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Groupon Shares Plummet on Slowdown in Daily-Deals Business

--Stock has lost almost three-quarters of IPO value --Company blames daily-deals slowdown on Europe --Direct sales of goods seen hurting margins By Drew FitzGerald Groupon Inc. (GRPN) shares lost nearly a quarter of their value Tuesday and fell to their lowest point ever as a dramatic slowdown in the company's core business of offering daily coupons for goods and services raised concerns about the segment's future growth. Late Monday, Groupon said its billings--the total amount spent by a customer and an indicator for the daily-deals business--slipped 5% in the second quarter from the year's first three months. Groupon officials said poor economic conditions in Europe led people to stay away from high-cost offers like laser-hair removal; however, analysts wondered if the decline represented more than that. "Daily-deal maturation has to be a factor," Citigroup analyst Mark S. Mahaney said. "The core daily-deal business is sharply slowing." Even among Groupon's more loyal customers, deal fatigue appears to be growing, analysts said. Gross billings per customer, excluding its direct-sale business, declined to $32 from $40 in the previous quarter. "We thought that was a very telling number," Benchmark analyst Clayton Moran said. "You bring people in, there's some level of excitement and interest, and then it loses its appeal over time." Mr. Moran added that he expects the weak trends to persist. Shares of the Chicago-based company recently fell 24% to $5.75, a 71% drop from their November IPO price of $20. Groupon's market value is now about $3.7 billion, down from as high as $13 billion last year. In recent months, Groupon Chief Executive Andrew Mason has discussed a strategy to expand from the company's daily-deal offers into other types of local services, such as offering technology to help local businesses manage appointments, update customer-loyalty programs and process payments. Mr. Mason describes the strategy as making Groupon the "operating system for local commerce." However, a weakening daily-deals business could hamper the company's ability to make progress on those expansion plans. "A sequential decline [in daily deals] implies a rapidly deteriorating core business," Mr. Mahaney said, and Groupon "needs to act fast to fill up this hole." In the second quarter, Groupon helped to fill the sales hole with Groupon Goods, a relatively new, low-margin business of selling merchandise such as jewelry or kitchen appliances. Such "direct" sales of products accounted for 12% of revenue in the second quarter, up from nothing a year ago. But excluding these sales, revenue declined 7% from the prior quarter. While Groupon Goods helped revenue, the direct sales of merchandise hurt the company's margins. Stocking actual products drives up Groupon's cost of revenue, which jumped to 24% of sales in the second quarter from 14% a year ago. Plus, the business of selling products online is already a crowded space with giants like Inc. (AMZN), eBay Inc. (EBAY) and Craigslist. "We understand that Groupon likely views Goods as a powerful means of leveraging its large base of [38 million] active customers," J.P. Morgan analyst Doug Anmuth said. "However, we'd prefer the Goods business to be an incremental growth driver rather than the primary driver, and we believe Groupon has less competitive advantage overall in this segment." The stock slide Tuesday in Groupon was enough to trip circuit breakers that limit the actions of "short" sellers, who borrow shares and sell them, hoping to replace the stock later at a lower price. Groupon's fall of more than 10% Tuesday morning meant, under SEC rules, short sales for a lower price than the latest trade are prohibited for the rest of today and Wednesday. After a short sale, Groupon shares must tick higher before another short sale can be executed. Growth concerns have dogged Groupon for the past year, causing short interest in the stock to skyrocket. The share of stockholders shorting the stock surged 46% during the last half of July, well before the company reported its latest financial results. --Shira Ovide, John Letzing, Michael Driscoll and Rolfe Winkler contributed to this report. Write to Drew FitzGerald at Subscribe to WSJ:

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