Groupon (GRPN) Q2 Loss More than Expected, Guidance Soft

Zacks

Groupon Inc. GRPN reported second-quarter 2015 adjusted loss of 3 cents per share, which compared unfavorably with the Zacks Consensus Estimate and the prior year quarter loss of 2 cents per share.

The company reported non-GAAP earnings of 2 cents a share, within the guided range of 1 cent to 3 cents.

Quarterly Details

Revenues decreased 1.2% year over year to $738 million and also lagged the Zacks Consensus Estimate of $754 million. However, sales were within the company’s projected range of $700 million and $750 million.

Region-wise, revenues from North America increased 13.5% while that from EMEA and the Rest of World (Asia-Pacific and Latin America) declined 10% and 17.8%, respectively from the prior-year quarter.

Gross billings increased 1.8% year over year to $1.5 billion in the quarter. Region-wise, billings from North America increased 12.2% year over year. However, billings from the EMEA region and Rest of World declined 10.3% and 9.4% year over year, respectively.

As of Jun 30, 2015 active customers increased 6% year over year to 48.6 million, with 24.9 million customers in North America, 15.5 million in EMEA, and 8.2 million in Rest of World.

At the end of the quarter, on an average, active deals were about 510K globally while those in North America rose to 240K.

Groupon reported that its monthly unique users i.e. people using Groupon through both mobile devices and web came over 150 million (80 million in North America) in the quarter.

In the quarter, the company divested its stake in Ticket Monster for $360 million ($285 million in cash).

Margins

Gross margin decreased 300 basis points in the quarter to 45.7%. Operating expenses declined 8% year over year to $342.1 million. Loss from continuing operations was $15.3 million compared with a loss of $10.7 million in the year-ago quarter.

Balance Sheet

Groupon exited the quarter with cash and cash equivalents worth $1.1 billion compared with $1 billion reported in the prior-year quarter. Cash flow from operating activities was $17 million in the quarter compared with cash outflow of $22.7 million reported in the prior-year quarter.

Free cash outflow was $57.2 million in the quarter.

Outlook

For the third quarter of 2015, Groupon forecasts revenues in the range of $700 million and $750 million. Groupon expects adjusted EBITDA in the range of $45 million and $65 million for the quarter. Management expects to report non-GAAP earnings in the range of breakeven to 2 cents per share.

For 2015, the company continues to expect revenues between $3.15 billion and $3.3 billion. Adjusted EBITDA for 2015 is projected to be about $290 million.

Our Take

Rising e-commerce spending on mobile devices, a profitable domestic market and an underpenetrated international market are among the primary growth drivers for Groupon.

We believe that the company’s business model that focuses on discounts and deals to drive sales is likely to attract many consumers especially in the holiday season. Also, the company’s strategy of offering special deals prior to important events like Thanksgiving enhances its popularity. We expect these opportunities to continue to drive top-line growth.

Further, the convenience of online shopping has paved the way for online retailers to enhance their experiences. Moreover, increased traction in the mobile business driven by increasing adaptability of smartphones and tablets is another positive for the company.

However, the company continues to face significant competition not only from giants like eBay EBAY and Amazon.com AMZN but also from small companies like LiveDeal, which is a major near-term headwind. Growing competition is expected to keep Groupon’s pricing under tremendous pressure in the near term. Furthermore, it reduces the company’s bargaining power with the merchants as they can move to other deal providers.

Moreover, the soft outlook provide by the company failed to impress investors as reflected in the 5.34% decline in shares in Friday’s trading session.

Groupon sports a Zacks Rank #1 (Strong Buy). Another stock worth considering in the same space is PetMed Express, Inc. PETS, with a Zacks Rank #2 (Buy).

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