Will Groupon Stock See A Turnaround?

  • New Groupon CEO Rich Williams recently spoke at length regarding the company's turnaround bid.
  • Mr. Williams talked about the need for Groupon to exit certain international markets, the company's growing non-email sales channels, dumping the low-margin good business, and allowing lower discounts for merchants in its daily deals business.
  • How likely is this turnaround plan to work?

Daily deals market leader Groupon (NASDAQ:GRPN) has a new CEO sitting at the helm. CEO Rich Williams has come in firing on all cylinders. Mr. Williams believes the investing world at large does not understand Groupon, and he has an elaborate turnaround plan laid out. He talked about some of the biggest issues dogging Groupon, which have resulted in its stock falling out of favor with investors--Groupon stock is down a stupendous 65% YTD. Williams talked to GeekWire saying:

"We’re misunderstood by analysts. We’re misunderstood by media. We’re misunderstood by consumers — both those who haven’t visited our site in awhile and those who’ve never purchased from us."

Williams observed that Groupon "scaled too far, too fast, " and has promised to streamline the company’s international operations. Groupon recently exited Scandinavia, having previously exited India, South Korea, Turkey, Greece and other international markets.

Williams certainly has a point regarding streamlining Groupon’s international operations. Groupon’s EMEA operations have continued to badly lag the company’s North America operations. During Q3 2015, Groupon’s North America market realized a healthy 12% Y/Y growth in billings to $869 million while revenue grew 11% to $464 million. In contrast, billings in the EMEA region were down 1% Y/Y to $414 million while revenue was up a mere 2% to $199 million. The company’s Rest of the World segment fared even worse, with billings growing an anemic 0.1% to $184 million while revenue was down 5% to $50 million. The Rest of the World segment was responsible for 21% of Groupon’s ($31) million net loss for the quarter despite contributing just 7% to the top line.

The CEO also talked about the need for Groupon to stop chasing low-margin empty calorie ecommerce businesses including the high-revenue low-profit consumer electronics business. Groupon pioneered the daily deals business before other online retailers such as Amazon (NASDAQ:AMZN) stepped in and placed the company under a lot of pressure. With its daily deals business faltering, Groupon entered the ecommerce marketplace in a bid to keep growing. But the goods business is fraught with many challenges including intense competition and thin margins due to handling large inventories and fulfilling customer orders. It therefore makes sense for Groupon to at least scale down on its goods business in order to allow its razor thin profit margin to improve.

Mr. Willaims also spoke about Groupon’s non-email sales channels, which he said are not getting the respect they deserve:

"Sure, email is still important, but more of our purchases come from on-site search than email, and more than half our purchases occur on mobile."

About Gropuon’s core daily deals business, he had this to say:

"[W]e are the market leader ... we’ve had seven consecutive quarters of double-digit billings growth in North America; we’ve doubled our customers over the past five years."
And regarding frequent accusations that Groupon’s daily deals are bad for merchants’ bottom lines:
"The vast majority of our deals (82% as of the last report) are breakeven or better on the deal itself ... we still have to improve here. Not every brand or business is comfortable with deep discounts. We want to give more merchants more opportunities to run on our platform at lower discounts and with market rate offerings."

Mr. Williams asserted the vast majority of merchants using its daily deals are now in perpetual relationships with the company though they may phase in and out seasonally.

Can Williams make it come together for Groupon?

Even though Mr. Williams addressed some of Groupon’s thorniest problems, his comments probably don’t qualify for anything more than a little window dressing. Specifically his narrative about Groupon’s relationship with merchants suggests that Groupon sees ceding more margins on its daily deals business as the only way to entice new merchants to try it out:

‘‘Not every brand or business is comfortable with deep discounts. We want to give more merchants more opportunities to run on our platform at lower discounts and with market rate offerings."

Groupon’s cut on each daily deals coupon sold used to be 50% just four years ago--currently it has fallen to just 23%. This, coupled with the goods business, has shrunk Groupon’s gross margins from north of 80% to under 50% currently. The comment by Williams that Groupon is willing to allow lower discounts for merchants in order to win new business implies that Groupon’s margins might shrink even further in coming years.

While the company’s strategy to exit some international markets and dumping low-margin goods business are the right thing to do so as to give a boost to Groupon’s margins, lowering its take rate on the daily deals business in a bid to lure more merchants will unfortunately have just the opposite effect. Mr. Williams has not yet divulged any useful details regarding how Groupon hopes to keep expanding its top line and how the company will achieve profitability. At this juncture Groupon still remains a value trap rather than a good turnaround bet.

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