Groupon (GRPN) Down 71.3% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for Groupon (GRPN). Shares have lost about 71.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Groupon due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Groupon Earnings and Revenues Lag Estimates in Q4

Groupon reported fourth-quarter 2019 non-GAAP earnings of 7 cents per share, missing the Zacks Consensus Estimate by 58.8%. The figure declined 30% year over year.

Revenues of $612.3 million lagged the Zacks Consensus Estimate by 11.5% and declined 23.5% on a year-over-year basis (down 23%, excluding foreign exchange effect).

Region-wise, North America revenues decreased 26% from the year-ago quarter to $373.5 million. International revenues fell 19.1% (down 13.4%, excluding foreign exchange effect) year over year to $238.8 million.

Quarter Details

Service revenues declined 7.5% year over year to $294.8 million. Product revenues slumped 34% to $317.5 million.

Moreover, Local revenues of $267.4 million declined 5.9% from the year-ago quarter. North America Local revenues decreased 5.6% and International Local revenues fell 5.2%, excluding foreign exchange effect.

Further, Goods revenues tumbled 33.4% year over year to $326.4 million. North America Goods revenues plunged 39.5%. International Goods revenues declined 22.4%, excluding foreign exchange effect.

Travel revenues decreased 27.1% year over year to $18.5 million. North America Travel revenues plunged 37.3%. International Travel revenues declined 10.5%, excluding foreign exchange effect.

In the fourth quarter, gross billings were $1.22 billion, down 13.6%, excluding foreign exchange effect.

North America billings were $767 million, down 17.3% year over year. International billings were $456.2 million, down 6.8% excluding foreign exchange effect.

North America Local, Goods and Travel gross billings declined 6%, 36.1% and 18.3% on a year-over-year basis, respectively.

International Goods and Travel gross billings declined 4.3% and 19.5% on a year-over-year basis, excluding foreign exchange effect, respectively. However, International Local billings increased 4% excluding foreign exchange effect.

Global units sold during the reported quarter declined 16% year over year to 42.6 million, primarily owing to lower traffic and fewer customers. North America units were down 11% in Local and 32% in Goods. International units were up 4% in Local but down 22% in Goods.

Customer Metrics

As of Dec 31, 2019, Groupon had approximately 17.1 million active customers internationally compared with 17.5 million at the end of the previous quarter.

Moreover, as of Dec 31, 2019, the company had approximately 26.5 million active customers based in North America compared with 27.7 million at the end of the prior quarter.

Operating Details

Gross profit in the fourth quarter came in at $310 million, down 15.3% (down 14.7%, excluding foreign exchange effect) year over year.

International gross profit decreased 11.4% year over year, excluding foreign exchange effect, to $102.8 million. Intense competition in Groupon’s Goods category, weak consumer sentiment in Europe, particularly the U.K., and a customer shift toward lower margin Local offerings negatively impacted profitability.

International Local, Goods and Travel gross profit decreased 6%, 26% and 11% on a year-over-year basis, excluding foreign exchange effect, respectively.

Moreover, North America’s gross profit dropped 16.3% to $207.3 million, primarily owing to fewer customers and lower traffic. North America Local, Goods and Travel gross profit decreased 6%, 45% and 41% on a year-over-year basis, respectively.

Adjusted EBITDA grew 53% year over year to $83.8 million.

Selling, general and administrative expenses decreased 3.5% year over year to $187.7 million in the reported quarter.

Marketing expenses declined 25.2% to $82.1 million, primarily owing to optimizing spend with regard to high-value customers and lower offline marketing expenses in North America.

Operating income declined 35.2% year over year to $40.1 million.

Balance Sheet & Cash Flow

Groupon exited the quarter ending Dec 31, 2019, with cash and cash equivalents of $750.9 million, up from $567.3 million, as of Sep 30, 2019.

Free cash flow came in at $185.9 million compared with $0.9 million in the previous quarter.

Groupon also announced that its board of directors approved a proposal related to a reverse stock split of the company’s common stock at a ratio of between 1-for-10 and 1-for-12. The proposal will be submitted for stockholder approval at the June 2020 Annual Meeting. Management currently expects the reverse stock split to be effective by the end of the second quarter.

Plan to Exit Goods Business

Groupon announced a plan to exit the Goods category and focus on local experiences marketplace (includes Things to Do, Beauty & Wellness, and Dining). The market’s worth is estimated to be more than $1 trillion.

Groupon plans to exit the Goods category in North America by the third quarter of 2020 and globally by the end of the year.

Following the successful execution of the plan, management projects both unit and gross billings to grow in high-single digits by 2022. Revenues are expected to grow in mid-single digits, while adjusted EBITDA margin is expected to expand in the high-teens range.

2020 Guidance

For 2020, Groupon plans to launch a new mobile app and expand bookable offers. The company expects to grow North America Local units in the second half of 2020 on a year-over-year basis.

Moreover, the company plans to execute the density strategy related to inventory in 10 cities.

Groupon will also relaunch the brand and deploy a full-funnel marketing strategy as well as reset the cost base by exiting the Goods business.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended downward during the past month. The consensus estimate has shifted -433.33% due to these changes.

VGM Scores

Currently, Groupon has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Groupon has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.