It’s almost never enough to just read the headline earnings from a company and ignore the rest of the information. I’m constantly amazed at the amount of information the average investor can glean from a quarterly earnings release. When looking at Groupon Inc (NASDAQ:GRPN)’s recent earnings, I found two issues that are standing in the way of the company’s earnings growth. The good news is, they are both 100% controllable by the company. The bad news is, neither issues is easy to fix.
Groupon Goods Should Scare Both Online And Traditional Retailers
Most people know Groupon Inc (NASDAQ:GRPN) for their daily e-mails with deals on all types of products and services. However, Groupon launched Groupon Goods within the last year, and this category is growing so fast, that it may soon take over as the company’s number one business.
In case you aren’t aware, Groupon Inc (NASDAQ:GRPN) Goods is the company’s exclusive pricing on retail goods. This offering is a real threat to retailers of all stripes. Part of what makes Amazon.com, Inc. (NASDAQ:AMZN) so successful is their relentless focus on price and convenience. However, what hurts Amazon.com, Inc. (NASDAQ:AMZN) sometimes is their massive selection.
Just as an example, Groupon is currently offering an Asus 14” laptop for $299.99. If you want to try and price compare through Amazon, you’ll have to look at 108 different Asus 14” laptops. Too many choices may cause customers to just assume that Groupon has the best deal. In addition, Groupon is beating Amazon on free shipping with orders of $15 versus Amazon.com, Inc. (NASDAQ:AMZN) requires a purchase of $25 or more.
Speaking of traditional retailers, Groupon Inc (NASDAQ:GRPN) Goods also poses a direct threat to two of the largest domestic retailers in Target Corporation (NYSE:TGT) and Wal-Mart Stores, Inc. (NYSE:WMT). Think about this, Wal-Mart and Target have convenience on their side, as they have over 1,700 and 4,000 domestic locations respectively. However, neither store offers free shipping on orders of $15 or more with no other qualifications. In addition, neither Target or Wal-Mart can match Groupon Goods prices.
Forget About Daily Deals, Goods Could Be A Category Killer
In the most recent quarter, Groupon’s traditional business saw revenue decline 13.66%, but Groupon Goods’ revenue increased 1,549%! When you consider that Groupon Goods launched about a year ago, for this category to make up more than 35% of revenue is astounding.
While Amazon is talked about for many things, over 60% of the company’s revenue is from general merchandise sales. While Amazon’s 28% increase in merchandise sales last quarter was impressive, it is nothing close to the 1,500%+ increase that Groupon Inc (NASDAQ:GRPN) Goods just turned in. Target and Wal-Mart are doing well, but analysts expect just a 3% increase in revenue at Target this year, and Wal-Mart is expected to see a 4.7% increase.
With 41 million active customers, and this count up 22% year-over-year, you can be sure some of these customers were hooked by a Groupon Goods offer.
But….There Are 2 Big Challenges
While the traditional Groupon business has massive margins due to the lack of inventory, the opposite is true of the Goods business. In fact, compared to Amazon.com, Inc. (NASDAQ:AMZN)’s gross margin of 24.13%, Target at 28.88%, and Wal-Mart at 26.56%, Groupon Goods’ gross margin was just 2.93% in the current quarter. That’s not a mistake; I said less than 3% was their gross margin.