Walmart gives its workers a raise

Shares of Walmart Stores (WMT) slumped more than 2 percent Thursday after the world's largest retailer announced plans to give raises to 500,000 workers of its workers.

Under the plan announced today, the company will raise the wages for all of its full- and part-time employees at its Walmart U.S. stores and Sam's Clubs in the first half of the current fiscal year. This will ensure that Walmart employees will earn at least $9 per hour, $1.75 above the current $7.25 federal minimum wage. Starting Feb. 1, 2016, current associates will earn at least $10 per hour. The company also will overhaul its system of scheduling workers, which critics have complained is abusive, to provide more predictability and improving training.

The company's move to raise wages will depress profits in the short run.

"The problem unfortunately for Walmart is they get a lot of negative publicity about their wages," said Brian Yarbrough, an analyst with Edward Jones, who rates Walmart as a "hold" in an interview, adding that he thinks the criticism is unfair. "I don't know why all of the sudden the light went off. They really haven't had good results for years."

Indeed, results for the most recent quarter, which includes the holiday season, lagged Wall Street's expectations. Sales gained 1.4 percent to $131.6 million. Net income rose 14 percent to $4.97 billion, or $1.53 per share compared with $4.35 billion or $1.36 per share, a year earlier. Excluding one-time items, which is how analysts calculate their forecasts, profit would have been $1.61. Comparable sales, a key retail metric measuring activity at stores opened at least a year, rose 1.5 percent in the U.S. Consensus forecasts called for profit of $1.54 on revenue of $132.36 billion.

Per-share earnings will be depressed because of the wage increases by 20 cents for the year. The retailer also is beefing up its e-commerce operations to better compete against Amazon.com (AMZN) at a cost of between 6 cents per share and 8 cents per share. According Yarbrough, the investment in higher wages will pay off because happier employees will be more productive and provide better customer service.

"Longer turn that's what the hope is here," he said.

The stock recently traded at $84.19 and has gained 12 percent over the past year, underperforming the broader S&P 500 Index, which rose 14 percent during the same time.

Union-backed groups such as "Our Wal-Mart" and other critics have argued for years that Walmart, also the country's largest private employer, pays its workers too little. Wall Street has also taken note and has argued that the retailer's sales have suffered because it has too few employees at its stores to keep shelves stocked and attend to customer needs. CEO Doug McMillon, who was brought on board in 2013 to improve Walmart's lackluster financial results, decided to address both issues simultaneously.

"Overall, these are strategic investments in our people to reignite the sense of ownership they have in our stores," he said during the company's earnings conference call today.

The company denies that its decision was solely driven by outside critics.

"We listen to our critics but we listen to our associates more," said Kory Lundberg, a spokesman for Walmart, in an interview, adding that many had complained that there wasn't a clear pathway for advancement for them.

Associates, who have complained about erratic scheduling, will now work a schedule that will be set for 6 months and will be able to sign up for additional shifts if they are interested, Lundberg said.

These changes will help workers such Emily Wells, a member of "Our Wal-Mart" who earns $9.50 an hour and is scheduled to work 20 hours per week.

"The company is addressing the very issues that we have been raising about the low pay and erratic scheduling, and acknowledging how many of us are being paid less than $10 an hour, and many workers like me, are not getting the hours we need," she said in a press release.

The company's move has gained kudos from Anna Chu of the Center for American Progress, who called it a "good step in the right direction." The retailer's move may pressures other industries that rely on low-wage workers such as restaurants to pay their workers more as well, she said.

When asked to comment on Walmart's move, Target (TGT), the second-largest retailer, said in a statement that it already pays above the federal minimum wage at all of its stores. "However, we typically don't provide specific details on our compensation and benefits programs," the company said.

Coincidentally, the White House today began a new push to raise the minimum wage, which hasn't been increased since 2009.

Some Walmart critics, though, are unimpressed. Richard Trumka, the head of the AFL-CIO, noted in a press release that "for years Walmart has kicked and screamed that raising wages was not a feasible business model."

Christine Owens, executive director of the National Employment Law Project, noted that a $10 an hour wage isn't enough for a full-time worker to keep a family of four out of poverty. She argued that the company can afford better wages, a point that "Our Wal-Mart" made.

"Walmart workers have helped make the company one of the largest and most profitable corporations on Earth, building untold wealth for the Walton family," she said in a press release. "For this, they are seeking a $15 an hour wage, an opportunity for full-time work, and dignity. "

Lundberg, however, said that the retailer has given employees the raises it can afford.