Shutterfly (SFLY) gave traders an outstanding chance to collect profits last year as it ran from a base below the IPO price of $15.00 to an ultimate high of $36 in a few short months.  Since that time the stock has come full circle and is trying once again to find support at $15.00.  Because many investors originally bought the shares on the IPO pricing in September of 2006 right at this level, the support area needs to hold strong in order to keep these long-term holders interested.  I would make the argument that the stock has a good shot of holding and moving above these levels.

Last week management reported earnings figures for the fourth quarter and consequentially the full 2007 year.  While earnings numbers beat expectations and margins continued to look healthy, the market was spooked by the conservative guidance given for the first quarter.  Management tried to put on a brave face by stating that consumers will likely quit spending on other discretionary items before neglecting sentimental memory type items like the products the company offers.  This argument only goes so far with a cash strapped consumer environment.  However, the stock has likely been pricing in this scenario for months now as it took a greater than 60% haircut.

On the positive side, the company is making great strides towards growing its business and increasing consumer awareness.  A study done on magazine advertisers showed SFLY as one of the top 10 most recognized brands.  Customer retention remains strong with 70% of sales coming from repeat customers and new initiatives by the company should make this trend even more pronounced.  For instance, the company recently acquired Nexo which gives SFLY access to more online social interaction initiatives.  As people begin to use Shutterfly as part of their online communication with friends and relatives, loyalty should migrate to new levels.  Since customers are able to store an unlimited amount of digital photography with no compression of files, many will find the website a part of their daily lives as they use SFLY to store, share, print, and back up their photographs.

Additionally, the company has entered a marketing agreement with CK Media which will expose even more potential users to Shutterfly.  CK Media will assist with scrapbooking classes, co-marketing and collaboration with traditional SFLY businesses in order to drive synergies and increase each customer’s reliance on products or services offered by each company.  This creative approach to marketing has helped the company keep customer acquisition costs to a minimum and margins at a healthy level.

To assist in sourcing the new business the company is bringing in, management has opened a new production and distribution center in Charlotte.  This will make servicing the east coast much more manageable and cost effective since the company’s headquarters is in California.  The center has increased the capital expenditure rate for 2007, but is definitely under control given the fact that the company has no long-term debt and cash of over $125 million on its balance sheet.  While the company continues to spend on initiatives to drive growth and maintain the infrastructure to support such growth, management has committed to spending in line with revenue trends and is willing to cut back if the slowing economy takes a larger bite out of sales than expected.

While I am not currently excited about many consumer stocks, this name appears to have significant value given its depressed state.  The company is profitable and growing.  Consolidation in the industry allows SFLY to continue to grab market share, and a creative development team continuously puts out new products which help to stimulate demand.  With many different verticals including wedding, baby, pets, and travel; the company benefits from emotional decisions by consumers.  It enjoys pricing power over competitors such as Snapfish (a division of Hewlett Packard – HPQ) and has strong margins of profitability.  I am watching to make sure that the $15 price area is not significantly breached, and if the stock can find support in this area I will likely begin to build a position.

SFLY Notes

FD: Author does not have a position in SFLY

Additional Reading:

TechTrader Daily review of SFLY earnings

Notable Calls on SFLY / Snapfish pricing