Gap Minimum Wage Hike: Great PR, Modest Cost

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Gap Inc. (NYSE: GPS) announced Thursday it will boost the minimum wage for its employees to $9 an hour in June and $10 in June 2015. Are they crazy? Not really. The announcement makes great public relations, and it may only add modestly to the company’s operating expenses.

Here’s 24/7 Wall St.’s analysis of the move. Gap says the pay increase ultimately will affect some 65,000 employees. So, let’s say all them are making $8 an hour now, which would be better than the U.S. minimum wage of $7.25. The company says most of these employees are, in fact, making more than $7.25.

If these 65,000 employees work 30 hours a week and 50 weeks a year, the added annualized cost in the first year would be about $97.5 million. Gap’s operating (SG&A) expenses in fiscal 2012 (which ended on Jan. 31, 2013) were $4.23 billion, or 27.6% of sales.

If the new policy was in place in fiscal 2012, and if we use simple math, the wage increase would have cut net income about 8% to $1.04 billion, or to about $2.13 a share. In fiscal 2012, the company earned $1.14 billion, or $2.33 a share. That is assuming 488 million shares outstanding. And with it being simple math, it does not include cost cuts elsewhere nor does it include any base price hikes that may or may not come after this move.

Gap has been using investments in technology and its online business to control overall expenses. Still, it believes a motivated sales staff is critical to its success. The company did not specify the impact of the wage change on its bottom line, but it said, “We’re confident that we can fulfill this commitment while continuing to deliver strong results for our shareholders.”

The company recently reported fourth-quarter sales of $4.58 billion, down 3.2% from the fourth quarter of fiscal 2012. It did not explain the decline; bad weather may have had an impact.

Full-year sales of $16.15 billion were up 3.2% from a year earlier. It will report quarterly results after the Feb. 27 market close. It projected earnings for the quarter at $0.65 to $0.66 a share, compared with $0.73 a year ago.

Gap shares were up 15 cents to $42.34 in early Thursday trading. They have risen about 8% on the year, after climbing 25.9% in 2013. The consensus price target on the stock is $45.10.