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Wunderlich: Groupon Local Business Not Delivering

Jayson Derrick

Blake T. Harper of Wunderlich Securities downgraded shares of Groupon (NASDAQ: GRPN) from Buy to Hold with a price target lowered to $6 from a previous $10 following the company's second quarter results.

The analyst noted the reason for the downgrade is due to a lower-than-expected growth in the Local category and a view that it would be difficult to see the category rebound meaningfully in the next quarter or two. The analyst also noted the company lowered its fiscal 2014 EBITDA outlook by 10 percent.

Local Not Delivering

During the second quarter, North American Local billings grew by two percent while revenue declined seven percent from a year ago. Europe, the Middle East and Africa saw its Local billings decline by six percent, while revenues declined 13 percent from a year ago.

“The North American revenue decline was due to lower take rates from a mix shift in deals as well as promotions the company has run itself,” Harper explained. “The company reiterated its expectation for the North American Local business to grow billings double-digits year over year by year-end, mainly from higher redemption rates... We believe it will be a challenging goal.”

While Local billings were troubled in the second quarter, goods billings grew to 40 percent of total billings while goods revenue represented 54 percent of the company's overall revenue base. However, Harper views the goods segment less favorably than Local given the competition base which includes Amazon and eBay.

Harper is skeptical of Groupon's beliefs that the company can turnaround its Local division, but the analyst believes that Groupon can make progress on other company initiatives (like Goods) that will contribute to a gross margins improvement.

Bottom line, according to Harper, the Local segment will be “the largest determinant of the stock.”

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