Shutterfly Rides On Restructuring Efforts Amid Headwinds

On Sep 26, we issued an updated research report on internet-based social expression and personal publishing service provider, Shutterfly, Inc. (NASDAQ:SFLY) .

Efforts to Improve Operational Efficiency

Shutterfly has undertaken various structural changesas announced in fourth-quarter 2016. In fact, the company plans to retire many of its other brandsin order to focus more on profitable and cost-effective brands. Also, the existing customers will be migrated to one common website and all other websites will be shut down as has already been done for its Tiny Prints brand.

Thus, Shutterfly plans to invest in a single Consumer platform with all customers gaining from investment in the Shutterfly.com site in the near term. This, in turn, is likely to reduce complexities of usage to a large extent, consequently increasing customer satisfaction.

Additionally, one of the largest structural changes made by the company is to reduce workforce by approximately 13% or 260 employees. This is expected to result in an annualized cost decrease of roughly $25 million.

Meanwhile, Shutterfly signed a follow-on deal with Hewlett Packard Enterprise Company (NYSE:HPE) in the last quarterto upgrade its printer fleet. Markedly, the underlying lease in the deal is expected to result in expense savings of $15 million over the next five years. Going forward, these higher quality and more efficient printers are anticipated to help improve Shutterfly’scost structure while using automation to reduce its reliance on seasonal labor.

Furthermore, the company intends to improve operational efficiency and open new manufacturing facilities or consolidate the existing ones for future expansion.

Added Growth Initiatives

Shutterfly is well focused on product innovation as a core part of its strategy to drive sales growth. It plans to re-invest in Tiny Prints as its premium cards & stationery brand and create a Tiny Prints boutique on a dedicated tab on Shutterfly.com. Additionally, the company intends to focus on the new Shutterfly Wedding Store as a part of its wedding strategy in the long run.

Last year, Shutterflyadded more products to its newly launched statement gifts category, besides enhancing home décor category as well as cards and stationery category.

In fact, the company is making progress with its Shutterfly 3.0 initiative, which encompasses a new integrated photo management solution also called the All New Shutterfly. This photo management service is anticipated to deepen the company’s relationships with its customers and drive sales over time.

Furthermore, the company’s focus on improving technology-related offerings seems to bode well. Evidently, Shutterflyhas been continuously enhancing its mobile experience and optimized navigation, and also working on the look and functionality of its websites.

Meanwhile, the company’s improved mobile app continues to drive a record number of customers, thus expanding its mobile footprint.

In the second-quarter 2017, the company saw one million downloads of its app on the back of successful marketing efforts. Moreover, mobile sales that include both mobile web and mobile app, accounted for 25% of the Shutterfly brand revenues in the quarter, which was an increase of more than 600 basis points year over year.

Overall, mobile continues to grow at a significantly faster rate than the company’s desktop business, and is expected to become an important growth driver in the near term.

Potential Headwinds

Shutterfly generally incurs loss in the first three quarters and makes profit in the final quarter of every year because of the seasonal nature of its business. Also, it is affected by vacation and other travel trends as these drive digital camera sales. Therefore, weaknesses in the travel industry owing to macro-economic slowdown or political instability can hurt the company’s business.

Additionally, competition from other companies selling greeting cards or stationery at highly competitive prices on eBay Inc. (NASDAQ:EBAY) and Amazon.com, Inc. (NASDAQ:AMZN) , is a threat to Shutterfly’s topline.

Notably, the company has been incurring higher costs pertaining to the accelerated development of new production facilities along with a rise in the manufacturing, labor and training costs. In fact, with the announcement of the major restructuring goals, the company expects to incur restructuring charges ranging from $15 million to $17.5 million in 2017. These costs could weigh on the company’s margins.

Shutterfly’s revenue growth has also been slow over the past couple of years. This is because the company had spread its resources thin across many businesses, brands and platforms, making it impossible to dedicate the right level of resource to each one.

Although the company has undertaken huge structural changes to this end, 2017 is expected to be a transition year for them, with different brands transitioning at different times over the course of the first three quarters. Thus, the company projects net revenues in 2017 to grow a meager 1% over last year.

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