It's not taking long for Zulily ZU stock to sink to the lower values we highlighted just a day ago in our post Wall Street Journal calls out the Zulily business model. Our IV suggested a 25% decline to $35 and the stock is indicated to be getting close to it. (Down 17% aftermarket today after earnings to $38/share.)
The report was fine in line with expectations. Growth was strong and operating metrics all looked solid. (You can listen to a replay for the next 30 days at the ZU IR website.) I'm sure a transcript will be available soon as well.
For example: Active customers came in at 3.7M (versus 1.9M a year ago) with higher average transaction sizes. 83% of orders were repeats from existing customers. 5.5M orders were processed in the quarter. Management admits that backlogs are higher than normal due to heavy order volume which hurt gross margins. Revenues for the quarter were $237M. Order to ship time was over 13 days versus 11 days last quarter.
But the problem facing Zulily is indeed one of positioning. The point that the management team misses is that investors don't like to own "misunderstood" companies without a clear end game. So far Zulily hasn't put that out there.
The company is caught between some known consumer favorites and is pioneering something new. For example there are limited selection/fast delivery/low price models like Costco or SierraTradingPost that work. There are also huge selection/fast delivery/low price which is the very successful Amazon model, especially with Prime which makes it a first source for lots of things.
So far Zulily has excelled at providing customers with well-curated frequently-updated and diverse selections of products at good prices - albeit with fairly lousy delivery (13 days and trending upward based on the results last quarter.) Two weeks isn't fatal but it means that you aren't going to buy things there that you need soon.
There are clearly some products that work in this format. Even though I'm not the target demographic for Zulily I did purchase a pair of shoes (brand and size I know) and a funky boardgame (Farm-opoly) on Zulily. I didn't care when they would arrive. Of course I also checked Amazon but Zulily had the product at the best price so I was fine with it.
But nobody quite knows what this consumer category is. "Discovery" is great but can that work in an Amazon world? In the meantime Zulily has to continue to "invest" in both marketing and back-end infrastructure. But are those very investments just diluting value from the core capability which is engagement, customization, merchandising and sourcing?
Listening to management talk makes it clearer that Zulily should combine with another company to handle the things they are not good at and leverage the front-end skills and customer relationships that are unique.
Just because our IV estimate for this year is $35 doesn't mean the shares can go far below that. The P/S ratio remains very high and the shares won't be a "bargain" to most investors until they are below $20/share. No rush on this one.
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