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Zulily Marches Ahead

Posted on Wednesday, Dec 10th 2014

A recent comScore report on the US e-commerce industry reveals that Q3 2014 desktop e-commerce sales in the country grew 13% to $53.9 billion. This was the twentieth consecutive quarter of positive year-over-year growth and the sixteenth consecutive quarter of double-digit growth. Mobile commerce continued to report a stronger growth as it improved 17% over the year to $6.7 billion. Total digital commerce sales came in at $60.6 billion for the quarter.

Zulily’s Financials
Flash sale site Zulily (Nasdaq: ZU) saw their third quarter revenues grow 72% over the year to $285.8 million, marginally ahead of the Street’s forecast of $285.28 million. Adjusted EPS of $0.02 improved over previous year’s breakeven quarter and surpassed market expectations of a loss of $0.03 per share.

Among key metrics, Zulily’s active customers improved 72% to 4.5 million. Total orders placed increased 63% to 5.9 million and average order value grew 2% to $56.33. For the trailing twelve month period, 84% of their North American orders were placed by repeat customers. Mobile usage continued to increase as 50% orders were being placed on mobile devices compared with 45% a year ago and 49% in the previous quarter.

Despite the impressive financial performance, the market was not pleased. Analysts were looking for Zulily to add over 480,000 customers during the quarter compared with the reported addition of 352,000 customers. The company was hit by certain email delivery issues that made them pull back their marketing efforts.

The outlook was also disappointing. For the current quarter, Zulily expects revenues of $391.3 million-$416.3 million and to end the year with revenues at $1.2 billion-$1.225 billion. The market was looking for revenues of $412 million for the quarter. According to analyst Shawn Milne of Janney Capital Markets, Zulily wants to maintain their image of being a premium goods seller and does not want to compromise by focusing on last minute holiday orders that will result in “unfavorable unit economics”.

Zulily’s Market Expansion
Zulily has been focused on market expansion in the recent quarters. During the recently ended quarter, Zulily launched their newly automated Ohio fulfillment center and began operations for a new Nevada fulfillment center. They added another 800,000 square facility in Pennsylvania which will become operational as a fulfillment center by mid-2015 and will help them reduce transport costs and increase delivery efficiencies.

As part of customer service enhancement, Zulily built their in-house customer service function in Ohio and are looking to grow the support service to a 900-employee operation over the next three years. To keep the customers engaged on mobile devices, Zulily launched an upgraded iPad app and a new Android tablet app.

Zulily’s international presence is also improving as they recently launched a local site for their Australian subscribers. Prior to that, Zulily had similar pages for their Canada and UK subscribers. They now deliver to more than 70 countries.

As I have mentioned earlier, Zulily’s strength lies in their ability to effectively market niche products from small and branded boutiques. They are focusing on the vendors by building out a team of vendor planners who work with the vendors and help plan their businesses as far ahead as 18 months out. Zulily’s model is not only helping Zulily offer attractive products to their end customers, but is also helping the vendors, some of whom have seen their revenues double within a year.

But the market is not entirely pleased with that. Their stock is trading at $26.47 with a market capitalization of $3.3 billion. It touched a high of $73.50 in February this year.


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