Wal-Mart has faith its higher wages will pay off
Wal-Mart Chief Executive Officer Doug McMillon keeps a copy of an April 1996 Fortune magazine article in his office. It's headlined "Can WalMart Get Back the Magic?" As McMillon put it in the prerecorded quarterly earnings discussion that the company released this morning:
It's a pretty strong indictment of our future, and the fun fact is that it was written in 1996. The sub-headline on the article offers such a good summary that I'm not going to go to the effort of paraphrasing.
Built on magnificent simplicity, the company has grown so vast and complex that Sam Walton would barely recognize it. CEO David Glass sees a bright future in food retailing; Wall Street has its doubts.
Long story short: Glass was right, Wall Street was wrong. Wal-Mart is now North America's biggest grocer, and by the end of 1999 the company's stock price, which had gone pretty much nowhere from 1992 through 1996, had more than quintupled.
As you can see from the above chart, Wal-Mart has had its downs and ups since then. After hitting an all-time high in January, its stock price is now in another slide.
McMillon, who took over as CEO last year and was the subject of his own, quite flattering Fortune profile just a couple of months ago, brought the 1996 Fortune article along to the annual holiday-season planning meeting for store and market managers in Denver this month as a motivational tool.
Wal-Mart was going through big changes then, and it proved the doubters wrong. "We're in another period of change right now," McMillon said he told them.
Much of the change has to do with technology, he continued, and combining "the best of the offline world with the best of online to serve customers however they want to shop." And one of the biggest, toughest challenges has to do with making shopping in WalMart's stores less of a dreary, utilitarian slog:
As you know, in the first quarter, we initiated a comprehensive multi-year plan to increase starting wages and training for associates in our U.S. stores and clubs.
During the second quarter, we implemented the next phase of changes to our Walmart U.S. store structure, including adding department managers. Our focus on running better stores that are clean and well-stocked, have friendly associates and an efficient checkout is resonating with customers.
They've always counted on Walmart to have great prices. Now, we're building their trust with better in-stock and delivering an enjoyable shopping experience.
In one sense, this is already working: Same-store sales were up 1.5 percent in the second quarter of Wal-Mart's 2016 fiscal year, which ended July 31 -- the fourth straight quarter of gains. But there are complications. One is that, as Bloomberg's Shannon Pettypiece reported earlier this month, raising the starting wage for Wal-Mart workers to $9 an hour earlier this year and $10 by next February has irked a lot of veteran Wal-Marters:
In interviews and in hundreds of comments on Facebook, Wal-Mart employees are calling the move unfair to senior workers who got no increase and now make the same or close to what newer, less experienced colleagues earn.
Also, perhaps less surprisingly, paying workers more has squeezed profits -- although the starting-wage increase actually isn't the biggest factor. This is from the "assumptions for fiscal 2016 earnings per share guidance" in today's earnings press release ( the overall estimate is for earnings of $4.40 to $4.70 a share, down from $4.99 in fiscal 2015):
The impact from investments in wages, training and additional hours in our stores and clubs will be approximately $0.24, including approximately $0.08 in the third quarter. Our decision to add associate store hours beyond our February plan is the primary driver.