Gerald Stevens, Inc.

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Gerald Stevens, Inc.

301 East Las Olas Boulevard
Fort Lauderdale, Florida 33335
U.S.A.
Telephone: (954) 713-5000
Toll Free: (800) 333-8483
Fax: (954) 713-5020
Web site: http://www.geraldstevens.com

Public Company
Incorporated: 1998
Employees: 3,775
Sales: $110.59 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: GIFT
NAIC: 44422 Nursery and Garden Centers

Gerald Stevens, Inc. is the largest floral retailer in the United States. After rapidly consolidating the highly fragmented floral industry during the last years of the 1990s, the company operates more than 350 floral shops. In addition to its retail locations, Gerald Stevens also markets flowers, plants, and gifts through catalogs, direct mail, telegraph service, telephone orders, and via the Internet, offering same-day delivery throughout the nation.

Origins

Gerald Stevens began with a single, albeit ambitious, goal: become the largest specialty retailer of flowers in the United States. At stake was the approximately $16 billion domestic floral market, an industry populated by 50,000 operators and dominated by no one. The industry was highly fragmented, representing an ideal opportunity for a company to act as a consolidator and, floral shop by floral shop, secure lucrative market share. Such was the objective of Gerald Geddis and Steven Berrard, two high-profile executives who founded Gerald Stevens in January 1998. Geddis and Berrard had worked together at Blockbuster Video, the giant video rental chain that had achieved its considerable mass by consolidating the video rental industry. Geddis had served as the company’s president and chief operating officer. Berrard had served as Geddis’s superior, holding the title of chief executive officer. By 1997, Blockbuster, which had been purchased by Viacom Inc. three years earlier, was experiencing serious difficulties, convincing Viacom’s chairman, Sumner Redstone, that wholesale changes were needed to protect his investment. As part of the company’s reorganization, corporate headquarters were moved from Florida to Texas. Geddis and Berrard stayed behind, leaving the company in 1997. Although they conceded they knew nothing about running a floral business, Geddis and Berrard were intimately familiar with the riches consolidation could bring. The pair shied from the comparison, but industry analysts dubbed Gerald Stevens the Blockbuster Video of flowers.

“Our goal is to nationally brand our product,” Geddis declared in a November 27,1998 interview with Business First-Columbus. Although the company would fall short of making the Gerald Stevens name a national “label” for flowers during its first several years in business, it did score success in acquiring scores of florist shops, an inherent aspect of creating a national brand. Geddis and Berrard formed New River Capital, a venture fund, to serve as the financial vehicle to drive their acquisition campaign forward. The principle of economics underpinning Geddis’s and Berrard’s strategy was the economies of scale Gerald Stevens would realize as the umbrella organization for a national network of floral shops. As a group, Gerald Stevens floral shops would realize appreciable savings through volume buying and efficiencies in payroll, insurance, and administrative functions. As a group, the shops would benefit from increased advertising, eclipsing by far the marketing efforts the shops could afford independently. Further, the shops would benefit from any affiliations the corporate office forged with flower growers, adding to the incentive for floral shops to join Gerald Stevens.

Once Gerald Stevens started to expand, it did so with frenetic energy. After receiving a $20 million credit line from Nationsbank, the company raised $21 million in a private placement arranged by Allen & Company Inc., giving it the resources to embark on a prodigious acquisition campaign. The private placement of stock was completed in October 1998; the same month, the company acquired AGA Flowers, Inc., a floral import business based in Miami, Florida, the addition of which represented an important step toward the development of a same-day distribution system. During the next two months, Gerald Stevens dove headlong into the acquisition mode, purchasing 72 floral shops in ten domestic markets and entering into agreements to acquire an additional 41 stores in existing markets and in five new markets. Easily the most important acquisition agreement reached during this period occurred on December 10, 1998, when the company announced a reverse merger with Florafax International, Inc. The effect on Gerald Stevens’ stature was profound.

1999 Merger with Florafax

Based in Vero Beach, Florida, Florafax was the fourth largest flowers-by-wire provider in the United States, having been founded in 1995. The company directed orders from consumers to its 5,300 member florists located in all 50 states, the Bahamas, Bermuda, Puerto Rico, and the U.S. Virgin Islands, serving as a powerful go-between. Through a wholly owned subsidiary named The Flower Club, Florafax also marketed flowers and gifts directly to customers. The merger provided ample evidence of Geddis’s and Berrard’s intent to develop a complete distribution infrastructure capable of serving customers wherever and however they wished to purchase and send flowers. The founders were striving to develop the capability to market flowers not only at retail locations, but also through catalogs, direct mail, the Internet, and through telephone orders.

In addition to its strategic importance, the merger with Florafax ushered Gerald Stevens into the public spotlight. According to the details of the transaction, publicly held Florafax in essence acquired Gerald Stevens and then changed its name to Gerald Stevens, making a new entity, with Geddis and Berrard in charge, that debuted on the NASDAQ National Market System. Based on the value of Florafax’s stock price at the time of the announcement, the combined companies boasted a market capitalization of $350 million.

As Gerald Stevens entered 1999, company officials worked on finalizing the Florafax merger, which was not expected to be completed until March 1999. Meanwhile, the company adhered to its strategic plan, relentlessly pursuing expansion. In January 1999, the company acquired seven floral retailers that operated 21 retail stores. Significantly, the acquisitions moved Gerald Stevens into four new markets—Salt Lake City, Milwaukee, St. Petersburg, Florida, and Savannah, Georgia—solidified the company’s presence in existing markets, and provided the company with three new hub facilities that served satellite stores. In February 1999, the company acquired Internet Services, LP, the parent company of FlowerLink, which added another important distribution channel. FlowerLink, through its Internet commerce site, www.flowerlink.com., provided customers with access to nearly 1,000 floral shops throughout the country for delivery nationwide.

By May 1999, seven months after beginning its expansion campaign in earnest, Gerald Stevens held sway as the largest floral retailer and marketer in the country. The company operated 125 stores, most as free-standing units, acquiring floral shops at a rate of one every other day. In May 1999, the company continued with its development of a nationwide distribution infrastructure by announcing the acquisition of $20 million-in-sales Calyx & Corolla Inc. Based in San Francisco, Calyx & Corolla had been founded by Ruth Owades, a mail-order entrepreneur who developed Gardener’s Eden into a $15 million-in-sales catalog enterprise before selling out to Williams-Sonoma in 1987. With Calyx & Corolla—ranked as the leader in Internet and telephone flower delivery—she opted for the same conclusion, but cashing out did not signal the end of her relationship with the business. Instead, she became part of the Gerald Stevens team, taking a seat on the company’s board of directors and continuing to run Calyx & Corolla under its own name. Geddis and Berrard were the first to point out that they had little practical knowledge of how to run a floral business. Consequently, when Gerald Stevens acquired a floral business, it also absorbed the individuals who previously had managed the business, acquiring managerial expertise as its stature swelled.

By the fall of 1999, Gerald Stevens had earned two significant distinctions. The company ranked as the largest floral retailer in the country and as the fastest-growing concern in the industry. During the preceding year, the company had acquired more than 230 retail floral shops and established a presence in 28 states, with the total number of stores increasing by the week. By October, Gerald Stevens’ corporate offices could no longer adequately house the company’s staff, which, nationally, had increased from nine employees to 3,000 employees within a year. Office space was tripled, adding a new facility for the accounting and marketing teams and providing room for anticipated growth. According to the company’s estimates, it controlled nearly 1.5 percent of the $16 billion market, leaving tremendous room for growth. Within the next five years, management expected to expand to at least 1,000 stores nationwide, to establish a presence in the 100 largest markets, and to develop 50 additional markets. Expectations were high, but as employees settled into the new building at Port Everglades, the feverish growth of the previous year began to produce worrisome results.

Company Perspectives:

Our goal is to become the premier specialty floral and gift retailer and marketer in the United States. We intend to accomplish this by selling a broad selection of floral and floral-related products, providing superior customer service and building strong customer loyalty. Because of our management team’s extensive experience in developing nationally branded specialty retailers, we believe we have the skills and experience necessary to establish Gerald Stevens as the preeminent brand in the floral industry.

Mounting Financial Losses in 1999

For Gerald Stevens, explosive growth through acquisitions delivered remarkable revenue growth and dismal profitability. During the third quarter of 1999, sales jumped from the $4.7 million registered during the third quarter of 1998 to $36.3 million, but the revenue increase also coincided with a net loss of $1.2 million. The loss was attributable to the overhead costs incurred from developing a corporate structure capable of managing a massive national chain, as Geddis and Berrard struggled to keep ahead managerially and administratively with the company’s physical growth. At the time, analysts projected that the company would be profitable by February 2000.

Undaunted by the financial loss, Geddis and Berrard ended 1999 demonstrating the same aggressive behavior as they had shown at the start of the year. Late in the year, the company opened its first store under the Gerald Stevens brand name in Boca Raton, Florida. The development of the Gerald Stevens name into a national brand had been purposely slowed because most of the acquired stores enjoyed a loyal customer base— customers the company did not want to lose by quickly eliminating the local identity of the acquired stores. Instead, Gerald Stevens eased its stores through the transition. Concurrent with the opening of the Boca Raton store, the company began co-branding its others stores with the Gerald Stevens name in advertisements, seasonal catalogs, and direct mail deliveries. Additional Gerald Stevens branded stores were scheduled to open in Atlanta and Fort Lauderdale in February 2000, with other markets gained their own branded stores later in the year.

As the company took its first methodical steps toward fostering familiarity with the Gerald Stevens name, it also stepped beyond U.S. boundaries for the first time. In November 1999, the company gained access to the Toronto, Canada market in a month-long acquisition spree that added 51 floral and gift shops to its fold. Included within the month’s purchases was the acquisition of Johnston The Florist, the largest chain in Pittsburgh and the fifth largest chain in the United States. By the end of the year, Gerald Stevens operated more than 300 retail locations, but as it entered the new century the mounting financial losses could not be ignored.

In 1999, Gerald Stevens posted a $12.3 million net loss. In the first half of 2000, the pattern of rapid escalating revenues and falling profits repeated itself. In the third quarter of 2000, revenues increased from $36.3 million during the same period in 1999 to $83.7 million, as the company’s net loss increased from $1.2 to $3 million. The continuing losses and the inability of the company to meet analysts’ projections translated into a declining stock price, serving as an unwelcomed catalyst for change. By June 2000, the company’s stock price had taken a 52-week plunge from $16 per share to $1.75 per share, forcing management to amend it expansion plans. The goal of reaching 1,000 retail locations by 2005 was shelved, primarily because of the depressed stock price, which was used as an acquisition currency. At the time, Gerald Stevens operated more than 350 stores, but with further acquisitions put on hold, the company focused on implementing cost-cutting measures. Said Geddis in a June 16, 2000 interview with South Florida Business Journal: “We built our corporate overhead to support a substantially larger company than we are today. Given our recent decision to temporarily suspend acquisitions, we have brought that overhead back in line with the needs of current businesses.”

Considering the company’s strengths, the future of Gerald Stevens was promising. The company controlled a nationwide network of stores, the ability to market flowers and gifts through every distribution channel, and was presided over by practiced corporate veterans. Much had been accomplished during the company’s formative years in business, and much remained to be done, but assuming that management was able to turn Gerald Stevens’ dominant market position into a profit-producing enterprise, the first decade of the 21st century promised to witness a single, unrivaled king of the retail floral industry.

Principal Subsidiaries

Florafax International Inc.; Calyx & Corolla Inc.

Principal Competitors

1-800-FLOWERS.COM, Inc.; Roll International Corporation; IOS Brands Corporation.

Key Dates:

1998:: Company is founded to consolidate the retail floral industry; reverse merger with Florafax International is announced.
1999:: FlowerLink, an e-commerce floral concern, is acquired; Calyx & Corolla Inc. is acquired.
2000:: Acquisition campaign is temporarily halted.