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Don’t Give Up on Groupon

March 05, 2014 | About:

Groupon (GRPN) has recently released its quarterly results in which it managed to beat market’s estimates, but the company’s shares are down 26% this year. Moreover, RBC and Credit Suisse have exacerbated the situation by downgrading the stock. Despite the pessimism, there were several positives in Groupon’s earnings.

In the final quarter of 2013, Groupon’s revenues increased 20.4% from the previous year to $768.4 million, which was better than analysts’ expectations of $718 million. The business swung from an operating loss of $12.86 million in fourth quarter 2012 to an operating profit of $13.35 million. Groupon, however, still posted a net loss of $81.2 million, or $0.12 per share, which is flat from the prior year’s results. Excluding one-off items, this translated into adjusted profit of $0.04 per share, which was also above analysts' estimate of $0.02 per share.

Turnaround in EMEA Region

In North America, the company’s revenues climbed 18.2% to $443 million while in EMEA region, it recorded growth of 42.5% to $251 million. This solid growth easily offset the 15.2% decline in revenues from the rest of the world to $73.4 million.

During the previous quarter, Groupon witnessed 5% year-over-year growth in worldwide gross billing to $1.6 billion. Gross billings reflect the total amount collected from customers and is one of the key metrics to determine the growth of the company. Compared to the previous quarter, the gross billings growth in North America and the rest of the world was disappointing but the EMEA region witnessed a big turnaround. In EMEA, the company swung to an year-over-year growth of 6% in the fourth quarter from a decline of 21% in the third quarter.

Mobile Momentum

Groupon continues to gain traction in mobile. During the quarter, 9 million people downloaded Groupon’s app around the world. This comes after the company reported 9 million app downloads in the third quarter of 2013. The company now has recorded 70 million app downloads to date.

Besides the number of downloads, the percentage of transactions completed through mobile is another important metric to determine the growth in mobile. In these terms, Groupon reported a growth of 10%. By December, around half of its worldwide transactions were completed through mobile.

Transition from Push to Pull

Groupon has been transitioning from a "Push" business, which relied on sending daily deals to customer’s emails, to "Pull" business, which attracts customers by providing a search portal for deals. During the conference call, the management said that its customers have increased the usage of Groupon’s Pull, its online market place. However, Pull requires customers to delay their purchase decisions. The growth of Pull has, therefore, had an adverse impact on its local business. This negative impact could continue for a “few more quarters” but the company’s larger strategic decision towards Pull could be beneficial for the long term.

In the current quarter, Groupon will spend $25 million for marketing its Pull business.

Growing Direct Sales

Groupon is pushing its physical good sales (e-commerce) as part of its broader strategy to reduce its exposure towards the Push business. In this context Groupon competes directly with Amazon (AMZN) and eBay (EBAY).

In the previous quarter, the company’s direct sales surged 63% to $366.7 million.

This unit is operating on razor sharp margins as Groupon’s shipping and infrastructure costs are still high. Its daily-deal business witnessed a gross margin of nearly 87% while the direct sales business reported gross margins of less than 8%.

Groupon, however, has taken several measures that could considerably improve its direct sales, as well as its profitability. This includes launching of a shopping cart, of which most of the customers are currently unaware. As the word spreads, the company will start shipping more than one unit per order which will improve its effeciency. Secondly, Groupon has recently opened its first distribution centre so its cost benefits have not been fully utilized yet.

Moreover, with the growth of this business, the company will likely open more distribution centers in the future which will further drive down the costs.

To improve its logistics operations, Groupon got hold of Amazon’s head of Amazon Prime Shipping Program Robbie Schwietzer.

Furthermore, Groupon has recently made some significant acquisitions, including the purchase of Ideeli Inc., online flash fashion retailer, for $43 million. This will likely give a boost to its direct sales and ecommerce business.

Through these measures, Groupon can considerably grow its revenues while reducing its costs.

The company is very small player as compared to the e-commerce giant Amazon (AMZN). In the previous quarter, Amazon reported revenues of more than $25 billion, which is 5 times as much as Groupon’s market cap.

Bottom-Line

Groupon’s turnaround is going in the right direction but it is far from complete. The company still has a lot of work to do in terms of billings growth in North America and overall improvement in margins. On a positive note, the company has shown significant improvement in mobile and EMEA region while its direct sales continue to grow. The company has taken several measures that could power the growth of its direct sales business in the coming quarters.

Therefore, although the company’s stock has struggled this year and is down 26% to $8.68, there is room for optimism.

Disclosure: This article was written by Sarfaraz A. Khan, with valuable contribution from Gohar Yousuf, research assistant at Half Bridge Business Review. Neither Sarfaraz A. Khan, nor Gohar Yousuf, have any positions in the stock(s) mentioned in this article.

About the author:

Sarfaraz A. Khan
Sarfaraz A. Khan is a capital market analyst and finance writer. His specialty lies in energy stocks. He also covers consumer goods, services sector, technology stocks, emerging markets and ETFs. His work appears on TheStreet, Seeking Alpha, Motley Fool and GuruFocus.

Visit Sarfaraz A. Khan's Website


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