Those of you following my research know that I was bullish on Groupon (NASDAQ:GRPN) when I started following the stock in summer of 2020. The company had just started implementing its turnaround plan, seemingly realizing its mistakes of the past and showing eagerness to fix them.
To recap, the key pillars of Groupon strategy back then (right column):
Source: Groupon Q4 2019 Earnings presentation
That was two years ago. Each point of this strategy made sense and provided some optimism for the company and respectively for the stock.
Ever since then, company's management provided an update on where they stood in implementing this strategy: Goods category was exited by the end of 2021, inventory became more dense and included not only heavily discounted deals, but also regularly-priced services, relationships with merchants have been improved and posting offers became more automatic and easier.
All these changes were implemented by the management team with Aaron Cooper at the helm as interim CEO. Mr. Cooper remained interim CEO at Groupon for 1 year and 10 months, a term seemingly too long for an interim position. Some questions were asked on the earnings call on Groupon's long-term strategy, given that the company is undergoing a major restructuring under an interim CEO, since a new set of permanent leadership might have a totally different view on the company?
A new set of leadership did indeed arrive in December 2021, with Kedar Deshpande being appointed as a new CEO. Prior to Joining Groupon Mr. Deshpande has been a CEO at Zappos for a little over a year, spending about 10 years with the company in total.
The market was not impressed by the news about leadership change, especially after positive reactions to Q3 results and promising new deals announced in November with Google Pay and Square. In our view, this could be partially due to investors' concerns regarding the change in company's course. Two years into the Groupon's turnaround plan, the management was replaced, only to start a new turnaround program. Groupon investors have been extremely patient waiting for Cooper's strategy to pay out, and just as the end seemed to be near, a new set of management was about to start all over again.
Groupon share price did see some upticks since the beginning of the year. In January GRPN shares jumped due to a re-evaluation of its minority stake in SumUp - a German start-up producing mobile payment devices. However, GRPN share price went right back down after the company announced that its stake in SumUp comprised only 2.4% (instead of rumored 5%), translating into $540m if SumUp is valued at $22.6bn.
Source: Seeking Alpha
In late February Groupon announced its Q4 and FY21 results, which to be honest were not that bad, in our opinion. Q4 revenue came in just $1.6m below expectations and the company missed EPS by $0.03.
The company managed to generate 9% quarterly growth in its services category, which was short of double-digit quarterly growth, which we believed was urgently needed to show progress in its turnaround, however, at the same time Q1 demonstrated almost 30% y-o-y growth, which was not bad.
Source: Groupon Q4 results
On an annual basis, in 2021 the company delivered revenues at the lower end of its guidance and slightly below $975m that we forecast in our DCF model.
Source: Groupon Q4 Results Presentation
The company delivered an astounding $120m in net income in 2021, but before you get all excited - net income came from the reevaluation of Groupon's stake in SumUp ($93m) and tax benefits ($32m). On a level, the company generated almost $5m in operating loss in 2021.
At that point in time, after three months at the helm of Groupon, the new CEO Kedar Deshpande was:
still in the process of digging through our value propositions for merchant partners and customers
In our view, it took the CEO a bit too long to try to understand the company, especially given his promise of swift action. The priorities that Mr. Deshpande announced on the Q4 '21 earnings call were also hardly new to Groupon investors: improve inventory, heal the relationship with merchants etc. On top of that, he signaled the cut to already not-so-big (<$200m p.a.) marketing budget. Compare that to almost $1.2bn at Airbnb (ABNB) and you will understand why you hardly ever see a Groupon commercial. In our view, after all the changes that have been implemented in the company by the previous leadership, Groupon needed an increase in the marketing budget, to share the news about "new" Groupon with potential customers and educate them about new local deals, bookable inventory and other changes. As we mentioned in our previous article, in our opinion, Groupon's problem is that everybody thinks that Groupon is dead. A comment that we frequently get below our articles goes something like this: "Oh, they are still alive? Didn't hear about them in ages". The company has it's 24m loyal customers, however, in our opinion, it struggles to attract any new members. Groupon on Instagram produces content, however, has just 300k followers.
At the beginning of May Groupon published its Q1 '22 results, which were significantly below market expectations. Company's revenues from services declined 11% y-o-y and 29% q-o-q. According to company's management, the demand did not come back as expected after the Omicron wave, as merchants could fill their capacity on their own and didn't need to post discounted deals on Groupon for yield management. It looks like Groupon could not get rid of its perception as a place for heavily discounted deals, despite previous management's efforts in this direction.
Kedar Deshpande also referred to Groupon as "marketplace that offers discounted experiences and services" and offered the following solutions on Q1 '22 earnings call to turn the company around:
In contrast to his prepared remarks a quarter before, in May Mr. Deshpande stated:
everything I have seen is something I have seen before
Indeed, his idea to separate premium beauty and wellness services in a new marketplace is very similar to Zappos' strategy, which has a separate VRSNL website for premium brands. In our understanding, the previous Groupon management was well aware of the problem that the company was perceived as a marketplace for heavily discounted deals, however, they consciously decided against creating a new brand, since that would require significant investments in marketing.
On a more general note, it makes us a bit cautious to hear a CEO state that he's seen everything before when he's come from an online shoe store and is not even six months into the job at a company with such a variety of offering and geographies as Groupon.
We might be wrong about our pessimistic view of GRPN. In May 2022 GRPN stock jumped on the news that Jan Barta increased its holding of GRPN to 10%. Another major shareholder at Groupon - Dusan Senkypl has been appointed to Groupon's board of Directors in June. Both belong to Pale Fire Capital - a private equity firm headquartered in Czech Republic. Their increase in holdings might be a signal that they see potential in the company and respectively in the stock. They can either provide funding for the turnaround or Groupon might be taken private, at a premium. The latter would be positive for Groupon investors and a good exit strategy for the stock.
Also, the strategy of the current CEO might work out, which would propel GRPN share price.
As Groupon is being dragged through a new restructuring after a restructuring, we are not very optimistic that a combination of a second wave of cost cutting, reduced marketing spend, combined with creating new brand and marketplace platform as well as inventory bundles of bowling and dinner nights is something that will jumpstart Groupon. Therefore, unfortunately, we throw in a towel on the company and look for opportunity to cut losses while exiting the stock. One such possible exit strategy could be Pale Fire Capital taking Groupon private.
To watch: Groupon to announce Q2 '22 results around August 8.
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This article was written by
Individual investor, equity analyst, stock expert and panel speaker. Following stock markets for over 15 years and interested in special situations, distressed equity with some highly successful investments and a few less so:) As a CFA charterholder, I adhere to high ethical standards and quality of research.
Disclosure: I/we have a beneficial long position in the shares of GRPN either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.