Taking a cue from Wal-Mart Stores, Inc. (WMT), and perhaps recognizing it’s only a matter of time before it becomes legislation anyway — and maybe even as an investment in its workers — Target Corporation (TGT) announced on Monday it would be raising its corporate-wide minimum wage from $9 to $10 per hour.
Owners of Target stock are understandably concerned. While Costco Wholesale Corporation (COST) has proven that higher wages does indeed lead to greater productivity, Walmart has also proven that paying employees more can take a sizable bite out of the bottom line.
In other words, this decision could go either way for Target. It’s a matter of the other things it does from here that will determine if the raised minimum wage will actually be an investment, or just an expense.
What to Expect for Target Stock
The rationale for the yet-to-be-confirmed wage hike isn’t tough to pin down.
Most employers of hourly workers have been under pressure to boost pay at least to a so-called living wage. If it wasn’t the “Fight for $15” movement being driven by a consortium of unions and underpaid workers to prod pay increases, legislators would have done the deed. And if nothing else, the fact that current and would-be employees now have a legitimate alternative employer, defections are inevitable.
It’s not just a simple matter for the company’s human resources managers, however.
Walmart made a similar move beginning in early 2015, upping its minimum wage to $9.00 by April of that year, and upping it again to $10.00 per hour in January of this year.
It took only a matter of a few weeks for those bigger paychecks to take a toll on Walmart.
For the quarter ending in April of 2015 — at the onset of its wage-improvement plan — higher payroll costs took 2 cents per share off the bottom line, whittling what would have been a profit of $1.05 per share of WMT to only $1.03. All told, last year its new minimum wage standards cost the retailer an extra $1.2 billion. This year that added expense will reach $1.5 billion.
For perspective, the retailer has generated $14.7 billion worth of net income over the course of the last twelve reported months.
That’s roughly 10% of its annual profits. Owners of Target stock have a reason to be concerned.
The Rest of the Story
While Walmart’s experience with a higher minimum wage thus far has been alarming, TGT shareholders may not need to shudder just yet.
It’s an ugly truth, but the truth all the same: Walmart is a poorly run company, and it stands to reason the company didn’t manage the other aspects of its business that could have extracted greater productivity from more motivated workers. Perhaps the fact that it raised wages only to then cut its workers’ total hours — effectively reducing its productivity capacity — may be the reason Walmart didn’t see any net benefit in raising wages.
Target, though still smaller, is a better-managed organization, delivering a better customer experience as well as a better employee experience … even at lower pay rates.
In other words, with an engaged workforce that’s about to go from good to great (presuming Target won’t do the obviously stupid thing like paring down to a skeleton crew) rather than setting itself up to achieve Walmart’s end result of going from good to … something not any better, TGT owners may actually see a performance benefit.
At the very least, we may want to give the well-managed retailer the benefit of the doubt.
Bottom Line for Target Stock
There’s no denying brick-and-mortar is facing a headwind as an industry in and of itself, and although Target has a respectable online presence, the company feels it needs to spend $2 billion on its e-commerce effort next year in order to remain competitive. Adding what will be another big expense on its non-e-commerce front may seem fiscally overwhelming.
Investors, though, may want see this particular glass as half-full rather than half-empty. Target is apt to parlay higher pay into better in-store employee results, where Walmart failed to do so.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
