Kroger investors cheer as grocer eyes sale of convenience stores

October 11, 2017

Kroger Co., battered for months on the stock market by intense grocery competition as Amazon.com Inc. muscles into the industry, has finally given investors cause for optimism.

The supermarket giant kicked off its biggest rally in more than two years after saying it might sell its convenience-store business, an attempt to capitalize on a merger wave in that field. The operation, which spans 18 states, including Indiana, and generates about $4 billion in sales, includes names such as Tom Thumb and QuikStop.

“Considering the current premium multiples for convenience stores, we feel it is our obligation as a management team to undertake this review,” Chief Financial Officer Mike Schlotman said in a statement Wednesday.

Kroger is evaluating operations at a time when Amazon.com is pushing into the supermarket business with its $13.7 billion deal for Whole Foods. The outlook for groceries, already a low-margin business, has been further complicated by the recent arrival from Europe of low-cost competitors Aldi and Lidl.

Kroger said it opted to put its convenience-store business on the block after a review found that it might have more value outside of Kroger. The Cincinnati-based company hired Goldman Sachs Group Inc. to help handle the process.

Investors applauded the idea of a convenience-store sale, sending the shares up as much as 7.3 percent, to $22.03 each, on Wednesday. That was the biggest intraday gain since March 2015. The stock had been down 41 percent this year through Tuesday’s close.

Shares of the company were temporarily halted on Wednesday morning after Kroger issued a confusing sales figure for the convenience-store business. It initially said the division generated $1.4 billion in sales, but that was just revenue from inside the stores.

Possible suitors

The most obvious buyers may be 7-Eleven Inc. and Alimentation Couche-Tard Inc., which are battling to become the largest convenience-store chain in North America, said Christopher Mandeville, an analyst at Jefferies LLC. Casey’s General Stores Inc. might be another possibility, he said.

Couche-Tard, based in Quebec, agreed last year to buy the gas-station chain CST Brands Inc. for almost $4 billion, its biggest deal yet. That transaction brought Couche-Tard thousands of locations in the southeastern U.S., Texas and New York, as well as eastern Canada. The company is now the second-largest largest convenience-store operator in the U.S.after 7-Elevenwith more than 5,300 locations.

The total U.S. convenience store industry posted sales of about $565 billion last year. Chains make up less than 40 percent of the industry, leaving “ample room” for acquisition, according to Jennifer Bartashus, an analyst at Bloomberg Intelligence.

Many brands

Kroger operates 784 convenience stores, employing about 11,000 people under such banners as Turkey Hill Minit Markets, Loaf ‘N Jug and KwikStop. The majority of locations also offer gas, and the business sold a total of 1.2 billion gallons of fuel last year.

The company has been under pressure to show it can adapt to the rapidly changing retail landscape. On the day the Whole Foods deal was announced in June, Kroger lost more than $2 billion in market valuea sign investors expect Amazon to ravage the grocery industry with its supply-chain prowess and margin-crushing retail tactics.

Even before the Whole Foods deal hurt grocery stocks, Kroger had posted two straight quarters of declining same-store sales, its worst slump in more than a decade.


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