) is an online retailer and manufacturer of personalized photo
products and services, with brands such as Shutterfly, Tiny Prints,
Treat and Wedding Paper Divas in its brand portfolio. Market
capitalization for the company stands at about $1.75 billion.
Business for the company is highly seasonal, with Shutterfly
generating more than 50% of annual revenues in the fourth
quarter, when demand is elevated by the holiday season. Within this
seasonality, the company has seen consistent growth in its top line
for 51 quarters, fueled by inorganic as well as organic growth.
For the nine months in 2013, Shutterfly reported revenues of
$373 million, a 29% increase over the prior year $289 million. For
the forthcoming fourth quarter, Shutterfly expects revenues between
$392 - $405 million. However, this growth in revenues for the
company comes at the cost of negative operating and net income
margins. Operating and net income margins for the January -
September period stand at (-22%) and (-9%) respectively. A year
ago, these margins were (-21%) and (-10%) during a comparable
In this article, we take a look at various factors impacting
Shutterfly's business for the fourth quarter. We have a
Trefis price estimate for Shutterfly
, which is nearly 7% above the current market price.
Check out our complete analysis of Shutterfly
Improved Discretionary Spending Levels, Acquisitions To
Support Impressive Top Line Growth Trajectory
As stated earlier, Shutterfly's business is highly seasonal and
bulk of the revenues are generated during the holiday season.
Additionally, the company's revenues are dependent on the state of
the U.S. economy. During the recessionary period of 2008 - 09,
Shutterfly's revenue growth rate declined to 14% and 15% in fiscal
2008 and 2009. Post recession, top line growth for fiscal years
2010, 2011 and 2012 climbed to 25%, 54% and 35% respectively.
Shutterfly's revenues are highly correlated with consumer spending
levels within the U.S., and given the positive outlook on holiday
season e-commerce sales showcased by logistics operators FedEx
) and United Parcel Service (
) this year, we believe Shutterfly's Q4 guidance is on the
conservative side. We note too that analysts' revenue consensus
estimates are at the high end of guidance..
We expect factors such as a stronger U.S. economy, increased
discretionary spending, and strategic partnerships with traditional
brick-and-mortar retailers such as Costco (
) to contribute to an expansion in total customers purchasing
Shutterfly's products going forward. This is despite Shutterfly's
termination of a part of the partnership with Costco relating to an
reduction in price of its Tiny Prints cards could offset revenues
by more than the expected $8 million and decrease total customers
for the company.
In organic growth will contribute as well. Shutterfly
R and R Images
in Q3 and Q4 which should support top line growth going forward.
These acquisitions are an addition to Shutterfly prior acquisitions
Photoccino, Penguin Digital
and Kodak Gallery's online photo service.
R and R Images
is a digital marketing solutions provider while
is a premier online marketplace for photographic and video
equipment rentals. These acquisitions could spur growth in
Shutterfly's Enterprise Customer base going forward. Revenues from
enterprise customers also tend to be contract-based and recurring
in nature, lasting across a time period as opposed to individual
product sales which are immediate, which could be beneficial to the
company's long term success. Currently, Shutterfly's revenue split
between individual and enterprise clients stands at 93%:07% for the
nine months in 2013.
Shutterfly's average price per order could see some uptick
following an expansion in the company's premium line of products
across brands such as the flagship Shutterfly brand, Tiny Prints
and Photo Books. Moreover, services such as expedited shipping and
next day delivery could support an increase in Shutterfly's average
price per order in Q4 primarily due to the shortened holiday season
Margins Could See More Downward Pressure
Shutterfly operates in a highly competitive industry. While the
company provides a complete suite of services from sharing to
designing to printing, it faces stiff competition from providers
such as Snapfish and VistaPrint. Shutterfly has been spending
heavily on sales and marketing activities to promote its own
products. As a percentage of revenue, marketing expenditure for the
company has grown from 18% in 2007 to 23% in 2012. For the nine
months in 2013, marketing spend stands at approximately 29.5%.
However, much of this spend is an upfront investment to support
holiday season sales for the company.
Going forward, we anticipate operating and net income margins to
continue to see downward pressure due to intense competition within
the industry. On the flipside, a migration to premium products
could offset this to a degree. Moreover, net income margin for
Shutterfly is expected to be pressurized in the near term by an
increase in tax burden from the acquisitions made in 2013 as
revenue generation lags expenses incurred.
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