Groupon’s Profit In 2011 Was Actually $22.6 Million Less

Groupon’s got problems: they pay old merchants with new merchant revenue and most deals are one-offs. There are very few successful repeaters in their business. Some have called them a ponzi scheme because of the new money paying off old merchants. I’m not going to say that, but what happens when the new merchants start to wane? The answer seems to be to move into new markets, like bigger ticket items. The next question is, why are big ticket items better for groupon’s business model and bottom line? I don’t think they are. The final question, is why are there so many restatements for such a young company. I don’t know if anyone there knows where their business model rabbit hole leads and so they are shape shifting their financials with the times. They might find solid footing, but right now that’s anyone’s guess.

Right now there are definitely more questions than answers with this company.

As to “are primarily related to an increase to the Company’s refund reserve accrual to reflect a shift in the Company’s fourth quarter deal mix and higher price point offers, which have higher refund rates.” : –

This means 1) in the 4th quarter they had a larger proportion of offers which were at a high price point. 2) These high price point offers aren’t only more expensive, they’re refunded more frequently. 3) They apparently have cash set aside to handle paying these refunds. 4) They didn’t put enough cash into this fund to adequately cover the mix of deals they were offering during the 4th quarter. 5) They discovered this after the fact and were forced to earmark some operating funds as going into this reserve.

Questions you might ask after this: how conservative are they in their refund estimates, and what proportion of the reserve has been used on a quarter over quarter basis in the past? Does this deal mix portend some longer term trend or is it a blip? What percentage of their cash on hand is actually earmarked for refund purposes (you can work this out from their filings).

Now, who’s ready to short GRPN?


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