Etsy (NASDAQ: ETSY) just released another quarterly earnings report, and it was a doozy.
The crafty online marketplace, which is home to millions of artisans hawking various wares, has been spinning its wheels since the pandemic ended, and its latest quarterly numbers were yet another disappointment for investors. The stock finished down 12% on the news and is now trading at its lowest point since before the COVID-19 pandemic started.
The numbers were familiar to investors who have been patiently waiting for a turnaround. Gross merchandise sales (GMS), which represent the total dollar value of goods sold on the platform, fell 3.7%, which was impacted in part by the sale of Elo7, the Brazilian online marketplace that Etsy sold last year just two years after buying it.
Revenue inched up 0.8%, helped by higher fees, but adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) and net income both declined.
Over the last two years, GMS is down more than 8%, a clear sign that the business is in retreat.
Image source: Etsy.
Excuses, excuses, excuses
Etsy was one of the bigger pandemic success stories as the stay-at-home period drove people around the world to take up new hobbies or spend some money freshening up their living spaces or on self-care products.
However, since then the business has been moving in reverse as consumers seemed to have moved back to pre-pandemic spending habits in categories like travel and restaurants that were off-limits during the height of the pandemic.
CEO Josh Silverman offered a familiar explanation in the first-quarter report, saying performance was "pressured by the challenging environment for consumer discretionary products."
However, that excuse is starting to ring hollow. After all, Etsy's year-over-year comparisons are now with periods that are well after the pandemic cooled down. The whipsaw effect, by which consumer spending moved back from goods to services, should have normalized by now. That Etsy's GMS is still declining means that its growth could be stuck in neutral for a long time.
Other consumer discretionary companies have returned growth as well. Amazon's numbers have improved since the post-pandemic lull with it reporting 7% growth in its first-party online stores segment in the first quarter and 16% growth in third-party seller services. Shopify's sales growth has also accelerated following a post-pandemic dip.
Management touted the improvements they're making to the product under its "Right to Win" strategy, which is focused on making it easier for shoppers to find what they're looking for on Etsy, associating its brand with value, and other improvements. In the first quarter, the company launched gift mode to help shoppers find the perfect present and made improvements to search.
However, the Right to Win strategy has yet to pay off in any measurable way. Active buyers rose on the Etsy marketplace were up less than 2% in the first quarter to 91.6 million, showing the company is having trouble attracting new customers.
Other warning signs
Since he took over Etsy in 2017, Silverman has done an overall good job. He made some tough decisions early on, laying off staff, and pivoting the company to a more profitable business model that could serve all stakeholders over the long term.
However, management's more recent decisions look more suspect. Its "House of Brands" strategy through which it's acquired marketplaces like Reverb, Depop, and Elo7 has cost the company valuable capital. It sold Elo7 for reportedly much less than it paid for it at the height of the pandemic, and it took a write-down of nearly $1 billion on Depop, the clothing resale app it acquired in 2021, also at the height of the pandemic.
Both those purchases indicate management wrongly assumed that pandemic-era tailwinds would persist once the crisis ended, and overpaid to acquire other marketplaces.
Is it time to sell Etsy?
Based on the recent update, there's not much positive news to keep investors sticking around. Even Etsy's guidance only offered the slightest hint of improvement as it called for a modest acceleration in GMS in the second half of the year.
The stock is arguably cheap relative to its earlier heights, but it only offers value if you assume the business eventually returns to steady growth.
I'm an Etsy shareholder, and I'm not planning to sell the stock yet, but it does belong in the penalty box after several quarters of flat growth and disappointing results. I'm willing to give management a quarter or two more to show improvement in key metrics like GMS and active buyers. If that doesn't happen, I think it's safe to conclude that the stock's best days are behind it, and it will be time to hit the sell button.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Amazon, Etsy, and Shopify. The Motley Fool has positions in and recommends Amazon, Etsy, and Shopify. The Motley Fool has a disclosure policy.
