Hi Guys,
This is my first post on CoBF, so would love some feedback from the group on the below!
For reference, I have been following the daily deals business for the last two-three years as my firm has made 4 acquisitions in the daily deals/E-Commerce space.
Summary:
Groupon, in my opinion is a near term SHORT ahead of their next earnings release (exp. June 2, 2020) due to the immediate impact of COVID 19 on their experiences business only being compounded by the fact that they are in the midst of an internal restructuring/management changes etc.
Groupon has two core operating segments, Products & Experiences.
Products - In 2019, Groupon sold $1.092 Billion in products which contributed $174 Million in Gross profit. Prior to COVID19, the company announced plans to exit this business segment due to declining revenues and fulfillment costs/infrastructure required to run products making the segment uneconomical. Interestingly enough, for our portfolio companies we have managed to grow our products vertical by doubling down on grocery deals (up 4X during this pandemic), and COVID supplies (sanitizers, gloves, UV lights, civillian face masks etc). I have seen deals for face masks on groupon but dont see much in the way of grocery offerings as that requires additional infrastructure/logistics capabilities. It will be interesting to see how this unit performs in Q1/2020.
Experiences - In 2019, Groupon sold approx. $3.4 Billion worth of experience vouchers across its key verticals outlined below. Note: experience sales are reported net of fees paid to merchants, which translated to $1.13 Billion in Service Revenue (~33% Commission Rate). Key Verticals in the service sector are:
1) Things to do: Concerts, Sporting Events, Date Night & Family Night. $1 Billion in Annual Billings
2) Beauty & Wellness: Massage, Cosmetic Treatments, Yoga Classes. $900M+ in Annual Billings
3) Dining: Restaurants, Bars, & Fine Dining. $350M+ in Annual Billings
All of these categories contribute to about $1.01 Billion in Gross Profit (approx 85% of their total Gross Profit of $1.186 Billion) and are likely to be hit hard during this pandemic period (Mid March to date). For reference, our experience verticals were down 90% starting mid march, and while some categories like golf have recovered (golf for some reason is an essential service LOL), travel, events, beauty, dining are pretty much dead. My expectation is that the market should price in the impact of COVID on groupon once they see a decline in revenues starting Q1/ (Q2 will likely be much worse).
Risks: The most obvious risk is the chance of a take over, which is why the window for a short on the stock is also likely short. I think there will be a lot of strategics who would take an interest in groupon (Ali Baba's investment arm owns ~5.81% of the company already, and could be a great way for them to acquire cheap users). Groupon responded by adopting a shareholder rights plan to provide some measure of defence against a takeover.
Despite impact on earnings, the stock has bounced back in April and May alongside the market, while the company has announced plans to downsize (44% of its workforce laid off/furloughed) and offload office space at their headquarters in chicago.
What will be interesting to see is how the business performs over the coming months. As mentioned above in this thread, Groupons business model generates a hefty amount of float (they collect payment on order, but pay their merchants at a later date, a) on redemption of the voucher, which could be months ahead, or b) on sale with a term of say 4 weeks (to account for any potential refunds etc). Funny enough another post on CoBF re groupon mentions how float can be a double edged sword. Will be interesting to see how this impacts their near term liquidity.
Would love your thoughts and feedback on this gents!
