Another company we purchased during the quarter is 1”800”Flowers.com (800”Flowers) (FLWS, Financial). We can’t think of many better examples of a management team’s patience around investing than their recent acquisition of the iconic company Harry & David. Management studied the business for more than a decade and had multiple opportunities to purchase the asset at much higher prices. We see a fortunate parallel with our own approach to the company, having first met with the management when it was trading at significantly higher prices but patiently waiting for the right opportunity to invest. The opportunity came during the quarter when shares declined by nearly thirty percent, allowing us to invest at an undemanding valuation less than eight times EBITDA, with between 35%”50% up to our valuation estimates.
The company’s name tells a lot about its operations but we think there’s even more it doesn’t tell, and as a result of that, the company is both misunderstood and off the radar of most investors. Founded nearly forty years ago by CEO Jim McCann, 800”Flowers is the leading floral company in the world, connecting buyers of flower arrangements with local florists, primarily through its customer”facing website 1800flowers.com, familiar to the millions of consumers that regularly order flowers for delivery through it. Behind the scenes, 800”Flowers also owns a very profitable ‘wire service’ named BloomNet that electronically connects florists around the country to one another and provides a comprehensive suite of small business services to them, and we believe could have other applications in time. What is even less known by consumers and investors though is that 800”Flowers has become the world’s leading food gifting company—in part due to the extremely shrewd and transformative purchase last fall of Harry & David.
We believe the acquisition of Harry & David will accelerate 800”Flowers’ ability to compound value over the coming years for multiple reasons. To begin with, Harry & David has long been the leader in the food gifting industry and provides 800”Flowers a very valuable customer base, millions deep, to which it can cross”sell its other offerings. This includes 800”Flowers’ floral offerings but perhaps more importantly its other food gifting offerings—800”Flowers owns a host of strong brands such as Cheryl’s cookies, Fannie May chocolates, Popcorn Factory, and Fruit Bouquets which are all very well known within regions of the country but have tremendous opportunity to grow nationally. Among other things, a multi”branded web site will drive a lot of the cross”selling and is still being rolled out currently, in conjunction with a new customer loyalty platform named Celebrations. In our minds, there’s a strong likelihood that in time this platform becomes the first de facto gifting destination in consumers’ minds—bulwarked by trust and millions of loyal customers. Separately, both the floral and food businesses should continue to benefit strongly from consumers’ ongoing move to the Web and mobile devices, driven by what we believe is a powerful secular trend within society towards convenience—a trend in which we continue to invest. In addition, we would note that the online floral industry experienced an important event in December when the two other main companies in the industry (FTD and ProFlowers) combined, effectively creating what is likely to be a more profitable and less promotional duopoly between 800”Flowers and FTD over the coming years.
From Third Avenue Management's third quarter Small-Cap Fund shareholder letter.
