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Why Zulily, Inc. Stock Zoomed Lower Today

By Steve Symington - May 6, 2015 at 12:06PM

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Is Zulily's drop meaningful? Or just another movement?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Zulily (NASDAQ: ZU) were down 18% as of noon Wednesday after the online retailer reported mixed first-quarter results and reduced its full-year guidance.

So what: Quarterly revenue rose 29% year over year to $306.6 million, which translated to adjusted net income of $0.01 per diluted share. Adjusted earnings before interest, taxes, depreciation and amortization rose 66% year over year to $4.4 million.

Analysts, on average, were anticipating an adjusted loss of $0.03 per diluted share, but on higher sales of $313.1 million.

For the current quarter, however, Zulily expects revenue between $285 million and $300 million, with adjusted EBITDA between $8 million and $12 million. Wall Street was modeling second-quarter revenue and earnings of $358.6 million and $0.06 per share, respectively.

Finally, for the full year 2015 Zulily sees revenue between $1.3 billion and $1.4 billion, with adjusted EBITDA between $55 million and $70 million. By contrast, three months ago, Zulily called for 2015 revenue between $1.50 billion and $1.65 billion, and adjusted EBITDA between $55 million and $80 million. Consequently, analysts were anticipating 2015 revenue of $1.56 billion and earnings of $0.25 per share.

Now what: To its credit, Zulily did just launch its redesigned website last week, which it claims is "responsive in design and materially enhances the customer experience across all platforms."  

Zulily CEO Darrell Cavens explained during the subsequent conference call that "As we look back, we're finding that customers acquired from product and event specific marketing drove higher initial purchase behavior, but lower lifetime values. ... This has led to lower active customer growth as transactional customers are more likely to churn than our core repeat customers."

Consequently, Zulily has decided to slow its marketing as it retools its processes to invest with long-term ROI in mind. By focusing on improving the overall shopping experience and driving repeat business, Zulily is consciously sacrificing near-term growth in favor of higher quality long-term expansion.

Of course, that's little solace to our short-term-oriented market, which hates being told to hurry up and wait. For now, though, and while I applaud Zulily's prudent move, I'm content watching its progress from the sidelines until we see some traction in its new initiatives.

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