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Groupon Inc (GRPN): Concerns Remain Despite Signs Of North American Rebound

 July 16, 2013 09:52 AM


(By Mani) Groupon, Inc. (NASDAQ: GRPN) would incur additional remarketing expenses to stimulate growth in the near to medium term despite showing signs of stability within the overall North American business for billings/revenue.

Groupon operates a commerce platform that connects local merchants to nearby consumers in hundreds of markets around the world. The local daily deals business is the core operation of the company and involves merchants offering coupons for discounted goods and services in an effort to attract new customers.

While the company is rooted in the core daily deals business, Groupon has transitioned into a local commerce marketplace where consumers can find discounted offers across a broad range of categories.

[Related -Groupon Inc (GRPN): RBC Upgrades Recommendation, With 16% Downside – Say What?]

The company guided to $15 million to $30 million in incremental investment to drive customer growth for the second quarter alone. These costs could come in the form of take rate reductions, shipping promotions, online advertising expense, and other marketing-related expenses, some of which may appear as actual marketing expenses, others as contra revenue.

"We expect Groupon to see very little improvement in their International operations in 2013 as the company incurs costs to unify their technology platforms onto one global standard," UBS analyst Eric Sheridan wrote in a note to clients.

Groupon could stand to benefit from a reduction in the number of global markets on which it is focusing, but there is no evidence of any change in management's view on this topic to date.

[Related -Call Options Active on Groupon]

In addition to cost headwinds, the market is concerned by the lack of a permanent CEO. In February, Groupon said it is replacing Andrew Mason as its Chief Executive. The company appointed executive chairman Eric Lefkofsky and vice chairman Ted Leonsis to the newly created Office of the Chief Executive, effective immediately. Since then, the company is looking for a new Chief Executive.

Further, the company is struggling from increasingly difficult North American first-party (1P) comps and little to no upside on margins in the near term.

"We believe that at least part of the relative stability shown by Groupon's North American business over the past six months might be attributable to a competitive environment that has somewhat eased (in particular the operating results for Living Social)," Sheridan said.

However, over the medium term, there is a second wave of competition coming in the broader local merchant services market. While the battle in the space had been largely narrowed to Groupon and LivingSocial today, there is potential for an increasingly competitive environment in the near future.

The recent initiatives by Google, Inc. (NASDAQ: GOOG), Amazon.com, Inc. (NASDAQ: AMZN), Yelp, Inc. (NYSE: YELP) and Square (and potentially Facebook) could be added as new competitors in the back half of 2013 and beyond.

"Broadly speaking, these competitors have very solid advertising relationships with local merchants and/or are better capitalized than Groupon for the long term," Sheridan noted.

The shares of Groupon would witness more upside on the permanent appointment of a CEO and long term business plan for Groupon particularly for the International operations. The company should provide added detail and evidence of the benefits of the mobile platform in driving volumes, loyalty, customer spend, possibly lower remarketing costs, and a decreased reliance on email push.

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