After this past Wednesday's poor Q4 earnings report and underwhelming guidance for FY2013, Groupon Inc (NASDAQ: GRPN) Thursday announced the firing of CEO Andrew Mason, who will be replaced by Executive Chairman Eric Lefkofsky and Vice Chairman Ted Leonsis. The two will share CEO duties on an interim basis while the board searches for a replacement.
While most investors would agree that it was time for Andrew Mason to leave, the absence of a clear successor is just another uncertainty for the company. Indeed, the board had considered replacing Mason as early as this past November, and by all accounts had placed him on their version of "double secret probation". Which begs the question: Why does the board seem unprepared at this juncture with no clear replacement in mind?
Not that it really matters. Any new CEO will face the same challenges of a company struggling to remain relevant in the face of stronger competition from both innovative startups with local merchant relationships, as well as internet behemoths like Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN).
Still, management's Q1 2013 guidance for revenue of $560 - $610 million and operating income of $(10) - $10 million, which was well below consensus estimates, is perhaps a bit overdone. In fact, in the company's short history it has developed a record of guiding low and then beating those estimates.
To be sure, there were some encouraging numbers in the quarterly release. Gross Billings of $1.5 billion (+25% quarter over quarter, and +24% Year over Year) were the highest increase since the company went public in November of 2011. At the same time, there were declines in marketing costs of -14% Q/Q and -61% Y/Y. The North American customer base grew 8% Q/Q and 22% Y/Y. So, it would seem that the strategy of transitioning to higher quality merchants is beginning to see some traction.
Where does Groupon Go From Here?
The first thing that any new CEO should do is perform a simple SWOT Analysis. To help that newly minted CEO hit the ground running I have completed one here:
· Groupon has a large customer base with primarily local merchants
· The company has excellent data analytics which gives it an advantage in targeting deals
· The company employs a very flat hierarchy with most employees dedicated to the sourcing and implementing of daily deals at the customer level
· Subscribers are fickle and will move on if new and high quality deals are not constantly offered.
· Payment terms to merchants are not as favorable as other sites.
· History of poor customer service
· Leverage merchant loyalty through better payment terms and programs
· Expand deals beyond just merchandise and travel
· Expand and develop a customer loyalty program
· Low barrier to entry for other daily deal startups
· Everyday lower pricing
What Do Investors Do Now?
After a strong bounce on Friday, the stock is currently trading at just over $5/share. Share price may remain weak for some time as financial metrics are not likely to improve near term. Indeed the company has said that it is focused on growth over near term profitability.
Based on the company's guidance, I would estimate EBITDA of $390 million. Using a 5x multiple provides a reasonable $4.50 price to the stock. Of course if the company issues missed quarterly numbers or lowers its guidance the stock could trade as low as $2 - slightly above its current cash balance. On the upside, if the board can quickly find a competent CEO who can execute on company initiatives and re-accelerate revenue growth, the shares could rebound to as much as $7-$8/share.
The bottom line is that this is not a company I'd be willing to invest in until it can prove that it can successfully manage through this transition.