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Kroger: Activists Need Not Apply

A few months ago we highlighted the steep selloff in Kroger’s (KR) stock price after Amazon (AMZN) bought up Whole Foods (WFM). There was a lot of selling overreaction in the grocery space. Kroger shares are still down nearly 40% on the year. The selloff and need for a hyper-focus could attract an activist investor.

However, now Kroger is being its own activist investor, looking to explore strategic alternatives for its convenience store business. That is, Kroger might be selling off its gas station business, which is nearly 800 stores in 18 states. This is a solid business - generating $4 billion sales. However, it’s still a small part of the $118 billion in sales that Kroger brings in. Still, this would be a decent windfall for Kroger - a chance to cash in on a business that should trade at a premium multiple.

Kroger and other grocers trade at 11x earnings. One of the few publicly traded gas stations, Murphy USA (MUSA), trades closer to 20x. There are other opportunities for Kroger to streamline the business as well, in hopes of better positioning itself to fend off Amazon. In addition to the gas station business, we could see Kroger look to monetize its jewelry store or health clinic businesses. As well, Kroger could sell off its pharmacy business, much like Target (TGT) did with CVS (CVS).

Despite any appetite for activist involvement at Kroger, the company looks to be on the path right path.

It’s laid out a 2017 forecast that’s still strong despite the price war that Whole Foods is now waging thanks to Amazon. Its last quarterly results were in-line with expectations and it now has a cost savings plan for certain businesses. But it also has a heavy capital investment plan to put $9 billion into the new growth avenues over the next three years. This includes a scan, bag, go pilot for speeding up checkout by using your phone to scan items. All of which is a plan to make shopping a less tedious activity.  

Then there’s the push into more private-label goods, which Kroger has historically done well with. These brands, such as Simple Truth and Private Selection, are a higher margin for Kroger. Kroger needs to beat Amazon to the game, which is digital, and that’s where much of the $9 billion ‘restock’ investment will go.

Dumping the gas station business will help fund those plans. This includes beefing up its click and collect system (ordering ahead) and its online ordering pick-up locations. It’s also using Uber to deliver groceries as part of its quest to take on the last-mile effort.

Will an activist investor see this as enough? That’s the big question. For now, Kroger is being its own activist investor with a few potential catalyst, such as selling the pharmacy business or spinning off the gas station business - with the latter being most likely and the former being a potential underrated catalyst that the market is overlooking. Both of which could bring in some money for investing in the technology side and its large loyalty program. Seeing how well its scan, bag, go initiative works will be interesting, so keep an eye out there. As well, Kroger remains cheap enough to be enticing from a value perspective.

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