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What a higher minimum wage means for Costco

What a higher minimum wage means for Costco

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What a higher minimum wage means for Costco

What a higher minimum wage means for Costco
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President Obama is pushing for a nationwide minimum wage hike to $10.10 per hour from the current $7.25 rate. While many companies worry about what that would mean to their costs, there's at least one company that may actually benefit from a minimum wage increase.

Wholesale retailer Costco pays its employees an average of nearly $21 per hour, about 65% higher than its largest rival, Wal-Mart.  And, Costco's starting hourly pay is $11.50; that's $2.18 higher Costco's home state of Washington's minimum wage, right now the highest in the nation.

(Read: Gap to raise hourly pay to $10 in 2015; Wal-Mart remains 'neutral')

Costco has been cited by President Obama as proof that companies can survive paying higher minimum wages to its employees. In a press release, the President said:

"Costco is an example of a business that is acting on its own to pay its workers a fair wage, supporting increases to the minimum wage because it helps build a strong workforce and profitability over the long run through increased productivity, better morale and lower turnover rates."

But a higher minimum wage may not be as hunky-dory for workers as the President believes, according to the non-partisan Congressional Budget Office. In a report released Tuesday, the CBO found that while 900,000 Americans may well be raised out of poverty with a minimum wage of $10.10 an hour, it would mean 500,000 other workers would lose their jobs.

The half-million jobs cut would come as companies cut their workforce to preserve their margins. About two-thirds of minimum wage employees work for large corporations (with 100 or more employees).

The largest company hiring at minimum wage is Costco's rival, Wal-Mart, the world's largest retailer. And, this is where a higher minimum wage helps Costco competitively. In 2007, a UC Berkeley study estimated Wal-Mart would lose nearly $2.4 billion annually. That's 15% of Wal-Mart's entire net income of $16 billion.

That would, of course, chip away at Wal-Mart's operating margins which, at about 6%, are more than twice that of Costco's. That said, Wal-Mart is still phenomenally larger than Costco. Wal-Mart's 1.07 billion square feet of floor space is nearly 12 times more than Costco's 90.8 million square feet. Wal-Mart's $473.1 billion in sales over the last twelve reported months dwarfs Costco's $106.5 billion.

But, CNBC contributor Gina Sanchez, founder of Chantico Global, notes that it's not all of Wal-Mart that Costco is competing with. "If you look at just Wal-Mart's warehouse niche, which is Sam's Club, they have 175 more clubs," says Sanchez. "Yet Costco earns a more in revenues. That says it all."

In the last twelve months ending in January, Sam's Club revenues were $56.4 billion, a fraction of Costco's sales. And, while revenues at both Costco and Sam's Club are growing at roughly 5% on an annual basis, that's more than triple Wal-Mart's overall sales growth. That's part of the reason the markets are rewarding Costco; Wal-Mart trades at about 11 times its operating profits while Costco trades at 16 times.

(Read: Wal-Mart gives weak forecast amid higher taxes, tighter credit)

"I think that if you see minimum wages rising, that is only going to hurt Wal-Mart further," says Sanchez. "But, Costco is already beating them."

However, investors looking to buy Costco in the meantime should be cautious based on the stock's technicals, according to Jeff Tomasulo, Managing Partner of Belpointe Alternative Investments.
"Over the last two and a half years, Costco has performed extremely well; it's up about 45%," says Tomauslo. "But, there is some kind of trouble here."

Tomasulo is concerned with the stock moving below a key long-term technical level, its 50-week moving average as well as a key support level of $110 per share. The stock closed Wednesday at $114.91 per share.

"If it starts to close below the 50-week moving average and especially below the $110 [level]," says Tomasulo, "that's a sign of trouble that we could get a further correction in Costco."

To see the full discussion on what a higher minimum wage means for Costco with Sanchez on the fundamentals and Tomauslo on the technicals, watch the video above.

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