What Risks Does Groupon Face?


Investors obviously believe Groupon (NAS: GRPN) is facing some serious risks as a company, with the stock pummeled. But what are these risks, and can the company overcome them?

To help answer this question, check out our new premium report on Groupon. For a taste of what is offered in the report, following is an excerpt describing Groupon's risks.

In its quest for subscribers, Groupon overlooked a few things, like proper accounting. First, in its initial public offering registration statement, Groupon used its own metric for calculating operating income that didn't include its marketing costs. With this accounting scheme, it made $82 million in the first quarter of 2011, but with the traditionally accepted GAAP accounting, the company lost $117 million that quarter. After criticism, the company dropped this special accounting standard, but that wasn't the end of its accounting trouble.

Early in 2012, Groupon's auditors said the company had "material weakness in its internal controls," and had to restate fourth-quarter income from a loss of $42 million to a loss of $65 million. This happened because Groupon failed to set aside enough money for returns and refunds, and thus overstated its revenue.

Groupon has since dedicated itself to fixing its accounting missteps, and brought on two financially adept board members: the CFO of American Express and a retired Deloitte consultant. It also hired a new chief accounting officer. But, even in its second-quarter earnings, accounting concerns persisted. A new issue emerged regarding how Groupon records the total amount a customer pays for Groupon Goods, instead of just Groupon's share. Groupon's CFO says the reason for this is to conceal business costs from competitors, but if only Groupon's revenue share were counted, revenue growth would have been 30% compared to the 45% reported.

Beyond accounting issues, the lack of repeat merchants and customers might hamper growth. One study claims that 40% of merchants wouldn't repeat a deal with Groupon, another states that no new customers are brought in because of Groupon, and others claim that using discounting services like Groupon cheapens a brand. On Groupon's side, other studies have shown that 91% of businesses do receive new customers, and nine out of ten of the customers spend more than the Groupon value.

On the customer side, about 38 million of its roughly 150 million subscribers have purchased a product or service in the last twelve months, compared to 23 million for the year prior. However, average revenue per active subscriber has fallen 10%, from $74 to $67. As Groupon ramps down marketing expenses now that it has a customer base, it has to prove it can keep customers engaged even without constantly paying to remind them through advertising.

Past merchant experiences also haven't been kind to Groupon's reputation. There have been highly publicized disasters, like the small British cupcake bakery that had to make over 100,000 cupcakes at a loss to satisfy Groupon orders. Now, Groupon works closely to develop details of a deal and teach merchants how to handle an influx of customers. It also staggers expiration dates of deals, to avoid a flood of customers. But, if these types of stories persist, merchants could hesitate to do business with Groupon, even if it offers plenty of solutions outside of deals.

More in-depth analysis available
That was a sample of from our new premium report on Groupon. The collapsed stock may offer a great buy-in opportunity, or it may be a signal to get out and stay away, and our report will help you make that decision, complete with free updates on Groupon news and analysis. For your copy, click here now.

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