There's no way to sugarcoat Groupon's (NASDAQ:GRPN) horrendous quarter.
Let's not key in on the surprising deficit that everyone has been fuming about since the daily deals posted its fourth-quarter results after yesterday's market close. Let's address the deceptive revenue growth.
"Record billings growth this quarter is a clear signal that customers love Groupons," CEO Andrew Mason claims in the earnings release.
Don't believe that for a second.
Yes, revenue climbed a seemingly impressive 30% to $638.3 million during the quarter, but don't make the mistake of believing that consumers are snapping up more of those half-off pre-paid vouchers for restaurant outings, spa treatments, and other experience outings.
The only reason that Groupon's top line improved is that it's now taking a page out of the Overstock.com (NASDAQ:OSTK) playbook and reselling surplus merchandise that manufacturers need to clear out.
There's nothing wrong with being an outlet for the unwanted. Online retailer Overstock.com and surplus assets marketplace operator Liquidity Services (NASDAQ:LQDT) have been at it successfully for years.
Overstock is coming off a holiday quarter of reasonable sales where it posted a profit to reverse a year-ago deficit. Liquidty Services saw its consolidate revenue climb 15% in its latest quarter.
However, for Groupon this is merely a way to deflect criticisms for its bread-and-butter business that's growing stale. Instead of the thick gross margins associated with selling pre-paid vouchers and keeping 30% to 40% of the action, selling merchandise directly results in leaner markups.
Thankfully Groupon makes it easy to map out the decay of its original business. If you back out direct revenue -- and that's essentially the clearance-bin wares that Groupon has been selling directly through its site since late 2011 -- Groupon's non-direct revenue of $413.1 million has fallen 14% over the past year.
Yes, the dip in sequential as well. Groupon's non-direct revenue during the third quarter clocked in at $423.6 million.
So what's Mason so happy about? Customers don't love traditional Groupons the way that they used to. Merchants aren't happy about this, either. Groupon's cut of the vouchers slipped from an average of 40% to 35% this past quarter in an attempt to win back advertisers that weren't pleased with earlier experiences.
We didn't have to wait for Groupon's report to let us know that this is a doomed model. Amazon.com reports LivingSocial's metrics in its quarterly filings since the leading online retailer has a sizable stake in Groupon's nearest competitor.
Yes, Groupon and LivingSocial are in trouble.
Before killing off Groupon completely, it's worth pointing out that the company has a boatload of cash. The dot-com dud has $1.2 billion in cash and equivalents with no long-term debt on its balance sheet. Groupon has also been doing some pretty interesting things in offering services to its thick Rolodex of local merchants that's 250,000 strong and growing.
However, the "I have a Groupon" experience that seemed so trendy a few years ago is toast. Groupon can't go back to being the company we thought it was because that place no longer exists.