The problems facing ETSY were multi-faceted. First, some of the company' key operating metrics were decelerating, including Gross Merchandise Sales and active sellers. In other words, when ETSY went public on in April 2015, it had already reached its peak in terms of growth rates -- which is not uncommon for IPOs. Secondly, competition was ramping up as Amazon (AMZN) launched its own homegoods category. Consequently, ETSY had to bolster its marketing spend in order to protect its market share, which cut into margins and profitability. And lastly, unfavorable foreign exchange rates were providing a headwind as the company continued to expand internationally.
All of the above created a recipe for under-performance as it related to quarterly expectations. As the stock crated lower as a result, it didn't necessarily come as a surprise that in the spring of last year rumors began to swirl that ETSY may be a takeover target. Activist investors, such as TPG Group Holdings, honed in on the company and pushed for ETSY to find a willing suitor. These reports sparked some interest in the stock as investors anticipated that ETSY may be acquired in the coming weeks or months.
Of course, those acquisition rumors never panned out. However, in late June 2017, management provided an update on the company and announced that it would be implementing a turnaround plan. This plan included cutting its workforce by 15%, enhancing its search & discovering functions on the site, and maximizing the effectiveness on its marketing spend.
ETSY's renewed focus appeared to have immediate results as its first quarterly report since that announcement showed marked improvement. After missing EPS expectations in the prior two quarters, ETSY posted a profit of $0.10, beating consensus by $0.06, with revenue up 19% to $101.7 million, also edging out the $101.1 million estimate.
The company followed that Q2 report up with an even stronger Q3 report as EPS came in at $0.21 compared to ($0.02) in the year ago period. This also blew out the $0.08 Capital IQ consensus. And revenue growth again ticked higher to 21.5% as it generated $106.4 million in sales, beating the $105 million expectation. This quarter essentially confirmed that management's efforts in improving the shopping experience, adding new product categories and features, and enhancing marketing effectiveness were taking hold. As a result of the back-to-back strong quarters, shares of ETSY began to pick up notable steam, which continued into January of this year when the stock began to pull back.
Likely fearing that the stock had gotten ahead of itself, the stock sank by nearly 10% in January. But, as its Q4 report approached, investors began to position themselves for another impressive report and ETSY did not disappoint. Specifically, it generated EPS of $0.36, a vast improvement over the ($0.04) seen a year ago, and well ahead of the $0.13 Capital IQ consensus. In fact, that $0.23 beat was its strongest beat as a public company.
Meanwhile, on the topline, revenue growth once again accelerated, this time to 23.6%. Revenue of $136.3 million also was easily ahead of the $132.5 million consensus. For the first time, GMS hit the $1.0 billion mark, and was up 18% year/year. This growth was supported by an 11% pick-up in active sellers (1.9 mln) and a 17% boost in active buyers (33.4 mln). Furthermore, two if ETSY's core growth drivers continued to move in the right direction as International GMS accounted for 33% of the total compared to 30% in the year ago quarter, and the percent of mobile-generated GMS also grew to 52% versus 49%.
So, to wrap up, ETSY's improbable turnaround continues on, and is hitting a new gear altogether as shares approach its IPO opening price ($31) for the first time in years. The company, once thought of as "left-for-dead", has scraped itself off the mat, and ETSY's management deserves much credit for executing a challenging turnaround.