Why Shares of Zulily, Inc. Got Crushed

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What: Shares of Zulily, Inc.  (NASDAQ: ZU  ) were getting taken to the cleaners today, dropping as much as 32% after the company reported weak earnings in its first-quarter report.

So what: The online flash-sales retailer showed strong sales growth in the quarter, but operational problems weighed on the bottom line. Revenue jumped 87% to $237.9 million, but Zulily did not seem fully prepared to handle those new orders, as backlogs and shipment times increased, and it reported an adjusted net loss of $0.02 per share compared to estimates of a penny profit. The company uses a unique business model of purchasing products with vendors after customer orders come in. The model enables deep discounting, but also caused headaches when Zulily received a jump in orders near the end of the quarter, resulting in overtime wages and longer shipping times. 

Now what: Despite the bottom-line miss, the report had plenty for investors to be happy with, as sales in the quarter topped estimates of $233.6 million, and the company lifted its forward full-year revenue guidance to $1.15 billion-$1.20 billion, ahead of the consensus at $1.15 billion. With sales nearly doubling, I'd give management some time to iron out the cost side of the equation. For now, it's more important for Zulily to be expanding its customer base and driving customer loyalty to continue building the brand and growing sales.

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