With a tight U.S. labor market in the backdrop, Target Corporation TGT is undertaking efforts to boost employee strength. To this end, sources revealed that this retail powerhouse will increase minimum wages from $12 to $13 an hour, effective June onwards. Let’s take a closer look at this latest move.
Prudent Wages to Aid Employee Retention
Unemployment rates in the United States are at historically low levels. In this scenario, providing competitive wages becomes critical for attracting and retaining talented workers for most retailers.
Target’s hiked wages will be applicable to new and current employees. Markedly, the company’s new minimum wage rate of $13 an hour is above the federal minimum of $7.25 and higher than the minimum levels set across all 50 states. The recent hike appears to be a part of the company’s goal to provide wage at the rate of $15 an hour by 2020 end.
Markedly, Target is investing significantly to boost supply chain operations, e-commerce sales and enhancing merchandise delivery systems. For achieving these goals, a strong base of employees is a vital factor. Hence, the company’s efforts to provide sufficient wages to ensure adequate employee growth are worthwhile.
Notably, Target’s hiked wage rate is above Walmart’s WMT minimum wages of $11 an hour. However, media reports suggest that the company is likely to face competition from behemoths Amazon AMZN and Costco COST that pay minimum wages of $15 and $14, respectively.
High Wages Likely to Hit Profits
Although wage hikes might enable Target to bolster employee strength, it does entail a downside. Such moves are likely to raise the company’s cost burden and put pressure on margins. In fact, the company’s gross margin picture has been unimpressive for a while, thanks to escalated costs. Incidentally, in fourth-quarter fiscal 2018, operating margin was somewhat hurt by high wages. Going ahead, management expects to witness a marginal decline in the operating margin during the first quarter of fiscal 2019.
Nevertheless, we expect that this Zacks Rank #2 (Buy) stock will be able to cushion the aforementioned hurdle on the back of prudent efforts to boost revenues. Markedly, robust traffic, favorable store comps and a surge in comparable digital sales are favoring this discount retailer’s business. Moreover, the company is deploying resources to enhance omni-channel capacities, launch brands, remodel or refurbish stores as well as expand same-day delivery options.
Driven by these upsides, the company’s shares have gained 17.8% in the past three months compared with the industry’s rise of 12%. All said, we hope that Target’s well-chalked efforts will help it maintain strong footing in the retail space.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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