In a new blog posting, Hsieh confirms he had to let 8 percent of his crew go and may be closing some of his outlet stores as well. The underlying reason, Hsieh explains, is a cutting back of expenses by its investor, Sequoia Capital.

Zappos is paying all the affected employees through the end of the year, and longer for veteran workers who had been on-board for three or more years. The company is also reimbursing the cost of COBRA — the short-term health insurance available for people between jobs — for six months for those affected as well. Hsieh says that move will actually increase his costs for 2008. Despite the unfortunate reality of the situation, we commend him for this honorable move. It’s a far more compassionate gesture than the phony, PR-driven moves some other CEOs have made (Gannett layoffs, anyone?).

The full memo sent to employees follows.

To all Zappos employees:

Today has been a tough, emotional day for everyone at Zappos. We made the
hard choice of laying off about 8% of our employees. The layoffs will
affect almost every single department at Zappos. In addition, we are also
looking at closing some of our brick and mortar outlet stores in Nevada
and Kentucky.

This is one of the hardest decisions we’ve had to make over the past 9.5
years, but we believe that it is the right decision for the long term
health of the company. The rest of this email will explain why…

We feel fortunate that we have Sequoia Capital as an investor who had the
foresight to see the ramifications of the tough economic times that lie
ahead for all of us. On October 7, Sequoia held a meeting for all of their
portfolio companies (including Zappos), with one very clear message: Cut
expenses as much as possible and get to profitability and cash flow
positive as soon as possible.

Here is a link to an article that talks about the Sequoia meeting:

http://gigaom.com/2008/10/08/sequoia-rings-the-alarm-bell-silicon-valley-in-trouble/

Jason Calacanis also has a well-written email that talks about avoiding
the “death spiral”, which I highly recommend reading:

http://calacanis.com/2008/10/28/good-news-for-people-who-hate-bad-news/

Fortunately for Zappos, we’re in a much better position than many other
companies. Unlike many other companies, we are still growing and already
profitable and cash flow positive.

And we are also fortunate that we have a revolving line of credit from
Wells Fargo, US Bank, and Keybank. This line of credit has given us a lot
of financial flexibility. However, given the current economic uncertainty,
we believe it’s prudent to reduce our reliance on debt financing.

We’ve decided the right thing to do for the company is to be proactive
instead of reactive. We are proactively cutting back some of our expenses
today so that we can take care of our employees properly, instead of being
reactive and waiting until we are forced to cut expenses.

Because we are still growing and are already profitable, we do not have to
take as drastic of a step as most other companies of our size. Last year,
we did $840 mm in gross merchandise sales, and this year we are
forecasting to do about $1 billion in gross merchandise sales. However,
when we first put together our 2008 plan at the end of 2007, we were
expecting our gross merchandise sales to be even higher than $1 billion.

Because of all this, we are reducing our staff by 8%, but because we are
being proactive instead of reactive about it, we are able to take care of
our employees and offer them more than the standard 2 weeks severance (or
no severance) that most other companies are giving.

We are offering to pay each laid-off employee through the end of the year
(about 2 months), and offering an additional amount for employees that
have been with us for 3 or more years.

In addition, because our regular health benefits cover 100% medical,
dental, and vision for employees and 50% for spouses and dependents, we
decided to offer to reimburse laid-off employees for up to 6 months of
COBRA payments.

In doing all of this to take care of laid-off employees, we expect that it
will actually increase, not decrease, our costs for 2008, but we feel this
is the right thing to do for our employees. It will put us in the position
of having a lot more financial flexibility in being able to respond to
potential changes in the economy in 2009.

Ecommerce growth has slowed compared to its growth rate a year ago, but
the good news is that even in this tough economic environment, ecommerce
overall is still growing.

Within the footwear category, we are the online market leader. When times
are tough, the strongest players in any market have an opportunity to gain
even more market share, even if overall growth may be slower.
Historically, we have actually grown faster than the overall ecommerce
market, and we anticipate for that to continue in 2009.

For the rest of 2008 as well as for 2009, we anticipate continuing to grow
year over year. Our current forecasts are that we will continue to be
profitable and cash flow positive, as long as we are proactive instead of
reactive in managing our business and financials.

I know that many tears were shed today, both by laid-off and non-laid-off
employees alike. Given our family culture, our layoffs are much tougher
emotionally than they would be at many other companies.

I’ve been asked by some employees whether it’s okay to twitter about
what’s going on. Our Twitter policy remains the same as it’s always been:
just be real, and use your best judgement.

These are tough times for everyone, and I’m sure there will be many follow
up questions to this email. If you have any questions about your specific
job or department, please talk to your department manager. For all other
questions, comments, or thoughts, please feel free to email me.

Tony Hsieh, CEO

Related posts:

1. Zappos Layoffs Revealed Through Twitter
2. 12% of staff cut in Houston Chronicle layoffs
3. Twitter Marketing: An Interview with Zappos CEO, Tony Hsieh

“Sorry to everyone who got laid off,” one worker writes. “All my Zappos friends who got bad news today, keep your head up. Bigger and better things await you,” says another. “Much love to all my friends…you’re still family no matter where you end up! Keep your heads up!” a third posting states.

It’s not clear how many people were let go, though CEO Tony Hsieh did say the following (through, of course, his Twitter account):

“Very emotional day for everyone at Zappos. I’ll be sending out an update later today with details of what’s going on.”

Zappos has more than 400 employees on Twitter. Its CEO has 17,323 followers and is ranked as the #31 most followed Twitter user across the service.

Zappos Layoffs Update: 8 Percent of Staff Cut

Related posts:

1. Zappos Layoffs Update: 8 Percent of Staff Cut
2. Twitter Marketing: An Interview with Zappos CEO, Tony Hsieh
3. Amazon and Zappos – let’s see how high we can pile the crap