(Corrects date of last funding round in paragraph before ‘Losing Luster’ subhead, in story published July 31.)
Gilt Groupe Inc.’s new chief executive officer is trying to restore the promise of the online luxury retailer by focusing on what the company does best: deep discounts on a deadline.
Michelle Peluso’s company is testing technology to make its limited-time-only offers more effective, even as competitors shy away from the tactic and venture capitalists call it a fad. At stake are the ambitions for an initial public offering by the company, which was once valued at $1 billion as the buzzy standard-bearer of New York’s startup scene.
Gilt, which cut divisions and laid off employees after sprawling into too many businesses too quickly, is already seeing a return to faster growth under Peluso, who joined in February from Citigroup Inc. (C:US) Sales growth in the past three quarters is up 50 percent from the previous nine-month period. Peluso is reorganizing the business and opening up internal statistics to employees to get them energized about flash sales after a year of market skepticism.
“There’s still this myth out there that flash is not exciting,” Peluso, 41, said in an interview at the company’s headquarters in midtown Manhattan. “Flash is our core. We did take our eye off the core last year, but we’ve refocused and the performance of Gilt has improved quite a lot since then.”
Board members say Peluso, who replaced the company’s co-founder, Kevin Ryan, can bring the startup past $1 billion in revenue toward sustainable profitability and an IPO. The company had $550 million in sales last year, excluding businesses it discontinued, compared with $450 million in 2011.
While flash sales fueled Gilt’s growth, they lost their luster as more companies tried similar models, said Brian O’Malley, a venture capitalist at Battery Ventures, which isn’t invested in Gilt. Designer brands also have less need to rid themselves of excess inventory as the economy improves, diminishing Gilt’s supply of coveted items, he said.
“People are pretty negative on flash sales right now,” he said. “Gilt has probably taken longer to become a profitable business than any of them would have liked. It was probably the poster child of this space, but they expanded and got faced with some complexities they weren’t expecting.”
Some Gilt rivals are moving away from the tactic, while others are stumbling. Fab.com Inc. stopped its flash technique this month, choosing instead to let customers track departments and products they like. Rue La La and Lot18 laid off employees and scaled back. Totsy, a flash site aimed at moms, liquidated its assets this year.
Peluso’s team is working on making its flash sales better, depending on data the 6-year-old business has gathered to persuade its 8 million active users to spend more. The company, which drives shoppers to its site through e-mails, started by personalizing subject lines.
The approach under testing takes that customization to the extreme. By using data on customers’ clothing sizes, preferred categories, favorite brands and browsing history, Gilt is offering special time-sensitive sales tailored to individual customers, betting it will get a higher rate of purchases.
Peluso’s reasoning is that shopping is more exciting if it is an event, and that sales will be more attractive if they’re exclusive to a single person.
“The core business can be significantly bigger in the U.S. and overall, since we’re still such a small part of the discount luxury market,” she said. “There are parts of our business that we should be able to grow even faster.”
It’s a more focused growth strategy for a company that got its start in discount designer clothing in 2007 and kept expanding into new markets -- clothes for kids, travel packages, food and local deals -- under Ryan, a serial entrepreneur. Some of the new experiments were difficult to manage and invest in alongside the main business.
Jetsetter, a travel site, was sold to TripAdvisor Inc. (TRIP:US) in January. Gilt Taste, which dealt with perishable goods, was wrapped into Gilt Home. Park and Bond, a full-priced men’s clothing store, didn’t fit with the discount flash-sales business either, and was shut down.
“For certainly the first few years of Gilt, everything we touched seemed to work,” said Susan Lyne, a former Gilt CEO who is now a board member and also leads AOL Inc. (AOL:US)’s media properties. “The last few launches we did just didn’t resonate with our customers, and we were no longer a company in hyper-growth. A marketplace accepts the idea of unprofitable companies if they’re in hyper-growth, but we were growing 20 or 30 percent.”
The company has stopped losing money and expects to generate cash from operations for the first time by the end of this year. Peluso is boosting marketing spending to help grow globally and on mobile, which already accounts for more than 40 percent of sales.
Her style contrasts with that of Ryan, who was “the right person at the right time” to experiment with new businesses because of his entrepreneurial background, said Dana Stalder, an investor and board member. Ryan has co-founded a number of startups, including New York-based 10gen Inc., a database software company, and Business Insider Inc., a news site. He remains chairman of Gilt while he starts new companies.
Peluso was CEO of Sabre Holdings Corp.’s online flight reservations unit, Travelocity, which she helped modernize starting in 2003. In 2009, the year she joined the board of Gilt, she started working for Citigroup and became chief marketing and Internet officer, aiming to make banking technology more consumer-friendly. She would film people writing their thoughts about Citigroup on boards she placed on New York streets. Peluso also signed an agreement to sponsor Citi Bike, a system to share bicycles in New York City.
Peluso wakes up each day 5:30 a.m. to greet her 3-year-old and 4-year-old, who are usually already awake and playing. She spends time with them until 7:30 a.m., when she often has an employee to take to breakfast. At work, she sits at a different desk each week and spends some time doing the job of a different team, whether it’s retouching photos, paying bills or pushing out code to the website. That gives her a better sense of how each team could be more efficient and whether the employees have concerns she needs to address. She leaves the office at 5 p.m. every day to return to her family, and then signs on to work through e-mail again from 8 p.m. until 11 p.m.
At its latest round of funding, in 2011, Gilt was valued at about $1 billion, according to a person familiar with the matter who asked not to be named because the information is private. That compares with the more than $1 billion valuation of Fab.com, a competitor in New York with $115 million in revenue last year, and the $600 million valuation of the Fancy, which takes in about $3 million in revenue each month. Gilt has raised $229 million to date, and doesn’t plan to raise any more until an IPO, Peluso said.
“Everything Michelle is doing right now certainly puts us in a strong position to be able to IPO at the right time,” Lyne said.
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