ARKO Corp. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Merchandise Efforts: Consumers are prioritizing discounts, and traffic trends have been challenging. Value-oriented promotions include the Tyson Chicken Sandwich value meal for $4.99 and a free Nathan Hotdog with a large fountain drink. Foodservice has seen expansion: Nathan's Hotdogs are in over 500 stores, with same-store hotdog sales up over 30%; same-store non-franchise pizza sales increased ~11.5% in Q3.
• Loyalty Program: Enrolled loyalty members spend 80% more and visit almost twice as often as non-enrolled customers. The Fas Million Sweepstakes was launched, offering scratch cards and a chance to win $1 million.
• Channel Optimization: Converted 51 retail stores to dealer sites by the end of Q3, with an expectation to convert another ~100 by the end of Q4. Expected annualized benefit to combined operating income is ~$8.5 million, with cumulative benefit ~$15M-$20M.
• NTIs: Expanded NTI pipeline with 8 new-to-industry stores. One opened in Q3, with 3 more expected by year-end and the balance in 2025.
• New Design Pilot: Store layout and merchandise assortment finalized, with permitting to begin in Q4 and remodeling of 7 pilot stores in early 2025.

Segment Performance

• Retail Segment: Operating income was approximately $71 million in Q3 2024, compared to $81.5 million in Q3 2023. Total retail merchandise sales declined by approximately 7.3%, with merchandise contribution down 4.2% but margin rate expanding by 110 basis points. Same-store merchandise sales excluding cigarettes decreased by 5.7%, while total same-store merchandise sales dropped 7.7%. Same-store fuel contribution fell by ~4.3% due to a gallons decline, partially offset by a stronger fuel margin per gallon. Same-store operating expenses decreased by approximately 1.4%.
• Wholesale Segment: Operating income was $8.2 million in Q3 2024, versus $10 million in Q3 2023. This was driven by a decline in gallons and lower fuel margin per gallon, primarily from reduced prompt pay discounts.
• Fleet Segment: Operating income was $10.8 million in Q3 2024, compared to $8.8 million in Q3 2023. It was boosted by strong fuel margin performance, with $0.435 per gallon in Q3 2024 vs. $0.384 per gallon in Q3 2023.

Guidance

• Fourth Quarter 2024: Adjusted EBITDA is expected to range from $53 million to $63 million. Assumptions include a low to mid-single-digit decline in same-store sales, a mid-single-digit decline in retail gallon demand, and a retail fuel margin of $0.38 to $0.42 per gallon.
• Full Year 2024: Adjusted EBITDA range is $245 million to $255 million. The midpoint is $5 million below the beginning of year guide due to reduced expectation for fourth quarter same-store merchandise sales.

Risks

• Consumer Pressure: Persistent inflation and increased prices for daily necessities are restraining consumer spending.
• Macro Economic Factors: Uncertainty in fuel price and demand trends could impact sales and margins.
• Execution Risks: Challenges in executing channel optimization, NTI rollout, and store remodeling initiatives as planned.

Question and Answer

• **Q: Details on the 7-store pilot for the new design?

A: A third-party consultant was hired, store layout and merchandise assortment are being finalized, the brand name will be disclosed, permits will be begun in Q4, and construction will start in early 2025 if successful.**

• **Q: Impact of OTP back bar space expansion?

A: Testing was successful, showing a shift from cigarettes to OTP, with rollout to 1,000 stores by end of Q1 2025, and higher margins for OTP.**

• **Q: Outlook for same-store sales?

A: October was better than September, with a cautiously optimistic view that Q3 was the bottom, and hurricanes had no material impact on Q3.**

• **Q: Funding of promotional activity?

A: Most promotions are 100% funded by vendors, e.g., the Fas Million Sweepstakes and a December OTP promotion funded by suppliers.**

• **Q: Strategic rationale for dealerization?

A: Concentrate on jewel assets, convert retail stores to wholesale where return on investment isn't seen, benefiting from rent and fuel supply agreements.**

• **Q: Growth ramp for NTIs?

A: The NTI pipeline is expanding, with 8 stores started, and ramping up expected, seeing opportunities with liquidity and footprint.