The Next Hurdle for Companies: Overhiring

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Nothing has been easy for businesses lately. Since the end of 2019, they’ve dealt with lockdowns, supply-chain snarls, rising costs, and higher interest rates. Now they might have to cope with the possibility that they expanded for demand that might not arrive.

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Take (ticker: AMZN). On its first-quarter conference call last month, Chief Financial Officer Brian Olsavsky acknowledged that Amazon had “built toward the high end of a very volatile demand outlook,” only to realize that it has an “opportunity to better match our capacity to demand. ” Olsavsky used the word “overcapacity,” admitting that Amazon had expanded too quickly.

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The stock took a beating. Amazon shares are down about 22% since first-quarter earnings, while the S&P 500 and Nasdaq Composite are off some 6% and 8%, respectively.

One problem was that Amazon hired employees faster than sales were growing, a sign of overcapacity and declining efficiency. Revenue per employee over the past 12 months was $297,107. That’s impressive, but in 2019, before the pandemic, the figure was $351,531, so sales productivity is down roughly 15%.

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Other companies in the Russell 1000 index have suffered similar declines. For some, the metric has fallen because sales have plummeted and haven’t recovered to prepandemic levels. For instance, Carnival (CCL) sales have slid to about $3.5 billion from almost $21 billion in 2019, while the workforce fell to less than 40,000 from more than 100,000, as management tried to contain costs. Other companies, including AmerisourceBergen (ABC) and Charles Schwab (SCHW), have made acquisitions or divestitures over the past few years that make comparisons very difficult.

Still, 12 companies, plus Amazon, were able to grow sales while seeing large drops in sales productivity from 2019’s level. They’re a diverse group: Costco Wholesale (COST), Nvidia (NVDA), Skechers USA (SKX), Toro (TTC), Morgan Stanley (MS),

Goldman Sachs (GS), Huntington Bancshares (HBAN), Mastercard (MA), Universal Health Services (UHS), ManpowerGroup (MAN), Allstate (ALL), and Equinix (EQIX). Their average sales-productivity decline since 2019: 17%.

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Amazon stock is down some 32% this year. Nvidia, off 40%, is the only stock in the group that did worse. Costco has fallen 12%; Morgan Stanley, 18%, and Mastercard, 7%. Only Allstate is up this year, some 9%. Despite that, not all of these stocks are cheap. While Goldman, Morgan Stanley, and Huntington trade for 11 times earnings or less, Costco trades at 38 times; Nvidia, at 31 times.

Falling sales-per-employee doesn’t doom a business, but can mean trouble if it is overexpanded. One to watch: Costco. The retailer’s same-store-sales growth has averaged about 11% over the past year, compared with 6% before the pandemic. But growth has been slowing from recent peaks. Costco reports fiscal third-quarter earnings on May 26, and if its outlook suggests deceleration, investors could get a nasty surprise.

Write to Al Root at [email protected]


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