Black Friday through Cyber Monday: Festive Finance Showdown!

The excitement of Black Friday is not just about snagging incredible deals; it also ushers in a lesser-known challenge: rising bad debts.

As shoppers eagerly take advantage of significant discounts from Thanksgiving to the end of the weekend, at major outlets like Amazon and Walmart, it's vital to reflect on the wider implications.

Have you considered how this intense period of shopping affects the retail and fintech industries? Our comprehensive article takes a deep dive into the key financial metrics of both traditional retailers and Buy-Now-Pay-Later (BNPL) fintech entities.

The insights are quite revealing, especially for BNPL companies, which tend to encounter a significant increase in bad debts during the festive season. Embark with us on a detailed exploration of the ‘Festive Finance Showdown’ spanning from the holiday season quarter!

Amazon’s cash assets jumped 50% during the festive season

Amazon reported its biggest Thanksgiving sales last year (2022). Independent retailers selling on Amazon.com saw total sales topping $1 billion across the 4-day shopping extravaganza.

But how do cash, payable figures, and Amazon’s provision for receivable look post Black Friday and Cyber Monday? We looked at quarter-over-quarter results to find out.

Spike in cash assets: Amazon sees a spike in its cash assets in the December quarter owing to the holiday season sales. In 2022, its Q4 cash assets were $68.2 billion, almost 50% greater than the average of the previous three quarters.

According to Amazon’s annual report:

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Increase in accounts payable and DPO: Amazon sees an increase in its accounts payable due to higher inventory purchases made during the quarter to meet holiday sales demand.

The higher third-party seller sales volume during this season further drives up the payables. Amazon’s accounts payables numbers in both Q4 2022 and Q4 2021 were almost 15% higher than in the other quarters of the respective years.

Owing to the busy season, the settling of supplier accounts also gets delayed. Days Payable Outstanding (the number of days taken to pay suppliers) is around 10 days longer than otherwise.

Increase in accounts receivable and DSO: The holiday sales also result in a small jump in the accounts receivable and Days Sales Outstanding for e-commerce players. For Amazon, the accounts receivable in the last quarter (ending December 31) is almost 23% greater than the average of the rest of the quarters.

Its DSO is also 3-5 days higher in Q4 compared to the other quarters.

Black Friday AR Metrics for brick and mortar retail giants

We also looked at the QoQ AR metrics for some of the top brick-and-mortar retail players (Walmart, Target, and Costco).

We expected to see results similar to those of Amazon’s Black Friday sales numbers but we were pleasantly surprised. There were many differences between the QoQ metrics for Amazon and the retail giants.

Cash and cash equivalents There was no significant jump or pattern observed in the cash and cash equivalents growth/decline for the brick-and-mortar firms. This could be because all three of the retail players we looked at had their quarter close in January/February, providing a longer time to settle the holiday sales accounts.

Accounts payables & DPO: The accounts payable for brick-and-mortar retail firms like Walmart and Target were the highest in the July – October quarter, or the quarter just preceding the holiday sales.

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The Days Payable Outstanding (DPO) was also highest for the retailers in this quarter (Jul – Oct). The longer DPO and higher AP figures could likely be due to the big retailers gearing up for the holiday season sales and stocking up inventory.

Accounts receivables & DSO: While no drastic ups and downs in accounts receivable figures could be observed in the last quarter compared to the previous ones, the DSO was longer for the quarters ending in December/January compared to the rest. This is also in line with the general trend for the retail industry where DSO spikes in December.

The longer time needed to collect the huge volume of sales made on credit during the festive season could be a likely factor contributing to the higher DSO.

BNPL firms feel the heat after festive season sales

8% – 10% of all Black Friday shoppers used the Buy Now Pay Later (BNPL) payment option to complete their purchases in 2022, up from 6% – 8% in 2021.

In this method, the buyers do not pay the full sales amount upfront. Instead, they pay it as equal installments spread across 4 weeks, 6 weeks, 6 months, or a year.

While several articles out there warn customers not to take on excessive debt or buy beyond their means during the festive season, are BNPL firms able to collect back all their receivables?

We looked at the AR numbers for three leading BNPL firms – Affirm, Zip Co, and Sezzle, and discovered some interesting trends.

Higher revenues in the holiday sales quarter

Last year (2022), BNPL firms had a major jump in online sales (68%) during the week of Black Friday (Nov 21 to Nov 27) compared to the previous week, according to Adobe Analytics.

Our analysis of the three major BNPL firms shows that 2022 revenue in the quarter covering Black Friday is almost 13% higher than the average revenue reported in the other quarters of the year.

Thanks to better economic conditions, the revenue in the 2021 Black Friday quarter was 46% higher compared to other quarters.

BNPL transaction volumes surge despite market slowdown

Transaction volumes are an indicator of the strength of your customer base and market conditions.

On average the transaction values for these three BNPL firms in the quarter of Oct-Dec 2022 increased by 10% – 35% compared to the average of the other three quarters in the year.

The trend has been similar for 2021 as well. The percentage jump reported in 2021 was higher than that of 2022.

Increase in receivables in the holiday season quarter

Similar to transaction volumes, BNPL firms also see a spike in their accounts receivables during the holiday quarter.

Affirm and Zip Co saw their receivables in the 2022 quarter covering Black Friday increase by 10% – 40% compared to the average of the other three quarters. In 2021, all three firms saw their receivables value increase by 13% – 25% compared to the other three quarters.

This isn’t surprising since a direct correlation between transaction volumes and receivables is expected.

Bad debt is a major worry for BNPL firms

Bad debt is turning out to be a major headache for BNPL firms.

Delinquency rates for BNPL firms were higher than those for credit card companies, mainly because financially vulnerable households were nearly 4X more likely to avail BNPL schemes.

While all the firms do not report the ‘bad debt’ numbers, we noticed that the provision for uncollectible accounts spikes during the quarter when Black Friday sales take place.

Considering that most BNPL firms service loans that range from 4-6 weeks, we can convincingly say that a good portion of the receivables do turn delinquent during the quarter.

At Sezzle, the provision for uncollectible accounts increased by a whopping 267% in the Black Friday quarter compared to the other quarters in 2022. In 2021, the same figure was 333%.

For Affirm, the provision for uncollectible accounts increased by 57% in the Black Friday quarter compared to the average of the other quarters in 2022. Affirm also waived interest receivables to the tune of $4.8 million in the 2022 Oct-Dec quarter, 39% higher than the average of the other three quarters.

Conclusion: Tighter credit risk management is the need of the hour

While the holiday season brings ‘cash’ cheer to some, others scramble to collect receivables.

BNPL firms need to tighten their credit checks to reduce bad debt risk, especially during the holiday season sales. Else, the increase in bad debt would negatively affect their revenue, share prices, and valuation.

On the other hand, retail giants face supply chain pressures and predatory pricing challenges during Black Friday sales. Amazon seems to be ahead in the race with superior cash flow and AR metrics. As the online sales market continues to grow, this lead is only likely to be widened unless the competition ups its e-commercegame.