Clip This: Coupons.com IPO Could Be a Winner

NEW YORK (TheStreet) -- Darn few initial public offerings generate enough buzz that they make competitors' stocks dip even before the newcomer begins trading.

But that appears to be happening with Coupons.com, the printable grocery-coupon site whose $161 million IPO is set for this week.

Analysts said speculation about new competition helped push shares of Retail-Me-Not (SALE), which debuted in July, down 11% on Friday. Its shares are 47% for the year to date. But Retail-Me-Not, which serves up discounts from mall-based retailers, isn't Coupons' main target. In case you missed the point, CEO Steven Boal appeared in the company''s video roadshow holding a sheaf of newspaper coupon inserts -- the shiny paper kind we've all known since we were kids.

The hype is the next giant whooshing sound leaving the papers will be revenue from coupon inserts -- coming years after eBay (EBAY) took the garage sale ads, Craigslist the apartment listings and AutoTrader.com the used-car business.

For its next trick, Boal says, Coupons.com hopes to expand the grocery-coupon business by using mobile and other technologies to tie itself in with grocers' loyalty programs and convince consumers to redeem ever more of the coupons they see, increasing the size of the decades-old market for grocery coupons even as Coupons.com takes market share.

So far, that formula has translated into big growth but not into profits.  Coupons.com's sales jumped 50% last year to $167.9 million, with a net loss of $11.2 million (18 cents a share). But, as usual with tech IPOs, there are reasons to look a little deeper at the numbers.

The company began producing solid operating profits in the second half of 2013, with earnings before interest, taxes and non-cash expenses hitting $5.27 million in the fourth quarter. Its business model shows signs of scaling nicely: sales rose much faster than overhead in 2013 and the cost of goods improved by six percentage points, with gross margins hitting 69%. As the company grows, its overhead ratios should come down more. 

"It looks pretty good. Growth has been pretty high,'' Renaissance Capital analust Greg Leffert said. "There are barriers to entry. It's easy to start a coupon site, but they've built a pretty good moat."

That "moat'' is the result of the  $40 million Coupons.com has spent on R&D in each of the last two years. Most of it has gone into efforts like integrating with retailers' point of sale systems and loyalty programs, programs Boal says will be the company's competitive advantage over time. That spending is also the reason why profits have been small so far.

The main reason to look hard at this deal is the size of the market for coupons, which has only begun to shift online and to mobile devices, the company argues. 

Consumer packaged-goods companies issue 315 billion coupons in a year -- and only 1.3 billion of them go through Coupons.com, which is much bigger than any online grocery-coupon site. Industrywide, about 2.8 billion of those 315 billion coupons were redeemed last year, the company's prospectus says.

The industry's problem is that most consumers use coupons -- but don't use them often. The logic is that more convenient coupons, either printed at home or saved to a mobile phone, will be redeemed more often. And there is something to that: Consumers used 14.2% of coupons they printed at home in the first half of last year, and less than 1 percent of coupons that appeared in newspapers, consulting firm NCH Marketing Services reported.

"We're in a huge, stable market, now shifting to digital and at a tipping point,'' Boal said.


Another bullish signal is the doubling since summer of RetailMeNot, the putative competitor that went public in July. Retail-Me-Not specializes in coupon codes for clothing and other retailers, with little exposure to the grocery-store shopping where Coupons.com gets most of its revenue.  Shares of Retail-Me-Not dropped late last week because of Coupons.com's pending deal, but there is little overlap in the business, Jefferies analyst Brian Pitz said.

After its jump, RetailMeNot is trading at about 7.8 times this year's projected sales, using Wall Street forecasts, after adjusting for the company's cash position. At a middle-of-the-range IPO price of $13, producing a market cap of about $950 million, Coupons.com would command 4.6 times last year's sales. Analysts haven't yet published 2014 forecasts for Coupons.com.

Bottom line: Lots of people will be shopping the Coupons IPO. With the initial price set a little low, shares may spike, settling in with valuations near RetailMeNot's. Once it does, the stock will be best for longer-term holders, with anyone still looking for a quick discount likely to be disappointed.

At the time of publication the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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