Groupon Earnings Preview Q3 2015: Value Trap Or Good Turnaround Bet?

  • Groupon will report Q3 2015 results on Nov.3 2015 after market close.
  • The company has been facing a conundrum of slowing top line growth and mounting losses due to its growing goods business.
  • This trend is unlikely to change in the near future.
  • Questions still linger whether Groupon's business model can really work. This dark cloud hangs over the company and makes its dirt cheap shares a value trap.

Daily deals market leader Groupon (NASDAQ:GRPN) is due to report third quarter fiscal 2015 earnings on Nov.3 after closing bell. Groupon provided guidance for revenue of $700 million to $750 million after anticipating a huge 600 basis point impact from FX headwinds. The mid-point of that guidance implies Groupon will record Y/Y revenue decline of about 3.5%. Groupon reported revenue growth of 3% during the second quarter. Meanwhile, the company said that it expects adjusted EBITDA of $45 million to $65 million and non-GAAP EPS of $0.00 to $0.02.

Groupon failed to meet earnings expectations during the last quarter. The company had, however, managed to either meet or beat expectations for the preceding three quarters. The consensus is for Groupon to report GAAP EPS of -$0.04 to $0.01 the prior year. This seems to be roughly in line with the company’s own guidance.

Groupon Earnings Surprise History

Quarter End
Per Share
EPS* Forecast
Jun2015 08/07/2015 -0.03 -0.02 -50
Mar2015 05/05/2015 -0.01 -0.01 Met
Dec2014 02/12/2015 0.02 -0.02 200
Sep2014 10/30/2014 -0.01 -0.04 75


Meanwhile, Groupon’s shares have been badly hammered this year, falling 58% YTD. The shares are down more than 80% from their 2011 debut price of $28, and are currently trading at an all-time low.
GRPN stock chart

Source:Groupon Stock Price Data by

Slowing Growth and Mounting Losses Crippling Groupon

Groupon went public in 2011 to plenty of hoopla and fanfare. Back then, the daily discount deals that were the company’s lifeblood, were all the rage in the retail space. For the next three years, Groupon enjoyed blistering growth that saw its revenue jump from less than $0.5 billion to about $3.2 billion currently.

The daily deals business is a high-margin one, and Groupon enjoyed gross margins north of 80% back in 2011. But the initial ardor for daily deals soon lost steam. Merchants initially agreed to offer discounts of around 50% to their marked up prices in the hope that customers would come back and in the process bring repeat business to the establishment as well as new referrals. But it soon turned out that the average Groupon customer was only interested in the fat discounts a Gruopon coupon entitled them to, while only about 20% ever came back or made any referrals.

To keep merchants interested in daily deals, Groupon decided to lower its cut on each coupon sold from 50% initially to just 23% in 2014. This move naturally cut into the company’s gross margins.

To keep growing in the face of lackluster demand for daily deals by merchants, Groupon decided to diversify its revenue stream by selling goods directly online. But ecommerce is a highly competitive space with mostly low margin due to cost of fulfilling customer orders and maintaining inventory, as well as handling defective goods and customer returns. So Groupon’s margins were squeezed even further.


Source: Forbes

So Groupon has been facing a severe conundrum where its core business is not growing while its new businesses can only command thin margins. And, this is a business that might soon put Groupon Amazon (NASDAQ:AMZN) crosshairs and in the end get obliterated like other eCommerce upstarts that once threatened the online giant.

Is Groupon a Basket Case?

All appearances seem to suggest that Groupon will be lucky to survive let alone grow and thrive. Groupon has for a long time remained in investors’ good books despite its mounting losses due to its impressive top line growth. But that growth story has now largely evaporated. The company’s revenue growth has shrunk from mid-teens a couple of years ago to low single-digits currently.

For Groupon to return to investors good books, it will have to either find a way to grow its top line at a brisk clip once again, or find a way to improve its anemic margins and become profitable.

As things stand right now, Groupon’s short and medium-term success strategy that is most likely to bear fruit is margin improvement. The company has been taking steps that have begun improving margins gradually. One of these include raising the number of units per order. Groupon saw its gross margins in the North American region improved 200 basis points during the last quarter to 10.4%. Margins in EMEA region are expected to soon follow suit.

Groupon has also been taking steps to grow its userbase. The company has lately been shifting from heavy reliance on marketing emails as its primary marketing channel to other channels such as using organic search. Groupon rolled out this program in North America a few quarters ago, and it has helped the company search deals to grow from 23% of transactions to 30% currently. Positive results are similarly expected when Groupon begins to rollout the program in other markets. This should help to stem, or at least slow down, decline in the email business.

But all these are small incremental steps that will take time before investors can become fully convinced that Groupon’s business model can really work. Until the company is able to clearly demonstrate that, Groupon shares are likely to remain a value trap.

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