Elizabeth Trotta

Groupon Suffers From Buyers’ Remorse

The Exchange

Online deal giant Groupon is dealing with back-to-back pieces of negative attention after an earnings restatement and a report that the Security and Exchange Commission has launched a preliminary investigation into its financials.

According to a report in The Wall Street Journal, which cited one source, the SEC hasn't made a decision yet as to whether it will open a formal probe of Groupon.

This isn't the first time Groupon has raised eyebrows with regard to its first numbers. Before its November initial public offering, the company was forced to revise its revenue accounting in order to appease regulators.

But how bad are things for Groupon? It's still producing revenue, and again, the SEC's exploration hasn't been formalized, so let's not get ahead of ourselves. On the other hand, the company is still young, and while it has to please customers, one of its main goals should be to instill investor confidence in its business plan and management.

Last week, investors were shocked when the company revised its earnings to account for a failure to estimate the correlation between the price of a product and buyers' remorse. Groupon launched a large volume of higher-priced deals late in 2011, and its financial results didn't reflect the higher volume of customers who bought those deals only to ask for a refund several months later. The refunds tacked on an additional $14.3 million to the loss of $42.7 million it had previously reported based on its fourth-quarter results.

After Friday's admission, Groupon was required to state that it had a  "material weakness" around the financial statement closing process.

"This is common for fast growing companies with new financial teams and significant international operations," RBS analyst Ross Sandler wrote in a research report. "Groupon is working to resolve the material weakness, and we expect it to be removed by year end 2012 (upon the 2012 10-K)."

Wall Street Reacts

The reassurance wasn't enough for everyone. Groupon's gaffe didn't sit well with investors, and some other Wall Street analysts. Bank of America-Merrill Lynch cut the stock to neutral from buy, and Stifel Nicolaus slashed its rating to sell from hold.

"I just question whether it means that the addressable market is as gargantuan as they say it is," Stifel Nicolaus analyst Jordan Rohan said on CNBC Monday. Rohan said his concerns were not so much the revision as the implications regarding consumer satisfaction.

As customers decided they didn't want to hang on to Groupon's pricier deals, investors, for their part, decided they didn't want to hold on to the stock. But the severity of the selloff has sparked some criticism.

As Breakout pointed out yesterday, the stock was "penalized more than $1 billion for what is essentially a $100 million revenue restatement from last year, a 10% beating that is arguably too harsh."

Cue Spotlight

So far, the SEC's action has been limited to a probe. All of the agency's investigations are conducted privately, and it normally uses a combination of the following approaches to these matters -- informal inquiries, interviewing witnesses, examining brokerage records and reviewing trading data.

A formal SEC investigation is different. A formal investigation can involve subpoenas for witnesses to testify and produce books, records and other relevant documents. In situations where that step is taken, the staff presents its ultimate findings, and the commission then has the authority to direct its staff to file a case in federal court or bring an administrative action. Often, the cases are settled without a trial.

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