Groupon: Another Regularly Scheduled Disaster

GRPN is once again imploding after a disappointing earnings report

   

We should be getting used to this.

When Groupon (NASDAQ:GRPN) announces its earnings, there’s usually plenty of action, and it’s usually strongly to the downside. The daily-deals site’s reaction following its fourth-quarter report was no different, with the stock falling more than 20% to well below $5 per share. (GRPN came public in November 2011 at $20.)

Going into last night’s announcement, the Street was looking for revenues of $640.2 million and an adjusted profit of 1 cent a share. GRPN deftly maneuvered itself well under the bar, doing sales of $638.8 million (still a year-over-year improvement of 30%) and losing 3 cents per share.

Worse, the weakness should continue into Q1 2013, where Groupon forecast revenues of $560 million to $610 million, well under the consensus estimate for $650 million.

In the face of all this bad news, Groupon’s CEO Andrew Mason still managed to stay upbeat on the conference call.

He noted that mobile is gaining substantial momentum, with about 40% of North American transactions coming from mobile devices, and he also stressed that Groupon remains in the early stages of what he sees as an enormous local market opportunity.

Still, his optimism seems tone-deaf.

Groupon’s core daily-deals business appears to be fading away. It relies on huge amounts of email marketing, which tends to aggravate users. To deal with this problem, the company recently introduced its Local Marketplace program, which essentially relies on users searching on websites and mobile devices for deals. There are some encouraging signs of fraction, but it’s still early.

Groupon also has expanded into selling real goods, which it keeps in inventory, a la Amazon.com (NASDAQ:AMZN). Examples of such products include Apple (NASDAQ:AAPL) iPhones, Bucco boots and Bling Blusher tooth brushes. However, Groupon does not have much scale or even brand identity in the e-commerce market. Plus, the sale of goods have razor-thin margins. This helps to explain why the company continues to sustain net losses — during the past year, Groupon’s gross margins have plunged from 80.4% to 55.7%.

As one would imagine, Groupon’s valuation is certainly becoming much more appealing, with GRPN trading at just 1.79 times sales. Still, that’s not enough reason to buy the stock amid a deteriorating core business and the poor-margin business into which it’s expanding. And while reach normally is a positive, you can’t help but wonder whether the struggling company — which has operations in 48 countries — is overextended.

It’s a bad confluence of negative factors that point to Groupon continuing to struggle for some time.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of “How to Create the Next Facebook” and “High-Profit IPO Strategies: Finding Breakout IPOs for Investors and Traders.”Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


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