Shutterfly 2013 Annual Report Download - page 16

In addition, we face significant production risks at peak holiday seasons, including the risk of obtaining
sufficient qualified seasonal production personnel. A majority of our workforce during the fourth quarter
of 2013 was seasonal, temporary personnel. We have had difficulties in the past finding a sufficient number
of qualified seasonal employees, and our failure to obtain qualified seasonal production personnel at any
of our production facilities could harm our operations.
Macro economic trends could adversely affect our financial performance.
Our financial performance depends on general economic conditions. The U.S. economy is
experiencing a slow economic recovery from a deep recession, concerns about inflation, low consumer
confidence, high unemployment rates and other adverse business conditions. Fluctuations in the U.S.
economy such as the recent recession could cause, among other adverse business conditions, a prolonged
decline in consumer spending and an increase in the cost of labor and materials may harm our operating
results. Purchases of our products are often discretionary. If the economic climate does not improve,
customers or potential customers could delay, reduce or forego their purchases of our products and
services, which could impact our business in a number of ways, including lower prices for our products and
services and reduced sales. In addition, adverse economic conditions may lead to price increases by our
suppliers or increase our operating expenses due to, among others, higher costs of labor, energy,
equipment and facilities. A prolonged and slow economic recovery or a renewed recession may also lead to
additional restructuring actions and associated expenses. Due to reduced consumer spending and
increased competitive pressures in the current economic environment, we may not be able to pass these
increased costs on to our customers. The resulting increased expenses and/or reduced income would
negatively impact our operating results. If the economic recovery continues to be slow, or if the economy
experiences a prolonged period of decelerating or negative growth, our results of operations may be
further harmed.
Competitive pricing pressures, particularly with respect to pricing and shipping, may harm our business and results
of operations.
Demand for our products and services is sensitive to price, especially in times of recession, slow
economic growth and consumer conservatism. Many external factors, including our production and
personnel costs, consumer sentiment and our competitors’ pricing and marketing strategies, can
significantly impact our pricing strategies. If we fail to meet our customers’ price expectations, we could
lose customers, which would harm our business and results of operations.
Changes in our pricing strategies have had, and may continue to have, a significant impact on our net
revenues and net income. From time to time, we have made changes to our pricing structure, specifically
for 4x6 prints, in order to remain competitive. Most of our other products, including photo books,
calendars, cards and stationery and other photo merchandise are also offered by our competitors. During
the fourth quarter of 2011, many of these competitors discounted those products at an unprecedented
level. As a result, we also changed our discounting strategy, which impacted our acquisition of new
customers, average order value, net revenues, gross margin, and our adjusted EBITDA and net income
profitability measures. If in the future, due to competitor discounting or other marketing strategies, we
significantly reduce our prices on our products without a corresponding increase in volume, it would
negatively impact our net revenues and could adversely affect our gross margins and overall profitability.
We generate a significant portion of our net revenues from the fees we collect from shipping our
products. For example, shipping revenue for the Shutterfly brand website represented approximately 16%,
16% and 15% of our net revenues in 2013, 2012 and 2011, respectively. We offer discounted or free
shipping, with a minimum purchase requirement, during promotional periods to attract and retain
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