We remain Neutral on Shutterfly Inc. (SFLY) over the long-term, based on first quarter 2011 earnings, acquisition of Tiny Prints and the possibility of a turnaround in the commercial printing business, partially offset by seasonality of business.
We are impressed with Shutterfly’s outperformance in the first quarter, which was mostly attributed to robust growth in Personalized Products and Services. Increased demand for photo book, cards and stationary collection drove this segment. Photo books, cards and stationery, contributed as much as 60% to total net revenue and grew a whopping 40% year over year.
Shutterfly is focused on growing its business through strategic partnerships with retailers and acquisitions. During the first quarter, Shutterfly completed the acquisition of Tiny Prints, a privately held company that operates tinyprints.com and weddingpaperdivas.com, two fast growing e-commerce brands.
This was the largest acquisition in the company’s history and is anticipated to increase activity in the cards and stationary category, especially ahead of the summer wedding season. Shutterfly also looks forward to some initial cross-selling opportunities between photo books, calendars and share sites. These would lead to some synergies which Shutterfly will enjoy in the third and fourth quarters of 2011.
Shutterfly is also focused on building a successful commercial printing business and forming a sponsorship and advertising program. In November 2010, the company had acquired certain assets and liabilities of Texas-based WMSG Inc., a privately held digital direct marketing company.
We believe WMSG's digital marketing and print-on-demand solutions will help Shutterfly to expand its presence in the commercial print market. Shutterfly is counting on this expansion for an alternative use of its non-seasonal manufacturing capacity.
However, Shutterfly’s business is highly seasonal. The company generates a large proportion of its earnings during the fourth quarter of every year, which is the holiday season. More than 50% of net revenues also come from the fourth quarter. This trend suggests seasonally weak quarters ahead. The company expects to post a GAAP loss of 46 cents to 35 cents per share in the second quarter.
Additionally, WMSG and Tiny Prints acquisitions are still in early business development stages and are likely to take some time to materialize. Management expects to incur approximately $6 million one-time costs related to the Tiny Prints acquisition, with approximately $3 million occurring in second quarter.
The company’s competitors include LookSmart Ltd. (LOOK) and Photoworks and Webshots brands of American Greetings Corp. (AM). These companies offer certain services similar to those of Shutterfly and in some cases at lower price points.
Agreement –– Estimate Revisions
Over the last 30 days, there was no movement in Shutterfly’s earnings estimates. The current Zacks Consensus Estimate is a loss of 39 cents for the second quarter reflecting a year-over-year decline of 78.3%.
Based on the above fundamentals, we expect the company to perform in line with the market. The quantitative Zacks #3 Rank (short-term Neutral rating) for the company indicates no clear directional pressure on the stock over the near term.
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