flws initiation

Apr 11, 2012

Consumer

NasdaqNM

FLWS

Buy Initiation

Current Price

$2.87Target Price

$5.00

Market Capitalization 186.74M

Shares Outstanding 65.06M

Float 25.09M

Institutional Holdings 60.10%

12-month Low/High $2.08/$3.84

Average 90-day Volume 109,605

Fiscal Year End Jul 3

Revenues ($ MIL)

Period 2011A 2012E 2013EQ1 102A 117A 118EQ2 229A 240A 261EQ3 159A 178E 191EQ4 182A 201E 212E 690A 736E 782E

EPS ($ MIL)

Period 2011A 2012E 2013EQ1 (0.08)A (0.08)A (0.03)EQ2 0.20A 0.25A 0.25EQ3 (0.04)A (0.02)E 0.01EQ4 (0.01)A 0.05E (0.01)E 0.09A 0.14E 0.22E

1-800-flowers.comReady to Bloom in 2012 and Beyond?

We are initiating coverage of 1-800-Flowers with a Buy Rating and a $5 price target based on the prospects for the company to accelerate Consumer Floral growth as consumer sentiment and the economy improve

1-800-Flowers is the domestic leader in Consumer Floral with an iconic brand and a compelling marketing strategy that leverages Social Media to drive customer engagement and E-Commerce sales

1-800-Flowers has experienced a meaningful improvement revenue, EBITDA, and customer metrics over the past quarters; we believe the company can return to peak Consumer Floral revenue and margins over the next several years

We estimate the company will grow EBITDA by 19% and 16% in fiscal 2012 and 2013, respectively, driven by higher floral sales and increased operating leverage; the company could generate a sizable cash balance in the next few years

In our view, FLWS shares are grossly undervalued, trading at trough multiples, despite the improvement in fundamentals; we encourage investors to be opportunistic ahead of expected growth in the top and bottom lines

Equity ResearchChristopher Ferris, Senior Research Analyst, Digital Media and Technology (646) 429-1727 [email protected]

Michael Kupinski, Director of Research (561) 994-5734 [email protected]

Noble Financial Capital MarketsTrading: (561) 998-5489 Sales: (561) 998-5491 www.noblefcm.com

Refer to the last two pages of this report for Disclosures

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Investment Appraisal

We are initiating coverage on 1-800-Flowers with a Buy rating and a $5 price target based on several factors: 1) The prospects for the company to continue improving the results of its Consumer Floral business, driven by a more favorable consumer retail environment; 2) The company's marketing-leading position in Consumer Floral, coupled with a superior marketing strategy, led by Social Media, should help them continue to gain share on competitors; 3) We view FLWS shares as undervalued at current levels, and believe investors should take advantage of depressed valuations ahead of improved results, expected over the next several quarters.

1-800-Flowers was born with just a few floral shops in New York and is one world's leading floral and gifting companies, counting over 36 million unique customers. The company features an iconic brand and market-leading share of the floral gifting business. It also owns the second largest wire service, connecting florists across the country, and a Gourmet Food and Gift Basket business that includes Fannie May Chocolates and The Popcorn Factory.

1-800-Flowers is also a pioneer in employing new technology to drive retail sales. In the 1980s, the company led the push for telephonic sales, allowing consumers to place orders by phone and have them delivered anywhere in the country. The company was one of the first to sell retail products on the Internet, partnering with Compuserve and AOL in the early 1990s, and establishing one of the first E-Commerce web sites in 1995.

Today, the company is embracing Social Media to help drive growth of its products. 1-800-Flowers has developed a special relationship with Facebook (having been one of three companies showcased at the Social Media giant's Advertising Summit earlier this year), and we believe Social Media, while still only a small part of sales, will become a long-term driver of sales. We also believe the company can take share from competitors, based on its marketing skill and savvy leveraging of Social Media.

To many investors, the company may appear on old, mature, staid, low-growth story - we take a different view. 1-800-Flowers was pummeled by the recession, which caused Consumer Floral sales to fall from their peak of $490 million of annual revenue at a 13% EBITDA margin to $366 million and a 6% EBITDA margin. However, the company's Consumer Floral results have improved dramatically over the past several quarters, after 3 years of declining growth in the face of consumer weakness. Sales have risen for 4 straight quarters, and a leaner, smarter FLWS is taking advantage of the improving environment to drive better top-line and bottom-line growth. Segment revenue growth rose 8% in calendar 2011 and is up 11% in the first half of the fiscal year 2012. EBITDA has risen 18% in the first half of the year. We believe the trends will continue and could accelerate if the consumer economy improves. The company also appears to be outperforming competitors who are experiencing slower growth, suggesting FLWS's marketing efforts are effectively driving increased market share. We believe the company can return to peak Consumer Floral revenue and margins over the next several years, driving substantial earnings and cash flow growth and higher valuations.

Despite the recent improvement industry fundamentals and performance, FLWS shares still trade at depressed,

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1-800-flowers.com FLWS | CURRENT PRICE $2.87 | Buy | 04/11/2012Christopher Ferris [email protected] (646) 429-1727 | Michael Kupinski [email protected] (561) 994-5734

trough multiples. FLWS shares at trading at just 3.5 times our calendar 2013 EBITDA estimate, well below their midpoint range of 7 - 12 times over the past 5 years, despite improving fundamentals. In our view, investors have the opportunity to snatch up shares of a leading E-commerce company with improving fundamentals as at very reasonable valuation.

We see a number of near-term catalysts for FLWS shares including 1) continued improvement in Consumer Floral trends, driving higher revenue and EBITDA growth; 2) Improved BloomNet (wire service) profitability; 3) Upside earnings surprises, which are possible given positive trends and recent management execution; 4) Tuck-in, targeted acquisitions in the Floral or Gifting space that are accretive to results.

VALUATION

Our price target is based on a sum-of-the-parts model, which seeks to assign high and low values to each of the company's individual business segments based on fiscal 2013 estimates (see Figure 1).

For the Consumer Floral business, we value the business at a low or trough multiple of 4 times estimated 2013 EBITDA and a high or peak multiple of 8 times estimated EBITDA. We view this as a very conservative valuation, given we expect segment EBITDA to grow by 19% in fiscal 2012 and 16% in fiscal 2013.We are also ascribing a low multiple of 4 and a high of 8 times for BloomNet, the company's wire service. We also view this as reasonable, given the business' high revenue growth rate in the mid-teens, and the potential to grow EBITDA substantially over the long term.

We value the company's Gourmet Food and Gift Basket business at a low multiple of 2 times and a high multiple of 5 times estimated 2013 EBITDA, give the segment's modest low-to-mid-single digit revenue and EBITDA growth rate.

After adding a 4 multiple of corporate overhead and expected net cash, we arrive at an estimated low valuation of approximately $2.50 per share and a high valuation of $8 per share - averaging these two, we arrive at a midpoint of $5 per share.

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In our view, FLWS shares are trading near trough multiples, despite a meaningful improvement in fundamentals over the past several quarters. While shares have rallied from their lows last year, we believe the market is putting little value on the growth potential of the company's floral and gifting brands. At current levels, FLWS shares are trading at just a 3.5 multiple of estimated 2013 EBITDA, 13.1 times estimated 2013 EPS, and just a 0.2 turn of revenue. The current EBITDA multiple is not only far below historic ranges, it is well below the average of roughly 5 - 13x over the past 5 years, and well below the midpoint multiples shares were trading at in fiscal 2010, when the company's earnings took a severe hit due to the recession (see Figure 2). Results have improved significantly, but the stock has yet to respond. In our view, the market is not recognizing the improving fundamentals for the company, valuing its operations as if they were legacy businesses in decline, rather than as a steady, low-double digit cash flow growth businesses on the upswing.

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Our $5 per share price target implies that FLWS shares cloud trade at just 7.6 times 2013 EBITDA, 22.8 times a 2013 EPS, and just a half a turn of revenue, all very modest multiples, even for single digit growth business in a mature industry.

Company Overview

1-800-Flowers is arguably the world's leading florist. The company traces its origins back over 35 years to several floral shops owned by the CEO, Jim McCann. He purchased the 1-800-Flowers phone number, built a national brand around it, and rode the wave of telephonic floral order growth. The company has always been an innovator in the Floral and E-Commerce businesses. FLWS was launched one of the first E-Commerce websites and was the first company to partner with AOL. Now, the company is harnessing the power of Social Media to expand its floral and gifting businesses.

Consumer Floral - The Core of the Company

1-800-Flowers offers consumers a wide range of fresh cut flowers, floral arrangements and plants, often tailored for specific life events or holidays. The 1-800-Flowers brands is one of the most recognized in the gifting industry, allowing consumers to place orders for flowers and have them delivered same-day to virtually any address in the country. The company has a powerful brand, a leading E-Commerce site (see Figure 3), and existing customer base that exceeds 36 million.

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The company offers a wide array of fresh-cut flowers, floral arrangements, plants and other gifts through its floral business. Consumer orders are primarily placed telephonically or through the company's E-Commerce site, and also at the company's retail stores or franchise outlets. The company has the capability to either fulfill orders directly from its own inventory or send the order to florist in their network in the appropriate city, on a same-day or any-day basis.

1-800-Flowers a market leader

The floral industry generates roughly $35 billion in sales per year internationally, $16 billion domestically (~$8 billion cash-and-carry, and ~$8 billion in the gifting space). 1-800-Flowers is a dominant player in the gifting space with nearly $400 million in annual floral sales and approximately $85 million in wire service revenues. Domestically, FLWS is the leader in direct Consumer Floral, with ProFlowers, FTD, and Teleflora trailing with revenues of approximately $320 million, $220 million, and $70 million, respectively. 1-800-Flowers has the advantage of a powerful brand and a strong marketing presence. At the business' height in calendar 2008, the business generated $490 million in revenue - a number we believe it can return to over the next several years.

How does their Consumer Floral business work?

1-800-Flowers operates a hybrid fulfillment system. Most of the floral orders are fulfilled by one of the company's BloomNet wire service partners, a local florist. In most cases, FLWS accepts a customer order over the phone or through its website; the order is sent to an appropriate florist in the destination city, which fulfills the order. FLWS and the florist split the revenue from the transaction and FLWS receives its service charge. FLWS is responsible for the marketing costs and the customer satisfaction guarantee. The gross margin for this type of sale is about 38%. FLWS only takes possession of about 20% of the orders it receives, shipping them directly to the consumer. This generally offers a lower average sale, but a higher gross margin. The company also operates 2 retail outlets and over 100 franchised stores in the U. S.

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Figure 3. 1-800-Flowers E-Commerce Homepage

BloomNet, 1-800-Flowers' Wire Service

Most local florists have insufficient foot traffic to stay in business and require wire services such as BloomNet to drive revenue. Florists who join BloomNet acquire access to FLWS's orders. Florists receive an order, fulfill it, and receive 71 cents on the dollar of the order value. BloomNet essentially acts as a clearinghouse and broker, ensuring an order is properly routed and that both sides get paid. 1-800-Flowers selects the florists they wish to belong to the network based on their capabilities and regularly monitors their performance. Currently, about 7,000 florists belong to the BloomNet network, several thousand of which are exclusive to FLWS. Approximately 50% of BloomNet's revenue is derived from the monthly fees paid by its members, and 50% is from hard goods sold directly to the florist, such as vases.

BloomNet offers some advantages over competitors' wire systems. First, BloomNet features a tiered pricing model; the more orders a florist fulfills through the system, the more FLWS gets paid. By contrast, other wire systems charge rack rates, whereby a florist may pay fees whether they are receiving any orders from the service or not. Second, BloomNet's directory is largely digital, whereas some competitors are not, using printed directories, akin to a phone book. In our view, on an online, digital directory using a search engine-like model is the future of the business, and likely to increase the number of exclusive network partners.

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1-800-Flowers well positioned and taking share from competitors

Flowers appear to be well-positioned to capitalize on an improving consumer marketplace. In our view, the company features a leading E-Commerce site and has a compelling Social marketing strategy that is gaining traction with consumers. We believe FLWS is taking share from competitors in the Consumer Floral space. FLWS has been growing its revenue significantly for the past year, while its key competitors, FTD and ProFlowers have not. FTD saw its growth slow to 2% in the December quarter compared to FLWS' 10% growth; in the September quarter, FTD's growth was 4% versus FLWS'12% growth. Although FTD's figures include international results and do not provide the level of details FLWS does, it's clear FTD is having a more challenging time growing revenue than FLWS. United Online, FTD's parent company, noted on its recent quarterly call that it was struggling to cope with competitors beating them on price. We also think FTD is simply being out-marketed and out-smarted by FLWS' Social Media strategy. ProFlowers, while private and does not disclose financials, appears to have been losing some ground to FLWS as well. During the recession, ProFlowers was positioning itself as the "cheap" flowers option, and is now struggling to maintain share as the market improves. While we can't confirm figures, our sources suggest their revenue is down 10% from its highs, and has yet to bounce back.

Floral Business Outlook Improving

1-800-Flowers' Consumer Floral sales stagnated in late 2007 and it experienced 11 straight quarters of negative growth before returning to positive growth in the March 2011 quarter. FLWS has now seen 4 straight quarters of growth, including a surge of 11% growth in the first half of fiscal 2012. This is undoubtedly tied to an improving consumer environment and employment outlook, in addition to marketing and merchandising efforts by the company. The company has also moved away from low priced products, focused on higher quality, higher-end items, and been willing to sacrifice some order flow in order to achieve a higher average ticket price. The average order valued increased 7% in fiscal 2011 and 11% in fiscal Q2'12.

Floral sales are closely tied to consumer sentiment. Although the correlation may be imperfect, it is clear the precipitous decline in consumer sentiment in calendar 2008 and 2009 coincided with the decline in FLWS' Consumer Floral sales. As consumer sentiment has begun to improve over the last few quarters, so too have FLWS' sales. Should consumer confidence continue to gain stream, we believe FLWS sales could go faster than we anticipate (See Figure 4).

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Consumer Floral sales appear to be rebounding, industry-wide. Although we do not have exact sales figures, the anecdotal evidence is compelling. The Society of American Florists (SAF) reported the number of adults buying flowers for Valentine's Day rose 23% over the prior year, while comScore reported that visitors to Flowers and Gift websites increased 28% in February. Traffic to 1-800-Flowers rose 103% over the prior year in February, which would seem indicate a strong quarter and fundamental environment for Consumer Floral sales. It appears to the trend has continued into second half of the fiscal year, as the SAF expects Easter sales to rise 21% over last year's levels. A survey of North American florists also suggests most are optimistic about prospects for 2012, with 86% believing sales in the next 6 months will be better or equal to current sales.

Gourmet Food and Gift Baskets

1-800-Flowers has expanded into the Gourmet Food and Gift basket businesses, a highly fragmented, $16 billion market. The products complement the company's gift-giving focus, and offers cross promotional opportunities. The company's key brands include Fannie May chocolates, Cheryl's, 1-800-Baskets, Winetasting.com, and The Popcorn Factory. The company fulfills its orders through a number of centers around the country and operates 94 retail stores.

The biggest advantage of the Gourmet Food and Gift Basket business is the opportunity is cross-promotional

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opportunities and the ability to leverage the floral customer database to drive sales. The company has experienced some success at this, although growth is only moderate. Last year, segment revenue and EBITDA grew 3% and 6%, respectively. The downside is that unlike much of the floral business, the company must handle with inventory and manufacturing without any hiccups. The segment's growth has been unspectacular, but steady. Our model assumes the business will continue growing at a low-to-single digit pace going forward, with a low-double digit margin.

Leveraging Social Media - "If it's not Social, we're not doing it."

1-800-Flowers has traditionally embraced new technology to drive its business, whether it was 1-800 numbers, launching one of the first true E-Commerce websites, or being one of the first companies to sell products on AOL in the 1990s. Such forward thinking has continued with the next wave of technology, Social Media. FLWS is actively using Facebook, Twitter, Pinterest, and exploring a host of other Social mediums as a means to conduct its business.

The act of giving a gift, or giving flowers, in of itself, is social. As management is fond of saying, 1-800-Flowers is in the business of delivering smiles. The social aspect of giving flowers or food makes emerging Social Media platforms a logical place for 1-800-Flowers to reach new customers and engage its existing customers. In addition, the company leverages Social Media, particularly Facebook and Twitter, as marketing and customer service tools in what is a customer-centric, customer-care business model. 1-800-Flowers has one of the most forward-thinking Social Media strategies we've seen in the E-Commerce companies. As President Chris McCann of 1-800-Flowers.com has stated, "If it's not Social, we're not doing it." Social is at the heart of what the company does.

"Everything is Facebook"

Over the past few years, FLWS has focused heavily on leveraging Facebook as a platform to engage and communicate with customers and increase sales. The company uses Facebook holistically to help drive results. To quote Mr. McCann:

"Our business is about relationships, and Facebook is about relationships. The consumer has voted, and Facebook is part of our lives. Therefore, it's an indispensable part of how we integrate and develop relationships between our brand, our culture and customers.

Like many businesses, 1-800 Flowers has a Facebook page. However, FLWS distinguishes itself from others and its competitors in how it has used that page to engage customers. The company has been working specifically with Facebook for over a year on developing a Social Media strategy to drive engagement and business to FLWS. The company believes it can reach tens of millions of friends of friends through its fans, soon to top 400,000, making their page a powerful ambassador of the 1-800-Flowers brand, and ultimately, sales.

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Figure 5. 1-800-Flowers Facebook Homepage

Engagement

1-800-Flowers posts updates to its page daily, if not hourly, announcing special offers, new floral arrangement and gift ideas. Consumers can shop and make purchases inside Facebook, without leaving it, using the apps FLWS has on the site. The premise is to keep users hooked, engaged, and returning for more deals - often making a purchase without even visiting the E-Commerce site (See Fig 9). Although we can't be sure how much of the company's E-Commerce traffic or sales are being driven by Facebook, our guess is that it's

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substantial, and could eventually become as meaningful as standard Internet search.

The company also engages customers by asking them to participate in polls, contests, and by also sharing pictures of their gifts. Customers are encouraged to upload photos of the "smile" that was delivered to them. FLWS will continue to use this advertising to make brand advocates out of their best users. With Facebook announcing an acquisition of Instagram this week, we won't be surprised to see FLWS doing some Flower Photo promotions with the very popular iPhone app.

The best measurement of "engagement" we know is the number of users or "Likes" the page has. 1-800-Flowers have almost 365,000 likes, and growing fast. This is substantially more than its Floral competitors (See Figure 10).

Customer Service

Many companies fear Facebook, closing off their pages to true customer engagement. These companies don't allow users to post on their walls, voice concerns, or compliments. As such, their page, if it's managed at all, becomes a corporate propaganda site of little use interest or credibility to a customer.

FLWS takes the opposite approach, opening up their site to customer compliments and complaints. It's no surprise that customers that are dissatisfied with an order (usually delivered by a fulfilling florist, not FLWS itself) come to the company's Facebook page to vent their frustration. FLWS has a dedicated customer service team going by the pseudonym "Tina Flowers," answering questions and solving customer service issues. Complaints are quickly addressed and solved (see Figure 6). As a consumer-oriented brand in a Social Media world where anyone can be a critic or write a review, FLWS knows it must be proactive.

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Figure 6. 1-800-Flowers Facebook Customer Service Example

Special Offers

The company has leveraged Facebook very effectively to make offers to customers. For Valentine's Day, the company experimented with a Facebook ad campaign using Facebook's virtual credits. FLWS also launched "sponsored stories," which generated stories on the right hand side of the page for a user whose friend liked 1-800-Flowers, allowing for a truly engaging ad as opposed to just a random, static advertisement. FLWS noted the success of the campaign, seeing a 250% increase in engagement to its Wall Posts around the holiday, and the number of users that logged into 1-800-Flowers.com using their Facebook identification rose 400%.

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Figure 7. 1-800-Flowers Facebook Offers Example

Source-1-800-Flowers

Facebook can also inform marketing and product decisions, saving the company valuable time and money. For example, leading up to Mother's Day last year, the company reached out to its Facebook fans that were mothers, asking them to "Like" the arrangements they wanted to receive on Mother's Day. 4 of the top 5 best selling arrangements were those selected by its Facebook user base (see Figure 8). When the company considers product launches, they use Facebook as a test first.

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Figure 8. 1-800-Flowers Engagement Example

Source-1-800-Flowers

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Figure 9. Facebook

Advertising

1-800-Flowers is likely to explore more inventive advertising methods with Facebook to increase sales. Facebook is likely to start stepping up its advertising efforts this year after it goes public, probably introducing sponsored advertisements in user's news feeds. FLWS could take advantage by buying advertisements tailored towards friend's birthdays, or to married people on Valentine's Day. For example, on a user's wife's birthday, an ad for 1-800-Flowers may appear directly in a user's news feed, offering him a special discount. We think such highly targeted advertising is just months, not years away, and is exactly the kind of targeting that will drive FLWS sales in the future. These ads certainly won't be cheap, and may be more expensive than the typical web and radio ads the company uses, but we believe the ROI will be far greater.

The results are clear - FLWS is driving sales from Social Media

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Although it does not disclose what percentage of sales are derived from Social Media (and we don't think the company actually knows), we believe it is a meaningful amount, possibly a double-digit percentage of sales. 1-800-Flowers are also more popular than its competitors; FLWS currently has approximately 365,000 Facebook fans, compared to 100,000 for FTD, and 82,000 for Teleflora. The company's followers even rival Martha Stewart (See Fig 10). 1-800-Flowers has been so successful and innovative in terms of how it has utilized Facebook that it was one of just two retailers invited to present at the Facebook Advertising Summit in New York in February of this year; the other company? Wal-Mart.

Mobile- The Next Wave

1-800-Flowers is also embracing mobile marketing, which dovetails with its Social Media strategy. The company first launched its mobile website over 6 years ago, and is available on Blackberry, iPhone and Android. The company realizes that Mobile is a natural extension of Social, as much of social networking is done on the smartphone. All of the company's social initiatives apply to the smartphone. Currently, only a small percentage of sales are conducted from the mobile phone, but we believe the figure is growing by triple digit percentages.

In our tests, the company's mobile application appears as the second listing in a simple search of "Flowers" in the iOS App store, which should help 1-800-Flowers fans easily find the application and help attract users simply interested in flowers. In our test, the app worked well and we sent flowers through it with ease.

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However, some of the reviews of the app were not flattering, and the app had just a 2 out of 5 star rating. This could be because of a small sample, but is concerning nonetheless.

Figures 11 and 12. 1-800-Flowers Mobile Interfaces

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Income Statement

1-800-Flowers is very transparent in its financial reporting, delineating results from its key three business segments, Consumer Floral, Bloomnet, and Gourmet Food and Gift Baskets, in addition to providing overall E-Commerce results. The company's direct-to-consumer businesses (Consumer Floral, Gourmet Food and Gift Baskets) are contained within the E-Commerce segment, while BloomNet, retail store sales and wholesale to florists are contained with "Other" segment results.

1-800-Flowers suffered through the recession...

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The company was pummeled by the economic downturn, seeing its revenue fall precipitously, particularly in Consumer Floral. The company's Floral business fell from $492 million in revenue and a 13% EBITDA margin to just $369 million and a 9% margin in fiscal 2011.

...and has emerged with strong growth

However, FLWS has bounced back over the past four quarters, with strong growth in Consumer Floral and BloomNet. Consumer Floral increased nearly 8% in calendar 2011 versus calendar 2010, driven by healthier consumer environment and by the company's better marketing and product focus. EBITDA growth has been even more impressive, increasing 45% in calendar 2011 and 15% in the first half of the fiscal year (although the company did have a one-time gain on the sale of stores). For the first six months of fiscal 2012, Consumer Floral and BloomNet revenues have increased 11% and 18%, respectively, while total revenue has grown by 8%. Consumer Floral EBITDA has risen 12% in the first half of 2012, while total profit has risen 5% (See Fig 13).

Fundamentals continue to improve

We expect the fundamentals to continue to favor the company and expect better results for the remainder of calendar 2012 and into 2013. Consumer sentiment, which is tied closely to flower sales (see Fig 4) has risen near 17 points or 28% since September 2011. The economy, stock market, and employment outlook all appear to be showing signs of life, which bolsters our confidence that FLWS will continue to see improved sales. In addition, we believe the company's continued marketing efforts, particularly with Social Media, will continue to bear fruit and ultimately help drive better results.

2012 and 2013 should be strong growth years for FLWS

We are estimating total company revenue will increase nearly 7% in 2012, a conservative estimate, given the

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strong growth seen in the first half of the year. We note that management raised its revenue guidance on its Q2 conference call from low-to-mid single digits percentage growth to mid-to-high single digit growth. We estimate the company will grow EBITDA by 19% to $41 million. Our fiscal 2012 EPS estimate is $0.14, up from $0.09 in the prior year.

In 2013, we expect the company to continue driving strong growth from all segments. We estimate 6% top-line growth and 16% EBITDA growth, driven by higher BloomNet and Gourmet and Food Basket margins. We estimate 2013 EPS of $0.22, and believe our estimates could prove conservative, particularly if the economy gains traction later this year and into 2013.

We believe the company can return to peak Consumer Floral revenues and margins

1-800-Flowers' Floral businesses are hitting their stride, the economy appears to be improving, and their marketing efforts, particularly socially, are a success. As such, we believe it's possible the company could return to its peak Consumer Floral revenue and margins of $492 million and 13%, last seen in fiscal 2008. Our estimates are more modest, implying only mid-single digit top-line growth and margins returning to 10%. If FLWS can do better, we believe FLWS shares will appear much undervalued, at current levels.

Balance Sheet and Cash Flow

1-800-Flowers features a fairly clean balance sheet after having de-levered significantly over the past few years. The company current has $30 million of cash and $37 million of debt. Since 2008, the company has paid down more than $90 million in debt despite a very challenging consumer environment. The company has a revolving credit line in place with a seasonally adjusted limit ranging from $40 - $75 million.

The company mainly uses its income from operations to fund its activities, and generates solid free cash flow. FLWS generated $14 - 25 million in free cash flow in each of the last 3 years, and appears on pace to generate approximately $20 million of free cash flow in 2012. If the consumer floral business continues to improve, producing higher revenue and better margins, we believe the company could consistently generate free cash flow exceeding $20 million per year, building significant cash balance in the coming years (see Cash Flow Statement). The company does repurchase shares in the open market from time to time, but mainly to offset new share issuance. We do not see the company making any significant moves to return cash to shareholders in the near term.

In the past, the company has made a number of acquisitions to complement its gifting, gourmet food, and gift basket businesses. We would not be surprised to see the company make additional acquisitions in this area to complement its existing brands. However, we would prefer to see the company focus on continuing to improve the growth of its Consumer Floral and BloomNet businesses rather than spends its cash or lever up acquiring new gifting businesses.

MANAGEMENT

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1-800 Flowers features a seasoned management team that essentially created the Consumer Floral E-Commerce business. The McCann brothers are entrepreneurs that have built the company from just a 1-800 phone number into a nationally recognized, leading consumer brand. Management's longevity, tenure, experience, and commitment to the company bolster confidence in our thesis.

James McCann- Chairman and CEO. Mr. McCann has been involved in the floral industry since 1976, having begun as a retail shop owner in New York. Mr. McCann has held his position at the company since its inception.

Christopher McCann- President, 1-800-Flowers.com and Floral Group. Mr. McCann has been President since 200 and has been a Director of the company since its founding, and is the brother of CEO James McCann.

William Shea- Treasurer and Chief Financial Officer. Mr. Shea has served as the company's CFO since 2000, and joined the company in 1996. Prior to joining the company, Mr. Shea was a CPA at Ernst and Young.

RISKS

Economy- The strength of the economy, particularly consumer sentiment, is particularly important for the consumer floral segment. The entire floral industry was hit hard by the 2008- 2009 recession. Further weakness in the economic outlook could have a negative impact on the company's earnings.

Third Party Vendors- 1-800-Flowers depends on local florists and third-party vendors to fulfill much of the company's orders to a customer's satisfaction. The local florists may belong to Bloomnet, but FLWS does not directly control those florists, and if customers are dissatisfied with the local florist, they may choose not to utilize FLWS when placing future oders.

Seasonality- The companys results are seasonal in nature, making revenue and earnings results difficult to predict.

Competition- 1-800-Flowers face intense competition from publicly owned entities with greater financial resources such as FTD, large non-public competitors such as Teleflora, as well as from standard retail florists. The company must continue to create and market appealing products to its customer base in order to maintain market share and grow revenue and earnings.

Shipping and Labor Costs- Increased shipping costs or labor issues could increase the company's costs or negatively impact sales.

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Floral Supply and Cost- If the supply of flowers becomes limited and/or the price of flowers rises substantially, many of the company's products may not be available. Many of the flowers supplied to customers are grown abroad and their availability could be affected by a number of factors, including import duties, agricultural restrictions, sever weathers, political unrest, and trade restrictions, among other factors.

Customer Demand- The company must accurately predict customer demand for its products. The company does not maintain a large inventory of flowers. However, the company has expanded its non-floral products, increasing inventory levels. If it does not properly manage those costs, the company may lose customers or experience increased costs.

Franchisees- Franchisees could damage the company's brand or increase its costs by failing to comply with franchise agreements or operating standards.

Internet/Technology Problems- 1-800-Flowers is an e-Commerce company that could be negatively impacted by an Internet outage or technical issue that restricts customers from placing orders. Long outages or disruptions, particularly around holidays could negatively impact results.

Acquisition Risk- The company has a history of making acquisitions in the gift space. If the company fails to integrate those acquisitions smoothly, it may negatively affect results.

Sales Taxes- FLWS does not collect sales taxes in some jurisdictions. Some states have adopted laws obligating e-Commerce companies to collect sales tax on consumers, which could prevent some consumers form purchasing from the company's brands.

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Valuation Summary

Our price target is based on a sum-of-the-parts model, which seeks to assign high and low values to each of the company's individual business segments based on fiscal 2013 estimates. Our $5 per share price target implies that FLWS shares cloud trade at just 7.6 times 2013 EBITDA, 22.8times a 2013 EPS, and just a half a turn of revenue, all very modest multiples, even for single digit growth business in a mature industry. In our view, FLWS shares are trading near trough multiples, despite a meaningful improvement in fundamentals over the past several quarters.

The main risks to 1-800-Flowers' valuation are economic weakness, the health of the consumer, competition, third-party vendors, and acquisition risk.

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DISCLAIMERAll statements or opinions contained herein that include the words "we", "us", or "our" are solely the responsibility of Noble Financial and do not necessarily reflect statements or opinions expressed by any person or party affiliated with the company mentioned in this report. Any opinions expressed herein are subject to change without notice. All information provided herein is based on public and non-public information believed to be accurate and reliable, but is not necessarily complete and cannot be guaranteed. No judgment is hereby expressed or should be implied as to the suitability of any security described herein for any specific investor or any specific investment portfolio. The decision to undertake any investment regarding the security mentioned herein should be made by each reader of this publication based on its own appraisal of the implications and risks of such decision.

This publication is intended for information purposes only and shall not constitute an offer to buy/sell or the solicitation of an offer to buy/sell any security mentioned in this report, nor shall there be any sale of the security herein in any state or domicile in which said offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or domicile. This publication and all information, comments, statements or opinions contained or expressed herein are applicable only as of the date of this publication and subject to change without prior notice. Past performance is not indicative of future results.

IMPORTANT DISCLOSURESWithin the past 30 days, a Noble Financial Company Research employee and/or their immediate supervisors have not effected a transaction for their own account(s) in the investment(s) referred to in this report, nor will such a transaction take place within 5 days of its publication.

A Noble Financial Company intends to seek investment banking business with this company in the next three months. A Noble Financial Company is not a market maker in the subject company.

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WARNINGThis report is intended to provide general securities advice, and does not purport to make any recommendation that any securities transaction is appropriate for any recipient particular investment objectives, financial situation or particular needs. Prior to making any investment decision, recipients should assess, or seek advice from their advisors, on whether any relevant part of this report is appropriate to their individual circumstances. If a recipient was referred to a Noble Financial Company by an investment advisor, that advisor may receive a benefit in respect of transactions effected on the recipients behalf, details of which will be available on request in regard to a transaction that involves a personalized securities recommendation. Additional risks associated with the security mentioned in this report that might impede achievement of the target can be found in its initial report issued by a Noble Financial Company. This report may not be reproduced, distributed or published for any purpose unless authorized by a Noble Financial Company.

U.S. CLIENTSFor purposes of distribution in the United States, this report is prepared for persons who can be defined as "Institutional Investors" under U.S. regulations. Any U.S. person receiving this report and wishing to effect a transaction in any security discussed herein, must do so through a U.S. registered broker or dealer. Noble International Investments, Inc. is a U.S. registered broker dealer.

RESEARCH ANALYST CERTIFICATIONIndependence Of ViewAll views expressed in this report accurately reflect my personal views about the subject securities or issuers.

Receipt of CompensationAll or part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views in the research report.

Ownership and Material Conflicts of InterestNeither I nor anybody in my household has a financial interest in the securities of the subject company or any other company mentioned in this report.

Additional information is available upon request. Any recipient of this report that wishes further information regarding the subject company or the disclosure information mentioned herein, should contact Noble Financial by mail or phone.

Noble International Investments, Inc., dba Noble Financial Capital Markets is a FINRA registered broker/dealer.Member - SPIC (Securities Investor Protection Corporation)

NFCM RATING DEFINITIONS % OF STOCKS COVERED % OF IB CLIENTS

BUY: potential return is >15% above the current price 63% 24%

HOLD: potential return is -15% to 15% of the current price 26% 2%

SELL: potential return is >15% below the current price 5% 0%

Report ID: 5320

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flws initiation

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