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Why Kroger Decided to Sell Its Convenience Store Business

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Why Kroger sold its convenience store business

As we discussed previously, America’s largest supermarket, Kroger (KR) decided to sell its convenience store business to the EG Group for $2.15 billion.

The convenience store business was Kroger’s non-core business. Kroger announced its intention to explore strategic alternatives, including a possible sale of the business, in October 2017.

“As part of our regular review of assets, it has become clear that our strong convenience store business unit will better meet its full potential outside of our business,” said Kroger’s CFO Mike Schlotman.

Kroger plans to focus on its core supermarket business. Kroger will use the sale proceeds to repurchase shares and lower its net debt-to-adjusted EBITDA ratio.

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How did Kroger stock respond to the deal?

Kroger stock fell 3% on February 5—slightly less than the broader market decline. In comparison, the S&P 500 Index and the S&P Food and Staples Index fell more than 4% during the day.

Kroger’s better performance was a result of the company getting a good price for its convenience stores. The price was in line with analysts’ expectations. Moody’s Investors Service forecast in November last year expected that Kroger could get between $2 billion and $2.5 billion for its convenience store business.

Kroger’s decision was well received by analysts

Analysts were broadly positive about Kroger’s deal.

“It gives them an opportunity to pay down debt or to pay for some of the new initiatives they have announced, said Lori Hudson of Bahl & Gaynor. She also said, “The convenience stores are a different business model with an even bigger exposure to fuel costs than the traditional grocery.”

“It’s not part of their online business,” said Joseph Agnese of CFRA Research. He said, “In that way, it’s kind of expendable. I think they’re going to focus on their core business.”

Investors looking for exposure in Kroger through ETFs could invest in the First Trust Consumer Staples AlphaDEX Fund (FXG), which invests 7% of its portfolio in the company.

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