Kroger Shares Jump After Company Eyes Sale of Convenience Stores

  • Names such as Loaf ‘N Jug and QuickStop could be on the block
  • Company is evaluating assets as Amazon pushes into industry

Why Kroger Might Sell Convenience-Store Business

Kroger Co., battered for months by intense grocery competition as 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 and generates about $4 billion in sales, includes names such as Tom Thumb and QuickStop.

Kroger started evaluating the operation about three or four months ago and decided that it was best to consider a sale because consolidation in the convenience-store industry could make it a valuable asset, according to Chief Executive Officer Rodney McMullen.

“The economics make sense to do it,” McMullen said Wednesday in an interview at the New York Stock Exchange.

Kroger is looking to sell the convenience stores while pushes 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, based in Cincinnati, hired Goldman Sachs Group Inc. to help handle the process, according to a statement on Wednesday.

Investors applauded the idea of a sale, sending the shares up as much as 7.3 percent before they retreated to close up 1.2 percent at $20.78 in New York. The stock had been down 41 percent this year through Tuesday.

Kroger shares were temporarily halted on Wednesday morning after the company 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 without including gasoline revenue.

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-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.

Loaf ‘N Jug, KwikShop

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. McMullen said the decision to look for a buyer for the convenience stores wasn’t directly tied to Amazon’s purchase of Whole Foods, a deal he said was a getting a little too much attention in the media and on Wall Street.

“The market is going to assume the worst, and you have to prove otherwise,” McMullen said. “It’s our job to deliver.”

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