With Groupon Inc. (NASDAQ: GRPN) Chief Financial Officer Jason Child stepping down, it is open season on Groupon once again. The classic line of attack is to mention the oft-cited lack of barriers to entry in the business of supplying discounts to consumers online. Any teenage whiz kid operating out of his mother’s basement can supposedly offer the same thing with very little capital, or so critics say. But if you look closely, that doesn’t seem to be why Groupon is floundering.
Internet marketing is about branding, tenacity and constant optimization. These are the barriers to entry, and they are more formidable than you might think. True, Groupon has lost close to $1 billion already since its 2012 initial public offering (IPO). It is surprising (or perhaps less so given the news of Child stepping down) that much of its losses are due to self-inflicted wounds from downright strange bookkeeping and very questionable financial decisions.
Here are some examples. Take a look at Groupon’s income statement since its IPO and it shows that revenues are up a very respectable 37%. No problems there. While the cost of that revenue has rocketed up 128% by comparison, this could even be considered excusable for a young company trying to find its groove and the sweet spot of efficiency that takes time to master.
But what is really odd is that, during its IPO year, Groupon had an operating income of almost $100 million. That’s great, but it also had an income tax bill of $146 million. How does that happen?
No matter how closely this problem is analyzed, it requires someone with a Ph.D. in global tax law, if there is such a thing, to understand this:
The effective tax rate was 153.7% for the year ended December 31, 2012. The most significant drivers of our effective tax rate … included the impact of unrecognized tax benefits related to income tax uncertainties in certain foreign jurisdictions, losses in jurisdictions that we were not able to benefit due to valuation allowances, amortization of the tax effects of intercompany sales of intellectual property and nondeductible stock-based compensation expense.
Leaving aside exactly what that means technically, in the end, it shows that the CFO could not figure out how to maneuver around well enough so as not to be double or triple taxes on every foreign transaction. Any CFO who would allow his company to pay an effective tax rate of 153.7%, and to have to report losses to shareholders as a result, should be replaced.
It didn’t get much better in 2013 either. Groupon posted a respectable operating profit of $76 million and somehow turned it into a $95 million loss, and this time for two odd reasons. First, taxes again, this time reporting an effective rate of 93%. Well, at least Child kept it below the 100% mark. Even worse though was its bungled up investment in Life Media Limited, aka F-Tuan, a Chinese internet discount company, in an attempt to break into the Chinese market. Clearly, Groupon had no insight about what it was doing because its entire investment in F-Tuan went bust and Groupon lost over $85 million in that venture.
Does Groupon have a future? Yes, if it gets its act together and organizes its books right. Sales are not its biggest problem. Revenues are growing nicely. It could be more efficiently run, but that will come with time. It just has to stop acting like a beginner investor. For example, it acquired Ideeli, a Korean deals company at a discount for $260 million in January 2014. This was a good move, and then it sold it for $360 million. That’s great if you are a hedge fund manager, but Groupon should not be acting like a day trader of online discount companies. If it invests, it should be for long-term growth, not to make a quick buck.
What is it doing with that quick buck anyway? Adding $200 million to its buyback program, bringing it up to $500 million. Apparently, Groupon is so scared of bungling its next investment that it couldn’t think of anything to do but add to a buyback. Even announcing a dividend would sound more effective for investors than that.
What Groupon should do is hire someone who knows how to organize the books correctly and to stay away from shady deals in China. Groupon does not even have a chief operating officer. If the company can grow up, then yes, it can expand effectively. The sales are there. We will see who replaces Child, and if it hires a COO at all.