Groupon Pre-Earnings: Expecting Strong Holiday Season Sales

Groupon (NASDAQ:GRPN) is scheduled to report its fourth quarter results for 2014 on Thursday, February 12th. We expect the company to deliver strong results during Q4, fueled by its key growth initiatives of accelerating demand in local businesses across North America and international markets, raising profitability in the goods division, and optimizing operations in international geographies. Since major headwinds related to email declines and redemptions subsided in the recent past, we believe this will help drive earnings in the key holiday season.

The company’s measures to strengthen its presence across mobile ecosystem and to roll-out new product innovations will spur its business in the coming quarters, in our view. In terms of bottom-line results, we think the company could face some pressure in Q4 owing to seasonality and its impact on take rates and promotions during the holiday season. Currency headwinds were likely an issue as well.

Check out our complete analysis of Groupon

Progress Against Profitability Initiatives Will Be Monitored

The lack of profitability in Groupon’s business model has been a long-standing concern for its investors. In order to mitigate this issue, the company is undertaking various measures to raise its margin profile in the goods’ business and international segment. Groupon aims to increase its goods margins in North America by moving a higher proportion of its business to drop-ship, raising its fulfillment capacity, and increasing the number of units per order. These measures strengthened goods’ gross margins in North America to about 10% in Q3, which was a notable first step.  It will be interesting to see gross margin results during the fourth quarter, as profitability usually comes in lower during the holiday season.

The ‘rest of the world’ geography is highly unprofitable as the operating margin within this segment was reported at -16% during the nine months ended September 2014. Groupon aims to curb these losses by standardizing its best practices globally. These efforts have begun to yield results as adjusted EBITDA from the ‘rest of the world’ geography came in positive in Q3 for the first time in several quarters. We expect the company to show positive results against this strategy in the fourth quarter as well.

Growth Strategies Could Continue To Gain Traction

Groupon’s mobile and product innovation initiatives have shown promising results in the recent past. Its cumulative app downloads surpassed 100 million in Q3, and the mobile platform now accounts for over half of the company’s business. A recent mobile app ‘Snap’ (which offers deals related to household products) gained popularity with users, with over one million app downloads in the recent past. We expect the company to report robust progress against its mobile strategy during the fourth quarter as well. We also expect mobile platform development to be critical for the company’s long-term growth, considering mobile commerce is rapidly gaining share in the broader online commerce market.

Groupon has launched two new features, Pages and Gnome, to bolster its adoption with consumers and merchants. Pages provide an online identity for local merchants with valuable information (such as contact information, maps and reviews). Though more than seven million pages have been built, only a small proportion of such pages have been rolled out publicly. And Gnome provides a new operating system for merchants to track insights regarding item-level product sales and also provides for easier redemption by consumers. While it is still early, we will closely monitor the earnings call to see the impact of these new features on both SEO (search engine optimization) and the expansion of the merchant network. Organic search comprises around 7% of the company’s business in North America and consistent roll-out of more pages will help expand this SEO share, in our view.

Broad Based Growth Expected Across Geographies And Business Segments

We expect broad-based growth across all geographies during the fourth quarter. During the third quarter, gross billings within North America, EMEA (Europe, the Middle East and Africa) and Rest of World rose at healthy rates of 16%, 10% and 155%, respectively, and we expect this trend to continue in Q4 and coming quarters.

We expect strong demand across goods’ and travel categories to fuel gross billings growth in Q4. Local billings accelerated in North America in Q3 to 10%, and we expect this metric to continue to see above-10% growth in the near-future.

Our $7.09 price estimate for Groupon’s stock, is around 5% below the current market price.

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