The EPI, Still Without a Clue

The Economic Policy Institute, Research and Ideas for Working People, tries to show Walmart how it should run its business.

The Wal-Mart debate
A false choice between prices and wages

By Jared Bernstein and L. Josh Bivens

"...Wal-Mart could raise wages and benefits significantly without raising prices, yet still earn a healthy profit. For example, while still maintaining a profit margin almost 50% greater than Costco, a key competitor, Wal-Mart could have raised the wages and benefits of each of its non-supervisory employees in 2005 by more than $2,000 without raising prices a penny. ..."

"Is this any way to run an economy?"

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At least their estimate of

At least their estimate of the raise is about right.

For FY2006, WMT net income was $11,231M, profit margin was roughly 3.50%, shares outstanding was 4,188M, 18 P/E ratio and there were 1.8M employees. Costco's average net profit margin over the last couple of years is 1.80%.

Using those numbers:
11,231 net income/.035 profit margin = $320,886M...gross revenue
1.80 Costco profit margin* 1.50 = 2.70%...the 50% higher than Costco's profit margin
320,866 gross revenue * .027 adjusted profit margin = $8,664M...WMT's adjusted net income (a drop of $2,567M)
2,567M drop/1.8M employees = $1,426...the annual raise given to all employees (pretty close to their non-exucutive raise of $2,000).

True, WMT could do that, but here is what would happen to the shareholders:

2,567M drop/4,188M shares = .61...the per share drop in net income
.61 EPS drop * 18 P/E = $10.98...per share drop in stock price
$10.98 share price drop * 4,188M shares = $45, WMT drop in market value

That's right, a $46 billion drop in market value! Good stuff.

That $46 billion dollar drop

That $46 billion dollar drop is roughly 20% of the WMT's market value.