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Constant Contact: Groupon Without The Accounting Follies

 April 02, 2012 06:25 PM

Author: Barry Randall, Crabtree Asset Management
Covestor model: Crabtree Technology

In the field of comedy, there is something called "a gift." It's a person or event that seems to provide an endless stream of material, a mother lode of comedy gold. Like Newt Gingrich. Or Octo-mom. Or Lindsay Lohan.

In the world of investing, Groupon (GRPN) is our gift. From the video of its CEO Andrew Mason doing yoga in his underwear to the company inventing a brand new accounting metric ("Adjusted Consolidated Segment Operating Income"?), Groupon has consistently offered up brightly wrapped nuggets of fun and happiness to the often dry and drab world of business.

[Related -Groupon Inc (GRPN): RBC Upgrades Recommendation, With 16% Downside – Say What?]

And on Friday, March 30, Groupon gift-wrapped yet another box of joy, a restatement of their financial performance in their fourth quarter, which ended three full months ago, and which was originally reported in mid-February. The specifics are pretty dry, but the bottom line is that, a) the company should have accounted for a higher level of refunds; b) revenue was therefore lower; c) the reported net loss was therefore larger and d) the whole mess shows their internal accounting controls are (still) lacking. That they released this information late on a Friday, after the market close, was the equivalent of a flashing "APPLAUSE" sign in the sky.

[Related -Call Options Active on Groupon]

The really funny thing is, however, that such shenanigans aren't really Groupon's biggest weakness. We'll get to that, but not before acknowledging the company's status as the undisputed king of the Daily Deal marketing segment. Groupon's market share is twice that of its nearest rival, LivingSocial. And it has a vast number of "subscribers," to whom it sends deep-discount coupons on behalf of merchants looking to drive traffic and repeat business.

Merchants remain attracted to Groupon because they (e.g., restaurants, hair salons, skateboard parks) don't have the marketing resources to run such promotions. Moreover, because Groupon charges only for a percentage of the deal, the deal is only a variable, rather than a fixed cost. If it works, great, but if it doesn't, the merchant isn't incurring any ongoing expense of an ineffective marketing department.

A Groupon "subscriber" is merely someone who's added their email to Groupon's mailing list. And as of the end of December, Groupon claimed to have 170 million such subscribers. This immense number is the carrot that Groupon dangles in front of merchants, many of which only haphazardly collect and utilize email and contact information from their own customers.

But really, how valuable is Groupon's subscriber list? Since they spent over $400 million to acquire all those email addresses, I guess you could say they're pretty valuable.

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