Investing in the Future
Wal-Mart (NYSE:WMT) has always stood as a pillar of innovation and efficiency in the retail sector, but their latest change stands out from anything they have done in the past. Wal-Mart refers to its latest trend in employment practice as upskilling. Critics have often debated Wal-Mart's treatment of its labor force with some citing the lower pay and qualifications as creators of job opportunities for a broader group of people, and others claiming that employees should earn higher wages from the profitable giant. Wal-Mart listened to the latter group and implemented new employment practices including more training and higher wages.
Beginning in 2016, Wal-Mart will implement a new training program for all employees. Wal-Mart expects these new training manuals, workshops, classes, and on the job exercises will improve employee morale, improve customer service, increase employee productivity, reduce employee turnover, and give all employees valuable skills applicable to their future careers. Training programs at all levels should also help move Wal-Mart employees up the corporate ladder, encouraging promotions from within the company.
If successful in reducing employee turnover, this investment in its workforce will save the corporation millions of dollars. The Wall Street Journal found that standard retail turnover is roughly 50% in the first 6 months of employment in the retail industry. This high turnover rate rings in at about $5,000 per employee. Wal-Mart also began increasing pay rates, on schedule to pay all but brand new employees at least $10 per hour.
These sweeping changes so starkly contrast the usual Wal-Mart initiatives that some investors worry about the sustainability of their low cost business model. However, in addition to the anticipated cost savings of reduced employee turnover, investors should remember that basic economics tells us that the increased productivity expected from these improvements will shrink the amount of labor required. While these changes have remained in the spotlight, Wal-Mart also has other changes in the works.
Wal-Mart is no stranger to competition. Traditionally, they have banked on their low cost business model to give them a competitive edge, and they have emerged as the poster child for that business model. While some people do not agree with the pressure Wal-Mart puts on many vendors to deliver products faster while paying less for them, they pass these cost savings on to the customers which has created returning customers and a flourishing business.
However, as technology continues to make the world more efficient, Wal-Mart must once again inject some innovation into their business strategy to keep up with new competitors, especially in the ecommerce sector. Wal-Mart has taken a multifaceted approach to their entrance into not only the digital age, but also into an age of fast-paced living in which consumers attempt to accomplish 30 hours of work and errands into a single 24 hour day.
Recently, Wal-Mart has focused heavily on building their ecommerce presence. Research by Fast Company found that Wal-Mart's "app-wielding customers make twice the shopping trips per month and spend 40% more than non-app users." Wal-Mart's R&D also has a GPS project that guides customers through their massive stores to the product they want to buy. In addition to apps and working on enhancing their website to compete with online retailers, Wal-Mart also has a plan that will allow customers to skip the lines even when shopping in stores. Customers will be able to scan the items with their cell phones and pay for them without having to wait in line.
To compete with smaller convenience stores, Wal-Mart has opened a series of smaller "neighborhood stores" which will allow customers to run in and out if they only need 1 or 2 items. On the other end of the spectrum, Wal-Mart recently announced that their bulk warehouse store, Sam's Club, will accept American Express (AXP) cards beginning October 1st. This deal followed the announcement of American Express's severed relationship with Sam's Club rival, Costco (COST). Acceptance of these credit cards is expected to entice more customers to the 650 Sam's Clubs nationwide.
Wal-Mart's tumbling stock price reflects the apprehension felt by investors following the new changes in employment practices. A quick look at the company's financials, however, does not show an economic reason for this falling share price.
Wal-Mart has posted increased annual revenue every year for well over 15 years, ending last year with a hefty $485,651 million in revenues. This year's Q1 revenues fall just shy of 2015's Q1 revenues, but that is reasonable with the new additional spending on employees. This new investment in employees might cause the first decrease in annual revenue in decades. This is not expected to last, however, with analysts projecting an average annual growth rate of 5.04% over the next 5 years.
Quarterly EPS has produced a negative surprise in the past 2 quarters (-1% for Q1 and -3.6% for Q2), but this again must be read with the understanding that the company's massive new expenditures on employees is an investment that will pay off in the future. Wal-Mart boasts one of the lowest P/E ratios in its industry, at just 13.36. This especially impressive when compared to the industry average of 30.36.
Analysts clearly understand that the investment has strong implications for the company's future. With 4 analysts rating WMT as a strong buy, and 16 rating it as a hold, investors have little reason to start dumping the stock.
Wal-Mart's radical new approach to employment may worry some investors, but it should not. Investing in employees will lead to cost savings in the future. It will be interesting to watch the effects that these deviations from the typical Wal-Mart employment practices have on their financials. It has the potential to impact the books anywhere from salary expense to legal expenses. Furthermore, the new agreement between Sam's Club and American Express might bring in new members, increasing membership income. It will also be interesting to watch how the smaller "neighborhood stores" stack up against well-known convenience stores.
These changes have major upside potential and the I Know First algorithm is bullish on this stock in the long term, with a bullish algorithmic forecast to support the fundamental analysis of WMT stock.
Business relationship disclosure: I Know First Research is the analytic branch of I Know First, a financial start-up company that specializes in quantitatively predicting the stock market. This article was written by Susanna Berman. We did not receive compensation for this article, and we have no business relationship with any company whose stock is mentioned in this article.