After a Hot IPO, Can RetailMeNot Avoid Becoming the Next Groupon?

by Josh Wolonick, Minyanville staff writer

On Friday, July 19, the newest online coupon business, RetailMeNot SALE, had a significantly successful IPO. The company priced its initial offering at $21 per share and saw its stock soar 32% over that mark to $27 per share on that first day of trading. Currently, the company's stock trades at $27.92.

The company is now the largest digital coupon marketplace in the world. It has contracts with over 60,000 paid retailers and brands, and it offers hundreds of thousands of different coupons. What sets the company apart from its competitors -- such as Groupon GRPN and Amazon Local AMZN -- is that the vast majority of its coupons are for online sales. As Jeff Crowe of Norwest Venture Partners, which owns 20.5% of the company, said in a press release, "RetailMeNot has pioneered this space, making online coupons as ubiquitous as online shopping itself." He further added that what initially drew his firm to invest in the company was RetailMeNot's "early vision to make online coupons a staple for consumers and merchants alike.

RetailMeNot employs a wide array of digital mediums, including email newsletters, mobile apps, and a social media presence, to allow customers to discover and redeem coupons from its extensive catalog. Often the company's coupons will give consumers a code to input while online shopping, requiring none of the printing and barcode scanning of coupons for non-digital goods and services.

The IPO comes at a good time for consumer discretionary companies; that segment of the S&P 500 (INDEXSP:.INX) is up 26% year-to-date, higher than the index's 18.37% year-to-date increase. E-commerce represents a small but significant bit of that growth. In 2012, online retail sales in the US generated $231 billion, which was 8% of total American retail sales, and total online retail sales are expected to increase by 13% to $262 billion in 2013. Moreover, the research firm Forrester expects e-commerce sales to outpace brick-and-mortar sales over the next five years, with total online sales reaching $370 billion in 2017.

Like Groupon before it, RetailMeNot has shown rapid growth, with revenue rising 37% to $40.6 million in the first quarter of 2013. During 2012, RetailMeNot drew, on average, 24.2 million unique monthly visitors to its site. In total, it had 450 million visits to its site in 2012. Its 2012 revenue was $144.7 million, which made for a compound annual growth rate of 193%. Also worth mentioning is the insider trading activity at the company: 27 insider purchases were filed with the SEC on July 24, including a major purchase by JPMorgan Investment Management Inc, a beneficial owner of the company.

But also just like Groupon, RetailMeNot is subject to the same debate over whether or not coupons are helpful or ultimately harmful. Tim Engle, the Chief Strategy Officer of Jewelry Television, a company that sells jewelry online and on cable TV in 85 million homes, told the Wall Street Journal that his company no longer uses online coupon services like RetailMeNot. As he said, "We ended up discounting a lot of products that didn't need to be discounted."

That said, thousands of companies still use RetailMeNot and its competitors. Kathleen Waugh, a spokesperson for Toys "R" Us Inc., told the Wall Street Journal, "We've had great success with these sites and consider them an important part of our overall marketing strategy." Additionally, she said that RetailMeNot was one of her company's biggest partners.

One of the big questions on investors' minds is whether or not RetailMeNot will suffer the same fate as Groupon, with its strong IPO and its subsequent 62% decline in value. That remains to be seen, but RetailMeNot has some strong assets that will likely help it grow. The company knows how to make a profit: From 2010 to 2012, the company's net income jumped from $2.3 million to $26 million. At the time of its own IPO, Groupon was not profitable. Currently, 78% of RetailMeNot's business is domestic, giving RetailMeNot a lot of growth potential in global markets.

And perhaps most importantly, the company is poised to continue taking advantage of the current uptrend in mobile use and engagement with apps and social media presence. In fact, the entire global mobile commerce market will see huge growth in the coming years, as the IDC is forecasting it to grow by 36% annually until 2017. (Last year, that market hit $63.4 billion.) Facebook's FB recent earnings knockout can be largely attributed to growth in mobile ad revenue, commerce, and engagement. RetailMeNot has the means to capitalize on that growth as well.

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