Jefferies analysts are questioning whether Etsy (NASDAQ:ETSY)’s recent restructuring move is enough to respond to ongoing challenges in 2024.
Etsy (NASDAQ:ETSY) initiated its first restructuring in six years, aiming to cut 11% of its core workforce (225 employees) and complete a full reorganization by the end of the first quarter of 2024.
The move is seen as a strategic step to better position Etsy (NASDAQ:ETSY) for future growth. Jefferies analysts estimated annual expense reduction from the workforce reduction could total approximately $40 million.
“Etsy's new restructuring program provides needed flexibility after two straight years of GMS (Gross Merchandise Sales) declines and increasing digital advertising costs from Temu's international push,” Jefferies analysts wrote.
Analysts were disappointed by Etsy’s updated fourth-quarter guidance, which fell short of buy-side expectations. The guidance includes a 1-2% year-over-year decline in Gross Merchandise Sales (GMS), revised revenue growth of 2-3%, and an EBITDA margin of 27-28%. This implies a change in the take rate, increasing 80 basis points year-over-year to 20.8%.
Notably, the guidance suggests a decline in December compared to trends observed in October and November.
Jefferies said it is currently reviewing their model in light of this new information.
Analysts also pointed out that Etsy's international push, particularly in response to competitors like Temu and Shein, has increased digital advertising costs. Temu's monthly active users (MAUs) have surged 182% year-over-year, leading to a narrowing gap in MAUs between Temu and Etsy. This has resulted in a significant increase in digital marketing costs for Etsy, with Temu's share of paid traffic across e-commerce growing by almost 1,000 basis points year-over-year.
In response to the rising costs, Etsy has experimented with new channels and products, conducting four self-funded promotions in the third and fourth quarters.
While the first two promotions were positive in terms of return on investment (ROI), the third in early fourth quarter resulted in a negative ROI thanks to added marketing expenses, totaling around $6 million and $17 million in the third quarter and fourth quarter year-to-date, respectively.
Etsy has also revealed plans to focus on brand marketing channels in the fourth quarter, historically a smaller component of its customer acquisition strategy. Jefferies notes that these channels typically have longer payback periods.
“We came away from today's news wanting to better understand if the restructuring is a reaction to continued headwinds in CY24 and whether the revised 4Q GMS guidance is conservative,” analysts wrote.
Jefferies has an Underperform rating on Etsy stock and a $50 price target.