ZU Stock: Is Zulily Growing Itself to Death?

Zulily Inc (NASDAQ:ZU) stock is plunging by as much as 17% in morning trading on Wednesday, after the flash sales e-commerce company reported disappointing first-quarter revenues and lackluster second-quarter guidance.

ZU stock isn’t in free fall because Zulily isn’t growing — it is. The top line grew 29% in the first quarter.

zulily zu stockZU stock is in free fall because investors worry that Zulily doesn’t know how to handle its explosive growth. As a Zulily investor myself, I have some of those same concerns.

ZU Stock’s First Quarter

Zulily, a flash-sale website that markets to moms, is having trouble keeping its focus. Instead of doing everything within its power to change the well-known delivery problems the site has had, Zulily decided to expand its stock keeping units — you know, because more is always better.

The ZU stock price today would argue otherwise. Although earnings per share came in at a penny, beating analysts’ calls for a loss of 4 cents per share, revenue missed by a mile.

Zulily logged $306.6 million in sales versus analyst expectations for $314 million. Of course, as everyone knows, investing is about the future, not the past. Unfortunately for ZU investors, the future ain’t looking as hot as it once was, either.

Revenue guidance for both the second quarter and the full year were both severe disappointments. The $285 million to $300 million Zulily expected this quarter fell well short of the $362 million Wall Street wanted, while the $1.3 billion to $1.4 billion in projected revenue for fiscal 2015 wasn’t quite the $1.58 billion analysts expected, either.

As if that wasn’t already bad enough, Zulily named Brian Swartz, former Chief Financial Officer at Apollo Education Group Inc (NASDAQ:APOL), its new CFO. It must be conceded, Swartz does have experience with falling stock prices — APOL stock has lost 70% over the last five years.

Zulily needs to refocus on its core customer — the mom. What better time to do that as we approach Mother’s Day on Sunday? Mom would really like you to figure out who you are at your core, Zulily, because it’s obvious. You’re a momma’s boy. Just own it.

Amazon.com, Inc. (NASDAQ:AMZN), Overstock.com, Inc. (NASDAQ:OSTK), Wayfair Inc (NYSE:W) — these are all companies that understand who they are. It’s time to grow up and join the club, ZU.

The Risk of a Falling Knife

When you try to catch falling knives, you often get cut. That’s the way the game goes, but despite Zulily’s issues, I’m still cautiously optimistic about ZU stock going forward.

In April, Zulily announced that it was revamping its business model to drastically reduce shipping times, and it was a change that, when announced just a month ago, helped to make me a Zulily bull.

I still believe the change in Zulily’s business model will help retain valuable return customers, as will its refocused product mix. Zulily didn’t change its business model until last month, so we wouldn’t have seen the effects of the new model in first-quarter numbers.

Frankly, I’m pretty disappointed in Zulily’s management for not being able to gracefully handle ZU’s own popularity, but I’m going to give Zulily another shot before giving up on ZU stock entirely. Falling knives can bounce back pretty forcefully.

As of this writing, John Divine was long Jan 2017 ZU $20 calls and was long W stock. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.

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