Etsy shares climbed more than 19% Tuesday after private equity firms TPG Group Holdings Advisors, Inc. and Dragoneer Investment Group, LLC revealed significant stakes in the artisanal marketplace. The stakes were purchased “on the belief that they were undervalued,” and the firms noted in a Securities and Exchange filing dated May 4 that they had “contacted representatives of Etsy to offer to engage in discussions regarding strategic alternatives.”
On Etsy’s blog on Monday, CEO Josh Silverman responded to the 13D filing, saying the company is “reviewing our strategic and operational plans to ensure Etsy is focused on the most value-enhancing near- and long-term opportunities." Chairman Fred Wilson said the board will carefully consider all options to enhance shareholder value, following Etsy's review of its strategic and operational plans.
The moves come two weeks after Silverman replaced Chad Dickerson as CEO, which was also the day that hedge fund Black-and-White Capital, owner of 2% of Etsy’s shares, released two letters highlighting critical issues and necessary steps to address them. Cited issues included steep deceleration of gross merchandise sales growth, poor corporate governance (including the need to separate the chairman and CEO roles) and a need to “explore strategic alternatives” to maximize shareholder value — presumably including a sale.
Twelve years after its founding, two years after its initial public offering and less than two years after the launch of “Handmade at Amazon,” Etsy is faltering. Shares have slumped since its IPO, as Amazon’s rival marketplace has proven to be stiff competition.
Etsy recently posted a first quarter loss of $421,000, down from a $1.2 million profit in the year-ago period. Q1 revenue rose 18.4% to $96.9 million and Q1 operating expenses rose 36.4% to $64.3 million. Gross merchandise sales rose 14.2% (or 15.2% on a currency-neutral basis) in the quarter to $719.0 million, supported by 12.4% year-over-year growth in active sellers and 18.5% year-over-year growth in active buyers.
Earlier this month, Black-and-White Capital slammed the company for its spendthrift ways. “[M]anagement’s efforts have failed to fully capture this tremendous opportunity for growth,” Black-and-White Chief Investment Officer Seth Wunder said in a statement. “[T]he company’s historical pattern of ill-advised spending has completely obfuscated the extremely attractive underlying marketplace business model, which should produce incremental EBITDA margins of greater than 50% with low capital investment requirements.”
In response, in addition to the CEO switch, the crafts marketplace said it will eliminate about 80 positions, or approximately 8% of its workforce. In a conference call with analysts, though, executives said that marketing expenses would likely rise. “I think it's worth noting, Etsy did not do any marketing for the first eight years of its history, and traditionally when you have a marketplace vibrant enough and good enough to earn a direct traffic as the Etsy marketplace does, with the breadth and depth of really terrific inventory from great sellers like Etsy, that’s something you want to talk about,” Silverman said, according to a transcript from Seeking Alpha.
He added: “I think that quite candidly we have done some good work in the last few years to start to build those capabilities, but I'm very enthusiastic about the continued upside that we have to invest further marketing dollars and in infrastructure and capabilities to put those marketing dollars to work at very high ROI.”
In any case, pressure on Etsy has only been dialed up, and a review is under way. "We will prudently invest in areas that will deliver the greatest returns," Silverman said Monday. "At the same time, we see significant opportunities to scale our marketplace business model and drive efficiencies. In everything we do, we will strive for operational excellence and focused execution. I am encouraged by what I have seen and heard from our employees, sellers, buyers and shareholders. I'm excited to build on Etsy's solid foundation while increasing our focus on areas where we can do better. We look forward to providing additional details when our review is completed."