Wal-Mart beat revenue estimates but missed on earnings, in a report that sent shares sliding and led to fresh questions about the company’s wage boosts.
Wal-Mart said Tuesday its operating margin slid to 5.1 percent in the most recent quarter, down from 5.6 percent a year ago. The company said that issues in its pharmacy business and “shrinkage” (stealing plus spoilage) plus “higher wage investments” led to the problem with its bottom line.
In April, the retailer raised its lowest starting wages to $9 per hour, with a promise to raise them to $10 by February. On the company’s earnings call, Wal-Mart U.S. CEO Greg Foran repeatedly referred to the hike as an “investment.”
The company said that increased wages and hours will take a 24-cent bite out of earnings per share, a bit more than previously anticipated. The company now expects to earn $4.40 to $4.70 per share in the full year.
While slightly higher wages won’t exactly sink the retail giant, they are a potential concern for investors. More generally, an improving labor market should cause wages to rise, potentially increasing cost pressures for many labor-intensive American businesses.
“I do see early signals of wage pressures,” said Aneta Markowska, chief U.S. economist with Societe Generale. “I think it’s a bit too early to worry, but once you start to get into Q2 next year, that’s when I would expect cost pressures to take over and start to squeeze margins in a more pronounced way.”
The most recent reading on the Labor Department’s Employment Cost Index showed just a 0.2 percent rise in labor costs in the second quarter. Yet for Markowska, a more precise measure is the Atlanta Fed’s wage growth tracker, which shows wages increasing at 3.2 percent as of June. The tracker directly compares the wages of each individual, rather than accidentally tracking demographic shifts.
Yet when it comes to the nearer term, individual companies are likely to see “a big more top-line growth, so that helps to hedge against margin pressures,” she told CNBC in a phone interview.
Indeed, Envestnet head of global strategy Zachary Karabell says that the calculus is even more direct for the behemoth that is Wal-Mart.
“If their 2 million workers cannot be viable consumers, then you’re missing a massive internal market,” Karabell said.
More generally, “if your margins are falling because wages are going up, that’s ultimately good for you, because they’ll also be able to raise prices. So when it comes to Wal-Mart, this is their way of investing in the future.”
Still, judging by the stock’s 3 percent slide Tuesday, investors may be a bit more skeptical.