Analysis: Why CafePress is a leading e-commerce platform

Part 4

Key catalysts and value drivers that can fuel CafePress growth

Opportunities: What more can PRSS do?

PRSS has many ways to grow through expanding products, gaining new customers, increasing average order size and repeat business, new partnerships with owners of branded content, geographical expansion to Asia, the Middle East, and Latin America, and acquisitions. The company can also approach businesses like PFS Web and Speed Commerce to work together in order to offer complete customization and ecommerce fulfillment solutions.

CPEnlarge Graph

The company is just beginning to explore opportunities in the nonprofit world. PRSS has launched dedicated sites for such organizations as Autism Speaks. These sites allow people to make donations by buying custom t-shirts and other goods.

I approached the CEO of PRSS with an idea to enter the healthy eating category. As mentioned earlier, Wall Street currently values this category as a fast-growing, timely, high-multiple business. I am one who suffers from tremendous food allergies. I order many customized food products online that require efficient and small production runs. I have to be less concerned about price than I am about ingredients. I suggested PRSS look to buy Youbars.com (among others). Youbars.com allows you to create bars to your liking.

  • With YouBars:
    • You choose the ingredients and the bar size.
    • You view the nutrition facts of your custom energy bar while you are creating it.
    • Your box of custom nutrition bars is made fresh-to-order and shipped to your door with a satisfaction guarantee.
    • Your customized nutrition facts and your chosen protein bar name are printed on each individual protein bar package.
    • The CEO of PRSS happens to know well the founder of YouBar. Bob Marino is even mentioned in a book on customization written by the founder of YouBar. Who knows where this relationship could lead or what it could mean for future growth areas?

One can see how this business could be much larger than it is today while maintaining its leadership position. The company should complete its integration and restructuring this year. If it can continue to add new customers’ profitably and grow incremental profits, this won’t continue to trade at its current valuation. And it very well may not remain an independent public company forever.

The company feels strongly that it can grow internally double digits. As the new social and mobile efforts take hold, internal growth will improve. The company has reduced the number of flash sales (Groupon-type business), which has hurt sales in the short term but will help margins in the long run. The new partnerships like Marvel and other top companies will add to growth as they are launched. Signing of these happened a while ago, but the timing of launch has been unpredictable due to the initial work and customer’s timing. Many new seeds have been planted that should start to show up next year.

Gross margins have been hurt by over 300 basis points due to the interruption from the integration and running of duplicative facilities, and the inclusion of the EZ Prints business. The integration will be complete by year end and the company has just anniversaried the acquisition, so the negative margin compares should be behind them. Additionally, capital expenditures are elevated this year at $14 million to complete the integration. As earnings recover and capex resorts to normalized levels, cash flows should improve.

2014 analysis

For argument’s sake, I assume the company only improves profitability on current business by 200 basis points due to a higher gross margin. This should be easy to do, as the expense on the restructuring will be behind it.

Price target

At ~$6 per share, PRSS is trading at 3.6x 2014 EBITDA. Given the company’s market position, proprietary content, technology innovation, corporate partnerships, and so much more, this seems a little extreme. I do believe PRSS has “earned” a discounted valuation to the comps listed earlier until it proves out consistent sales and earnings growth. But the seeds are planted to begin to see that next year. A fair valuation for PRSS might be 0.6x sales and 7x EBITDA, which puts the stock next year at $10.50. And if the company should be approached by a suitor, a valuation of 1x sales or 8x to 10x EBITDA is possible.

The Market Realist Take

On its business outlook for 4Q 2013, CafePress expected solid growth in its e-commerce properties. Its guidance reflects changes to certain partner roadmaps, including program launches occurring later in the quarter than it had expected, along with a cautious view on consumer spending during the holidays.

The company said it’s finalizing the launch of Create and Buy products with a new partner, and the delay in that project has led to a reduction in guidance for 4Q. It said the emergence of these partnerships along with the pipeline of other partners signals momentum in the emerging growth area for CafePress. These partnerships ensure the expansion of CafePress’s presence in the e-commerce segment. It aims to not only offer the largest selection of customized products on all CafePress properties but also to power customization on its partner sites across the web. It said that while making its guidance, it has to include many partner-related variables, including the timing of loading the products on the partner’s site and launching specific programs. It has recognized that the precise timing of revenue is difficult to predict. So the launch of certain programs coupled with the cautiousness around holiday spending has led the company to take a slightly more conservative view of its 4Q revenue.

For 4Q 2013, it anticipates net revenues in the range of $88.5 million to $96.5 million and adjusted EBITDA ranging from $8.0 million to $11.0 million. For fiscal 2013, it expects net revenues ranging from $244 million to $252 million, a year-over-year increase of 12% to 16%, and adjusted EBITDA of $10 million to $13 million.

The company’s peer Shutterfly (SFLY) expects net revenues to range from $392.1 million to $405.1 million, a year-over-year increase of 11.5% to 15.2%. PFS Web (PFSW) stated on its earnings call that Shop.org, the digital division of the National Retail Federation, is predicting a 13% to 15% jump in e-commerce sales compared to the holiday season last year. According to its own estimates, it expects many of its current direct-to-consumer clients to see year-over-year increases in line with or greater than those projected overall industry trends. PFS Web expects to see sequential improvement in the fourth quarter as it realizes further benefit from new and expanded client relationships and also experience higher volumes during the holiday season. eBay Enterprise launched four brands on its new suite of modular Commerce Technologies during the quarter. It expects to deliver lower year-over-year revenue growth in Europe than in North America, primarily due to planned changes it’s making in its business in Europe to improve its customer value proposition, marketing execution, and profitability. Vistaprint said it focuses on delivering against its holiday expectations during the second quarter, as well as continued improvement of its customer value proposition globally and its marketing execution in Europe.

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