Why would selling off some stores improve a company's value?

Question

I was watching Mad Money last night and he was discussing Sunoco how they were planning to liquidate some of their retail locations, thereby improving their value. Why is it that removing locations (presuming they're not a net loss) improves a companies value. Wouldn't removing a revenue stream (no matter how small) be bad for business? Is there something I'm missing?

Answer 1

Two different takes on an answer; the net-loss concept you mentioned and a core-business concept.

If a store is actually a net-loss, and anybody is willing to buy it, it may well make sense to sell it. Depending on your capital value invested, and how much it would take you to make it profitable, it may be a sound business decision to sell the asset. The buyer of the asset is of course expecting for some reason to make it not a net loss for them (perhaps they have other stores in the vicinity and can then share staff or stock somehow).

The core-business is a fuzzier concept. Investors seem to go in cycles, like can like well-diversified companies that are resilient to a market downturn in one sector, but then they also like so-called pure-play companies, where you are clear on what you are owning. To try an example (which is likely not the case here), lets say that Sunoco in 5% of its stores had migrated away from a gas-station model to a one-stop-gas-and-repairs model.

Therefore they had to have service bays, parts, and trained staff at those locations. These things are expensive, and could be seen as not their area of expertise (selling gas).

So as an investor, if I want to own gas stations, I don't want to own a full service garage, so perhaps I invest in somebody else.

Once they sell off their non-core assets, they free up capital to do what they know best.

It is at least one possible explanation.

Answer 2

I'd like to modify the "loss" idea that's been mentioned in the other two answers. I don't think a retail location needs to be losing money to be a candidate for sale. Even if a retail location is not operating at a loss, there may be incentive to sell it off to free up cash for a better-performing line of business.

Many large companies have multiple lines of business. I imagine Sunoco makes money a few ways including: refining the gas and other petroleum products, selling those petroleum products, selling gas wholesale to franchised outlets or other large buyers, licensing their brand to franchised outlets, selling gas and convenience items direct to consumers through its own corporate-owned retail outlets, etc.

If a company with multiple lines of business sees a better return on investment in certain businesses, it may make sense to sell off assets in an under-performing business in order to free up the capital tied up by that business, and invest the freed-up capital in another business likely to perform better.

So, even "money making" assets are sometimes undesirable relative to other, better performing assets.

Another case in which it makes sense to sell an asset that is profitable is when the market is over-valuing it. Sell it dear, and buy it back cheap later.

Answer 3

Maybe the location isn't yet, but will soon become a new loss. For example older soon out of warranty equipment, new tax laws in the locality soon to take affect or even just declining sales over the past periods of measurement.

Perhaps labor disputes or other locality issues make running the store difficult.

There is the possibility that the land the location occupies is worth more sold to the new big box retailer than it will be in the next 10 years of operation.

In some cases, companies want to have a ton of cash on hand, or would sell assets to pay off debt.