Why RetailMeNot Inc Stock Soared on Earnings

Source: RetailMeNot.

Investors in RetailMeNot reacted with exultant optimism to the company's earnings report for the third quarter of 2015 on Tuesday, sending the stock up by 20% on Tuesday. The company is still facing considerable challenges, but it seems to be making progress in some key areas.

One of the challenges it faces comes from Google, which made some important changes to its search algorithm in May of last year, hurting different players in the online world. According to data from StatCounter, Alphabet owns a gargantuan 91.6% of the global search market across both desktop and mobile, so it's hard for companies in the industry to avoid being affected by the new algorithm.

Based on management's comments during the second-quarter conference call, RetailMeNot gets approximately 60% of its traffic from search, so the company needs to find the right way to recover the lost ground and better adapt to the new Google search algorithm.

In addition, the shift toward mobile computing requires a considerable effort for companies trying to adapt and thrive under the emerging industry paradigm, and RetailMeNot is no exception.

Key numbersBoth sales and earnings came in ahead of Wall Street forecasts. Expectations were quite low leading to the report, so this does not say much about the health of the business. However, stock prices tend to be quite sensitive to these factors in the short term, and this is probably one of the main reasons RetailMeNot stock exploded higher after the news was announced. Here's how things look compared to the year-ago quarter.

What happened with RetailMeNot this quarter?While segments like in-store and mobile are showing encouraging signs, they're still not fully compensating for declining revenues in desktop, the company's biggest segment.

In-store and advertising revenues increased 91% to $11.8 million, representing 22% of total sales.
Mobile online transaction sales increased 55% to $4.9 million, representing 9% of total net revenues.
Desktop online transaction net revenues, which includes tablet, declined 24% to $35.8 million, representing a big 68% of total net revenues.
Total visits were 159.7 million, down 1%.
Mobile visits in the quarter increased 41% to 67.2 million, or 42% of total visits.
Desktop visits in the quarter declined 19% to 92.5 million.
Mobile unique visitors grew 28%, totaling 18.6 million.

What management had to sayCotter Cunningham, CEO and founder, highlighted the company's strong performance in its mobile and in-store and advertising segment. Cunningham also provided an optimistic view of the company's future:

Moving forwardManagement raised sales guidance for the full year 2015, from $231 million to $239 million to $240 million to $242 million. While it's good to see the company increasing guidance, it's also important to keep in mind that RetailMeNot cut its full-year guidance in the second quarter, so the recent increase comes from a reduced level. Besides, current guidance still represents a year-over-year decline of 9% in revenue at the midpoint.

For the fourth quarter of 2015, the company is expecting sales in the range of $74 millino to $76 million, representing a decline of 14% at the midpoint versus the fourth quarter in 2014.

Investors may want to closely monitor RetailMeNot's ability to stabilize sales in desktop over the coming quarters. Growing sales in other segments are clearly a big positive, but desktop still brings in the lion's share of the company's revenue, so it has a major impact on the company's overall financial performance.

The article Why RetailMeNot Inc Stock Soared on Earnings originally appeared on Fool.com.

Andres Cardenal owns shares of GOOG and GOOGL. The Motley Fool owns shares of and recommends GOOG and GOOGL. The Motley Fool recommends RetailMeNot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.