3 Positives and 4 Negatives From Zulily's Q2 Report

Despite a strong second quarter, Zulily ZU shares are under pressure due to forward-looking margin concerns.

CRT Capital thinks the report was mostly strong, but prefers to sit on the sidelines for the time being.

3 Positives

1. Strong top and bottom line results. Orders are up 92 percent year over year on 4.1 million active customers over ttm.
2. Mobile orders made up 49 percent of total sales, accounting for 124 percent year-over-year growth.
3. The company is relying on much fewer discounts than expected.
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4 Negatives

1. Guidance was mixed. Revenue was raised, but EBITDA was maintained.
2. Third quarter gross margins are under pressure as the company sees fulfillment costs increasing. CRT expects margins to increase in the fourth quarter.
3. The time it takes to ship an order is higher than expected and than what it was in 2013.
4. CRT thinks 2015 capital expenditures could be higher than expected after Zulily raised its 2014 capex expectations.

“While there's much to like about the ZU story — rapid customer and transaction growth, a strong mobile footprint, a highly engaged audience and a retail strategy that stands out from the crowd by not trying to beat Amazon at its own game — we remain on the sidelines for now given our concerns over ZU's mixed execution since IPO, still high valuation and long order delivery times that we believe could pose an obstacle to broader adoption,” analyst Neil Doshi said.

CRT’s $41 price target is based on 28 times EV to EBITDA, giving the company a $.6 billion enterprise value.