Zulily (ZU) dropped sharply this morning, despite reporting an earnings beat, as management’s comments over guidance overshadowed the company’s solid results. However, I continue to like the stock and see the current weakness as an attractive buying opportunity for us.
The company is still growing its sales at a rate of 74% a year and despite a tough year-over-year comparison on marketing costs, ZU is still running at richer margins than Wall Street expected. Many traders were steeled to see a net loss above $0.03 a share; instead, ZU practically broke even in the quarter. Clearly the “Back to School” season was good for the company, maybe even better than what the market wanted to see.
The sour note is from management’s unwillingness to raise guidance on the current quarter. We already know that ZU is looking at around 55% sales growth as we move into the holidays—a good but not critical season for children’s apparel—and that earnings are on track to be better than every other period in the company’s history put together. This quarter was the turning point for ZU in terms of approaching profitability. Because of this, I don’t expect the shares to trade below $30 three months from now, much less in the spring. The last time ZU dipped to these levels, shares were back above $40 eight weeks later, and since nothing has changed here in terms of fundamentals or the formal earnings trend, I expect we’ll see a similar rebound move in the near future. With plenty of time for a recovery, continue to buy ZU up to $36.70.