Back to top

Analyst Blog

Retail giant Wal-Mart Stores, Inc. (WMT - Free Report) has raised its minimum salary for entry-level store managers, as per Reuters. This is in accordance with the new Obama administration rule slated to be effective Dec 1 that will require employers to pay overtime to salaried workers earning less than $47,500 a year. The managerial raises came into effect in September.

With Wal-Mart’s minimum wage being below that threshold, the alternative was to pay its staff overtime. Hence, the retail giant, which employs 1.5 million workers, has increased its minimum salary from $45,000 to $48,500 annually, which is above the threshold.

The new overtime rule is an effort to shrink the wage gap and would help boost consumer spending power. However, it will burden employers with too much additional cost. In fact, the retail industry is likely to be among businesses most affected by the change, as the sector is the largest private employer in the country, supplying about 42 million jobs.

WAL-MART STORES Price and Consensus

 

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

Last month, officials from 21 U.S. states filed a lawsuit claiming the new overtime rule will place a heavy burden on state budgets. The U.S. Chamber of Commerce and other business groups also filed a separate challenge to the rule in the same federal court.

We note that Bentonville, AR-based company has been 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.

As the largest private employer in the U.S. with 2.2 million employees, Wal-Mart has pledged to invest worth $2.7 billion on raising employees’ wages and give them extra training in fiscal 2017. Under the initiative, the company had increased its minimum wage to $9 an hour in Apr 2015, and to $10 per hour in Feb 2016.

Along with pay raises, Walmart and Sam’s Club launched new short-term disability and simplified paid time off (PTO) programs in Mar 2016 to 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.

In Sep 2016, Wal-Mart paid more than $200 million in cash bonuses during second-quarter fiscal 2017 to over 900,000 hourly workers, as 99% of its stores met targets for cleanliness, faster checkout and better service.

As a result of the 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 customer service. This will ultimately encourage shoppers to spend more. With fewer people quitting jobs, the company aims for better margins.

Wal-Mart currently carries a Zacks Rank #3 (Hold).

Some well-positioned retailers include The Children's Place, Inc. (PLCE - Free Report) , Urban Outfitters Inc. (URBN - Free Report) and Tilly's, Inc. (TLYS - Free Report) , all sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Children’s Place has an average positive earnings surprise of 33.06% in the trailing four quarters. It also has a long-term earnings growth rate of 10.33%.

While Urban Outfitters has a long-term earnings growth rate of 15.00%, Tilly’s has a growth rate of 15.50%.

Confidential from Zacks

Beyond this Analyst Blog, would you like to see Zacks' best recommendations that are not available to the public? Our Executive VP, Steve Reitmeister, knows when key trades are about to be triggered and which of our experts has the hottest hand. Click to see them now>>