The Minimum Wage Bill is here, and if passed, minimum hourly wages would rise from $7.25 to $10.10 in two years.
Although this 39.3% hike would strain job creation (over the short-term), the bottom-up inflation would certainly pump up disposable income among the poor and middle class.
The Phillips curve attached above suggests that once inflation is induced, unemployment rate dips over the intermediate term, before normalizing to its fair value. The proposed bill involves inflating the wages in three phases, which should boost job creation (over the intermediate term) in three phases. If the bill is passed, I believe that Wal-Mart Stores, Inc. (NYSE:WMT) would be one of the prime beneficiaries.
Impact of the bill
Wal-Mart Stores, Inc. (NYSE:WMT), which is a huge retail chain with 10,792 stores worldwide, missed Street estimates in the previous quarter. This was because Wal-Mart caters to the lower income classes, which were financially constrained due to rising gasoline and natural gas prices. If the proposed bill is passed, Wal-Mart Stores, Inc. (NYSE:WMT)’s customers would have more disposable income, which would naturally reflect on Wal-Mart’s revenues.
But the effects of the bill aren’t entirely positive. Rising wages would stress profit margins and companies (Wal-Mart included) would have to rely on volumetric growth. Companies like J.C. Penney Company, Inc. (NYSE:JCP) and Coach, Inc. (NYSE:COH), which cater to the middle and higher class, would experience rising costs without much impact on their sales. To ensure a steady bottom line, these companies could either hike prices and retain their margins, or expand rapidly to target volumetric growth.
Coach, Inc. (NYSE:COH) sports a solid balance sheet, and plans to increase its store count in China by 31.6% in FY13. Besides that, it plans to add 10 new stores in Japan, and management is aiming to boost its overall square footage by 10% in the coming year. In my opinion, Coach looks well poised to record volumetric growth, but J.C. Penney does not.
J.C. Penney Company, Inc. (NYSE:JCP) has been struggling with its profitability, and its strategy of relative pricing has received a lot of flak. Moreover, its ongoing legal wrangling with Macy’s, Inc. (NYSE:M) could further impact same-store sales negatively. Although the retailer has laid off an undisclosed number of store employees and adopted an hourly wage system to reinstate profitability, I believe that it would lead to understaffed stores and demotivated employees.
Why Wal-Mart?
Getting back to Wal-Mart Stores, Inc. (NYSE:WMT), it has plenty of growth prospects lined up to ensure volumetric growth. The company expanded its retail space by 14 million sq. ft. in 2012, and plans to add 15-17 million sq. ft. in 2013, which translates into 220-240 new store openings.
Additionally, the Government of India relaxed the Foreign Direct Investment norms, increasing the foreign institutional stake cap to 49%. As a result, Wal-Mart Stores, Inc. (NYSE:WMT) is free to pump in capital into its joint venture with India-based Bharti Retail, which would allow rapid expansion in the country.
Besides the pending bill, Wal-Mart has also been a great company for investors. Its board believes in returning value to its shareholders, and Wal-Mart has returned $13 billion this year. Last quarter, Wal-Mart repurchased $2.9 billion worth of shares, and paid out $1.3 billion in dividends.
It still has $3.7 billion worth of repurchase authorization left. Going by the pace of its share repurchases, I estimate that Wal-Mart would exhaust its remaining $3.7 billion this quarter, which accounts to a pending purchase of around 43.6 million shares at the current market price.
Wrapping it up
But that’s not all. Wal-Mart Stores, Inc. (NYSE:WMT) has been delivering impressive growth, and added $22 billion in sales this year. Its annual cash flows surged 18.1% in FY13, while the company enjoyed 18.2% returns on investment. I believe that the pending bill is an added bonus, and Wal-Mart’s growth momentum will continue in light of its aggressive expansion plans.
The article How Investors Can Capitalize on the Minimum Wage Bill originally appeared on Fool.com and is written by Piyush Arora.
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