Etsy Inc on 2 August forecast third-quarter revenue below market expectations, signalling softening in demand for handcrafted goods at its online marketplace, sending its shares down 6% in after-hours share trading.

A rise in prices of essential goods has forced consumers to cut back on spending on discretionary items, which include higher-margin home furnishing goods and personalised products and gifts sold on Etsy's marketplace.

This has taken the sheen off Etsy's gains during the Covid era, when consumers with disposable income splurged on decor and other discretionary products. The company's consolidated gross merchandise sales fell 0.6% to $3.01 billion in the second quarter ended June 30.

"Consumers continue to make very tough choices on where and how to spend their money, and we're fighting hard to help our sellers get their share," Etsy CEO Joshua Silverman said on a call with investors.

The company also said the return of student loan payment in the fall in the United States and dwindling savings for consumers might further curtail discretionary spending and weigh on sales for Etsy.

The company's quarterly revenue of $628.9 million beat Street expectations of $619.1 million, benefiting from a near 21% rise in services revenue on gains from advertising.

The company expects revenue for the third quarter at between $610 million and $645 million, while analysts were expecting $632.4 million, as per Refinitiv data.

In response to complaints from some sellers in the UK over the company's policy of retention of amounts from sales, Etsy said that it is reducing the percentage of funds held in reserve at least by half for "a vast majority" of such sellers.

It added that only a small percentage of sellers have a reserve on their account, which is in place to protect both buyers and sellers against fraudulent activity.