Companies That Need A Headcount Reduction: Wal-Mart

Wal-Mart (WMT-NYSE) may find itself with little choice, although there are ways it can accomplish the same end-result without the negative publicity that would come from a headline of “Layoffs!”.  In fact, it can accomplish this in a way that may reward shareholders and have almost no negative social backlash to the company itself.

24/7 is taking an ongoing look at some companies in a wide array of businesses that may be forced to reduce headcount or close stores in order to maintain existing margin levels and earnings growth, especially in an environment of declining GDP growth as has been forecast for 2007 and beyond. 

The mere mention of “Wal-Mart” and “employees” in the same sentence conjures up strong emotions in many people, but for a moment let’s set aside the debate on how those employees are compensated and focus on their contribution to top-line (and therefore the bottom-line) performance.   That’s what it really comes down to for WMT shareholders.

Wal-Mart may be at an inflection point where future revenue per employee figures could decline and force the company to reduce headcount, close underperforming stores, or scale back on new store openings.   In order to have some workable figures on Wal-Mart, we have to do some massaging of the raw revenue data to account for Sam’s Club and the international operations, which skew the results for domestic Wal-Mart stores: Sam’s Club operates in a much different model, having far fewer employees per location and revenue per employee at a level nearly three-times higher than at Wal-Mart stores.  And as for the international units, the store density figures don’t come close to what we find in the U.S., where the company has over 3,300 Wal-Mart stores and employs about 1.3 million people as of January 31, 2007.  At what point does cannibalizing occur at a level that can’t be ignored?  Many living in the U.S. can probably drive to three or four different Wal-Mart stores in 30 to 45 minutes or so, and the company is planning on opening up to 330 new stores domestically.

If we just looked at company-wide revenues that included Sam’s Club and international stores, Wal-Mart would sport a revenue/employee figure of about $190,000.  But if we isolate the domestic Wal-Mart store revenues, we arrive at a revenue figure for 2007 of roughly $226 billion, and total revenue per stated employee of nearly $175,000.  This compares to $176,000 in revenue per employee at Target, but the difference that overall volume is much more important to Wal-Mart because it runs on operating margins that are lower than Target.  In order to achieve the same level of profitability metrics as Target, Wal-Mart’s revenue per employee would need to be 40% higher if everything remained static.  Online sales figures may skew these numbers slightly, but they are generally lumped in at other discount and big-box retailers as well.

Wal-Mart is not getting it done with their comparable same-store-sales anymore; same-store sales came in at less than 1% in February; forecasts are not that much higher for this month; and the company is slashing prices more and more in the holidays to bump up its raw sales numbers on volume.  As employee costs rise either through minimum-wage hikes or a public-relations benefits increase (it could actually happen), the revenue per employee figures could fall off the proverbial cliff regardless of how many cheap plasma TV’s it sells.

Investors who have been impatiently stuck over the last 5-years should not be too surprised if the company announces a reduction in store growth in the upcoming quarters, as this would probably be a much easier-to-digest first step than an announcement of a headcount reduction.  Wal-Mart also has a saving grace that could keep it from ever having to make any announcement about any headcount reductions, even if it is a somewhat of a dubious honor:  company-wide employee turnover out of all units is in the vicinity of 600,000 annually.  The company could merely just replace some of these workers at a much slower rate and that would give the company the opportunity to actually reduce headcount without even announcing any layoffs.  It can also attempt more employee transfers to newer stores if the geography allows. 

The company just boosted its dividend to investors on March 8 and shares closed down $0.05 that day at $47.65 because of weak same-store-sales.  As of 3:30 PM EST today shares were $47.70 and that is after the Fed-related rally, while the DJIA is up close to 2%.  The company gave up its bid for an industrial loan charter over the Wal-Mart banking criticism, Lee Scott has been criticized over his excessive bonus for “meeting sales targets,” and we still think the company needs to toss him out in favor of someone that can appear as “more likable.”  Lee Scott will get even more negative PR if he announces layoffs, but here is a method he can use that might actually work better for shareholders.  This should also come before their recent expansion in China.  If the company is already doing this, they need to do it better and in a manner that shareholders will actually know it.

Written by Ryan Barnes,
edited by Jon C. Ogg
March 21, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.