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Shopify stock sinks amid layoff plan as CEO admits, ‘I got this wrong’

At the height of the COVID-19 crisis, many companies tethered to online spending predicted that the pandemic would permanently alter the trajectory of e-commerce growth for the better as people built new shopping habits online.

Now Shopify Inc. SHOP, -15.55% has become the latest to admit that its projections may have gotten out of hand.

The e-commerce company announced Tuesday that it plans to lay off about 10% of its staff as it adjusts to the evolving landscape. Chief Executive Tobi Lütke said in a blog post that Shopify would notify employees Tuesday and that it expected the layoffs to mainly impact the recruiting, support, and sales teams, though the impacts would be felt across the company as Shopify targets “over-specialized and duplicate roles, as well as some groups that were convenient to have but too far removed from building products.”

Shares were plunging 15% in Tuesday morning trading.

Lütke explained that Shopify “has always been a company that makes the big strategic bets our merchants demand of us,” and that, as the pandemic accelerated e-commerce habits, the company “bet that the channel mix — the share of dollars that travel through e-commerce rather than physical retail — would permanently leap ahead by 5 or even 10 years.”

Now, Shopify sees that the mix of e-commerce spending is getting back to about where it would have been expected using pre-COVID projections. “It’s now clear that bet didn’t pay off,” Lütke said. “Ultimately, placing this bet was my call to make and I got this wrong. Now, we have to adjust.”

The e-commerce mix is “[s]till growing steadily, but it wasn’t a meaningful five-year leap ahead,” he continued.

Shopify plans to offer affected employees 16 weeks of severance pay plus an additional week of pay for each year that they had been at the company.

The layoffs mark “a significant change in direction for a company that was still guiding to ‘aggressive’ hiring plans as recently as early May,” wrote Baird analyst Colin Sebastian, though he saw the move as “needed.”

“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 continued.

Shares of Shopify have lost 80% over the past 12 months as the S&P 500 SPX, -0.68% has fallen 11%.

The company is scheduled to report second-quarter results Wednesday morning. Fellow e-commerce player Amazon.com Inc. AMZN, -3.52% is on the docket for Thursday afternoon.

PayPal Holdings Inc. PYPL, -5.24%, another company tied to e-commerce, will be another earnings name worth watching when the company posts its own results next Tuesday. PayPal brought down its pandemic-era growth expectations earlier this year.

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