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An Initial Analysis of RetailMeNot (SALE)

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March 26, 2014 – Comments (0) | RELATED TICKERS: SALE , GRPN , COUP

RetailMeNot (SALE) is a company that has intrigued me lately and is a candidate for an upcoming addition to the Pencils IRA Project portfolio. I thought I would share some initial research and see if we can get a discussion going on this business. 

The Business

RetailMeNot is the largest online coupon marketplace in the world, with over 500 million visits to its website over the past year. The company, in short, connects consumers with digital coupons offered from a variety of retailers around the world. 

Initially, like others, I was unsure if this gives RetailMeNot much of a competitive moat. However, the company's strategy is similar to Zillow's: advertisers (or, in this case, retailers) follow the views. Retailers want their coupons to go to the widest audience. This is where RetailMeNot has a tremendous advantage, given the ~500 million yearly website visits (and mobile app use) mentioned above. 

RetailMeNot's business model, while simple, is validated by the growing number of businesses entering the digital coupon field. Groupon (GRPN launched its "Freebies" coupon service toward the end of 2013 in the U.S. (http://articles.chicagotribune.com/2013-11-20/business/chi-g...Coupons.com (COUP) is another competitor in the digital coupon space. 

RetailMeNot's mobile app has more than 11 million downloads on iPhone and Android devices. This presents a major opportunity for RetailMeNot to empower and engage retailers to deliver a more interactive consumer experience. RetailMeNot's In-Store Solution -- a tool that allows consumers to take advantage of in-store coupons online ("connecting online shoppers to offline sales") -- which has been well received by retailers thus far (probably due to the fact that preliminary research suggests retailers see significant returns on investment when using the In-Store Solution):

Forrester interviewed and surveyed a dozen RetailMeNot retail partners that had used and tested the company's online and mobile promotional channels measuring the impact of those initiatives on the organization's in-store sales. Based on the creation of a composite retailer and their use of the RetailMeNot In-Store Solution over three years, the study found a significant return on investment that provided — at low labor costs — growth in incremental revenue driven by increased transaction volumes and higher average order values....

The following are actual quotes from retailers in the study lauding RetailMeNot's In-Store Solution:

"We want to engage with our customers whenever and wherever they want. The RetailMeNot In-Store Solution helps us connect with customers in the real world while on mobile devices. With the RetailMeNot app, they get a push notification when they are near one of our stores or based on a promotion schedule. That brings many of them into the store. If they choose to visit us online, we are more than happy to convert the customer that way. Regardless, it is a fantastic win for us."

"Adding the ability to measure the impact on in-store sales has been one of the top benefits to the program. We test multiple offer types weekly."

"The In-Store Solution makes it easier for us to interact with the customer on the go. We have a big initiative for omnichannel and mobile. RetailMeNot is very large part of that."
 - http://www.prnewswire.com/news-releases/study-by-independent...

RetailMeNot's innovation with services such as the In-Store Solution will help the company continue to develop and expand relationships with retail partners. As we will see with the company's financial performance, RetailMeNot's strategy has paid off thus far. 

Financials

RetailMeNot's sales have grown at an average annual rate of 87.83% to $209.84 million in 2013 (growing 45.03% in 2013). The company has produced positive free cash flow over the past four years, although operating cash flow (and free cash flow) both fell in 2013. Free cash flow production has increased at an average rate of 80.1% annually to $25.04 million in 2013. This free cash flow production -- along with stock issued two out of the past four years -- has helped the company accumulate $165.88 million in cash with $41.31 million in debt. 

While RetailMeNot saw cash flow decrease a bit in 2013, I don't question the ability of the business to generate sufficient cash flow. The company is quickly expanding -- as its insane sales growth suggests -- and I like the steps management is taking to ensure long-term growth. 

Net income grew 21.32% to $31.53 million in 2013, making for a profit margin of 15.03%. 

Management

RetailMeNot's management team is one of the main factors that continues to spur my interest in the company. Cotter Cunningham founded RetailMeNot in 2009 and continues to serve as CEO, having brought on board executive talent from Austin, TX, tech circles. I encourage anyone interested in learning more about the management team to check out the bios of company's executives: http://www.retailmenot.com/corp/executives

RetailMeNot holds a 4.1/5 rating on Glassdoor, while Cunningham receives an 88% employee approval rating. This is with only roughly 25 reviews, so it should be taken with a grain of salt, but worth noting nonetheless. This compares to 2.9/5 rating for Groupon (with a 60% CEO employee approval rating) and a 3.2/5 rating for Coupons.com with a 61% employee approval rating for the CEO.

RetailMeNot has made several acquisitions since its founding in 2009, which makes the positive employee reviews all the more notable: 

Through all of the acquisitions, RetailMeNot has been able to maintain its corporate culture by treating employees the right way, Cunningham said. It got 60 employees through the acquisitions.

“We believe people work hard for us, so we need to work hard for them,” he said.
 - http://www.siliconhillsnews.com/2013/10/31/persistence-and-c...

In the Q4 2013 conference call, Cunningham and company reiterated their focus on generating long-term growth and results: 

"We remain focused on investing for long-term growth by continue to extend our markets, enhance our product offerings and increase consumer engagement. We will continue our investment philosophy of investing for long-term growth while maintaining strong adjusted EBITDA margins as we scale our business....

We continue to see strong positive trends across our business including traffic growth, monetization, consumer engagement and retailer adoption of our mobile solutions. We believe the investments we are making in the business are setting us up to extend our leadership position in the large and growing market for digital marketing solutions."
 - http://seekingalpha.com/article/2000911-retailmenots-ceo-dis...

Valuation

Management expects revenue to grow approximately 27% in 2014, so as the company scales its operations revenue growth is diminishing overall. Currently the stock trades at a P/E of 152 and a P/S of 8.92. The stock is certainly priced at a premium, but this doesn't mean that it is automatically a lousy long-term investment. If the company can continue to grow sales (and income) at rates of 20%+ over the next several years, the stock can grow into its valuation while rewarding patient investors with market-beating returns. 

Let's start by evaluating RetailMeNot with the P/S ratio. Groupon trades at a P/S of 2.15 and Coupons.com has a P/S of 10.03. Both companies are growing at slower rates than RetailMeNot -- Coupons.com still has negative net income and cash flow production. 

Currently RetailMeNot's sales per share is $9.09. If the company can grow sales by 20% annually over the next five years and trade at a P/S of 2.15 in five years, here is where the stock would be in 2019: 

9.09*(1.2^5)*2.15 = $48.63

Yikes. Not very appealing considering today the stock trades at $35.16. However, one might argue that RetailMeNot would trade at a higher P/S ratio in five years if the company continues such impressive revenue growth rates. We can use the same scenario above, except let's assume that the company grows sales at22% annually and trades at a P/S ratio of 3 in 2019: 

9.09*(1.22^5)*3 = $73.70

In this scenario, the stock would more than double over the next five years and provide investors with ~15% annualized returns. When utilizing the Future Value technique to evaluate stocks, it really comes down to what we think is realistic for a company to attain. There is no way to definitively know how the market will value any given stock down the road, but we can do our best to project realistic scenarios for a company to expand sales/earnings and how the market might value those results in future years. 

Of course, this is why it is worthwhile to delve deeper into companies. The more we learn about a company, the deeper our understanding (and ability to make realistic projections) becomes. I still have things to learn about RetailMeNot -- particularly the competitive environment and the company's ability to expand going forward -- but I am generally growing more optimistic about the business as I learn more about its visionary management team, continued innovation, and impressive performance up to this point in time. I don't think it is out of the question for the company to grow sales at 22%+ over the next 3-5 years. 

Conclusion, for now...

I aim to do some more research into RetailMeNot, but this is an intriguing company worth another look by Foolish investors. Honestly, I don't think any of my friends take advantage of digital coupons through services like RetailMeNot or Groupon (if they do, it certainly isn't a regular occurrence). I think this concept has quite a bit of room to run, particularly as RetailMeNot expands its relationships with retailers around the U.S. and internationally. Given the company's sales growth over the past several years, there has clearly been growing consumer interest in digital coupons. 

I also encourage anyone interested in learning more to check out Brian Shaw's (TMFBrewCrew) article on RetailMeNot from February: http://www.fool.com/investing/high-growth/2014/02/18/retailm...

Thoughts on RetailMeNot? 

Best,
David K

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