When it was created, Groupon (GRPN 8.21%) was an exciting early entrant in the online space, helping to connect local businesses to new customers. But the company has struggled to find its way.
Now, looking to get back to its roots, management's goals for 2022 suggest there's still a lot for the company to learn.
A painful fall
A little over a decade ago, Groupon held its initial public offering (IPO), debuting at $20 per share. The stock currently trades at around $19 per share. That sounds like a decade of sideways motion, but the company held a one-for-20 reverse split in mid-2020. When you account for that split, the stock is down 95% from its IPO price over 10 years ago.
Image source: Getty Images.
From a business perspective, it would seem like Groupon fills an important niche. Using coupons, the company helps small stores connect with customers they might not otherwise reach, because they lack their own online direct marketing platform. But then, the company shifted toward direct selling, believing it could take its online database of users and convince them to buy physical goods. That's a vastly different business model which requires buying, storing, and delivering products. It's a much more expensive proposition, and it didn't work out as well as hoped. Groupon has been shifting away from this model over the past year or so and going back to its roots of selling coupons or promotions for local restaurants and other merchants.
The transition has muddied the company's financials, because its revenues and costs are both materially lower now that it isn't selling products it has purchased. That said, there are some notable positives hidden in the numbers, including three consecutive quarters of active local customer growth in its core North American market and the not-so-subtle fact that Groupon produced positive free cash flow in the fourth quarter of 2021.
But there's still a reason to worry here.
Exactly what does Groupon do again?
Given the company's history, you would expect it would have a good handle on selling coupons on behalf of local stores and restaurants. But when the company laid out its 2022 goals in its fourth-quarter earnings release, there seemed to be something amiss. The first goal presented was "Determining the most important role that Groupon needs to play for merchant partners." If the company doesn't know this by now, what has it been doing for the last decade?
The second goal isn't much better: "Becoming a better partner to our merchant partners by building merchant trust and a better understanding of merchant economics." This suggests the company lacks an understanding of its direct customers, the merchants that use its service. And worse, its customers realize this and don't trust Groupon.
The rest of the goals are less worrisome but still aren't comforting. On the business customer side, the final goal is "Refining our inventory strategy to ensure we have the right marketplace supply density to drive customer engagement, support merchant partner growth, and unlock our flywheel." That sounds like a fancy way of saying "getting more coupons to sell." Did this really need to be turned into a goal presented to investors?
For coupon customers, the company is focused on "enhancing customer trust by proactively providing customer refunds, delivering the highest quality customer service, and leveraging data to provide a more personalized customer journey to meet their needs." That's basic business management and probably didn't need to be presented in a list, either. It is notable, though, that refunds are such a large issue. Delaying refund payments would presumably help preserve cash, which is good for the company's balance sheet but perhaps not so good for its image.
In fairness to the current management team, the company has been working through some material changes. That includes executive turnover (the new CEO was only in place for around 80 days prior to the earnings release) as well as the overhaul of the business focus. At another company, one could easily take a glass-half-full view of the goals instead of the more cynical glass-half-empty one presented above. But Groupon's business is not particularly robust and has yet to show any kind of stability, despite a decade as a public company.
It seems like Groupon still hasn't figured out what it wants to be when it grows up. Most investors won't be lining up to bet their hard-earned savings in the hope that it resolves its issues in a way that turns out well.
Too much risk
At best, Groupon is a turnaround story that falls squarely into special-situations-investing territory. That's a high-risk/high-reward area in which only the most aggressive should be playing.
For a typical investor, the company's goals should reveal the very real problems it faces even as it gets back to the basics of the business. Perhaps the current leadership can bring the ship back on course, but until there's far more sustained and proven progress, most investors should probably watch from the sidelines.
