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Will Groupon Stock Break the Reverse-Split Curse?

By Rick Munarriz - Jun 17, 2020 at 10:45AM

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A few days after a 1-for-20 reverse split, Groupon claws its way back with a well-received financial report.

There aren't too many stocks that have executed reverse stock splits and lived to tell the tale. Groupon (GRPN 6.45%) is hoping to be one of the few storytellers to defy mortality after completing a 1-for-20 split last week, and it's off to an encouraging start after posting well-received financial results after Tuesday's market close.

Groupon didn't have much of a choice in going for a reverse split. The stock broke the buck in early March, starting the clock on its potential exchange delisting. It was already starting to play the part of a speculative penny stock, and the pandemic shutdown naturally made things even worse. How could it survive when the local restaurants, shops, and service providers that it leans on to provide daily deals were closing down during the shelter-in-place phase of this pandemic?

But with businesses now starting to gradually ramp up again in a soft economy (fertile soil for Groupon's model), it does give the deal maker some intriguing appeal here for investors. 

Nine screens displaying the Groupon logo at its corporate office.

Image source: Groupon.

Make the deal

Calling this week's financial update a success is relative, of course. The leading provider of flash sale deals on goods and local experiences did see its revenue plunge 35% to hit $374.2 million for the first three months of this year. It's checking in with a big adjusted deficit of $1.61 a share. The current quarter is going to be even worse. This is still being hailed as a victory for Groupon since analysts were holding out for a larger loss on a 36% slide in revenue. 

Groupon's service revenue, consisting mostly of the discounted vouchers that the former dot-com darling is known for, declined 28% to $207 million. Product sales, which it was initially in the process of winding down, plummeted 43% to $167.1 million. We've seen the product sales segment go from a little more than half of its revenue a year earlier to just 45% now, and that was all by design as Groupon was hoping to eliminate its low-margin foray into discounted merchandise sales. 

A lot has happened at Groupon in recent months. It's in the process of furloughing 2,700 employees, and that April move also included bringing in a new CEO. It also decided to reverse course on abandoning its goods segment with the pandemic drying up opportunities for local deals. It's shifting to a third-party marketplace format for that business. 

The current quarter is going to be even worse than the one it just reported. Most of the world is scaling back on social outings, and the global travel industry is on ice. Groupon experienced a 20% decline in global units sold for the first quarter, but that shortfall rests entirely in the hands of a 77% drop in North America through the last 10 days of March, with a more pronounced decline overseas. The pace in North America in terms of units sold has improved to a decline of 68% in April and 66% in May. Internationally, Groupon has gone from an 80% plunge in unit performance from late March through April to a 76% drop in May. 

The end result here is that the second quarter is going to be brutal, but we're seeing the trend getting less cruel as the quarter plays out. With more cities starting to reduce local business restrictions, Groupon actually has local offerings worth buying. It points out that in North America, its beauty and wellness category saw a 40% increase in the second half of May relative to the depressed level it was at through the first half of the month. Overall unit sales in North America improved 18% from April to May with a 30% month-over-month gain internationally. The year-over-year comparisons will be a hot mess, but we are seeing Groupon taking baby steps back. 

Most companies that execute reverse splits only go on to resume their slides to zero. A reverse split doesn't fix a broken company. However, Groupon has already made back last week's initial hit after the reverse split took effect, and now it's a matter of building on the newfound bullish momentum.

This could be the perfect climate for Groupon. Merchants getting back to business need to start drumming up leads again, and Groupon offers a way for local establishments with flexible margins to do so in a cost-effective matter if they can afford to take pocket change on the dollar for the introduction. We're also in a recession, and that means consumers will gravitate to the marked-down vouchers that Groupon sells. There is a lot of work for Groupon to do, but with its sleeves rolled up as it claws its way back from a long way down, it's in a good position to overcome the reverse-split curse.   

Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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