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Originally published February 20, 2014 at 8:24 PM | Page modified February 21, 2014 at 6:16 AM

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Zulily: Hot site for moms hits a moment of truth

Breakneck growth has made mom-oriented flash sales website zulily a darling with investors and one of the biggest e-commerce companies in the region. On Monday they’ll get to see if zulily lives up to the hype as it publishes its first quarterly earnings results as a publicly traded company.

Seattle Times business reporter

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At zulily’s Seattle offices, models strut in leather boots and flowery dresses; assistants carry toys and baby pajamas back and forth. Racks of ballerina outfits and rainbow angel wings crowd in among the dozens of writers and photo editors charged with touting about 60 new mom-oriented “flash sale” deals that go on its website every day, seven days a week. It’s like a cross between a newsroom and a vaudeville backstage.

Launched by former Blue Nile executives just four years ago, zulily has become one of the hottest names in e-commerce, making a big splash last November with an initial public offering that valued the company at $2.6 billion — a figure that nearly doubled on the day of its IPO.

On Monday, the 950-employee company will unveil its first quarterly financial results since going public — which means investors will get the first inkling of whether their lofty expectations for continued breakneck growth can be met.

To grasp how high those hopes for zulily are, consider this: The company, which had $439 million in sales for the first nine months of 2013, is now worth about $5.1 billion. That’s approaching half the market value of Nordstrom, whose latest nine-months sales were 19 times larger than zulily’s.

Some high-profile Internet companies have recently disappointed investors. Twitter, which became a publicly traded company a few days before zulily and sparked a similar buying frenzy, saw its shares drop 20 percent after it posted its first quarterly earnings earlier this month.

Critics of the flash-sales model, which relies on limited-time discounts that are supposed to spur consumers into action, will be looking at zulily for anything that might reek of Groupon, a daily-deals website that had a red-hot IPO in 2011, but quickly lost its luster.

The company’s challenge is to successfully scale up a business model that relies on a large army of merchandise-sourcing experts seeking novel products and a hands-off approach to handling inventory that results in relatively slow deliveries.

Riding the online wave

The rise of zulily comes at a time when online retail seems to have gained a definitive upper hand versus its brick-and-mortar competitors.

Data published last month by market research firm ShopperTrak indicated that foot traffic among retailers dropped 14.6 percent in the holiday season versus the previous year, despite 2.7 percent growth in overall retail sales.

Foul weather played a role, but analysts and executives have pointed to an enduring migration away from malls, as consumers increasingly shop from their desktops and mobile devices.

But zulily is competing in an increasingly crowded landscape, not only with giants such as Seattle-based Amazon, but also with the online sites of traditional retailers such as Gap.

Other flash-sales sites, such as Gilt, Rue La La and Nordstrom’s Haute Look, also offer apparel for kids. Not all have had smooth sailing: Both Gilt and Rue La La laid off staff in 2012.

So experts say zulily needs to keep people coming back by offering a pleasant experience and endless, but well-curated variety.

“People go to these sites because they build brands for themselves,” said Sucharita Mulpuru, an analyst with Forrester Research. “It’s almost like a grocery store in some ways. You go intending to buy something and you end up with something else.”

Executives of zulily, who were not available for interviews ahead of the earnings news, have extensive pedigrees in online retailing — and are therefore familiar with the industry’s ups and downs.

Chief Executive Darrell Cavens was a high-ranking executive at online jewelry store Blue Nile. Chief Financial Officer Marc Stolzman is also Blue Nile’s former CFO. Chief Information Officer Luke Friang was at before joining zulily in 2011. Mark Vadon, zulily’s co-founder and chairman of the board, founded Blue Nile and held its reins as CEO until 2008.

The company has outgrown its original offices in the Sodo neighborhood and is moving hundreds of workers to new waterfront headquarters on Elliott Avenue West. Last month the company also leased a 48-acre distribution center in Nevada for an initial $1.3 million a year.

How it works

Moms are increasingly using e-commerce as a form of entertainment, in addition to satisfying their need for specific products, zulily said in its IPO documents.

Key to its strategy is to constantly offer a fresh crop of time-limited sales on new items, which users can glimpse on its website only after signing up and signing in.

A recent visit showed discounted furry BEARPAW boots, children’s socks from Swedish maker Happy Socks or Fisher Price, and a $34.99 throw pillow urging onlookers to “Keep Calm and Walk the Dog.” The pillow was deeply discounted from the original suggested retail price of $85.

Sales events are heralded by targeted emails and push notifications. The average item on the zulily site retails for more than 50 percent off the suggested retail price, the company says.

Most products, zulily says, come from boutique retailers and emerging brands that otherwise would be hard to find. That gives vendors an audience of millions, and customers the sense of discovering new things.

To make this all happen, zulily relies on 314 buyers tasked with finding the next hit.

That’s a lot of buyers, says Forrester Research’s Mulpuru — and their sheer number explains how zulily was able to grow as fast as it did.

In comparison, TJX Cos., the owner of T.J. Maxx and Marshalls, with nearly $7 billion in quarterly sales as of November, has 800 buyers.

Macala Wright, an independent digital market strategist, says zulily’s staff of buyers allows it to seek deals from new designers at a reasonable cost instead of relying on retailer overflow — a reliance that crushed the business models of many flash-sales sites as that overflow dried up when the economy emerged from the recession. It also keeps things fun.

“Consumers want some originality,” Wright said.

Another key part of zulily’s strategy: producing its own content — lots of it. Some 50 writers come up with the prose to pitch its newfound wares, which are photographed at the company’s 43 in-house studios.

Unlike most online retailers, zulily typically doesn’t hold items in inventory: It gets them from the manufacturer once a zulily customer has placed an order.

That allows the company to offer a wider variety of products than would otherwise be possible. On a typical day, a customer can find more than 4,500 types of products on its site.

But it also means delivery is slower than with competitors, a fact the company acknowledges in its prospectus. Also, said Forrester Research’s Mulpuru, not owning its own inventory makes it difficult to get the attention of some of the biggest apparel makers, which could hinder growth.

“If you want to scale and be a billion-dollar business, there’s not that much inventory they can sample without owning,” she said.

Another obstacle for growth is that the baby market is finite, said Mulpuru. But zulily already seems to be branching out.

It soon discovered that moms like shopping for themselves as well as for their children, so the site offers a wide variety of shoes, bags, yoga mats, scarves, dresses, lingerie and jewelry. Items other than children’s apparel accounted for 54 percent of units sold in the first nine months of 2013, up from 45 percent during 2012.

So far the formula has resulted in exponential growth. About 2.6 million customers purchased at least once from the site in the 12 months ended last September, a 96 percent increase from the previous year. Of those shoppers, 83 percent were repeat customers.

Some startups have grown along with the online retailer: Jelly the Pug, a children’s apparel maker in San Francisco, had fewer than five employees when it began its association with the online site in 2011. Now it has its own factory in Pakistan and employs between 250 and 300 people, and its shipments rose from about 10,000 units a month to 50,000 units last January, said Jelly the Pug CEO Adnan Mehmood.

“They have a large customer base so we can take a lower margin and move a higher volume,” he said. “That’s been the biggest win-win.”

Ángel González: 206-464-2250 or On Twitter: @gonzalezseattle

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