Downsizing and Your Portfolio

Unfortunately, your portfolio gains can mean someone else's loss.

Colleen Paulson
Colleen Paulson
Feb 7, 2008 at 12:00AM

If you haven't been directly affected by layoffs, chances are that you know someone who's lost their job recently. Last week, the Labor Department announced that the marketplace lost a net 17,000 jobs, the first net job loss since 2003.

On top of the Labor Department statistics, Home Depot (NYSE: HD) plans to cut 500 headquarters jobs, and Wal-Mart (NYSE: WMT) will eliminate an unknown number of clothing-division employees because of lackluster sales results. These cuts and others recently announced by Yahoo! (Nasdaq: YHOO) and Lockheed Martin (NYSE: LMT) are troublesome for both affected employees and concerned shareholders.

HQ cuts for HD
The recent heartburn in the housing market has been well-documented, and Home Depot hasn't been immune to the pain. Its stock price has fallen more than 30% from its 52-week high. Those 500 job cuts may not sound like much for a company with more than 360,000 employees, but the headquarters staff is higher-paid than your average orange-apron-wearing store clerk. These layoffs could have a big impact on the bottom line, since the 500 lost jobs represent 10% of Home Depot's overall headquarters staff.

Let's say that the total compensation (including benefits) for one of these staff members is $100,000 per year. Cutting 500 of these jobs would slash an additional $50 million from corporate expenses annually. That's not a huge number when your company's annual revenue approaches $90 billion. Still, every $50 million counts when your trailing-12-month net margins are less than 6%, as Home Depot's were last quarter. The impact could be much larger if higher-level, higher-paid executives are among those eliminated.

Is Wal-Mart hitting the wall?
Following Wal-Mart's recent fashion failures,  the company decided to revamp its apparel group, emphasizing that it's looking for stronger financial results and better ROI. While Home's Depot's cuts seem to affect the entire organization, Wal-Mart's clothing-division restructuring should have significantly less corporate impact; only "dozens" of the headquarters' 12,000 employees might potentially lose their jobs. If anything, Wal-Mart is trying to send a signal to both employees and Wall Street that failure to perform comes at an internal price.

Layoffs for the sake of layoffs
Before Microsoft made its bid for Yahoo!, the little search engine that could announced plans for additional broad-based downsizing. Unfortunately, this latest round of job cuts seemed to be letting employees go for no real reason, signaling problems with Yahoo!'s overall business strategy. Yahoo! has gone through many recent restructurings, including the past summer's replacement CEO Terry Semel by co-founder Jerry Yang, and an advertising-department revamp. Of course, if Microsoft does buy Yahoo!, the changes in Sunnyvale are just beginning.

Cyclical job cuts and growth
At government contractor Lockheed Martin, the impending completion of its F-35 joint strike fighter program will also spell job cuts. The projected 850 jobs on the chopping block are no surprise; the company's long planned for such cuts as the F-35 program becomes "technically stable." Project-based employment for durable-products manufacturers such as Lockheed and Boeing (NYSE: BA) involves a continual ebb and flow of employee hiring and firing.

Unfortunately for employees and shareholders alike, layoffs don't necessarily add value to an organization. While the ex-employees feel the most pain, the leaner corporation and its remaining employees must also struggle to make up for their absence. "Reorganization," as corporate America often likes to refer to job cuts, can signal that a great change is coming -- or show that a company lacks a strong strategy going forward.

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