Mid-Earnings Season, What are Companies Saying About The Wage Debate?

The discussion regarding wages in the US is a never-ending story. This year, the topic is becoming even more visible, perhaps due to 2017 tax cuts or political pressure, as wages have not kept up with the economic growth despite the fact that unemployment remains at multi-year lows.

Companies, mainly from the retail sector, acknowledge this topic. They also fuel the debate further as they take steps to address the issue.

Walmart increased their basic wage to $11 per hour at the beginning of the year (the federal minimum wage is $7.50 per hour). Target did the same just a few months after. Most recently, Amazon pushed the effort further. It announced its minimum is now going to be $15 per hour on par with the highest minimum wage in the US in San Francisco, California.

It is therefore of no surprise that mentions of the minimum wage by the US corporate world are continuing to climb.

 

This trend is even more visible when looking at mentions of the term “living wage”, an alternative to minimum wage which should provide workers with income that meets their ‘basic need’.

I would also like to point out that perhaps, more importantly, the US corporate world has been talking a lot more about the minimum wage as can be seen below.  

Questions regarding this topic are prevalent on Earnings calls. The companies themselves feel the need to point out the topic at various conferences and events as well.

The trends are understandable. The impact of the wage increases could test whether the companies are going to be able to withstand this policy and how much their bottom-line will  be affected, should the minimum wages continue to rise.

Several sources already point out that smaller businesses could struggle. Interestingly a study from Harvard has pointed to the effect of the minimum wage using Yelp data. This study shows that smaller businesses (restaurants in this case) closed down more frequently when minimum wage increased.

The Hill also pointed out that the wage increases could not only hit the businesses, but the workforce as well. Businesses could be incentivized to further their efforts in robotizing processes which could create troubles for parts of the US workforce and have an overall effect on the US economy.

There are some concerns about the impact on the big business as well. Amazon’s significant move is likely to impact other retailers and could eventually eat into the profit margins of others as well as per this Business Insider analysis. This could put pressure on the already strained retailer stocks and not only them.

As Q3 earnings season progresses, banks, industrials and real estate firms are all discussing the potential impact of further increases to the minimum wage.  For example, realty titan S.L. Green’s executives discusses how the minimum wage has the capacity to place additional strain on small business owners, and factor into their ability to pay rent.

Although the very bottom-line of this discussion is clear, one should be aware that these wage increases are not isolated and understand the broader context.

Amazon’s increase could impact their margins, but they took away other parts of worker’s compensation. Thus, some workers might even be worse off as per Bloomberg analysis. Walmart might be exposed to wage increases, but one can’t forget that on the same day they announced the hike they also closed a material amount of their warehouses.

A potent question will also be whether the affected businesses will be able to pass the increased cost to the consumer, minimizing the effect of the wages. As q3 Earnings Seasons continue, AlphaSense will be an integral tool to evaluate the reactions of affected businesses and understanding their strategies.

Jan Svenda is an independent equity analyst focused on the U.S. Small / Micro-cap space where he searches for long ideas trading around Net Current Assets Value (NCAV) and for short ideas which showcase a significant potential for aggressive or manipulative accounting. Most of his research can be seen on his Seeking Alpha profile alongside a monthly performance of his ideas.