Opinion: Shutterfly shakeup in wake of soft sales

Shutterfly Inc.‘s announcement of its fourth-quarter earnings shook up more than its investors, who dropped the company’s stock 13 percent by this morning. The board also announced the upcoming departure of CEO Christopher North, who shepherded the company for three years and orchestrated the purchase of Lifetouch Inc., and the formation of an exploratory committee to explore options for the company, including selling it.

While the company’s topline grew last year, as a result of contributions by Lifetouch, the Shutterfly Consumer business is still a matter of concern. Particularly weak: TinyPrints, which saw a 17 percent drop in sales in the key holiday segment.

Christopher North, CEO, Shutterfly, will step down in August.

“Starting with the Shutterfly consumer segment, net revenues was $528 million or 1% year-over-year increase,” said North, in the quarterly analyst call. “Within this segment, Shutterfly brand revenue growth of 3% was offset by a decline of 17% in the Tiny Prints boutique. Our weak overall results in consumer were particularly disappointing given that in so many areas our strategic investments are delivering results, most notably in mobile and in category and range expansion. Mobile has significantly outperformed our expectations with mobile purchases increasing 560 basis points year-over-year to 27% of total Shutterfly brand revenue in Q4 and app revenue increasing 68% year-over-year to $97 million.”

In a conversation with analysts Tuesday, North stated the company has been fielding inquiries.

“We’ve had interest from a number of parties over the last several years, frankly, as recently as the last couple of months,” said North. “But we don’t think it’s prudent to get into just disclosing whether it’s a strategic or financial buyer…In recent months, Shutterfly was approached by a third party about the potential acquisition of the company. The company and board subsequently engaged with several additional third parties regarding a potential acquisition of the company, but no proposals have been received. ”

According to MarketWatch:

Amid all that change, a bigger shift may be in the making. Shutterfly said Tuesday afternoon that it had been approached by a potential acquirer, and its board has reached out to other potential buyers. No proposals have been received, but the company brought Morgan Stanley on as a financial advisor as it mulls its strategic alternatives.

The acquisition news probably didn’t surprise SunTrust Robinson Humphrey analyst Youssef Squali, who wrote in a note ahead of earnings that private-equity firms have been sniffing around and would probably jump at any sign of weakness.

“With the public markets giving little-to-no credit for execution in core and Lifetouch cost/revenue synergies, we would not be surprised to see an activist investor and/or private equity firm take interest in Shutterfly again,” Squali wrote in a Feb. 1 note. “ We note that we’re aware of at least two instances of PE interest in the last 2-3 years.”

Source: Shutterfly analyst presentation

Missing the cards

Several analysts on the call expressed surprise regarding the weakness in the TinyPrints business. North conceded there was intense price competition in cards this year, but also acknowledged customer preferences are changing, especially at the “value-end” of the spectrum, from photo paper to inkjet.

“It’s about having the right cards offering, the right design, the right formats,” he explained. “And frankly, we did not have the right offering for our more value-oriented consumer. We had in 2018, as we have had in prior years, focused our value offering on photo-paper based cards. And what we saw in 2018 is the battle for the value customer really switched into card-stock based cards. That’s an area where we can be very competitive. We have meaningful cost advantages in particular around card-stock based cards. But our value offering in 2018 was focused on photo paper, so even assuming that’s clearly we’re going to think about through 2019.”

Growth in mobile

North provided some interesting data about the growth in mobile uploads and product development, but customer response has not yet yielded growth.

“The Shutterfly app also drove a large increase in photo uploads,” he said. “In Q4 customers uploaded 2.7 billion photos, a 34% increase over the fourth quarter of 2017. We now manage more than 50 billion photos in Shutterfly Photos on behalf of our customers, a valuable source of not only loyalty and engagement but also a large data set to train our algorithms on to further simplify and enhance customer experience. Personalized gifts in home décor (also known as PGHD) delivered a significant reacceleration of growth thanks for the faster rate of new product introduction, as well as the new categories. We launched 47 new products in 2018, double the number launched in 2017, while also introducing the new kids and pets’ categories.”

Driving cost synergies with Lifetouch

Shutterfly management also expects greater synergies between Lifetouch and Shutterfly, including the rationalization of facilities. The company plans to implement a common manufacturing platform, under an initiative called Project Aspen, which will yield $130 million in cost savings over five years. Initially, this means the closure of four legacy Lifetouch plants – two of which were previously announced – and now plants in Chico, Calif., and Chattanooga, Tenn., will be shuttered this year. Shutterfly also plans to open a new 237,000 square-foot facility in Texas in the first half of 2020, which will serve both Lifetouch and Shutterfly.