Groupon Falls 8.6%: Restructuring Plan to Blame?

Shares of Groupon, Inc.GRPN plummeted about 8.6% in yesterday's trading session following management's decision to restructure its international business by exiting as many as seven countries resulting in the elimination of nearly 10% of its workforce.

That means 1,100 jobs primarily in seven countries including Morocco, Panama, the Philippines, Puerto Rico, Taiwan, Thailand and Uruguay that it is pulling out of.

This is not the first time that the company has closed its business operations. Earlier, Groupon had backed out of Turkey and Greece, divested its Indian arm to Sequoia Capital a few months back and also sold off its stake in Ticket Monster for $360 million.

So What Made Investors Panic?

Groupon has been struggling for the past few quarters. In the last three months, Groupon's shares have lost over 30% as revenue growth faltered. Therefore, it's a no surprise that investors panicked when Groupon cited underperformance as the reason for its exit from these markets.

In last-reported quarter for instance loss reported by the company was greater than expected and revenues also failed to meet expectations. Revenues from North America increased 13.5% year over year but EMEA and Rest of World dropped 10% and 17.8%, respectively.

The company believes that exiting the underperforming regions will drive growth for the company in the long run as it will allow it to focus on its core businesses.

Nonetheless, Investors are getting jittery about allotting a high multiple when growth appears to be stalling. It doesn't help that the recent quarterly loss was greater than expected.

Management definitely appears to be rethinking its strategy as the new restructuring plan directly contradicts the company's earlier business model per which Groupon undertook rapid international expansion and that too at the cost of profits. So if they don't come out and connect with investors, share prices can very well decline further.

Bottom Line

Management's change of heart has increased uncertainties. Moreover, the company has also been seeing downward estimate revisions for some time now.

Negative estimate revisions over the last 30 days have led to a sharp decline in the Zacks Consensus Estimate. For fiscal years 2015 and 2016, estimates have decreased by 11.1% and 16.7% to a loss of 9 cents and 6 cents per share, respectively.

Apart from the effects of the business transition, Groupon can also be affected by rising competition from key players like eBay EBAY and AMZN on the one hand and smaller companies like LiveDeal on the other.

Groupon, at present, has a Zacks Rank #4 (Sell). A better-ranked stock in the same space is Blue Nile Inc. NILE with a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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