Netflix Could Be Hit By Postal Cost Hike

Citigroup is out with a negative call on Netflix (NASDAQ:NFLX), saying an audit prepared by the Postal Service Office of the Inspector General [OIG] has concluded that the soft leading edge on 70% of NFLX's return mailers (NFLX is not specifically mentioned but is implied) get stuck during sorting and require manual processing and added about $21 million in annual labor costs.

To combat labor costs that are forecast to soar to $61.5 million over the next two years, the OIG has recommended imposing a 17 cent surcharge on each mailer. If NFLX has to bear the full brunt of this increase (without other cost offsets), monthly operating income per paying subscriber would fall 67% from $1.05 to $0.35. NFLX questions whether the USPS will accept the OIG's suggestions, and if no hikes occur, the impact would be limited.

Based on the magnitude of this risk, the firm believes NFLX will most likely redesign its mailers to better accommodate automatic processing. However, they are somewhat concerned that the USPS has singled out the rental by mail industry, which could allude to price increases despite any compliance with the mailers. Reiterates Sell and $18.50 target on NFLX.

They have also confirmed that Blockbuster's (BBI) mailers are not prone to the same issues. Reiterates Buy on BBI.

Notablecalls: Rising postal expenses have always been among my top concerns when it comes to Netflix. If indeed USPS has singled out the rental by mail industry, NFLX will need to pass on the expenses to subscribers. That will put it in a tougher place vs. BBI.

I suspect NFLX will trade down on these comments in the near term.

Comments

[borisb]

CITI analyst MM has dropped the ball o Netflix many times
and wasnt able to et Blue Nile right on a huge upmove why should we take his remarks seriously? also his BBI comments are pityfully mechanical without any intuitive accuracy. i would like his job!

[SDBryan]

I don't see how you can say NFLX is a sell and BBI is a buy when the concern is that the postal service is targeting rental by mail providers. That would mean BBI would be negatively affected along with NFLX.

And if NFLX can just change their mailer and avoid the fee, then they change the mailer and still whoop on BBI in terms of subscribers.

[bettysbooty]

This may be the dumbest reason I have ever heard of for favoring BBI over NFLX. Envelopes can be re-engineered. BBI has physical storefronts that must be paid for. A mere extra 17 cents extra per flyer will not take the cost advantage netflix enjoys and hand it over to BBI. Have you read BBI's last few qtrly reports? They are losing money hand over fist & are buried in a pile of debt already.

If the shipping cost increases 17 cents/mailer (and that's a big if), it will be an obvious negative to profits, but only short-term and won't change the competitive dynamics between BBI & NFLX. That's not to say NFLX is out of the woods by any stretch. They still face a desperate competitor (BBI) who's proven they can mount a fight and many deep pocketed competitors (AAPL, AMZN, Comcast, TW cable, TIVO, etc, etc) that will make life tough for them. There's way too many long-term threats in this space to worry about...a TEMPORARY .17/mailer POTENTIAL increase is just a silly thing to spend much time on.

Focus on the mountain of other concerns...how big will this market get? will or has amzn's or aapl's service eat into subs? is the watch now video over internet capability a competitive advantage? how easy would it be for competitors to ape this service and price structure? will cable companies enter to protect their customer base or acquire customers in other markets? so many other questions to worry about than this silly issue.