Here Are The Key Positives And Negatives From Groupon’s Q2 Earnings Report

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Shares of Groupon (NASDAQ:GRPN) traded lower post the second quarter earnings release, as the results fell short of market expectations. The stock  has tumbled by around 50% this year, based on the uncertainty surrounding the company’s future. Nonetheless, we continue to remain bullish on Groupon’s long-term growth prospects. Considering the growing opportunities in the offline to online business, coupled with its attractive position in the market, we believe Groupon’s stock could currently be undervalued. The company’s efforts to move beyond e-mail based marketing strategies and to expand its merchant network, appear to be showing progress. At the same time, we think its profitability could rise in the coming years. The key headwinds seen during the second quarter — pertaining to adverse currency effects, a deceleration in the North American local business, and reduced margins in the EMEA goods business —  are short-term issues, in our view. We believe these headwinds will subside over the coming quarters.

Check out our complete analysis of Groupon

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Here Are The Key Things That “Worked Well” For Groupon During The Second Quarter

Operating Income In North America Rose By Over 80%: Groupon’s North American operations showed improvement in profitability — operating margin (as a percent of revenue) rose to 5.6 % in Q2 2015 as compared to 3.4 % in a similar period a year ago. This was also driven by higher margins in the goods business, where gross profits as a percent of gross billings expanded by 200 basis points sequentially to 10.4%. With gross margins expected to increase to mid-teens in the goods business in coming years,  North America could continue to see higher profitability in our view.

Demand Accelerated In The EMEA Region: The gross billings growth (in currency neutral terms) accelerated within EMEA from 7% in Q1 to 9% in Q2 2015. Within the local business, gross billings improved from a 2% decline in the previous quarter to 4% growth in the second quarter (excluding FX). [1] While this acceleration in overall demand was encouraging, the company saw reduced profitability from this region during the second quarter.

‘Push’ To ‘Pull’ Strategy Taking Shape: Groupon’s efforts to move from a push-only model (wherein it relied solely on emails to drive business) to pull marketplace appear to be paying off — search for deals comprised for 30% of total transactions in North America, as compared to 23% in Q2 2014. [1] We believe continued progress in this area is essential for the sustainability of Groupon’s business, as the email strategy alone is insufficient over the longer run.

Growth Strategies Showing Progress: Groupon has introduced ‘Merchant Pages’, that provide information pertaining to contact information, maps and reviews for tens of thousands of merchants across North America. To date, the company has launched 2 million such pages (for indexing by Google), as compared to a total population of 9,00,000 at the end of the last quarter. Moreover, the company is topping these features with low-discount deals and market-rate local offers to enhance its penetration among merchants. These features broaden Groupon’s popularity with merchants, helping bring more inventory to the site. In addition, these efforts are also expected to help in SEO (search engine optimization) over the coming years, as a greater share of organic search traffic will be diverted to such pages.

At the same time, Groupon is focusing on high-frequency local use cases (in categories where customers spend heavily such as food and drink, beauty and health) to gain a larger share of the customer wallet. We believe these measures could translate into strong growth in overall billings over the coming years.

Here Are The Key Things That “Did Not Work” For Groupon During The Quarter

Foreign Exchange Headwinds: FX headwinds (particularly with the euro) had a huge impact on the overall growth rates during the second quarter. It had an approximate 800 basis point unfavorable impact on both consolidated gross billings and revenue. The management anticipates 600 basis point negative impact on annual growth rate in revenue from foreign exchange movement during the third quarter.

North American Local Business Showed Some Deceleration: Local gross billings increase in North America decelerated from double-digits growth in the past few quarters to 8% in Q2 2015. The company attributed this decline to tougher year-over-year comparisons, and expects this growth to return to double digits in the third quarter.

Goods Margin Fell In The EMEA Region: The EMEA region saw reduced profitability during the second quarter, as goods gross profit (as a percent of gross billings) dropped to 12.5 % in Q2 2015, as compared to 14.4% in the previous quarter and 18.6% in Q2 2014. While the management expects this to be a short-term issue, which was caused by shift in mix towards lower-margin products, we will be keeping an eye on this metric in coming quarters.

Rest Of The World Operations Posted Losses: These operations saw operating loss of around $6.8 million as compared to a loss of $9.5 million in Q2 2014. The company is undertaking restructuring efforts in some of these geographies — during the quarter, the company divested a part of its stake in the Indian operations. We believe these losses will decrease in the coming years, as the same cost saving and restructuring efforts should pay off.

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Notes:
  1. Groupon’s (GRPN) CEO Eric Lefkofsky on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, August 7, 2015 [] []