What happened

Shares of online retail services provider Groupon (GRPN 2.76%) rose a quick 16% or so in early trading on Nov. 5. The main impetus for the advance was the company's pre-market earnings release. However, by about 11 a.m. EDT the stock was up only about 8%, having given up around half of its earlier gain.

So what

Groupon is still working through a material business transition, and its financial results are tough to read because of it. From a top-line perspective, revenues in the third quarter of 2021 fell 30% year over year. However, this was largely related to the company's shift away from selling physical products itself. Selling products directly to consumers results in higher sales figures but also increases the cost of goods sold, since Groupon has to buy the inventory it sells. Thus gross profit was up 13% compared to the same period in 2020 because of a huge drop in product costs. To put a number on that, the cost-of-revenue line item on the earnings statement fell from just shy of $144 million in the third quarter of 2020 to a little under $34 million in 2021. That's a pretty big shift in the company's business approach.

A compass with the arrow pointing to the word strategy.

Image source: Getty Images.

Groupon is looking to get back to its roots by helping to connect local merchants with local shoppers via "deals." During the quarter, roughly 75% of its North American deals were repeatable in nature (the goal is to get to 80% by year end), and about 50% of its retailer customers used the company's self-service platform. That said, marketing expenses were higher by 69% in support of the shifting business model. In addition, Groupon's units sold metric wasn't all that reassuring. In North America, local units sold was flat but physical goods units dropped materially (as expected, given the business shift) year over year. Internationally, both local units sold and physical goods dropped. The customer count was flat in North America but lower internationally. Overall, Groupon appears to be shifting toward a more profitable business model, but the transition is complicated, it's not over yet, and it may not be going quite as well as hoped given the customer count numbers. Which brings up the final earnings tally, with the company reporting adjusted net income of $0.38 per diluted share in the third quarter, up from $0.15 in the same stanza of 2020. A notable improvement, for sure, but there's still so much going on that it's hard to figure out an appropriate run-rate expectation. 

Now what

There are a lot of moving parts here as Groupon shifts its business model. Most investors will probably want to sit on the sidelines until the transition is complete. However, those with a constructive view of the changes being made should be pleased with the update. Though perhaps not pleased to the tune of a 16% stock price gain. And even the 8% advance at 11 a.m. EDT might be a bit too sanguine if Groupon can't grow its customer numbers, but we won't know that until the current transition is further along.