 9% since purchased. Provide operating income has improved, but I’m skeptical since I think the company is under reporting operating expenses. Malone was on one side of the transaction, FTD on the other. Given this and the decline in the business I think it’s fair to haircut this $430m valuation by 20% to $336m. But we don’t need to. At a $300m valuation for FTD and a generous $430m for Provide, the EV is $730, putting the stock at $15. Haircut Provide by 20% and the stock is worth $12.
Liberty Interactive Corporation owns 35% of the shares per the last filing as a result of selling its Provide Commerce Business to FTD for $121m in cash and 10m FTD shares valued at $309m. Since Liberty sold Provide to FTD, Provide’s revenue declined by 9%. This does not look like it was a good deal for FTD and if Liberty wanted to buy FTD, it seems like it would have already bought it instead of selling Provide. Nonetheless, a Liberty acquisition is a risk.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise do not hold a material investment in the issuer's securities.