Wal-Mart’s Portfolio Review Could Mean Divestitures In South America

Wal-Mart Stores CEO Doug McMillon recently told analysts in New York that the company is now reviewing its large, broad portfolio of holdings and he reminded the analysts that the retailer has been known to exit certain businesses and countries that no longer a growth plan.

Wal-Mart’s top executives have been clear in recent speeches that the retailer is focusing on its North American – largely U.S. – business and China in the near to mid term. To that point, in recent months the retailer has shed in Mexico its large restaurant service business and its banking business. McMillon said the Chilean property management business also is on the market, and would include10 shopping centers in Chile totaling roughly 2.69 million square feet.

Walmart Chile did not give an estimated value for the assets, but said it earns 0.6% of its income from renting retail space in the malls. The Chilean property management company controls Lider, Chile’s principal supermarket chain, and participates in several other fields including finance and food services, according to the retailer’s website.

An international consultant in Latin America recently said it is not unreasonable to believe that Wal-Mart may sell the entire Chilean retail chain.

Charles Holley, chief financial officer, at Wal-Mart also reiterated that the retailer is analyzing the businesses it owns to determine future growth potential. While he said the retailer is open to reshaping the portfolio, he was clear there would be no fire sale or any hurried actions.

Holley said the major contributors to growth have flipped since 2012, when the international markets carried the majority of the retailer’s overall sales growth potential. Today it’s the U.S. market that has turned its comp sales positive in recent quarters with what company execs say is untapped potential in an improving U.S. economy. Wal-Mart expects fiscal 2019 international sales will improve, but not as much or as robust as the company’s domestic business.

TROUBLED BRAZIL
Clint Lazenby, a consultant with #OnShelf, said it doesn’t make sense to keep spending money in markets like Brazil that are riddled with corruption and spiraling downward economically. He said Wal-Mart has been unable to assemble the three separate business into one cohesive business given difficult tax structures, and other hurdles. The economy there is week. Brazil moved into a recession in June.

Charles Grom, an analyst at Sterne Agee & Leach Inc., said in a note to investors that Wal-Mart hasn’t shied away from exiting markets in the past. He reminded investors that Wal-Mart sold its German and South Korean units in 2006 after years of disappointing results.

Other experts agree that Brazil is likely on the table given Wal-Mart has been struggling to make a profit in Brazil for years. Lazenby said it’s a tough place for retail as the French chains Carrefour SA and Casino Guichard-Perrachon SA have a lion’s share of that market.

McMillon in August referred to the Brazilian market as “challenging.” Wal-Mart opened its first Brazil location in 1995 and now operates supercenters, supermarkets, warehouse stores, bodegas and gas stations under various brand names it acquired in three separate deals.

International economists with Morgan Stanley downgraded Brazil’s retail sector on Friday (Oct. 23) to “cautious” citing weakness through next year. They expect Brazilian stores to underperform other Latin American retailers amid the weak economic climate. Brazil’s retail sales tumbled more than economists estimated in August and in September, according to the national statistics agency in Rio de Janeiro. Retail sales in September fell 6.9% from the previous year, versus a median forecast for a 5.8% decline. That follows a revised 3.9% slide last month. Consumer confidence bottomed in September as 95,602 jobs were eliminated on the heels of 86,543 jobs lost in August.

ARGENTINE WOES
The other South American country in Wal-Mart’s international portfolio is Argentina, which according to experts has underperformed in recent years.

Wal-Mart entered Argentina in 1995 opening its first supercenter in Buenos Aires. They introduced the first Changomas format in 2007. The retailer operates 108 retail stores in Argentina and lags behind Carrefour SA’s dominant marketshare having been there since 1982 with more than 500 stores in country.

Wal-mart has struggled to make headway in Argentina and the market is seldom mentioned by executives when discussing the international portfolio. Retail watchers classify Argentina as a laggard in Wal-Mart’s International portfolio and would not be surprised if Argentina also goes on sale making for a clean sweep of the retailer’s South American investments.