Quick quiz: Which profitable company just launched an IPO that saw its shares jump 71% on their first day of trading? If you said Twitter (TWTR +0.00%) -- bzzzt, wrong! The micro-messaging company is far from money-making, and it looks as if it'll continue to post losses in the foreseeable future. The correct answer is Zulily (NASDAQ: ZU), the stock of which zoomed from an offering price of $22 per share to close the day at $37.70 on its debut this past Friday.
Small clothes, big growth
Although it's branched off into numerous other categories, Zulily is at heart a retailer of children's apparel. As expected of a 21st-century sales outlet, it also prominently features daily, limited-time "flash" deals on its site. This combination seems to be working well for it lately; in the January-September period of this year, the company eked out a profit of around $155,000.
Never mind that the number is thin (revenues for the period were $439 million). The fact that Zulily is making money at all is a rare and special characteristic for a company at such an early stage of development. It's also admirable considering that the company is a retail operation, in which skinny-to-negative margins are the norm.
Zulily seems to know how to attack its markets. Top-line growth is extremely strong for the young (founded in 2009) company, with net sales jumping from $18 million in fiscal 2010 to $143 million the following year, and then popping by 132% at an annual clip to $331 million in 2012. Like a toddler, the company continues to put on size and weight quickly; in the aforementioned January-September period for this year it's already posted net sales of almost $439 million.
Beware the lurking beasts
Little Zulily is Red Riding Hood cautiously stepping through the forest. She has to go on her way without becoming a meal for one or several of the hungry beasts along the path. Every major e-commerce site worth its bandwidth is busy and active in the flash deals space. The obvious monster competitor here is Amazon.com (AMZN 0.91%), which has to be considered a double threat because of its propensity to march into every retail product category known to humankind. Entering the phrase "children's clothes" in the site's search bar produces in excess of 194,000 results.
Zulily also has to contend with general retailers with strong online presences that have successfully done business in similar wares. Two of the 12 top-level menu categories on Target's (TGT +1.68%) website are devoted to non-adults, with a wide spectrum of goods ranging from baby wipes to school uniforms to child-sized table and chair sets. Meanwhile, customers sniffing around for current deals can probably find something they like in the sprawling "clearance" section of the site.
A way out of the forest
Those wolves are hulking and scary, but Zulily appears to be finding its route through the woods as a niche retailer. Despite its underdog size, it has a well-chosen and robust variety of goods for sale in its specialty categories.
And as a newly minted public company, its numbers are encouraging, particularly when matched against some other recent issues. As mentioned, it's profitable in contrast to IPO rock star Twitter. Also worth noting is that it trumps the e-messaging site in terms of those January-September sales ($439 million, in contrast to Twitter's $422 million).
Zulily stock should also benefit from being in the retail space. Look at what happened with shares of The Container Store (TCS +0.00%), another IPO from the sector this month. They popped on their debut, closing on the first day nearly 100% higher than the offering price of $18, and have since remained close to that level. Unlike Zulily, the company hasn't recently shown a profit, it has a heavy bricks-and-mortar presence that will always eat into costs, and its goods are utilitarian as opposed to colorful and fashionable and fun.
Zulily is the kind of company and the sort of stock that attracts fans, and that bullish feeling gives it a good chance for its shares to rise higher in their first full week of trading. Further along the forest path, if the company can continue to fatten that top line and keep its net in the black, it should be able to stay popular and -- hopefully for its investors -- grow that stock price.
