Wal-Mart is paying back.
At its annual investor day, the company cut its outlook for profits over the next two years, and forecast a drop of 6% to 12% in 2017.
Following the news, shares fell as much as 10%. This wiped out about $US18 billion of the company’s market value, and was the worst drop for the stock in over a decade.
In a note to clients, Stifel analysts wrote:
“While the headlines suggest WMT’s guidance specifics disappointed or WMT is entering a “reinvestment period” — we think the underlying narrative is far more important. The market is reacting to meaningful evidence that WMT has substantially over-earned. WMT calls out specifics of wage and price investments — and yes these are discrete actions taken by WMT; but we believe they are just symptoms of where WMT sits in its history.”
They have a “hold” rating on the stock.
Their point is that previously, Wal-Mart kept its expenses on wages low and instead focused on its share of the retail market. That’s a strategy that probably worked, since Wal-Mart is the world’s largest retailer.
However, Wednesday’s news is an indication that this has now switched, and Wal-Mart may have over-earned all along.
While the wage hikes are good for workers, news that they would hurt profits down the road is bad for investors.