If the notoriously cheap Walton were alive today, he would probably be surprised that his pioneering profit formula -- keep costs low so that prices are as low as possible and customers buy more -- is now virtually impossible to maintain. Full blame for that can be pinned on employees demanding higher wages and the rise of e-commerce giants such as Amazon (AMZN) , which are open 24 hours a day, seven days a week.
Perhaps the retail legend saw some of this on display from up above on what was a dark day in Wal-Mart's history on Wednesday. Wal-Mart's usually stable stock price tumbled 11% as the company said at its annual investor day that higher wages for associates will dent profits by about $1.5 billion in the 2017 fiscal year, following a $1.2 billion hit this fiscal year.
Wal-Mart founder Sam Walton
For years, Wal-Mart has had the upper hand with its employees, paying them state minimum wages, offering basic healthcare plans, and using computerized systems to control their hours. But with the rise of social media and the internet giving employees a free platform to express views, and the rising cost of living causing state governments to push through higher minimum wages, Wal-Mart has had to change with the times.
As a result, it has lost a key element of its business model put in place by Walton that has supported the company's profits since its founding. Further, rising employee costs are arriving as online shopping is also limiting the ability of Wal-Mart to raise prices at all to help deliver sustainable profit growth.
Wal-Mart added on Wednesday that it expects earnings per share to decline between 6% and 12% next year. Wrote Sterne Agee analyst Charles Grom in a note to clients on Wednesday : "What's surprising to us is that the new outlook is incorporating roughly $20 billion in share buybacks in the next two years, which implies significant margin contraction along with modest sales growth."
Employee costs aren't the only line item on the income statement Wal-Mart is battling to control.