General merchandise giant Wal-Mart Stores (WMT Free Wal-Mart Stock Report) has released adjusted fiscal fourth-quarter 2014 earnings per share of $1.61, a slight increase over last year's tally and well above guidance of $1.46 to $1.56. Revenues rose 1.4% year over year to $131.6 billion.

The big news from the earnings release, however, was the announcement that Wal-Mart is increasing the pay of approximately 500,000 part-time and full-time sales associates, or 40% of its workforce. The Wal-Mart U.S. and Sam's Club employees will be bumped up to $9.00 an hour over the next two quarters ($1.75 above the federal minimum wage), and some managers will receive $2.00 more in compensation, bringing their per hour salary to $15.00. Further, by February 1, 2016, current associates will earn at least $10.00 an hour. Employees also will reportedly be given more predictable hours and greater flexibility to take on additional shifts. The department manager position is also being reestablished to provide better training and oversight.

The total cost this year is expected to be $1 billion, and the intended benefit is a morale boost and a corresponding improvement in worker performance. It remains to be seen whether the pay hike will have its intended effect, as labor groups had been calling for $15 an hour wages for all associates. We view the increase as well-conceived, as high employee turnover has been present for some time.

Meanwhile, Wal-Mart U.S. saw its top line rise 4.1% year over year, as shoppers took advantage of low gas prices; the company anniversaried last year's food stamp reduction; and steps were taken to improve shelf stocking. Same-store sales grew 1.5%, the best result in more than two years. Most of the credit goes to traffic gains, which turned positive after nine quarters in decline. The comp was 100 basis points greater than the level reached in the prior quarter and above guidance of flat to up 1%. 

The Health and Wellness Department stood out thanks to higher penetration of Medicare and Medicaid boosting prescriptions, branded drug inflation, and a healthy over-the-counter business. Grocery was aided by inflation and the aforementioned food stamp effect. The Neighborhood Market store format outperformed with a 7.7% same-store sales increase. The entertainment category had a high single-digit negative comp owing to a lack of blockbuster gaming titles and a shift to digital media consumption.  

Investment to improve the customer experience contributed to operating expenses rising 5.6%, and overall operating income fell 60 basis points for the domestic unit. 

International sales grew 3% in constant currency terms, but appreciation of the U.S. dollar drove the reported figure down 3.9%. Three of the five largest sales regions, Canada, Mexico, and Brazil, delivered positive comps, but fierce price competition in the U.K. and deflation in China resulted in negative same-store sales in those countries.

Finally, management lowered companywide sales growth guidance for 2015, from 2%-4% to 1%-2%, due to $10 billion worth of expected negative currency exchange. This is also expected to reduce earnings per share by $0.10. The wage and employee experience restructuring plan should lower first-quarter earnings per share by $0.02 and the full-year tally by $0.20. First-quarter share net is expected to fall between $0.95 and $1.10, versus $1.10 last year. The full-year range was established at $4.70-$5.05, versus $4.99 in 2014. In response, we are lowering our fiscal 2015 estimate by $0.45, to $4.85.

Overall, we were pleased with the company's performance in the fourth quarter, as it appears initiatives to improve customer satisfaction appear to be paying dividends. We expect lower fuel prices to continue to provide a tailwind. We think the wage hike should help customer satisfaction in the long run, but if this does not materialize, the stock price may suffer. All told, we continue to find the shares suitable for conservative investors. 

About The CompanyWal-Mart Stores, Inc. is the world’s largest retailer, operating 3,288 supercenters (includes sizable grocery departments), 508 discount stores, 632 Sam’s Clubs, and 407 Neighborhood Markets in the U.S., plus 6,107 foreign stores (mainly in Latin America, with the balance in Asia, Canada, and the U.K.) for total square footage of 1.101 billion (as of 1/31/14). Most stores are owned and are within 400 miles of an expanding network of distribution centers. Groceries accounted for 55% of U.S. sales, while sales per square foot were about $437.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.