No one should be happy with Liberty Interactive (NASDAQ:QVCA) buying out flash sale site Zulily (UNKNOWN:ZU.DL) for $2.4 billion. The $18.75 per share offer doesn't even get investors in the flash sale site back to where they started 2015, and the QVC parent's shareholders have to wonder if they're vastly overpaying for a dwindling franchise.
Gone in a flash
Zulily is in decline. Having gone public at $22 a share in November 2013, its stock quickly soared to more than $73 the following February before beginning a long, steady decline, eventually hitting a nadir of $9 a share this past May as its previous meteoric sales growth evaporated. When it reported second quarter earnings earlier this month, net sales had only inched 4% higher to $297.6 million.
Although the back half of the year is typically Zulily's busiest season, its rate of growth has slowed precipitously and not just on revenues, which I noted after its big first quarter earnings miss -- investors had ample warning a slowdown was coming. It's also slowing on the other metrics Zulily claims are important to watch, including the number of active customers, the total orders placed, and the average order value. All of those metrics are also showing signs that the flash sale site may be past its prime.
- A year ago, active customers increased 86%; this year they rose 19%.
- Total orders placed jumped 92% in the second quarter of 2014; they were up just 7% this year.
- The average order value was $53.85 last year, up 1%; this time, it fell to $53.63.
The company still has many of the same disadvantages that have turned many shoppers off to the site, including long ship times, a virtual no-return policy, and high shipping fees. The deal-a-minute formula also looks tapped out as daily deal rivals like Groupon and RetailMeNot are already shells of their former selves, and their stocks trade at fractions of their prior valuations.
So, Liberty Interactive investors may be wondering what are they getting out of the deal that could be worth $2.4 billion?
According to the press release announcing the deal, the two businesses are "highly complementary" but have very little overlap in vendors. Liberty sees the opportunity of introducing Zulily's vendors to its QVC television platform as well as putting Zulily on TV, too.
That may be asking a lot. Zulily says it's looking to gain insight into how QVC handles quick payments and quicker shipping, something that shouldn't be all that hard to have figured out. It's Zulily's inventory-lite business model that greatly contributes to its inability to get product to consumers in a timely fashion.
Moreover, while both Zulily and QVC focus on the impulse purchasing habits of higher-income women, the former has targeted a niche market (new moms) that still offers a limited window of opportunity. QVC may be able to help its new addition to broaden its horizons, but there doesn't seem to be enough of a payoff beyond that core group to make the premium price tag seem reasonable. And it's certainly going to need to improve fulfillment.
Under the terms of the deal, Liberty Interactive will pay Zulily investors $9.375 in cash for each share they own, along with 0.3098 share of newly issued QVC stock. The cash portion will come from Liberty's cash on hand, cash at Zulily, and QVC's revolving credit facility.
The half stock deal does limit the risk for Liberty Interactive, as does using Zulily's cash to help pay the balance. If it can fix the problems that plague the flash sale site and expand its base by making it and its vendors available to more customers, there could be some greater upside in future growth that the market was discounting.
Yet the deceleration under way at Zulily suggests it may have missed the chance to make a more viable business out of itself, and while perhaps not nuts for paying as much as it did, Liberty Interactive should have been able to drive a harder bargain.