Is Wal-Mart (WMT)'s Pay Increase Helping Investors Too?

A number of reasons may be cited for Wal-Mart Stores Inc. 's WMT upbeat second-quarter fiscal 2017 results reported last week. The retail giant's earnings and revenues both exceeded the Zacks Consensus Estimate, driven by an improvement in comps and higher e-commerce sales.

Wal-Mart has been making efforts to understand the evolving needs of its customers to regain their confidence, and thus, boost sales. It has delivered positive comps in the U.S. in the last eight consecutive quarters. Lower fuel prices aided sales as it eased consumers' spending power. E-commerce has also contributed to the company's sales.

Additionally, Wal-Mart is making huge investments in e-commerce initiatives to compete with the biggest online retailer AMZN and to improve customer service. The company has recently sold its Chinese e-commerce business Yihaodian to local retailer to expand its reach in China. The company also closed underperforming stores, including 102 Walmart Express stores to improve its sales results.

Apart from these, the most important initiative of the Bentonville, AR-based company was paying its workers more and training them to improve its stores' performance. Paying more and better than other companies is working for Wal-Mart, which had been struggling to boost its sales.

WAL-MART STORES Price and Consensus

WAL-MART STORES Price and Consensus | WAL-MART STORES Quote

Wal-Mart, being the largest private employer in the U.S. with 2.2 million employees, raised wages of more than 1.2 million employees of Walmart U.S. and Sam's Club in February, as was announced in Jan 2016. Under the plan, the biggest retailer raised its hourly wage to least $10 per hour for around 500,000 employees hired before Jan 1, 2016. Those who were already paid higher got a 2% pay hike. The entry-level associates hired after Jan 1 got $9/hour and will be given at least $10/hour after completing their training program. Walmart has also raised the minimum wage of its non-entry level hourly workers. As a result, the new minimum wage for top-level hourly employees will increase to $15 an hour from $13, while the base salary for assistant managers will also rise.

Walmart's average full-time hourly wage is now $13.38/hour. The average part-time hourly wage is $10.58/hour. The company's wage increases would cost $1.5 billion and lead to a 6%−12% drop in profits in fiscal 2017 (ending Jan 2017).

The move marks the second phase of the company's two-year $2.7 billion investment in workers. Wal-Mart spent $1 billion on raises and training last year, per the plan announced in Feb 2015 to hike wages of approximately 500,000 full-time and part-time associates at Wal-Mart U.S. stores and Sam's Clubs.

Moreover, under the Labor Department rules unveiled in May 2016, more than 4.2 million additional American workers will qualify for overtime pay, which will be effective in December.

Along with pay raises, Walmart and Sam's Club have launched new short-term disability and simplified paid time off (PTO) programs in Mar 2016 that will streamline paid vacation, sick time, personal time and holiday time into one category. These changes will expand support for associates dealing with extended health issues and provide them greater control over their paid time away from work.

As a result of wage increase and better training, Wal-Mart has managed to reduce inventory turnover and improve working capital management, having been criticized in the past for underpaying its workers.

Though the wage hike will raise the expense burden on the retailer and reduce its earnings over the near term, we believe this will keep workers contented and also help improve Wal-Mart's customer service. This will ultimately encourage shoppers to spend more. With fewer people quitting jobs, the company aims for better margins. In fact, investors are optimistic on the stock as shares are on an upswing and have jumped more than 19% since the pay increase was announced in January.

Wal-Mart currently carries a Zacks Rank #2 (Buy).

Stocks to Consider

Other well positioned retailers include Boot Barn Holdings, Inc. BOOT and Citi Trends, Inc. CTRN . Both hold the same Zacks Rank as Wal-Mart.

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AMAZON.COM INC (AMZN): Free Stock Analysis Report

CITI TRENDS INC (CTRN): Free Stock Analysis Report

WAL-MART STORES (WMT): Free Stock Analysis Report

BOOT BARN HLDGS (BOOT): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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