Wage Pressures And Holiday Comps In The Retail Sector

As retailers enter the peak of the holiday shopping season, one theme running through the sector is wage pressure. 

Target Corporation TGT announced in late September that it would increase wages to $15 an hour by 2020, the first discount low-wage chain to embrace a new normal, according to CNBC.

Target's logic for the increase: it helps attract talent to the highly competitive retail sector. The minimum wage mandated by the federal government is $7.25 per hour, although individual states have the leeway to set their own minimum. 

Following service industry strikes in 2012, states and cities that include about about 18 percent of the U.S. workforce have adopted the $15 minimum wage, according to CNBC. 

What does Target's move mean for others? Companies such as Amazon.com, Inc. AMZN, Wal-Mart Stores Inc WMT and McDonald's Corporation MCD could be forced to follow suit.

Margin Pressure Imminent?

An increase in wages, a direct cost, has the effect of deflating gross margins. UBS analyst Michael Lasser delved into this issue in a September note. Lasser sees both horizontal and vertical implications of wage increases, with the horizontal impact referring to the pressure on retailers to follow up on wage increases instituted by peers.

From a vertical view, raising the starting wage rate has a cascading effect within a workforce, with wages pushed up across all bands, Lasser said.

UBS listed the companies it projects are most likely to feel the heaviest burden from wage pressure and those that it projects can withstand the pressure.

The Most Affected:

• Kroger Co KR
• Sprouts Farmers Market Inc SFM
• Bed Bath & Beyond Inc. BBBY
• Pier 1 Imports Inc PIR
• Macy's Inc M
• Gap Inc GPS

The Least Affected:

• Costco Wholesale Corporation COST
• Lowe's Companies, Inc. LOW
• Home Depot Inc HD
• Tapestry Inc TPR, formerly Coach
• Lululemon Athletica inc. LULU

BTIG Projects 1.5% Holiday Comp For Retailers

Giving his outlook on holiday sales, BTIG analyst Alan Rifkin said he expects 1.5 percent holiday comps for hardline retailers.

"While macroeconomic data is generally better compared to 2016, we expect holiday comps this year will be polarized, with home furnishings weighing down the average," Rifkin said. In comparison, 2016 holiday sales were up 4 percent after an initial forecast for 3.6 percent growth.

Among the positives BTIG sees are unemployment levels at 16-year lows, record household net worth, a buoyant housing market, easy earnings per share and comps compares, the alleviation in deflationary conditions and a decent back-to-school season.

Sales could be pushed down by cautious low-income consumers, e-commerce gaining share over hardliners and higher gas prices and mortgage rates, according to BTIG. 

The  expects 3.8 percent comps for home improvement retailers; 2.2 percent for dollar stores; and flat comps for home furnishing retailers.

Most holiday-sensitive companies derive over 40 percent of the fiscal year's earnings per share form the fourth quarter, including home furnishings and consumer electronics, Rifkin said. 

Helped by positive fundamentals, less holiday-sensitive names such as home improvement and auto parts retailers are expected to fare well, with an average comp of 3 percent, excluding outliers such as Advance Auto Parts, Inc. AAP and Floor & Decor Holdings Inc FND, Rifkin said. 

BTIG named Dollar Tree, Inc. DLTR as its top pick for the 2017 holiday season, with the strong comps performance at Family Dollar and the namesake stores and immunity to e-commerce offered as the rationale.

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