Wal-Mart Stores, Inc. (WMT) posted mixed fourth-quarter results Thursday, but the really big news was that WMT is raising the pay of its U.S. employees to at least $9 per hour, or $1.75 above the federal minimum wage.
Walmart stock reacted predictably, falling more than 3% at the opening bell.
True, the wage hike hardly comes out of the goodness of WMT’s heart. As MarketWatch first noted, Walmart took a one-time charge of 5 cents per share for “a wage and hour litigation matter.”
In other words, the wage hike comes only after a fight in court.
It’s a good move, nonetheless. Although it will raise costs and pinch margins at first, in the long run, putting more cash in the hands of the nation’s lowest-paid workers will be a win for WMT and Walmart stock. After all, consumers can’t spend what they don’t have.
Consider that consumer spending on retail goods accounts for 35% of all economic activity. Hiking the minimum wage gives consumers more firepower, ultimately stoking the economy and juicing Walmart revenue. Higher revenue means higher earnings, and higher earnings mean more gains for Walmart stock.
Walmart certainly needs the help. Even tumbling gas prices couldn’t help the world’s largest retailer match analysts’ revenue forecast for the quarter.
WMT Reverses Sales and Traffic Declines
On the upside, WMT beat Wall Street’s profit estimate and logged a second-straight quarter of growth in U.S. same-store sales. Same-store sales are a critical measure of a retailer’s health, so the better-than-expected gain of 1.2% — notched during the all-important holiday selling season — is welcome news.
The gain, which exceeded Walmart’s forecast of flat-to-1% growth, broke a multi-quarter string where same-store sale were either flat or actually fell. On a company-wide basis, same-store sales rose 1.5%.
Americans, it seems, have lost their love affair with big box retailers. Walmart has responded with smaller store formats, which appears to have paid off in the most recent quarter. Traffic increased 1.4%, which also reversed a multi-quarter trend of declines.
It all added up to an earnings beat. For the most recent quarter, Walmart’s earnings rose to $4.97 billion, or $1.53 per share, up from $4.43 billion, or $1.36 per share, a year earlier. More importantly, on an adjusted basis, earnings came to $1.61 per share, which exceeded Street estimates by 7 cents, according to a survey by Thomson Reuters.
Revenue, however, came in light, rising 1.4% to $131.6 billion. The Street was looking for the top line to hit $132.4 billion.
In guidance, Walmart’s full-year earnings forecast was set below Street estimates, hurt by foreign exchange and costs related to the minimum wage hike and related programs. Indeed, the minimum wage hike and other employee initiatives will cost $1 billion this fiscal year.
Walmart is still struggling with increasing total revenue as it revamps stores and depends more on e-commerce. The minimum wage hike only adds to market skepticism, and, combined, these issues will likely weigh on Walmart stock for some time.
But these are the kind of strategic changes rarely seen in publicly traded companies. They’re intended to be long-term investments. It will take some time, but eventually the minimum wage hike and other employee programs will provide a return on investment. That investment will benefit WMT revenue — and, by extension — anyone holding Walmart stock.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
