Can This Internet Retailer Go from Good to Great?

By Markets Fool.com

The Internet retail market is booming today as more people make purchases online or through mobile devices such as smartphones than ever before. This shift to online shopping shows no signs of slowing. In fact, by 2018, online sales in the U.S. will top $414 billion for a compound annual growth rate of 9.5%, according to research firm Forrester. Let's take a closer look at Internet retailer Zulily , and whether strong industry dynamics could take the company from good to great in the quarters ahead.

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The future of shopping
There is no denying that online shopping is here to stay. However, a better question is whether flash-sale site Zulily has what it takes to go from "meh" to mega online retailer. Zulily, which caters to women with kids through daily online flash sales, has had a rough time lately. Investors pushed the stock lower by as much as 80% over the past year following weak sales guidance and higher costs for customer acquisition. The stock is now trading around $13, or a cringe worthy 40% below the company's 2013 initial public offering price of $22 per share.

Despite recent setbacks, Zulily has a good foundation to build upon. It ended 2014 with 4.9 million active customers, an increase of 54% over the previous year, though the cost of obtaining new customers also grew over that period. Additionally, the company generated net sales of $1.2 billion last year, up 72% year-over-year. This tells investors that Zulily has the potential to become a meaningful growth stock. However, a deeper dive into the company's operations reveals one major headwind that could hinder Zulily's ability to go from good to great down the road.

Source: Zulily.com.

Sluggish delivery is one of the key things holding Zulily back from greatness today. Thanks to e-tail giant Amazon , online shoppers have come to expect two-day shipping. Unfortunately, it often takes two to three weeks for Zulily to get purchases to its customers, according to The Wall Street Journal. Therefore, by the time you receive that infant romper you ordered, there's a good chance your baby will have outgrown it already.

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This can lead to poor customer satisfaction, which for Zulily could mean fewer customers returning to the site to make future purchases. (Gasp!) Still, Zulily hasn't made meaningful strides to fix the problem. The company's average shipping time, for example, actually increased to 13 days during the first quarter of fiscal 2014, up from 11 days a year earlier.

There must be a better way
Here's the problem: Zulily doesn't own the merchandise it sells. Instead, the company orders the products from third-party vendors only after it sells them on Zulily.com. This leads to the convoluted process by which Zulily must wait for the vendors to first ship the products to one of Zulily's warehouses, before then sorting and reshipping the merchandise to its customers.

In some ways, this actually works to Zulily's benefit because it enables the company to carry a wide range of products from more than 10,000 vendors without the high cost of overhead inventory. Nevertheless, Zulily needs to cut wait times if it wants to have a real shot at e-tailer greatness.

Management says it is testing a vendor fulfillment program that would allow vendors to store merchandise at Zulily's fulfillment centers. "Because the inventory still belongs to the vendors we are able to do this without taking risk on our balance sheet," explains Darrell Cavens, Zulily's chief executive. Investing in better distribution methods and faster shipping will take significant resources and could crimp Zulily's profits in the near-term.

Zulily may be the fastest-growing flash sale site around today. However, if it doesn't get a handle on shipping, the company may not be around for long. Consequently, I don't believe Zulily can go from good to great until it significantly reduces delivery times.

The article Can This Internet Retailer Go from Good to Great? originally appeared on Fool.com.

Tamara Rutter owns shares of Amazon.com. The Motley Fool recommends Amazon.com. The Motley Fool owns shares of Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.