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Obamacare And Retailers: The Good, The Bad, And The Ugly

By Dan Moskowitz – Feb 1, 2014 at 8:30AM

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Target, Wal-Mart, and Costco have all taken different approaches to dealing with the Affordable Care Act. Which of these companies has handled it best?

Obamacare has led to much debate from both sides of the aisle. Not only was its rollout controversial, but it has major implications for businesses and how they operate. One sector of the American economy, retail, will need to change the way it functions in particular. Put simply, by 2015, they must offer health insurance to all employees working 30 hours per week or more. Otherwise, they must pay a $2,000 penalty per worker. 

Target (TGT -0.02%), Wal-Mart (WMT 0.43%), and Costco Wholesale (COST -0.15%) have all made moves in response to Obamacare. One of these retailers has taken the good-guy approach, another potentially plays the bad guy role (depending on how you look at it), and while the third retailer is seen as ugly, in this case, beauty is in the eye of the employee.

Looking at the retail space as a whole, if employees are happy then they're likely to offer better customer service, which then leads to happy customers. This chain reaction matters more than most people think.

The good
Last year, United Parcel Service stopped covering employees' spouses if an employee's spouse had coverage available through his or her employer. Regal Entertainment Group cut hours for thousands of its employees to less than 30 per week. And Stryker, a medical device company facing an excise tax due to Obamacare, laid off 5% of its workforce (1,000 people).

It would seem as though these trends would spill over into the retail space, especially since retailers employ massive numbers of people. However, just as Costco raised its employee pay during the financial crisis, it recently partnered with Aetna to form Costco Personal Health Insurance. This has resulted in lower rates than the state-run exchanges . This is one of many examples of how Costco treats its employees well, which leads to an excellent company culture and possibly higher sales.

The bad
Target recently announced that it will not offer health coverage to part-time workers. This will begin on April 1, and it's not a joke. Target's reasoning: if it offered its part-time employees health insurance, it would prevent them from having opportunities to take advantage of better alternatives. Target will give $500 to every part-time employee who will no longer have coverage through the company. This move will impact between 30,000 and 36,000 people. Of course, it's more likely that Target is looking to cut costs, especially after its recent massive data breach. While it would be a reach, it's possible to put a positive spin on this news.

The ugly
If you were to ask people to select the retailer that best describes ugly, many of them would choose Wal-Mart. Due to the way Wal-Mart treats its employees, this is understandable. However, according to the Journal of the American Medical Association, an "Unsubsidized enrollee (referring to Obamacare) could pay premiums from five to nine times what they would pay for a Walmart employee plan." Wal-Mart employees have access to better facilities in the event of a serious illness, such as the Mayo Clinic or Cleveland Clinic. It should also be noted that Wal-Mart moved 35,000 people to full-time status last year.

Wal-Mart is far from the most moral company in the world, but it's not as ugly as many people think, either. 

Foolish takeaway
Wal-Mart shouldn't be hated by investors; it generates significant cash flow and returns capital to its shareholders. However, Wal-Mart employees aren't the happiest bunch you will come across.

As far as Target goes, its employees are often happier. That said, Target's recent move might lead to resentment, and combined with customer loss of trust due to its data breach, this doesn't make for a positive situation.

Costco believes that taking care of its employees and making sure they are treated and paid what they deserve makes for a well-run operation. Over the past year, Wal-Mart and Target have grown their top lines 0.91% and 0.97%, respectively. Costco, meanwhile, has grown its top line 3.23% over the same time-frame. Whether it's the way Costco treats its employees or Costco's business model (likely a combination), you might want to consider an investment in Costco before looking at its peers. However, please do your own research prior to making any investment decisions. 

Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Costco Wholesale and United Parcel Service. The Motley Fool owns shares of Costco Wholesale. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Walmart Inc. Stock Quote
Walmart Inc.
WMT
$153.07 (0.43%) $0.65
Target Stock Quote
Target
TGT
$163.38 (-0.02%) $0.03
Costco Wholesale Stock Quote
Costco Wholesale
COST
$533.66 (-0.15%) $0.83
Aetna Inc. Stock Quote
Aetna Inc.
AET
United Parcel Service Stock Quote
United Parcel Service
UPS
$182.52 (-0.17%) $0.32
Stryker Stock Quote
Stryker
SYK
$232.74 (1.06%) $2.45
Regis Stock Quote
Regis
RGS
$1.37 (%)

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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