Shutterfly’s Rising Expenses Are The Main Concern For Monday’s Earnings

Shutterfly (NASDAQ:SFLY) will announced its Q1 2012 earnings on April 30. It saw solid sales in 2011, with its yearly revenue growing to $473 million. However, due to an even higher increase in its sales and marketing expenses, its operating profit was dragged down and ended up lower than it was in 2010. Since then, a number of significant developments have occurred in the online photo sharing space, which could impact Shutterfly’s sales going forward.

Shutterfly competes primarily with services like HP’s (NYSE:HPQ) Snapfish, American Greetings’ Photoworks and Webshots brands, and even Apple (NASDAQ:AAPL) that ventured into this business lately, with its new Cards app on iOS.

Check out our complete analysis of Shutterfly.

Customer growth expected to continue

Shutterfly’s total number of customers increased from around 4.1 million in 2010 to almost 5.9 million in 2011, following the acquisition of Tiny Prints. However, Shutterfly acquired Kodak Gallery earlier this year, which could lead to a significant jump in its user numbers. It has more than 75 million users in the U.S. and Canada. Following the acquisition, all the Kodak Gallery customer accounts and images will be transferred to Shutterfly, which should lead to a massive bump in its user numbers.

We expect some updated numbers or guidance in this earnings release, following which we will update our forecasts and estimates.

Until then, you can see how any increase in its customer base over the years impacts its stock value by dragging the trend-line in the chart below.

Average order value could decline

Shutterfly’s average order value increased 12% to around $37 in 2011, primarily due to the change in product mix following the Tiny Prints acquisition. We expect this to continue to grow marginally throughout our forecast period. However, increasing competition can force the company to lower prices which can lead to a decline in average order value, going forward.

Additionally, the addition of the new Kodak Gallery users could weigh on the average revenue metrics, which would lead to a decrease in our forecasts. We should see more light on this during the earnings call.

You can tweak this chart to see how the average order value impacts the Trefis price estimate for Shutterfly.

Sales & marketing expenses need to be cut down to size

Shutterfly’s sales and marketing expenses increased by more than 90% in 2011, which has bumped up SG&A expenses as a % of gross profit to 68% – an all-time high. This was primarily due to increasing competition in the space and aggressive marketing by its competitors like Snapfish. Going forward, we expect SG&A expenses to decline as a % of gross profit.

Shutterfly’s SG&A numbers in Q1 should help us improve our forecasts. If it is unable to clamp down its SG&A expenses in the coming years, there could be a significant negative impact on its stock price.

We have a $30 Trefis price estimate for Shutterfly, which stands slightly below current market price. Personalized photos, cards and albums account for around 78% of its value.

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