NEW YORK (TheStreet) -- It's been a good couple of months for the lower end of the wage scale.

Last week, McDonald's (MCD) made waves when it announced plans to raise wages by about $1 per hour for some 90,000 of its lowest-paid workers starting on July 1. The move followed similar wage hikes by Wal-Mart (WMT), Target (TGT) and TJX Companies (TJX) earlier this year. Big retailers Ikea and Gap (GPS) raised their minimum wages in 2014.

"We are acting with a renewed sense of energy and purpose to turn our business around," McDonald's president and CEO Steve Easterbrook said in a statement on April 1 announcing the move. "We know that a motivated workforce leads to better customer service so we believe this initial step not only benefits our employees, it will improve the McDonald's restaurant experience." 

But what will these raises mean for each company's income statement? The short answer, despite what you might think considering how many workers these companies employ, is probably not much. While higher pay and better benefits may help some with recruitment and retention, many analysts expect the bottom-line impact of these wage hikes to be minimal. 

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Here's a closer look at the impact these wage hikes will have on the results of some of America's largest employers.


By some estimates, the $1-per-hour wage increase at McDonald's will cost the company about $52,000 annually per restaurant, or about $78 million per year in total. Still, that only represents roughly 1.6% of the company's total payroll expense, which the company reported to be more than $4.8 billion in 2013, the most recent year for which full-year figures are available.

McDonald's owns about 1,500 of the chain's U.S. locations, and workers at those restaurants are the only ones who stand to benefit from the wage increase. That leaves the roughly 750,000 employees who work at franchise-owned locations out in the cold, and significantly mutes the impact that this increase will have on the company's bottom line. 

This fact has left many market watchers, including Bank of America/Merrill Lynch economist Ethan Harris, less than impressed. "Of course there will be spillovers as the franchises and other fast food stores come under pressure to match the increase," Harris wrote last week, "but clearly the direct impact on average wages is low. This 32-ounce Coke seems to have a lot of ice in it."

Efraim Levy, an analyst with S&P Capital IQ, says that the wage hike will have a marginal impact in the short term, but likely won't budge the company's stock price or its financials overall.

"In the grand scheme of things, this is strictly a top-line issue," he says, indicating that the chain will likely be able to make up for the increased labor costs in other areas, isolating its impact on overall earnings. "It only affects a small component of the business."


In February, Wal-Mart kicked off the 2015 wage increase trend when it announced plans to increase the base wage it pays about 500,000 of its employees to at least $9 per hour by this month, and $10 an hour by February 2016.

The company said the increase will cost it about $1 billion a year and affect roughly 40% of the company's workforce, although Wal-Mart said that only about 6,000 employees were earning the federal minimum wage of $7.25 per hour at the time of the announcement. For the remainder of the company's workforce, their wage increase will amount to less than $1 per hour.

Wal-Mart reported nearly $16 billion in total profit in 2014 on revenues of more than $476 billion, for a gross profit margin of more than 24%. Even at $1 billion in total cost, then, the impact of this move to the company's overall revenue will be minimal, accounting for just over 1% of the company's current total short-term liabilities and equaling less than 0.2% of total revenues. Moreover, the goodwill and positive PR that this wage increase generates are especially valuable for a company like Wal-Mart, which regularly receives fire for low worker pay and poor benefits.

Still, some argue that the company has not gone far enough, and calls for a $15-an-hour wage for full-time workers would be a much more difficult adjustment for Wal-Mart to make. 

TJX Companies

TJX, the parent company of discount retailers T.J. Maxx, Marshalls and HomeGoods, matched Wal-Mart's commitment to increase pay for its U.S. hourly workers in February, hiking wages to at least $9 an hour starting this June and to at least $10 an hour by February 2016.

TJX management declined to comment on how much the wage increase will cost the company, but given that the majority of TJX's 191,000-plus employees work less than 40 hours per week and on an hourly basis, the impact will likely be more significant than for some of the other companies discussed here. According to Credit Suisse, the average pay rate at TJX is currently $8.24 per hour. At that level, the company's first raise could cost it as much as $1,500 per employee per year, and the $10-per-hour pledge will add $2,080 per employee to that figure.

Still, few investors are worried about TJX's ability to weather the increased cost.

"Although wage increases will continue to be a drag on future earnings, we think that these increases are in line with market trends and are a necessary investment," Morningstar analyst Bridget Weishaar wrote in a note following the announcement.


Following the Walmart and TJX announcements, rival Target in March announced plans to increase wages for all of its 347,000 U.S. workers to at least $9 per hour starting this month. It is not clear how many of Target's workers will see a pay boost as a result, however, as the company said it already pays more than the federal minimum wage in all of its 1,800 stores.

Whatever the increased cost, however, Target CFO John Mulligan told analysts last month that the wage increase would not have any "material impact" on the company's costs or its financials.

"Our goal is to always be competitive with the marketplace," a Target spokesperson told The Wall Street Journal (paywall) following the announcement.

Still, it is hard to ignore that Target is raising wages at the same time that it is cutting costs. The company in March laid off some 1,700 workers and it has begun shutting down its operations in Canada as part of a move that the company says will save it $2 billion.

Ripple Effect

The real-world impact of these wage increases, however, remains to be seen, argues S&P Capital IQ's Levy. Maybe now some workers will be more able to shop at their own stores, he says, or have more to spend elsewhere. But the real driving force of these moves, in his view, is the public relations boost that they are bringing to the companies involved.

"I think the corporation does get some PR out of saying 'we're raising our wages to be more competitive in the marketplace and offer better pay and benefits to our employees,'" he says. "If you're someone who said 'I don't want to go to McDonald's because they don't pay their employees enough,' maybe now you won't say that anymore."

He also believes that McDonald's, because of its leadership position in the fast-food industry, will likely create a ripple effect that forces competing restaurants to soon raise their wages as well. 

Justin Carbonneau, a partner at Validea Capital Management, agrees but argues that wage increases like these don't happen without healthy underlying businesses.

"I see this as a signal that business is pretty good," he says. "The further we get from the financial crisis, I think the more companies will look to do these things."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.