From Unicorn to Unicorpse: RetailMeNot Going on Discount

I have always been skeptical about the skyrocketing valuations that VCs apply to startups as they go about their mad rush to fund businesses. In their zeal, they ignore the necessity of a sustainable business model and have funded many a unicorn that have crashed and turned into a unicorpse*. The stock market is a different playing field altogether and for companies to sustain their valuations under public scrutiny is a whole different ballgame. Funny money no longer works. Online coupon site RetailMeNot (Nasdaq: SALE) has already realized that it is not an easy task to bask in the pre-IPO glory once the scrutiny begins.

RetailMeNot’s Financials

Austin, Texas-based RetailMeNot was founded in 2006 as Smallponds Inc. The company acquired several smaller companies over the course of the next four years before renaming themselves as RetailMeNot by the year 2010. It earns revenues through advertising and commissions from sales made on retail sites accessed from their website. Revenues have increased from $16.9 million in 2010 to $144.7 million in 2012. The company has also been profitable since 2010. For the last fiscal year, revenues grew 26% to $264.7 million and it ended the year with an EPS of $1.03.

It was venture funded until 2013 when it went public. Prior to listing, it had raised $300 million from investors that include Austin Ventures, Norwest Venture Partners, Adams Street Partners, Google Ventures, Institutional Venture Partners, and J.P. Morgan. In July 2013 it raised $191 million in an IPO by selling 9.09 million shares at $21 each. The company was valued at $1.5 billion at the time of its IPO.

But the financials have since deteriorated.

Last month, RetailMeNot reported their third quarter results. Revenues for the quarter fell 7% over the year to $52.41 million, but were ahead of the Street’s forecast of $48.58 million. EPS of $0.12 was also ahead of the market’s projected earnings of $0.04 per share.

By segment, in-store and advertising net revenues grew 91% to $11.8 million for the quarter. Mobile online transaction net revenues increased 55% to $4.9 million and Desktop online transaction net revenues, which includes tablet, fell 24%, to $35.8 million.

Among operating metrics, mobile device share continued to improve. During the quarter, mobile site visits grew 41% over the year while the company reported a 19% decline in desktop visits. Total visits to the site fell 1% to 159.7 million with monthly mobile unique visitors at 67.2 million and desktop visits at 92.5 million.

For the current year, RetailMeNot forecast revenues of $240 million-$242 million, ahead of the Street’s forecast of $236 million. It expects to end the current quarter with revenues of $74 million-$76 million compared with the market’s forecast of $74 million.

RetailMeNot’s Rebate Offering

RetailMeNot’s member base may be declining, but it is not for lack of trying. To attract more users, earlier this quarter, RetailMeNot announced the release of RetailMeNot Rebates. As part of this offering, the company has tied up with Snipp Interactive, Inc. and will integrate Snipp’s processing engine into its receipt verification process. Unlike the traditional rebate claim method which is time consuming, RetailMeNot’s offering will allow consumers to submit a snapshot or email of a receipt and get their rebate within five business days for verification of the offer. The consumer will then be able to claim redemption in the form of gift cards or money in an online PayPal account.

It is also supporting social causes through the Save it Forward campaign that allows consumers to use the savings they realize through RetailMeNot as donation to someone else. Users will be able to donate the savings through a Save-it-Forward coupon which can then be redeemed by the next person who checks out.

Despite its moves, RetailMeNot’s performance in the stock market continues to suffer. Its stock is trading at $10.16 with a market capitalization of $532.5 million. It touched a 52-week high of $21.68 in May and a 52-week low of $7.66 in August this year. The company may have beaten market expectations, but its declining revenues and traffic, stretched margins, and weak monetization capabilities have ended the stock’s glorious days. RetailMeNot earns revenues from retail partners who repay it for the traffic directed to the retail sites. Unfortunately, retailers do not have a lot left to share with middle-men like RetailMeNot after they have given heavy discounts to their consumers. This leaves little in earnings for RetailMeNot. Additionally, coupon sites see consumers scout mobile devices for coupons, but apply the coupon code on a separate desktop page, thus causing the coupon site to lose revenues, in turn resulting in reduced monetization of the traffic.

Besides the obvious business issues, RetailMeNot has also seen their investor Austin Ventures sell their stake. Austin Ventures’s exit is on account of their strategy to get out of early stage growth investments, but it could not have come at a worse time as RetailMeNot continues to struggle to figure out where the next line of earnings will come from.

* The term Unicorpse was first coined in a TechCrunch article by Aileen Lee of Cowboy Ventures.

This segment is a part in the series : From Unicorn to Unicorpse