Kroger Could Sell Jewelry Biz, but Who's Buying?

Now that Kroger has reached a deal for the sale of its convenience store business, could its jewelry stores be next?

The Cincinnati-based food retailer earlier this week announced a $2.15 billion deal to sell its convenience store division to the British c-store operator EG Group. That move, officials said, followed a decision to exit non-core business announced last year and an asset review that took into account rising valuations in the sector: Analyst Scott Mushkin of Wolfe Research estimated the price tag for the c-stores was about nine times EBITDA of the $4 billion convenience business.

In a note to clients this week, Mushkin said that Kroger should also explore the option of selling its jewelry stores, using the proceeds to reduce debt and provide flexibility to add scale “in the right areas”—for example, Kroger's rumored interest in online retailers such as Boxed.

A Kroger spokesperson was not immediately available to respond to WGB. 

Kroger’s jewelry store business is smaller than its c-store division both in stores and sales, but the company describes jewelry as a “a high-margin business with good cash flow.” It typically does not report how jewelry sales are trending. Kroger operates more than 300 jewelry stores under the Fred Meyer Jewelers and Littman Jewelers banners, which are mainly located in shopping malls, along with the in-store jewelry departments at Kroger’s Fred Meyer and Marketplace supercenters. 

Related:Kroger Considers C-Store Sale Amid 'Restock' Plan

According to Kroger’s 2016 annual report, revenue from jewelry stores is the primary source of Kroger’s  “other” category sales, which also includes food production plant sales to outside customers, data analytic services, variable interest entities, specialty pharmacy, in-store health clinics, digital coupon services and online sales through Vitacost.com. They hit a combined $3 billion in sales in 2016.

One difference between retail jewelry and convenience store businesses may be their relative health and prospects for growth, sources say. Kroger is something of a “tweener” in retail jewelry, much bigger than most operators in a business where independents remain significant but dwarfed by the industry giant Signet, which operates roughly 10 times the number of outlets Kroger does.

But these aren’t great times for retail jewelry businesses. Publicly traded Signet—parent of the Zales, Kay and Jared jewelry store banners, among others—said recently it had a disappointing holiday season and was expecting same-store sales to decline by mid-single digits during the current fiscal year, due in part to effects of having outsourced its credit. Beyond that, retail jewelers are struggling to connect to a new generation of shoppers and have been subject to declining traffic and tenant bankruptcies at shopping malls concurrent with the rise in internet shopping, said Rob Bates, news director of JCK, an industry trade.

“Millennials just aren’t as reliable a customer as the baby boomers were,” Bates told WGB. “There’s some hope that when they start getting married, things will start to get better.”

JCK reported last month that Fred Meyer had seen a net decline of 18 jewelry stores between the end of Kroger’s respective third quarters in 2016 and 2017, and that an unspecified number of additional stores were to be closing early this year. The company described the closing sites as underperforming units with expiring leases.

Though Bates acknowledged a financial buyer might have interest in Fred Meyer, noting that Warren Buffett’s Berkshire Hathaway owns Fred Meyer Jewelers competitor Helzberg, he conceded that “there’s not a lot of obvious buyers for 300-store jewelry chains out there.”