If you stop reading income statements at the top line, you're missing out on the whole story. Revenue growth or lack thereof is just one dimension of multidimensional companies. Periods of top-line declines aren't fatal, and in some cases, they're actually preferable.
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McDonald's (NYSE: MCD), Groupon (NASDAQ: GRPN), and Conn's (NASDAQ: CONN) are all going through a stretch where revenue is going the wrong way. It's not the end of the world, however. All three stocks are trouncing the market as all three are trading 37%, 40%, and a whopping 112%, respectively, this year. There's a unique reason for why each of these three companies is not living up to the prior year's top-line standards, and the market's cool with it on all three fronts. Let's dive into all their stories.
Shares of the world's largest burger chain opened higher on Tuesday morning despite the company posting a 10% currency-adjusted drop in revenue. Mickey D's has now come through with 13 consecutive quarters of year-over-year declines, and that's fine.
McDonald's is in the process of handing over company-owned restaurants to franchisees, swapping register sales for a thin sliver of that in the form of franchisee royalties and other fees. It has now refranchised 4,000 of its formerly owned and operated locations.
Sales are actually growing at the individual unit level. Comps at its domestic eateries rose 4.1% with even stronger gains overseas. This isn't reflected in top-line results as the 10% increase in franchisee revenue has been more than offset by the 23% slide in company-owned restaurant revenue, but the margins are substantially higher in collecting franchisee checks. Adjusted earnings inched higher despite the decrease in sales.
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The top dog in selling prepaid vouchers for restaurants, spas, and other local experiences reports financial results next week, but its guidance last time out called for at least 10% less in revenue. This follows an 8% slide in revenue during the second quarter and a 4% dip in the period before that. Revenue isn't just going the wrong way; Groupon's top-line declines are actually accelerating.
Groupon isn't McDonald's. It doesn't have company-owned burger joints it can hand off to franchisees. Groupon is just pruning away at its model so it can focus on what works. It has been dumping profit-slurping international operations. We're also seeing it scale back Groupon Goods, its once-ambitious push into discounted physical wares that helped pad revenue at the expense of weighing on margins.
The bottom line doesn't lie. Groupon has posted larger-than-expected profits in each of the past three quarters.
It's not easy running a bricks-and-mortar business these days, but the 8% stumble in revenue at Conn's in its latest quarter is by design. The retailer of furniture, appliances, and consumer electronics has cranked out four straight periods of year-over-year negative sales growth, but the lost sales are the sales that Conn's didn't want.
Conn's stock was in the doghouse as it sold big-ticket items to deadbeat buyers on credit, and when they didn't pay up, it was Conn's left holding the bag. Conn's has strengthened its financing standards, and that's panning out as delinquencies are shrinking at the expense of weaker sales. It has also been discontinuing some of its less profitable products, and that has translated into widening margins.
The declines won't be perpetual. Analysts see Groupon and Conn's posting modest top-line gains next year. The rebound at McDonald's isn't likely to happen until 2020 when it's done transferring company-owned restaurants. The market's patient but, more importantly, it knows that sometimes you have to give up a little at the top to gain a lot at the bottom.
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