Wal-Mart Eyes Expansion in China; Sells Online Unit to JD.com
Wal-Mart Stores Inc.WMT has been struggling of late to expand its reach in China. In an effort to cure ailing sales in one of the world's toughest retail markets, Wal-Mart has recently inked a deal with Chinese e-commerce giant, JD.com JD.
Under the terms of the deal, Wal-Mart Stores plans to sell its Chinese e-commerce business Yihaodian to local retailer JD.com in exchange for a 5% equity stake in JD.com. JD.com will issue about 145 million new class A shares to Wal-Mart, worth about $1.5 billion at JD.com's current valuation. Wal-Mart's Sam's Club China will open a flagship section on JD.com, and both companies will leverage their supply chains and broaden the range of imported goods. Wal-Mart will continue to operate the Yihaodian direct sales business and will be a seller on the Yihaodian marketplace.
We note that JD.com is the second-largest online retailer in China after Alibaba Group Holding Ltd. BABA in terms of market cap. The deal with JD.com is expected to give Wal-Mart a better chance of competing in the cutthroat retail industry in China and expand its reach in the country.
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JD.COM INC-ADR Price
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The deal comes as a surprise as last year in July, Wal-Mart had acquired full control of Yihaodian in China. With its full ownership, Wal-Mart expects to further accelerate its e-commerce business in China.
Wal-Mart has struggled hard to expand its business in China. The retailer opened its first store in the country in 1996, but only has about 430 there currently. The company states various reasons for the sluggish business operations there. In China, the company has long been dealing with food safety scandals, even after trying to maintain high food safety standards. Wal-Mart China also has been facing significant pressure from government austerity measures and deflation. The company also faces problems in understanding discerning Chinese consumers as their buying decisions aren’t always price driven.
Besides China, Wal-Mart is also experiencing weakness in Mexico and Brazil due to ongoing macro-economic headwinds.
The company has also faced specific challenges in its large e-commerce markets outside the US. Economic softness in Brazil and China continued to weigh on growth. A highly competitive environment and food deflation in the UK are concerns..
The company is facing severe challenges and has been showing signs of acute weakness since the past few quarters. Increased investments in technology and an increase in pay of its workers are increasing its expense burden. Higher labor costs along with the company’s efforts to overhaul its stores and invest in its online operations in order to compete with Amazon.com, Inc. AMZN will weigh on its earnings in the near term.
Nevertheless, this Bentonville, AR-based company is making efforts to understand the evolving needs of its customers to regain their confidence, and thus boost sales. Wal-Mart has delivered positive comps in the U.S. in the last seven quarters, after delivering negative comps for many quarters. This was the result of lower fuel prices, which eased consumers’ spending power. Wal-Mart’s U.S. sales edged higher as changes in stores helped the retailer attract shoppers. E-commerce sales have also contributed to the company’s sales.
This Zacks Rank #2 (Buy) retailer also started fiscal 2017 on a positive note with both earnings and revenues beating the Zacks Consensus Estimate.
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