Grubhub bonds slump on disappointing EBITDA guidance, imperiled free cash flow

Grubhub’s capital structure plummeted after the company slashed 4Q19 guidance, raising concerns over its ability to stay competitive in a saturated market and generate free cash flow, according to two buyside and one sellside source following the company.

As part of its 3Q19 earnings report, the online takeout dining platform guided revenue at USD 315m-USD 335m for 4Q19, compared to previous Street expectations of USD 387m, two of the sources said. It also projects USD 15m-USD 25m of adjusted EBITDA in 4Q19, compared to the earlier forecast of USD 79m.

The midpoint of 4Q adjusted EBITDA guidance would represent a 52% year-over-year decline versus USD 42.1m in 4Q18.

Given Grubhub’s year-to-date EBITDA of USD 160m, the new guidance implies full-year 2019 EBITDA of USD 175m-USD 185m, or around 25% lower than the company’s previous 2019 guidance of USD 235m-USD 250m.

Moreover, the company said in a shareholder letter yesterday that 2020 EBITDA would likely fall further, coming in at “at least USD 100m.”

Grubhub’s USD 500m 5.5% senior unsecured notes due 2027, just issued in June, traded most recently at 95 to yield 6.331%, from 98 yesterday post-earnings release and down almost eight points from 102.625 on Friday (25 October) before the earnings, according to MarketAxess.

The company’s stock traded this afternoon at USD 33 per share for a market cap of USD 3.136bn, down 43.48% from yesterday’s close.

“The market reaction was negative because we were surprised. The company has been saying that they don’t need to change their model or worry about competition that much and now they’ve changed their tune,” one of the sources said.

When Grubhub brought its debut bond to the market this past summer, investors warned of the rising competitive pressures facing the company, despite its ample free cash flow and foothold in the market, as reported.

After reporting 3Q19 earnings, management conceded that the food delivery space is saturated with competition and that the overall market is heading toward low double-digit growth – as opposed to the current growth rate of 40%.

“The idea was that even if Grubhub continued to lose market share to its competitors, which it did, the market and the company were still growing. But based on the company’s expectations, market growth will slow down, which means Grubhub will have to fight harder to keep its market position,” one of the sources said.

Indeed, Grubhub’s share has decreased dramatically over the last two years, according to Data Points. The data provider said that Grubhub held a 30% share in September 2019 sales, while Uber’s UberEats holds 20% and Softbank-backed DoorDash holds 34%. In contrast, in February 2018, Grubhub’s market share totaled 50%, with UberEats at 20% and DoorDash at roughly 15%.

Based on Grubhub’s new 4Q guidance, free cash flow for 2019 will likely shake out to roughly USD 65m (13% of debt), given USD 180m of adjusted EBITDA less USD 90m of capex and USD 25m of interest expense.

At the minimum USD 100m in EBITDA for 2020, leverage would shoot up to 5.5x and free cash flow could go negative, assuming capex and interest remain at current estimates, sources noted.

“We believe online diners are becoming more promiscuous,” Grubhub CEO Matt Maloney and CFO Adam DeWitt said in a shareholder letter. “The easy wins in the market are disappearing a little more quickly than we thought.”

Management also stated on the call that to remain competitive, it intends to increase restaurant inventory by hiring more salespeople and adding non-partnered restaurants to the platform. In the non-partner model, the company will receive a delivery fee for each transaction, as opposed to the partner model, in which the company receives a delivery fee plus a platform fee.

The company also intends to expand free delivery and promotional support, three of the sources said.

For 3Q19 ended 30 September, the company reported a 10% year-over-year decline in adjusted EBITDA, to USD 53.8m. Quarterly revenue, on the other hand, shook out to USD 322m, up from USD 247m YoY.

When reached for comment, a Grubhub spokesperson referred inquiries to the shareholder letter.

2019 Debtwire

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