Zulily's Guidance Had Analysts Apologizing

Zulily Inc ZU released first quarter 2015 earnings on May 5, revealing decelerated growth and slashed guidance. The grim outlook caused Zulily shares to fall 18 percent on Wednesday.

The e-commerce website posted first quarter revenue of $306.6 million. Although this marks a 29 percent year-over-year increase, it fell below the analyst consensus of $313.5 million. Zulily’s quarterly revenue also represents growth deceleration, as last quarter’s posted revenue marked a 52 percent year-over-year increase. Management attributes the slowdown to first time customers failing to return to the website. However, Zulily highlighted that active customers grew to 5 million, marking a 35 percent year-over-year increase.

Zulily posted non-GAAP diluted net income per share of $0.01, beating the analyst consensus of a loss of ($0.04) per share. In addition, Zulily repurchased approximately 2.3 million shares for $31.3 million in the first quarter.

However, the bad news arrived when Zulily slashed guidance. Zulily had previously guided full-year 2015 revenue between $1.5 billion and $1.65 billion before slashing it in the earnings report to $1.30 billion to $1.40 billion. Zulily is expecting second quarter revenue between $285 million and $300 million; substantially below first quarter earnings.

Additionally, Zulily named Brian Swartz as the new CFO, former CFO of Apollo Education Group.

Analysts quickly became hesitant of Zulily following earnings and slashed guidance.

Analysts at Stifel Nicolaus led by Scott Devitt downgraded Zulily from Buy to Hold following the earnings report and issued a rare apology for recommending the stock. Devitt wrote that Stifel Nicolaus was wrong and is sorry for recommending the stock because “Zulily was not able to transition from the straight fastballs of Little League (its initial model) to the curve balls of the Big Leagues (a more sustained growth model).” He continued, “We made a horrific call on the stock when we initiated coverage in January.” At the time, Devitt believed Zulily had a “solid growth profile and limited inventory risk,” making it an “appealing long-term asset.” Devitt now acknowledges that he did not realize the company “would have this much trouble with the curve.”

Consequently, Scott Devitt has an average loss of 36.5 percent per Zulily rating. Overall, Devitt has a 59 percent success rate recommending stocks with a +15.6 percent average return per rating.

Separately, Mark Mahaney of RBC Capital reiterated a Hold rating on Zulily but lowered his price target from $18 to $12. Mahaney acknowledged that “the lily is wilting” and noted, “The dramatic deterioration in ZU’s fundamentals ranks as one of the most surprising developments we have seen in the Internet sector over the past year.”

Consequently, Mark Mahaney has an average loss of 48.9 percent per Zulily rating. Overall, Mahaney has a 64 percent success rate recommending stocks with a +21.9 percent average return per rating.