Wal-Mart Stores Inc.’s Wage Hike Is a Profit Killer (WMT)

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Shares in Wal-Mart Stores, Inc. (WMT) have collapsed over the last year and the way the world’s largest retailer is spending money, there’s little hope for a bottom in WMT soon.

Wal-Mart Stores Inc.'s Wage Hike Is a Profit Killer (WMT)To be fair, one of the reasons for the sluggish economic recovery is the reluctance of companies to invest in their businesses. WMT can hardly be faulted on that count, but the timing is bad. Rising costs are tough enough, but the strong dollar is also hurting Walmart stock.

The latest increase comes in the form of higher wages. Walmart has spent a small fortune on raising its minimum wage to $10 an hour, and now labor costs are going up again.

WMT plans to give almost all of its U.S. hourly store employees a raise next month, and it’s not out of the goodness of its heart. The labor market is tight. The unemployment rate of 5.5% is just shy of full employment, and wages are at long last rising in response.

And in a problem more specific to WMT, some workers say the new, higher minimum wage is unfair to veteran employees.

The company said the pay hike will cost about $2.7 billion over the next two years and pressure next year’s earnings by as much as 12%.

Although WMT doesn’t really have a choice, those numbers are not good for the Walmart stock price.

WMT’s Expensive Strategy

After all, costs were mounting even before last year’s decision to boost wages. WMT is investing heavily in its e-commerce operations in order to better compete with Amazon.com, Inc. (AMZN).

Any time you take on AMZN in anything, you’re going to have to spend a lot.

To be fair, Target Corporation (TGT) is also investing heavily in a turnaround. But sluggish sales and a strong dollar eating away at international revenue have made Walmart stock a disaster. Indeed, shares are down 30% over the last 52 weeks. The morbid broader market is off more than 8% for the same period.

As recently as November, the picture was brightening for WMT, as it appeared to be making progress with its turnaround. Walmart earnings crushed estimates in the last quarter, revenue declined solely because of the rising greenback.

Critically, same-store sales rose 1.5%. Indeed, improvements in customer traffic allowed WMT to report a fifth consecutive quarter of same-store sales growth, which is a key measure of a retailer’s health.

For now, however, it’s too soon to bet on a Walmart stock rebound. Shares have traded essentially sideways since mid-March, and the current marketwide downdraft is bad news for all stocks.

The latest moves by WMT should eventually bear fruit, but it looks like that’s going to take a couple years at least.

In the meantime, all we can hope is that Walmart employees put their higher wages back into the economy.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2016/01/wal-mart-wmt-stock-wages/.

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