Etsy's profit margins experience a decline, despite robust revenue expansion

Etsy Unveils New Initiatives, Boosts Forecasts, but Margins Squeezed

Etsy, the online marketplace for unique and handmade goods, has announced a series of new initiatives, including television advertising in the U.S. and a free shipping offer, which have impacted the company's margins.

In the third quarter, Etsy's revenue increased by 31.6% year over year, totaling $197.9 million. The growth was driven by an increase in both Marketplace and Services revenue. However, the ongoing challenges to margins were reflected in changes to the company's guidance. Etsy has boosted its forecast for full-year GMS growth to 25% to 26%, but narrowed its EBITDA margin forecast to $179 million to $187 million.

The free shipping offer, which does not seem to be affecting the habits of occasional buyers, has been well received by frequent Etsy buyers and new ones. This positive reaction has driven good results, but some sellers are encountering difficulty incorporating free shipping into their pricing. On average, sellers have shifted about 60% of the shipping cost into their item prices, while tests had shown them shifting closer to about 84%.

In addition to the new initiatives, Etsy has acquired the musical instrument marketplace Reverb in 2019. Reverb contributed $77 million in GMS and $6 million in revenue during the third quarter. Reverb had nearly 600,000 active buyers and 155,000 active sellers during the same period. The new marketplace is expected to continue compressing margins as it is integrated into Etsy's operations.

However, according to a Seeking Alpha transcript, as of the third quarter, Reverb does not yet benefit from Etsy's more advanced programming. The artisans marketplace also added approximately 4.2 million new buyers during the quarter, and the active buyers base grew by 19.1% and active sellers grew by 19.3% year-over-year.

Despite the positive growth, net income dropped by 25.6% to $14.8 million. Gross profit rose by 24.7% to $129 million, but gross margin contracted by 360 basis points to 65.2%. The stock tumble late Wednesday after market close was due to the changes in the company's guidance.

In summary, Etsy's third quarter results show a continued growth in revenue and active users, but also challenges in maintaining margins due to new initiatives and the integration of the Reverb marketplace.