Groupon, Inc.GRPN stock plummeted 26.3% yesterday following the company's third-quarter 2015 earnings release.
Though this was the first quarter in a long time that the company delivered earnings (if only after excluding one-time expenses), investors weren't impressed. And it's not without reason because there are in fact a bunch of concerns at present.
The prime ones being its inability to boost revenues, a complete turnaround in management and marketing strategy and importantly, underperformance in some key regions that forced the company to shut down operations.
We can also argue that all these changes are somewhat corrective measures for the fiascos created under the previous business strategy. Since its IPO in 2011, Groupon has been focused on rapid international expansion that has taken a severe toll on its profits. But since this did not add enough users in the new regions, it led to suboptimal performance and subsequent exit from these regions.
So, this time when Groupon finally showed some signs of improvement in its bottom line, investors are again skeptical.
What's the Management's New Plan?
New CEO Rich Williams attempted to cheer investors with a three-pronged strategy emphasizing international growth, shopping and marketing initiatives.
In line with this plan, Groupon has already started streamlining its international business by exiting as many as seven countries (Morocco, Panama, the Philippines, Puerto Rico, Taiwan, Thailand and Uruguay). These were in addition to the Turkey and Greece shutdowns and divestiture of its Indian arm to Sequoia Capital. Earlier, Groupon also sold its stake in Ticket Monster.
The shopping business is also being restructured with the lower-margin (specifically empty calories products) being de-emphasized to increase focus on higher-margin healthy food offerings. Of course, the move will result in a negative impact on revenue, which management currently estimates at $50 million to $100 million in the fourth-quarter.
Most importantly, Groupon intends to ramp up its marketing activities significantly going ahead. The company expects to increase 2016 marketing related expenses by $150 million to $200 million, or a negative impact of about 2 cents to 3 cents per share on the bottom line.
Groupon managed to beat estimates in the last-reported quarter, but GAAP loss came to 4 cents a share, more than the prior-quarter's loss of 3 cents. Its revenue performance wasn't encouraging either. Management guidance for the current quarter was particularly disappointing on account of the above mentioned restructuring changes.
Will It Work?
Groupon is trying to change the consumer perception of its brand as it transitions from a deals company to a marketplace company, so increasing marketing dollars does appear to be a necessity. At the same time, there are significant uncertainties/risks involved because there is naturally no guarantee of success. But this is definitely a do-or-die thing for Groupon.
Add to this the risk of foregoing revenue (evident from its decision to transition from low-margin to high-margin business) and Groupon appears to be doing too much at once, further increasing execution risk.
One positive in this respect is the new CEO, because he has prior experience at leading online retailer Amazon AMZN where he headed the worldwide marketing and advertising team.
The company intends to reduce the number of discounted deals to attract more merchants. It also plans to leverage the growing mobile user base at the core of its business strategy rather than the email-based approach that it swore by in the past.
While positive, it's important to note that such initiatives typically take some time to materialize and have some impact on the bottom-line.
Amid the increased uncertainty, the company will also have to deal with the competition from the players like eBay, Amazon.com on the one hand and smaller companies like LiveDeal on the other. In addition, increasing presence of the social media companies like Facebook FB and Alphabet GOOGL in the e-commerce space can also pose serious challenges in Groupon's recovery as merchants are increasingly adopting these platforms to sell their products.
Therefore, we believe that unless Groupon clearly defines itself, it could become increasingly difficult for this Zacks Rank #2 (Buy) company to turn around.
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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