Groupon Reports ‘Material Weakness,’ Restates Quarterly Revenue

Groupon Inc. (GRPN), the largest provider of daily deals online, reported a “material weakness” in its financial controls and said fourth-quarter results were worse than previously stated because of higher refunds to merchants.

The revisions reduced revenue in the period by $14.3 million to $492.2 million, the Chicago-based company said yesterday in a regulatory filing. Groupon had reported $506.5 million last month.

The announcement marks another setback for Groupon, which has struggled to get its financial statements in order since filing for an initial public offering in June. Two months after its prospectus, the company abandoned a controversial accounting method for operating income after a review by the Securities and Exchange Commission. Groupon then restated 2010 results in September because it had counted the total amount of its daily- deal sales as revenue, including fees paid to merchants.

“This feeds some of the negative sentiment around their disclosure,” said Ken Sena, an analyst at Evercore Partners Inc. in New York, who has an equalweight rating on Groupon shares.

Groupon shares fell 5.9 percent to $17.29 in extended trading yesterday after the announcement. The stock, down 8.1 percent since the IPO in November, had climbed 3.8 percent earlier in the day.

‘Wildly Profitable’

Groupon also stumbled ahead of its IPO when Chairman Eric Lefkofsky said the company is “going to be wildly profitable” in an interview with Bloomberg News. In July, the company updated its IPO filing, asking investors to disregard those comments because they didn’t accurately or completely reflect his views.

The changes announced yesterday are “are primarily related to an increase to the company’s refund reserve accrual,” leading to higher reimbursement rates, Groupon said. In response to the conclusion that the company’s internal controls contained a material weakness, Groupon said it’s been working for several months with an accounting firm and will report on the effectiveness of those controls by the end of the year. While Groupon’s independent auditor is Ernst & Young LLP, the company said it’s working with a different accounting firm.

The auditors are at fault for not identifying problems with the financial controls earlier, said Herman Leung, an analyst at Susquehanna Financial Group in San Francisco.

Lack of Controls?

“This should have been highlighted by the auditors,” said Leung, who has a neutral rating on shares of Groupon and doesn’t own the stock. “The business is growing so fast that it sounds like they don’t have the proper financial controls to deal with the growth.”

Charlie Perkins, a spokesman for New York-based Ernst & Young, declined to comment on the earnings restatement.

Groupon said the revision accounts for an increase in higher-priced deals, which are more likely to be refunded by customers. Last year the company began Groupon Reserve, a service for upscale deals such as a five-course meal at Santa Monica, California-based restaurant Whist for $99.

The higher refunds widened Groupon’s net loss by $22.6 million, or 4 cents a share.

Groupon pioneered the daily-deal market, where consumers buy discounts on restaurant meals, nail-salon packages and other services. Groupon (GRPN) splits the revenue from the offers with merchants.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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