Groupon’s Profits Likely To Soar Despite Limited Top Line Growth

Groupon (NASDAQ:GRPN) is scheduled to announce its Q3 2017 earnings on November 1. In recent quarters, Groupon has been exiting certain low-performing international markets, due to which it reported a decline in revenues. Since Groupon’s international operations weighed on the company’s profits considerably due to higher marketing and promotion expenses, it has been a welcome decision for shareholders, with the stock trading almost 40% higher than January levels. We have a a $4 price estimate for Groupon, which is around 10% lower than the current market price.

Below we take a quick look at expectations for Groupon’s Q3 results, the company’s full year guidance as well as some key growth metrics for the company’s operations.

See our complete analysis for Groupon here

Groupon Q3 & Full Year Expectations

Groupon guided for Q3 revenues to come in around 10% lower on a y-o-y basis to $650 million. Yahoo Finance consensus estimates for the company’s net income per share range from 2 cents a share to a loss of 3 cents a share. Comparatively, the company reported a loss of 7 cents a share in Q3’16.

For the full year, Groupon’s net revenue is expected to be around 8% lower than 2016 at $2.9 billion. Groupon’s management expects gross profit of just over $1.3 billion, which would be 7% lower on a year-over-year basis. However, its gross profit margin is expected to expand by 50 basis points to 45.7%, as shown above. Moreover, disciplined expense management – as well as shutting operations in various markets – could help lower losses and increase its operating profit. As a result, Groupon’s adjusted EBITDA is expected to be in the $200-240 million range, according to the company’s own estimates. We forecast its full year adjusted EBITDA to be around $230 million, as shown above. This could help Groupon’s adjusted EBITDA margin to improve by almost 2 percentage points to 7.8% for the full year. In addition, Groupon’s net income per share for the full year is expected to be almost 175% higher on a y-o-y basis to 11 cents a share, according to consensus estimates complied by Reuters.

Factors That Will Drive Growth For Groupon

Groupon North America is the largest segment by revenue for the company, and is also the only segment reporting top line growth in recent years. Groupon North America revenues grew at a CAGR of 9% from 2014 through 2016, while the company’s net revenues declined at a CAGR of 1%. The company’s gross billings and gross profits have increased in North America, owing to its strategy to focus in the region and move away from certain low-margin goods businesses, particularly outside of North America and Western Europe. The renewed focus on North America led to an addition of over 5 million customers in 2016. This has further increased by around 1 million customers in the first half of 2017.

Groupon’s take rate, or the percentage of transaction value (gross billing) kept by Groupon, has seen some declines in North America in recent years. We forecast this figure to remain at around 55% through the end of our forecast period.

On the other hand, Groupon’s operations in Africa, Asia-Pacific, Latin America and sections of Europe have not performed as well. Total revenues generated from the EMEA and Rest of the World segments have both fallen in recent years. The company spent more on marketing in order to improve performance in poorly performing markets. However, the increased marketing efforts and order discounts had more of an impact on Groupon’s customer base than gross billings.

As a result, Groupon’s management decided to exit several markets over the last few quarters, thereby reducing its potential addressable market size. Groupon was operating in almost 50 countries a few years ago, and that figure is now down to 15 countries. However, with presumably lower order discounts and relatively lower new customer acquisition costs in markets in which Groupon intends to stay, the company is seemingly on course to improve profitability in the long run.

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