Zulily vs. Big-Box Discounters: Which Offers Investors the Bigger Deal of the Day?

Zulily Inc. is proving it has staying power, and it's giving big-box retail stores another reason to fear e-commerce rivals.

May 19, 2014 at 3:05PM

Zulily (NASDAQ:ZU), the fast-growing e-commerce site that caters specifically to women with babies and children, may not be on Wal-Mart's (NYSE:WMT) or Target's radar yet, but it could be soon, as the flash-sales retailer demonstrates just how lucrative online sales can be when properly executed. Big-box stores such as Wal-Mart and Target have struggled in recent years as more people have begun shopping online, and Zulily's rapid rise to fame in a niche market of online commerce offers further proof that this is the future of shopping.

Shopping in-store is so last season
Why trek to a store like Wal-Mart or Target when you can order everything from the comfort of your home on sites like Amazon.com (NASDAQ:AMZN) or Zulily? Amazon sells just about anything you can think of today, and the e-commerce giant is even adding same-day delivery now in New York, Dallas, and San Francisco. Big-box retailers, on the other hand, continue to suffer from declining traffic at their stores.

Between severe winter weather and more consumers shopping online, Wal-Mart and other physical retail chains can't seem to catch a break these days. Wal-Mart reported disappointing first-quarter earnings on Thursday, blaming unfavorable weather conditions for a 5% slump in profit. Traffic at Wal-Mart's stores, meanwhile, declined 1.4% in the quarter. 

Yet as Wal-Mart's in-store traffic continues to fall, it is beginning to see stronger online sales on Walmart.com. In fact, e-commerce sales increased 27% globally during the first quarter. That's impressive for a company that was late to join the shift to online sales.

Better late than never
Today, Wal-Mart is aggressively investing in its e-commerce platform to better compete with Amazon and other growing online retailers. "We have the opportunity to create transformative growth through stronger e-commerce capabilities," said Wal-Mart CEO Doug McMillon. However, big-box players like Wal-Mart shouldn't underestimate newer, smaller entrants in the e-commerce space, such as Zulily.

Sure, Zulily is a speck of sand in a world currently dominated by Wal-Mart. The big-box store, after all, generated net revenue of $115 billion in the latest quarter, compared to just $237.9 million in net revenue for Zulily in its recent quarter. However, it wouldn't be the first time a niche e-tailer grew from seemingly nothing into an online powerhouse. Just look at a company like Shop It To Me. This Internet retailer grew from a niche personal Web shopper site in 2005 into an online powerhouse making more than 2 billion product recommendations per month by 2012. Zulily has an opportunity to unlock similar growth in the coming years thanks to its loyal and growing community of moms on the go. 

Screen Shot

Source: Zulily.

My point is this: Big-box stores like Wal-Mart are weighed down by significant overhead costs related to their physical store locations, whereas the changing retail landscape has come to favor more limber e-tailers like Amazon and Zulily.

Don't get me wrong, Wal-Mart currently has an unmatched distribution network that enables it to quickly and cheaply ship online purchases to customers today. The big-box store is also investing more heavily in its online channel these days.

Nevertheless, as fellow Fool Brian Nichols points out, Zulily has proven adept at offering the lowest possible prices on select merchandise by keeping its costs low by purchasing its inventory in bulk. Zulily is also investing in its future by putting the majority of its second-quarter capex toward building out its fulfillment centers. The company is on track to double the size of its Nevada distribution center by the third quarter, with other investments in its infrastructure coming online later in the year. This should help Zulily speed up delivery times and improve the overall user experience going forward.

Recognizing a growth stock before the herds
Not only does Zulily operate in the fast-growing e-commerce space, but it has also carved out a profit-rich niche for itself in women's and children's merchandise. In fact, the company reported first-quarter results this month in which it generated net sales growth of 87% year over year. 

Zulily's stock price has soured lately because of rising short interest ahead of the company's lockup expiration last week. Shares have fallen nearly 24% in the past month and are currently trading 53% below the stock's 52-week high of $73.50. With the stock now priced around $34 a share, I believe this creates a buying opportunity for long-term investors.

Ultimately, this is a company in the early stages of its growth story. While the stock price will likely remain volatile in the near term, patient investors should be rewarded down the road as Zulily continues to grow its customer base and e-commerce presence at large.

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Tamara Rutter owns shares of Amazon.com. The Motley Fool recommends and owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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