1 Mom-Focused Online Retailer Is Primed for Growth

Source: Zulily

Zulily (NASDAQ: ZU  ) , an online retailer focused on moms, has been one of the fastest growing retailers in the past few years. It has expanded its top line from a mere $18 million in 2010 to $696 million in 2013. Looking ahead, Zulily has guided for close to $1.2 billion of sales in full-year 2014, which will represent 69% year-over-year revenue growth.

What are the reasons for Zulily's past success? Is Zulily likely to replicate the same winning formula and meet its 2014 sales target? It's worth comparing Zulily with other retailers such as Blue Nile (NASDAQ: NILE  ) and Destination Maternity (NASDAQ: DEST  ) to have a better understanding of its competitive advantages and growth prospects.

Online
The U.S.online retail market is forecasted to grow at a 14.5% CAGR between 2012 and 2017 to reach $360 billion, in contrast with a 2.9% CAGR for the bricks & mortar retail market during the same period. This statistic should come as no surprise to anyone who either is a shopper himself or tracks the performance of both listed online and offline retailers. But Zulily isn't your average online retailer, and it has successfully differentiated itself with its unique business model.

Most successful online retailers are typically focused on a specific product niche, with the aim of meeting the needs of consumers already actively looking for specific products they have in mind. These products are usually non-unique, and customers look at price and convenience as key purchasing factors.

One example is Blue Nile, an online retailer of high-quality diamonds and fine jewelry, whose key selling point is affordable diamond engagement rings. Blue Nile's customers can buy a one-carat diamond ring for $6,500, approximately half of what it will cost to buy something similar at a competing bricks & mortar retailer.

In contrast with other "conventional" online retailers, Zulily provides consumers with a discovery-based, experiential shopping experience. Most of Zulily's customers (mainly moms) are usually in "window-shopping" mode, surfing around to discover new brands without any active intention to purchase anything specific.

Moreover, this group of consumers tend to be habitual shoppers visiting Zulily's website daily, resulting in stronger customer loyalty. In comparison, consumers visit conventional online retailers' driven by needs. For example, couples will go to Blue Nile's website when they have marriage plans and are looking for engagement rings.

In response to the browse-and-discover stance of its customers, Zulily has in place a unique merchandising strategy where it offers a daily selection of new and diverse products at attractive prices. It typically conducts flash sales events lasting for as long as 72 hours, where more than 6,000 product styles are available for purchase on any single day at half of the manufacturer's suggested retail price.

The results validate the popularity of Zulily's merchandising strategy with its customers. In the first quarter of 2014, Zulily saw the number of orders placed and average order value grow by 91% and 4% year over year, respectively. It's also telling that Zulily's gross margins (28%) are higher than Blue Nile's (19%), despite selling lower-priced items (clothing versus diamonds).

Source: Zulily.

Moms
Anyone who has tried to sell products to kids will understand the difference between end-users and economic buyers. While kids are the ones who play with toys, moms have the biggest say in what gets bought and what doesn't.

A 2010 comScore survey indicated that women made up close to half of the U.S. online population but accounted for 61% of online purchases. Another 2009 study by the Advertising Age showed that women controlled almost three-quarters of household spending.

Notwithstanding the economic significance of women (and moms in particular), their needs haven't been satisfied. The market for children's apparel, women's apparel, and home decor products is very fragmented, reflected in the fact that 65% of Zulily's domestic sales are contributed by vendors that sell $50,000 worth of product per event. With more than 13,000+ brands featured and in excess of 100 daily flash sales events, Zulily has become a one-stop shopping destination for moms.

Similar to Zulily, Destination Maternity, the country's largest maternity-apparel retailer, is another company that has satisfied its customers' needs with multiple brands. While Zulily's brand diversity provides choices and discovery for moms, Destination Maternity's brand portfolio serves the purpose of cornering the maternity-apparel market at various price points.

Destination Maternity's Motherhood Maternity brand (average unit price is $20) is targeted at budget-conscious customers with lower price points, while its A Pea in the Pod brand collection (average unit price is $125) has a line of exclusive designer label products to justify its premium prices. In addition, demand for maternity apparel is relatively stable, because it is a non-discretionary product category with little fashion risk from the perspective of moms.

Zulily hasn't stood still; in fact, it has evolved in line with the growing and diverse needs of moms. Children's apparel's share of Zulily's sales has declined from 55% in 2012 to 39% in the first quarter of 2014. This reflects Zulily's shift in product assortment, introducing more children's merchandise and other items in the home, kitchen, and pet categories.

Foolish final thoughts
With revenues of $238 million in the first quarter of 2014 representing 87% year-over-year growth, Zulily raised its 2014 full-year sales expectations from the $1.10-$1.15 billion range to the $1.15-$1.20 billion range, reflecting management's confidence in its own prospects. In my opinion, Zulily promises exciting growth prospects, as I expect its positioning and business model to gain further traction with more moms.

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