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updated: 2/21/2014 7:14 AM

Groupon forecasts profit below estimates on mergers, marketing

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Bloomberg News

Groupon Inc. shares fell after the company forecast first-quarter profit that trailed analysts' estimates on higher expenses for acquisitions and marketing.

Two companies acquired last month will hurt profit by $20 million this quarter, Groupon said yesterday in a statement. That impact, plus $25 million in additional expenses for marketing and growth initiatives, will lead to adjusted earnings before interest, taxes, depreciation and amortization of $20 million to $40 million, Groupon said. Analysts had estimated $96 million, according to data compiled by Bloomberg.

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The shares slid as much as 13 percent to $8.96 in late trading yesterday. Chief Executive Officer Eric Lefkofsky has been pursuing acquisitions as he seeks to convert the company from daily e-mail deals to a service offering thousands of discounts. Last month, the company completed its acquisition of South Korean e-commerce marketplace Ticket Monster Inc. and agreed to acquire fashion site Ideeli for $43 million in cash.

The forecast showing the impact of those purchases put a damper on Groupon's fourth-quarter results, which exceeded analysts' estimates with stronger mobile sales.

Sales rose 20 percent to $768.4 million, the Chicago-based company said. That beat the $718 million average estimate of analysts compiled by Bloomberg. Leaving out one-time items, earnings of 4 cents a share beat the 2-cent average projection of analysts.

"I don't think everything will be smooth sailing, but they are definitely moving in the right direction," Tom Forte, an analyst at Telsey Advisory Group, said in an interview.

Retail Struggle

Groupon's net loss was $81.2 million, or 12 cents a share, little changed from a year earlier.

Online retailers generally struggled in the fourth quarter. Amazon.com Inc.'s profit and sales trailed analyst estimates on a slowdown outside the U.S. and a surge in holiday shopping costs. EBay Inc.'s sales fell short of analyst estimates, and the company said in January that activist investor Carl Icahn had proposed splitting off its PayPal online-payments unit.

Groupon, which also competes with deal sites like LivingSocial Inc., forecast first-quarter sales of $710 million to $760 million, compared with the average analyst estimate of $685.4 million.

Groupon makes money by offering discounts -- known as Groupons -- from businesses such as restaurants and nail salons. It then shares the revenue with the merchants.

Self-Service Feature

To boost growth, the company has been making major improvements in the past year to its site and mobile applications. Earlier this month, it unveiled a self-service feature that could let thousands of additional merchants work with the online-deals provider every month. Known as Deal Builder, the tool offers templates and step-by-step directions so merchants can create product and service offers without help. Previously, Groupon's sales force worked with sellers -- usually in person or via phone -- to create offers.

Groupon also beefed up its management team, most recently adding executives from Orbitz Worldwide Inc. and Wal-Mart Stores Inc.'s WalmartLabs.

"The fact that they are able to attract these high-quality people to their company shows that this is a story that's on the mend," Forte said.

This month, Groupon lost Jeff Holden, vice president of product management, to car-service provider Uber Technologies Inc.

Groupon has to show revenue growth this year without sacrificing profit margins, Steve Weinstein, senior Internet analyst at ITG Investment Research, said in an interview.

"I think they got it on a more stable footing over the last year," Weinstein said. "Now it's our opportunity to assess, 'OK, what can this business really be -- what is the realistic growth?' Domestic e-commerce is growing at double digits, and they can probably do a little better than that, because they are doing something that's unique."

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