Expedia's (NASDAQ:EXPE) stock is taking a beating, down more than 20% in recent trading. In the quarterly earnings conference call, management expressed it best -- there is "no sugarcoating" the fact that first-quarter results were a major disappointment.
Revenue and gross bookings only grew 1.8% and 14% year over year, respectively, since the company was challenged on multiple fronts. Lower customer traffic and conversion rates were the primary culprits. But why this is so is perhaps most concerning.
The company indicated that its domestic business was hurt by a decline in its vacation packages. It is countering the weakness by advertising specific package promotions in an attempt to generate more customer traffic. It also hopes that its price guarantee strategy will be another way to entice would-be travelers. The ultimate aim is to "increase the quality and quantity of traffic."
These initiatives may indeed provide some short-term relief to the recent weakness, but it is possible the company is facing a much more systematic problem that quick fixes cannot remedy. During the question and answer session of the conference call, one analyst expressed concern about increased competition from supplier direct sources. The response from Expedia's management was less than encouraging: It agrees that this is a legitimate threat, but it is "hard to quantify" just how pronounced a problem it is. Management countered by indicating that it believes some things can be done internally -- like various tweaks to the website -- to improve the conversion rate.
Perhaps these internal changes will alleviate some of the negative pressure. But I have to believe that the question many travelers are asking is, "Why use Expedia when I can go to websites for a Marriott or a Southwest Airlines, and book travel plans directly?" To answer this question, it will be critical for Expedia to relay to customers that the convenience of a one-stop shopping experience is both the fastest and most economical way to make travel plans.
At one point in the call, management waxed philosophical, indicating that "sometimes you have to take a step backward, before you can take a step forward." I guess this is true under some metaphors, but for a mountain climber, a step backward would be fatal. And a slip, a stutter, and a stumble backward by a boxer would be an invitation for the opponent to go for the knockout. I am not predicting such a doomsday scenario for the online travel agent, but the headwinds Expedia is facing will not dissipate any time soon. Until the company can better "quantify" the supplier direct threat, and then implement an effective counter to this problem, my inclination is to watch this one play out from afar.
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Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.
