Groupon forecast trails estimates amid retail transition

Groupon Inc.'s transition from daily- deal e-mails to e-commerce retail is hitting bumps along the way.

The Chicago-based company forecast second-quarter earnings that trailed analysts' estimates as it invests in its strategy. That overshadowed first-quarter sales that rose 26 percent to $757.6 million, beating the $738.4 million estimate of the analysts polled by Bloomberg. The shares fell the most in more than two months.

Chief Executive Officer Eric Lefkofsky is converting Groupon to a service offering thousands of discounts, an effort to boost growth and compete with marketplaces like Amazon.com Inc. To attract consumers and expand sales, Groupon has been running TV ads and expanding its offerings.

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.

"Obviously the jury's still out," Edward Woo, an analyst at Ascendiant Capital Markets, said in an interview. "There are a lot of skeptics in the market, including myself. You invest in a company hoping to get growth and profits, but they don't have profits. Without growth, valuations tend to decrease." He advises selling the shares.

Groupon shares slid 14 percent to $5.80 at 9:37 a.m. in New York. They dropped as much as 15 percent earlier, the biggest intraday decline since Feb. 21.

Breaking Even

For the second quarter, the company forecast $725 million to $775 million in revenue and adjusted earnings of break-even to 2 cents a share. Analysts estimated sales of $754.4 million and an adjusted profit of 3 cents a share.

"The main story is that our plans are on track," Lefkofsky said in an interview. "From a financial standpoint, we delivered a strong quarter."

Groupon's first-quarter loss, excluding some items, narrowed to 1 cent a share. Analysts had projected a 3-cent loss. The net loss widened to $37.8 million, or 6 cents a share, from $4 million, or 1 cent, a year earlier, according to a statement yesterday.

"As we migrate to this marketplace, we tell people our business is going to build throughout the year versus being lumpy last year," Lefkofsky said. "We are pleased with where we are at."

Groupon's shares dropped as low as $6.11 in late trading. After more than doubling in 2013, they had tumbled 43 percent this year through the close of trading yesterday.

Strategy Change

"Things have gotten marginally better," Steve Weinstein, an analyst at ITG Investment Research Inc., said in an interview. "But I wouldn't say that they are showing a real inflection in the business, that their strategy is really changing the trajectory. There's still a lot of work to be done."

For the full year, Groupon said it expects more than $300 million in adjusted earnings before interest, taxes, deprecation and amortization. That compared with an earlier forecast for a slight improvement over 2013's $287 million.

Groupon is searching for a new female board member, Lefkofsky said. Mellody Hobson isn't seeking re-election when her term as a director ends in May, and the rest of the board members are men.

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.

Bulk Sales

It also increasingly negotiates for the goods directly with vendors and distributors, and stores and ships products from the warehouse it opened last year in Hebron, Kentucky. Last week, Groupon started selling razors, vitamins and other consumer goods in bulk in an effort to grab more of the e-commerce market. Its new service, called Basics, lets consumers stock up on more than 100 household, personal care, health and wellness, and grocery items. Initially available in the continental U.S., Basics doesn't require a subscription.

In another move against retailers like Amazon, in April Groupon began offering in-store coupons from national retailers such as Staples Inc. and Macy's Inc.

It's also been letting consumers know of the change in its strategy with TV commercials, which began airing on April 7 in six markets, including Atlanta and San Francisco. The recent TV spots are designed to educate consumers to come to Groupon when they want to buy anything, any time, anywhere.