Groupon’s Goals For 2015 & Beyond (Part 2 Of 2)

This article represents the second in a series of two notes we are publishing on Groupon (NASDAQ:GRPN). In the previous article, we had discussed Groupon’s revenue goals for 2015 and beyond, along with our take on whether these goals seem achievable. In this note, we assess the company’s bottom-line goals for the coming years, along with the likelihood of the company realizing these targets.

Groupon aims to expand its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) by more than 25% in 2015 and beyond. We think the company could easily surpass these targets this year on account of its strategies to enhance margins in the goods’ and international businesses. We expect North American goods business to see improvement in profitability over the coming quarters, helped by various measures to reduce shipping and fulfillment expenses. The addition of third-party merchants will further boost margins in the goods segment. In addition to these factors, we also forecast profitability to improve within the rest of the world geography, owing to cost cutting and restructuring initiatives.

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Groupon’s Adjusted EBITDA Goal Is Set At Over-25%

Even while Groupon aims to grow its revenue by 15% in 2015 and by over 20% by 2017 (both in currency neutral terms), it has set its adjusted EBITDA targets at even more aggressive levels of more than 25% for both 2015 and beyond. The key drivers that are expected to produce the company’s profits in the future include:

Improvement In Gross Margin: Groupon aims to grow its gross profit by more than 20% annually over the long-term, at par with the overall gross billings growth. In order to accomplish this goal, the company has undertaken various measures to raise its goods’ margins (especially in North America). The goods’ business accounted for around 36% of the company’s overall gross billings over the last twelve months. At the same time, the goods’ business contributes negatively to the overall profitability.  This is as the gross profit as a percentage of gross billings within the goods’ segment is lowest at around 12%, as compared to the local (at around 32%) and travel (at around 18%) businesses.

Groupon aims to improve its goods’ gross profits by moving additional business to drop-ship, augmenting its fulfillment capacity and raising the number of units per order. These efforts are showing progress as the gross profit as a percentage of gross billings within the goods’ business in North America expanded by 320 basis points annually to 8.4% in Q1 2015. Within North America, the company aims to increase goods gross margin to around  15% by 2017. And globally, the company aims to increase its goods’ gross margins to 15-20% over the long-term. We think there is scope for margin improvement within the EMEA goods business as well, as the company’s gross margin in the region was seen at around 16% recently, as compared to 25% for its key competitors in the region.

Profitability Could Improve In The ‘Rest Of World’ Geography: The ‘Rest of World’ operations are unprofitable for Groupon as the operating loss as a percentage of revenue within this geography was seen at -7.6% in Q1 2015. The company aims to curb these losses by standardizing its best practices globally and by exploring strategic alternatives for some of its regional operations in Asia. The recent divestiture of a controlling stake in Ticket Monster represented a step in this direction, and is also expected to positively impact profitability in the coming future.

Trefis Take On Whether The Bottom-Line Target Is Achievable:

We think that Groupon is well-poised to grow its adjusted EBITDA by at least 25% in 2015 and it could easily surpass its goal of $315 million in adjusted EBITDA for the year. In this estimate, we have modeled the company’s investments to somewhat accelerate during the second half of 2015 on active deals and order discounts. We expect the company’s margin initiatives to pay off in the coming quarters and lead to higher profitability in the North American region.   Additionally, the rest of the world geography could see an increase in profitability in the near-future owing to the recent divestiture of Ticket Monster.

Our $8.01 price estimate for Groupon’s stock, represents near-20% upside to the current market price.

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