Cirigroup 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 mil in annual labor costs.
To combat labor costs that are forecast to soar to $61.5 mil 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. Reits Sell and $18.50 tgt on NFLX.
They have also confirmed that BBI's mailers are not prone to the same issues. Reit 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 n-t.
To combat labor costs that are forecast to soar to $61.5 mil 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. Reits Sell and $18.50 tgt on NFLX.
They have also confirmed that BBI's mailers are not prone to the same issues. Reit 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 n-t.
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