Asda Sells 24 Stores for £568 Million Amid Falling Sales

Asda, the Leeds-based supermarket chain, is set to raise £568 million through the sale of 24 stores and a distribution centre, which will be leased back for ongoing operations. This move comes as the company grapples with declining sales and market share, raising concerns about its financial health. The announcement precedes the release of Asda’s quarterly results, expected next week, which are anticipated to reflect continued challenges in the competitive grocery sector.

Sales at Asda dropped by 3.9% in the three months leading to November 2, 2023, according to data from Worldpanel by Numerator. This decline has resulted in a one percentage point decrease in market share compared to the same period last year. The supermarket’s parent group reported a significant loss of nearly £600 million last year, attributed to decreasing sales and rising debt servicing costs.

Concerns Over Financial Stability

Clive Black, a retail analyst at Shore Capital, commented on the implications of the store sell-off. He described it as a potential “sign of weakness,” suggesting that the sale of tangible assets indicates underlying financial distress. While the transaction could provide Asda with much-needed funds to address its debt or invest in the business, it also introduces higher rental costs, which could restrict operational cash flow.

“If trading was robust, this could be accommodated. Unfortunately, that is not the case,” Black stated, expressing disappointment over Asda’s trading performance. He noted that the latest market share data for grocery retailers has been particularly troubling.

Analyst Patrick O’Brien from GlobalData pointed out that Asda’s strategy, under new chairman Allan Leighton, to launch aggressive price cuts has not yet made a significant impact on sales. “We had anticipated a more forceful approach to pricing, but that has not materialised,” O’Brien remarked.

Union Concerns and Future Outlook

Amidst these developments, Nadine Houghton, national officer for the GMB union—which represents many of Asda’s employees—voiced concerns about the supermarket’s future. “Asda’s owners, TDR Capital, are selling off assets to manage the debt liabilities created by their own borrowing. Debt levels, lease liabilities, and interest payments are rising, while market share and employee morale are at an all-time low,” Houghton stated.

Asda operates 579 supermarkets, 517 Express convenience stores, and 29 Asda Living outlets. The current sale involves two buyers: DTZ Investors and Blue Owl Capital. This transaction is part of a broader strategy to reduce Asda’s significant debts following a highly leveraged £6.8 billion takeover in March 2020 by the Issa brothers and private equity firm TDR Capital.

Armarveer Singh, a credit analyst at CreditSights, indicated that this latest deal could negatively impact Asda’s credit rating due to increased leasehold exposure. Reports suggest that the proceeds from the sale will primarily be used to pay down a debt owed to Walmart, which retains a 10% stake in Asda.

Asda has previously sold off assets, including warehouses for £1.7 billion in 2021 and supermarkets for £650 million in 2022, all while agreeing to lease back the properties. In a more unusual move, the company signed a ground rent deal for £300 million in 2023.

An Asda spokesperson affirmed the company’s approach to property management, stating, “Asda’s property strategy is centred on maintaining a strong freehold base while also taking a considered and selective approach to unlocking value from our estate where appropriate. These transactions reflect that approach, enabling us to realise value from the sites while retaining full operational control.”

As Asda navigates these challenges, the upcoming quarterly results will be closely monitored for further insights into the supermarket’s performance and strategy moving forward.