Groupon's merchant payments eyed ahead of results

Reuters News
Posted: May 08, 2012 1:19 PM
Groupon's merchant payments eyed ahead of results

By Alistair Barr

SAN FRANCISCO (Reuters) - Groupon Inc's <GRPN.O> accounting has been scrutinized since the daily deal company went public in November, but the percentage it pays merchants is under the spotlight ahead of first-quarter results from the company next week.

Accrued merchant payables - what Groupon owes merchants that run its daily deals - have been growing faster than revenue, suggesting future pressure on profit margins, some analysts say.

Groupon has lost more than half its market value this year on concern about waning demand for its daily deals and the company's accounting troubles.

The company recently revised fourth-quarter results, admitting to "material weakness" in its financial statements - a disclosure that triggered the latest leg down in its share price.

On April 30, Groupon appointed two new directors to the audit committee of its board to stave off criticism of its accounting practices.

However, on the same day, Groupon was named on a North America Biggest Concerns List with 23 other companies by the Center for Financial Research & Analysis, a forensic accounting research firm founded in 1994 by Howard Schilit.

CFRA analysts highlighted that Groupon's accrued merchant payables jumped 23 percent to $572 million in the fourth quarter, compared to the third quarter. Meanwhile, net revenue grew 14 percent to $492 million over the same period.

"This has implications for margins in the business going forward," a CFRA analyst said in an interview. The analyst did not want their name used, citing the policy of the firm, which is owned by MSCI Inc <MSCI.N>.

A Groupon spokesman declined to comment for this story.

Shares of the company were down 2.3 percent to $10.22 in afternoon trading on Tuesday, a day of broad losses for stocks.

If merchant payables increase faster than revenue, that may suggest merchants are asking for a bigger cut of the money Groupon collects from its daily deals, the CFRA analyst added.

Groupon has traditionally taken about 40 percent of this money, something known as the take rate. Merchants keep about 60 percent, but are paid over about 60 days after a deal runs in the U.S. (and longer in international markets).

This take rate will be a major focus when Groupon reports first-quarter results on May 14.

For a $40 coupon offered at a $20 discount, Groupon's accounting would reflect $8 in revenue and $12 in merchant payables, according to CFRA.

If merchants negotiate a more favorable take rate, for example 70 percent to the merchant and 30 percent to Groupon, revenue would fall and merchant payables would rise. In the case of the $20 discounted coupon, Groupon would recognize $6 in revenue while $14 would be booked to accrued merchant payables, according to CFRA.

"If Groupon's merchants are taking a bigger cut, that will eat into revenues and make it harder for the company to reach scale," the CFRA analyst said. "There may not be enough revenue to support Groupon's operations, including its large sales force and heavy marketing spending."

Sameet Sinha, an analyst at B. Riley & Company, expects Groupon's take rate to decline as merchants push for more favorable terms.

Google Inc <GOOG.O> and Inc <AMZN.O>, which have rival daily deal businesses, are likely offering a bigger cut to merchants and may be paying them more quickly, the analyst added.

Over time, if Groupon is forced to offer better terms, its accrued merchant payables may decline, cutting what has been an important source of cash that the company has used to fund rapid expansion, Sinha and other analysts said.

"If merchant payables shrink (from slowing sales or competitive forces), it could cause working capital to consume cash and the cash balance to begin to deteriorate," Chuck Cerankosky, a chartered financial analyst at Northcoast Research, wrote in a note to Groupon investors last week.

The company mentioned this as a risk in its annual report, filed on March 30.

"To the extent we offer our merchant partners more favorable or accelerated payment terms or our gross billings do not continue to grow in the future, our cash flow could be adversely impacted," Groupon said in the filing.

(Reporting By Alistair Barr; Editing by Tim Dobbyn)