Flash sale specialist Zulily (UNKNOWN:ZU.DL) reported first quarter earnings that can be described in a single word: horrible.
Net sales grew to $306 million, just making the low end of the revenue range management previously provided. And though analysts bemoaned the drop off in growth from the fourth quarter's 52% rate, that's not the real concern because Zulily is something of a seasonal retailer and its third and fourth quarters are the strongest, so a decline in the first quarter is not unexpected.
Zulily's problem lays in the revenue growth rate plunging from 87% in the first quarter a year ago to just 29% in 2015.
Raising warning flags
When sales growth drops by 50% or more year over year, that should be a red flag for investors. And it doesn't matter if we're talking about growth of 150% one year followed by 75% growth the next. Even though we all know such phenomenal rates are impossible to sustain, such slowdowns generally precede an earnings shortfall.
If investors had heeded the warning sign Zulily issued last quarter when its growth rate went from 100% to 52%, they would have been able to get out before suffering even greater pain. Stock that had been trading at almost $20 a share plunged 30% to $15 after it reported fourth quarter results, but that would have been a better price to exit at than the $12 a share they dwindled to before the current earnings release.
Now the stock is tumbling again, trading in the single digits, and management's guidance for the rest of the year doesn't give any encouragement that things will improve. In fact, it's hard to see that it's stock is still not overpriced.
Growth has all but evaporated
Zulily said it expected second-quarter revenue to come in at $285 million-$300 million, well below the $362 million analysts were forecasting, and full-year net sales are expected to come in at a range between $1.3 billion-$1.4 billion, also below the $1.5 billion expected by Wall Street.
At best Zulily is forecasting 5% quarterly growth -- at worst it's flat. That's a big change from last year when net sales nearly doubled. For the full year it's predicting 16% growth at most, a far cry from the 72% jump it saw in 2014. Investors are being given yet another red flag, as if they haven't had enough already.
Even on the metrics Zulily claims are key -- active customers, total orders, placed, and value of the average order -- we see growth rapidly decelerating.
A year ago, Zulily reported the number of active customers had grown 95% to 3.7 million people, and this year it said they increased by 35%. Last year total orders placed jumped 90% -- this year, 14.5%. In the first quarter of 2014, average order size rose 4.3% to $55.34 while this time around it was up less than 1.7% to $56.26. No matter how you look at it, Zulily growth is standing on the brakes.
Hurry up and wait
One area where the flash sales specialist did improve was in its order-to-shipment response time, which declined from 13.2 days a year ago to 11.9 days this year. But as much of an improvement as that is, as I pointed out in December, it woefully lags rivals like Rue La La and Gilt, let alone Amazon.com (NASDAQ: AMZN), which pioneered two-day shipping, is experimenting with same-day delivery, and now is exploring instantaneous ordering options.
Back then I noted the relatively long delay in customer gratification could be a problem to future growth and it seems that may be at least part of the reason why all of its growth metrics are evaporating.
Now I did follow up and grant it the grudging possibility 2015 could be the year it lived up to its potential if it straightened out its delivery shortcomings. It's expanding fulfillment centers and is still working out the kinks in its inventory-lite business model.
Plenty of air below
It's clear, though, at this stage anyway, Zulily still has a long way to go before it hits bottom, and despite the savage haircut it's been given over the past year -- the stock is down 76% over the past 12 months -- it still trades at more than 25 times estimated 2015 earnings.
With GAAP losses of $2.5 million, negative free cash flow, and now a new CFO on board after the last one stepped down in February, there's very little to recommend Zulily at this time.