In early May, Shopify (SHOP 1.11%) surprised Wall Street by announcing aggressive cost-cutting that sharply reduced its head count. The move was aimed at helping return the business to sustainably positive cash flow and earnings.
It worked, and these improvements were amplified by accelerating demand. The stock went on to nearly double from the time of that announcement through mid-December.
Etsy (ETSY 0.34%) is hoping to walk a similar path. The e-commerce marketplace specialist announced on Dec. 13 that it is laying off a large part of its workforce. As with Shopify, executives said their goal is to make the company more nimble, focused, and better positioned for faster growth.
Let's look at the restructuring plan with an eye toward whether it might support a rally in Etsy's stock in 2024 and beyond.
Etsy wasn't as aggressive
Etsy made a hard decision to whittle down its employee base, but the move isn't nearly as aggressive as Shopify's transition was. Etsy will be 11% smaller when the project is completed in early 2024, compared to Shopify's roughly 20% cut.
The company isn't exiting any significant business lines, either, as Shopify did with its logistics segment. Instead, Etsy's management said its priority around the layoffs was to raise efficiency and direct more resources toward core growth and innovation priorities. "We need to acknowledge and adjust for today's realities" of slower industry growth and higher competition, CEO Joel Silverman said in a letter to employees.
Encouraging takeaways
Yet investors should be happy to hear that Etsy is taking growth and efficiency more seriously since these strategic shifts should boost returns, especially if the business recovers its prior positive momentum. Sales volumes on its platform have been flat for nearly two years, after all, which isn't a great outcome for its merchants.
Securing a volume rebound is important, and that's why the company is investing heavily in shifts like making the shopping experience more organized and curated. But Etsy needs to lower its cost burden in the meantime so it keeps making the platform more valuable to sellers and buyers. Adjusted net profit declined to 27% of sales in the first three quarters of 2023, down from 28% a year earlier.
What to watch
This strategic shift will likely be less impactful than Shopify's restructuring program has been. Etsy isn't making dramatic cost cuts, and that's likely a key reason why Wall Street hasn't sent the stock much higher following the announcement. Shares remain in negative territory, down about 30% year to date compared to the 24% rally in the S&P 500.
A major part of Shopify's rally was rebounding growth, too, which combined with its aggressive cost cuts to send cash flow and profitability much higher this year. Ultimately, Etsy's business would need to see a similar growth-led rebound for the stock to break out of its 2023 funk.
Investors should watch sales volumes over the next few quarters for signs of accelerating gains. Combined with a rising operating profit margin, that success might mean Etsy is worth considering as an attractive growth stock again. But its cost-cutting on its own doesn't change the broader picture for this struggling e-commerce platform business.
