Arko - Q1 2024

Executive Summary

• Q1 2024 was resilient on margins but soft on volumes and inside sales; Adjusted EBITDA was $36.6M, down year-over-year due to lower fuel contribution, Virginia gaming income elimination, and higher same-store operating expenses.
• Retail merchandise margin expanded 180 bps to 32.5% as mix shifted toward higher-margin categories; retail fuel margin rose to 36.4 cpg, while same-store fuel gallons fell 6.7% versus OPIS down 5.9%.
• Management introduced a multi-year transformation plan (store-level capital allocation, pricing/procurement optimization, dealer conversions) and expanded the buyback to $125M; a $0.03 dividend was declared.
• Guidance: Q2 Adjusted EBITDA $70–$77M with retail fuel margin 37–40 cpg; FY 2024 Adjusted EBITDA maintained at $250–$290M with retail fuel margin 36–40 cpg.
• Potential stock reaction catalysts: margin durability and merchandising initiatives (pizza, food service) vs. demand headwinds; clarity on transformation plan and dealer conversions at the investor day later in 2024.

What Went Well and What Went Wrong

What Went Well

• Merchandise margin rate expanded ~180 bps to 32.5%, lifting merchandise contribution +9.7% to $134.9M despite lower same-store sales, driven by marketing and merchandising initiatives.
• Retail fuel contribution increased 5.5% to $92.9M, with margin up to 36.4 cpg; acquisitions contributed ~$7.8M to retail fuel contribution.
• Strategic actions: launch of $4.99 pizza and expanded food program; plan to dealerize select retail sites to improve profitability; expanded buyback to $125M signaling confidence and perceived undervaluation.

Management quotes:

• “We are…developing a multi-year transformation plan…to accelerate organic growth”.
• “Converting these stores to dealer sites…offers the opportunity to significantly reduce site operating expenses and corporate G&A”.
• “We firmly believe our current valuation does not fully reflect the underlying value… the Board has approved an expansion of our share repurchase program to $125 million”.

What Went Wrong

• Same-store merchandise sales declined 4.1% (-3.0% ex-cigarettes) amid hesitant consumer behavior and inflation; transactions were down, with softness early in the quarter.
• Same-store fuel gallons decreased 6.7% (vs. OPIS down ~5.9%), pressuring same-store fuel contribution (-$2.8M), partially offset by stronger margin per gallon.
• Adjusted EBITDA fell to $36.6M from $47.5M YoY, impacted by Virginia gaming revenue elimination and elevated same-store operating expenses (wages, repair & maintenance, workers’ comp).

Transcript

Jordan Mann (Senior Manager of Investor Relations)

Good afternoon and welcome to ARKO's First Quarter 2024 Earnings Conference Call and webcast. On today's call are Arie Kotler, Chairman, President and Chief Executive Officer, and Rob Giammatteo, Executive Vice President and Chief Financial Officer. Our earnings press release and quarterly report on Form 10-Q for the first quarter of 2024 as filed with the SEC are available on ARKO's website at www.arko-corp.com. During our call today, unless otherwise stated, management will compare results to the same period in 2023. Before we begin, please note that all first quarter 2024 financial information is unaudited. During this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Please review the forward-looking and cautionary statements section at the end of our first quarter 2024 earnings release for various factors that could cause actual results to differ materially from forward-looking statements made during the call today. Any forward-looking statements made during this call reflect our current views with respect to future events, and ARKO is under no obligation to update or revise forward-looking statements made on this call, whether as a result of new information, future events, or otherwise. On this call, management will share operating results on both a GAAP and on a non-GAAP basis. Descriptions of those non-GAAP financial measures that we use, such as operating income, as adjusted, and Adjusted EBITDA, and reconciliations for those measures to our results as reported in accordance with GAAP are detailed in our earnings release or in our quarterly report on Form 10-Q for the quarter ended March 31, 2024.

Additionally, management will share profit measures for our individual business segments along with fuel contribution, which is calculated as fuel revenue less fuel costs and excludes intercompany charges by GPMP. Now I would like to turn the call over to Arie.

Arie Kotler (Chairman, President and CEO)

Thank you, Jordan, and thank you all for joining us this afternoon. We performed as we expected during the first quarter and remained focused on managing our controllable in this challenging macro environment. While performance trends that we shared in February improved modestly throughout March, we continue to see a hesitant consumer adjusting to persisting inflationary pressure. We are aggressively positioning ourselves to navigate this near-term headwinds as we continue to believe in the longer-term opportunities offered by the resilient convenience store industry. We believe that the operational announcement that we are implementing will not only help to guide us through this microeconomic environment but will also lay the foundation for the multi-year transformation plan we are developing to accelerate organic growth.

Turning to the first quarter 2024 performance, we generated $36.6 million in Adjusted EBITDA, which was above the implied midpoint of the range we shared on our last call. Although same-store merchandise sales declined compared to the strong prior-year quarter, they were up 4.6% on a two-year stack excluding cigarettes. Additionally, our ongoing efforts to enhance assortment mix drove significant merchandise margin expansion, which offset the decline in same-store merchandise sales, delivering modest merchandise contribution growth over the prior-year period. We also made progress on all three of our merchandising pillars with continued growth of our fas REWARDS loyalty program, acceleration on our core destination merchandising categories, and expansion of our food offerings. We expect these efforts to drive traffic to our stores and to improve profitability.

While these pillars will remain central to our merchandise strategy, I would like to utilize more time on this call to focus on the larger structural changes we are initiating. We have been an aggressive acquirer over the last 10 years, closing on 26 acquisitions to build scale. We bolstered our core retail segment with additional lines of complementary businesses in the form of our wholesale and fleet-fueling segments. Since going public in 2020 through March 31, 2024, we have added on an end basis 210 retail stores, 219 wholesale sites, and 296 cardlock locations. Additionally, over the last three years, we converted more than 40 retail stores to our wholesale network. Coming off this period's rapid acquisition-driven expansion, it is now time to aggressively focus on accelerating organic growth.

We intend to execute this next stage in our strategy by refining our value proposition into one that more clearly resonates with our customers while leveraging our unique multi-segment operating model. I would now like to give some color on our developing multi-year transformation plan we referenced on our last conference call, which will be fully shared during our Investor Day later this year with more details provided in between. Earlier this year, we kicked off a holistic performance review of our business to evaluate the significant opportunity we believe exists within our retail store network, and we are in the process of developing a plan with more aggressive and targeted allocation of capital towards strategic subsegments of our retail stores. We expect that this investment will support our efforts to grow share in expanding markets and maintain our competitive positioning in more stable markets.

With respect to this work, we are working with a nationally recognized consulting firm to develop and pilot different options for a 360-degree offering for our customers. We will leverage what we learn about our customers to help us announce our customer value proposition along with the design and operations of our stores, with a significant focus on food service. The pilot will focus on 5-7 stores within one of our regions, with the goal of a region-wide rollout before, ultimately an expansion across our retail footprint. The end result will be selectively and methodically make meaningful investment in our store base to drive traffic and improve profitability. Finishing up on capital allocation, we are advancing the construction of the 3 new stores that we mentioned on our last conference call. We expect NTIs will become increasingly important as we work to navigate competitive dynamics.

Concurrently, we are focused on both our pricing and procurement strategies across our retail stores to support ongoing merchandise margin rate growth. We believe there are opportunities to optimize pricing to drive top-line growth, and we are evaluating zone pricing capabilities to match pricing strategies with the needs of different customer segments. On the procurement side, we are working on sourcing strategies to leverage our scale to improve cost of goods. Together with the more aggressive and focused capital investment in strategic subsegments of our stores, we believe we are creating a more competitive retail network. We also plan to more fully leverage our unique business model, specifically our wholesale segment, which has matured nicely since our Empire acquisition in 2020.

As we review our portfolio of retail stores, we have identified a meaningful number of locations that we believe will deliver more profitability as dealer sites within our wholesale segment than by continuing to operate as retail sites. Converting these stores to dealer sites at scale offers the opportunities to significantly reduce site operating expenses and corporate G&A. This more aggressive approach to dealer site conversion is currently underway, and we expect to provide updates on a quarterly basis moving forward. Before I hand off to Rob, I want to address the installment payments for acquisition of the WTG asset that closed in March of 2023, as I believe there was confusion around our registration of shares and subsequent repurchase.

Full details can be found in our public filings, but the bottom line is we satisfied the $50 million deferred purchase price originally provided for in the purchase agreement for a total of $36.5 million. To elaborate, in accordance with the purchase agreement, on February 12, 2024, we were required to notify the TG seller whether we would pay the first $25 million installment payment in shares or in cash. Our closing share price that day was $8.36, and we elected to pay in shares to create additional liquidity in the stock while preserving cash for strategic investment. On March 1st, we issued 3.4 million shares to TG at a price per share of $7.31, which was based on a 10-day VWAP calculation in accordance with the formula in our purchase agreement. However, we continue to experience a decline in our stock price over the following weeks.

Given our confidence in our business as well as the long-term opportunity before us, we repurchased these shares on March 26th for $5.66 per share, or a payment of approximately $19.3 million. Concurrently, we reached an agreement with the TG seller to satisfy the second $25 million installment payment originally due in March 2025 for a reduced price of $17.2 million. I'm happy to take questions after our prepared remarks if any of that remains unclear, but we believe we were able to capitalize on an opportunity to deliver value to our stockholders. On that note, we continue to believe our share price does not fully reflect the underlying value of our business. During the quarter, we repurchased 4.8 million shares for a total of $28.3 million under our existing $100 million stock repurchase program.

Today, I'm pleased to announce that our board has approved an expansion of our repurchase program to allow the repurchase of up to $125 million of our common stock. I'd like to finish by thanking the team here for all of their hard work. I will now turn the call over to Rob to review financial results for the first quarter and touch upon our thinking on the second quarter and full year 2024.

Robert Giammatteo (EVP and CFO)

Thank you, Arie. Good afternoon, everyone. Jumping right into first quarter 2024 results. As Arie referenced earlier, total company adjusted EBITDA was $36.6 million for the quarter, above the implied midpoint of the range provided on our last call. This compares to adjusted EBITDA of $47.5 million from the year-ago period, with the variance driven by lower fuel contribution, regulatory statewide elimination of Virginia gaming income, and increases in same-store operating expenses. At the segment level, our retail segment contributed approximately $33.8 million in operating income compared to $41.6 million in the year-ago period. Adjusted operating income for the quarter was $46.5 million compared to $54.1 million in the year-ago period. Total retail merchandise sales and merchandise contribution were up approximately 3.6% and 9.7%, respectively, with merchandise contribution benefiting from significant rate expansion of 180 basis points.

Retail segment fuel gallons and fuel contribution were up 2.6% and 5.5%, respectively, to the year-ago period. Increases in merchandise sales and fuel gallons were driven by acquisitions that closed in 2023, which contributed $3.4 million in retail segment adjusted operating income for the quarter. Same-store merchandise sales, excluding cigarettes, were down 3% versus the year-ago period, while total same-store merchandise sales were down 4.1%. Despite the sales decline, same-store merchandise contribution was up modestly compared to the year-ago period, reflecting continued strong underlying margin rate expansion of over 150 basis points. Same-store fuel contribution was down approximately $2.8 million for the quarter, with a decline in gallons partially offset by stronger year-on-year fuel margin per gallon. Same-store fuel gallon demand was down 6.7% for the quarter compared to National OPIS, which was down 5.9%.

Fuel margin of 37 CPG was up 1.3 CPG from the year-ago period and improved sequentially throughout the quarter, reaching 38.1 CPG for the month of March. Same-store operating expenses were up 3.3% for the quarter, with the increase related to hourly wage rate growth, accelerated repair and maintenance, and elevated workers' comp claims related to Q1 events. Moving on to our wholesale segment, operating income was $7 million for the quarter compared to $7.6 million in the prior year period. Adjusted operating income was $18.3 million for the quarter versus $18.6 million in the year-ago period, with total gallons up 1.7% driven by acquisitions. Gallon growth was partially offset by lower fuel margin per gallon of 9.2 CPG, which was down 0.4 CPG from the year-ago period. For our fleet segment, operating income was $8 million for the quarter compared to $8.4 million in the prior year period.

Adjusted operating income was $9.8 million for the quarter versus $10 million in the year-ago period, with total gallons up 12.3% driven by the WTG acquisition. Gallon growth was offset by fuel margin performance, which, while healthy at 38 CPG, faced a challenging comparison to prior year performance of 42.4 CPG, where we had significantly elevated diesel margins. Total company general and administrative expenses for the quarter was $42.2 million versus $40.4 million in the year-ago period, with the year-on-year increase primarily related to acquisitions that closed in 2023, along with consulting support for the development of our multi-year transformation plan. Net interest and other financial expenses for the quarter were $2.5 million compared to $13.6 million in the year-ago period.

The significant year-on-year reduction was driven by the lower valuation of warrants related to the current ARKO share price, along with retirement of our remaining TEG purchase obligation on the favorable terms that Arie referenced earlier. Net loss for the quarter was $0.6 million compared to $2.5 million for the year-ago period. Please reference our press release for a detailed reconciliation from total company net loss to Adjusted EBITDA. Turning to the balance sheet, excluding lease-related financing liabilities, we ended the first quarter with $885 million in long-term debt comprised of our 2029 senior notes, the outstanding balance on our Capital One line, and the remainder primarily related to real estate and equipment financing. Our $140 million ABL remains completely undrawn as we manage working capital needs from operating cash flow.

We maintain substantial liquidity of approximately $764 million, including $184 million in cash on hand at quarter end, along with remaining availability on our lines of credit. Of this total liquidity, approximately $425 million is attached to our Capital One line, which is reserved for M&A activity. Together with our outstanding Oak Street commitment of almost $1.5 billion, we remain comfortable that our balance sheet has more than adequate flexibility to support both ongoing organic growth initiatives and M&A. Including investment capital, total capital expenditures for the quarter were $29.2 million. Turning to forward guidance, for our second quarter, we expect total company Adjusted EBITDA to be in a range of $70-$77 million. For full year 2024, we are maintaining our full year guidance range for total company Adjusted EBITDA in the range of $250-$290 million.

As referenced in our most recent earnings call, our full year earnings outlook corresponds to an average retail fuel margin of 36 CPG on the lower end and 40 CPG on the higher end of our guidance range for the year-to-go period. With that, I'll hand it back to Arie for closing remarks.

Arie Kotler (Chairman, President and CEO)

Thanks, Rob. I'd like to close out the call by emphasizing a few key points discussed on this call that will inform the framework of our strategy going forward. Over the past decade, our focus has been acquisitive as we have scaled to become one of the leaders in the convenience store industry. We now believe it is the right time to leverage our unique multi-segment operating model to more fully unlock the embedded value within our retail store network. We are committed to further driving shareholder value by improving the organic growth and profitability of our business, and we look forward to sharing our strategic transformation plan during our investor day later this year. With that, we will open it up to questions.

Operator (participant)

Thank you. At this time, if you would like to ask a question, please press the star and one on your telephone keypad. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question. We'll pause for a moment to allow questions to queue. Our first question comes from Bobby Griffin with Raymond James.

Bobby Griffin (Managing Director)

Good afternoon, everyone. Thanks for taking my questions.

Arie Kotler (Chairman, President and CEO)

Bobby.

Bobby Griffin (Managing Director)

Arie, I first wanted to talk a little bit about the merchandise comps of -3% ex the cigarettes. Can you talk a little bit about what you're seeing from your customer? I know there's a lot of moving parts right now in the economy, but is some of the weakness here trade down among items, smaller basket sizing? Anything there that you're seeing kind of across different geographies to help us kind of gather kind of what's going on from the core customer?

Arie Kotler (Chairman, President and CEO)

Sure. I'll elaborate a little bit, and then I'll let Rob maybe jump in. But I think everybody sees that since Q4 going all the way to Q1, even though Q1 is probably the lowest Q, we see the microeconomic challenge. We see the inflation pressure, especially in markets that we do business with involve low income. So yes, people are trending down. Price of fuel, by the way, doesn't help us as well. The increase basically in price of fuel, that's another, actually, I think, that actually impacts their purchasing habit. So I think people are spending less money, and I think that's one of the reasons that we actually emphasize over here. If you're looking on our two-year stack, our two-year stack, it's actually 4.6% excluding cigarettes.

The reason I keep talking about excluding cigarettes is because the minute we are selling the I call it the high margin items, and as you can see over here, we were able actually to finish the quarter with basically a -3% excluding cigarettes, but we were able to increase margin on same-store basis by 150 basis points. I mean, we basically were able to increase margin company-wide by 180 basis points from 30.7% last quarter to 32.5%. And as you can see over here, the decrease in sales, we were able to basically compensate for that in selling high marginal items.

So I think people are smoking less, but I think with the value proposition and all of the initiative that marketing is issuing over here, especially the $4.99 pizza that we just launched in January, show you that that's basically bringing more people in the door in terms of increasing basically sales of high margin items. And that's the reason I keep saying this industry is very resilient. I mean, we see right now softness across the retail industry. But again, I think this is something that happens every few years, and we just need to basically actually walk through the challenge and make sure that we continue to bring valuable promotions for our customers. And I can tell you that this is the one thing that our team constantly working, especially now going into 100 Days of Summer.

I mean, the amount of valuable promotions that we have ready right now for 100 Days of Summer, I don't think I ever saw anything like this in my career.

Robert Giammatteo (EVP and CFO)

Yeah, Bobby, I'd just add on. I didn't see anything significant between the categories. I think it's a transaction issue where transactions are down. So I think it's more of a macro issue that we're seeing versus assortment.

Bobby Griffin (Managing Director)

Okay. And then, I mean, how we talked last time, maybe just kind of how are you guys thinking about it as it plays out through the year, just trying to maintain the stacks? I mean, that was kind of the last conversation we had about some of these aspects. Or anything you can share about April and early May trends?

Robert Giammatteo (EVP and CFO)

Yeah. I think, look, April looked a lot like Q1 as it started off the first couple of weeks, and then we saw it start to inflect a little bit and turn more positive in the second half. So I think that we're seeing some acceleration off of what the trend was weaker in Q1. But again, it was kind of a tale of two months with weaker in the first half and a little bit stronger in the back half. So we're still watching it closely. As you might imagine, the next 30 days, we're going to be in the peak selling season. We'll know a lot more at that point. But at this point, we feel okay with how we've got the rest of the year positioned.

Bobby Griffin (Managing Director)

All right. That's helpful. Then lastly, Rob, just trying to unpack the guidance a little bit. I obviously haven't had a time to flow it all through the model yet and come up with new numbers. But is there something offsetting some of the fuel margin? Because the EBITDA came in at least below our model for 2Q, and the retail side of cents per gallon is in line with kind of what we're speaking. So I'm thinking maybe there's, is there more pressures inside OpEx, or is there any other offsets that are worth calling out as we kind of clean up the 2Q numbers for ourselves?

Robert Giammatteo (EVP and CFO)

Yeah. Look, what I shared, Bobby, for the full year at the last call, we said that the Q2 through Q4 gallons would be down 5%, right? We base that on the fiscal 2023 results, that longer-term trend. Our year-to-go period, we are basing on that flat two-year stack. We are putting, to Arie's point, a lot more promotional activity behind the pizza program to drive sampling, and we believe that's going to have a meaningful impact in the second and third quarter. Did share that for the year, we expect the retail CPG midpoint to be down one CPG from 2023, and we are modeling increased merch margin rate the rest of the way Q2 through Q4, albeit at a slightly lower rate than what we saw in the first quarter.

So not a lot to change from what we talked about in the fourth quarter call back in February. So maybe we'll chat offline on some of the other questions.

Bobby Griffin (Managing Director)

Yeah. I guess just what's any major change in the OpEx environment? I guess that's what I was getting at.

Robert Giammatteo (EVP and CFO)

No. OpEx, we're modeling OpEx and total company G&A up low single digits for the year.

Bobby Griffin (Managing Director)

That's the same as we talked about. Okay. Perfect. That's helpful. I was just trying to unpack those things. I appreciate the details. Best of luck here in the second quarter.

Operator (participant)

Thanks, Bobby. Our next question comes from Anthony Bonadio with Wells Fargo.

Anthony Bonadio (VP of Equity Research)

Yeah. Hey, guys. So sort of piggybacking on Bobby's question on guidance, I wanted to dig in on the gas margin guidance a little bit. Can you just talk about maybe what you're seeing so far in the quarter that's getting you to that Q2 $0.37-$0.40 per gallon range? And then given that's a little more constructive of late, just looking at industry data, I guess why is that $0.36-$0.40 still the right number for the year? Just any updated thoughts on how you're thinking about margin dynamics would be helpful.

Arie Kotler (Chairman, President and CEO)

Yeah. Look, I think if I could predict it, I'd be in a different place. But I think, look, we were going up against last year, which saw significant acceleration in the second and third quarter specifically. We were up against a $0.40- and $0.41-cent CPG in the second and third quarter. So we do expect and we're modeling things to expand from where we were in the first quarter. We've seen some encouraging things recently with Rack to Retail where we think it's a higher level supported than the first quarter. But we're expecting to be, as I mentioned, $0.01 down, the midpoint being $0.01 down to last year. And you can look at what last year ran. It ran $0.403, $0.412, and $0.395 in the second, third, and fourth quarter. So that's kind of how we're looking at things.

Okay. And by the way, Anthony, I think the one thing to remember is our strategy. Our strategy basically didn't change. We were able to capture an extra $0.013 per gallon on same store, going from $0.357-$0.37 per gallon. Company-wide, $0.364 versus the $0.354. So we were able to capture an extra $0.01 over here company-wide while basically trending very, very close to the basically to the OPIS national average over here. So we're going to continue to try and capture margin and continue to be very competitive, of course.

Anthony Bonadio (VP of Equity Research)

Okay. Got it. That's helpful. Then I just wanted to ask about inside margins a little more. It looks like Q1 was a new record on inside margins. Can you just maybe dig in a little bit on some of the underlying drivers there and then how you're thinking about the ability to sustain that expansion as we model the rest of the year?

Arie Kotler (Chairman, President and CEO)

We're not providing details, as you know, about exactly how we got the margin. I think the most important thing to say is that with cigarette decline, as I mentioned, it's basically continuation of core categories. I kept talking about the $4.99 pizza, which is a very, very valuable item. And we're basically selling high margin items more than cigarettes. And I think that's what drives the margin over here. And remember, we kept talking about food service concentration. We just started. We just started. Pizza was just the beginning. We are getting ready to launch the Nathan's hot dog into our stores. We were able to add 105 bakery items to additional stores. So as long as we continue to add more and more high margin items, and that's what we're doing and that's what we're focused over here, that's what's going to drive basically the margin up.

Anthony, just to be clear, we don't expect that level of accretion in the forward quarters. We're not modeling that at least, but we're continuing to drive, to Arie's point, to drive the food service penetration, which we think is significant opportunity for us versus where we think the industry is.

Anthony Bonadio (VP of Equity Research)

Understood. Thanks, guys.

Arie Kotler (Chairman, President and CEO)

Thank you.

Robert Giammatteo (EVP and CFO)

Thank you.

Operator (participant)

Our next question comes from Ben Wood with BMO Capital Markets.

Ben Wood (VP of Equity Research)

Hey. Thank you for taking our questions here. Wanted to follow up a little bit on the inside store trends, but specifically with the pizza rollout from last quarter. Any color you can share at this point as any sales lift you're seeing, incremental labor, or shrink? We'll start there.

Arie Kotler (Chairman, President and CEO)

We don't see any incremental labor at the moment. Like I said, we launched the pizza in January, third week of January. We launched the pizza just before the football, basically. We're very happy with the, we're basically with the results so far. This pizza program, grown to become a very strong category since we launched it. It's a great offer to our customers. And like I said, we're going to use this basically the pizza program we're going to use for 100 Days of Summer. And just to elaborate, I mean, we're talking about very high-value promotions. For example, when you buy 12-pack of Pepsi, 2 packs or 12-pack of Pepsi, you're going to get basically a free pizza. And all of those promotions are being supported by the CPG company that are supporting us over here.

So the idea is really to drive and drive and drive and drive more pizza sales with all of the high margin item that we see across that. I believe that the more inflationary pressure we see over here, I believe that's going to become a very big seller for us moving forward.

Ben Wood (VP of Equity Research)

Okay. That's helpful. And then switching gears a little bit, can you just walk us through the thought process behind converting some of your retail sites and dealer sites in just a little bit more depth? Any color on the magnitude? I know you said it was meaningful, but are there specific markets or banners you can share at this point? And then just trying to get a sense for maybe what the spread is between the performance at some of your retail sites. But what were some of the benchmarks you guys used to address which sites you would convert versus which sites you would retain in the fleet?

Arie Kotler (Chairman, President and CEO)

Sure. Sure. Sure. First of all, maybe for a high level, just to basically mention that, this is not something new that we actually did. This is something we used to do in the past. As I mentioned earlier, we converted in the past less performing stores in some geographies that are less attractive for us, or we don't have scale. So this is something that was done in the past. I think what the goal and this is something I mentioned on the last call. The goal is really to drive organic growth and invest in our best stores and concentrate on the best stores in our fleet. So as part of our transformation plan, we basically hire a consulting firm, a very reputable consulting firm to help us. We've been working with them over the past few months.

Over the past few months, the idea is really for them to challenge us, to challenge our fleet, to learn a little bit more about the markets that we have. We are stronger in some markets, and maybe we carry a little bit in some other markets, or we don't have the scale in some markets. So the idea really is to take some of the stores and we identify some of them, some of the stores that are basically performing less than the other. We are not sure that there is a lot of upside in some of those stores to invest money because I don't believe that the return on capital is going to be there. And given that we have the wholesale platform over here, and that provides us an advantage, remember, we have 1,800 customers. Every one of those customers becomes a potential dealer.

The idea is really to go ahead and dealerize some of those stores as we did in the past. We're going to be able to basically reduce operating expenses because of that. We're going to be able to reduce G&A because of that. At the end of the day, we're just going to make more money running them as wholesale location versus retail location. Remember, we're going to still keep basically the fuel volume because the stores still aren't under our control. We're going to keep the fuel volume. It's just going to be a long-term arrangement with some of those dealers while we're actually keeping the scale over here.

We didn't determine the amount of stores at the moment, but what we are planning on doing on a quarterly basis, we're going to update you guys on how many stores we decided to dealerize and what's basically the impact because of that.

Ben Wood (VP of Equity Research)

Thank you. I appreciate all the color.

Arie Kotler (Chairman, President and CEO)

Of course. Thank you, Ben.

Operator (participant)

Our next question comes from Karru Martinson with Jefferies.

Karru Martinson (Managing Director)

Good afternoon. When you talk about optimizing pricing to drive top-line zone pricing, what's the impact that you're looking for both on the top margin and also on the gross margin line?

Arie Kotler (Chairman, President and CEO)

Yeah. Thanks for the question. We're not sharing that level of detail today. That's going to be more as we get into the investor day. But certainly, you can understand there's a lot of folks who do this matching customer segments and the pricing in the various stores. So the work that's been done that Arie was talking about has a lot of detailed customer market research done in terms of what type of customer. How does that match with our brand promise, our brand delivery, and trying to understand, again, where we can be perhaps more aggressive on price and where we need to be a little less and understand a lower segment customer?

So it's going to be something we think is a significant opportunity fleet-wide, and we think it's going to make more sense to resonate with our customers, especially the more cost-sensitive ones who are being impacted in the inflationary environment. So more to come as we get to investor day. That's going to be one of the items we're going to be diving into.

Karru Martinson (Managing Director)

Okay. But that is built into the guidance that you have for the year, correct?

Robert Giammatteo (EVP and CFO)

No. So that's something that's a capability. So as Arie mentioned, the transformation, there's quite a bit of capabilities. That would be one of the capabilities, part of the transformation program.

Karru Martinson (Managing Director)

Okay. Just on the share buyback authorization, just so I'm clear, it looked like you had about $1 million left on the original $100 million. Is the $125 million a brand new program, or is it that $25 million expansion from the original $100 million?

Arie Kotler (Chairman, President and CEO)

It's a $25 million expansion.

Karru Martinson (Managing Director)

Okay. Thank you very much. Appreciate it. Thank you very much, guys.

Arie Kotler (Chairman, President and CEO)

Thank you.

Operator (participant)

Our next question comes from Hal Holden with Barclays.

Hale Holden (Managing Director)

Hey. Afternoon. I had two questions. The first one is, when you flip retail stores to dealerize them and maintain the wholesale relationship, does that result in a cash inflow to the company, or is it just simply a reduction in G&A expense?

Arie Kotler (Chairman, President and CEO)

It's both. I mean, first of all, you increase profitability. I mean, when you do something like that, you're able to increase profitability because you don't carry the operating expense. You don't carry the G&A. So it's basically will increase profitability and increase, of course, the cash flow over here.

And then many times, there may be key money attached to it also, so it's favorable across the board.

Hale Holden (Managing Director)

All right. So that's kind of what I was asking. There can be a key payment back to you in some cases.

Arie Kotler (Chairman, President and CEO)

Sure. Sure. Sure. At the end of the day, just to be clear, the vast majority of that, we are not selling the business. I mean, we're still basically either collecting rent or basically, in some cases, by the way, we may have a consignment arrangement that we're actually going to split basically some of the profit when it's related to fuel.

Hale Holden (Managing Director)

Okay. My second question was, as you guys think about the small trial that you're doing for the new store format that's going to grow, is the expectation that you'd fund that out of operating cash flow, or would we see you potentially increase borrowing to accelerate it?

Arie Kotler (Chairman, President and CEO)

I think we have plenty of liquidity right now. You're probably going to see us using operating cash flow for that. I mean, that's the deal.

Hale Holden (Managing Director)

Okay. Great. Thank you very much.

Arie Kotler (Chairman, President and CEO)

Thank you.

Operator (participant)

Our next question comes from Mark Astrachan with Stifel.

Mark Astrachan (Managing Director and Senior Equity Research Analyst)

Yeah. Thanks. Afternoon, guys. Wanted to just ask a bit more on the in-store sales, how you're seeing traffic versus ticket, any sort of changes there and what potentially is driving a little bit of the softness. That's the first question.

Robert Giammatteo (EVP and CFO)

Yeah. So Mark, as I mentioned earlier, transactions are down. Again, it's been offset a little bit by average ticket on the upside, but transactions have been the driving force on the downside.

Mark Astrachan (Managing Director and Senior Equity Research Analyst)

Is that materially different over the last, I guess, the last two quarters versus maybe prior three or four quarters, order of magnitude?

Arie Kotler (Chairman, President and CEO)

You're going to have to forgive me for that one for being new in terms of we just put some of the analytics in place. So that could be something we can follow up on for you.

Mark Astrachan (Managing Director and Senior Equity Research Analyst)

Okay. And then maybe just a bigger picture question. If you could remind us just on how the food service sales, so the prepared stuff in store, tends to respond in a tougher macro environment where the consumer's maybe squeezing a little bit more out of their dollars?

Arie Kotler (Chairman, President and CEO)

Well, I think that's the reason we are basically offering value over here. I mean, that's the reason we are concentrating on pizza. That's the reason we are concentrating on hot dogs. That's the reason we are concentrating on bakery items. We're really trying to provide chicken, forgot, of course, the famous chicken. We're really trying to provide value to our customers, bundle to our customers. I mean, that's the reason I mentioned, for example, today, for example, if you go to our stores, you can pick up a 2-liter Pepsi with a pizza for $5.99. I mean, this is a great value for our customers. And I think that's really what we have to drive over here because people are looking basically for those opportunities. People are actually coming to our stores because of that.

Remember, we have the loyalty members, over 2 million members that's getting every day basically those valuable promotions. And this is what drives those people into our stores. And we keep seeing that we didn't talk about that, but we keep seeing that. If you're looking on just in this quarter, we basically saw that the average enrolled loyalty transaction size were 34% greater than the non-enrolled members. And I think those promotions basically were driving them into our stores.

Mark Astrachan (Managing Director and Senior Equity Research Analyst)

Got it. And just lastly, within your markets, I mean, maybe focus on just the markets where you're more concentrated. How do you think you've fared versus some of your competitors from a fuel gallon consumption standpoint? And I ask it in part wondering whether you're seeing a bit of shift away from retailers, which are offering a little bit more value from a gas standpoint. Is that constrict the number of folks that go into the stores? If those locations maybe are part of bigger retailers, is there a bit of a share shift towards grocery and kind of more traditional means of grocery shopping compared to prepared foods? Anything you could sort of offer there would be helpful.

Arie Kotler (Chairman, President and CEO)

So I'll give you a high-level answer on that, okay? I think that in many, many markets that we operate, our actual rural areas, where we are the factor, we are actually the grocer. So there is no question that people are looking for better pricing. There's no question about it. But that's the reason I, as I mentioned earlier, OPIS national average was 5.9% down, and we were -6.7%, very close to OPIS. The gallons were just not there. And the idea is, and we actually see the other way around, that we believe that the more people coming into our stores to get those valuable promotions, there is a good chance that they're actually going to go outside. We are trying to tie, by the way, the food sales, the inside sales to great promotion.

I mean, for example, we are working with our CPG company that every time you buy a product inside the store, you get some cents per gallon over there. So I just think that some of the larger operators, again, without mentioning any name, they're trying to basically mitigate the decline by very aggressive pricing. But I can just tell you that the very aggressive pricing is going to sacrifice their fuel contribution dollars. And this is significantly, by the way. And we just don't see any reason to do that because we see basically that the demand is not there. And when the demand is not there, just to lower prices and make less money, you know, Mark, that was never our motto since you know us.

Mark Astrachan (Managing Director and Senior Equity Research Analyst)

Got it. That's helpful. Thank you.

Arie Kotler (Chairman, President and CEO)

Thank you.

Operator (participant)

We have no further questions in the queue at this time. I would now like to turn the call back over to today's presenters for any additional or closing remarks.

Arie Kotler (Chairman, President and CEO)

Thank you very much, operator. Thank you, all of you guys, for joining the call. By the way, great questions, really great questions today, given that it's after 5 o'clock. What we are trying to do over here, we're trying to give as much insight as we can into our performance to help investors understand our compelling growth story over here. I can tell you that we have a big plan ahead of us. We have a lot of initiative ahead of us during this year. We are heading towards 100-day of summer, which is basically our best season. And we're looking forward to talk to you guys again in the next quarter. Have a great afternoon, everybody.

Operator (participant)

This does conclude today's program. Thank you for your participation. You may disconnect at any time.