Aug. 6 (Bloomberg) -- Groupon Inc.’s transition from daily-deal e-mails to e-commerce retail isn’t going smoothly, with investments in the strategy cutting into profits. The shares sank.
The company forecast third-quarter earnings of as much as 2 cents a share, excluding some items, compared with the average analyst estimate of 3 cents a share. That overshadowed second-quarter earnings of 1 cent a share, excluding some items, in line with the 1-cent average estimate. Sales rose 23 percent to $752 million, according to a statement yesterday, falling short of the $762 million average estimate.
Chief Executive Officer Eric Lefkofsky has been trying to turn Groupon into a website offering thousands of discounts to boost growth and compete with marketplaces like Amazon.com Inc. To attract consumers and expand sales, Chicago-based Groupon has been adding mobile and online features and beefing up its team. Customers have been slow to embrace Groupon’s change of plans.
“It’s slow progress, and that’s the problem. I think people were just hoping that they’d be able to do it faster to justify a $4 billion valuation,” said Edward Woo, an analyst at Ascendiant Capital Markets who advises selling the shares. “I don’t think they are there yet.”
Groupon fell 13 percent to $6.17 at the close in New York, the biggest one-day drop since May. That gives the company a market value of $4.13 billion.
The company cut its forecast for 2014 earnings, excluding interest, tax, depreciation and amortization, to more than $270 million from an earlier prediction of more than $300 million. The company is increasing its marketing spending and investing more in projects that are showing good return on investment, it said.
“Because we are seeing some of the really positive momentum right now, we could have dialed down that marketing and delivered $300 million of Ebitda,” Lefkofsky said in an interview. “But because the ROI has been so strong and we’ve been pleased with our marketing performance, we decided to invest. We try to double down and accelerate that growth.”
The second-quarter net loss expanded to $22.9 million, or 3 cents a share, from $7.57 million, or 1 cent, a year earlier.
“Groupon has definitely turned the corner,” Lefkofsky said. “We are very much a business in transformation. We are expanding beyond our daily-deal e-mail roots and really morphing into a mobile marketplace. We are finally starting to see the payoff of that.”
The company’s strategic shift is changing the way its users make purchases. Once customers have the option to buy deals on a website, instead of during a limited time typically associated with e-mailed deals, that reduces “the sense of urgency in purchasing,” Arvind Bhatia, an analyst at Sterne, Agee & Leach Inc., wrote in a research note. “This has effectively delayed billings and lowered near-term top-line growth,” he wrote.
What’s more, consumers may not be taking to the company’s websites as quickly as envisioned. Monthly average desktop unique visitors to Groupon’s U.S. websites, as well as its mobile unique visitors, declined in the second quarter, according to Mark Mahaney, an analyst at RBC Capital Markets.
“I do think it’s important they show long-term traffic growth,” Mahaney said in an interview. “The strategy, our guess is, will take a long time to prove out, and it will be a very expensive goal to achieve in terms of marketing dollars and product suite that they have to offer.”
To turn the business around, Groupon has been rolling out new services for consumers and merchants. In May, the company expanded its in-store payments business with a new service called Gnome that helps merchants identify customers with the company’s coupons and let them pay for purchases using Apple Inc.’s iPad mini. Merchants pay Groupon a small monthly fee for the tablet and also a transaction charge.
In June, Groupon introduced a way to sell last-minute hotel deals on its mobile app, with a feature called Gateway Tonight.
Earlier this year, the company completed its purchase of South Korean e-commerce marketplace Ticket Monster Inc. and acquired fashion site Ideeli. It’s also recently begun selling goods like razors in bulk, part of Lefkofsky’s plan to challenge Amazon.
“He is clearly doing all the right things, including just boosting employee morale,” said Sameet Sinha, an analyst at B. Riley & Co., before the results were announced. “It’s obviously a tough thing to turn a company around, but he is making all the right decisions.”
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