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Topic: Spinoffs

Suitors line up for convenience stores

Kroger LISTEN:  

KROGER CO. $28 (New York symbol KR; Consumer Sector; Shares outstanding: 881.4 million; Market cap: $24.7 billion; Takeover Target Rating: Medium; Dividend yield: 1.8%; TSINetwork Rating: Average; started up in 1883 and is now the largest grocery store operator in the U.S. by sales.

The company has 2,790 locations (1,480 of which also sell gasoline), mainly in the South, Midwest and West Coast.

In addition to Kroger, the company’s banners include Ralphs, City Market, Dillons, Food 4 Less, Fred Meyer, Fry’s, Harris Teeter, Jay C, King Soopers, QFC and Smith’s.

Kroger’s other operations include 783 convenience stores, 306 jewellery stores and 38 plants that make its private-label baked goods and dairy products.

The company continues to open new stores. As a result, through acquisitions, its sales rose 19.2%, from $96.8 billion in 2013 to $115.3 billion in 2017 (fiscal years end January 31).

Overall, Kroger’s earnings gained 43.8%, from $1.4 billion in 2013 to $2.05 billion in 2017. Due to fewer share outstanding, earnings per share jumped 60.6%, from $1.32 per share to $2.12 per share.

To increase shareholder value, the company has agreed to sell its convenience store operations to EG Group. Based in the U.K., that privately held firm operates over 2,600 convenience stores across Europe.

Kroger’s convenience stores generate $4 billion in annual revenue and operate under names such as Tom Thumb, Quik Stop, Turkey Hill, Loaf ‘N Jug and KwikShop. The majority of the locations offer gasoline. On average, they sell a total of 1.2 billion gallons of fuel a year.

The company will receive $2.15 billion when it completes the sale in the first half of 2018.

Kroger plans to use the cash to buy back shares and pay down its long-term debt. As of November 4, 2017, it stood at $13.1 billion, or a high 54% of its market cap.

Meanwhile, the company continues to upgrade its traditional brick-and-mortar supermarkets, lower its food prices, bolster in-store technology and invest in online initiatives.

These measures—what Kroger calls its “Restock” plan— could involve an investment of as much as $9 billion over three years. The moves should help Kroger gain a competitive advantage over rivals such as Wal-Mart, discounters Lidl and Aldi, and the newly merged Amazon- Whole Foods.

For the fiscal year ended January 31, 2018, Kroger likely earned $2.04 a share. The stock trades at a moderate 13.7 times that forecast. Its $0.50 dividend yields 1.8%.

Kroger is okay to hold.

CASEY’S GENERAL STORES INC. $114 (Nasdaq symbol CASY; Consumer Sector; Shares outstanding: 37.6 million; Market cap: $4.3 billion; Takeover Target Rating: High; Dividend yield: 0.9%; TSINetwork Rating: Average; operates more than 2,000 convenience stores in Iowa, Missouri, Illinois and 11 surrounding states.

Casey’s is now the target of activist investors JCP Investment Management LLC, BLR Partners LP and Joshua Schechter. Together they have issued an open letter to Casey’s that recommends it explore strategic alternatives, including a sale. The activists believe Casey’s stock could win a bid per share of $150 or more.

As Kroger’s recent deal demonstrates (see left), convenience- store assets remain highly attractive to consolidators, and Casey’s is one of the last publicly held chains available.

Casey’s General Stores is a buy.


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