Etsy (ETSY, Financial) saw its shares drop 8% after reporting a Q4 revenue miss and offering cautious forward-looking statements. The company anticipates a continued decline in Q1 consolidated gross merchandise sales (GMS) similar to the 6.8% year-over-year drop seen in Q4. Investors remain frustrated as Etsy has not shown year-over-year improvement since Q3 2023, with declines worsening.

Etsy's struggles stem from consumers favoring low prices and fast delivery, benefiting giants like Amazon (AMZN, Financial) and Walmart (WMT, Financial). Unlike its peer eBay (EBAY, Financial), Etsy faces challenges due to its focus on discretionary products such as handmade and vintage goods. eBay, on the other hand, thrives with categories like trading cards and consumer electronics. Inflationary pressures have led consumers to prioritize essentials over Etsy's offerings.

• Etsy is shifting focus from immediate consumer conversion to enhancing customer experience, aiming to make its app a discovery hub. This strategy has impacted GMS, with an estimated opportunity cost of several hundred million dollars in FY24. Management believes this is crucial for long-term growth.
• The transformation began last year with Etsy highlighting its 100 million unique goods and improving its search algorithms with quality indicators like positive reviews and on-time shipping. This incentivizes sellers to improve customer experiences.
• Etsy is also enhancing its gifting options, a core aspect of its platform. In 2025, the company plans to emphasize key gifting moments to boost engagement, alongside increased marketing efforts and a strengthened loyalty program offering free shipping.
• Despite these efforts, Etsy's Q4 revenue was $852.16 million, a modest 1.2% year-over-year increase. Adjusted EPS rose significantly to $1.03, surpassing analyst estimates for the first time since Q2 2023, but it wasn't enough to offset weak demand dynamics.

Etsy faces a challenging transition year in 2025 as it navigates consumer preferences for affordable, fast-delivered goods. The company must stabilize its declining GMS growth and achieve significant improvements in the coming quarters to regain investor confidence and boost its stock performance.