Rising expenses are a good thing for Walmart

In the alternative universe where Amazon resides, surging expenses that eat into the company’s profitability are viewed favorably. If Walmart were afforded the same treatment its stock would have surged after it was revealed increased labor, health care and e-commerce costs eroded second quarter profits.



Operating profits at the Walmart U.S. division fell 2.4% to $5.25 billion and the culprit was increased labor expenses and healthcare costs. Walmart is spending more on labor to improve the store experience and more employees are taking advantage of the retailer’s health plan, which indicates Walmart’s benefits aren’t as horrible as critics suggest. The company’s overall profits were also dinged by increased expenses related to e-commerce, essential investments for any retailer with a long term orientation.



“Operating income was pressured by investments in additional associate hours and by higher health-care costs. We’ll keep working during the back half of this year to get the combination of price investments and store associate hours right to deliver improved comp sales and serve our customers in a way that exceeds their expectations here in the U.S.,” said Wal-Mart Stores, Inc. president and CEO Doug McMillon.



The increase in labor expenses was intentional, the rise in health care costs, not so much, according to Walmart U.S. president and CEO Greg Foran.



“Healthcare costs increased approximately $180 million versus last year and were well above our initial estimates,” Foran said. “As we’ve mentioned previously, the primary drivers of expense growth were increased associate enrollment and cost inflation.”



That situation isn’t expected to change anytime soon.



“Near term, we expect continued pressure from health care and anticipate over $500 million in year-over-year expense growth for this fiscal year,” Foran said.



The intentional increase in store labor was focused on specific areas such as the front end, deli, bakery, and overnight stocking where Walmart has an opportunity to impact the customer experience. In total, salaries and wages increase more than $200 million compared to last year as there were additional costs related to the reset of key departments such as entertainment and sporting goods.



On the e-commerce front, Walmart said expenses increased as it continued to invest in broad areas such as talent, technology and fulfillment. The company expects to open its third fully dedicated e-commerce fulfillment center near Indianapolis in early 2015. More recently, the company rolled out its Savings Catcher price comparison app nationwide.



According to McMillon, Savings Catcher, “leverages our data analytics capabilities to automatically match competitors’ ads and strengthen customers’ confidence that they are receiving the lowest advertised price on like items.”



For Walmart, the rollout was largely unheralded. Hard to imagine that would have been the case if Amazon CEO Jeff Bezos announced a similar capability.