Last week’s article, A Busy Day for Shutterfly and Lifetouch – Part 1, provided a summary of Shutterfly’s February 5th press releases and the company’s financial results as reported during that day’s investor call. Part 2, A Busy Future, provides a quick 2018 review, examines Shutterfly’s vision of the future, identifies specific plans for 2019 and offers my perspective on how Lifetouch fits into those plans.
2018 COMPANY REVIEW
On the investors call CEO Chris North summed up the year by saying, “Overall, we had many successes in 2018, including Lifetouch schools account growth, as well as preschool and studios overall performance; in Shutterfly Business Solutions, strong growth and margin improvement; in Shutterfly Consumer, personalized gifts and home décor growth acceleration, new category launches and rapid mobile growth…we also made significant progress against the Lifetouch integration.”
In 2018 Shutterfly launched 47 new products and a new product category, Shutterfly Kids, targeting the parents of children aged 4 to 14 with school gear, kids room items, toys and games etc. a logical extension attractive to Lifetouch’s customers.
In January 2019 Shutterfly repaid $200 million of their Term Loan B debt used to finance the acquisition.
North outlined the combined company’s future. Together, they will capture, preserve and share their customers’ most important memories by leveraging Shutterfly’s strength as the leader in personalized photo-based products and photo storage, combined with Lifetouch’s strength as the leader in school and family photography. The vision is to create the only end-to-end memory solution for families. He pointed out that, “In doing so, we significantly increased our potential to create shareholder value.”
LIFETOUCH 2018 REVIEW
Shutterfly was pleased with Lifetouch’s 2018 performance particularly the school and preschool businesses where both experienced net account growth.
The good news was partially offset by a participation rate that failed to meet expectations. In response North stated that they plan to make significant investments designed to improve the participation rate in 2019 and beyond, recognizing that a significant driver of participation is the parent’s awareness of picture day.
North explained that much of the modernization planned for Lifetouch was not possible in 2018 due to the short time-frame between the acquisition’s close and Lifetouch’s peak fall season.
They were able to test “a lightweight first phase of technology integration” and enhanced marketing to a subset of Lifetouch customers. Initial enhancements were made to Lifetouch’s online ordering platform resulting in a significant increase in customers shifting from paper based to online ordering.
North shared that they conducted dozens of customer facing tests and elaborated that, “…in 2019, we will further develop our tools and programs to drive awareness, including investing in building marketing teams, integrating platforms, developing programs and dramatically increasing the portion of the customer base we can reach with direct consumer communications.”
In other words, 2019 is the year in which Shutterfly intends to equip and launch Lifetouch into the digital age that has become a way of life for the millennial household’s CMO (Chief Memory Officer).
2019 LIFETOUCH PLANS
Lifetouch revenue is planned to be relatively flat throughout 2019 with continued growth in schools and preschools, a modest decline in studios and continued declines in church. Continuing the net increase in accounts, improving AOV and stabilizing the participation rate should fuel the growth they expect in the schools business.
North emphasized the importance of having added Lifetouch to the Shutterfly portfolio when he said, “Lifetouch also represents our best opportunity to step change the size of the Shutterfly consumer customer base. As a reminder, Lifetouch has more than 15 million estimated three-year active customers, that is customers that have made any purchase in the last three years, with only 27% overlap with Shutterfly, leaving more than 11 million estimated non-overlapping three-year active customers. Our 2018 testing and research confirms that Lifetouch customers want their photos on Shutterfly, and see it as a natural extension of their Lifetouch buying experience. We also discovered something we had not expected that Lifetouch could be an effective channel for reengaging overlapping customers who had lapsed on Shutterfly.”
Most Lifetouch customers will continue to place orders on the Lifetouch website in 2019, but Shutterfly is preparing for an integrated, customer facing e-commerce platform. They committed to significantly increase the number of Lifetouch customers who will be able to use Shutterfly Photos as their exclusive delivery method for their digital photos in 2020.
This integrated experience will be made available for fall picture day, the prestige portraits graduation business, the preschool business and the studios business.
The result is Lifetouch customers will be able to store, organize, share, create product and purchase their Lifetouch and personal photos on a single platform with a single set of account credentials.
PROJECT ASPEN – COMMON MANUFACTURING PLATFORM
North introduced a major initiative called Project Aspen, a single next-generation manufacturing platform serving Shutterfly Consumer, Lifetouch and Shutterfly Business Solutions. The intent is to drive cost synergies through a common manufacturing platform thereby facilitating greater utilization during seasonal peaks and leveraging their newly combined purchasing power and scale. The plan is for Project Aspen to result in approximately $130 million in savings over five years. North explained, “As we bring these businesses together over the next few years, we have opportunities to create significant value to the cost and revenue synergies.”
Part of the savings includes closing four legacy Lifetouch plants in the second half of 2019.
· Chico, California
· Chattanooga, Tennessee
· Bloomington, Minnesota
· Rockford, Illinois
These plants will be replaced in the first half of 2020 with new technology in a new 237,000 square-foot facility in Texas serving both Lifetouch and Shutterfly.
On the investor’s call North stated, “We are not doing as well as we need to in attracting new customers to Shutterfly as a whole…” He committed to increase Shutterfly’s marketing spend on building brand awareness, to improve their holiday card business by introducing a good, better, best strategy and to continue growing mobile. He cited continuing the integration of Lifetouch thereby attracting and converting Lifetouch customers to the broader array of products and services available through Shutterfly.
Mobile is playing a significant role in the plan to create shareholder wealth having driven strong performance across the key metrics measured by Shutterfly including growth in new customers, repeat customers, revenue per customer and new customer acquisitions.
Shutterfly will focus on growing mobile’s impact in 2019 by adding new products, improving and simplifying the customer experience, and by expanding product creation technology. North plans to, “drive deeper and more personalized engagement with our customers in 2019.”
Enhancing the customer’s mobile experience coupled with the customer’s dependence on Shutterfly’s photo storage could yield improved customer loyalty, incremental purchases and increased AOV for Shutterfly and Lifetouch.