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RetailMeNot (SALE) - Certainly not another Groupon

2/25/2014

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The company operates the largest digital coupon marketplace in the world, essentially connecting consumers with top brands. As of December 31st 2013, they offered coupons from 70 000 retailers wtih 600 000 coupons each month, and received more than 550 million visits on their websites. They own the leading digital coupon sites in US (retailmenot.com), UK (vouchercodes.co.uk) and France (Poulpeo.com, Bons-de-Reduction.com, Ma-reduc.com). Around 78% of revenues come from USA, while the rest (22%) is international, which is growing considerably faster considering that in 2011 sales outside US represented only 9.7% of the total. 

The main difference between Groupon, is that SALE offers digital coupons used to get discounts on online purchases (you just copy a link at checkout and get a discount), whereas Groupon sells mostly "daily deals" for brick and mortar shops and establishments (customer has to print and present the coupon at redemption). On top of that, Retailmenot has been profitable for the past three years, while Groupon still struggles in this area. One of the contributors to this is that 95% of traffic to SALE's websites is from non-paid sources, in other words organic traffic. Also, the site has overtaken Groupon as the number 1. coupon website in US.

Recently, Groupon launched a program called "Freebies", which offers similar coupons like SALE, however the total portfolio represents less than one tenth of those on Retailmenot.com. As such, SALE can achieve much better economies of scale and profit margins, because their discounts and prices from retailers depend on volumes sold, which is much higher than other competitors.

RetailMeNot has several competitive advantages: 
1. Difficulty to find relevant coupons - consumers usually shop at different retailers for many different products, Retailmenot.com aggregates offers from 70 000 retailers and presents them in a very user-friendly form.
2. Insufficient infrastructure - many websites lack the infrastructure to periodically check all coupons, what leads to unreliable, expired digital coupons and customer frustration. SALE offers the largest, most comprehensive and up-to date portal.
3. Traditional coupons are inconvenient - hard to find and organize, and they are not easily available on-demand when you are shopping.

JP Morgan and some funds held preferred stock in the company, which was converted into common stock on IPO. The preferred dividends used to depress earnings quite heavily, as a result net income is expected to jump following their disposal. SALE stock trades at a forward P/E ratio of 31 and P/S of 10, which is still good considering they grew revenues by 55% and net income by 79% in the last quarter. Mobile revenues were up 180% to $11.7 million, while sales from international market grew 85% to $16 million. Total visits to their websites grew 24% to 184 million, suggesting that existing customers spent more money than last quarter using RetailMeNot coupons. The company has $165 million in cash and $80 million in total liabilities, while return on equity should reach 10% this year.

Risks
The biggest risk I see now is possible competition, while they are quite ahead of others, there are several sites offering similar coupons. They must keep getting more retailers into the platform and acquire additional sites to grow the coupon portfolio. 
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