May 12, 2015
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Wage increases in focus ahead of retail earnings

May 12, 2015

Labor expenses will be a key focus during retailers' earnings conference calls in the coming weeks, with many companies under pressure to boost workers' wages at a time when low U.S. unemployment levels have given workers more leverage.

Wal-Mart, Target Corp, T.J. Maxx, Gap, and McDonald's have already announced wage increases, and the trend appears to be trickling further into the retail and restaurant sectors.

"The competition for that job is tougher for the employer. The employee has choices now," said Thomas Sudyka, managing director at investment management firm Lawson Kroeker based in Omaha, Nebraska.

So far in this reporting season, companies such as Bed Bath & Beyond and Buffalo Wild Wings have discussed wage pressure, while Pier 1 Imports plans incentive pay for the first time in three years.

Fast-food workers have been vocal in fighting for better wages. They rallied in U.S. cities on April 15 to demand higher pay, using the deadline for filing tax returns to publicize their argument that they cannot survive on the hourly wages paid by many U.S. corporations.

The U.S. government said Friday U.S. job growth rebounded last month and the unemployment rate dropped to a near seven-year low of 5.4 percent, while average hourly earnings rose three cents in April, a year-on-year gain of 2.2 percent.


Big retailers reporting in the week starting May 13 include Macys, Nordstrom and Kohl's.

The following week, Home Depot, Wal-Mart, Staples, Target and Gap are due to report. Costco Wholesale Corp and Tiffany & Co both report on May 27.

Macys, Kohl's and Home Depot say they set their wages on a market-by-market basis as the competitive situation varies around the country. Kohl's said it also watches other factors driving employee decisions, such as the work environment and future opportunities for advancement.

Staples in March discussed a 2014 cash build-up for incentive compensation that would be paid out in 2015 but it did not give details.

Bed Bath & Beyond said during a conference call early in April it had planned for an additional expense of 6 cents a share this year due to increased compensation. Analysts expect Bed Bath & Beyond to earn about $1.91 per share this year on a fully reported basis, according to Thomson Reuters I/B/E/S.

"We are modeling an increase in our investments in compensation and benefits beyond what we have always historically planned for, to continue to assure that we preserve our ability to attract, and retain, the best associates," Sue Lattmann, the company's chief financial officer told investors.


Many companies will try to cut other costs, or raise prices where they can to absorb the extra expense of higher wages, said Lawson Kroeker's Sudyka.

During its quarterly conference call on April 28, Buffalo Wild Wings told investors it faced pressure to raise the salaries of minimum wage workers as well as higher-paid workers. There were also additional labor costs from the creation of new roles aimed at boosting sales.

Chief Operating Officer James Schmidt told investors that "if labor has to be a little higher, but it's driving higher same-store sales, we would look and try to look at other lines of the (profit and loss statement) where we can recapture that."

Some analysts said investors will likely take wage increases in their stride, as better pay should translate to improved sales, with consumers having more money to spend.

"Even if companies can't pass on the costs, it's a one-time hit and we can grow from there," Sudyka said

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