RetailMeNot Earnings Show Why Online Coupons May Not Be a Great Bet for Investors

The coupon purveyor's stock tumbled after its quarterly report came out last night.

Aug 5, 2014 at 5:10PM

Shares of RetailMeNot (NASDAQ:SALE) fell nearly 29% today after the coupon seller provided disappointing guidance in its second-quarter report.

The company showed off strong growth in its most recent quarter, as sales jumped 37% to $59.5 million, just short of the consensus estimate of $60 million. On the bottom line, net income fell 16% to $4.3 million due to increased investment, but adjusted earnings per share still matched the analyst estimate at $0.17. 

Most important, RetailMeNot's forward guidance was much weaker than expected: The company sees revenue in the current quarter of $53 million-$57 million, below the consensus of $62.6 million. For the full year, the company lowered its forecast from $276 million-$282 million to $262 million-$270 million. Analysts had projected revenue at $282 million for the full year. 

Concerns about RetailMeNot have grown since Google reformulated its algorithm in May, punishing coupon merchants in search results. The stock is now down about 60% since a late February peak at $47, and the dialed-down guidance seems to be further evidence that Google's changes are taking a toll on the company. 

Still, most major indicators of the company's performance are moving in the right direction, as organic revenues for the quarter grew 34%, international sales jumped 57%, and mobile revenue more than doubled to 114%.

CEO Cotter Cunningham played down the impact of Google's algorithm shift on the earnings conference call, saying, "We don't see anything in this [shift] that gives us more pause than previous ones or increases our concern."

Top-line growth has not been a problem for RetailMeNot, but I'd be concerned with the reduced guidance and the fall in profits. Spending on product development nearly doubled in the quarter, and stock-based compensation also increased sharply, though that figure is excluded from non-generally accepted accounting principles calculations. 

In the aftermath of last night's report, RetailMeNot received some analyst downgrades, mostly on concerns about Google's algorithm changes and on its lowered guidance. However, some analysts stood by the company: Jefferies said the negativity was fully priced in, while Credit Suisse expected the company to return to margin expansion by the second half of next year. 

I'd be more skeptical, as Google's recent algorithm update could pave the way for similar refinements in the future. The search leader has made it clear that it sees coupon merchants such as RetailMeNot as "low-quality" search results.  Given that, it may not be much longer until we see another update from Google, again hurting coupon vendors like RetailMeNot. While the stock could be a steal at today's price after the company grew its top line by 37%, I'd like to see profit growth and further evidence that it can sufficiently diversify its Web traffic to compensate for any future adjustments by Google.

Jeremy Bowman has no position in any stocks mentioned. The Motley Fool recommends Google (A and C shares) and RetailMeNot. The Motley Fool owns shares of Google (A and C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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