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Groupon’s Never-Ending Woes

Posted on Wednesday, Feb 26th 2014

Groupon (Nasdaq: GRPN) just cannot catch a break. They expected to turn around a failing business model by bringing in a new CEO, but it hasn’t helped much. The company continues to deliver disappointing projections, causing the stock price to fall. They are struggling to find the right mix of offerings and are continuing their experiments with product sales to arrive at a profitable business model.

Groupon’s Financials

Groupon’s fourth quarter revenues grew 20% over the year to $768.4 million, surpassing market expectations of $719.0 million. But growth in revenues has not translated into positive earnings. The company continued to struggle and ended the quarter at break-even, compared with a loss of $0.04 per share reported a year ago and a loss of $0.01 projected by the market.

By region, revenues from North America grew 18% and from EMEA grew 43% which offset the 15% decline in revenues from the Rest of the world.

Among other operating metrics, at the end of the previous year, active customers increased 9% to 44.9 million with 20.8 million in North America, 14.2 million in EMEA and 9.9 million in Rest of the World. Mobile continued to be a strong driver with 50% of the worldwide transactions coming through mobile devices. During the quarter, their mobile app was downloaded more than 9 million times.

They ended the year with revenues growing 10% to $2.6 billion and an adjusted EBITDA of $286.7 million.

For the current quarter, Groupon forecast revenues of $710 million-$760 million with EBITDA of $20 million-$40 million. Groupon expects to end the current year with a loss of $0.02-$0.04 per share compared with market projections of earnings of $0.02 per share.

Groupon Acquires Ideeli

In a bid to diversify offerings, Groupon recently announced the acquisition of online fashion retailer Ideeli for an estimated $43 million. New York-based Ideeli, founded in 2007, offers flash deals on designer apparel and home décor to its members. The sale was at a significant discount considering that Ideeli had raised $107 million in venture funding so far. Ideeli will continue to operate their independent website and will help Groupon build on the strong demand they were seeing in these retail categories within Groupon Goods. Additionally, they will also be able to leverage Ideeli’s mobile and flash sales experience to add to their offerings.

Unfortunately for investors, the addition of Ideeli will dilute Groupon’s earnings as the company was not making profits at the time of the acquisition. Last year, Ideeli earned $115 million in revenues with an operating loss of $30 million. Groupon has already accounted for this expected loss in the current year earnings projections.

Groupon Launches Self-Service Platform

Groupon’s big worry has been their increasing marketing costs. During the current quarter alone, they plan to increase marketing spend by another $25 million. To win more merchants, they have had to deploy a big sales force. Further, since Groupon deals are focused on consumers searching for discounts, it is not very often that merchants return to Groupon to post additional offers. Thus, Groupon’s sales force is constantly scouting to add more merchants to their vendor database. Recently though, Groupon has tried to manage these rising costs by offering the merchants a self-service option, Groupon Deal Builder. The online tool lets merchants create their own deals without needing to interact with a sales representative. Groupon steps in only to validate the deal and to arrive at an agreeable commission percentage. This platform is expected to help Groupon get to the really small vendors while controlling some of their sales costs.

But the move may be a little too late for the restaurant industry. Recently, Las Vegas based e-commerce platform launched their one of a kind web and mobile platform that directly connects local restaurant merchants with the consumers. Restaurants can create offers instantly using Livedeal’s intuitive interface that is fully customizable to allow them to choose the times and the number of deals that are given out. Additionally, LiveDeal does not charge restaurants any third party fees as the customer pays the restaurant directly and does not need to route the voucher payment through LiveDeal. LiveDeal is yet to earn revenues, but they have managed to attract restaurants who are tired of the limitations that are placed by Groupon with regards to the number of offers.

Groupon’s stock is trading at $7.80 with a market capitalization of $5.18 billion. It touched a year high of $12.76 in September last year. The stock price is also significantly below the $20 IPO price it listed at two years ago.

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