Can Groupon Kick This Terrible Habit Tonight?


Groupon (NAS: GRPN) wants to make a deal with investors, but nobody's buying. Shares have plunged more than 70% since last November's IPO, even though the company smacked the cover off the ball in May's first-quarter report.

The online coupon wrangler reports second-quarter earnings after tonight's closing bell. Will this be Groupon's moment of redemption? Let's find out what to expect.

Analysts predict adjusted earnings of $0.03 per share on about $573 million in sales. The bottom line would compare to a loss of $0.22 per share a year ago, but some accounting gymnastics made it very difficult to come up with a real revenue line for that period. For what it's worth, management's guidance set up revenue goalposts at $550 million on the lower end and $590 million at the top, characterizing this as 40% to 50% annual growth. With this as a guide, the year-ago quarter's sales must have been roughly $393 million.

The company has yet to report a bottom-line GAAP profit in its young life, but does present positive cash flows on a regular basis. That's often a good sign in Foolish eyes, but there are good cash flows and bad cash flows, too. In this case, Groupon is widening the spread between its accounts receivable and merchant accounts payable, which strikes me as a low-quality trend.

In short, Groupon seems to be holding back payments to the companies that actually use its coupon services. At some point, these bills must be paid if Groupon wants to have any credibility with investors or merchant partners. Management calls this a "natural spread," but I'm not sure I buy that term.

To get a handle on Groupon's long-term health, look for discussion of the "merchant accounts payable" metric. This needs to grow slower than revenue in order to look sustainable, and it would be a break from current trends.

In fact, the receivables only underline Groupon's questionable operating model. The company offers local marketing muscle to its merchant partners in return for a slice of already low-margin sales that depend on deep-discount coupons. This can work, but only if Groupon establishes itself as the king of the local deals hill beyond any reasonable doubt.

Archrival LivingSocial does exactly the same thing. Heavyweights Google (NAS: GOOG) and (NAS: AMZN) fill my inbox with very similar local and online offers every morning. Big G and Amazon can back their deal-wheeling up with other, more profitable operations such as ad placement and actual e-tailing sales, while Groupon and LivingSocial can't.

In short, I don't see a long-term market for what Groupon is doing, and reserve the right to be shocked by positive short-term surprises along the long road to oblivion. My bearish CAPScall on Groupon has been a good bet so far.

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