Groupon Inc (NASDAQ:GRPN) shares have been upgraded by analysts at Evercore Partners. The analysts cite “higher outer-year estimates and easing back-half comparison” as their reasons for upgrading the stock to Equal-Weight from Underweight. They also raised their price target to $8 per share from $6 per share.
Last month Wunderlich analysts granted Groupon a Buy rating, and in June, Morgan Stanley also noted signs of a possible turnaround in progress.
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Groupon merchant customers interviewed
Analysts Ken Sena and Andrew McNellis said they interviewed more than 50 of Groupon Inc (NASDAQ:GRPN)’s merchant customers in New York City and California. They said they also examined the aggregate gross margin profiles of more than 1,000 companies in eight different sectors. Using the that data, they determined that daily deals can only be justified in “the most margin-driven categories” on the basis of return on investment.
However, when they compiled the views of Groupon’s merchant customers, they found that for the most part, they are pleased with the company’s offerings, and their satisfaction seems to be increasing. The analysts note that better real-time and location targeting will help improve merchant economics even more over time even though they currently see a yield gap in daily deals.
Merchants are more selective in using Groupon
The analysts also found that merchants who use Groupon Inc (NASDAQ:GRPN) are doing so “on an increasingly selective basis.” They said this makes it possible for them to address some sort of capacity that otherwise would not be satisfied. According to Evercore, mobile engagement and also more frequent updates to software is making this possible.
The result is that consumers are provided with more information, while merchants have more control over the deals they offer. This enables merchants to then learn better ways to use Groupon’s products to get the most out of them. As merchants learn, they discover, for example, how to use Groupon to fill their seats during off-peak hours or to offer deals only to first-time customers.
Determining the merchant yield gap
The analysts also used their interviews to measure how much merchants were overspending relative to the face value of the vouchers. They included repeat visits in their calculation. The analysts discovered that on average, overspend was around 95 percent, although it needed to be 200 to 300 percent for merchants to break even in terms of gross profits.
The analysts said this continues to be a challenge for Groupon Inc (NASDAQ:GRPN) and other daily deal companies, although they believe that this return on investment gap will close over time, particularly based on its mobile usage growth and the greater controls merchants have over the deals offered.