Why Wal-Mart's Shrinking Profit Should Scare Liberals

By JED GRAHAM
INVESTOR'S BUSINESS DAILY

Doug McMillon, President and CEO of Wal-Mart, speaks in an interview with Bloomberg Television in New York on June 23, 2015. AP View Enlarged Image

Wal-Mart's second profit warning in two months should be a wake-up call for the political left. If America's largest private employer is struggling with its own pay increases, how will other businesses cope with even larger minimum-wage hikes?
Long the scourge of progressives for its relatively low wages, Wal-Mart (NYSE: WMT) announced early this year that it would unilaterally boost its own base wage, first to $9 an hour this past April and to $10 by February 2016.
"People have known that $10 was coming for a while," Wal-Mart CEO Doug McMillon told CNBC's Jim Cramer on Wednesday. "This news today was just we quantified it for everybody."
Wal-Mart's stock price promptly suffered its sharpest one-day sell-off in a quarter century, diving 10%. Shares kept falling, ending the week down 11.7%.
The stunning hit to profitability for the nation's biggest retailer raises serious questions about the Democrats' economic agenda to raise the minimum wage to $12 or $15 an hour, while asking low-wage employers to provide their workers with health insurance and paid sick leave.
Wal-Mart Sees Big Earnings Slide
Taken together with August's announcement of a 7% to 13% drop in earnings per share in the current fiscal year, Wal-Mart's latest warning of a further 6% to 12% EPS decline next year — even as it plans to cut share count with a new $20 billion stock buyback — points to a dramatic drop in profitability.
Just three years ago, the liberal blogger Matthew Yglesias opined that Wal-Mart could easily afford to give its workers a pay raise by letting its profit margins shrink by a percentage point, bringing its margins roughly in line with that of Costco Wholesale(NASDAQ: COST) or Macy's (NYSE: M).
Mission accomplished: The low end of Wal-Mart's forecast suggests its profit margin could fall from about 3.6% in 2013 to as little as 2.3% in fiscal 2017.
Yet the push to boost the minimum wage well above $10 an hour is only gaining steam. Democratic presidential front-runner Hillary Clinton has backed a Senate bill to raise the minimum wage to $12 an hour by 2020, as has President Obama. Meanwhile, Vermont Sen. Bernie Sanders is stirring up the Democratic base by embracing a $15 wage as a matter of social justice. Several cities, including Los Angeles, already have imposed a $15 minimum.
Labor Costs Would Double
That's not all. Obama has proposed seven days of mandatory paid leave that would add about 36 cents an hour to a $12 minimum wage.

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And the burden of ObamaCare's employer mandate will continue to grow. The per-employee fine for companies that fail to offer 30-hour-per-week workers qualifying coverage will rise to $2,120 in 2016. When that fine, which is imposed after taxes, is converted to tax-deductible wages, it will equate to $1.70 an hour for a full-time worker.
Adding it all up, by the time the minimum wage would rise to $12 an hour in 2020 under Democratic plans, the total increase in compensation costs imposed by Washington would amount to just over $7.50 an hour, including additional social insurance taxes on the higher wage. In other words, the $7.25 federal minimum wage would have essentially doubled for a full-time worker.
Ken Perkins, president of Retail Metrics, said that there were good reasons for Wal-Mart to raise wages, with or without the political pressure to do so.
"They underpaid their employees for a long time and are playing catch-up," he said.
With so much turnover at low-wage retailers, Walmart is betting that better-paid workers will be "more effective at generating revenue," Perkins said.
Wal-Mart's higher, though modest, margins and solid balance sheet make it more able to withstand wage increases than many other retailers.
Retailers Closing Stores...

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