Wal-Mart's Pay Increases Hide a Dirty Secret

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Wal-Mart (NYSE: WMT) has always been a lightning rod for the debate on living wages. Critics contend the company has built its success on the back of low-wage employees, noting that many of Wal-Mart's employees are dependent upon government assistance. In a 2004 study, Americans for Tax Fairness, a left-leaning organization, said that Wal-Mart employees cost U.S. taxpayers $6.2 billion in public assistance; the group equates this to a government handout to the company's shareholders, most notably the Walton family.

New CEO Doug McMillon has done an admirable job reversing this criticism. After years of underinvestment in human capital took their toll, McMillon announced a plan to increase training and salaries in 2015. After initially selling off harshly in response, the stock trounced the greater market. However, the company's newest announcement shows the limits of Wal-Mart's generosity.

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Pay raises for you -- the unemployment line for you

This month, Wal-Mart announced plans to increase the starting wage for all hourly associates in the United States to $11 per hour, alongside a one-time cash bonus of up to $1,000. All told, the company expects the change to benefit more than one million associates and cost a combined $700 million over the next fiscal year. Like many companies eager to curry favor with the new administration, Wal-Mart partially credited the GOP tax cut as a factor behind the raises.

Soon thereafter, news of this generous giveback was eclipsed by a report that Wal-Mart will close more than 60 of its membership-only Sam's Club stores, affecting approximately 10,000, according to company spokesman Greg Hitt. This evaporated the goodwill generated by news of the prior increase, and made the company's selective disclosures look slightly duplicitous and self-serving.

Wal-Mart was less open about the savings the Sam's Club layoffs would produce. However, using conservative back-of-the envelope math (35 hours per week, $11-per-hour wages, 52 weeks per year, and 9,500 laid-off employees), Wal-Mart will save at least $190 million per year on costs for hourly associates, along with millions more on benefits, FICA taxes, rent, and other ownership costs.

Later, The Wall Street Journal reported Wal-Mart would cut an additional 1,000 jobs at its Bentonville, Arkansas headquarters by month's end. Ironically, many economists predict job losses when government-mandated minimum wage increases are forced upon businesses; Wal-Mart's actions appear to support the premise that higher wages hurt job growth, even without a federal diktat.

Wal-Mart put an unnecessary bull's-eye on itself

Perhaps this is Wal-Mart's new plan: Shrink geographical coverage by closing lower-grossing stores, and spend more money hiring better-quality talent in better locales. It's a change from founder Sam Walton's vision of covering the entire United States.

It may be a natural progression for the company, as geographically the United States continues to recover unevenly from the Great Recession. Bigger cities and their inner suburbs have fared better than large rural areas and more distant suburbs, as the economy increasingly becomes consolidated and dominated by a few large employers. It makes sense for Wal-Mart to transition its store portfolio to reflect this trend.

It's likely that Wal-Mart's combined actions are slightly net positive to the greater economy, because lower-wage workers have a higher propensity to spend. But it's an asymmetric comparison, as job losses are often more damaging than small increases in pay.

Wal-Mart's announcing pay increases and crediting the GOP tax law put a large bull's-eye on itself, if it must continue to close locations to rightsize its store portfolio. This is an unfortunate misstep, because it's likely that e-commerce will continue to force traditional retailers to downsize and emphasize digital operations.

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Jamal Carnette, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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