Groupon Invester Confidence Resembles 50% Off Deal

Shortly after Groupon went public just five months ago, the stock soon reached a high of $31.14 per share. Now, Groupon stock is hovering around $14. Is this just another half-off strategy meant to entice more investors into the social coupon pool? Unfortunately, analysts don’t jump on stock deals the way they might purchase a facial or a skydiving lesson.

Is Groupon flying without a parachute? Well, let’s just say that the social coupon giant has been plummeting through the cloudy realm of increased competition, nonexistent profit, questions over its accounting practices and a plunging stock price.

Doubts over the operation were heightened last week, when Chicago-based Groupon unexpectedly revised its financial results for the fourth quarter, saying it had overstated its fourth-quarter revenue by $14.3 million. That put its actual loss for the quarter at $65.4 million.

The company blamed the revisions on increased customer returns that it did not anticipate, but one investor filed a lawsuit in federal court, seeking class-action status and accusing Groupon of making false and misleading statements about its financials.

Potentially far more serious is a report, attributed by the Wall Street Journal to unnamed sources, that the Securities and Exchange Commission is investigating the company.

“The jury is still out on the long-term sustainability of the daily deals industry,” said Herman Leung, an analyst at Susquehanna Financial Group. “There is a daily deals fatigue in the marketplace right now.”

There are concerns that partnerships with local merchants will continue in large numbers, Leung said. Many merchants have already been burned by customers who use daily deal coupons for discounted goods or services and never return to buy items at full price.

“The rate for the same customer to come back without a Groupon right now is only 1 in 5,” Leung said. “If merchants don’t fix the model and drive better consumers then they have a definite issue to worry about.”

A major effort by Groupon to not only grow but also differentiate itself from competitors was to venture into much higher-priced offerings — such as laser eye treatments for more than $2,000 — than its usual restaurant or spa treatment deals.

But that effort got the company into hot water. In its filing with the Securities and Exchange Commission that revised revenue, Groupon said it had underestimated the rate at which customers would return such high-end deals. To that end, the company blamed “a material weakness” in its internal controls.

Jordan Rohan, an analyst with Stifel Nicolaus, said that the higher rate of returns may signal that Groupon will have trouble cracking the luxury goods and services market.

“The company just told investors that expanding into more complex and more expensive offers is difficult,” Rohan wrote in a note to investors. “Essentially, more consumers were dissatisfied with big ticket purchases than would have been dissatisfied with a discounted burrito or massage.”

If the company is ultimately unable to persuade shoppers to buy luxury cruises or four-star restaurant dinners, Rohan said, that could be a problem “bigger than an accounting or trust issue.”

Last week’s restating of revenue by Groupon was hardly its first accounting error to come to light. Last summer, the company was forced to tweak its accounting methods after facing criticism that it was inflating profits by excluding marketing costs, customer acquisition costs and stock-based compensation.

Then, in the run-up to its IPO, Groupon was forced to restate its financials after facing scrutiny over an error that counted fees paid to merchants as revenue.

Bottom line: Every business–from big mega corporations to small mom & pops–need repeat full-price customers in order to survive. Small businesses that work with social coupon sites ARE full-price customers, despite their own self-inflicted deep discount. But how many will be repeat customers of Groupon?

Exerpts from Los Angeles Times: http://www.latimes.com/business/la-fi-groupon-growing-pains-20120407,0,3798871.story