Etsy (ETSY -0.97%) reported stellar third-quarter results after the bell on Nov. 3. Sales of $532.4 million and diluted earnings per share of $0.62 both crushed Wall Street's estimates, and the stock price popped more than 15% during the following trading day.
The business is finding ways to continue its strong momentum following the remarkable triple-digit percentage revenue gains experienced as a result of the pandemic. The upcoming holiday season will provide a near-term tailwind for customer demand.
Etsy is making all the right moves to be fully prepared for what has historically been its most important quarter of the year. Like a kid on Christmas morning, shareholders have a lot to be excited about.
Virtual Santa Claus
Management wants Etsy to be a top shopping destination this holiday season, and they've been encouraging buyers to start looking for gifts earlier than last year with an Early Holiday Sales Event that offers discounts of up to 20% off. The company is also utilizing targeted marketing initiatives, including a new TV and digital video Give More Than Gift campaign, to drum up interest for the critical fourth quarter.
Etsy's nearly 96 million active buyers will get help finding what they're looking for with a new gift finder tool. "It's a fun and interactive way for us to help you find surprising and delightful gifts tailored exactly to the interest and taste of the recipient," CEO Joshua Silverman said on the Q3 earnings call. With almost 100 million items on the site, the need for this has never been more obvious.
In the month of October, keyword searches that contained holiday terms almost doubled year over year. A big part of this was Halloween-themed décor and apparel. It's very likely that gross merchandise sales (GMS) per active buyer, which increased by 20% compared to the prior-year period to $132, will tick higher in the fourth quarter.
Looking ahead, the leadership team cites external forecasts for strong holiday spending, as well as the continued penetration of e-commerce, as positive indicators.
Uniqueness as a competitive strength
Unlike many retail businesses, Etsy doesn't own any inventory itself. It's simply a platform that connects buyers and sellers across the globe. Because of this favorable situation, the supply chain problems facing many other companies aren't really a factor. Indeed, 88% of buyers claim that Etsy has items they can't find anywhere else, so they are willing to wait for what they deem to be a one-of-a-kind product.
But to improve the shopping experience, Etsy has reduced the number of late deliveries in the U.S. by 50% since the start of 2021. And in order to provide more transparency to its buyers, 95% of domestic product listings show an expected delivery date at the time of purchase, up meaningfully from earlier in the year.
It's amazing to me that Etsy has been so successful thus far by not even setting an estimated delivery time on a large portion of its merchandise. Giving users more clarity as to when they'll receive an item should certainly drive higher conversion on the site.
Management is expecting sales of $675 million (at the midpoint) and GMS of $4 billion (at the midpoint) for the current three-month period, which would both be double-digit year-over-year gains. "In fact, our guidance implies that the fourth quarter will be our best GMS quarter ever," Silverman said. Etsy is clearly ready to handle the surge in shopping on its marketplace this holiday season.
With a stock price that has appreciated 45% this year, Christmas has come early for investors.