Shares of home-furnishing e-commerce company Wayfair(NYSE: W) popped on Friday after it announced it was cutting 13% of its global workforce. As of 10:10 a.m. ET, Wayfair stock was up 11%.
Why did the market respond positively to this?
Wayfair CEO Niraj Shah summed up the problem by saying, "The reality is that we went overboard in hiring during a strong economic period." For an example of a strong economic period, consider that the company's revenue jumped from $9.1 billion to $14.1 billion in 2020. It built up its workforce too much as sales boomed and now has to course-correct.
To be clear, Wayfair has already been course-correcting. In August 2022, the company laid off 5% of its workforce. Then, in January 2023, it laid off another 10%. Apparently, the previous cuts didn't go far enough, motivating it to let go of more people today.
In the upcoming first quarter of 2024, Wayfair expects to take a hit of $70 million to $80 million as a result of its layoffs. However, the company believes this decision will save it at least $280 million on an annualized basis going forward. The market recognizes that Wayfair needs to be more profitable and is glad to see the company move in that direction.
What now?
Wayfair's business has improved. In the third quarter of 2023, the company generated positive cash from operations of $121 million compared with a cash outflow of $431 million in the prior-year period.
However, Wayfair has much more work to do. Management is trying to get to a 10% margin for adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Its adjusted EBITDA margin is only about 1% on a trailing-12-month basis.
Wayfair's growth has largely stalled for now, so it's looking to reach its goals by cutting expenses. The company perhaps took a step in that direction today, but it likely still has work to do.
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Jon Quast has no position in any of the stocks mentioned. The Motley Fool recommends Wayfair. The Motley Fool has a disclosure policy.
