Updated from 9:59 a.m. EST to provide additional analyst comments in the ninth paragraph.
NEW YORK (
) --The daily deals category as we knew it is dead, and
acknowledgement of this may cost CEO Andrew Mason his job.
The Chicago-based online commerce company reported
results yesterday that were much worse than Wall Street expected, with the company in the midst of a business model pivot. Groupon is moving from the once-lucrative model of daily deals into more direct e-commerce sales, bringing it into competition with powerhouses
and, to a lesser extent,
So far, the shift in model looks like a train wreck, with Groupon's operating and free cash flows plunging year over year. Operating cash flows fell 61% year-over-year to $65.7 million, compared to $169.7 million in the fourth quarter of 2011. The decline in free cash flow was even worse, plunging 83% year-over-year to $25.7 million. Despite the sharp drops, Groupon still had $1.2 billion in net cash and cash equivalents at the end of 2012.
Wells Fargo analyst Jason Maynard is a Groupon skeptic. "
We are notconvinced that unloading overstock goods at very low margins is a good strategy," Maynard wrote in a research note. "We believe that this diminishes the brand, and could drive the more profitable deals to other premium branded sites. More importantly, we think this puts Groupon on a collision course with Amazon."
Daily deals once excited Wall Street because of their high margins, but low barriers to entry invited a raft of competition from related businesses, which forced a re-rating of Groupon and the industry as a whole. Consumer reviews site
and restaurant reservation service
were among those who jumped in, most to little success. The effect on valuations has already forced Amazon to take a write down on its investment in Groupon rival
Mason, 33, has been at the helm of Groupon since founding the company in 2008, but with the company in transition he may no longer be the right man for the job.
Hudson Square Research analyst Dan Ernst suggested a change by the board away from Mason could be positive for the company. "Our view might be more negative except that A) it appears the new COO has near term plans to significantly cut costs overseas, and B) the magnitude of current issues could prompt the board to make changes, that would likely serve as a positive catalyst for the stock."
It's a long way from the $6 billion price
was reportedly willing to pay for Groupon at the height of its popularity.
A good portion of Groupon's fallacies are a direct result of the company itself, noted Piper Jaffray analyst Gene Munster. "Since IPO, the Groupon story has largely been a comedy of errors, drawing into question the viability of the daily deal space," Munster wrote in the note. "Our belief is that while the company has done a poor job of articulating fluctuations in the business model, operating in daily deals and the broader local space is a viable business."
Merrill Lynch's Justin Post downgraded the stock to "underperform," mentioning the drastic decline in gross margins versus estimates. Groupon's gross margins for the quarter were 55.7%, sharply below his estimate of 66%. "Despite the positive growth in customers (+23% y/y) and mobile transactions, we are increasingly cautious on Groupon's business model mix shift, which is pressuringGMs and creating more long-term profit uncertainty vs. the eCommerce group," Post wrote in his note.
The local deals business continues to decline around the world, says JPMorgan analyst Doug Anmuth, and the company's International segment is a drag on costs. Anmuth believes that growing profits this year may be difficult to do if costs aren't cut internationally.
It will be increasingly difficult to complete any business model transition and not start to burn through that $1.2 billion cash hoard. If operating cash flows continue to drop as sharply as they did in the fourth quarter, Groupon may need to tap the public markets for equity. Investors looking to bet on a successful turnaround certainly won't need a "Groupon" when buying shares.
And if there is a turnaround, it may very well be without Mason at the helm of the ship.
Written by Chris Ciaccia in New York