2023-10-10 15:54:18 ET
Summary
- Retail stocks have been performing poorly, with the SPDR S&P Retail ETF down 42% since its peak in November 2021.
- Groupon's stock is in freefall today, potentially indicating trouble at the company.
- Groupon is exploring ways to divest its non-core assets as retail spending remains solid but consumers become more cautious.
- I outline key price levels to watch on the chart.
Retail stocks have been badly beaten over the last two years. I keep tabs on the SPDR S&P Retail ETF (XRT), an equal-weight equity fund tracking a basket of consumer stocks. After doubling from its Halloween 2020 low to a peak in mid-November 2021, shares are down a stunning 42%. Still, the group has traded sideways since May of last year, underperforming the S&P 500.
Amid so much volatility and consumer-stock shakiness, I'm downgrading Groupon (GRPN) from a buy to a hold. I was bullish on the stock after it reported earnings back in February, and shares more than doubled from under $8 to above $16 last month. Today, shares are in freefall following news of an asset sale , potentially indicating liquidity troubles at the embattled company.
Retail Wreckage: Non-Profitable Consumer Stocks Struggle Amid Rising Rates
For background, Groupon operates a marketplace that connects consumers to merchants. It operates in two segments: North America and International. The firm sells goods or services on behalf of third-party merchants and first-party goods inventory, serving customers through its mobile applications and websites.
The Chicago-based $322 million market cap Broadline Retail industry company within the Consumer Discretionary sector has negative trailing 12-month earnings per share and does not pay a dividend. Immediately before today’s plunge, shares traded with a high short interest of 31%, and implied volatility has now reached extreme levels at 154%.
Asset sales often result in negative market responses, but today’s move asserts something serious may be happening with Groupon. The divestiture of about 9.4% of its 2.3% stake in SumUp Holdings S.à r.l. for €8.4 million was seen as transacting at a price below expectations. It’s also part of a larger transaction involving other SumUp investors.
What’s more, the retailer is exploring other possible moves to monetize its non-core assets. All this comes as retail spending remains solid, but also as consumers are seen as turning more cautious considering still-high inflation, the resumption of student loan repayments, and simply less excess savings.
Back in August, the news flow was much better with the company. GRPN reported Q2 operating earnings that were better than what analysts had been expecting. A per-share loss of -$0.10 came alongside a 16% drop in yearly revenue, which also was better than feared. Shares surged in the days after the results hit the tape – continuing an upward trend that began around its Q1 earnings date this past May.
On valuation , analysts expect total FY 2023 EPS to come in at -$0.66, a 70% year-on-year increase. Groupon is expected to be earnings-positive in 2024 with an acceleration in per-share profits by 2025. Sales, however, are seen as holding steady near $500 million on an annual basis, so cost-cutting moves and operating leverage will be key to watch. Considering the firm has net debt of $176 million (total debt of $294 million less cash of $118 million), that's a hefty burden considering today’s market cap of barely above $300 million.
Free cash flow per share is also a red flag at -$5.70 over the last 12 months. While there’s a sanguine growth story possible here, the valuation is depressed with a price-to-sales ratio of just 0.64 (using today’s updated numbers). I still believe the company is a good value if it can right the ship, but today’s news is particularly concerning. Even if we assign an industry average P/S, then we're talking about an upside potential of 27% - that sounds strong, but not when real risks are emerging.
Groupon: Mixed Valuation Metrics
Seeking Alpha
Compared to its peers , Groupon features a relatively poor valuation grade while its growth outlook is suspect. Since the firm does not produce free cash flow or even operating earnings, it’s particularly vulnerable to rising interest rates and a broader risk-off investing theme which is ongoing. Momentum had been strong with GRPN, but today’s drop put an end to that story. The bright spot here is that EPS revisions have been solid since the firm has topped Wall Street’s earnings estimates in each of the past four quarters.
Competitor Analysis
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q3 2023 earnings date of Monday, Nov. 6, after market close. No other volatility catalysts are seen on the calendar.
Corporate Event Risk Calendar
The Technical Take
GRPN rallied big in Q2 and Q3 as the earnings-turnaround narrative played out. That optimistic thesis ran its course. Notice in the chart below that shares rose into key resistance at the $16 mark. That was the low from March of 2022 as well as where sellers came about the following June. You might say that appears to be an arbitrary price point but take a look at the RSI indicator at the top of the graph – the momentum uptrend snapped just before the price trend (as is often the case).
Moreover, the RSI printed a bearish divergence when GRPN hit $16. Today, GRPN appears to have held support in the $9.47 to $10.28 zone – the highs from November last year and this past February. With the 200-day moving average firming rising (and a bullish golden cross having taken place just two months ago), today’s giveback, while harsh, doesn’t change the broader upward bias despite a break in the rate of trend off the May 2023 nadir. Long with a wide stop under $9 could work.
Overall, it’s not uncommon to see a stock pullback following a major advance. Today’s drop is almost an exact 50% retracement of the rally, and a speculative long position could shape up well into year-end.
GRPN: Bearish Momentum Turn Following By A Price Retreat, $9.50 Support
The Bottom Line
I have a hold rating on Groupon. The fundamental thesis is shaken given today’s news and severe drop, but the stock has only given back half of the May-September climb while the long-term moving average continues to rise.
For further details see:
Groupon's Bullish Run Halted, Turnaround Story In Jeopardy