Groupon Mid Year Review: Stock Up 70% On Growing North America Customer Base

-70.78%
Downside
14.36
Market
4.20
Trefis
GRPN: Groupon logo
GRPN
Groupon

Groupon‘s (NYSE:GRPN) stock is up about 17% in the last year and a whopping 70% year-to-date (YTD) following solid second quarter results last month. The company’s stock had tumbled over 10% after its first quarter results missed earnings expectations in April, but soared 25% after it reported better-than-expected second quarter earnings and full year guidance last month, with both revenue and adjusted profits beating market expectations. However, it wasn’t all great news for the company – below we discuss all aspects of Groupon’s performance in the last six months.

Positive Developments

  1. North American Sales: In the first half of the year, Groupon’s revenues grew 1% year-over-year (y-o-y) to $1.5 billion driven by a 6% increase in North American gross billings and sales. The company’s strategy to focus on the North American market and move away from certain low-margin goods businesses seems to be bearing fruit, and we can expect Groupon to further consolidate over the next few quarters. The company has already shut operations in 20 countries in the last 18 months and intends to exit from Indonesia by the end of the third quarter. This will take the company’s international presence to 26 countries, compared to 47 in January 2015.grpn-1
  2. Active Customers: Groupon’s active customers have increased at a healthy rate of 1 million per quarter for the last two quarters in North America, owing to the company’s strategy to focus on high margin markets. While its customers in the EMEA region saw a marginal fall, active customers in other international markets declined at an average rate of 400,000 customers per quarter in the same period.grpn-19                                             
  3. Beating Market Estimates: Owing to better than expected performance in North America in the first two quarters, both in terms of gross billings and customers gained, Groupon revised its full year revenue and adjusted EBITDA guidance. This was the primary reason for improvement in investor confidence and helped the company’s stock gain 70% year-to-date. grpn-5
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Points of Concern

  1. Profitability: Groupon’s focus on increasing its customer base and gross billings had an adverse impact on profitability. The company’s operating margin in the first six months of 2016 declined 650 basis points y-o-y in North America, 450 basis points in EMEA and over 11 percentage points in the rest of the world. Higher marketing costs and order discounts were the primary reasons for the margin decline in North America whereas declining sales were the primary contributing factor in international markets. Interestingly, the decline in operating margin was lower than expected which led the company to revise its adjusted EBITDA target from $85-135 million to $140-165 million in full year 2016.  grpn-4grpn-3                                             
  2. Free Cash Flow: Higher order discounts and customer acquisition costs led to a drastic decline in cash flows from operating activities in the first two quarters this year. This translated into net negative free cash flows in this period. Groupon is executing its strategy to exit from unprofitable markets well and will need to continue implementing it going forward to get back to positive free cash flows. The fourth quarter is seasonally a strong quarter and we can expect to see higher sales translating into positive cash flows in that period.
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