CHICAGO (CN) — Online food delivery service Grubhub faces a securities fraud class action after it reported deeply disappointing third quarter financial results, causing its share price to fall by nearly 40%.
Lead plaintiff Roei Azar sued Grubhub, its CEO Matthew Maloney and CFO Adam DeWitt in Chicago Federal Court.
Grubhub was one of the first online food delivery platforms for consumers, and has maintained its market dominance. But in the past year it faced major pressure from competitors such as DoorDash and Uber Eats, which offer low delivery fees in an effort to lure away Grubhub’s customers.
Grubhub downplayed the impact of these tactics on its bottom line, and focused on securing exclusive restaurant partnerships, such as its partnership with Yum! Brands in 2018. Just last week, the company announced an exclusive partnership with the burger restaurant Shake Shack.
Throughout 2019, the company told investors it was attracting new “high quality” customers, and expanding into smaller markets — meaning outside Chicago and New York — with the expectation these markets would provide returns to investors.
But according to 30-page complaint, Grubhub’s customer orders were actually declining through 2019, and its competitors’ sales tactics forced it to expend significant capital to retain its market share, allegedly “eviscerating the company’s profitability.”
“Grubhub was tracking tens of millions of dollars below its revenue and earnings guidance,” the complaint states, contradicting CEO Matthew Maloney’s statement this year: “We believe our efforts will yield more growth, not just now but for quarters and for years to come.”
In October, Grubhub released its third quarter financial results showing that daily delivery orders had fallen by 6%, and that the company would earn $100 million before taxes in 2020, “more than 70% below market expectations,” the complaint state.
The company’s share price fell by 39% on the news, dropping from $58.39 to $33.11 per share.
In a letter to shareholders, Maloney belatedly acknowledged that its customers were tending to use competitors’ platforms more frequently, and that he expected growth to slow.
“Most shocking, he stated that Grubhub had moved away from its historic business model of focusing on restaurant partnerships and was instead seeking to quickly add non-partnered restaurant volume,” the investors say. “In other words, Grubhub needed to embrace the same business tactics that defendants had long derided and had used to differentiate Grubhub from its competitors.”
Grubhub’s share price has recovered somewhat in the past month, but remains far below its pre-reveal price, trading at $40.06.
The company declined to comment.
The investors are represented by Brian Cochran with Robbins Geller Rudman & Dowd.