Zulily's IPO debuted in November 2013 - the shares priced at $22 and the stock roared out of the gates, jumping over 70% in the first day of trading to $37/sh. The company continued climbing to an astronomical $70/sh in the span of months! However, after February 2014, the company's share price rapidly declined to a low of $9/sh before being acquired by QVC at $18.75/sh, a respectable premium. At it's peak, the company was worth over $9B, at it's low it was worth about $1B, and it was acquired for $2.4B, all in the span of less than two years. Let's examine the business to see what happened:
Zulily is a daily flash sales site that launched in 2010 focused on moms. Products are sourced from thousands of large and small vendors and sold to Zulily's many millions of customers. Due to the "daily deal" format, Zulily effectively publishes a new site every day with thousands of unique items that are typically available for only 72 hours. The company started in children's apparel which is still the largest category but has since expanded to many other apparel categories. The company is heavily reliant on a merchandising model and has about 350 people merchandising and taking photos of products. As a result, customers get a huge product assortment, but Zulily has to also scale their own fulfillment operations as they grow. In terms of the market that Zulily serves, there are two ways to look at it: 1) 38M moms in the US (Zulily has several million active customers today) and 2) $461B of annual retail spend in kids & women's apparel.
Zulily has demonstrated consistent revenue and EBITDA growth. It's actually quite remarkable, the business did just $18M of revenue in 2010 but rocketed to over $1B of revenue in just four years. They turned EBITDA positive in 2013 as they went public. In terms of operating leverage, the company has maintained fairly consistent levels. Marketing has stayed flat as a percentage of revenue and SG&A has increased slightly. Gross margins have stayed relatively stable at 27-30%. Note: 2015 and 2016 are based on current analyst estimates.
Key Performance Indicators (KPIs)
The company cites KPIs such as total orders place, number of active customers, revenue per active customer and average order value. These are demand KPIs and I assume that the company also intensively tracks (but does not report on) many of their supply side metrics. The growth is really impressive - they had a whopping 5M customers in 2014 with increasing revenue per active customer and average order values.
So Why Did The Stock Tank?
It's about expectations. When Zulily went public they were approaching $1B of revenue and growing 100% year over year. Optimistic investors were willing to pay a premium multiple if Zulily was somehow able to maintain that kind of hyper growth for years to come (with increasing margins as well). As you can see below, this didn't happen exactly as planned. At IPO, analysts were forecasting very healthy growth through 2016 with EBITDA margins increasing to 7.6%. Instead, growth stalled in 2015 while EBITDA margins simultaneously suffered. Significantly lower growth means you get a significantly lower valuation multiple, even more so when EBITDA shrinks since it's a proxy for free cash flow. This is a business with thin margins so slight fluctuations in margins can be devastating.
To be fair, the growth and profile of the company is still extremely impressive and far superior to most ecommerce businesses of this breed. However, for the sake of simple comparison, ecommerce companies typically trade on revenue multiples between 0.5x-1.5x forward revenue. At it's IPO, Zulily priced at about 2.5x forward revenue, and at it's peak reached almost 8x forward revenue! While Zulily has had impressive performance, they have faced scaling challenges that are common in operationally intense ecommerce businesses.
Valuing a business like Zulily requires looking at much more than a few basic metrics. Ecommerce businesses are fascinating because there is so much transactional data (see my previous post on other ecomm companies). It would be interesting to look at other key metrics such as working capital, fulfillment KPIs, shipping time, refunds and customer cohorts.
Zulily's lackluster performance in the public markets led some to ask the question of whether businesses like Zulily can ever be a viable, independent public entities. I believe that it's all a question of valuation and expectations. It's easy to critique the flaws of a business, but by any account Zulily is a beast of a company. Valuations are based on the present value of future cash flows and as it turns out ecommerce businesses aren't super profitable (despite massive revenue). The QVC acquisition is a great move for the company and will hopefully provide synergies that will benefit both businesses for years to come.