Groupon’s Restatement Impacts Valuation Little But Delivers A Big Blow To Its Image
Groupon (NASDAQ:GRPN) is no stranger to controversy and has had several clashes with the SEC over its accounting procedures in the run-up to its IPO. Groupon had already reported its Q4 2011 earnings in February but last week announced that it was forced to restate its revenue for Q4 2011, after it discovered a “material weakness in its financial controls”. [1] It reported lower net revenue and higher operating expenses due to an increase in its refund reserve, which led to a significant decrease in its reported net profit. However, Groupon is standing behind its guidance for the next quarter, implying that it doesn’t expect this accounting change to impact its earnings going forward.
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High Refund Rates Could Weigh on Groupon’s Sales and Operating Profit.
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The revised numbers were primarily due to an increase in Groupon’s refund reserve accrual, which was due to a shift in the company’s deal mix which 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 to Groupon’s operating cash flow. However, if the refund rates are even higher than Groupon now predicts, it could weigh on Groupon’s revenue and operating profit 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.
We will be updating our model to reflect these changes, but we don’t expect them to impact Groupon’s value significantly. However we point out that weak financial controls does not inspire confidence for investors and so this gaffe could impact the company’s value indirectly.
We currently have a $14 Trefis price estimate for Groupon, which stands nearly 20% below its market price. Groupon’s daily deals business in North America and international markets accounts for almost all of its value. Groupon leads the daily deals space where it competes with LivingSocial backed by Amazon (NASDAQ:AMZN), Google (NASDAQ:GOOG) Offers, Yelp (NYSE:YELP) and countless clones.
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