Shopify warns of more losses ahead as e-commerce slowdown hurts earnings outlook

Open this photo in gallery:

Shopify Inc. SHOP-T posted a massive second-quarter loss and warned of more operating losses ahead as the Ottawa technology provider confronts a slowdown in e-commerce that prompted it to cut 10 per cent of its global work force this week.

The company, which provides tools for businesses and creators to run their stores and sell their products and services online, reported a net loss of US$1.2-billion on Wednesday, or 95 US cents a share, compared with a profit of US$879.1-million a year earlier, or 69 US cents a share. But the net loss includes a US$1-billion net unrealized loss on equity and other investments, Shopify explained.

On an adjusted basis, Shopify reported an operating loss of US$41.8-million, or 3 US cents a share, while analysts had expected a profit of 2 US cents. The company also said it expects adjusted operating losses in the third and fourth quarters this year will exceed those of the second quarter.

Amy Shapero, Shopify’s chief financial officer, said in a conference call with analysts on Wednesday that operating income has grown over the past five years, but she now believes 2022 “will end up being different, more of a transition year, in which e-commerce has largely reset to the pre-COVID trend line.”

Gross merchandise volume, a figure that shows the value of sales through the Shopify platform, grew 11 per cent from last year to US$46.9-billion this quarter, but that, too, missed estimates of US$48.6-billion. Revenue was up by 16 per cent, year over year, to US$1.3-billion, which was also slightly under projections of US$1.33-billion.

Wednesday’s financial results underscore the difficulties that Shopify is facing with growth in its core e-commerce business slowing sharply as of late. It is the second quarter in a row that Canada’s tech leader has missed analyst forecasts. In the first quarter, Shopify fell short for the first time since it went public in 2015.

On Tuesday, Shopify internally announced it is cutting about 1,000 jobs, as chief executive officer Tobias Lutke acknowledged and apologized for overestimating the growth of e-commerce, which led Shopify to hire too many people in order to meet that expected demand. “I got this wrong,” Mr. Lutke said in a memo to nearly 10,000 employees around the world.

In Wednesday’s conference call, Mr. Lutke attempted to further justify what led to the layoffs. He explained that founder-run and innovation-focused companies such as Shopify deliberately make big bets, but said the layoffs taught him a “valuable lesson” about future decisions related to the company’s growth.

“I know there is generally not a lot of appetite for risk-taking, but I think our company especially is defined by us not following some kind of orthodox playbook,” Mr. Lutke said. “There’s no ‘This is prebaked Shopify’ on the shelves of Barnes & Noble, and we have to make it up on the fly.”

Samad Samana, managing director and analyst at Jefferies Group LLC, told clients in a note that Shopify’s second-quarter financial results show trends for e-commerce are “deteriorating even more swiftly than expected.” Meanwhile, Royal Bank of Canada analysts Paul Treiber and Daniel Perlin moved their long-term sentiment for Shopify from “positive” to “negative” following the earnings report.

Online spending took off at the beginning of the COVID-19 pandemic, when consumers were stuck at home because of public-health restrictions and flush with cash they weren’t spending on vacations or entertainment. These trends gave e-commerce leaders such as Shopify a big boost, but they have since largely reversed.

Consumers are now gradually shifting back to more physical, in-store shopping. They are also tightening their discretionary spending amid surging inflation and economic uncertainty, stemming from the war in Ukraine and soaring interest rates.

Ms. Shapero told analysts the “macro environment” and the sudden reversal of pandemic trends are forcing the company to “rigorously evaluate and adjust our spending priorities.” It also led to the unexpected losses this quarter, she said.

Shopify’s US$2.1-billion acquisition of San Francisco startup Deliverr Inc., the company’s largest deal to date, and its ambitious compensation overhaul that would give staffers more choice in how they are paid, is another reason for those losses, she said.

Shopify will slow hiring for the remainder of 2022 and end the year with a “modest” head count, Ms. Shapero said. “The company is not interested in having linear growth of head count,” Mr. Lutke added. Neither of them would say whether or not further layoffs are expected if the company’s profit margins continue to shrink.

Shopify’s stock rallied Wednesday after plunging nearly 14 per cent on the Toronto Stock Exchange on Tuesday to close at $40.69. Shares recouped much of those losses and closed at $45.17.

Your time is valuable. Have the Top Business Headlines newsletter conveniently delivered to your inbox in the morning or evening. Sign up today.