Walmart shares fall 6% after pledging to raise its average hourly wage to $15

Creative Touch Imaging Ltd./NurPhoto/Getty Images

Here we go again.

Walmart shares plunged 6% Thursday morning after the big-box retailer announced a number of investments to spur growth, including spending billions on raising its average U.S. hourly wage to more than $15 per hour. The increases, which will benefit about 425,000 store and distribution center employees out of Walmart’s 1.5 million U.S. workers, overshadowed a strong holiday-quarter earnings report.

The stock market’s reaction Thursday was reminiscent of what shares did in October 2015, when the company, then a bumbling e-commerce player, announced massive investments in wages, then starting at $10, and on e-commerce. That day, shares fell 10%, their biggest single day decline ever.

Since then, the company has come under pressure to further increase store workers’ pay at a time of big sales gains during a pandemic and intense competition for talent with the likes of Target and Amazon, which have already raised their internal minimum wages to $15.

Walmart CEO Doug McMillon himself recently opposed an across-the-board minimum wage of $15, a move supported by President Biden, arguing that is too high and that compensation should reflect local market conditions. It’s worth noting though that Walmart’s new $15-per-hour level is an average, meaning many workers won’t make that. Walmart’s new starting wages will range from $13 to $19 per hour.

The retailer has been a big winner in the pandemic as shoppers consolidate their trips to fewer stores and increasingly place orders online to pick them up curbside. That success, which yielded an 8.6% increase in comparable sales at Walmart’s namesake U.S. stores in the fourth quarter, has stemmed in large part from having motivated store workers.

It has also come from Walmart’s heavy investments in recent years not only in worker wages but also in store renovations and an e-commerce infrastructure.

Walmart’s financial results since then show those investments have largely paid off both in stores and online. While it still lags Amazon by an enormous margin, in 2020 its U.S. e-commerce rose 79%, and it is now the second biggest digital retailer out there.

Walmart also announced a $14 billion capital expenditure program, roughly 40% more than last year’s. Walmart says the focus will be on things like an improved supply chain, automation such as in-store robots, grocery order fulfillment, and tech to improve shopping for customers.

“Walmart’s accelerating capex spend will crank up the competitive pressure, particularly in the U.S.…building on the momentum it has been generating over the past several years,” Moody’s vice president Charlie O’Shea wrote in a research note.

Other parts of Walmart’s business did well. Sam’s Club, which faces a tough rival in Costco, saw comparable sales rise 10.8% in the fourth quarter, while sales at Walmart International increased 5.5%. As for Walmart U.S.’s comparable sales growth for the holiday-season quarter, it handily beat analyst forecasts by several percentage points.

Other factors that spooked investors were that the 2020 sales increases will be tough to beat and Walmart’s forecasts show its growth will moderate to more normal levels. The company expects comparable sales at Walmart U.S. and Sam’s Club to increase by a low single-digit percentage this year. What’s more, Walmart is venturing further into areas like advertising and web marketplaces, areas where it is a relatively new entrant, so success is not guaranteed, whatever its big investments.

Under McMillon, Walmart has come a long way in reinventing itself as something more than a big-box retailer selling commoditized stuff at massive, tired stores. But Walmart’s rivals, from Costco to Target to Amazon, have also gotten stronger in recent years, making new investments paramount.

“We’re managing for the short term, but we’re building for the long term,” McMillon told Wall Street analysts at Walmart’s virtual investor day. That’s just about what he said in 2015, when shares were worth about half of what they are today.

Subscribe to Well Adjusted, our newsletter full of simple strategies to work smarter and live better, from the Fortune Well team. Sign up today.

Read More

Artificial IntelligenceCryptocurrencyMetaverseCybersecurityTech Forward