Groupon (NASDAQ:GRPN) is in a funk, and it's willing to play a bad card that will sink its losing hand. The daily deals specialist's board is approving a reverse stock split to artificially inflate its share price, and shareholders will get to vote on the proposal come June. There aren't too many companies that have gone this route and done right by their stakeholders, but a lot of things aren't going right at Groupon these days.
Tuesday afternoon's report was a disaster at every turn. Revenue plummeted a sharper-than-expected 23% decline to $612.3 million, its weakest top-line tally in the holiday-spiked fourth quarter since 2011. Analysts felt the dip in revenue would be roughly half what Groupon ultimately delivered. Its adjusted profit of $0.07 a share is also about half as much as Wall Street was targeting.
Groupon announced that it would be dumping its low-margin goods business. It will also suspend selling new memberships to Groupon Select, the premium subscription platform that it launched just six months ago to give its most active customers deeper discounts. However, if you have a sense of stock split history, there's probably nothing as bad in Tuesday's horrific financial update as knowing that most companies shifting into reverse never shift back into drive.
You're going the wrong way
Stock splits are zero-sum events. Whether your 100 shares at $10 become 1,000 shares at $1 in a forward stock split or 10 shares at $100 in a reverse it's still a cool grand any way you slice it. However, it's not a surprise that the market tends to initially applaud a conventional forward stock split while sending shares lower on the announcement of a reverse split.
A reverse split conveys a lack of confidence, and it's not just the initial hit that weighs on most of the companies that have gone this route. A study by researchers at NYU Stern School of Business and Emory University looked at 1,612 reverse splits that were executed in a 40-year span of time through 2001. They found that the reverse stock splits underperformed the market by 16% a year following the stunt, and the gap widens in the second and third year.
Some companies don't have much of a choice. Stocks buckle below the minimum requirement to sustain a major exchange listing. Sometimes it's just a matter of firming up a share price to attract broader institutional investors.
There are rare cases of companies surviving and even thriving after a reverse split. Booking Holdings (NASDAQ:BKNG) in 2003 and Laboratory Corporation of America Holdings (NYSE:LH) in 2000 are market-thumping multi-baggers since going this historically unsavory route. Some of the more recent success stories include Citigroup Inc. (NYSE:C) in 2011 and Xerox Holdings Corporation (NYSE:XRX) in 2017, but in those cases the stocks have roughly kept pace with the buoyant market.
Groupon isn't dead. It actually makes sense to move on from goods to focus on its signature discounted vouchers to local experiences. Dealing in closeouts involves costly physical fulfillment in a cutthroat market, and it also gnaws away at the Groupon brand. It's surprising to see Groupon give up so quickly on Groupon Select, but with the company admitting that most of its premium members were leaning heavily on the platform to get price breaks on the now discontinued goods -- driving those razor-thin margins even lower -- it makes sense to stage a retreat until it can survey the landscape of the new normal.
History says that reverse splits are bad bets. Groupon can't sugarcoat the grim message that the move will send to investors. Time will tell if it's one of the rare survivors of a reverse stock split, but for now an investment that once seemed to be a clear winner among consumer discretionary stocks for its ability provide folks more bang for their buck will have a lot to prove to get back on track.