What’s Equal to About 7 Wal-Mart Stores: Discouraging Developments at Groupon

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Groupon (GRPN) has been so vilified -- for its goofy-and-now-departed CEO, Andrew Mason; for its overvalued IPO; and for reportedly turning down a $6 billion offer from Google (GOOG), that one wants to find something nice to say about the company.

Its disclosure practices (like Homer Simpson, doing the bare minimum) don’t give one much to work with, however. Sales force productivity, and what’s being done to improve it? Relationships with local merchants and pricing arrangements with same? What percentage of those getting Groupon emails actually buy something?

One can come up with all sorts of meaningful metrics that Groupon doesn’t share, if it collects them at all. The shares, as seen in a stock chart, have more than doubled off their all-time low of $2.60, if that’s where you bought, but are a sliver of the high.

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One senses the company trying to stabilize itself. It cut marketing spending by more than half last year to $336.9 million. It boosted spending on an actual sales force, pushing up SG&A 44% to $1.18 billion. The result in the fourth quarter was somewhat alarming: third-party and other revenue – essentially the daily deals business – fell about 14% to $413 million.

Revenue growth for the quarter and the full year 2012 came mostly from so-called direct revenue, essentially selling goods online like Amazon (AMZN) does. The total for 2012 was $455 million. Nice, but it amounts to the equivalent of about 7 Wal-Mart (WMT) stores. And the gross margin is terrible, at about 7%. It seems unlikely that Groupon, so late to the game, can carve out a large and profitable online retailing operation that competes with Amazon, which itself is making a pitiful profit margin on sales.

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The local deals business is difficult, no doubt, but it’s the one in which Groupon has a competitive advantage, namely no other company of scale is focused on it. Groupon at year end had about $1.2 billion of cash, which buys it some time. To attract thinking investors, however, the company needs to better explain its strategy and find a way to make the local deals business work.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com.


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