Layoffs and Cost Cuts

George Chin |

Seems odd, doesn’t it? A company lays off employees which implies its business is slowing. Still, sometimes the stock of a company rises after layoff announcements. Why?
While it is unfortunate for those who are laid off, layoffs are essentially a means to cut costs. The more costs that are cut, the less this category of expense goes against gross revenue. Cutting costs tends to increase earnings and that is sometimes rewarded in the equity markets.
This week’s note is just to remind you that if you see layoffs, it likely means a slowing economy. But a slowing economy can be offset as companies tighten their belts (which often times positively impacts earnings). Positive earnings growth tends to be rewarded in the market. Cutting costs is one way to drive earnings growth. 
A recent CNBC column covered this exact issue. See excerpts below.


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“Corporate America has a message for Wall Street: It's serious about cutting costs this year.
From toy and cosmetics makers to office software sellers, executives across sectors have announced layoffs and other plans to slash expenses — even at some companies that are turning a profit.

As consumers watch their wallets, companies have felt pressure from investors to do the same. Executives have sought to show shareholders that they're adjusting to consumer demand as it returns to typical patterns or even softens, as well as aggressively countering higher expenses. 

Companies in years past could get away with passing on higher costs to customers who were willing to splurge on everything from new appliances to beach vacations. But businesses' pricing power has waned, so executives are looking for other ways to manage the budget or squeeze out more profits.”

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