Costs tied to Shopify Inc.’s product fulfilment strategy and new employee compensation scheme are holding back profits, the e-commerce company says, as it struggles to regain momentum after a year-long slump.
Shopify SHOP-T shares sank by more than 15 per cent on Thursday, after the Ottawa-based company’s softer-than-expected outlook for the new fiscal year, closing at $60.39 on the Toronto Stock Exchange.
Shopify’s cost-cutting measures over the past few months have failed to provide an expected boost to the company’s financial performance, it acknowledges. The company’s weak revenue outlook, meanwhile, highlights the competition it’s facing from juggernaut Amazon.com Inc. AMZN-Q, which Shopify said it’s talking with about a possible partnership.
“Investors are disappointed by Shopify,” said Gil Luria, managing director and senior software analyst for U.S. investment bank D.A. Davidson. “Because Shopify was bootstrapped and not tied to venture capital money, from its very beginning, they had to always maintain profitability. But when we saw that the company’s growth reversed and slowed down in 2022, that profitability went away, so they reacted with fairly large cost cuts. And yet, the company is now telling us those cuts actually had significant offsets.”
Last year, Shopify shares plummeted by nearly 70 per cent from its early pandemic highs in 2021, after some consumers began to cut back on discretionary spending and turned away from online shopping habits. This led to many challenges, as Shopify navigated a downturn that continues to affect the technology sector.
To address these concerns, Shopify slashed more than a 10th of its global work force and trimmed its operations to become leaner overall. Additionally, the company changed its compensation packages for employees to counteract internal dissatisfaction, which came because Shopify workers saw the total value of their salaries suppressed by the fallen stock.
The company launched a new compensation scheme in September, providing employees personal choice in how they are paid. Instead of restricted stock units in addition to base salaries at an allocation set by management, Shopify workers received a single total compensation amount and were able to determine how much is cash versus stock.
But now, Shopify believes that scheme, coupled with its major efforts to build a fulfilment and delivery network, is piling on top of the company’s operating expenses. And those expenses have grown progressively over the past few quarters, Shopify executives said this week.
Presenting his first financial report as Shopify’s new chief financial officer, Jeff Hoffmeister said expenses from Shopify’s US$2.1-billion acquisition of San Francisco startup Deliverr Inc. and its new compensation system “will continue to cause an impact” for the company. He cited those expenses as reasons for Shopify’s adjusted operating income dropping to US$61-million in the fourth quarter of 2022 from US$130.2-million a year earlier.
“Given the timing of when we initiated these changes, the year-over-year comparability [for profits] will be impacted during the first three quarters of 2023,” Mr. Hoffmeister told analysts in a conference call late Wednesday, adding that Shopify is working on “initiatives already in process in order to help us manage operating expenses,” such as leveraging technology to automate internal processes where possible.
When Shopify bought Deliverr in May last year, the company’s largest acquisition to date, it was part of an ambitious strategic shift to rival Amazon. “It’s not a bad thesis because Amazon has taught the world correctly that fulfilment and delivery operations are important to e-commerce,” said Rick Watson, chief executive of RMW Commerce Consulting LLC in New York.
“Where Shopify may have got it wrong is that I don’t think they needed to buy a logistics company to make fulfilment happen. Perhaps they could’ve just partnered with different players, like they normally do.”
Mr. Luria at D.A. Davidson believes investors may have good reason to be antsy about the progress from Shopify’s fulfilment network. “It’s a tough hill to climb when you’re competing against Amazon, the most robust distribution network in the Western Hemisphere,” he said.
But National Bank of Canada managing director Richard Tse said Shopify didn’t have much choice: “Fulfilment is one of the most in-demand services for merchants. Given that, it’s a requirement, not a bet.”
When asked about Shopify’s relationship with Amazon, Shopify president Harley Finkelstein suggested the two companies have been in talks to potentially co-operate on parts of their businesses instead of competing with one another.
“We like it; we’re in talks with Amazon now to make that work,” Mr. Finkelstein said about Buy With Prime, a new feature that allows Amazon customers with Prime memberships to purchase directly from retailers that have a partnership with Amazon.
“There’s no update on that at this time, we’re still talking. … Anything that’s going to make our merchants’ lives better, and make sure their business is future-proof to new technology that comes out, we want to make available to them.”