What Wal-Mart's wage woes mean for Gap, TJX


Wal-Mart shares continued to tumble Friday, after the world's largest retailer put a price tag on the billions of dollars in costs it would rack up as part of its previously announced wage increases.

The discounter saw more than $25 billion of its market share wiped out in just one week, as analysts and investors alike were shocked to learn that these hikes would amount to $1.2 billion in additional costs this year, and another $1.5 billion next year.

That's despite the fact that Wal-Mart had previously outlined its plans to raise its minimum pay to $9 an hour this year, and with a second bump to $10 next year.

Wall Street's sharp reaction to Wal-Mart's pay hike also raised questions about the potential implications for other retailers who had already increased or planned to raise their minimum wage — a list that includes Gap, TJX and Ikea.

A shopper checks out at a register at a Walmart in Los Angeles.
Jonathan Alcorn | Reuters

But while its competitors shares initially fell in sympathy, analysts said there are several reasons why Wal-Mart's $2.7 billion in wage investments shouldn't spook its counterparts.

For one, Wal-Mart not only committed to upping its minimum wage to $10 an hour next year, but it's also raising the ranks of higher-paid managers, and increasing the number of hours in its stores. For another, the stakes are much higher for the world's largest private employer, which has 1.4 million workers in the U.S. alone.

And while 75 percent of the hit Wal-Mart expects to take on its earnings relates to employee pay, it is also shoring up its investments in e-commerce and working to reduce shrink. The retailer added that it expects its pharmacy business to continue to take a bite out of profits, after lower-than-expected reimbursements in the category dented gross margin in its second quarter.

The company on Wednesday projected its earnings will slide to between $4.40 and $4.70 a share this year — down from $4.84 — and drop another 6 to 12 percent next year.

"This is all just internal to Wal-Mart," said Craig Johnson, president of Customer Growth Partners. "It has zero implications for other companies."

An employee arranges frozen turkeys displayed for sale at a Walmart Store in Los Angeles.
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Despite concerns otherwise, Johnson said he doesn't think there will be a trickle-down effect on other retailers who have already raised or plan to increase their minimum pay.

So far, the evidence backs up his thesis.

A spokeswoman for Ikea on Thursday confirmed that the furniture retailer would indeed follow through with bumping its average hourly wage for the second year in a row, to $11.87 from $10.76.

A spokeswoman for Gap clarified that it included the impact of its minimum hourly wages — which went from $9 to $10 in June — in its 2015 guidance, which calls for earnings per share to fall in the range of $2.75 to $2.80.

Though that is a deceleration from 2014's $2.87 a share, it also accounts for costs associated with other initiatives, including the decision to shutter 175 stores in North America over the next few years.

And a spokeswoman for TJX, which in June increased pay for its full- and part-time hourly U.S. employees to at least $9 an hour, reiterated that its wage initiative has been covered in its earnings reports and guidance for the past three quarters.

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On its most recent earnings call, the retailer said its earnings per share growth was negatively impacted by about 5 percent due to wage initiatives, incremental investments, pension costs and foreign exchange. Morgan Stanley estimates the wage hike accounted for 60 percent of that amount.

At that time, the company also said it expects these factors to weigh 9 percent on its earnings per share growth during this fiscal year, which is expected to fall in a range of $3.24 to $3.28, compared to $3.15 the prior year.

Next year, TJX will once again raise the hourly pay for all of its U.S. workers, to $10 an hour. Morgan Stanley analyst Kimberly Greenberger said wage headwinds will be more pronounced in 2016, accounting for about a 10 cent per share hit, and moderate slightly in 2017 to about 8 cents a share.

When it comes to sheer numbers, Wal-Mart employs 2.2 million workers around the world, compared to TJX's roughly 198,000, Gap's 150,000 and Ikea's 123,000.

But analysts emphasized that Wal-Mart's investments are not all about raising the minimum wage. The company is also adding approximately 8,000 department managers, with those working in certain departments starting at an hourly wage of $15. It will also add roughly 3,500 department managers this holiday to facilitate in-store pickup.

"There's some additional cost that's going into the structural cost of the stores," Raymond James analyst Budd Bugatch told CNBC.

Despite the dramatic slide in its stock, Johnson said Wal-Mart's move highlights that retailers are finally starting to remember the importance of investing in human capital. Not only does better compensating workers create a more enjoyable in-store experience, it also reduces turnover — therefore cutting back on the cost of hiring and training workers — and helps discourage employee theft.

The majority of this type of theft occurs in the final weeks of a worker's tenure, Johnson said.

Barclays analyst Meredith Adler told CNBC that while it will likely take years for Wal-Mart to turn things around, increasing its investments is a necessary step toward making its stores stand for more than just low prices.

"The old Wal-Mart model of being all about price, it just doesn't work anymore," she said.