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Why 1-800-Flowers Has Upside

1-800-Flowers' (NASDAQ:FLWS) continued investment in new technology could boost its financial performance through increasing its differentiation versus peers.

The floral and gourmet foods gift retailer is focusing on improving the customer experience and becoming more innovative, which could strengthen its competitive position.

The stock's valuation and earnings forecasts suggest that it has further capital growth potential after its 25% rise in the last year.

Improving customer experience

The company's focus on improving the customer experience could widen its economic moat. For example, it launched a digital self-service portal in the last fiscal year that enables its customers to have greater control over their orders. They are able to make changes to their delivery dates, addresses and gift messages, which has led to an increase in the company's customer satisfaction metrics.

In addition, the company's SmartGift gifting application provides greater product differentiation versus its sector peers. It allows the company's customers to send a gift even when they do not have their recipient's address, with the recipient having flexibility in terms of their choice of gift and its delivery date. This not only provides the company's customers with a greater degree of convenience, it also involves recipients of 1-800-Flowers' products in the gifting experience. This is expected to widen its customer base, as well as providing the business with additional data and insights into its recipients that can be used to increase its customer engagement levels.

Innovation

The business is increasingly utilizing artificial intelligence (AI) in order to differentiate its offering versus sector peers. AI is boosting the company's digital marketing potential, since it enables the business to offer greater personalization to its potential and its existing customers. Additionally, the company's use of AI extends to its gift concierge, "Gwyn", which helps 1-800-Flowers' customers to search for gifts, ask for assistance and place orders.

The company continues to invest in its mobile app, with its introduction of new Progressive Web App (PWA) technology leading to improved speed and functionality for its mobile users. Alongside this, the business is testing new technology innovations that are designed to help its customers to express themselves when sending gifts. For example, the business has invested in an augmented reality gift messaging feature on its mobile app called smart message. It could improve 1-800-Flowers' gift-giving experience and boost loyalty across its customer base.

Potential risks

The company faces an uncertain operating outlook as a result of weak consumer confidence. Consumer sentiment has declined through 2019 to reach its lowest point since the start of the year. Since 1-800-Flowers sells discretionary items where consumers can trade down to cheaper options, its sales performance may be negatively impacted by the ongoing trade dispute between the US and China.

Further, the company may be negatively impacted by increasing labor costs due to low unemployment levels and rising minimum wages. This could put its margins under pressure in future.

In response to rising labor costs, the company is expanding its cold storage facilities to prebuild some inventories using its core employee base during periods of lower demand. This could reduce its requirement for higher staff numbers during periods of peak demand.

In order to combat a potential slowdown in retail spending, 1-800-Flowers is investing in improving its range of products in order to broaden its appeal to a wider customer demographic. For example, it is introducing products that occupy a greater range of price points. In addition, it is focusing on products that appeal to millennial customers, since millennials are expected to make up over one third of total retail sales in the U.S. by 2020.

Outlook

1-800-Flowers is forecast to record a rise in its earnings per share of 19% in the next fiscal year. Its forward price-earnings ratio of 27 suggests that it offers fair value for money.

The company's investment in new technology and its focus on innovation could enable it to produce further capital growth following its 26% outperformance of the S&P 500 in the last year.

Disclosure: the author has no position in any stocks mentioned.

This article first appeared on GuruFocus.