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Is Groupon a Near Term Short?


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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!

 

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Be careful shorting ~$1 stocks.

 

Frankly, the points you raise are well known to the market. This was a $3 stock before the pandemic, and you don't even need to do that much work to see how in trouble they are.

 

The crux of the work that needs to be done here is really how long can they survive. We need to assess their liquidity and capital requirements.

 

Ignoring cost of goods, they have about $1 billion of annual operating expenses (marketing, SG&A, net of D&A, etc...). Annual capex and interest requirements are another ~$75 million. So $1.1 billion annual capital requirements, or, $94 million per month.

 

The Company ended 2019 with $751 million cash and nothing drawn on their $400 million credit facility (except for a small amount of letters of credit). Do they have $1.2 billion current liquidity? I don't think so. First, $205 million cash is locked overseas. Corporations historically have trouble quickly moving cash back to the US if it is in foreign countries. Next, their credit agreement has a $250 million minimum unrestricted cash covenant (inclusive of $150 million that looks like it has to be kept in a lock box or something). Point is, true liquidity is probably around $300 million because I don't think they are going to have total access to their credit facility. The credit facility is secured by all assets, which for an asset lite Company is a bit of an oxymoron. I have looked at dozens of businesses over the last couple of months in similar situations, and they all drew their revolvers in March or early-April. The fact Groupon hasn't drawn on their facility makes me think they may not be able to, or are unwilling (could have springing covenants that they may not be in compliance with).

 

So, $94 million monthly capital requirements and $300 to $550 million liquidity (the greater end here ignores the minimum liquidity covenant). This means they have 3 to 6 months before they literally run out of money.

 

There are some caveats to this analysis. First, it assumes they don't cut costs and expenses which they certainly will. So add another 3 months. Next, we don't know what the cash burn situation will be. I think it is going to be negative, primarily because they run a $424 million net working capital deficit which is definitely going to unwind on them in a mean way. So dock 2 months from liquidity (guessing with this stuff).

 

Net net, I think they probably have between 3 - 9 months liquidity before running out of money. This is why the stock is trading at $1 - it took me ten minutes to figure this out and everyone else has had since March.

 

So, going into earnings being short the stock is probably a bad idea because the only thing people are going to care about is how bad the cash burn situation is going to be. If it is worse than expected, stock becomes a rock. If it is about as expected or better, this stock will rocket. The only thing people care about this earnings season is whether or not the Company will "make it".

 

Given the large amount of negative sentiment here, I am inclined to bet that the stock will probably rise on earnings that are "not as bad as feared". This has been a theme I've been observing in my levered small-cap universe.

 

I could totally be wrong though!

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GRPN was not a $3 stock before Covid.  It was $1.50 or so - the blowup was due to atrocious earnings/guidance/restructuring not Covid.  It then went much lower cause of Covid.

 

The risk of the short is there is huge synergies if they ever combined with YELP. 

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