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Etsy forecasts downbeat first quarter on sluggish discretionary demand

A sign advertising the online seller Etsy Inc. is seen outside the Nasdaq market site in Times Square following Etsy's IPO in New York

(Reuters) - Etsy Inc on Wednesday warned of a fall in first-quarter gross merchandise sales (GMS) on weak demand for handcrafted goods and personalized gifts sold at its online marketplace.

Shares of Etsy declined about 4% in extended trade, as the company also reported fourth-quarter GMS that missed market expectations.

Crimped disposable incomes in the United States have forced consumers to avoid shopping for non-essential goods sold at Etsy's two-sided marketplace.

Etsy expects first quarter GMS to decline in the low-single digit to mid-single digit range as consumer discretionary spending remains strained.

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For the fourth quarter ended Dec. 31, Etsy's consolidated gross merchandise sales – a key metric to measure sales on its online platform – fell 0.7% to $4 billion. Analysts expected a rise of 1.3% to $4.09 billion, according to LSEG data.

Retailers have also banked on deeper discounts and promotions to appeal to bargain-hunting customers, further increasing competition for Etsy, and putting sellers at its two-sided marketplace at a disadvantage.

In response, Etsy has been working towards aiding its sellers on marketing, and has also been investing in testing promotions across its site to attract more buyers.

However, this took a toll on the company's margins in the fourth quarter, which fell 370 basis points to 9.9%. In the prior quarter, it reported net income margin of 13.8%.

The company has banked on cost reduction initiatives, including a recent plan to cut its workforce, to help ease the hit from soft demand for crafts supplies and home decor items, which has lagged a pandemic boom.

Its holiday-quarter revenue rose 4.3% to $842.3 million and beat analysts' expectations of $827.8 million, with the company saying that GMS rose 4% year-over-year in the key Cyber Week shopping period last year.

Rachel Wolff, an analyst at Insider Intelligence, said the "mixed" results suggested that Etsy was struggling to keep pace with larger ecommerce players while tackling "strong competition" from low-cost competitors like Temu.

(Reporting by Juveria Tabassum; Editing by Shailesh Kuber)