Sprint Corporation (S) announced last week that it will incur a $165 million charge in the fourth quarter, pertaining to severance cost and related items. The expense will ensue from the company’s layoff policy that it is adopting to bring down total cost.
The workforce reduction that Sprint started on Jan 16 is likely to be over by June. The company employs over 39,000 workers and has no exact figure for layoffs. But the expected severance cost for the fourth quarter suggests a substantial reduction.
Going forward, Sprint also expects to make other material changes to check costs. The news struck a discordant note and the company’s stock price closed around 7 cents below the opening price and down 1.65% from previous day closing at $8.92, on Thursday trading.
According to media reports, the company has been struggling with an inflated cost structure since the acquisition of Nextel in 2005. As a result, redefining its cost structure is a prerequisite. The company is particularly targeting layoffs from divisions like customer care and enterprise and may also seek store closures. The axe will not only fall on ground level employees but also on the management level.
Reducing workforce to ensure cost benefits is a long-term strategy for the company that will give it a competitive edge over the likes of AT&T Inc. (T), Verizon Communications Inc. (VZ) and T-Mobile US, Inc. (TMUS).
However, in the near term, we believe the cost incurred for carrying out such a policy will be detrimental to margin growth. Operational efficiency will also be affected given the negative sentiment that the news is brewing in the company.
Sprint currently carries a Zacks Rank #3 (Hold).
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