Retail analyst: Wal-Mart layoffs can lift stock

Doug McMillon, chief executive officer, speaks on stage during the annual Wal-Mart Shareholers meeting on Friday, June 5, 2015, at Bud Walton Arena in Fayetteville.
Doug McMillon, chief executive officer, speaks on stage during the annual Wal-Mart Shareholers meeting on Friday, June 5, 2015, at Bud Walton Arena in Fayetteville.

Any job cuts or management restructuring at Wal-Mart Stores Inc. could be viewed by Wall Street as a positive for the company's financial performance, a retail analyst said Wednesday.

Wal-Mart executives have spoken of a need to simplify and speed up management operations, and employees at Northwest Arkansas recruiting firm Cameron Smith and Associates are being prepped for a significant round of layoffs.

Sustaining long-term investor confidence takes more than workforce cuts, though, said Edward Jones retail analyst Brian Yarbrough.

A slight dip in stock price accompanied news that Target Corp. was laying off 1,700 employees in March. In the days that followed, however, the stock price rose steadily from a $77.67 closing March 10, and the retailer has been above $80 per share on most days since.

Target, which closed at $81.84 on Wednesday, isn't performing well simply because it laid off 1,700 and eliminated another 1,400 jobs in March, Yarbrough said.

But "it's unfortunate for employees that are put into this situation when it occurs, and you hate to say it, but typically investors reward stocks for these types of layoffs," Yarbrough said. "Stocks react favorable to big announced layoffs. With that being said you'll have to see how it plays out over longer term. Initially the stocks move up, but that doesn't guarantee long-term confidence."

Employees at Cameron Smith and Associates have been told to ready themselves for an influx of "phone calls, emails and resumes" in anticipation of a significant round of layoffs at Wal-Mart's Bentonville headquarters. Wal-Mart last experienced mass layoffs in 2009, and stock prices dipped in the week that followed the announcement that as many as 800 jobs were being eliminated.

Target's layoffs came less than a week after CEO Brian Cornell outlined a restructuring plan aimed at saving $2 billion and helping the retailer move faster. Cornell said the company needed to get more efficient and leaner as it ramped up investments in technology and the supply chain.

Similar comments about moving with speed and eliminating red tape have come this year from Wal-Mart CEO Doug McMillon and other company leaders as they look for ways to make the operation more nimble in their quest to improve sales.

Part of improving store performance is making life easier on store employees. McMillon, in an attempt to highlight bureaucracy and red tape slowing down the company, used the example of an electronics department manager who spent five hours on the phone with company headquarters and still didn't get a problem solved.

"That is unacceptable," McMillon told analysts last month, later adding, "We want people to make decisions and move with speed and not have the organization run in a way that causes it to slow down."

McMillon and others at Wal-Mart haven't talked specifically about layoffs. A spokesman said Tuesday that the company is evaluating "our management structure as every high-performing company would."

That some in Northwest Arkansas are bracing for the possibility that Wal-Mart is restructuring shouldn't come as a surprise, Yarbrough said. McMillon's comments about bureaucracy are telling, and the company's $1 billion investment in employee wages and training programs have been viewed by some investors as a drag on the bottom line.

Wal-Mart reported a 1.1 percent increase in same-store sales for the first quarter of the current fiscal year. Net sales of $70.2 billion were up 3.5 percent from the same quarter a year ago.

Typically U.S. sales make up about 60 percent of the retailer's $486 billion in annual revenue. Wal-Mart reported $114 billion in revenue across all business segments for the first quarter.

Wal-Mart, which ended Wednesday trading at $72.23 per share, will announce its second-quarter results Aug. 18, and Yarbrough said investors are anxious to see how Wal-Mart will make up ground with its billions in workforce investments and e-commerce spending.

"Wal-Mart is investing a lot in stores with labor and raising wages. There are a lot of expenses in stores and infrastructure. For years and years, the way Wal-Mart offset expenses was cutting back in stores," Yarbrough said. "That impacted customer services. Now there isn't a lot of opportunity to take cost out of stores, so of course management is looking directly at headquarters. Anytime you hear a company say they're slow making decisions, that usually means there are too many layers of management."

"Layoffs can provide a one- or two-time boost," Yarbrough added. "Ultimately it comes down to driving sales and revenue. For Wal-Mart, that means improving sales in the U.S. by 2-plus percent on a consistent basis."

Business on 07/30/2015

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