Walmart (WMT 1.83%) recently disclosed that it sold its entire stake in JD.com (JD +2.08%), one of China's top e-commerce companies. That exit was surprising, since Walmart had been one of JD's leading investors since 2016 and still held a 9.4% stake in the company earlier this year.
JD's stock sank after the abrupt announcement, but Walmart's stock held steady as investors digested the news. Here are three reasons why the retail giant parted ways with JD, and why that divestment might be a smart move.
Image source: Walmart.
1. Walmart has outgrown JD.com
Walmart was struggling in China in 2016. Its brick-and-mortar stores faced a lot of competition, and its Yihaodian e-commerce platform wasn't gaining much traction in a crowded market. That's why it sold Yihaodian to JD and initially took a 5% stake in the e-commerce leader. It subsequently doubled that stake to more than 10%.
Over the years, Walmart and JD worked together to expand their delivery services. The two companies also co-invested in the online delivery platform Dada, which eventually went public as Dada Nexus (DADA +0.00%) in February 2020.
NASDAQ: WMT
Key Data Points
But today, Walmart's Chinese business can flourish on its own without JD. It currently operates 286 Walmart Supercenters and 48 Sam's Club stores across the country. Over the past few years, its Chinese unit reduced its number of Walmart Supercenters but increased its number of Sam's Club stores -- which are performing much better by focusing on membership-based bulk and discount sales like Costco (COST 3.25%).
Sam's Club also generates about half of its sales online in China -- it no longer needs to rely on JD or other Chinese e-commerce marketplaces to drive its digital sales.
As a result, Walmart's sales in China grew at an impressive compound annual growth rate (CAGR) of 10% from fiscal 2019 to fiscal 2024 (which ended this January). During the same period, Walmart's total revenue grew at a CAGR of 5%.
|
Metric |
FY 2020 |
FY 2021 |
FY 2022 |
FY 2023 |
FY 2024 |
|---|---|---|---|---|---|
|
China net sales growth |
0% |
7% |
21% |
6% |
16% |
|
Walmart net sales growth |
2% |
7% |
2% |
7% |
6% |
Data source: Walmart.
2. It plans to reinvest its cash into Sam's Club
Walmart raised about $3.7 billion in cash by liquidating its stake in JD, and it plans to reinvest a lot of cash into expanding Sam's Club across China. It's already aiming to open 10 new Sam's Club stores in China by the end of this year.
Walmart could still have plenty of room to expand that banner, since it operates nearly 12 times as many Sam's Club stores in the U.S. than in China. That expansion could enable Walmart to gradually scale back its namesake Supercenter stores, which face tougher competition from other superstores in China, deepen its penetration of more lower-tier cities, and widen its moat against Costco -- which operates seven stores in mainland China and 14 stores in Taiwan.
3. JD's stock isn't a great investment anymore
Walmart might have kept its stake in JD if its stock were soaring higher. But over the past eight years, JD's stock has risen only 3%. Over the past three years, it's declined 58%.
NASDAQ: JD
Key Data Points
JD's stock tumbled as its growth cooled. Its revenue rose at a CAGR of 27% from 2018 to 2021, but grew just 10% in 2022 and 4% in 2023. That deceleration was caused by China's economic slowdown and stiff competition from Alibaba (BABA 0.27%) and PDD (PDD 0.40%). Analysts expect its revenue to grow at a CAGR of only 5% from 2023 to 2026.
JD's stock might seem dirt cheap at 9 times forward earnings, but it's trading at that discount because its high-growth days are over. China's antitrust regulators could prevent it from meaningfully expanding its ecosystem into adjacent markets, and the persistent tensions between the U.S. and China could further compress its valuations.
Therefore, it made a lot of sense for Walmart to simply divest its stake in JD and reinvest its cash elsewhere. It's also still leaving the door open for future collaborations with JD, so it's not really abandoning its longtime partner.
What does this sale mean for investors?
This divestment is good news for Walmart's investors, since it's a smart move to liquidate a stagnant investment to ramp up its investments in China. But it's bad news for JD, which could stay stuck in its rut until it overcomes its long-term challenges.
