Shopify stock soars as it abandons logistics strategy, cuts deeper into workforce

The e-commerce stock soared as much as 27 per cent in trading Thursday

The logo of Shopify is seen outside its headquarters in Ottawa, Ontario, Canada, September 28, 2018. REUTERS/Chris Wattie
Shopify is laying off 20 per cent of its staff and will sell its logistics business as the company aims to focus on its e-commerce platform. (REUTERS/Chris Wattie)

Shopify (SHOP.TO)(SHOP) is laying off 20 per cent of its staff and will sell its logistics business as the company shifts its strategy to narrow focus to its e-commerce platform.

The e-commerce software company announced on Thursday, alongside the release of first quarter results, that it has entered a definitive agreement to sell the majority of its logistics business to U.S.-based Flexport. Flexport will take on the technology, services and employees related to the logistics operations, while Shopify will receive a 13 per cent equity interest in Flexport, and a seat on the company's board.

Shopify did not disclose the value of the deal.

Shares of Shopify closed the trading day on Thursday at $77.65 per share on the Toronto Stock Exchange, an increase of 23 per cent compared to Wednesday's close. It marks the biggest intraday rise since 2015, according to Bloomberg, and the highest stock price for the company this year.

In an open letter to employees, chief executive officer Tobi Lutke said that Shopify will shrink by 20 per cent on Thursday. The 20 per cent reduction is in addition to employees who will leave with the company's logistics business, Shopify's chief financial officer Jeff Hoffmeister said on a conference call with analysts on Thursday.

"For the past year we’ve been subtracting everything that’s in the way of making the best possible product. This is extremely important, because we are heading into a decade of high velocity and massive change. We will require speed, agility, and a great deal of innovation," Lutke wrote in his letter.

"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."

The layoffs mark the second time in 10 months that the company has significantly reduced its workforce amid a slowdown in e-commerce growth. Shopify had rapidly expanded in the wake of the COVID-19 pandemic's e-commerce boom, betting that the share of online purchases in the retail space would permanently jump ahead by five to 10 years. That bet didn't pay off, and the company laid off 10 per cent of its workforce, or approximately 1,000 employees, last July.

The move also marks a strategic shift for Shopify, as the company abandons the logistics business it first entered in 2019. The sale to Flexport includes Deliverr, the fulfilment technology firm that Shopify acquired for $2.1 billion in 2022.

Williams Blair analyst Matthew Pfau says the company's logistics efforts "have been a point of contention with investors since the company announced its intention to enter the market."

"Investors have been concerned about the capital requirements of building a logistics network as well as the potential impact on margins," Pfau wrote in a note to clients, adding that the issue was compounded by Shopify's shifting strategy in the space, as well as its move to acquire Deliverr.

"Accordingly, the sale of the logistics business is going to be well-received by investors as it simplifies Shopify's story and bodes well for higher margins both in the short and long term," Pfau said.

"Over the course of one earnings release Shopify completely shifted its investor positioning to be a balanced growth and profitability company from one with unknown future profitability prospects."

Lutke framed the decision as helping the company focus on its "main quest" while eliminating "side quests" that he says "are always distracting because the company has to split focus."

"Shopify's main quest is to make commerce simpler, easier, more democratized, more participatory, and more common. I think that we have built the best commerce platform in the world for that," Lutke wrote.

"Making the global supply chains efficient and software addressable is Flexport's main quest and so this is the perfect home for this part of Shopify."

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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