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Spokane, Washington  Est. May 19, 1883

As 5-year milestone nears, zulily deals with growth

Alyssa Gay is zulily’s official voice on Twitter. She started as a receptionist, but the humor she showed in company correspondence led to the online retailer using her talents on Twitter.
Angel Gonzalez Seattle Times

Seattle-based zulily, the moms-oriented flash-sales website, has been one of the fastest-growing companies in recent memory – skyrocketing in five years from zero to more than $1 billion in annual sales.

Now the company, which Tuesday celebrates the fifth anniversary of launching its website, faces a tough challenge: convincing skeptical investors that its future is as bright as its past.

The company’s shares spiked to $68.39 last February on frenzied Wall Street optimism after zulily’s November 2013 initial public offering. Now they are trading at all-time lows under its $22 IPO price, amid concerns about a slowdown in growth.

Zulily must also handle the expectations of many customers who find its lag time for delivering orders – averaging 11.6 days for the quarter ended in November – too long.

CEO and founder Darrell Cavens said zulily is working hard to speed delivery to a seven-day time frame. It has erected several huge warehouse facilities, the third of which will open this year.

But zulily is never going to chase same-day or next-day delivery the way other websites are doing, Cavens said. That would require an overhaul of its business model, which relies on not holding inventory to offer an ever-changing kaleidoscope of discounted products.

“We’re going to drive shipping times down,” Cavens said in an interview. “But not at the expense of value and diversity of product.” He warned it may “take us a while to do that” as efficiency improvements are made through the shipment chain.

As for investors’ expectations, “Wall Street in the short term is not something that we as a management team or me as a CEO can control,” Cavens said. “We’re focused on building the business long term.”

Cavens recounts how when the company had its blockbuster IPO, he sent an email congratulating the staff. But the email also said “when the stock goes up, we’re not that much smarter, and when it goes down, we’re not that much dumber,” he said.

Roots in rush hour

The idea for zulily took form in summer 2009, as Cavens, then a Microsoft executive, mulled opportunities in the changing world of e-commerce with Internet entrepreneur Mark Vadon. The area was not new to them: Vadon was a founder of successful online diamond retailer Blue Nile, and Cavens had worked at Seattle-based Blue Nile for many years.

Having two young children – a boy and a girl – made Cavens see how much stuff parents buy, and how often. That was the opportunity.

The leap of faith took place that September, when Cavens was stuck in eastbound traffic on Highway 520 telling Vadon he was going to quit Microsoft. “He spent the whole time trying to talk me out of it,” Cavens said.

To no avail: Cavens quit his job. He and Vadon borrowed some office space from Seattle venture-capital firm Maveron, and two weeks later, after pitching the idea to the Maveron VCs on a white board, got some funding. Ten weeks later, the website was online.

Zulily’s concept was similar to other flash-sales sites such as Gilt.com: Offer big, time-limited discounts. But zulily initially focused on kids’ products, targeting busy moms browsing the Web for shopping and entertainment. Soon the company would offer women’s wear, home decor items and even men’s clothing – but always focusing on mobile-phone-toting mothers.

Zulily now employs 4,000 people, including some 1,400 in Seattle. The company last year moved from a crowded building in Sodo to spacious offices on Elliott Avenue, with a waterfront view.

There’s a vaudevillian atmosphere – models strutting in new dresses, dozens of photographers taking pictures, assistants moving racks of new clothing around.

“I find it hard to believe some days,” said Cavens, referring to the rapid growth.

Analysts expect zulily to post $1.2 billion in sales this year. In the 12 months that ended September 2014, zulily already exceeded the $1 billion milestone.

Not many companies have grown so quickly. Zulily’s growth curve resembles its crosstown rival, Amazon, which posted $1.6 billion in revenue in its fourth year of operations.

But that remarkable growth has begun to slow. In last year’s third quarter, revenues totaled $285.8 million, up 72 percent – a lot, but less impressive than the second quarter’s 97 percent growth rate. The number of orders likewise grew more slowly, 63 percent compared with 92 percent in the second quarter.

The deceleration coincided with troubles delivering daily email promotions to customers via one major email provider; analysts with RBC Capital say that may have affected results. The rate of deceleration was “larger than it should have been,” the analysts wrote.

Cavens said those issues have been worked out. “These bumps are going to happen over time as we’re growing a business this fast.”

The company is expected to announce fourth-quarter results sometime in February. Analysts on average expect sales of $411.8 million, a 60.2 percent year-over-year increase that would underscore its slowing momentum.

Zulily is also figuring out how to expand its international operations, which Cavens says are a big opportunity. He said the company is debating the fate of its 50-person London office, which runs a miniature-sized version of zulily for the U.K., but can’t offer the diversity of products it does in the U.S.

In the future, zulily could decide to ship product to U.K. customers from the U.S., just like it does for Canada and Australia with good results, but a decision hasn’t been made.

Zulily may also attempt to establish itself in a non-English-speaking market soon.

“Internationally, e-commerce is changing. Five years from now it’s going to look very different from what it looks like today,” he said.