What Factors Are Impacting Wal-Mart’s Operating Expenses?

Wal-Mart (NYSE:WMT) has been making strategic investments to integrate its digital and physical retail platforms. The company is in the process of upgrading its 4,648 U.S. stores, aimed at improving customer experience, and at the same time investing heavily in its e-commerce platform to counter the challenges posed by online retailers.

In 2013-2014, Wal-Mart witnessed weak comparable sales growth, disappointing customer surveys, a tighter labor market, and the secular trend of increased e-commerce demand. Accordingly, the company tried to drive earnings growth by cutting labor costs. Now, the company has been increasing its employee wages, investing in digital sales and has started an in-store pickup facility. As a consequence, Wal-Mart’s operating expenses grew marginally in the past 2-3 years. In the most recently reported quarter, Wal-Mart’s operating expenses were 21.7 % of its net sales, an increase from 19.9% in Q3 2014 (calendar year), while its operating margin declined from 5.3% in Q3 2014 to 4.3% in Q3 CY’16.

Impact Of Wage Hike

In 2015, Wal-Mart announced plans to improve its training processes, and give a two-stage, broad-based pay increase to its 1.2 million store employees in the U.S. over the course of two years. The company raised its minimum rates for hourly pay, which differed based on job type, but left the maximum rate unchanged. However, the company announced that it would provide a one-time 2% raise to employees who had already hit the maximum pay for their positions. After the raise in wages, Wal-Mart’s average pay for a full-time non-managerial employee is now $13.69 an hour, up 16% since early 2014. ^[1] The company also announced a minimum pay of $9 per hour before increasing it by a dollar in 2016 for new store workers who  successfully completed the company’s training program. It should be noted that the federal minimum wage had been $7.25 per hour since 2009.

This wage boost would cost Wal-Mart about $2.7 billion over fiscal years 2016 (year ends January) and 2017 and affect fiscal 2018 profits. However, this wage hike could eventually turn into a positive for the company’s financials, as it could lead to lower employee turnover, resulting in fewer expenses tied to hiring and training going forward.

Wal-Mart Technology Investments

Wal-Mart has spent heavily in the past two years in order to compete with Amazon (NASDAQ:AMZN) and other smaller, fast-growing discounters such as Aldi. In September 2016, Wal-Mart purchased Jet.com for $3.3 billion, which led to an increase in the company’s operating expenses. In addition to the Jet acquisition, Wal-Mart plans to invest more than $1 billion to improve its pre-existing store technology and customer services. Moreover, the company’s capital expenditures are expected to be approximately $11 billion in fiscal 2018 as the company moderates new store openings and plans to invests in e-commerce and digital initiatives.

Since the beginning of 2016, Wal-Mart has added 7 million SKUs to its online store and now offers more than 15 million SKUs online, as compared to the 2 million it offered in 2013. Much of the growth comes from more retailers selling on Walmart.com. ^[2]

Three straight quarters of positive comparable sales in fiscal 2017 validate the company’s investments in e-commerce and marketing initiatives. However, its earnings continue to slow down year-over-year due to these increased investments. Although Wal-Mart expects its operating expenses to continue to grow at a rate greater than or equal to the rate of its net sales in fiscal 2018, the company’s profits are expected to stabilize by fiscal 2019.

Please refer to our complete analysis for Wal-Mart  

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1. How Did Walmart Get Cleaner Stores and Higher Sales? It Paid Its People More, nytimes.com, Oct 2016 [↩]
2. Wal-Mart will spend more on e-commerce and online grocery, Internet Retailer, Oct 2016 [↩]