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Here's Why You Should Hold On to Shutterfly (SFLY) Stock

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On Apr 11, we issued an updated research report on the Internet-based social expression and personal publishing service provider, Shutterfly, Inc. .

In the last reported quarter, the company posted weaker-than-expected results, wherein both earnings and sales lagged the respective Zacks Consensus Estimate. Nevertheless, the company surpassed expectations in the three quarters before that, bringing the average positive surprise in the trailing four quarters to 11.6%.

Improving Operational Efficiency

As announced in the fourth quarter of 2016, Shutterfly has undertaken various structural changes. In order to focus more on profitable and cost-effective brands, the company plans to retire many of its other brands. Thus, going forward, Shutterfly will invest in a single Consumer platform, with all customers gaining from investment in the Shutterfly.com site. This is likely to reduce complexities of usage to a large extent, and should thereby increasing customer satisfaction.

Also, 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, the quality and scale of Shutterfly's manufacturing operations, combining its world class in-house manufacturing capabilities, make it one of the largest four color printers in the world, with its broad network of outsourced partners. The company also intends to improve operational efficiency and open new manufacturing facilities or consolidate the existing ones for future expansion.

Other Growth Initiatives

Shutterfly is well focused on product innovation to drive growth. Last quarter, the company announced its plans of re-investing in Tiny Prints as its premium cards & stationery brand and creating a Tiny Prints boutique on a dedicated tab on Shutterfly.com. Moving ahead, the company also plans to focus on the new Shutterfly Wedding Store as a part of its wedding strategy, which includes a premium Wedding Paper Divas-branded stationery collection.

In the third quarter of 2016, besides enhancing home décor category as well as cards and stationery category, it added more products to its newly launched statement gifts category. Such innovative offerings are expected to add to the company’s top line.

Meanwhile, 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.

Further, Shutterfly’s focus on improving technology-related offerings seems to bode well. It has been continuously enhancing its mobile experience and optimized navigation, and also working on the look and functionality of its websites. In Sep 2016, the company launched an improved Shutterfly mobile app on iOS and Android to offer a broader product catalogue, which is expected to expand its mobile customer base. In fact, in the fourth quarter of 2016, the number of app customers and the amount of revenues from the app doubled year over year.

Concerns

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. Additionally, 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.

Furthermore, the company has been incurring higher costs over the past few quarters, which is putting pressure on its margins. These costs primarily pertain to the company’s accelerated development of new production facilities along with a rise in the manufacturing, labor and training costs. Additionally, with the announcement of major restructuring goals, the company expects to incur restructuring charges over the first few months of 2017 ranging from $15 million to $20 million.

Meanwhile, it is to be noted that Shutterfly’s revenue growth has been slowing down 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 it, 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.

Bottom Line

Shares of Shutterfly increased 8.4% in the last six months against the Zacks categorized Internet Content industry’s fall of 1.7%. Meanwhile, estimates have mostly been stable ahead of the company’s first-quarter earnings release. Nevertheless, after faring through the transitioning year of 2017, we expect the company to get its groove back, given how all initiatives are in place.



Currently, Shutterfly carries a Zacks Rank #3 (Hold).

Stocks to Consider

Changyou.com Limited's current year earnings estimates rose nearly 20% over the last two months. It sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

YY Inc. (YY - Free Report) is another Zacks Rank #1 company which saw its current quarter and current year earnings estimates rise 21.2% and 9%, respectively, over the past month.

Spark Networks, Inc. carries a Zacks Rank #2 (Buy). Its current year growth estimate is 37.5% compared with the industry average of 29.5%.

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