Shopify Inc. (NYSE: SHOP), a burgeoning competitor to Amazon, is selling the two largest elements of its fulfillment network and relinquishing its logistics ambitions. In addition, the company is laying off around 20% of its global workforce.
Shopify also published first-quarter numbers on Thursday, revealing that the company’s bottom line is still struggling. Shopify reported an operational loss of $193 million, or a loss of $31 million on an adjusted basis, compared to a year earlier when the operating loss was $98 million, or operating income of $32 million on an adjusted basis. Revenue increased by 25% to $1.5 billion.
“Shopify’s strong first quarter results demonstrate once again that we’re the go-to solution powering businesses of all sizes, on every surface where they sell. The changes we’re announcing today will ensure we keep pace with the high velocity of change before us, delivering the cutting-edge solutions our customers have come to expect from Shopify,” said Shopify’s President, Harley Finkelstein.
The company’s shares spiked 25% when the markets opened on Thursday.
Deliverr delivered to Flexport; 20% layoffs
According to the firm, the majority of Shopify’s fulfillment assets will be acquired by logistics provider Flexport in an all-stock transaction that also includes the acquisition of the shipping service company Deliverr. Deliverr was purchased by Shopify last year for $2.1 billion.
In exchange, Shopify will earn a 13% share in Flexport, raising its overall ownership in the privately held company to the high teens, according to the company. Flexport will become Shopify’s official logistics partner, providing ecommerce tools to businesses. It will also purchase the warehouses of Shopify.
Flexport, which was last valued at $8 billion, declined to provide additional financial information. Analysts believe its valuation has likely fallen in recent months due to the difficult investment climate.
Even if the company was still worth $8 billion, Shopify is selling the assets at a loss, given the $2.1 billion it paid for Deliverr alone last year. According to the previous valuation, the e-commerce company would get approximately $1 billion in Flexport stock.
In a blog post on Thursday, the company revealed that it will lay off nearly 20% of its workers, the second large layoff in less than a year. Those affected will receive 16 weeks of severance compensation and medical benefits, according to the business.
Shopify informed employees of the layoffs in a memo from CEO Tobias Lutke on Thursday morning, ahead of the company’s quarterly results announcement.
“This is a consequential and hard week. It’s the right thing for Shopify but it negatively affects many team members who we admire and love working with,” Lutke said in the memo.
He described the employment layoffs and Flexport’s acquisition of Shopify’s logistics business as a return to the company’s original objective, which it began nearly two decades ago.
“The main quest of the company is its mission, the reason for the company to exist. Side quests are everything else. Side quests are always distracting because the company has to split focus,” Lutke said.
Shopify cut 10% of its personnel last year and reportedly laid off hundreds of other employees before and after the announcement.
“There’s no way to make this good news, but we designed a package that will attempt to make it the best possible version of a bad day,” Luke said of the announcement.
The business adjustments are also a notable reversal following the Canadian firm’s multiyear push to create its own warehouse and delivery services. However, investors cheered the company’s decision to focus more on its retail business on Thursday, sending its shares up as much as 17% in premarket trading.
On Thursday, the British grocery-tech business Ocado Group announced the acquisition of 6 River Systems, or 6RS, a major part of the Shopify network. Deliverr, 6RS, and the SFN App, which allows merchants to track shipments, make up Shopify’s logistics network.
The selloffs occur as the company seeks to reduce costs in the face of a post-pandemic downturn in internet shopping and high inflation. The moves will also allow it to discharge workers acquired through the transactions.
“Fundamentally, this lets Shopify get back to what we do better than anyone on the planet, which is the retail side of the business,” Finkelstein said.
Shopify said it will record a charge for job severances in the region of $140-$150 million in the second quarter.
Information for this briefing was found via Sedar, The Globe And Mail, The Economic Times, and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.