Regardless of the broader political and economic implications, the new year has brought happy faces to legions of lower-wage workers. In effect January 1, nineteen states have increased their minimum wage. The average gain in salaries is just under 7%, which implies that several state lawmakers are taking this effort seriously. More importantly, 38% of the union have voted on upping the minimum wage — clearly, this is no whimsical fad.
That should have companies — particularly those in the retail services sector — that predominantly hire lower wage workers shaking.
No matter how you slice it, raising the minimum wage increases overhead costs. That affects operating margins negatively, which hurts the bottom line. Worse yet, this is a coercive action with no associated benefits.
At a time when many industries are struggling, these and similar legislation in the future could put several names in the stocks to sell list. Unfortunately, there’s not much that businesses can do with the rising minimum wage. The most obvious action is to reduce workers’ hours. But that impedes growth. Furthermore, a business requires a certain number of employees to properly operate. Management could pass on the cost to consumers, but that is always an unpopular choice. And eating it would only accelerate the “stocks to sell” nomination.
For some states, the minimum wage is a non-issue. For example, Alaska, Florida, Missouri, and Ohio are each raising the salary floor by a nickel. In contrast, Arizona, Colorado, Maine and Washington have bumped up their base standard by a hefty average margin of 18%. Arizona is the most generous state, giving workers an additional $1.95, or a more than 24% bonus.
That might garner political favor, but here’s the catch — according to the Wall Street Journal, approximately 328,000 Arizona workers will be affected by their state’s new minimum wage. Assuming that they are all full-time employees, this would amount to more than $4,000 additional pay per capita, or more than $1.3 billion in total. Roughly speaking, this is 0.4% of Arizona’s gross state product. That’s not a crippling number, per say; however, that could make several companies that hire minimum wage workers in Arizona “stocks to sell” targets.
For now, businesses are adapting to these new laws. Unfortunately, if the trend continues — and every reasonable indicator suggests that it will — management will have to find drastic ways to cope, if they can.
Here are three stocks to sell amid the minimum wage madness!
Stocks to Sell: Target Corporation (TGT)
Of all the stocks to sell due to the pressures of the minimum wage, I’m most familiar with Target Corporation (NYSE:TGT).
This was my first “real” job and was therefore my introduction into the wacky world of corporate America. And the most profound memory of my time with TGT occurred early on — within a few months of employment, the minimum wage was raised, “earning” me an extra nickel per hour in wages.
As a kid learning the ropes, it was a nice bonus, although it really didn’t add up to much. On a broader scale, I admit that the unforeseen boost didn’t make me a better employee for Target. It was dreary work, as you can imagine, and the increased minimum wage didn’t change that fact. On a level of principle, moreover, TGT was burdened with an additional cost, but with no new benefit. And with the entitled Millennial generation taking over, the minimum wage issue only makes this worse.
For TGT, they’re one of the big-box retailers that can ill-afford politically motivated burdens. In recent years, TGT has had trouble moving inventory. Dust-collecting products represent valuable real estate that is being wasted. The answer of course is to move it at any cost, but then that hurts profitability margins.
Here in California, Target is hiring retail workers a notch above the minimum wage. They may be able to fend off the price tag of labor presently. But should the wage trend continue, watch out — TGT has to be considered one of the stocks to sell.
Stocks to Sell: McDonald’s Corporation (MCD)
Let’s be real — McDonald’s Corporation (NYSE:MCD) embodies the minimum wage debate like no other.
MCD was the first job of several of my high school colleagues, and is often the butt of jokes. It’s also a place where you’re not expected to stay long. At best, McDonald’s is a transitional place for most people so management is justified in their basement-dwelling wages.
What is problematic for the “Golden Arches” — and what makes MCD one of the stocks to sell under the circumstances — is government coercion. Again, let’s be real. Nobody eats out at McDonald’s expecting Ritz-Carlton service. We all know that the store clerks and attendants are compensated at the minimum wage, or just barely above it. They’re transitional workers or they can’t get a job anywhere else. Frankly, their skill set is low in demand, and their compensation reflects that.
So for MCD to be forced to pay what is essentially an extra tax makes no sense. Strip away the emotions and just look at the math. McDonald’s employs 420,000 full-time workers. A vast majority of them are run-of-the-mill clerks and attendants. If more and more states start raising their minimum wage laws — and that is the growing sentiment — MCD will face some troubles.
Either they’ll suck it up, and spread the pain to shareholders, or they’ll raise food prices and tax their customers. Whatever route they choose, the writing is on the wall — McDonald’s is in the stocks to sell bucket.
Stocks to Sell: Kroger Co (KR)
With all due respect, Kroger Co (NYSE:KR) is a prime candidate among stocks to sell. Technically, KR stock is all over the map. This volatility reflects severe industry headwinds in the food services sector, namely, food price deflation. The stubborn strength of the dollar hasn’t done any favors for Kroger and its competitors. Worse, with the hawkish U.S. Federal Reserve, economic analysts would largely agree that KR faces tough challenges.
Unfortunately, the minimum wage and the politics surrounding it add a new layer of unnecessary difficulties. It’s not just the fact that arbitrarily raising the floor on salaries equates to taxation without representation. That’s certainly an important element. But for grocery stores in general — and KR in particular — they have to contend with one of the most fearsome institutions in America: the labor union.
KR is essentially a “closed shop” entity. If you want an hourly job there, you have to sign up with your local food labor union. The obvious problem is that labor unions don’t work for free. That means that if states follow Arizona’s example of rocketing the minimum wage, the fees associated with union membership makes less sense to workers. Inevitably, this will induce more negotiations and headaches for Kroger.
Sadly, KR is an easy one. There are too many barriers to classify Kroger as anything but one of the stocks to sell.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
