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Groupon Grapples With the Good and Bad From Its Latest Quarter

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?

African American man holds pencil to his mouth contemplating a choice.
African American man holds pencil to his mouth contemplating a choice.

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.

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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.

New buyback: Groupon also authorized a fresh $300 million share repurchase plan, showing management's confidence in the company's future and the value of the stock. Groupon bought back $165.3 million and $61.2 million worth of stock in 2016 and 2017, respectively. But it didn't buy back any shares in the first quarter, so this new authorization was another welcome sign.

The fly in the ointment

There wasn't too much that went wrong, but one detail should give investors pause. North American active customers decreased by about 100,000, though international growth of 200,000 customers more than offset that. That's a bit concerning, since the company had been consistently adding active customers in North America throughout the past year.

Regarding the slowdown, CFO Mike Randolfi said:

Over the last year, we've become more granular in our customer analytics and segmentation, which enables us to increasingly target marketing dollars toward higher value customers, while at the same time choosing to not market toward lower value customers. [...] This contributed to a small decline in active customers this quarter, and we anticipate this will contribute to expected North America customer declines into Q2. We believe the resulting customer base will have greater potential for long-term gross profit per customer growth.

That's an interesting excuse, and one I'm not sure I totally buy. But it's certainly possible that low-frequency customers wouldn't be worth the extra marketing dollars. To the company's credit, average spend per customer increased 1% year over year and was also up slightly quarter over quarter. So there may in fact be something to management's theory here, as Groupon's remaining customer base seems to be spending at slightly higher rates.

If you believe in Williams' vision and his team's ability to execute, Groupon may very well be a long-term buy. Just keep in mind the company is trying to grow while also cutting costs, which is a difficult dance indeed.

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Billy Duberstein owns shares of Groupon. His clients may own shares in some of the companies mentioned. The Motley Fool recommends American Express. The Motley Fool has a disclosure policy.