Don't Panic Over RetailMeNot's Second-Quarter Results

RetailMeNot's second-quarter results disappointed Wall Street, but don't write off the digital coupon provider's growth story just yet.

Aug 25, 2014 at 6:54PM

RetailMeNot (NASDAQ:SALE) reported second-quarter results on Aug. 4. The market wasn't pleased with the results and has since pushed the stock down more than 25%. However, the sell-off may be overdone. Let's take a closer look.

Quarterly highlights
Total sales for the quarter increased 37% year over year to $59.5 million. Excluding sales from businesses acquired over the past year, organic sales increased 34% year over year. Net sales from international markets increased 57% year over year to $13.5 million, making up 23% of total sales as a whole.

RetailMeNot continues its strong growth in mobile, with mobile revenue increasing 114% year over year to $10.7 million. Mobile revenue made up 18% of overall sales, signifying just how much room there is to run in this quickly growing segment. Total visits to RetailMeNot's digital platform increased 27% year over year to 154.2 million.

Net income for the quarter decreased 16% year over year to $4.3 million ($0.08 per share), caused primarily by higher expenses relating to product development, sales and marketing, and stock-based compensation. Compared with the second quarter of 2013, product development expenses increased 87%, sales and marketing expenses rose 36.3%, and stock-based compensation shot up 175%. Adjusted EBITDA grew 25% year over year to $19.7 million.

I don't mind investments into R&D -- such expenses are common with young and innovative companies disrupting their respective industries -- but the drastic increase in stock-based compensation has the potential to be harmful to shareholders should it continue to progress at these levels in the coming years. (Stock-based compensation for employees and executives can lead to dilution of shares outstanding, thereby diluting earnings per share.)

Operating cash flow saw a strong year-over-year increase of 128% to $18.2 million, with free cash flow (including cash acquisitions) increasing 151.5% to $17 million. This strong free cash flow production helps validate the strength of RetailMeNot's core business right now, despite some short-term operational hiccups. 

So why the market hate?
A few things about this quarter peeved Wall Street analysts. First, RetailMeNot's revenue and sales fell short of the $60.2 million (actual sales were $59.5 million) and $0.17 in earnings per share (versus actual EPS of $0.08) the analysts were expecting on average. An approximate 1% revenue miss for a company growing as quickly as RetailMeNot is hardly a reason to panic, but investors should watch closely to ensure that the company's investments into product development and sales and marketing begin to drive growth.

RetailMeNot's search engine traffic was indeed affected by Google's algorithm change in May -- which caused RetailMeNot shares to drop 20% at the time -- and RetailMeNot's search engine traffic still hasn't recovered to the levels it reached before the change. There is thus some pressure on RetailMeNot's growth in the remainder of 2014, with management estimating a 5% impact on projected revenue in 2014 as a whole because of the algorithm change. On the conference call, management was quick to point out that the change didn't affect the company as significantly as some had been speculating it would in May, but it did disrupt and reduce RetailMeNot's page rankings, search traffic, and monetization levels.

For the upcoming third quarter of 2014, RetailMeNot management anticipates revenue to increase year over year approximately 16% to between $53 million and $57 million. For 2014 as a whole, management now projects the company to bring in total sales of $262 million to $270 million -- levels that would represent an increase of 25% to 29% from 2013. 

RetailMeNot's guidance for 2014 as a whole is exactly the same guidance management provided in the fourth-quarter conference call this February. Unfortunately, management raised guidance in May after reporting first-quarter results, thus leading to a nasty reaction this time around when guidance was reduced to initial levels. Rookie mistake for a company that's been public for just over one year. (I wish more companies would follow Warren Buffett's lead and provide no guidance to Wall Street.)

In short, RetailMeNot's 2014 expectations are right back to where they were in February of this year. The long-term outlook for RetailMeNot is really unchanged. 

Looking ahead
"While our top-line growth outlooks reflects some near-term headwinds," says CFO Douglas Jeffries, "we believe the long-term outlook for our business remains unchanged. Accordingly, we are continuing to invest against the long-term opportunities."

Going forward, RetailMeNot must diversify its operations to lessen its dependence on search engines to drive traffic and sales. While management claims it regained roughly two-thirds of the traffic lost by the Google algorithm change within one month, clearly the change dinged the company's shorter-term operations, focus, and outlook. RetailMeNot has certainly dealt with algorithm changes before, so I'm not concerned that this particular change will result in any significant lasting damage.

A survey from Gartner released this April found that digital marketing budgets are expected to increase 10% in 2014. Companies are allocating more of their marketing resources to digital and mobile venues, which still make up only a third of overall marketing budgets on average. RetailMeNot stands to benefit from these trends thanks to its wide audience of digital and mobile users. As RetailMeNot continues to reinvest in product development, the company is poised to generate solid sales growth over the next three to five years.

Foolish bottom line
Remember that RetailMeNot has $213.9 million in cash with only $22.8 million in debt. These numbers, coupled with RetailMeNot's steadily increasing free cash flow, serve as ammunition for the company to make acquisitions, invest in product development, and provide a cushion in tough times. 

Few of RetailMeNot's fundamentals have changed since May, yet the stock has been pushed down more than 40% in that timeframe. Overdone? I think so, but what really counts is how the company performs in the remaining quarters of 2014 and beyond. Investors should be watching closely to see whether RetailMeNot's growth strategy remains intact.

Leaked: Apple's next smart device (warning -- it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee that its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming that its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts that 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

David Kretzmann owns shares of Google (A shares) and RetailMeNot. You can follow David on Twitter: @David_Kretzmann. The Motley Fool recommends Apple, Gartner, Google (A and C shares), and RetailMeNot and owns shares of Apple, Google (A and C shares). Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information