The Pencils IRA Project is dedicated to building a portfolio of promising businesses that can be followed and replicated by both young and new IRA investors. Each holding of the Pencils IRA Project must meet the five pillars of a "megagrower" business -- purpose-driven business, innovative products, visionary leadership, increasing cash-flow production, and strong company culture -- with significant potential to create stakeholder value and substantially beat the market over the long haul.
As I discussed in a previous article, online coupon-provider RetailMeNot (NASDAQ:SALE) is taking advantage of the expanding field of digital marketing. By offering a platform for retailers and brands to offer deals and discounts to consumers, RetailMeNot has more than quintupled visits to its website since 2010. For the three additional reasons explored below, I am adding the company to my Pencils IRA Project.
3. Visionary, experienced, involved leadership
President and CEO Cotter Cunningham founded RetailMeNot in 2009. Formerly the COO of Bankrate.com, Cunningham began to "develop a hypothesis and business plan around the online coupon industry." The formation of RetailMeNot soon followed, and the company continues to grow its global presence as the top destination for consumers looking for deals and discounts.
While RetailMeNot is a young company, the business itself is overseen by a variety of experienced leaders. CFO Douglas Jeffries brings executive experience from Palm and eBay, while CTO Paul Rogers is a former Google engineer who has worked with RetailMeNot since the company's inception. The company's board of directors includes Gokul Rajaram, product engineering lead at Square, a commerce company perhaps best known for its mobile credit card reader for smartphones. Rajaram also served as an advertising director for Facebook and was the product management director for Google Adsense. Brian Sharples, the co-founder and CEO of HomeAway, also serves on RetailMeNot's board.
All but three of RetailMeNot's executives and board members are under the age of 50, and they bring with them an abundance of experience related to e-commerce, marketing, and developing vibrant marketplaces online. Management continues to focus on research and development, with total funds allocated to product development increasing from $4.4 million in 2011 to $30.6 million in 2013. In the first quarter of 2014, the company increased its product-development spending by 80% year over year to $10.7 million.
In addition to focusing on innovation, management recognizes the value RetailMeNot brings to retailers and brands around the world. Marketers will follow the eyeballs, and as RetailMeNot racks up more visitors, the network becomes all the more valuable to current and potential retailers looking to attract consumers with deals and discounts.
Building relationships with retailers, therefore, is essential to the long-term success of RetailMeNot. RetailMeNot recently entered a strategic partnership with General Growth Properties, or GGP, a real estate investment trust whose portfolio includes 120 malls in 40 states. This partnership will boost brand awareness by making RetailMeNot the "preferred digital coupon provider across GGP malls."
This focus on innovation overseen by an experienced leadership team -- which also recognizes the importance of strategic partnerships -- bodes well for the future of RetailMeNot.
4. Consistently increasing cash-flow production
RetailMeNot has been free-cash-flow positive over the past four fiscal years, and the company itself just went public in July 2013. The company grew operating cash flow from $2.6 million in fiscal year 2010 to $31.5 million in the 2013 fiscal year, producing $25 million in free cash flow over the course of the yearsource.
While the company's cash flow production hasn't been increasing in a straight line -- as is often the case for young and growing businesses -- RetailMeNot continues to produce solid free cash flow, helping build a sturdy balance sheet with $196.47 million in cash and $39.56 million in debt.
This cash flow production is encouraging when compared to that of Groupon (NASDAQ:GRPN) and Coupons.com (NYSE: COUP). Groupon's operating cash flow has declined from $290.5 million in 2011 to $218.4 million in 2013. In the first quarter of 2014, in fact, Groupon's operating cash-flow production fell year over year to -$20.7 million from $8.8 million. Groupon's cash flow production, in other words, continues to worsen in the face of increasing competition and growing losses. Coupons.com has produced negative free cash flow in each of the past three fiscal years, although the company's free cash flow nearly broke even in 2013.
RetailMeNot has grown sales at an average annual pace of 87.8% over the past four years to $209.8 million in 2013, with sales increasing 51% in the first quarter of 2014. Meanwhile, Coupons.com and Groupon saw year-over-year top-line growth of 41% and 26%, respectively, in Q1 2014 -- impressive, but still a far cry from RetailMeNot's sales growth.
Most importantly, RetailMeNot has become more effective when it comes to translating customer visits to its website and mobile app into sales. Net revenue per visit increased from $0.16 in 2010 to $0.37 in 2013 and reached $0.39 in the first quarter of 2014.
5. Strong company culture
"We believe people work hard for us," says founder and CEO Cotter Cunningham, "so we need to work hard for them." Thanks to perks such as free meals offered to employees each workday, fun employee outings (go-kart racing, anyone?), and weekly companywide "transparency meetings" to go over month-to-date sales and other metrics, RetailMeNot has strong ratings from employees on Glassdoor, a site where employees can anonymously rate their place of work.
Cunningham receives an 89% approval rating from employees on Glassdoor, while the company as a whole receives a 4.2/5 rating from employees. This is all the more impressive when compared to the 3.2/5 employee rating for Coupons.com and 59% employee approval rating of the company's CEO, Steven Boal -- or the 2.9/5 employee rating for Groupon and 61% employee approval rating of CEO Eric Lefkofsky. RetailMeNot makes a conscious effort to support and reward employees, and this shows in the company's superior ratings by employees on Glassdoor compared to its competitors.
Foolish bottom line
"We believe we're in the very early stages of a large market opportunity as retailers increase their use of digital marketing solutions to engage consumers," said Cunningham during RetailMeNot's most recent conference call. I am inclined to agree. RetailMeNot is poised to benefit from a confluence of two major trends: increased smartphone adoption and growing amounts of marketing money flowing into to digital marketing.
Given RetailMeNot's business model appealing to customers, retailers, and employees, I like the company's chances of expanding over the long haul and outperforming the market in the process. Welcome to the Pencils IRA Project, RetailMeNot!