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Groupon (NASDAQ: GRPN) garners considerable debate among investors. New CEO Rich Williams -- who took over in 2015 -- has embarked on an ambitious turnaround plan, exiting all international markets except Europe, cutting costs, and focusing only on higher-margin items. These changes have made headline numbers look scary. For instance, revenue declined 7% in the first quarter, but the company's profitability vastly improved as gross profit increased 5% in the same period.
Last quarter showed continued progress on these initiatives, but not everything was sunshine and rainbows. The stock has already shed its post-earnings gains, and the question remains: Did the good outweigh the bad?
Is Groupon's turnaround for real? Image source: Getty Images.
Accentuating the positives
To the company's credit, there were more than a few positives last quarter.
Groupon+: During the reported period, the company's voucherless Groupon+ offering became fully integrated with American Express cards and is now integrated with all three major credit card providers. Groupon+ members also surged with 1.5 million cards linking to the product, up 55% from last quarter to a total of 4.2 million linked cards as of Mar. 31.
That extremely rapid adoption is a big win. Groupon+ could be a game-changer for the company longer term, as it removes two major pain points for customers: pre-paying and having to print out and present a physical voucher.
Yet because customers don't have to pre-pay, Groupon's billings, revenue, and profits are all hurt in the near term as the program ramps up. For instance, while the North America local segment's gross profit was down 2%, when adjusted for Groupon+ and divestitures, gross profit would have been up in the low single digits.
Despite the short-term headwinds, the continuing strong ramp-up of Groupon+ should be a long-term tailwind for the company, as it looks toward a new, voucherless future.
Cost control: This has also been a central part of Williams' plan, and there were positive signs on that front as well. Notably, selling, general, and administrative costs continued to fall, not only decreasing 4% year over year but also dropping 1% from the higher-revenue fourth quarter.
Marketing expenses did surge 15%, but they were offset by lower product discounts (which boosted gross margins), so the net effect was lower overall costs. The 15% marketing increase also marked a deceleration from the fourth quarter's 24% increase. In sum, these lower expenses allowed the company to post a $3.4 million operating profit, as opposed to an $11.7 million loss in the year-ago quarter.