The New Deal At Groupon Isn't Enough

Groupon (GRPN -23.44%) has a fast-growing new business selling discounted products, but that isn't enough to mask the weakness in Internet coupons. Disappointing second-quarter financial results sent shares plunging to a new all-time low near $6 in trading after Monday's closing bell.

Styling itself more like Amazon, Groupon now carries products in inventory which it then sells to customers, as opposed to its core coupon business. Such "direct" sales of products accounted for 12% of revenue in the second quarter, up from nothing a year ago. But excluding these, revenue declined 7% from the prior quarter. And stocking actual products also drives up Groupon's cost of revenue. This jumped to 24% of sales in the second quarter, up from 14% a year ago.

That increase in costs cancels out some of the improvement Groupon has seen in marketing expenses, which dropped to 16% of revenue in the second quarter from 54% the prior year. Yet even as those expenses have declined, growth in gross billings--the total amount spent by customer--has gone negative. And other top-line measures are stalling, including the number of customers that purchased deals in the past year.

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