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Morningstar | Groupon’s Losing the Low-Margin Cohort in 1Q Beat; Maintaining $4.20 Fair Value Estimate. See Updated Analyst Note from 01 May 2019

Lower traffic and an eroding customer base in the first quarter left many online shopping carts abandoned for Groupon. However, the significant headwinds were expected as the coupon voucher marketplace continues to focus on a more profitable and international customer base. Still, the headwinds weren’t as bad as expected amid the transition. Over the first quarter, Groupon met our top-line expectations while beating management’s--and gross margins exceeded our outlook as well as management’s. We think improving operating margins are achievable as well as eventual revenue growth. Yet, Groupon’s new focus on high-value international customers is significantly risky given fluctuations in consumer confidence--which we’ve reflected in our very high uncertainty rating. We are maintaining our $4.20 fair value estimate for this no-moat name.

Revenue performance in the fourth quarter came in close to our projections, as the firm posted $578 million on the top line, representing an 8% year-over-year decline. North America net customers decreased by 940,000 as a result of Groupon’s transition to higher value customers.

Groupon reported gross profits of $306 million, down 6% compared with the prior year. Gross profit declines were better than expected in the quarter due to increasing gross profit per active customer in North America as inventory mix shifted to more high-end offerings like health, beauty, and wellness. Still, the company experienced lower email and SEO traffic in the U.S. Additionally, pricing and promotions didn’t work in the company’s favor in markets abroad, especially the U.K., as Europe experienced weakening consumer sentiment. Meanwhile, overall SG&A and marketing expenses came down by 5% and 6%, respectively, as the company continues to target higher value customers and improve operational efficiency.

While we believe Groupon can return to revenue growth over the next five years, we reaffirm our belief that the firm lacks any moat sources--which we believe will manifest itself in little room for gross margin improvement in the near term. However, we expect operating margins to improve by nearly 600 basis points by 2023 as a result of Groupon’s retargeted customer base.