One week ago, shares of buy now, pay later company Affirm were soaring in the wake of a press conference from Fed Chair Powell that fueled optimism that interest rates won’t rise as quickly as feared. Those gains have since been wiped out and today the stock is getting hammered following a dismal 2Q23 earnings report that illustrated just how impactful interest rates can be on its business. 

• The headline numbers were weak across the board with AFRM missing top and bottom-line expectations, while Gross Merchandise Volume (GMV) of $5.7 bln fell short of the company’s forecast of $5.73-$5.83 bln.
• On a growth basis, the 27% yr/yr increase in GMV was by far AFRM’s weakest showing as a public company, reflecting a deceleration in loan demand due to rising rates and softening sales for discretionary goods.
• In particular, AFRM called out the electronics, home and lifestyle, and sporting goods categories as notable laggards. It’s worth noting that beleaguered connected fitness company Peloton is a still a significant partner of AFRM’s and its troubles continue to weigh on its results. In Q2, the sporting goods category plunged by nearly 50% for AFRM, primarily because of PTON’s ongoing struggles.

However, AFRM’s issues extend well beyond the slumping sales at PTON.

• In fact, CEO Max Levin took some responsibility for the company’s disappointing results, stating that a key operational misstep contributed to the poor earnings report. Specifically, he said that the company was too late with increasing prices for its merchants and customers, which prevented it from mitigating the impact of higher benchmark interest rates — which increase the company’s borrowing costs.
• Consequently, AFRM’s ability to approve loans, and its ability to protect its margins, was negatively affected. For the quarter, adjusted operating margin came in at (15.5%) compared to (2.2%) in the prior quarter.
• Echoing the recent statements from GOOGLE CEO Sundar Pichai, Mr. Levin also conceded that AFRM got ahead of itself with its hiring, anticipating a stronger economy that would support higher growth for the company. Now, like GOOG, the company is right sizing its workforce by implementing a significant round of layoffs (19% of its workforce) to better align its cost structure with the slowing growth environment.
• Investors aren’t cheering this cost-cutting move, though, because AFRM’s guidance — especially for Q3 — is so weak. For the quarter, the company is forecasting GMV growth to slow further to just 14%, while Revenue Less Transaction Costs is projected to decrease by 20% to about $145 mln. The pricing initiatives that AFRM took later in the year will begin to pay off eventually, but it will take some time to see those dividends.

On the positive side, AFRM’s credit quality remains healthy, even as macroeconomic pressures mount. Delinquencies were inline or better than comparable periods in pre-pandemic years, and that encouraging trend continued through January. Securing funding also hasn’t been an issue as it ended January with $11.3 bln in available funding capacity — a new record high for the company. Outside of these two positives, though, good news was hard to find within this earnings report.