A Closer Look At The Impact Of Wal-Mart’s Wage Hike
Wal-Mart (NYSE:WMT) recently raised its entry-level wages for U.S. hourly employees to $11 an hour, which it attributed to the new lower corporate tax rate. In this article, we take a look at Wal-Mart’s wage hike history and the consequent impact it has on the retailer. We have created an Interactive Dashboard which outlines our forecasts for the company. You can modify our forecasts to see the impact any changes would have on the company’s earnings.
Wage Hike
The federal minimum wage had been $7.25 since 2009, and the labor market saw fairly meager pay gains for people at the lower end of the spectrum for the decade, a fact that helped Wal-Mart grow its bottom line. The company had been growing profits in part by keeping labor costs low, which could have taken a toll on in-store conditions and stock levels.
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In 2015, Wal-Mart announced plans to invest $2.7 billion over the course of two years, primarily 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. Accordingly, the company boosted workers’ pay to a minimum of $9 per hour, before raising it by a dollar in 2016. Along with this, the retailer also gave a one-time 2% raise to employees who had already hit the maximum pay for their positions. Many factors impacted the company’s decision to increase its minimum wages, but a primary idea behind this step was to promote a happy and more motivated workforce, which could help Wal-Mart create cleaner, more customer-friendly stores for shoppers to visit. In addition, the retailer was also trying to deal with the tighter labor market.
Impact Of Wage Hike
Wal-Mart’s operating expenses have been growing marginally in the past 2-3 years, largely due to increased employee wages, investments in digital sales and growth in store pickup facilities. In the most recently reported quarter, Wal-Mart’s operating expenses were 21.8 % 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 4.4% in Q3 CY’17.
Wal-Mart saw a decline of 4% to its earnings per share in fiscal 2017 (year ended January 2017) due to increased investments in wages. However, the company expects its adjusted EPS to range between $4.38 to $4.46, compared to previous guidance of $4.30 to $4.40 in fiscal 2018. We expect expect the wage hike effects to stabilize in fiscal 2018. In addition, three straight quarters of positive comparable sales in fiscal 2018 validate the company’s investments in e-commerce and marketing initiatives.
Wal-Mart’s 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. Still, the moves fall short of the demands of labor groups, which have called on companies to pay a “living wage” of $15 an hour. By the look of things, Walmart is trying to catch-up to some competitors. Target raised its wages to $11 for hourly employees in October 2017, with the goal of reaching $15 by 2020. Costco also raised its minimum hourly wage in March 2016 to at least $13.
Our $93 price estimate for Wal-Mart’s stock is slightly below the current market price.
Please refer to our complete analysis for Wal-Mart
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