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The Huge News Wal-Mart Didn't Make About Wages

The news that Wall Street analysts, bond investors and Wal-Mart's (WMT) competitors all feared on Tuesday didn't happen.

X Shares of Wal-Mart had underperformed in the two weeks leading up to Tuesday's annual investor day, ever since rival Target (TGT) announced that it was hiking its minimum wage from $10 an hour to $11, with a commitment to hit $15 by 2020.

The worry was that Wal-Mart, facing the same kind of wage pressures as Target amid 4.2% unemployment, would have to embark on a new round of pay increases. While Wal-Mart unquestionably enhanced its competitive position by investing an additional $2.7 billion in employee compensation in 2015 and 2016, while also investing heavily in e-commerce capabilities, the combination has been tough on profitability.

Even as Wal-Mart's U.S. sales, excluding Sam's Club, rose nearly $20 billion, or 6.9%, from its January 2015 fiscal year through January 2017, operating income slid by $3.6 billion, or 16.8%.

Wal-Mart signaled on Tuesday that those days of shrinking profits to secure its competitive position may be behind it. The company stood by guidance that earnings per share would grow 5% in the fiscal year starting February 2018.

While Wal-Mart investors cheered the news, the whole retail sector likely breathed a sigh of relief. AutoZone (AZO) CEO William Rhodes said on an earnings call last month that wage pressures had accelerated "significantly more than I have experienced in my nearly 23 years of AutoZone."

Rhodes said minimum wage laws explain only part of the pressure. "Probably the larger portion is being driven by general market pressures with lower unemployment and some specific actions taken in recent years by other retailers."

"Other retailers" surely referred to Wal-Mart, which bumped up its base wage to $9 an hour in 2015 and $10 in 2016. A host of other retailers, including Costco (COST) and Target, responded with their own wage hikes in the spring of 2016. Kroger (KR) and Target were among the best performing S&P 500 stocks on Wednesday. (Kroger also said Wednesday it is considering selling its convenience stores.)


IBD'S TAKE: Shares of Wal-Mart cleared a buy point of 82.09 on its welcome guidance. A buy point is the point when an investor has the best chance of near-term gains. So far, Wal-Mart's stock has been a case in point, rising to 85.73. The stock is barely still within the 5% chase zone, above which it  is considered extended. To find other stocks poised for gains, start with these IBD lists.


A new round of wage hikes by Wal-Mart, which has 1.5 million U.S. employees, would have put pressure on other modest-wage employers to match, and hawkish Federal Reserve policymakers keeping a close eye on wage growth as a precursor of rising inflation would have surely taken note.

Because Wal-Mart's wage outlook has pretty sizable implications for the U.S. economy, the big question is why Wal-Mart doesn't think it will need to match Target's wage hike, at least in the near term. It's now been 20 months since Wal-Mart implemented its last big wage increase. Wal-Mart said at the time that the $10 minimum only applied to associates hired by Jan. 1, 2016, and that new entry-level hires would get a $9 starting wage. That will pale compared with Target's $11 an hour and the $12 starting wage that Amazon.com (AMZN) offered as it tried to recruit 50,000 workers during a one-day hiring spree in August.

While Wal-Mart hasn't precisely spelled out its reasoning, here are some of the factors likely at play.

One of Target's reasons for hiking its minimum wage to $11 right now is to help it attract 100,000 seasonal employees. Wal-Mart, on the other hand, which hired 60,000 seasonal workers back in 2015, has said it will get by without seasonal workers for the second straight holiday season. Instead, it plans to offer current associates additional hours.

That potential for more hours is one of the ways Wal-Mart can deepen its relationship with its workers, while providing them with more income, even if it's not necessarily coming from higher wages. Under another new Wal-Mart program, associates can earn extra cash by delivering packages on their drive home from work, while helping to speed delivery to customers. Increased sales at Wal-Mart also have led to performance bonuses. In March, the company said that 850,000 associates shared $157 million in cash bonuses based on their stores' fourth-quarter performance.

After Wal-Mart's first big minimum-wage hike in 2015, there were concerns that the morale of more experienced workers just up the pay ladder might suffer if they were left out. That explains, in part, why Wal-Mart broadened out the pay hike in 2016 to include 1.2 million workers. It's easy to see why Wal-Mart wouldn't want a repeat, if it can avoid it.

At Wal-Mart's investor day, management said that the company has continued to increase pay, as needed, though on a market-by-market basis, depending on local conditions. The company also stressed, though not specifically with regard to wages, that it was more focused on having a performance-based culture after previously having "set the bar too low."

By rewarding workers with promotions — 200,000 in fiscal 2017 — more hours and incentive pay, it's possible Wal-Mart may be able to defer another minimum-wage hike for some time without experiencing a troubling increase in turnover.

Still, Wal-Mart's profit outlook doesn't look quite as impressive once you consider that the company also plans to buy back $20 billion in shares over two years. Buying $10 billion worth would shrink the share count by nearly 4% in the coming year at current prices, so 5% EPS growth might only translate to a 1% to 2% earnings rise, unadjusted for share count.

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