Why Shutterfly, Inc. Dipped 12% in October

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What happened

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Shares of photo products innovator Shutterfly, Inc. (NASDAQ: SFLY) fell 11.9% last month, according to data from S&P Global Intelligence.

So what

Shutterfly stock dipped nearly 10.5% after the release of third-quarter 2017 earnings on Oct. 24. While revenue ticked up by 4% to $195.4 million, gross margin disappointed investors, declining by roughly 4 percentage points to 32.9%. Management attributed this drag to thinner margins in the company's Shutterfly Business Solutions (SBS) segment.

However, lower general and administrative expenses helped offset the decrease in gross margin, allowing the company to post an operating loss of $35.8 million -- an improvement versus the comparable prior-year quarter's operating loss of $38.5 million.

The current year has been one of transition for Shutterfly. The company completed a restructuring in the third quarter that was initiated in February, and has resulted in $17.0 million in restructuring charges on the income statement. It has also consolidated its platforms, moving its TinyPrints and Weddings businesses onto the same technical platform as the Shutterfly flagship service.

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While the stock is down nearly 20% year to date, management believes that current-year initiatives will benefit the company's top and bottom lines.

For example, SBS, which prints and fulfills variable, four-color marketing collateral for businesses, reported a net revenue increase rate of 39% in the third quarter. Though it's a bit less than half the size of the consumer segment, SBS' revenue gain of $16.8 million more than offset the consumer businesses' top-line decline of $8.6 million. According to management, the drop in SBS gross margin can be thought of as an onboarding expense for significant new customers. The company expects that over time, SBS will regain margin from the new relationships it's winning through promotional pricing. 

Now what

Shutterfly is fairly confident that it will close out the year in good form. In the company's third-quarter earnings release, management kept full-year revenue guidance of between $1.135 billion and $1.165 billion intact. Gross margin is now expected to land between 48% to 49%, a percentage point lower than the previous target. The outlook for operating income, however, has been boosted to a band of $59.0 million to $79.0 million, versus a prior target of $48.5 million-$68.5 million. With the restructuring behind it, Shutterfly appears poised to reap cost savings during the final stretch of 2017. 

Asit Sharma has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.