Groupon Q1 Earnings Preview: Restatement Creates Uncertainty; Expect Continued Volatility

May. 8.12 | About: Groupon, Inc. (GRPN)

Groupon (NASDAQ:GRPN) reports 1Q12 results on May 14th. The Street expects:

  • Revenue: $531 million
  • EPS: $0.01
  • Q2 revenue guide: $559 million

Heading into the earnings, investors can expect some uncertainty involving Groupon's financials and continued pain in the group-buy industry.

Early last month, Groupon restated its 4Q11 results due to increased refund reserve accruals in which it adjusted revenue downward by $14.3 million, operating income by $30.0 million and net income by $22.6 million. The higher refund rate on the higher price offerings from the company's upscale service, Groupon Reserve, partially resulted in the increased refund reserve accrual.

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Higher refund accrual is a major risk that Groupon faces because it has serious impact on the company's margin. In a refund, Groupon return the associated purchase back to the customer, which lowers the revenue. However, investors need to note that the marketing cost associated with the purchase remains on the Groupon's income statement, thereby negatively impacting its margins.

While it is encouraging to see Groupon moving toward the upscale segment, higher than average refund rate is a major concern and could continue amid slow growth in the group-buy industry. I note that LivingSocial reported a loss of $92 million during 1Q12, which gives investors some color on the weakness in the overall industry landscape.

Going beyond earnings, investors can expect continued volatility of the stock and possible insider sales due to uncertainty involved in its financials and the upcoming June 1st expiration of lock-up agreements that will allow insiders to sell their shares.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.