Wal-Mart has faith its higher wages will pay off

The Pak Banker - - COMPANIES/BOSS -

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.

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