Kroger Co., battered for months by intense grocery competition as Amazon.com 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 $1.4 billion operation, which spans 18 states, includes names such as Tom Thumb and QuickStop.
“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 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 on Wednesday. That was the biggest intraday gain since March 2015. The stock had been down 41 percent this year through Tuesday’s close.
The most obvious buyers may be 7-Eleven and Alimentation Couche-Tard, which are battling to become the largest convenience-store chain in North America, said Christopher Mandeville, an analyst at Jefferies. Casey’s General Stores 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-Eleven – with 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.
Kroger operates 784 convenience stores, employing about 11,000 people under such banners as Turkey Hill Minit Markets, Loaf ‘N Jug and KwikShop. 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 value – a 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.
Source: Chicago Tribune
Featured Image: Kroger, Inc.
Inset Image: Kroger, Inc.