Groupon's (NASDAQ: GRPN) investors were recently hit by a flurry of troubling news. On March 25, the company announced the abrupt resignations of CEO Rich Williams and COO Steve Krenzer, though they remain employees with the company. Aaron Cooper, previously the president of Groupon's North America unit, was appointed as interim CEO.
On April 8, Cooper stated that Groupon would furlough "significant portions of our sales and sales operations teams in North America," and warned layoffs could follow. Groupon stock also slumped below $1, raising concerns that it could be delisted before the COVID-19 crisis ends. Let's look back at the company's struggles to see if it can stage an eleventh-hour turnaround before it gets kicked to the pink sheets.
Image source: Getty Images.
What happened to Groupon?
Groupon is worth barely $500 million as of this writing, but it notably rejected a $5.8 billion takeover from Alphabet's Google prior to its IPO in 2011. Groupon subsequently went public at $20 per share with a valuation of nearly $13 billion. At the time, it was the second biggest tech IPO in history after Google, which went public in 2004.
Groupon enjoyed a first mover's advantage in the local deals market, and Google, Facebook, and Amazon all launched competing platforms. Yet all three companies eventually abandoned the market due to concerns about profits and the longevity of the local deals business model.
Many merchants offered steep discounts on Groupon in the hopes of gaining new customers. However, many users simply moved on to the next deal instead of returning as repeat customers. Groupon also takes as much as a 50% cut of each sale, which made it even tougher for merchants to turn a profit.
Instead of addressing the fundamental problems with its business model, Groupon expanded its ecosystem via acquisitions. Its other marketplaces include the discount marketplace Groupon Goods, which was shuttered earlier this year; Groupon Getaways, a marketplace for travel deals; and GrouponLive, which offers discounts for live events. It also aggressively expanded overseas into over a dozen countries.
Why Groupon is in serious trouble
Groupon stock has plunged over 95% from its IPO price as its core business stopped gaining merchants and shoppers, and its expansion into physical goods and travel merely exposed it to fierce competition from market leaders like Amazon and Expedia.
Its international business also withered for similar reasons. As a result, revenue and gross profits have been trending downwards:
|
YOY Change |
2015 |
2016 |
2017 |
2018 |
2019 |
|---|---|---|---|---|---|
|
Revenue |
2.9% |
2.0% |
(5.6%) |
(7.3%) |
(15.8%) |
|
Gross Profit |
(5.5%) |
(0.6%) |
4.2% |
(1.0%) |
(10.2%) |
YOY = Year-over-year. Source: Groupon annual reports.
Groupon didn't offer clear guidance for 2020 back in mid-February, but it claimed its unit growth in North America would improve in the second half of 2020 as it "relaunched" its brand with an updated app, fresh products, and new marketing campaigns. It also expected to reduce its operating costs by closing Groupon Goods.
However, the COVID-19 pandemic is now forcing most of Groupon's local merchants to close their doors, and many of them may go out of business before the crisis ends. The departures of the CEO and COO indicate the company may be struggling for direction, and the furloughs mean it's trying to conserve cash.
Groupon could be delisted, but it won't go bankrupt anytime soon
If the stock remains below $1 at the end of the month, NASDAQ could issue a delisting warning. If that happens, Groupon can execute a reverse split to boost its share price back above the $1 threshold to stay on the exchange.
On the bright side, Groupon won't go bankrupt anytime soon. Its cash and equivalents balance dipped 11% to $750.9 million in 2019, but it hasn't drawn any cash from its $400 million revolving credit facility yet. But without a permanent CEO at the helm or a proven turnaround plan in place, Groupon will continue to lose relevance as the pandemic crushes its core markets.
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