It may sound strange, but the recent move by Wal-Mart Stores Inc (NYSE:WMT) to raise its minimum wage from $10 an hour to $11 an hour is likely a good thing for WMT stock. Yes, raising labor costs may actually result in lifting the value of WMT stock over time.
Part of the move is a result of the corporate tax cuts passed by Congress. Walmart will save about $2.5 billion annually as a result of the cut. WMT management says the change will affect over one million of its workers. That means the increase could be entirely paid for by the tax cut for employees who work 50 hours per week or less.
The tax cut, however, is not why WMT raised wages.
The primary reason is that Walmart is in the midst of reinventing itself, partially to deal with competition from Amazon.com, Inc. (NASDAQ:AMZN).
It made a great acquisition with Jet.com. It is closing its Sam’s Club stores and will likely use these locations as distribution and fulfillment centers for its Jet.com and Walmart.com e-commerce businesses. That will increase its e-commerce efficiencies and improve margins, while also removing cannibalization at the store level.
As part of this reinvention, Walmart is on a public relations offensive. After enduring years of lousy publicity for being a low-wage employer that didn’t care about its workers, WMT has pivoted in an effort to win the PR battle.
This may not sound important, but it’s important for WMT stock. A company’s image does affect consumer behavior. One of the reasons Whole Foods roared to success in its early years was because it presented an image of being “responsible” and “sustainable.” Many other companies have followed suit.
This also works in reverse. WMT has enough trouble competing with Amazon. It doesn’t need lousy PR. Now that the tax cut has come in, it can continue with its wage increase strategy that it started three years ago.
Besides the PR angle, there are potential tangible and intangible benefits to be seen for Walmart from higher wages. This pushes WMT away from low-cost, unskilled labor toward workers who are more likely to be receptive to training, to improve their skill sets and to lift themselves out of an $11-per-hour job and onto a higher-paying job within the company.
WMT can effectively then leverage its own training into developing a more productive and long-term workforce. This is what Costco Wholesale Corporation (NASDAQ:COST) has been doing for some time.
Walmart has been suffering for a while, and this move may also be a response to the labor market. This past year has seen employment gains. It may be that Walmart is feeling some wage pressure and figured it needed to raise the pay of its workers to attract better ones.
Bottom Line on WMT
I suspect this is all part of a longer-term reinvention, and possibly even an eventual re-branding for Walmart. Time will tell, but certainly management must see the huge declines in revenue, and has decided that the time had come to make some changes.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
