Shopify eases concerns over fulfillment network changes, shares rebound

Canada’s Shopify Inc (SHOP.TO) said on Monday proposed changes to its fulfillment network would help merchants on its ecommerce platform compete better with big retailers and would not reduce capacity, fueling a recovery in its shares.

Wall Street had raised concerns that the changes could mean big investments into Shopify’s fulfillment network and moving from a capital-light model to owning distribution centers, something investors will likely question in the current market environment.

Shopify provides infrastructure for retailers to set up their stores online and generates revenue mainly through subscriptions and merchant services. It has benefited from the widespread shift to e-commerce during the pandemic.

But a recent sell-off in technology stocks in the face of expected higher interest rates, coupled with concerns about Shopify’s fulfillment network had slammed the shares.

“We will be making changes to the SFN (Shopify Fulfillment Network) to help merchants compete with big-box retailers, such as prioritizing two-day shipping at affordable prices and access to easy returns for US shoppers,” the company said on Monday.

Shopify said it had informed warehouse partners and merchants that capacity would not be reduced due to the proposed changes. SFN is essentially a network of fulfillment centers that allow merchants to ensure timely deliveries and low shipping costs.

Shares of the Canadian company rose 7 per cent on Monday following the statement. They had fallen nearly 9 per cent to an 18-month low, weighed down by a report last week that Shopify was terminating or reducing contracts with warehouses and fulfillment partners.

“Shopify is nowhere close to building a type of fulfillment operation at the scale of Amazon, and investors should not expect anything like that in the near term,” said Wedbush analyst Ygal Arounian.

Shares of Shopify have had a roller coaster ride since the COVID-19 outbreak. They surged 237 per cent between2019 and 2021, boosted by a broader adoption of e-commerce by retailers, food brands and other mom-and-pop businesses. That helped the company to dethrone Royal Bank of Canada (RY.TO) as the most valuable Canadian company. The shares are down 31.6 per cent so far this year.

Shopify now ranks third as Canada’s most valuable company behind RBC and TD Bank (TD.TO).

The volatility displayed by Shopify shares this year is rarely seen in Canada’s other big market cap stocks, like the banks, that are attractive to institutional investors due to their steady growth prospects and high dividend yields.

Shopify said on Monday it had sufficient capacity to meet the fulfillment needs of its merchants using the SFN.

“Capacity will not be reduced, and we do not anticipate disruptions to our merchants’ fulfillment,” the company added.

The company said it would have more details on its fulfillment network during its fourth-quarter earnings announcement.