Focusing On AOV Should Drive Shutterfly Higher

Shutterfly (NASDAQ:SFLY) is an American online personalized photo retailer that sells various products such as its flagship photo books, cards, in addition to other services. The company has a market capitalization of about $1.6 billion and registered annual revenues of approximately $784 million in fiscal 2013. In addition to its core Shutterfly brand, the company has acquired various companies and other complimentary brands to  increase its customer base.

Shutterfly reported revenues of approximately $137 million in Q1FY14, 17.5% higher from a similar period in FY13. Revenues from its customer products business, which includes revenues generated from the sale of products and services through the Shutterfly, tinyprints, treat, thislife and other brands, registered a 19% increase in the quarter to reach $131 million. The total number of transacting customers increased 14% during the period to reach 2.6 million during the quarterly period. Comparatively, the total number of transacting customers increased 20% during Q1FY13 to reach 2.2 million.

In addition to slowing growth in its customer base, growth in Shutterfly’s average order value (AOV), which indicates the average amount spent by a customer in a year, has decelerated continuously. AOV during Q1FY14 stood at $33.76, 5% higher on a year-on-year basis. Comparatively, AOV during Q1FY13 was $32.13, 7% higher on a year-on-year basis.

In this note, we take a look at various drivers that could negate the slowdown in Shutterfly’s business. We have a Trefis Price Estimate of $49, approximately 18% higher than its current market price of $42.

See our complete analysis of Shutterfly

Providing Aggressive Discounts Curbs Revenue Growth

Although Shutterfly’s customer base has started to show signs of saturation, with a steady declining acquisition rate every quarter, we believe concentrated efforts on improving the average spend from a customer should drive overall revenues higher. Shutterfly’s AOV for FY13 stood at $40.19 compared to $37.58 in FY12. The higher AOV for full fiscal year compared to a quarterly period is due to the significantly higher revenue share from the fourth quarter. Shutterfly derives more than 50% of annual revenues from its fourth quarter, driven by high demand during the holiday season period. For this reason, Shutterfly’s AOV remains considerably higher in the fourth quarter than the AOV for the remaining three quarters.

We believe the company could re-accelerate its top line growth by focusing its efforts to boost overall AOV. The company has promotional discounts between 10-50% on its products, intended to promote growth in customer orders. For example, its 8×11 size photo book is the company’s top-seller and are priced 30% lower from their retail pricing at $17.49 and $27.49 for the soft cover and hard cover versions of the photo book. While the company’s stance in product markdowns certainly contributes to increases in customer order growth, we believe the company is aggressive with its current discount levels. Given the company’s dominant position in the online photo product market in the U.S., Shutterfly has some room to lower its current discount levels without losing customers, thereby expanding AOV.

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