Online ordering and food-delivery company Grubhub (GRUB) reported its second-quarter 2020 results on July 30, highlighting spectacular gross food sales for partner restaurants, explosive growth in diners and "Daily Average Grubs," and other positive, coronavirus-driven metrics. But its ballooning revenues led in the end to eight-figure quarterly net losses. If Grubhub can't achieve a net profit even with COVID-19's tremendous delivery sales boost, can it turn profitable once it merges with Just Eat Takeaway (JTKWY -0.67%)?
The merger
The deal inked earlier this year will result in Grubhub's merging with Just Eat in an all-stock deal worth $7.3 billion. Matt Maloney, Grubhub's CEO, will remain at the helm of U.S. operations. He will also join Just Eat's board alongside two other Grubhub directors, potentially giving Grubhub's current executives continued regional management clout even when the company is reduced to a Just Eat division.
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Grubhub shareholders will gain an approximate 30% stake in Just Eat because of the all-stock acquisition terms. Assuming neither party backs out before then, and the agreement passes regulatory scrutiny, the final merger will probably close in early 2021.
Flashy results or flash in the pan?
On the surface, some of Grubhub's most recent quarterly results look outstanding, as people dined at home to avoid coronavirus infection. According to its Q2 2020 release, the delivery company's gross food sales metric blazed upward 59% year over year, reaching $2.3 billion and leaving Q2 2019's gross food sales of $1.5 billion in the rearview mirror. Revenue was up 41% to $459.3 million, active diners rose 35% to 27.5 million people, and Daily Average Grubs (DAGs) jumped 32% to 647,100.
After totaling up the costs, however, it becomes apparent that making a record number of deliveries appears to be a losing proposition under Grubhub's current model. Total costs and expenses rose 60% year over year, strongly outpacing revenue growth. Rather than earning net income of $0.03 on each order placed through its platform as in Q2 2019, the company lost $0.77 per order. Grubhub swung to an adjusted net loss of $15.9 million, compared to positive adjusted net income of $24.9 million in Q2 2019.
Just Eat Takeaway in the coronavirus era
Similar to Grubhub's situation, the COVID-19 pandemic added rocket fuel to Just Eat Takeaway's sales and revenue. According to its Aug. 12 press release on half-year 2020 results, the respiratory virus propelled Just Eat's orders for the period upward by 32% year over year, reaching 257 million orders. Most of the acceleration occurred in Q2 once the coronavirus and its attendant lockdowns had taken hold across Europe and the globe.
Revenues predictably tracked higher in sync with more orders, jumping 44% year over year for the period ending June 30, reaching 1.03 billion euros ($1.2 billion) compared to 2019's 715 million euros ($849 million). The cost of sales rose faster, increasing 64%; growth in staff costs and operating expenses, among others, led to a 156 million euros ($185 million) total comprehensive loss in 2020, compared to a 28 million euro ($33.2 million) loss during 2019's first half.
A period of lightning-fast delivery growth led to a 464% increase in losses for Just Eat. In its notes to the tabulated revenues and expenses, Just Eat confirms repeatedly that its delivery success drove its profitability far into negative territory. It says its runaway cost of sales "was primarily driven by continued expansion of our delivery service offering" and notes the 31% jump in staff costs, a separate expense category from cost of sales, resulted from "more than doubling our delivery operations staff to support our large expansion of this offering."
Grubhub and Just Eat may not close the gap
Investors may instinctively expect a major change in the fortunes of Grubhub, Just Eat, or both following their upcoming combination. But the result may be just as financially unsustainable.
Both companies appear to operate in a similar way: The more deliveries they make and the bigger their up-front revenues, the more they end up losing during the quarter because of delivery expenses outstripping those same revenues. A situation of explosive growth in restaurant deliveries, which seems as though it would create a paradise of profit for big delivery companies, instead deepens their losses. The food delivery industry is also notorious for aggressive promotional activity.
GRUB Net Income (TTM) data by YCharts
Simply tossing Just Eat Takeaway and Grubhub into the same mixing bowl via a merger seems unlikely to cook up significantly different results at this point. Both continue pursuing the same business model, and merely joining forces as one business entity won't change the basic recipe.
While some analysts or commentators speculate on ways the pair could boost their bottom line into positive territory -- such as a delivery-free online restaurant order marketplace strategy, or delivering with drones and thus slashing personnel costs -- neither half of the upcoming merger has hinted at taking such measures, which remain speculative and unproven anyway.
Until Grubhub and Just Eat start making their current model turn a profit or adopt a radically new approach, Fools likely shouldn't count on the acquisition alone as creating a dramatic turning point for either company and may want to avoid both based on their loss-generating strategies. Consumer discretionary stocks with clearer long-term potential look to be more promising.
