Affirm Sees ‘Tepid’ Demand for Discretionary Goods

Affirm Holdings’ latest quarterly results showed double-digit gains in gross merchandise value (GMV), but a pullback in consumer spending in some categories and higher funding costs weighed on shares.

The quarterly shareholder letter from the buy now, pay later (BNPL) provider shows that in the fiscal third quarter, consumer demand for service and experience-related categories such as travel and ticketing was, as the categories grew by 62% year-over-year.

Direct-to-consumer products collectively delivered 24% year-over-year GMV growth.

But as management noted in the letter, there was “tepid consumer demand in several discretionary goods categories.”

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The consumer electronics category declined 8% year over year. The home/lifestyle category also declined 10% year over year, whereas it had grown 2% year over year in the fiscal second quarter.

The sporting goods and outdoors category was down 48% year over year, largely due to ongoing declines in Peloton-related GMV.

Revenue was up 7% year over year, or up 15% excluding Peloton to $381 million.

Active merchant count grew 19% year over year to 246,000 merchants overall, and merchants with greater than $1,000 in trailing 12-month GMV grew 29% year over year to 92,000.

During the conference call with analysts, Max Levchin, CEO, said noted that amid the rollout of Debit+ that “We delivered Debit+ into the main Affirm app, and while it’s still quite early, we continue seeing strong signals of consumer demand.”

Debit+ user transaction frequency after 90 days from activation is about seven times that of a “regular” Affirm user, he told analysts.

Michael Linford, CFO, said that revenues were driven “in large part by our outperformance in credit. That resulted in a pretty large beat ahead of our expectations in the provision for losses.”  Revenue less transaction costs was $167 million, down 9% year over year,

Management said that the banking sector in the last several months has pushed funding costs higher — an environment that will remain in place in the current fiscal fourth quarter.

The 30-plus-day delinquency rate for monthly installment loans, ex-Peloton, improved sequentially to 2.5% at the end of March from 2.7% at the end of December.  Investors sent the stock down 7% in extended trading.

“We’re proud of the credit results in the business and given the very short duration of our asset, the real-time performance of the portfolio drives the allowance calculation for Affirm,” Linford said.  “So what we’re not doing is, making estimates of where the economy will be in a year and building balances for that.”

Later on in the call, Levchin said that 88% of Affirm’s transactions come from repeat consumers. Levchin also noted on the call that the company is partnering with FICO “to build a first of its kind credit scoring model that would enable buy now, pay later loans to be consistently transparently factored into credit and lending decisions.”

And when asked about consumer spending, Linford noted that “as you get to Q3 of next fiscal year, when we get to about nine months from now, you will begin to lap easier comps. And so we’re optimistic that by the time we get there, some of those businesses will return to some solid growth. But for now, the headwinds there continue.”