• by Sarah Mahoney  @mahoney_sarah, February 22, 2024

Etsy beat financial forecasts with a robust fourth quarter. But while shifting marketing strategies boosted sales and brand awareness, the company offered a dim outlook for the months ahead. And the rising costs of performance advertising, as Etsy increasingly competes against companies like Temu and Shein, are cutting into the bottom line.

Consolidated gross merchandise sales slipped 1.6% to $4 billion on a currency-neutral basis from $4.03 billion in the fourth quarter of 2022. Revenue rose 4.3% to $842.3 million, compared with $807.2 million in the year-ago period. Net income fell 24% to $83.3 million, down from $109.5 million. In the company’s services division, which includes the Etsy Ads platform, revenue gained 9.4%.

And following a difficult period that involved widespread layoffs, the Brooklyn-based brand says other profitability measures hit all-time highs, including earnings before taxes of $236 million.

The number of active buyers on the crafty platform hit 92 million, up 3%, and Etsy reactivated 10 million buyers, an increase of 13%. Both metrics are records.

The quarter included multiple new marketing approaches, including the introduction of Gift Mode, an AI tool for selecting gifts, and Etsy’s first-ever Super Bowl ad.

The changes are all intended to “make Etsy even more Etsy,” says Josh Silverman, president and chief executive officer, in a conference call webcast for investors.

The ecommerce company has plenty of marketing success, including the highest-ever level for buyer intent to purchase in its top three countries, and it continues to gain market share.

Silverman highlighted the Gift Mode debut as an example of a shift in thinking. “Historically, we’ve launched a series of measurable incremental product improvements with minimal fanfare,” he says. “With Gift Mode, we've meaningfully augmented our playbook to not only create a great new product experience but also to create a consumer buzz about the product in a way we've never done before, with unmissable stories, content and moments to build excitement.”

Gifting continues to be a source of anxiety for shoppers, with 71% of consumers saying they fret about finding the right present.

On average, people spend $1,600 a year on gifts, but only 10% of Etsy customers have used it for gifts, creating an opening in a market that Silverman says is $200 billion in the U.S. alone.

Etsy spent $261 million in the quarter, a 7% increase, with spending on brand awareness efforts up 24%, increasing its return on ad investments. And it cut spending on performance marketing by 4%.

Despite those gains, Etsy issued a cautious outlook, expecting a decline in gross merchandise sales in the low single digits next quarter. And if current competitive trends continue, that decline could be in the mid-single-digit range.

Incremental investments in advertising and platform are also part of that “disappointing outlook,” writes Seth Basham, an analyst who follows Etsy for Wedbush.

He continues his neutral rating on Etsy, given “consumers’ preference for lower-cost alternatives in this weak macro environment, fierce competition in performance marketing channels and limited value creation opportunities.”

Competition from Temu and Shein, Chinese online retailers, “continue to drive cost-per-click for performance marketing to unsustainable levels,” he adds. “Etsy’s latest marketing tests, which contributed to some of January’s weakness, suggested it might have pulled too far back in performance marketing spend and led the company to 'lean back in,’ with spend now back to normal levels.”