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RetailMeNot Is A Must-Buy
September 25, 2014 | About: SALE +0%

Every day, I receive many print coupons delivered through physical

mail. First of all, it is not convenient to carry many coupons while
shopping. Second, it is not easy to look for your desired coupons
while making payments at the sale registry.
apolloportfolio

RetailMeNot (SALE) is the perfect solution for consumers who like

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coupons. The coupons can be downloaded to smartphones through

RetailMeNot's app and presented at the cash register. After the

4 followers

coupons are used, RetailMeNot can earn a fair percentage of revenue

Follow

from the merchants, which issue the coupons. Not only is the business
model simple and more effective than the traditional mail, but

RetailMeNot provides a 100% upside potential if it can maintain its high growth rate for the
next five years. With bright business outlook, SALE is a worthy investment.

Business Overview

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RetailMeNot is the world's largest marketplace for digital offers. The website can connect
retailers with the right shoppers anytime and anywhere to drive more sales. RetailMeNot's
portfolio includes RetailMeNot.com and VoucherCodes.co.uk, which are the largest online
coupon sites in the United States and United Kingdom respectively.
RetailMeNot is a high growth company. Its net revenues grew 37% to $59.5 million in the
latest quarter, and organic net revenues were up 34%. What's more, international net
revenues grew to $13.5 million, reflecting growth of 57%. The international revenues now
represented approximately 23% of total net revenues.
Another amazing fact about customer acquisitions for RetailMeNot is that more than 90%
of traffic came to the website either directly or via organic search, with less than 10%
derived from paid search. This shows the website has already built the momentum to
acquire customers, and the low customer acquisition costs is the reason why RetailMeNot
can enjoy 92% gross margins. From the business point of view, RetailMeNot is highly
lucrative.
However, it is worth mentioning that there was headwind coming from the Panda 4.0. As
Google updated its search algorithm to Panda 4.0, the RetailMeNot's organic search
ranking was negatively impacted. As a result, the website missed the Street's estimates on
revenues and adjusted EBITDA in Q2 2014. In fact, the website has already realized the
business threat and strives for diversifying its traffic sources. For instance, RetailMeNot
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has initiatives to increase customer usage of its mobile apps to become less reliant on
organic search. Given that RetailMeNot currently trades near its 52 week-low, the negative
impact seems to be fully reflected in its share price. As the retail trend toward the digital
form remains intact, RetailMeNot is still well positioned to enjoy future revenue growth.
In addition, RetailMeNot is an innovative company. For instance, it recently opened up its
proprietary A/B offer testing platform. This technology gives retailers insight into the impact
of an offer with specific metrics, such as overall sales, conversion rates, and order values.
The feedback and testing results are extremely positive. For the ever-changing
internet/mobile apps industry, companies are constantly testing for new ideas, and I am
positive that RetailMeNot, as the world's largest marketplace for digital offers, is well
positioned to ride the growth rate in the digital world with innovative solutions.

Financial Strengths
RetailMeNot is a $911 million market cap company with $213 million in cash, representing
23% of market cap. Their debt is only $36 million, which is much lower than the cash in the
balance sheet. As a result, the financial strength of the website is very strong, and it helps
to provide more financial flexibilities for RetailMeNot to pursue different growth trajectories,
including mergers and acquisitions.

Valuations
RetailMeNot only trades for about 10x EV/EBITDA. However, with 20% expected growth
for the next five years, the website is one of the cheapest companies in the e-commerce
universe in regards to valuations. As I mentioned above, the company just grew its net
revenues by 37% year-over-year in Q2 2014. With such high growth in sales, the 10x
EV/EBITDA valuation looks very inexpensive.
From the PEG perspective, RetailMeNot is expected to earn $1.17 in 2015. This results in
14.3x P/E multiple. Given 20% growth rate, the PEG is 0.7. The PEG below 1 indicates
value relative to the growth rate.
Stabilized Yr.
Year

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Sales

295.98

355.18

426.21

511.45

613.74

638.29

EBITDA

118.39

142.07

170.48

204.58

214.81

191.49

EBIT

103.59

124.31

149.17

179.01

184.12

159.57

Net Income

64.93

77.92

93.50

112.20

115.46

100.13

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EBIT x (1 - Tax Rate)

64.75

77.69

93.23

111.88

115.08

99.73

- Capital Expenditure

29.60

28.41

29.83

30.69

30.69

31.91

+ Depreciation & Amortization

14.80

17.76

21.31

25.57

30.69

31.91

- Change in Noncash Working Capital

4.37

7.99

9.59

11.51

13.81

3.31

Adjusted Free Cash Flow (NYSE:FCF)

45.58

59.05

75.12

95.26

101.27

96.42

FREE CASH FLOW (FCFF) VALUATION MODEL

Present Value of Free Cash Flow

284.57

Present Value of Terminal Value

1,312.01

Value of Operating Assets

1,596.58

Value of Cash, Marketable Securities & Non-operating assets

213.91

Value of the Firm

1,810.49

Value of Debt

49.81

Value of Common Equity

1,760.68

Value of Common Equity Per Share

32.62

For a more bullish scenario based on my DCF model with 20% sales growth above, the
website can be worth $32, which implies almost 100% potential upside. Although valuation
alone is not enough to warrant a buy rating, the bright outlook below helps to support why
RetailMeNot has a good chance to achieve a high growth rate.

Outlook
Brick-and-mortar retailers put a lot of effort to avoid being a showroom. RetailMeNot might
have a solution for them. It developed a mobile app with geo-fencing capabilities to target
shoppers near a store while providing coupons to drive in-store purchases. If the mobile
app can solve the showroom issue faced by most brick-and-mortar retailers, I bet that
RetailMeNot will become one of the most highly valued companies in the world.
In addition, some might argue that brick-and-mortar retailers will develop their own apps to
capture such business opportunities. But from the customers' point of view, would you
prefer downloading one app or downloading several different retailers' apps with different
user interfaces? I bet that the answer should be quite obvious and very favorable for
RetailMeNot.

Management Team and Board of Directors

(click to enlarge)

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[ Enlarge Image ]

Source: Proxy Statement

Two venture funds, Austin Ventures and Norwest Venture Partners, have invested in
RetailMeNot. I further looked into the qualifications of the board members. I found that Jeff
Crowe, a managing partner of Norwest Venture Partners, has substantial experience in the
internet, consumer, and software arenas. He was named Forbes' Midas List of tech's top
investors. He currently serves on RetailMeNot's board. In addition, Thomas Ball, a partner
of Austin Ventures, also serves on the board. Part of his success stories are provided
below:

Tom was an entrepreneur who founded a number of successful companies,

including Openfield Technologies, which merged with Razorgator Interactive
Group, where Tom was CEO, and eCoupons, where he was also CEO until the sale
of the company to Lifeminders (NASDAQ: LFMN).

I am delightful that RetailMeNot has both Ball and Crowe on its board.
Other than venture funds, Cotter Cunningham, RetailMeNot's founder and CEO, held the
most outstanding shares. He has 2.2% ownership. Prior to RetailMeNot, Cunningham
worked for Bankrate (RATE) for seven years as senior vice president and COO. With the
founder running the company as CEO, one advantage is that Cunningham knows
RetailMeNot much better than anyone else. Together with his previous experience working
as COO in Bankrate, I believe that he has the leadership skills and strategic decisionmaking capability to serve as a good CEO for RetailMeNot.

Risks
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First, some might argue that retailers will limit their use of coupons, as it might not be a high
return on investment channel to attract customers. However, JCPenny (JCP) alerted me to
the importance of coupons. As the idea of simplifying pricing and delivering everyday
values to customers seem to be good on paper, customers still perceive to obtain value by
utilizing coupons. As an successful entrepreneur in retail once told me, please don't try to
change customer behavior. It can be a grave endeavor. Second, RetailMeNot might
engage in dilutive acquisitions and negatively impact shareholders value. Third, low
barriers to entry is a risk for the website. As competitors can easily enter the industry,
RetailMeNot might have difficulty defending its business from its competitors. Fourth, my
sales growth might be too optimistic if the website cannot assist the brick-and-mortal
retailers to improve their revenues. And as technology and customer preference change
rapidly, competitors can gain a competitive advantage against RetailMeNot. As a result,
the business can be at risk. Fifth, please refer to the risks section of the10K to further
understand the business risk of investing in RetailMeNot.

The Bottom Line

For prospective investors in RetailMeNot, please learn a lesson from JCPenny and don't
underestimate the power of coupons. As more and more retailers are exploring ways to
distribute digital offers to drive sales, RetailMeNot is the prime investment candidate to
capitalize on this trend.
Disclosure: I am not a securities broker/dealer or an investment adviser. You are
responsible for your own investment decisions. All information contained should be
independently verified with the companies mentioned, and readers should always
conduct their own research and due diligence and consider obtaining professional
advice before making any investment decision.
About the author:
apolloportfolio

Visit apolloportfolio's Website

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Comments
Mocheng

- 1 month ago

i like the numbers for RetailMeNot, my only problem is the competition on online
couponing. Seems like every other day someone comes up with coupon site. Yes,
right now they are the leader, but I am worry about the actual growth vs expected
growth.

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