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RetailMeNot Is a Must-Buy

September 25, 2014 | About:

Every day, I receive many print coupons delivered through physical mail. First of all, it is not convenient to carry many coupons while shopping. Second, it is not easy to look for your desired coupons while making payments at the sale registry.

RetailMeNot (NASDAQ:SALE) is the perfect solution for consumers who like coupons. The coupons can be downloaded to smartphones through RetailMeNot's app and presented at the cash register. After the coupons are used, RetailMeNot can earn a fair percentage of revenue from the merchants, which issue the coupons. Not only is the business model simple and more effective than the traditional mail, but RetailMeNot provides a 100% upside potential if it can maintain its high growth rate for the next five years. With bright business outlook, SALE is a worthy investment.

Business Overview

RetailMeNot is the world's largest marketplace for digital offers. The website can connect retailers with the right shoppers anytime and anywhere to drive more sales. RetailMeNot's portfolio includes RetailMeNot.com and VoucherCodes.co.uk, which are the largest online coupon sites in the United States and United Kingdom respectively.

RetailMeNot is a high growth company. Its net revenues grew 37% to $59.5 million in the latest quarter, and organic net revenues were up 34%. What's more, international net revenues grew to $13.5 million, reflecting growth of 57%. The international revenues now represented approximately 23% of total net revenues.

Another amazing fact about customer acquisitions for RetailMeNot is that more than 90% of traffic came to the website either directly or via organic search, with less than 10% derived from paid search. This shows the website has already built the momentum to acquire customers, and the low customer acquisition costs is the reason why RetailMeNot can enjoy 92% gross margins. From the business point of view, RetailMeNot is highly lucrative.

However, it is worth mentioning that there was headwind coming from the Panda 4.0. As Google updated its search algorithm to Panda 4.0, the RetailMeNot's organic search ranking was negatively impacted. As a result, the website missed the Street's estimates on revenues and adjusted EBITDA in Q2 2014. In fact, the website has already realized the business threat and strives for diversifying its traffic sources. For instance, RetailMeNot has initiatives to increase customer usage of its mobile apps to become less reliant on organic search. Given that RetailMeNot currently trades near its 52 week-low, the negative impact seems to be fully reflected in its share price. As the retail trend toward the digital form remains intact, RetailMeNot is still well positioned to enjoy future revenue growth.

In addition, RetailMeNot is an innovative company. For instance, it recently opened up its proprietary A/B offer testing platform. This technology gives retailers insight into the impact of an offer with specific metrics, such as overall sales, conversion rates, and order values. The feedback and testing results are extremely positive. For the ever-changing internet/mobile apps industry, companies are constantly testing for new ideas, and I am positive that RetailMeNot, as the world's largest marketplace for digital offers, is well positioned to ride the growth rate in the digital world with innovative solutions.

Financial Strengths

RetailMeNot is a $911 million market cap company with $213 million in cash, representing 23% of market cap. Their debt is only $36 million, which is much lower than the cash in the balance sheet. As a result, the financial strength of the website is very strong, and it helps to provide more financial flexibilities for RetailMeNot to pursue different growth trajectories, including mergers and acquisitions.

Valuations

RetailMeNot only trades for about 10x EV/EBITDA. However, with 20% expected growth for the next five years, the website is one of the cheapest companies in the e-commerce universe in regards to valuations. As I mentioned above, the company just grew its net revenues by 37% year-over-year in Q2 2014. With such high growth in sales, the 10x EV/EBITDA valuation looks very inexpensive.

From the PEG perspective, RetailMeNot is expected to earn $1.17 in 2015. This results in 14.3x P/E multiple. Given 20% growth rate, the PEG is 0.7. The PEG below 1 indicates value relative to the growth rate.

Stabilized Yr.
Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Sales 295.98 355.18 426.21 511.45 613.74 638.29
EBITDA 118.39 142.07 170.48 204.58 214.81 191.49
EBIT 103.59 124.31 149.17 179.01 184.12 159.57
Net Income 64.93 77.92 93.50 112.20 115.46 100.13
EBIT x (1 - Tax Rate) 64.75 77.69 93.23 111.88 115.08 99.73
- Capital Expenditure 29.60 28.41 29.83 30.69 30.69 31.91
+ Depreciation & Amortization 14.80 17.76 21.31 25.57 30.69 31.91
- Change in Noncash Working Capital 4.37 7.99 9.59 11.51 13.81 3.31
Adjusted Free Cash Flow (NYSE:FCF) 45.58 59.05 75.12 95.26 101.27 96.42
FREE CASH FLOW (FCFF) VALUATION MODEL
Present Value of Free Cash Flow 284.57
Present Value of Terminal Value 1,312.01
Value of Operating Assets 1,596.58
Value of Cash, Marketable Securities & Non-operating assets 213.91
Value of the Firm 1,810.49
Value of Debt 49.81
Value of Common Equity 1,760.68
Value of Common Equity Per Share 32.62

For a more bullish scenario based on my DCF model with 20% sales growth above, the website can be worth $32, which implies almost 100% potential upside. Although valuation alone is not enough to warrant a buy rating, the bright outlook below helps to support why RetailMeNot has a good chance to achieve ahigh growth rate.

Outlook

Brick-and-mortar retailers put a lot of effort to avoid being a showroom. RetailMeNot might have a solution for them. It developed a mobile app with geo-fencing capabilities to target shoppers near a store while providing coupons to drive in-store purchases. If the mobile app can solve the showroom issue faced by most brick-and-mortar retailers, I bet that RetailMeNot will become one of the most highly valued companies in the world.

In addition, some might argue that brick-and-mortar retailers will develop their own apps to capture such business opportunities. But from the customers' point of view, would you prefer downloading one app or downloading several different retailers' apps with different user interfaces? I bet that the answer should be quite obvious and very favorable for RetailMeNot.

Management Team and Board of Directors

(click to enlarge)5972751-1411596970799691-Gordon-Tam--CFA

Source: Proxy Statement

Two venture funds, Austin Ventures and Norwest Venture Partners, have invested in RetailMeNot. I further looked into the qualifications of the board members. I found that Jeff Crowe, a managing partner of Norwest Venture Partners, has substantial experience in the internet, consumer, and software arenas. He was namedForbes' Midas List of tech's top investors. He currently serves on RetailMeNot's board. In addition, Thomas Ball, a partner of Austin Ventures, also serves on the board. Part of his successstories are provided below:

Tom was an entrepreneur who founded a number of successful companies, including Openfield Technologies, which merged with Razorgator Interactive Group, where Tom was CEO, and eCoupons, where he was also CEO until the sale of the company to Lifeminders (NASDAQ: LFMN).

I am delightful that RetailMeNot has both Ball and Crowe on its board.

Other than venture funds, Cotter Cunningham, RetailMeNot's founder and CEO, held the most outstanding shares. He has 2.2% ownership. Prior to RetailMeNot, Cunningham worked for Bankrate (RATE) for seven years as senior vice president and COO. With the founder running the company as CEO, one advantage is that Cunningham knows RetailMeNot much better than anyone else. Together with his previous experience working as COO in Bankrate, I believe that he has the leadership skills and strategic decision-making capability to serve as a good CEO for RetailMeNot.

Risks

First, some might argue that retailers will limit their use of coupons, as it might not be a high return on investment channel to attract customers. However, JCPenny (JCP) alerted me to the importance of coupons. As the idea of simplifying pricing and delivering everyday values to customers seem to be good on paper, customers still perceive to obtain value by utilizing coupons. As an successful entrepreneur in retail once told me, please don't try to change customer behavior. It can be a grave endeavor. Second, RetailMeNot might engage in dilutive acquisitions and negatively impact shareholders value. Third, low barriers to entry is a risk for the website. As competitors can easily enter the industry, RetailMeNot might have difficulty defending its business from its competitors. Fourth, my sales growth might be too optimistic if the website cannot assist the brick-and-mortal retailers to improve their revenues. And as technology and customer preference change rapidly, competitors can gain a competitive advantage against RetailMeNot. As a result, the business can be at risk. Fifth, please refer to the risks section of the10K to further understand the business risk of investing in RetailMeNot.

The Bottom Line

For prospective investors in RetailMeNot, please learn a lesson from JCPenny and don't underestimate the power of coupons. As more and more retailers are exploring ways to distribute digital offers to drive sales, RetailMeNot is the prime investment candidate to capitalize on this trend.

Disclosure: I am not a securities broker/dealer or an investment adviser. You are responsible for your own investment decisions. All information contained should be independently verified with the companies mentioned, and readers should always conduct their own research and due diligence and consider obtaining professional advice before making any investment decision.

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Comments

mocheng
Mocheng - 5 years ago    Report SPAM

i like the numbers for RetailMeNot, my only problem is the competition on online couponing. Seems like every other day someone comes up with coupon site. Yes, right now they are the leader, but I am worry about the actual growth vs expected growth.

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