Why Walmart’s Sale of U.K. Grocer Asda Makes It an Even Stronger Company - Barron's

Walmart said earnings per share would be 25 cents lower in the first full year after the sale.

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Walmart’s move to sell a majority stake of Asda, its U.K. grocery business, should help the retail giant accelerate its transformation, Telsey Advisory Group says.

Analyst Joseph Feldman reiterated an Outperform rating on Walmart (ticker: WMT) on Monday, while raising his price target by $10, to $155. He wrote that the deal “closes a multi-year effort to monetize the business.”

He noted that, while the Covid-19 pandemic helped to boost the division’s sales—as pantry stocking has helped supermarkets across the board—Asda has been losing market share in the U.K. in recent years, making it a less attractive asset for Walmart to own. The fact that the company will retain a minority stake in the grocer means it will still have some exposure to the U.K. market, while the sale gives it cash to use for higher-growth initiatives.

The loss of Asda’s sales will weigh on the company near-term. Walmart said earnings per share would be 25 cents lower in the first full year after the sale. However, Feldman argues that if Walmart can put the cash it gets from the deal to work wisely, it will more than make up for the bottom-line hit in coming years.

“Broadly, we like Walmart's new portfolio-based approach to its international businesses,” he wrote. “The company seems to be monetizing more mature businesses to free capital to invest in emerging areas and countries.”

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Given the company’s big push into food retail in recent years, including the rollout of subscription service Walmart+, it might seem odd it would choose to exit Asda now. But it does fit with the company’s pivot in the past few years toward focusing on higher-growth businesses, be it e-commerce or emerging markets.

Feldman argued that this is a solid strategy. “The recent decision to put capital in growth areas, such as Walmart Fulfillment Services, and emerging companies, such as JD.com, Flipkart, Dada-Nexus, and likely TikTok, should help generate solid returns over the medium term and keep Walmart ahead of the curve.”

Walmart shares were up 0.9% to $141.82 near midday Monday. The Dow Jones Industrial Average was up 1.3%. The shares are up more than 19% in 2020.

Write to Teresa Rivas at teresa.rivas@barrons.com

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