PayPal is gaining from brick-and-mortar weakness

In its fourth-quarter 2016 earnings report released on Jan. 26, payments platform PayPal Holdings Inc. (NASDAQ: PYPL) rounded out the year by exhibiting sustained growth over a broad variety of key metrics. Let's review those metrics, as well as the outlook for the coming year, after we run through financial highlights from the quarter directly below.

PayPal: The raw numbers

MetricQ4 2016 ActualQ4 2015 ActualYear-Over-Year Change
Revenue$2.98 billion$2.56 billion16.4%
Net income from continuing operations$390 million$367 million6.3%
Diluted earnings per share$0.32$0.306.7%

Data source: PayPal Holdings Inc.

What happened with PayPal this quarter?

  • The company continued its streak of double-digit revenue improvement versus the prior year in each quarter since going public in July 2015. The 16.4% increase in the fourth quarter of 2016 is a bit off the pace of the third quarter's 18% revenue gain, however.
  • Total payment volume (TPV), which measures the total dollar volume of payments PayPal facilitates, grew 22% over the comparable quarter, to $99 billion.

  • In comparison to the fourth quarter of 2015, active customer accounts rose 10% to 197 million. The company reached 31 payment transactions per active account, a leap of 13% versus the prior-year quarter.

  • PayPal continues to derive the majority of its revenue from the merchant side of its business. Merchant services TPV grew at a rate of 27%, and accounted for 84% of overall TPV.
  • Mobile payments also maintained an extremely strong trend, with total volume of $31 billion representing a 53% expansion over the comparable prior year quarter. Nearly a third of all PayPal's transaction volume occurred over mobile devices during the quarter.

  • Social payments app Venmo, which enables money transfers between friends as well as group payments for retail items and services, increased TPV by 126%, to $5.6 billion.

  • Operating income declined by roughly 70 basis points to 15.4%, driven by volume processed through the company's rapidly expanding Braintree subsidiary, which carries a slightly higher transaction expense than the overall company.

  • The organization continued to generate handsome cash flow. For the quarter, PayPal produced $923 million of operating cash flow. For the full year, it booked $3.2 billion in operating cash flow (in relation to $10.8 billion in revenue).
  • During the fourth quarter, PayPal continued its strategy of embedding itself across industry payment options and announced payment partnerships with Citibank and Fidelity National Information Services. In its earnings press release, the company also highlighted its January 2017 agreement with Discover Financial Services, which will enable PayPal's customers to more easily locate and utilize Discover as a funding option within PayPal's digital wallet.

What management had to say

Those who own or follow retail stocks are probably aware that mall-based retailers and some prominent big-box stores endured an extremely disappointing holiday season in the last quarter of calendar 2016. PayPal CEO Dan Schulman tied the flagging fortunes of this group to PayPal's success during its earnings conference call last week:

Our growth in Q4 came from across our global platform and we benefited from a notable shift in consumer behavior. Holiday shoppers increasingly bought gifts online and with their mobile devices through convenient omni-channel shopping experiences. For PayPal, this helped drive a 25% increase in payment volume, resulting in $99.3 billion of payment volume in the quarter.

According to Internet Retailer, Black Friday 2016 was the largest mobile shopping day in history. Between Thanksgiving and Cyber Monday, PayPal processed more than $2 billion in mobile payments.

That's $2 billion in volume over just five days. With ever-expanding mobile volume and a push to be ubiquitous as a payment option, PayPal's management believes that the company is in a unique position to capitalize on the deterioration of traffic in retailers' physical spaces.

RELATED: 9 retailers that bombed in 2016:

9 retailers that bombed in 2016
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9 retailers that bombed in 2016

J. Crew

The apparel retailer has had a difficult few years

J. Crew announced in November that sales at stores open at least a year dropped 8%, following a decrease of 11% in the same period last year.

Now, the company is attempting to change things up. In November, the retailer axed its popular bridal line. A month earlier, J. Crew launched an athleisure line with New Balance — a collection that Business Insider felt failed to live up to competitors' standards. 


Sears' sales continued to plunge in 2016. In the most recent quarter, revenue fell 13% to $5 billion, with losses widening to $748 million from $454 million in the third quarter last year.

The retailer is closing hundreds of stores, with more than 170 Sears and Kmart locations shuttering this year. 

And, things are only getting worse — many analysts say 2017 is likely the year that Sears goes bankrupt.


In August, Macy's revealed plans to close down 100 stores in early 2017 as the retailer looks for a solution to slowing sales and the growth of online competitors. 

In November, the retailer reported that net income for the third quarter fell by 87% to $15 million, following a 46% decline over the same period last year. Same-store sales at stores open at least a year fell 3.3%.

"These figures show a company grappling with what looks like terminal decline," Neil Saunders, CEO of the consulting firm Conlumino, wrote in a note to clients.

Hugo Boss

Huge Boss simply isn't cool any more. 

In a UBS report released in Decemberonly 20% of people surveyed said that Hugo Boss was a cool and fashionable brand, compared to nearly 40% a year ago.

Being off-trend is seriously impacting sales. In November, the company adjusted its sales prediction for 2016, saying sales could decline up to 3% in the year. 


The handbag maker stopped selling merch at more than 250 department stores in 2016 in an effort to regain its premium, luxury status.

However, the move hasn't paid off yet — in November, when reporting the company's the most recent quarter, Coach said it had its slowest growth in four quarters.

Nasty Gal

A decade after it was founded by then 22-year-old Sophia Amoruso in 2006, Nasty Gal filed for bankruptcy in November. 

"Filing for bankruptcy is actually the most responsible decision for the business," Amoruso said at an event in Sydney, Australia when the news broke, the Independent reported.

The trendy fashion retailer had been through some tumultuous times in recent years. Amoruso stepped down as CEO in 2015. In her absence, the retailer laid off employees and former workers complained of a toxic environment.

It looks like Nasty Gal could get a fresh start in 2017. On Wednesday, British online fast-fashion retailer announced it was bidding $20 million for Nasty Gal's brand and customer list. 

Lands' End

In December, Lands' End reported a 14.3% drop in same-store sales in the third quarter, with a 49% drop in apparel sales. That marked the ninth consecutive quarter of declining sales for the company. 

To make matters worse, Lands' End has also been dealing with problems in its executive suite.

In September, Federica Marchionni left her position as CEO. According to the Wall Street Journal, her departure was triggered by employees' disagreements with Marchionni's more high-fashion approach to the brand as well as the limited time she spent in the office — just one week every month. 


As teens' interest in the brand waned, Aeropostale filed for Chapter 11 bankruptcy in May.

After declaring bankruptcy, the retailer announced it would close 154 stores in the US and Canada. 

"Back in the day, all of the cool kids had trendy brand names plastered across the front (or back) of their clothing. The trend has changed, and style today, perhaps encouraged by social media, embraces individualism and uniqueness," wrote Nicholas Rossolillo in finance publication The Motley Fool. "Online ordering and heavy discounting have also taken a toll on the industry, especially mall-based retailers. Aeropostale simply hasn't been able to adapt."

Kate Spade

Kate Spade's sales have suffered in 2016 as tourists' visits declined and discounting grew more popular, making it harder to sell items at full-price. 

Now, the company is reportedly working with investment banks on a possible sale, the Wall Street Journal reported Wednesday.

The news comes six weeks after New York-based hedge fund Caerus Investors sent a letter to Kate Spade pushing the retailer's board to consider a sale.

"We have become increasingly frustrated by management's inability to achieve profit margins comparable to industry peers," Caerus' founder, Ward Davis, and managing partner, Brian Agnew, wrote.


Moving forward

Alongside earnings, management provided full-year 2017 guidance, projecting a revenue improvement of 15%-17%, which in dollar terms equals a range of between $12.45 billion to $12.65 billion. Management expects diluted earnings per share in 2017 to land between $1.26-$1.31, which implies an increase of 9.5%-13.9%.

A chart provided in the company's fourth-quarter 2016 investor presentation indicates how PayPal has room to achieve both its top-and-bottom-line objectives for the current year:

Chart showing 2016 financial highlights.

Image source: PayPal Holdings Q4 2016 investor presentation. Annotations in green by author.

As shown in the two places I've circled in green, PayPal grew its total payments volume at a pace that was several percentage points higher than recorded revenue in 2016. This implies that revenue still has the potential to accelerate. It also bodes well for the near term: For now, PayPal's share of the market is spreading at an admirable clip, one that's almost too fast for recorded revenue to keep up with.

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