Are wage increase announcements bad news for share prices? That’s the easy conclusion to draw after seeing the recent pullback in shares of Wal-Mart Stores, Inc. (NYSE: WMT) following an announcement that the retailer would raise wages for hundreds of thousands of its employees.

The starting wage for associates will increase to $9 per hour in April and further to $10 an hour by February of next year. Department managers will also see their starting wages increase to $13 an hour this summer and to $15 an hour next year.

#-ad_banner-#The raise will affect as many as 500,000 associates and could cost the company upward of $1 billion in additional annual wage expenses. Shares have now slid more than 3% since the late February announcement.

Investors saw this coming. Back in November, Greg Foran, CEO of Wal-Mart’s U.S. operations, warned the company would see pressures to the bottom-line as it balances wage leverage with higher customer service standards.

Though investors see the wage hikes as bad news, the opposite is true. Higher wages should strengthen the company’s competitive position and even boost bottom-line earnings.

Much Ado About Nothing

First, understand that the impact of the wage increase is likely overstated. Wal-Mart’s average sales associate already makes $8.81 per hour and the average across all staff is $12.85 an hour.

Many states already have minimum wage laws well above the federal minimum of $7.25 an hour. Five states, totaling 17% of the U.S. population, have minimum wages of $9 an hour or will institute such a lower limit by the end of the year. Add in the 14 states with minimum wages close to or more than $8 an hour and more than half (52%) of the country is already close to Wal-Mart’s new minimum.

Even if wage growth has stagnated over the last several years, an unemployment rate of 5.5% equates to higher turnover for retailers. Turnover in retail was 66% for part-time workers last year and 27% for full-time associates with benefits.

A 2003 paper by economists at the University of California found that turnover dropped by a third when employers enacted significant wage increases. The Wall Street Journal applied the paper’s findings to show that Wal-Mart’s wage increase could result in a savings of $350 million on turnover costs, offsetting a third of the cost to the increase.

Pay More, Get More

There is reason to believe that the move is strategic in nature, leading to a stronger competitive position and higher earnings for the company.

Since taking the position in late 2013, CEO Douglas McMillon has sought to curb the company’s high levels of employee turnover and lack of motivation among associates. He called out empty shelves and long lines seen during unannounced visits as a $3 billion opportunity to improve service and satisfaction.

Happier, well-paid employees mean lower turnover and the ability to attract better workers that currently work for lower-paying rivals. Accounting for 10% of U.S. retail activity, Wal-Mart has the ability to pressure others in the space. Unemployment in retail fell to 6.1% in February from 10% in 2010 and companies are seeing competitive pressure for workers.

Wal-Mart’s news likely pressured The TJX Companies, Inc. (NYSE: TJX) to make its February 25 announcement that it would also be raising wages to $10 an hour. TJX operates off-price clothing and home goods stores T.J. Maxx, Marshalls and HomeGoods, among others.

Wal-Mart is able to turn its size to a profitability advantage with a 5.6% operating margin, higher than 2.9% at Costco Wholesale Corp. (Nasdaq: COST) and slightly lower than 6.25% at Target Corp. (NYSE: TGT). If competitors are pressured to raise their own rates to keep turnover from rising, then they may see their operating expenses increase at a faster rate than at Wal-Mart.

Thanks in part to the wage hike announcement, analysts now think Wal-Mart will earn around $4.90 a share this year, below prior fiscal (January) 2016 earnings per share forecasts of around $5.25. That means profits will be slightly lower than fiscal 2015 levels. The profit forecasts assume a 70 basis point drop in operating margins to 3.2%, and a modest 1.4% sales increase to $493 billion.

Lower turnover and higher employee satisfaction could come through in higher sales and surprise the market with lower than expected expenses. If the company can boost sales just 2%, a conservative rate given general economic growth, and deliver a profit margin of 3.5%, then earnings would increase to $5.36 per share. The estimate brings me to a target of $88.44 on a price multiple of 16.5 times, an increase of 9.6% above current levels. Shares also carry a 2.4% dividend yield.

Risks To Consider: Increased expenses on the wage increase could be front-loaded while higher sales and lower turnover may take another quarter to show up in financials. That means the second quarter earnings may come under pressure as the wage increase hits in April.

Action To Take –> Understand what the new wage increase really means for shares of Wal-Mart and take advantage of the recent drop in investor sentiment.

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