Kroger Stock Rallies. It’s Selling 413 Stores to Propel Albertsons Merger.

Investors rallied behind Kroger and
Albertsons Cos.
‘s (ACI) announcement that they had reached a deal to divest hundreds of stores to C&S, putting the companies one step closer toward completing their proposed merger. Under the terms of the deal, C&S will buy 413 stores, eight distribution centers, two offices, and five private label brands from Kroger and Albertsons for about $1.9 billion, the companies said. Kroger may require C&S to buy 237 more stores to secure clearance for the merger.

The divestiture plan ensures no stores will close as a result of the merger and that associates will remain employed, the companies said Friday.

“Following the announcement of our proposed merger with Albertsons Cos., we embarked on a robust and thoughtful process to identify a well-capitalized buyer who will operate as a fierce competitor and ensure divested stores and their associates will continue serving their communities in the ways they do today,” said Kroger CEO Rodney McMullen. “C&S achieves all these objectives.”

The merger remains on track to close in early 2024, the companies said, subject to regulatory approval. The companies, however, have been struggling to get regulators on board ever since announcing the merger last October. The divestiture is the “first tangible signal” that the companies may be nearing a successful outcome on the deal closing, wrote Bernstein analyst Dean Rosenblum in a Friday note. Rosenblum rates the stock Outperform and has a $54 price target.

“This appears to be a more credible plan to obtain necessary regulatory approval,” agreed Oppenheimer analyst Rupesh Parikh in a note to clients Friday. Parikh has a Perform rating on the stock.

Kroger posted fiscal second-quarter adjusted earnings of 96 cents, rising from the prior year and beating analysts’ calls for 91 cents, according to FactSet. Sales at the grocer of $33.9 billion missed expectations of $34.1 billion. Same-store sales rose 1%, below expectations for a gain 1.3%.

The company also said it recorded a $1.4 billion charge in its second quarter to settle a majority of opioid claims brought against the company. The grocer agreed to pay up to $1.2 billion to states and subdivisions and $36 million to Native American tribes in funding for abatement efforts, as well as about $177 million to cover attorneys’ fees and costs to settle the majority of opioid claims, according to a press release. The company said the settlement was not an admission of wrongdoing or liability.

Without adjusting for the opioid settlement, Kroger actually swung to a loss in the second quarter, posting a net loss of 25 cents a share versus expectations for earnings of 90 cents a share. The company reaffirmed its fiscal-year guidance, adding that the opioid charge will not affect adjusted earnings per share for the year.

The company also said its financial results were pressured by disinflation, or a decrease in the rate of inflation. Grocers like Kroger have benefited from inflation, as they have been largely able to pass on higher prices to consumers and people have been prioritizing spending on needs over wants. Now, however, food prices are falling and people are still cautious with spending, the company said.

“Disinflation is occurring at a greater rate in 2023 than we originally anticipated, and customers are continuing to feel the effects of macro economic conditions,” said Gary Millerchip, Kroger chief financial officer, on a call with investors. “For these reasons, we believe the remainder of the year will continue to present challenges to navigate.”

Write to Sabrina Escobar at [email protected] and Emily Dattilo at [email protected]