Groupon (GRPN) beats expectations set by Wall Street and has surged 64%. Analysts had predicted Groupon would lose $2.75 per share in its second quarter and do sales of barely $200 million in total. In fact, Groupon lost only $0.93 per share and did $395.6 million in sales — nearly twice what analysts had predicted.
Investors are naturally elated. But should they be? Yeah, Q2 isn’t as terrible as Groupon would have expected, but it was still very rough. A loss remains a loss.
In addition, I’m not sure that the “earnings beat” of Groupon was as big as it was. The $0.93 per share of Groupon revealed that it lost a pro forma figure, while the company’s loss was actually $2.53 per diluted share in calculating according to commonly accepted accounts (GAAP) — far more similar to the Wall Street amount expected.
Also the sales figure of Groupon can not be all that is broken. While almost twice analyst expectations, the recorded revenue of $395.6 million still decreased 26 percent year-on-year.
Naturally, investors are therefore likely to focus less on the Groupon losses announced at Q2 and look to see if the business will reduce those losses in the future. CEO Aaron Cooper outlined in the report the manner in which Groupon “has made substantial strides to stabilize our company in order to return Groupon to growth,” in particular, through the “capitalisation of significant costs from our company.” And management expects to further cut the cost by realizing “about US$ 200 million in savings from our restructuring efforts” in 2021, and eventually a total.
Over the last four quarters published, if you realize that Groupon has lost a total of $226 million, this may be just enough cost reduction to correct the ship and allow Groupon to resume growth.
Groupon (GRPN)’s new strategy
Groupon estimates the North America market at 80 experiences pro consumer p.a. The management currently directs its attention to capture that market by offering not only heavily discounted deals, but also local experiences at little to no discount. In addition to that, Groupon plans to eliminate the restrictions on its deals, where the customer could use it only on particular day or could buy the deal only once, thus driving repeat purchases and revenue streams respectively.
If successful, this move will attract not only new customers interested in a broader and deeper inventory, but it will also improve the relationship between Groupon and its merchants. In the past, Groupon’s strategy was to place only heavily discounted offers on its platform, which was not acceptable to some merchants. Now the company is dedicated to building a lasting and mutually-profitable relationship with its merchants by offering also full-price services on its platform.
We view the strategy as positive, because, when successful, it will enable Groupon to return to revenues growth after years of decline. However, the current environment amid COVID-19 crisis poses a significant challenge to Groupon’s ability to execute on its plan. According to company’s earnings call, Groupon’s local units were down nearly 70% in Q2. It’s services revenue in Q2 decreased 60% compared to the same quarter last year. People are unlikely to try out new services, such as wellness and spa when they are concerned about their health and the risks associated with COVID-19.
Is Groupon (GRPN) a reliable investment?
Groupon is successfully steering its way through the COVID-19 crisis, delivering better than expected results and outlining clear strategy for growth.
