Groupon's headache continues
The earnings restatement from the deal-of-the-day website hasn't exactly inspired confidence among investors.
The Securities and Exchange Commission may launch a formal investigation into Groupon's earnings revision due to a "material weakness in its financial controls," which led to a reduction in its reported revenue and net profit.
Not surprisingly, Groupon has also been hit with its first shareholder lawsuit, which alleges that the company overstated revenue, issued materially false and misleading financial results and misled investors about its financial prospects and concealed weak internal controls.
The lawsuit, which lists Groupon's CEO and its lead IPO underwriters as defendants, seeks a class-action status on behalf of the shareholders who acquired Groupon stock between Nov. 4, 2011 and March 30, 2012.
Groupon's legal troubles may just be the beginning
Groupon's stock has dropped nearly 15% since it announced the revised earnings, partially validating our analysis that suggests that Groupon was significantly overvalued. Given the dip in its stock price, we might see a series of such lawsuits from aggrieved investors who have lost money from their investment in the company.
Groupon's earnings restatement can be primarily attributed to an increase in its refund reserve accrual, which was due to a shift in the company's deal mix. This mix now includes higher-priced deals. Since the refund rates are generally much higher for such deals, Groupon had to increase its refund reserves, which led to a decline in reported sales and an increase in operating expenses.
Since this is just an accounting change, there was no impact on Groupon's operating cash flow. However, if the refund rates are higher than what Groupon now predicts, it could weigh on the company's revenue and operating profit outlook in the coming years as the cost of refunds is either accounted for as a reduction in revenue or added to the cost of revenue.
Though the restatement hasn't impacted Groupon's intrinsic value significantly, it didn't exactly inspire confidence among investors, and could result in a bigger swoon in its stock price.
We currently have a $14 Trefis price estimate for Groupon, which stands nearly 10% below its market price. Groupon's daily deals business in North America and international markets account for almost all of its value. Groupon leads the daily deals space where it competes with LivingSocial backed by Amazon (AMZN), Google (GOOG) Offers, Yelp (YELP) and countless clones.
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
The solid report comes a month after the retailer closed all of its Canadian operations.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.