Kroger Weighs Sale of Convenience Stores

By Heather Haddon Features Dow Jones Newswires

Kroger Co. said it may sell its convenience stores and cut other costs, as the nation's largest traditional grocer battles Amazon.com Inc. and other new competitors.

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The nearly 800 convenience stores, most which sell gas, might "provide more value to someone other" than Kroger, Chief Financial Officer Mike Schlotman told investors at an annual meeting Wednesday at the New York Stock Exchange.

Kroger didn't name any bidders or say how long it would take to decide whether to sell. The grocer has hired Goldman Sachs & Co. to review options for the stores, operated in 18 states under brands including Turkey Hill Minit Markets, Loaf 'N Jug, KwikShop, Tom Thumb and QuickStop.

The grocer's stock rose more than 6% on the news, after shedding more than a third of its value this year as investors worried about the company's plans for fending off competition from Amazon and others. Shares in many food-sellers have tumbled since Amazon said it was buying Whole Foods Market this summer.

Selling the convenience stores could deprive Kroger of one means for reaching its goal to capture more of the roughly $1.5 trillion spent in the U.S. each year on food and consumables. The stores generated $4 billion in revenue last year and have delivered more than five years of identical store sales growth.

Convenience stores and other nontraditional retail outlets are one place consumers are buying more food instead of traditional grocery stores and, thanks in part to fuel sales and lower operating costs, convenience stores tend to have higher profit margins than traditional grocery stores.

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But Kroger and other food retailers are cutting costs swiftly and abandoning plans to build new stores to invest instead on e-commerce offerings. "We need to move faster on digital," said Chief Executive Rodney McMullen.

Executives also said that, under a program dubbed "Restock Kroger," they will seek to sell more advertising, generate new income from a data-analytics division, rethink how to restock shelves and continue to cut prices on some items to avoid losing customers. They said the effort will generate $400 million in profit by 2020, and that broader cost-cutting is expected to free up more than $4 billion in cash over the next three years.

Kroger executives also acknowledged that they didn't cut costs enough or guard against competitors while business was good. Discounters and other kinds of food-sellers have drawn new shoppers in the past two years, Mr. McMullen said.

Wal-Mart Stores Inc. executives on Tuesday said they would open the fewest number of U.S. stores in decades in their 2019 fiscal year and cut more costs to free up cash for e-commerce and store improvements. Costco Wholesale Corp. said earlier this month that it would expand home delivery service, a departure for a company that prioritizes in-store promotions.

Online food shopping is still small in the U.S., but it is expected to grow. Thirteen percent of people surveyed by the TABS Analytics research firm last month reported shopping for food online, up a percentage point from last year. Grocery analysts predict annual double-digit growth in online grocery shopping in coming years, compared with sluggish sales increases in traditional supermarkets.

Kroger reaffirmed its 2017 guidance on Wednesday despite the impact of storms such as Hurricane Harvey, which closed many of the company's stores in its third-biggest market, Houston. A handful of stores there suffered extensive damage and are being renovated.

Kroger expects positive same-store sales for the rest of the year after two recent quarters of negative identical-store sales put an end to 13 years of quarterly growth.

The company expects earnings per share to be flat or grow slightly for the rest of the year. Net earnings are projected at $1.74 to $1.79 a diluted share, with adjusted net earnings of $2 to $2.05 a share.

Write to Heather Haddon at heather.haddon@wsj.com

(END) Dow Jones Newswires

October 11, 2017 12:20 ET (16:20 GMT)