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Shopify to lay off 10% of workforce after pandemic growth bet ‘didn’t pay off’: CEO

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Shopify, the Canadian e-commerce giant that was once the country’s most valuable company, is laying off roughly 1,000 employees as its explosive pandemic growth stalls.

Shares of Shopify sank roughly 16 per cent on the Toronto Stock Exchange on Tuesday in reaction to the news it will cut 10 per cent of its staff. By market close the company’s stock price had recovered slightly to $40.69, a decline of 13.6 per cent on the day.

CEO Tobi Lütke said in a letter to employees made public Tuesday that the company made a bet that the global retail transition to e-commerce, which picked up during the COVID-19 pandemic, would continue to accelerate.

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The Ottawa-based company, which backs digital storefronts and provides a variety of e-commerce services to its “millions” of merchants, had scaled up its workforce to meet the demand it projected, Lütke wrote.

On March 1, 2020, Shopify said it had more than 5,000 employees; as of Tuesday it said it has more than 10,000 without accounting for the layoffs. That means the company effectively doubled its headcount over the course of the pandemic.

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Shopify was the country’s most valuable publicly traded company for much of the COVID-19 pandemic. It took the crown from Royal Bank of Canada on May 6, 2020, and slipped from the top spot briefly in March 2021 before RBC reclaimed the title in January of this year as tech stocks took a beating.

“It’s now clear that bet didn’t pay off,” said Lütke, taking the blame.

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Read more: Shopify says ‘extreme’ levels of pandemic-fuelled online shopping are easing

“Now, we have to adjust. As a consequence, we have to say goodbye to some of you today and I’m deeply sorry for that,” he said.

Most of the layoffs are in recruiting, support and sales jobs, Lütke wrote, as well as eliminating over-specialized and duplicate roles.

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Shopify shares sink on layoff news

Incorrect assumptions are largely to blame for Shopify’s follies, said Neil Saunders, managing director of GlobalData, in a note to investors.

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“Put bluntly, this was a huge strategic mistake that was driven by an insufficient understanding of customer behaviour, a lack of rigour in analyzing the market, and a bit of hubris,” he said.

Analysts Colin Sebastian and Rhys Ivory-Ganja of Baird Equity Research wrote in a note to clients Tuesday that the layoffs are a “needed course correction” for Shopify, which they note was still gearing up for “aggressive” hiring plans as recently as March.

“With many investors very concerned about the original level of planned spending this year, the silver lining from the bad news today is that Shopify management should now be more focused on operating efficiency,” Sebastian and Ivory-Ganja wrote.

Shopify is one of the tech stars that has been hammered during the recent market downturns, falling from an all-time high of $222.87 back in November. (Stock prices have been adjusted following a recent 10-for-one share split.)

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Canada’s main stock index, the S&P/TSX composite index, was down 131.80 points at 18,972.69 in late-afternoon trading Tuesday as Shopify’s decline weighed on the information technology sector.

The e-commerce giant is not alone in laying off workers. Over the last few months, Wealthsimple, Klarna, Twitter and Netflix have all shed staff as investor exuberance around tech stocks has faded, inflation has soared to an almost 40-year high and recession rumours have loomed.

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Shopify has suffered from a pullback in discretionary spending on products, which make up a big portion of sales platform, the Baird analysts wrote.

Read more: Walmart cuts outlook over inflation pains, sending shockwaves through Wall Street

But they noted that the long-term outlook for the e-commerce sector remains “very bright,” and suggested that Shopify could see a boost if pandemic travel demand wanes and shifted back towards goods in the fourth quarter of the year.

The company needs to do more than cut workers, Saunders argued.

He wrote, “With Amazon ramping up its services to merchants and opening its solutions to businesses that are not part of its platform, Shopify needs to work harder to appeal to new businesses and retain those existing clients using its services.”

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Overall, Baird sees revenue growth coming in around 20 per cent in 2022, below consensus estimates in the mid-to-high 20 per cent range.

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Shopify is set to report its second-quarter earnings on Wednesday morning.

The cuts coupled with Shopify’s recent performance increases the likelihood the company will lower its outlook, when it releases its latest earnings Wednesday.

RBC Capital Markets analyst Paul Treiber told investors that he expected Shopify to revise its full-year expectations. The company previously suggested the number of merchants using Shopify’s software would be comparable to that of 2021 and that merchant solutions revenue growth would be more than twice the rate of subscription solutions revenue growth on a year-over-year basis.

Shopify employees can keep home furniture

Shopify’s layoffs, which will be effective by the end of the day Tuesday, will come with 16 weeks of severance pay plus one week per year of the employee’s tenure. Restrictions on when an employee can sell their stock in the company will also be waived and medical benefits will be extended, Lütke said.

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Shopify transitioned to a fully remote setup in the early days of the pandemic, one of the first companies to take such a step in March 2020, and kept the model permanently.

The company is taking back the “hardware” it provided to employees, Lütke said, but those affected can keep the home office furnishings Shopify had covered during that time. The company will continue to pay internet bills over the transition and provide a “kickstart allowance” to help pay for new laptops.

He also said the company will help affected employees find new jobs where possible.

— with files from The Canadian Press

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