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Gilt Groupe is likely in its last days or months as a standalone company, and the story of why is about two things: The market it bet on and its failed business expansion.
The company is in talks to sell to Hudson’s Bay Company, the parent company of Saks Fifth Avenue and Lord & Taylor, according to two sources. While the talks are serious, one person cautioned that another buyer could emerge to acquire the company instead. The Wall Street Journal first reported the possibility of the sale for $250 million, less than what Gilt raised from investors and about a quarter of its one-time private valuation.
No matter who the buyer is, multiple sources expect Gilt to sell to someone in the not so distant future. And the story of why Gilt is in a position where it is being forced to sell has two sides. The writing has been on the wall since early this year when Gilt raised around $50 million in a last-ditch effort to reignite growth.
Part of the blame goes to multiple bad bets on expansion. Gilt first grew rapidly by selling heavily discounted women’s fashion apparel when the economy was rough and excess inventory was common. There were few places for brands to unload their goods quickly and at scale. Gilt raised hundreds of millions to help expand into categories including, travel, food and full-priced men’s apparel, all of which ended up flopping.
But the flip side of the story has always been more troublesome for Gilt: The realization that the flash-sale business is just not sustainable for a massive, standalone company. One reason is because as the economy has strengthened, fashion brands have typically had less inventory to unload. And when they do have more inventory to sell, there is now a much wider variety of sites and stores through which brands can distribute. Plus, Gilt gets more than a third of its revenue through Gmail email campaigns, and that method continues to be challenged because of how Google filters marketing messages out of the main inbox.
As a result, Gilt’s business weakened materially in 2014, sources previously told Re/code, with growth slowing in the first half of the year and then dropping off in the second. The company’s earliest customers weren’t coming back as often as they once did, and new customers were bargain hunters who were nowhere near as valuable as its early customers. Part of this has to do with the fact that Gilt was displaying more of the same brands that customers could find elsewhere, and showing them much more often than they once were.
“We didn’t have that mix right in 2014,” CEO Michelle Peluso previously told Re/code.
The company raised money as it tried to get close to profitability. That hasn’t happened, with the company’s revenue declining 10 percent in the third quarter as its cash cushion shrinks, according to the Journal. The company counters it has reached Ebitda profitability this quarter, which measures a company’s core business and doesn’t include certain costs such as taxes and depreciation. There are still a few weeks left in the quarter, often the busiest time for retailers, so that’s still a projection.
In the end, as the flash-sale fad started to wane, Gilt was never going to be a standalone profitable business at the scale it needed to live up to its hype and valuation. Now its team hopes it can just become one significant sales channel within a larger retail operation.
This article originally appeared on Recode.net.
