Look at Walmart (WMT) continuing to be proactive.
The deal announced by Walmart on Monday that it was dumping its China-based e-commerce marketplace business Yihaodian on locally relevant JD.com (JD) was a positive on numerous fronts. And believe me, I would be the first one tell you this was a crappy deal that would be negative to Walmart in any way possible. First, and this is the most important, Walmart signaled to investors that it should be taken at its word that it will not operate businesses that no longer make financial sense. The reason any business would say it doesn't make financial sense is likely because it's losing money and the line of sight into suitable profits is blurry at best. Good for Walmart for trying to create value from nothing (at least in the eyes of the market).
Second, it was a crafty deal on the part of Walmart. It was a very slick investment banker-like deal, as opposed to one inked by the Arkansas-based world's largest retailer. I like that the company got what amounts to a 5% stake in JD.com and preferred treatment on the company's website. The value of the stake has the opportunity to rise significantly in value over time, as JD.com goes to war with Alibaba Group Holding (BABA) in the surging Chinese internet commerce space. There is indeed room for two companies in the marketplace, and I like that Walmart now has a stake in the highly credible No. 2 market share holder. As Walmart gains better understanding of Chinese internet commerce ¿ likely made so by idea exchanges between the two teams ¿ it's not out of the realm of possibilities that Walmart buys all of JD.com at some point (such a logic partially explains why JD.com shares popped on the deal news). Let the relationship build between the two companies, shut out Alibaba from buying JD.com, and then strike at the right time in the future to gobble up the entire company.
And lastly, the deal allows Walmart to operate its China business more efficiently from two perspectives. One, the company sheds the operating expenses associated with Yihadian. I like when a company, such as Walmart, sheds lagging businesses -- it frees up money that could be reinvested back in more lucrative operations, in this case lower U.S. retail prices and even higher wages for workers. And two, Walmart is still trying to get its China store assets, 430 or so stores, singing from the same hymn sheet, but has gained a little bit of traction of late in better catering to picky Chinese shoppers. Being able to focus solely on stores, as opposed to both stores and its online website, should be quite helpful to get the momentum picking up.
Ultimately, the deal has me thinking back to comments Walmart CEO Doug McMillon made to us in attendance at the recent annual meeting. Basically, McMillon came out strong in Walmart re-evaluating all of its businesses and not being afraid to make moves to clean things up that weren't working. Interestingly, this notion was reinforced for me after a recent Instagram post of McMillon visiting the company's only home improvement store in South Africa -- judging by the photo, McMillon was there to assess why the company was even in this concept! Indeed, the proactive tone is also one I heard from a top Walmart international executive, when I asked whether the struggling U.K. business was being eyed for a sale. He said, "no," but I think Walmart's U.K.-arm Asda will be sold within the next five years to Aldi ¿ the U.K. market has turned into one of perpetually low margins due to the over-crowded retail market and rise of digital shopping.
Here are two of Walmart's other international businesses that are likely on the chopping block.
Brazil: For years, Walmart has struggled to make money in Brazil. It opened its first store in that country in 1995, and became bigger in the mid-2000s via acquisitions. Walmart Brazil now numbers 499 stores, and its financial results have only worsened of late, due to the country's challenging economic conditions. Having run the international arm of Walmart, I think McMillon knows Brazil is hopeless ¿ from my vantage-point the company has done everything in its power to turn the operation around (many of the initiatives were led by McMillon). Now it's time to cut bait.
Japan: For as long as I have covered Walmart, Seiyu has seemingly been a zombie asset. It just exists, not wowing anyone good or bad (if anything, results have been on the weak side). In 2002, Walmart acquired a 6.1% stake in Seiyu, and then went onto purchase the rest in 2008. The operation now numbers 343 stores. With Japan's economy finally showing some life, it's time for Walmart's dealmaker to pitch Seiyu as a prized asset for someone else's portfolio.
Meanwhile, I have championed for years that Walmart spins off Sam's Club into its own publicly traded company. I don't think that's going to be happening anytime soon, unfortunately. The business struck me as a weed when visiting Walmart's headquarters last month -- it's very integrated into Walmart's supply chain and way of thinking more broadly. Not saying a deal couldn't be done -- one where Walmart would retain a stake in the company similar to how Yum! Brands (YUM) structured its China spin-off -- but it could be years off.