Valentine’s Day has come and gone…thank goodness for the latter. Unfortunately, I would sell the naming rights to my first-born son to avoid the former.

It’s not a pleasant thought, I know. But frankly, I couldn’t care less.

You see, my family has been in the retail flower business for over 20 years. My father bought the business to give his wife an afternoon activity…a creative outlet of sorts, nothing more.

As the 10-year-old son of an aspiring floral stylist, I spent a majority of February 14 stuck inside the back of a beat-up white delivery van, trying desperately to balance multiple glass vases filled to the brink with ice-cold water as the driver made his way along the bumpy mountain roads of southeastern West Virginia.

Flower delivery isn’t for the faint-hearted, especially on V-Day. It’s a war zone.

Most assume it’s is the traditional day on which lovers express their love for one another; sending cards, candy and flowers…all the sentimental mush that covers a florist’s rent.

That’s true… But what most people neglect to see is the true motivation behind these jesters.

Case in point: A 10-year-old son steps out of the van, crosses the unraked yard and cautiously approaches the adversary’s house. He rings the doorbell. No barking yet… That’s a good sign.

A young nurse our young hero recognizes from his father’s clinic opens the screen door.

Nurse: “Who are those from?”

Hero: “I don’t know maam… I don’t read the cards.”

Nurse: “Are those from Roy…(dramatic pause)…or Billy.”

Hero: “I really don’t know ma’am… I just deliver.”

Nurse: “Well read the card!”

Our hero falls victim to the trap. He reads the card. “Please forgive me… I’ll never do it again,” it says.

“That *&*!,” she screams… “Do you know what he did?” Of course I don’t… I’m 10 years old. And even if I did, I probably wouldn’t understand. Regardless, she stands in her nightgown, curlers, a Virginia Slims cigarette dangels from her left hand with The Price is Right blaring in the background. She contines her assault.

Apparently, Roy strayed. But he isn’t no dummy. He sent me to absorb the wrath. That’s all too common in this business.

She continues to bombard our hero with her boyfriend’s promiscuous extracurricular activities as the getaway van starts to honk. But I can’t get out. And if I do, the odds that some under-fed, under-appreciated pit bull sits lurking in the shadows becomes overwhelmingly apparent. I take off, so does he. She yells “He just wants to play” as I dash towards the van with “Bruiser” nipping at my heels. Apparently, this 115-pound monster turned out to be another “gift from Roy.”

So goes the life of floral delivery boy.

The point is: Most people associate flower shops with nothing but positive associations. Occasions like Valentine’s Day and Mother’s Day are certainly big. And if you’ve ever seen the flower bill for even the average wedding, you would think florists were running the greatest racket since the Dutch Tulip Mania of the 17th century.

But sad the truth is… Flower shops aren’t built for any holiday season. They’re in business for funerals.

Funerals account for roughly 75-80% of annual revenues. Nothing affects a flower shop’s annual bottom line more.

As the shop’s accountant once said… “We live for funerals.”

People in the flower business know this quite well. They can’t rely on seasonal holidays, birthday balloons, or even the senior prom to keep business running strong.

The reason: Flowers are luxury items. They’re completely elastic. Meaning, as disposable income decreases, quantity demanded decreases.

As an economic indicator, you’d be hard pressed to find another business that accurately measures the sensitivity of a change in a consumer’s income than flower shops.

Unlike jewelry and other more notable luxury items, flowers have a very limited shelf life. So when things get tight for Roy, flowers are undoubtedly the first to go.

Even with funerals, what do you think goes first…the flowers or the coffin?

You get the idea.

So when revenues from Wednesday’s festivities don’t even cover the day’s cost of labor, you know Johnny Credit Card is becoming legitimately tight.

In yesterday’s Sleuth, editor Craig Walters likened the increase in violent crime to the start of a contraction in the business cycle. Craig noted that, according to Barron’s, stickups rose significantly in ‘73, ‘80, ‘81, ‘90, and ‘01. These were all years that the U.S. entered recessions.

Either way you slice it, crime is up and the flower business is down.

If my statistics on flowers and Craig’s on crime don’t convince you, perhaps the fact that the percentage of U.S. companies that failed to meet earnings expectations reached its highest level in more than two years. Twenty two percent of the S&P failed to meet fourth quarter earnings estimates.

That’s a significant milestone considering most U.S. companies, unlike their European counterparts, set their own yardsticks to analysts.

The lesson here is if we were indeed heading for a couple of quarters of negative GDP growth, you’d be wise to hold small-cap stocks with very negative income elasticity.

Meaning, as disposable income decreases, the quantity demanded for a particular company’s goods or services increase.

Economists call these items inferior goods. Inexpensive foods like Campbell’s soup and mass-market beer are viable substitutes for Petit Filet and French wine.

Keep an eye out for small-cap stocks that produce these goods.

Until Next Time,
Christopher Hancock
February 16, 2007
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Christopher Hancock

Christopher Hancock lives and breathes emerging markets. He travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

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