Groupon's big accounting goof stuns investors

The daily-deals company restates its fourth-quarter earnings

By InvestorPlace Apr 2, 2012 9:36AM
By Tom Taulli

The world’s top daily-deals site, Groupon (GRPN), has announced a restatement of its fourth-quarter earnings. In short, the sales and profits it reported weren't accurate.


This is fairly unusual for a newly public company, since Wall Street has no history of quarterly results to go on and it's crucial for a new stock to build trust out of the gate. Unfortunately, Groupon scared many investors into thinking this company is at best sloppy and at worst corrupt -- resulting in a sharp sell-off that sent the company stock tumbling.

In early trading Monday, the stock was off about 10% -- well below its early November IPO price of $20.

Essentially, Groupon did not adequately account for the expected returns of vouchers for Q1. As a result, the company's revenues were about $14.3 million worse, at $492.2 million, boosting the company's loss to $65 million from an original reported loss of $43 million.

This is not Groupon's first restatement. Last year, the Securities and Exchange Commission pressured the company to change how it recognized its revenues. The federal agency thought it was not proper to include the full amount of the voucher, since part of it went to the merchant, which meant Groupon's revenues were reduced from $713.4 million to $312.9 for 2010.

The SEC also required Groupon to de-emphasize its use of a creative accounting metric called “Adjusted Consolidated Segment Operating Income.” This basically stripped out most of Groupon's marketing costs, which made the company look much more profitable. Convenient, huh?

But the latest restatement is particularly troubling for investors. Groupon is selling higher-priced vouchers -- such as for travel and even cosmetic procedures -- that have a higher risk of being refunded. Forecasting amid such risks can be extremely difficult, which means there could be even more nasty surprises ahead.

Groupon also disclosed on Friday that its auditor, Ernst & Young, discovered a "material weakness in its internal controls" for 2011. There was no mention of any specifics, but it is something else for investors to fret about. Let’s face it: Groupon has been growing like a weed and has more than 10,000 employees, and the company has gone through two chief financial officers during the past year. The situation must be a nightmare for the accounting department.

Still, other hot social companies, like Zynga (ZNGA), LinkedIn (LNKD) and Pandora (P), have not experienced these kinds of accounting issues, despite the fact that they too are growing at breackneck speeds and have dynamic business models.

Groupon’s accounting might just be an attempt to mask a weak business model. Even though the company posted $1.6 billion in revenues last year, it still was not able to turn a profit.

The company continues to pour huge amounts into marketing and also must fend off a host of tough rivals like Amazon (AMZN), Google (GOOG) and LivingSocial. True, Groupon has been expanding its platform, such as by offering services for small businesses, but these efforts still are in their early stages.

And on the horizon? In early May, Groupon’s lock-up will expire, which will allow insiders to dump their stock. So a tip to investors: It’s probably not a good idea to get into GRPN shares anytime soon.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.

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Apr 2, 2012 2:56PM
Apr 2, 2012 2:35PM

You are correct I can without a doubt say that Goupon is one of the most sloppiest company. I recently started purchasing deals on Groupon but to receive the goods purchased is a pain. Goods purchased was recieved one month after the order against the company rules. Tracking system or delivery date or delivery status update does not exist and customer service is worst.

Apr 2, 2012 4:03PM
i'm glad i took chuck jaffes advice as groupon bing the stupid investment of the week,boy did he call that.
Apr 2, 2012 3:54PM
If anyone saw the 60 minutes feature with their CEO, this was fairly easy to see. They over emphasize how important their product feature writing is, and probably pay way too much to writers. Burying market costs? That's their major expense! 
Apr 2, 2012 3:58PM
Investors?  Anyone who bought this stock does not merit that title.  It was clear from the start (1) the company's idea was easily copied and subject to massive competition on the local level, (2) customers were not returning to merchant's but just taking advantage of a one time low price, meaning, no return customers for Groupon either, and (3) of short term duration in any event.
Apr 2, 2012 4:00PM
Anywhere else,that's called lying or fraud,but the SEC is busy looking the other way,while small time investors lose big,another czar from obama.
Apr 2, 2012 4:07PM
Groupon sells rides on Air Force One cheap if you contribute to obamas coffers.
Apr 2, 2012 4:05PM
Did obama subsidize  them or give them a no interest loan?
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