By Paul Goodwin, Chief Analyst, Cabot Emerging Markets Investor
From Cabot Wealth Advisory 6/21/16 Sign up for Cabot Wealth Advisory—it’s free!
Wal-Mart (WMT), which has enjoyed its ranking as the biggest retailer in the U.S. for many years, is also a big international seller—the company gets about a third of its sales from outside the U.S. But Wal-Mart hasn’t been able to crack China.
Sure, the company has well over 400 stores in China, but walk-in foot traffic at those locations has been going down for nine straight quarters.
Why hasn’t the Wal-Mart mega-store strategy worked in China?
There are a ton of answers, but the three biggest are:
1) Chinese consumers are buying more and more of everything online, and Chinese retailers are offering one-day delivery in big cities and adding more smaller cities to their delivery networks.
2) Wal-Mart’s U.S. pricing advantages don’t work as well in China, where price competition is cutthroat in the extreme.
3) Chinese rivals have a size advantage as huge online user bases in one area (search, e-commerce, messaging and games, for instance) can be leveraged as a foundation for other enterprises.
So it wasn’t much of a surprise to read on Monday that Wal-Mart is making a major strategy shift in its Chinese operations, selling Yihaodian (its online commerce marketplace) to JD.com (JD).
Wal-Mart first took a stake in Yihaodian—which specializes in selling groceries and other items of interest to affluent female customers—in 2011, then acquired full ownership in 2014. But with Yihaodian’s Chinese e-commerce market share at less than 2%, the enterprise clearly was not thriving, at least not up to Wal-Mart’s standards.
The sale of Yihaodian to JD.com will bring Wal-Mart into partnership with JD.com, a strong direct seller to Chinese consumers. Wal-Mart’s 5% stake in JD.com is valued at $1.5 billion based on JD.com’s current stock price. The partnership is a good bet, because JD.com has been slowly prying market share away from Alibaba (BABA).
The tie-up between the two companies will give Wal-Mart’s physical stores access to JD.com’s delivery network of warehouses and vehicles, plus a listing on JD.com’s websites. JD.com has spent a huge amount of money to strengthen its delivery infrastructure, mimicking Amazon’s (AMZN) strategy of building for the future rather than booking big earnings numbers.
I think Wal-Mart has made a good decision with this deal. The online giants in China look too strong for any foreign competitor to challenge. So rather than wasting time and money in that battle, Wal-Mart has chosen to ally itself with an established and successful player, one that has shown that it can make long-term inroads against the online titans.
Wal-Mart’s stock reacted positively to the news, although it’s still trading in a tight, gradually rising consolidation pattern after its May 19 gap up on earnings.
Based on this story, I might be tempted to make WMT my stock pick of the day. The stock fell from 91 last January to 56 in November, but has made good progress from its bottom. After a bad year in 2015, it trades at a reasonable 16 P/E and its dividend offers a solid 2.8% annual yield. Even though the stock is trading at its August 2013 price, it has near-term momentum, which is a valuable signal. Click here for more.
By J. Royden Ward, Editor of Cabot Benjamin Graham Value Letter
From Cabot Wealth Advisory 10/21/10 Sign up for free Cabot Wealth Advisory e-newsletter
Wal-Mart Stores (WMT) is the world's largest retailer with 8,500 stores, two million employees, and $400 billion total sales. Groceries now account for 51% of sales.
Shoppers seeking low retail prices and one-stop shopping are boosting Wal-Mart’s sales. Sales and earnings increased 10% while dividends jumped 20% per year during the past 10 years. We expect sales and earnings to increase 10% per year and dividends to advance 12% per year during the next five years.
WMT shares are undervalued at 12.5 times forward EPS. Dividends have been paid since 1973 and currently provide a yield of 2.2%.
Editor's Note: You can find additional dividend-paying stocks selling at bargain prices in the Cabot Benjamin Graham Value Letter. In every issue, you’ll find my legendary Maximum Buy and Minimum Sell Prices for over 250 stocks. Click here to get started today!
J. Royden Ward
Editor of Cabot Benjamin Graham Value Letter
A lifelong investment professional, J. Royden Ward applies his 40 years of investment research, portfolio management, writing and publishing experience to his role as analyst and editor of Cabot Benjamin Graham Value Letter, which is directed to long-term investors seeking a guide to profitable value investing based on the time-tested systems originally developed by Benjamin Graham, the Father of Value Investing. A second-generation disciple of Benjamin Graham, Roy in 1969 pioneered the development of a computerized model that applied the formulas developed by Graham using a unique ranking system. Today, Roy applies his system to two models in the Value Letter.
|Wal-Mart Stores (WMT)
702 SW Eighth Street
Bentonville, Arkansas 72716-8611
|Index Membership: Dow Jones Composite, Dow Industrials, S&P 100, S&P 500, S&P 1500 Super Comp
Industry: Discount, Variety Stores
Full Time Employees: 2,300,000
10/21/10 Wal-Mart Stores (WMT): Bargain Shoppers are Boosting Wal-Mart's Sales