SAN FRANCISCO Groupon Inc's (GRPN.O) goods-selling business appears to be a hit, generating estimated quarterly revenue of at least $50 million, less than a year after it launched, some analysts say.
But the rise of Groupon Goods, as it's known, has revived concern about accounting and transparency at the world's largest online daily deal company, hammering its shares.
"I can see it becoming a really good, big business for them," said Sameet Sinha, an analyst at B. Riley & Co. "Unfortunately, it's more mired in controversy than appreciation right now."
When Groupon reports quarterly results on Monday, Sinha and other analysts hope the company discloses more details about Groupon Goods - a move they say may help its flagging stock price.
"In the event the company does not address the issue, it is likely to fester," Lloyd Walmsley, an analyst at Deutsche Bank, wrote in a recent note to investors. A Groupon spokesman declined to comment.
This is the latest in a series of accounting problems facing Groupon, which went public in November at $20 a share. The company stopped reporting a controversial financial metric called Adjusted Consolidated Segment Operating Income last year after pressure from regulators.
In March it revised fourth-quarter results and admitted to a "material weakness" in its financial statements.
Analysts expect Groupon to report second-quarter earnings of 3 cents a share on revenue of $573 million, according to Thomson Reuters I/B/E/S.
In May, Groupon reported first-quarter revenue that blew away Wall Street estimates, sending its shares up almost 20 percent.
Groupon Chief Executive Andrew Mason said that was partly driven by new technology, such as SmartDeals, which makes the company's daily deals more relevant, increasing the chance customers will buy them.
However, after the company filed its first-quarter report with the Securities and Exchange Commission on May 15, some analysts began to worry that the revenue beat was driven by Groupon's accounting for its growing Goods business.
Groupon often takes inventory risk with the Goods business because it buys products in bulk at a discount and sells them to customers at higher prices. That is a contrast to the company's main daily deals business, where it acts as an agent, or middleman, between merchants and consumers.
When it takes on inventory, Groupon reports 100 percent of the revenue generated by product sales. When it acts as an agent, the company only reports its cut of the sale - usually 20 percent to 40 percent - as revenue.
That means the company's first-quarter revenue growth was probably boosted by the growth of Groupon Goods, analysts say.
Ken Sena, an analyst at Evercore Partners, estimated about half of Groupon's North America revenue growth in the first quarter was driven by the expansion of Groupon Goods and the different way the revenue is booked.
Sena also questioned why Groupon executives did not mention the effect of Groupon Goods when the company reported better-than-expected first-quarter revenue.
Sena cheered Groupon after the first-quarter results. But he downgraded the stock on July 26.
"New information has emerged related to the company's Goods category that makes us question the composition of the first-quarter North America revenue beat," Sena wrote.
Groupon's stock closed at $13.05 on May 16, the day after it filed its quarterly report with the SEC, which disclosed the accounting treatment of the Goods business for the first time. The shares have slumped since then, hitting a record low of $6.35 on August 2.
The stock was up nearly 4 percent to $6.91 on Friday.
Arvind Bhatia, an analyst at Sterne Agee, downgraded Groupon to "neutral" from "buy" on Wednesday. Bhatia had upgraded the stock on May 15, following what "appeared to be strong first-quarter results," he said.
"Based on a better understanding of Groupon Goods accounting and the impact it may have had on the first-quarter revenue growth rate, we are less sure the underlying first-quarter revenue trends were in fact as strong as we had originally thought," the analysts wrote in a note to investors.
Still, Bhatia said Groupon's accounting for its Goods business is "very appropriate."
If Groupon executives share more details about the Goods business when the company reports on Monday, "it will benefit all sides," the analyst added.
Sinha is keen to hear what portion of Groupon Goods revenue is reported on a gross basis - where 100 percent of sales are booked - and how much is reported on a net basis.
"The stock will continue to suffer until there's more transparency," he said. "The company should realize that."
(Reporting By Alistair Barr; editing by Jeffrey Benkoe)