Market Overview

Does a Minimum Wage Hike Threaten Retailer JC Penney?

President Obama announced plans to increase the federal minimum wage in his State of the Union address Tuesday night. Obama suggested a 24% increase in minimum wage, from $7.25 to $9.00 per hour. As one of the largest employers of minimum wage workers in the country, J.C. Penney (NYSE: JCP) stands to lose if this new legislation is implemented.

J.C. Penney currently employs nearly 160,000 workers, so a 24% wage increase could be devastating.

In recent months, J.C. Penney has been struggling to transition itself. Under its new layout, brands J.C. Penney carries will have their own unique boutiques within larger J.C. Penney stores. CEO Ron Johnson and the company's biggest hedge fund backer, Bill Ackman, have argued that this transition will produce remarkable returns.

In the meantime, however, sales have dropped at old J.C. Penney stores, as consumers may have become confused by the company's transition. Making matters worse, Internet sales, which require less labor than a brick and mortar store, have dropped significantly over the past year.

In one attempt to decrease the cost of labor, CEO Ron Johnson announced over the summer that he plans to eliminate traditional checkout methods. He hopes this transition will be completed by the end of 2013.

This plan might help the retailer save on the cost of labor. Despite the concern this wage increase raises for J.C. Penney, the legislation may actually be an opportunity to capture market share.

Most of J.C. Penney's competition also employs many minimum-wage workers including WalMart (NYSE: WMT), Target (NYSE: TGT), Sears (NYSE: SHLD), Macy's (NYSE: M), Kohl's (NYSE: KSS) and TJX (NYSE: TJX).

The company that can function most efficiently with the $9.00 minimum wage has the opportunity to capture market share by keeping prices near their current levels and avoiding staff cuts that would likely impact service.

The bottom line is that all retailers will likely be affected by an increase in the minimum wage. But if J.C. Penney is able to manage labor costs well, it could present a unique opportunity.

Posted-In: News Trading Ideas

 

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