Wal-Mart Boosts Wages After Tax Overhaul -- WSJ

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (January 12, 2018).

Wal-Mart Stores Inc. said it would raise starting hourly pay to $11 for all its U.S. employees and distribute one-time bonuses, doling out some of the windfall it expects from the U.S. tax overhaul as it competes for store workers in a tight labor market.

The giant retailer, which employs around 1.5 million people in the U.S., currently pays $9 or $10 an hour to most new store workers. The wage increase to well above the federal minimum could pressure restaurants, warehouses and smaller retailers that compete for low-skilled hourly workers.

On Thursday, the company also announced plans to cut roughly 10,000 jobs by closing about 10% of its 660 U.S. Sam's Club warehouse stores.

Chief Executive Doug McMillon cited the tax overhaul for the pay increase, which the Trump administration praised at the White House. But the wage boost also comes as many U.S. businesses are contending with tight labor markets and rising wages. Retail rival Target Corp. recently lifted its starting pay to $11 an hour and Costco Wholesale Corp. starts hourly staff at $13.

Some manufacturers, too, are reacting. Fiat Chrysler Automobiles NV said Thursday it would pay $2,000 bonuses to about 60,000 U.S. salaried employees and invest $1 billion in a Michigan plant following the tax overhaul.

The monthly U.S. unemployment rate has held at a 17-year low since October. Retail trade workers in the U.S. earned an average hourly wage of $15.51 in December, up about 11% from five years ago, according to the Bureau of Labor Statistics. For Wal-Mart, it is the third increase in its minimum wage since 2015.

"The labor market is tight and getting tighter," said Mark Zandi, chief economist at Moody's Analytics. Moody's estimates unemployment will fall to 3.5% by the end of this year in the wake of tax cuts, down from the 3.9% the firm predicted without the cuts. Tighter immigration enforcement will also pressure retailers, who hire the same types of workers that other industries losing undocumented workers will now seek, he said.

The higher wage will add about $300 million in annual expenses for Wal-Mart while the bonuses will result in a $400 million hit to the current quarter's profit, the company said. But the payout is just a sliver of what Wal-Mart, which had nearly $500 billion in revenue last year, stands to gain from the tax overhaul.

"The $300 million of incremental labor expenses in 2018 only represents about 15% of the potential cash windfall we estimate that [Wal-Mart] could enjoy," wrote Ray Young, a retail analyst for Gordon Haskett Research Advisors. He expects the company will dedicate at least as much to lowering prices and use much of the money to boost dividends and buy back stock.

Several other large U.S. employers announced plans to raise wages or pay bonuses in the wake of the tax overhaul. The day the legislation was signed by President Donald Trump, AT&T Inc. and Comcast Corp. said they would pay a $1,000 bonus to most of their U.S. employees, or more than 300,000 people. Wells Fargo & Co. said it would increase its starting pay to $15 an hour.

Mr. McMillon said Thursday that Wal-Mart was still reviewing the impact of the tax law, which lowers the corporate rate to 21% from 35%, but he said it would also earmark funds for training, lower prices and technology investments. The company has been ramping up its e-commerce efforts to challenge Amazon.com Inc.

During an October investor meeting before the tax overhaul, Mr. McMillon said he expected wages to keep rising, though he added Wal-Mart would manage the cost.

"Some of the work that we have under way as it relates to productivity positions us well to be able to thrive in that kind of environment," he said. Wages keep "moving in a more incremental fashion and we've been adjusting to that market by market and we'll continue to do that."

To combat wage pressures, Wal-Mart has tried to save on labor costs by adjusting the number of workers per store and more recently by automating many rote tasks. It is adding more self-service registers and using robots to scan shelves for items that are out of stock. Last year, Wal-Mart had around 15% fewer workers per square foot of store than a decade ago, according to an analysis by The Wall Street Journal.

When Wal-Mart increased wages and boosted training through 2015 and 2016, the moves cost the retailer $2.7 billion, an expense that pressured the company's stock price.

This increase will cost less because Wal-Mart already has a "sizable" group of stores paying employees at least $11 an hour and already had plans to increase wages in some stores during its coming fiscal year, which starts Feb. 1, said spokesman Kory Lundberg.

Wal-Mart's average hourly wage for full-time U.S. store employees is expected to rise to around $14.50 an hour after the latest change, up from $13.85 an hour currently, said Mr. Lundberg. Wal-Mart has been criticized for not paying workers enough or not giving them enough hours to earn a steady wage.

The federal minimum wage has remained at $7.25 an hour since 2009, but dozens of states and municipalities have implemented higher mandates in recent years. An $11 hourly wage is the minimum required in Massachusetts and Washington state.

The increase comes at a time of relative strength for Wal-Mart, despite the woes of some smaller and mall-based chains. The company, which is the country's biggest grocer, has reported strong sales over the last year as it ramped up its online business to fend off Amazon and benefited from the troubles at smaller retailers closing stores. Wal-Mart shares surged more than 40% last year, hitting record highs. The share price rose 35 cents to $100.02 on Thursday.

The amount of Wal-Mart's one-time bonus will vary based on length of service, reaching up to $1,000 for an individual with 20 years of service. Sam's Club employees affected by the closures will be eligible for the bonus, the person familiar with the plans said.

Around a dozen of the 63 Sam's Club stores being shut will become ecommerce fulfillment centers, the company said.

Wal-Mart also said it would offer full-time store workers the same paid family leave as corporate employees for the first time, a move that pleased some activist who had criticized the retailer's policies. Wal-Mart's change "transformed access to parental leave for low-wage working people across the country," said Katie Bethell, executive director of Paid Leave For The U.S., an advocacy group.

Write to Sarah Nassauer at sarah.nassauer@wsj.com

(END) Dow Jones Newswires

January 12, 2018 02:47 ET (07:47 GMT)