Arko - Earnings Call - Q4 2024

Executive Summary

• Q4 2024 delivered mixed results: total revenue $1.99B (down vs Q3 and prior year), diluted EPS of -$0.03, and Adjusted EBITDA of $56.8M (vs $61.8M prior year), with margin resilience offset by lower retail gallons and merchandise contribution.
• Retail fuel margin held at 38.7 cpg (down 0.5 cpg YoY) and merchandise margin improved to 33.0%, but retail fuel contribution fell to $100.2M and merchandise contribution to $134.9M, largely due to macro-driven gallon declines and dealerization-related site conversions.
• Transformation plan accelerated: 153 retail stores dealerized in 2024 (~100 in Q4); management now expects cumulative annualized operating income benefit in excess of $20M at scale, with $8.5M annualized from 2024 conversions, and additional ~100 conversions targeted by end of Q1 2025.
• FY 2025 guidance: Adjusted EBITDA $233–$253M with retail fuel margin 39.5–41.5 cpg; Q1 2025 Adjusted EBITDA $27–$33M with retail fuel margin 37.0–39.0 cpg; quarterly dividend of $0.03 declared.

What Went Well and What Went Wrong

What Went Well

• Merchandise margin rate increased to 33.0% in Q4 (32.9% prior-year), reflecting category mix and pricing initiatives; management highlighted OTP margin expansion and back-bar refreshes driving contribution mix.
• Fleet Fueling segment margin strength: proprietary cardlock margin rose to 48.1 cpg, lifting segment operating income to $12.4M vs $9.7M YoY.
• Transformation execution: 153 dealer conversions in 2024 (≈100 in Q4) with expected cumulative annualized operating income benefit >$20M at scale; near-term benefit from 2024 conversions estimated at ~$8.5M.

Representative quotes:

• “We made progress with our dealerization program…strengthening merchandising initiatives…enhancing customer engagement…a more aggressive value offer at the pump.” – Arie Kotler, CEO.
• “We now expect our total dealerization program to generate an annualized benefit in excess of $20 million…”.
• “We expect mid-teen percent operating profit growth in our Wholesale segment, driven by our ongoing channel optimization work.” – CFO guidance framing.

What Went Wrong

• Retail fuel contribution fell to $100.2M (vs $109.3M prior-year) on macro-driven gallon declines and reduced price volatility; retail gallons sold declined, with same-store fuel contribution down $7.4M.
• Merchandise contribution decreased to $134.9M (vs $146.8M), with pressure in core destination categories and cigarettes, and dealerization removing contribution from closed/converted stores despite margin improvement.
• Consolidated operating income dropped to $14.4M (vs $25.3M prior-year), and diluted EPS moved to -$0.03 (vs $0.00 prior-year), reflecting lower retail segment profitability despite segment margin resilience.

Transcript

Operator (participant)

Greetings and welcome to the Arko Corp. fourth quarter and full year 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow a formal presentation. If anyone should require operator assistance, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to introduce our host, Jordan Mann, Senior Vice President of Corporate Strategy and Investor Relations. Thank you. You may begin.

Jordan Mann (SVP of Corporate Strategy and Investor Relations)

Thank you. Good afternoon and welcome to Arko's fourth quarter and full year 2024 earnings conference call and webcast. On today's call are Arie Kotler, Chairman, President, and Chief Executive Officer, and Robb Giammatteo, Executive Vice President and Chief Financial Officer. Our earnings press release and annual report on Form 10-K for the year ended December 31, 2024, as filed with the SEC, are available on Arko's website at www.arkocorp.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 fourth quarter 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 fourth quarter and full year 2024 earnings release for various factors that could cause actual results to differ materially from forward-looking statements made during our 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, except as required by law. On this call, management will share operating results on both a GAAP basis and on a non-GAAP basis. Descriptions of those non-GAAP financial measures that we use, such as adjusted EBITDA and reconciliations of these measures to our results as reported in accordance with GAAP, are detailed in our earnings release or in our annual report on Form 10-K for the year ended December 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 our subsidiary, GPMP. Now I would like to turn the call over to Arie.

Arie Kotler (Chairman, President, and CEO)

Good afternoon, and thank you for joining us. 2024 was a challenging year for the industry and both a challenging and pivotal year for us as a company. Despite the challenging macro environment characterized by persistent inflation and constrained consumer spending, we remained focused on executing the strategic initiative that we believe will position Arko for long-term growth. We continue to work on our transformation plan, including the dealerization program, while continuing to provide our customers with value through foodservice, expansion of our other tobacco product category, and targeted promotional strategies to enhance customer engagement and loyalty.

Overall, against backdrop of external pressures and in a dynamic environment, we managed the business effectively and delivered results near the midpoint of our annual guidance, reflecting our ability to adapt to market conditions and drive operational efficiencies while maintaining a strong focus on customer value and long-term profitability. Over the course of 2024, we consistently observed a consumer who continued to struggle, as well as evolving customers' preferences, including increasing demand for OTP and higher expectations for foodservice.

In response to what we are seeing, we have made and continue to make investments to meet our customers' needs. I will first touch upon the immediate value we seek to deliver to our customers. We continue to reward our loyalty customers through promotions and have kicked off 2025 with incredible in-store promotions that provide value on merchandise, but notably, that led to sizable discounts on fuel. We recently launched our Fueling America's Future campaign, which offers loyal customers to earn up to $2 off per gal for up to 20 gal when purchasing value promotions inside the stores.

This not only provides relief to our customers, but importantly, rewards our enrolled loyalty members, which we believe will help grow our loyalty program. During the quarter, enrolled members spent an average of $104 per month, which is nearly 60% more than non-enrolled customers. Additionally, enrolled members visited our stores about three more times per month on average compared to non-enrolled customers, reinforcing the effectiveness of our loyalty strategy.

Turning to evolving customer preferences, I stated on our last call that one out of two enrolled loyalty members are cigarettes or OTP consumers. Over the quarter, we announced our OTP category by optimizing merchandising, expanding promotional activity, and leveraging strategic supplier partnerships to drive market share gains. Our back bar refresh initiative has allowed us to improve space allocation and expand product assortment to align with shifting consumer demand.

As of the end of the fourth quarter, we completed more than 800 tobacco back bar refreshes and expect to refresh 100 more in the coming weeks. Our strategy around OTP during the fourth quarter led to a 200 basis points improvement in gross margin for OTP category, further widening the gap between higher margin OTP and traditional cigarettes. Notably, OTP represented nearly half of our total tobacco category contribution in the fourth quarter. Continuing with this momentum in the category, since the start of 2025, we have ramped up promotional activity in OTP and cigarettes, offering significant deals to customers to further drive sales momentum.

Additionally, while we are working towards receiving permits for our seven pilot stores that will include an announced foodservice offering, we have seen strong customer response to the upgrade we have already made to our foodservice offerings, reinforcing our focus on delivering value-driven options. Our promotional efforts, including frozen and hot pizza, bakery, Nathan's Famous hot dogs, and roller grill deals, continue to gain traction. In fact, we have sold more than 600,000 pizzas since launching our $4.99 pizza special in Q1 2024.

We are refining our foodservice strategy to enhance convenience, quality, and profitability, driving trial and repeat purchases through targeted promotions and bundling strategies. Turning to fuels, although retail fuel volume declined for both the quarter and year, our pricing strategy helped preserve margins despite lower demand, lower fuel costs, and reduced price volatility, a backdrop which normally put pressure on the ability to expand margin. Same-store retail fuel gallons were down mid-single digits for the fourth quarter and year, while same-store retail fuel margin was only down $0.011 per gal in the fourth quarter as compared to the prior year period and up $0.007 per gal for the full year.

Lastly, over the quarter, we made meaningful progress on our dealerization program. As part of our broader transformation plan, we are strategically converting select retail stores to dealer sites where we believe we can generate higher contribution dollars through ongoing fuel supply agreements and rental income rather than continue to operate these locations within our retail segment. Our approach is centered on optimizing our portfolio, allowing us to focus our resources on high-performing retail stores while leveraging our dealer network to enhance profitability across our entire platform.

We exceeded our initial targets for dealerization, having converted more than 150 retail stores to dealer sites in 2024. We expect to convert a meaningful number of additional stores over the course of 2025, with approximately 100 more stores to be converted by the end of the first quarter. Surpassing our conversion goal in 2024 is a testament to our team's focus and execution. Robb will provide more substance to the numbers later. However, we now expect our total dealerization program to generate an annualized benefit in excess of $20 million to combine wholesale and retail segment operating income, with additional opportunity from G&A expense reduction.

As we move into 2025, our focus remains on our strategic priorities while delivering value to both our customers and stakeholders. We believe our disciplined approach to growth, operational efficiencies, and customer engagement initiative will position Arko for long-term success. With that, I will turn over to Robb to discuss our financial results and our 2025 guidance.

Robb E. Giammatteo (EVP and CFO)

Thank you, Arie. Good afternoon, everyone. Turning to the fourth quarter, total company adjusted EBITDA was $56.8 million compared to $61.8 million for the year-ago period, with the decrease caused primarily by lower retail fuel and merchandise contribution. At the segment level, our retail segment contributed approximately $62.9 million in operating income compared to $72.3 million for the year-ago period. Same-store merchandise sales, excluding cigarettes, were down 2.1% versus the year-ago period, while total same-store merchandise sales were down 4.3%.

Same-store margin rate was relatively in line with the prior year. Same-store fuel contribution was down 7.1% for the quarter, caused by a decline in gallons and lower year-on-year fuel margin per gallon. Same-store fuel gallon demand was down 4.4% for the quarter, while fuel margin of $0.387 per gal was down $0.11 per gal from the year-ago period, resulting from lower fuel costs and reduced price volatility this year. Same-store operating expenses were down approximately 1.2% for the quarter.

Moving on to our wholesale segment, operating income was $20 million for the quarter compared to $18.1 million in the year-ago period, with the increase primarily due to our channel optimization work. Inclusive of channel optimization, gallons were relatively in line with the year-ago period. Fuel margin was $0.93 per gal for the quarter, up $0.30 per gal to the year-ago period. For our fleet segment, operating income was $12.4 million for the quarter compared to $9.7 million in the year-ago period, with total gallons down 1% to the prior year. Increased segment operating income was driven by resilient fuel margin performance, which was $0.452 per gal for the quarter versus $0.367 per gal in the year-ago period.

Total company general and administrative expense for the quarter was $39.7 million compared to $38.1 million in the year-ago period, with the increase primarily due to lower stock-based compensation expense in the prior year period. Excluding the year-on-year change in stock-based compensation, general and administrative expense was down 2% to the year-ago period. Net interest and other financial expenses for the quarter were $19.7 million compared to $22.9 million in the year-ago period, with change caused primarily by fair value adjustments related to our warrants.

Net loss for the quarter was $2.3 million compared to a net income of $1.1 million for the year-ago period. Please reference our press release for a detailed reconciliation from net income and loss to adjusted EBITDA. Full year 2024 total company adjusted EBITDA was $248.9 million versus $276.3 million in the year-ago period, and full year 2024 net income was $20.8 million versus $34.6 million in the year-ago period. Turning to the balance sheet, we have substantial liquidity of approximately $841 million, including $262 million in cash on hand at quarter end, along with remaining availability on our lines of credit.

Our $140 million ABL remains completely undrawn as we continue to manage working capital needs from operating cash flow. Excluding lease-related financing liabilities, we ended the fourth quarter with $881 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. Total capital expenditures for the quarter were $36.1 million, with full year 2024 capital expenditures of $113.9 million.

Turning to full year 2025, we expect total company adjusted EBITDA to be in the range of $233-$253 million, assuming a retail fuel margin of 39.5-41.5 cents per gal, and mid-teen% operating profit growth in our wholesale segment driven by our ongoing channel optimization work. For the first quarter of 2025, we expect total company adjusted EBITDA to be in the range of $27-$33 million. We expect our same-store base will change materially as we move through 2025 due to our channel optimization work, and that our retained retail stores will be more productive for both merchandise sales and gallons as compared to average performance per store in the year-ago period.

As a result, we have set up our retail guidance framework to walk you from Q1 2024 average per store performance to estimated Q1 2025 total retail segment merchandise sales and gallons. Our retail segment guidance is supported by the following key assumptions. We are estimating our Q1 2025 average retail store count to be 1,339 stores, reflecting the impact of our ongoing channel optimization. Using Q1 2024 average per store performance as a base for Q1 2025, we expect an increase in productivity will partially offset a decline in same-store sales, resulting in a low single-digit decline in merchandise sales per average store compared to the year-ago period.

We expect merchandise margin rates to be generally in line with the year-ago period. For fuel, we expect an increase in productivity will more than offset a decline in same-store fuel gallons, resulting in a low single-digit increase in gallons per average store compared to the year-ago period, and we are assuming a retail fuel margin in the range of $0.37-$0.39 per gal. Moving on to our wholesale segment, we expect mid-single-digit operating income growth driven by our ongoing channel optimization work.

And finally, for our fleet segment, we are expecting high single to low double-digit operating income growth driven by expected resilient fuel margin per gallon. And with that, I'll hand it back to Arie for closing remarks.

Arie Kotler (Chairman, President, and CEO)

Thanks, Robb. I will close with some additional comments on our first quarter guidance. Headwinds from adverse weather conditions unfavorably impacted customer mobility and sales across key regions. Despite these challenges, our disciplined execution and ability to adapt helped minimize the impact. Seasonal softness in the first quarter is not unusual, and we would rather navigate these weather-related challenges now than during the peak summer month. With the weather, we plan to continue to operate the business and control what we can control, optimizing operations, maintaining pricing discipline, and delivering value to our customers.

On a positive note, fuel margin was up $0.25 per gal in January to the prior year, demonstrating both the strength of our pricing strategy and the resilience of our business. As we wrap up, I want to reiterate our focus on adapting to the dynamic market landscape. We remain committed to our dealerization program, foodservice, strategic store transformations, and value-driven initiatives. I'm optimistic about our strategies, including our Fueling America's Future campaign, which reflects our commitment to making fuel more affordable while helping families and small businesses manage rising costs.

We look forward to continuing to provide value-driven discounts on key essentials to support the communities we serve. Finally, I want to thank our employees for their hard work and dedication this quarter and in the quarters ahead and for taking care of our customers every day throughout the year. With that, we will open it up to questions.

Operator (participant)

Great. Thank you. At this time, we'll be conducting a question-and-answer session. If you'd like to ask a question, please press Star 1 on your cell phone keypad. A confirmation tone will indicate your line is in the question queue. You may press Star 2 to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star keys. One moment, please, while we pull up the questions. Our first question is from Bobby Griffin from Raymond James. Please go ahead.

Bobby Griffin (Managing Director and Lead Equity Research Analyst)

Good afternoon, everybody. Thanks for taking my questions.

Arie Kotler (Chairman, President, and CEO)

Yes.

Bobby Griffin (Managing Director and Lead Equity Research Analyst)

I wanted to first start on the 2025 guidance. And the midpoint implies it's down a little bit year-over-year with about a penny or so more in fuel margin. So can you just maybe help connect those dots? Because I know you got some of the dealerization savings starting to flow through, but I imagine there's some other cost pressures that you're dealing with in the business as well. So just trying to connect kind of going on there, those building blocks.

Arie Kotler (Chairman, President, and CEO)

Yeah, Bobby, as you think about the full year, again, we're staying pretty high with the guidance right now, and as I mentioned in my prepared remarks, we're going to have a shifting same-store base as we go through, so the same-store metrics we would normally give you at this time are going to be a little less relevant as the base changes, which is why we're steering people to the average, so as I mentioned in the Q1 guide, we are seeing a negative same-store trend right now in gallons and in merch sales, and again, I don't want to steer away from same-store because the base is going to change, but you do know we are facing that, and underlying that is going to put some pressure.

We are expecting things to improve as we go through the year, but we do see a negative trend right now. I think, as you've probably heard from others, January and February has had some significant weather impact, and there's a bit of a drag starting the year off. So that's really what we're looking at. We do expect, again, those average store metrics, we do expect those to improve as we go through the year, and again, on both the merch side and the gallon side.

Bobby Griffin (Managing Director and Lead Equity Research Analyst)

Okay. That makes sense. And then maybe, is there a building effect as we move through the year from the dealerization savings, or is that kind of prorated each quarter? And is there a step function change of that savings as we enter 2026?

Arie Kotler (Chairman, President, and CEO)

Yeah. So you should expect, I mean, in the guidance, we gave you the wholesale segment being up mid-single for the first quarter and up mid-teens for the year. So that is going to accrue as we go through, as we get more and more stores. The cumulative impact is going to become greater and greater. And as Arie mentioned in his prepared remarks, we will start to see more G&A savings as we start to streamline the business for the new retail footprint. So that will continue to accrue as we go through 2025, and there will be a wrap-around into 2026.

Bobby Griffin (Managing Director and Lead Equity Research Analyst)

Okay. And then I want to maybe pivot, appreciate all the details on the dealerization side of things. Can we maybe switch and talk about the stores that are left in the base? You still got a lot of stores there. Where are we in the remodel initiatives? I know you guys have done some stuff with the back bar, but what else are some of the initiatives for 2025 to help kind of the existing or the remaining, let's call it remaining stores that are in the retail network during 2025?

Arie Kotler (Chairman, President, and CEO)

Yeah. As I mentioned, Bobby, earlier, I mean, we started a campaign called Fueling America's Future. This campaign is supposed to take care of our customers, given that everybody's feeling the pressure right now, the macroeconomic pressure. The thought process is really to concentrate on those stores. We are leveraging our strategic supplier partnership, and we are going to target on promotionals that basically will encourage our customers to buy fuel. In the past, the way we look on our business, in the past, usually you count on people that come into the pump and from the pump go inside the store.

We're actually shifting gears over here, and we are actually encouraging customers that are coming inside the store right now to buy fuel. I mean, we are going to provide with Fueling America's Future. We are going to provide up to $2 off per gal, which is up to 20 gal. The average gallon per consumer, it's around anywhere between 9 to 11, and this is going to be equal to $40 saving on a gas fill-up, and we're talking about every transaction, you're going to be able to stack basically your saving, which means that at the end of the day, you can visit our stores three, four times a week, and all of a sudden end up with $40 savings on your next fill-up, and this is where we're actually shifting most of our energy right now.

In addition to that, you just mentioned the back bar. In 800 stores, we have another 100 stores that we are just getting ready to complete in the next few weeks, but the idea is really to concentrate on OTP, tobacco, and fuel. If you think about that, one out of two customers coming to our stores is at least one out of two customers is a tobacco consumer. And this is where we see people actually basically concentrating right now. And this is really going to be the promotional activity for 2025. Tobacco provides great promotional, basically deals on tobacco, and at the same time, concentrate on fuel.

To answer your question regarding to remodeling, we have the seven pilot stores that we actually talked about them. I mean, we are really at the end of the process of permits. Permits take a little bit longer, but we are actually finalizing the permits, and we believe we're going to start construction in late March of at least two of those stores. So those are the things that we are doing in addition to, of course, foodservice and all of the other things that we spoke in the past. And I'm more than happy to elaborate.

Bobby Griffin (Managing Director and Lead Equity Research Analyst)

Okay. And yeah, Arie, I mean, if it's easier, we can go through it offline, but just the $2 off aspect of fuel, maybe that's obviously a very big discount. So how does that translate into maintaining the profitability or actually driving further profits and EBITDA of this business? Is it the requirement of some type of inside-the-store purchases? Help us connect that because when we hear $2 off on a $4 or $5 gal, it sounds very significant, and there's a question on maintaining the profitability level as well.

Arie Kotler (Chairman, President, and CEO)

Yeah. That's not going to touch profitability in a way. It's not going to actually apply to margin. It's really all about partnership and combination basically with our partners, which is basically our vendors. It's not going to touch profitability. It's not going to decrease margin inside the store, and it's not going to increase margin outside the store. As a matter of fact, we believe with this promotion, we believe we're going to be able to drive gallons. That's really what we're trying to do over here. We're trying to drive gallons and combination between people that are coming to our stores today to buy everyday essential products, but they're not purchasing fuel.

Remember, we are operating in a lot of rural locations, a lot of small towns. So many times, customers that come to our stores are not necessarily buying fuel and vice versa. There are customers that are just driving to the pump, and they're not getting inside the store. We believe with those promotions, we believe we're going to see some big correlation between the two. But to be clear, this is not going to, in our guidance, we are not planning on reducing fuel margin or reducing margin inside the stores.

Bobby Griffin (Managing Director and Lead Equity Research Analyst)

Okay. I appreciate the details. I'll turn it over to somebody else. Thank you for the time.

Arie Kotler (Chairman, President, and CEO)

Thank you, Bobby.

Robb E. Giammatteo (EVP and CFO)

Thanks, Bobby.

Operator (participant)

Next question is from Kelly Bania from BMO Capital Markets. Please go ahead.

Kelly Bania (Equity Research Analyst)

Good evening. Thanks for taking our questions. I was wondering if you could just help us a little bit more understand the remaining retail stores here, given these shifts with the dealerization, and just give us some insight into how those same-store sales and gallons are trending for the remaining stores if you take out the 250 cumulative stores that will be dealerized by the end of Q1? Just what's happening? We have some of the disclosures from the release, but what is happening on a same-store sales and same-store gallon trend for the remaining stores?

Arie Kotler (Chairman, President, and CEO)

Sure. Robb, would you like to take it?

Robb E. Giammatteo (EVP and CFO)

Sure. Yeah, Kelly, those stores outperformed, as you might expect. They outperformed the balance of the company for Q3 or Q4, excuse me, and are outperforming Q1 quarter to date. So again, we're going to give it a little bit more run rate before we're calling out those trends, but they are higher. Still negative, but they are higher than the balance of the chain. And again, we're watching that, and we would expect that to continue. And as I mentioned in my prepared remarks, these are more productive stores. So again, we're going to benefit from stores that are more competitive, able to drive business versus perhaps some of the macro trends that have been weighing on some of the less competitive stores.

Arie Kotler (Chairman, President, and CEO)

And just to add to it, Kelly, that was from the get-go. That was part of the transformation plan. Part of the transformation plan is to make sure that we are concentrating on the best stores. We are concentrating on stores that we believe at the end of the day will actually have some organic growth potential. And the stores that we just believe that mature or we don't see the increase in organic growth, those are the stores that we're basically shifting to the wholesale segment.

Kelly Bania (Equity Research Analyst)

Got it. Yeah, that's helpful. So it sounds like they are more productive. They are performing better, but they are still negative. So I'm just trying to understand the magnitude of the sequential improvement, if I'm hearing that right, on the merchandise comp front as we move through 2025, what you're expecting, what you're seeing at a category level, just trying to understand since we don't really have the comparisons.

Robb E. Giammatteo (EVP and CFO)

Right. And Kelly, that's one of the challenges. Again, as we're talking about comp or same-store sales, we want to steer you. We will still be providing same-store detail. We'll be reporting it, but in terms of guiding it, because we're not giving you the same-store base, it's going to be impractical for you to model it that way. And again, so if you think about what we're talking about right now, these more productive stores are offsetting that negative same-store trend both for merch sales and for gallons, where again, the average store, again, if you're modeling it, the average store is going to be down low single digits in merchandise sales per the average store last year, and they're going to be up low single digits in gallons per average store versus last year.

Again, we will certainly be talking about same-store sales, but for modeling purposes, it's going to be easier for you to get to our numbers modeling it that way.

Kelly Bania (Equity Research Analyst)

Okay. And you talked about the Fueling America's Future promotion. I guess this is really kind of intended to help your customers, but also to grow gallons. Where do you think what is in the plan for 2025 with respect to gallons, I guess, both at the retail side and the wholesale side? Because I think you talked about mid-teens EBIT growth in wholesale. So what kind of gallon assumptions are underlying the whole plan here?

Robb E. Giammatteo (EVP and CFO)

Yeah. So Kelly, we have not typically guided gallons on the wholesale side. And again, as you know, you're driving. You have the metrics for the CPG for the various sites and the gallon growth. If you think about the fourth quarter, just as a proxy, I can give you one data point on that. We had roughly 9 million gal in the fourth quarter that was related to channel optimization shifting to the wholesale channel. So that can give you an indication that at the level we're at right now, ending the fourth quarter with 150 stores, we're on 9 million gal shifting to that channel. So again, as we add the extra 100 in Q1 and the modeling that you guys will do for what you're assuming for Q2, Q3, you can see that that's going to get significant.

Arie Kotler (Chairman, President, and CEO)

Kelly, just to add one comment because I hear what you just said. I just want to make it clear. It's not only growing gallons. It's growing traffic. That's the reason we are putting all of our energy on Fueling America's Future campaign with fuel. And at the same time, we are actually increasing the promotional activity very heavy on the tobacco and OTP inside the stores. We started in Q4. We already saw the results in Q4. In Q4, we were able to increase the OTP margin by 200 basis points. I mean, we see that this is working. And this is where we actually concentrate right now, tobacco and fuel, which we believe is going to drive traffic outside the store and inside the store.

Operator (participant)

Next question is from Anthony Bonadio from Wells Fargo. Please go ahead.

Anthony Bonadio (VP of Equity Research)

Yeah. Hey, guys. Thanks for taking our questions. So I wanted to start out on fuel margins. The guidance range seems to suggest you're pretty constructive on the outlook for fuel margins in 2025. So can you just talk about the different assumptions underlying that and how we should think about idiosyncratic contributions versus broader industry trends, just trying to better understand how you came up with that range?

Robb E. Giammatteo (EVP and CFO)

All right. Do you want to talk about any of the macro? And I can talk about the specifics.

Arie Kotler (Chairman, President, and CEO)

That's the macro. You can talk maybe about the guidance, and then I'll talk about the macro.

Robb E. Giammatteo (EVP and CFO)

Yeah. Yeah. So, Anthony, as Arie mentioned, January was nicely up to last year. And again, January was a softer month last year, but it was up nicely. As we look at the general dynamics of the industry, we do continue to see wage increases and things on the operating expense side of the business as we continue to have same-store traffic challenges that are not specific to us, but other players as well as the mom-and-pops in the space. This is one of the areas where we continue to see structural increases.

Again, we have it up modestly for the full year, but we do continue to see some of the trends that we've seen from 2023 and 2024 moving into 2025. So again, we're constructive on it based on our pricing strategies, based on what we expect to happen with competitive set. Again, we look at that as the lever that players are going to go to to offset some of the traffic challenges, at least coming out of the first quarter.

Arie Kotler (Chairman, President, and CEO)

Yeah. Just to add to it, Anthony, as always, our strategy is to maximize fuel contribution dollars. I know we're very robust on CPG from basically a margin standpoint. The one thing I want to remind you and everybody, of course, is that we finished 2024 with basically a 5% decline. I mean, that was based on, of course, published information from OPIS. We were 5% in 2024. We are hopeful that the price of fuel will start with a $2 and not with a $3. In some areas of the country, it starts with a $2. I believe that the price of fuel will start with $2 versus $3. I believe that we're going to see some gallons increase countrywide. That's my belief.

And this is one of the reasons that we launched the Fueling America's Future campaign to go after gallons, to grab gallons, and of course, to make sure that we increase traffic inside the store, given at least what we see from a microeconomic standpoint. We believe that this is going to be very important for our business, for our stores, in order to actually increase traffic.

Anthony Bonadio (VP of Equity Research)

Got it. That's helpful. And then just on same-store OpEx, it looks like that decreased 1.2% in the quarter, which is actually the third straight quarter of declines there. Can you just talk about the key drivers of that and just how you're thinking about the opportunity for further improvement there as we move into 2025?

Robb E. Giammatteo (EVP and CFO)

Sure, Anthony. So obviously, some of the expense reductions are a result of the top-line reduction, right? So as we have lower top line, we're going to have less demand in the store for laborers, for stores that are not on minimum coverage. We have lower credit card fees. Some of those lower traffic would be repair and maintenance, less wear and tear. I mean, some of those reductions are you would take an increase to see stronger sales. So again, we're managing what we can control effectively.

But again, as you go forward, you would love to see the same-store sales turning positive, and you'd like to see a little bit of growth in the OpEx that would be driving more margin to the bottom line. So again, we're managing what we can control well. I think, again, as we are looking at the first quarter and we're suggesting to you that our same-store trends and gallons are down. Expect we're going to be managing OpEx as best we can on that front as well, as well as G&A expenses, and that's the trend we're looking at right now. Obviously, we are expecting and we're modeling that things pick up as we move through the year, so again, we're just where we are right now with these negative trends.

Anthony Bonadio (VP of Equity Research)

Got it. Thanks, guys.

Arie Kotler (Chairman, President, and CEO)

And Anthony, I believe, by the way, the negative trend, my belief, is that the majority of that is weather-related, just this year benefit. I mean, you see what is happening in most of the country. And I think with the promotion activity that we have and with the concentration on those two top categories, I'm very, very optimistic going into 2025, especially as we move towards the spring, towards the summer, 100 Days of Summer starting in May. I mean, I'm very, very bullish on that.

Operator (participant)

Next question is from Mark Astrachan from Stifel. Please go ahead.

Mark Astrachan (Managing Director and Senior Equity Research Analyst)

Yeah. Thanks. Good afternoon, everybody. I guess maybe just to start on the commentary about weather, any sense of just what kind of impact it had on your business or on the industry in the first couple of months of the year? And I guess maybe more broadly, the C-store channel, if you look at a bunch of categories sold in the store, seems to have started weakening kind of back half, fourth quarter of 2023. So a year now, kind of four to five quarters into just a generally weaker trend. We can see that there's a bit of a shift in consumption of things into mass and grocery channels away from c-stores.

I guess, yeah, I'm curious, one, as I said, just what the weather impact might be. And two, on the other piece of it, just whether you think there's any impact on that shift from a consumer perspective in terms of just being spread thinner and trying to purchase things more in bulk, take home instead of an immediate consumption? And then does that reverse as or if the consumer environment improves? Thanks.

Robb E. Giammatteo (EVP and CFO)

Yeah. I'll jump directly into it. I think that the consumer is basically feeling the pressure, the microeconomic pressure, especially in the areas that we do business. So I really believe it's related to the pressure, to the inflation, to the pressure on the consumer. And this is the reason, by the way, that we are concentrating, I said earlier, we are concentrating, Mark, on fuel and tobacco. Because those two categories, if you think about it, between fuel and tobacco, those two categories represent probably 70% of our revenue.

And this is the area that's going to bring traffic inside the store. We have very, very, very big promotions related just to those two categories because I don't think those two categories are declining. Yes, cigarettes declining, but you know what? OTP is picking up in exchange of cigarette decline. Fuel is declining. We saw what happened in 2024. So instead of just sitting on the sideline, what we are doing, we're basically very, very active on those two fronts. And that's the reason when I brought the Fueling America's Future, we picked up to $2 off per gal.

We believe that's going to drive traffic, that's going to drive gallons, which were hurt over the past basically few years. Related to the weather, I mean, you see what happened in weather. I mean, the weather in the middle of January, we had snowstorms in so many areas in the country that we usually don't see it. I mean, and we had another one in February. But as I said, I mean, that's, I think, as part of our guidance, this is something that we take into account. And to be honest, I prefer to have those weather issues during January, February, rather than having them during the summer. It's not something that it's unexpected sometimes during this time of the year.

Arie Kotler (Chairman, President, and CEO)

And Mark, we have been looking really aggressively to try and baseline what that trend impact is. And it has been so noisy, even by region, that it's difficult to establish a baseline. There have been so many weather events, and they've been so broad and sustained, whether it's precipitation or whether it's temperature. It's very difficult for us to read the trend. That's why we do believe there's an impact, but quantifying it at this point has been challenging. And we're seven weeks in, and it's been tough to read. There's been that much volatility with the daily performance.

Mark Astrachan (Managing Director and Senior Equity Research Analyst)

Got it. Okay. And then maybe just a clarification. So I guess I could be wrong thinking strategically, but I feel like historically, when we've talked about focus on fuel margin versus fuel gallons, you've been focused more on margin. And now it sounds like with the promotion, you're implying that you're focusing more on gallons. Is there some shift within the company to do that?

Robb E. Giammatteo (EVP and CFO)

No. No. No. No. No. So to be clear, Fueling America's Future is really to drive traffic. We are concentrating on traffic. We are not going to change. We always, as I said, our strategy is to maximize fuel contribution dollars. Nothing is going to change over here. The idea with those promotions is we believe by definition, the minute you give up to $2 off per gal, we believe that you're going to be able to increase gallons just by doing that. But the real reason for that is really to get basically the traffic inside the store. Because in order for you to get those promotions or to get basically those discounts, those big discounts, you need to get inside the store to get them. And we believe that's going to drive traffic inside the store.

Mark Astrachan (Managing Director and Senior Equity Research Analyst)

Got it. Okay. Thank you.

Robb E. Giammatteo (EVP and CFO)

Thank you.

Operator (participant)

Next question is from Karru Martinson from Jefferies. Please go ahead.

Karru Martinson (Managing Director of Equity Research)

Good afternoon. When you look at the conversion of the retail stores, I mean, what do you think the core of these kind of higher-performing stores is within that channel?

Jordan Mann (SVP of Corporate Strategy and Investor Relations)

What do you mean the core of the?

Karru Martinson (Managing Director of Equity Research)

So if we're averaging right now a little over 1,300 stores that we'll get down to, what do you think is the core that when you're done with the dealerization is that kind of goes forward as a better, improved, faster-growing retail channel?

Jordan Mann (SVP of Corporate Strategy and Investor Relations)

Okay. Robb, would you like to take it?

Robb E. Giammatteo (EVP and CFO)

Yeah. I think this is one that, as we've talked about before, if you look at our Q4 dealer sites was over 100, and we're guiding for 100 on Q1. We're not sharing forward plans. In many parts, we've got a number of counterparties, and we've got internal targets that we have to make sure we are comfortable with before we release externally. We obviously are modeling our full year to have a certain count transition, but we are only sharing Q1. Again, you can make your own determinations. Based on looking at what Q4 is and Q1 is, I already mentioned that it's expected to be a meaningful impact.

So again, I'm going to leave that to your discretion to model yourself. But again, we do expect it to be meaningful. The organization is postured and pivoted to aggressively pursue that. Again, we'll be updating this on the quarter and giving you much more detail as we have it.

Jordan Mann (SVP of Corporate Strategy and Investor Relations)

I just want to be clear. It's not about the quantity. It's about the quality. Just to be clear. Quantity, we care less about the quantity. We care more about the quality. As part of our transformation plan, the thought process is really we want to make sure that we keep stores that we have huge economy of scale. We see the opportunity to invest in those stores. We see huge opportunity to increase profitability in these stores. We see we're going to optimize our footprint and allocate resources for more efficiency. I mean, those are the things that we are doing over here.

So at the end of the day, the stores that we would like to end up with are the stores that we see a huge upside for ourselves. By the way, the other stores are great stores. We are moving them to the wholesale segment just because we believe that some of those dealers are just great entrepreneurs, but they can actually run those stores terrific. We just feel that we need to spend our time and resources in areas that we see that we have huge organic growth opportunities over there, and that's what we're doing over here.

At the end of the day, to increase profitability, the bottom line is we're going to increase profitability by actually shifting. I think, by the way, this is, I think, the unique thing about our model that we are a little bit different than some others. When we bought Empire four years ago, that was not exactly the plan, but I think that's the luxury right now that when we have over around 2,000 dealers today, we basically have 2,000 customers that are going to be customers for some of those stores or going to be dealers for some of those stores that we control at the end of the day, and I think that's the unique place that we are sitting right now.

Karru Martinson (Managing Director of Equity Research)

When you think about optimizing that footprint, is it exiting certain regions, or is it more just kind of or potentially adding to more regions, or is it more kind of going by a store-by-store basis?

Jordan Mann (SVP of Corporate Strategy and Investor Relations)

We are going store-by-store basis. At the end of the day, I mean, of course, if we have one store that we feel this is like an unbelievable store that got huge potential of growth, but next to it, there are three stores that do not have the potential growth that we see over there, obviously, we're going to have to exit this region. So yes, we are concentrating on regions. We are concentrating on states. We are concentrating on areas that we see opportunity for growth. I mean, we see we're looking on. I can go on and on and on. We're looking on demographic. We're looking on population. We're looking at what happened, what increased, what happened in the markets. But it's really store-by-store basis. I mean, the analysis that we started last year as part of our transformation plan, it's literally by store.

Karru Martinson (Managing Director of Equity Research)

Thank you very much. Appreciate it.

Jordan Mann (SVP of Corporate Strategy and Investor Relations)

Absolutely. Thank you.

Operator (participant)

Next question is from Hale Holden from Barclays. Please go ahead.

Hale Holden (Managing Director and Head of US Fundamental Credit Research)

Hey, afternoon. I have two questions. The first one is just holistically, if I think about your guidance, the EBITDA guidance for the year, the midpoint's 243-ish. You guys did 248 and 24. So I'm trying to figure out how to bridge to the 20 million in dealerization savings that you expect to get over time and why perhaps we're not seeing that flow through into the annual EBITDA guide.

Jordan Mann (SVP of Corporate Strategy and Investor Relations)

Sure. I'll take that one. So as you think about the $20 million, again, that's at an annualized run rate. And as you know, we'll start to annualize the activity in Q3 of 2024 from the start of this program, right? So we are not likely to be at steady state until later in 2025, possibly 2026, but that is when the run rate would be achieved. So we are, as I mentioned in prepared remarks, our wholesale profitability was up $2 million in the fourth quarter due to the channel optimization work. So if you translate that out at the current level of run rate, you'd get that $8 million-$8.5 million that we talked about last quarter for the stores that were done at the end of the fourth quarter. The stores that are being done right now, we've got another 100.

As I mentioned, there's more to come, so you will not be at the annualized run rate until you're far deeper into 2025, and that's the reason you're not seeing the full $20 million accrue in 2025.

Hale Holden (Managing Director and Head of US Fundamental Credit Research)

Okay, so maybe another way to think about it is, I mean, how do I think about an apples-to-apples number? Because you guys have a lot of moving parts. I'm trying to, obviously, absolute EBITDA is lower, but it does feel like the dealerization is maybe resulting in lower EBITDA, or is it just that we think the trends are going to be lower for merchandise sales?

Jordan Mann (SVP of Corporate Strategy and Investor Relations)

No, it's certainly accretive. It's definitely not drive. It's an accretive program. I think if you can look at 2024 versus 2023 and look at the same store performance metrics for merchandising and gallons, you can pretty quickly get yourself to a place that says, if I'm negative, pick a number, negative low single digit, same store sales or same store gallons. And again, I'm not guiding you on same stores, but I'm just saying if you're negative, you should be able to do the math that says, what does my same store business do, and what is the organic decrease there?

What we're doing here is a bridge to optimize the channels, right, to provide some buoyancy to the P&L that's going to offset some of those trends that have been in place for a while. As we transition to more of that, I already talked about activating the core customer and then transitioning into that longer-term food and the store remodel program. That's the strategy. So you should be thinking about this as purely an accretive program for channel optimization, offsetting some of the same store trends. And again, if you do the math from 2023 to 2024, you should be able to get to a place that says, what is the underlying same store business doing? Understanding that same store base is going to be moving significantly quarter by quarter.

Hale Holden (Managing Director and Head of US Fundamental Credit Research)

Got it.

Robb E. Giammatteo (EVP and CFO)

And then.

Just to add one more thing. As I mentioned earlier, a meaningful number of stores are going to be converted. So at the end of the day, it's also about timing, just to be clear. It's all about timing. If we're going to be able to move quickly, things may change. But we're trying to be careful over here.

Hale Holden (Managing Director and Head of US Fundamental Credit Research)

Got it. And then the way we're kind of penciling out is you should be free cash flow positive, although I don't really have a CapEx number with the new stores that you're planning to build. So I just wanted to make sure that as you go through this transition, you kind of expect to be free cash flow positive for the year in 2025.

Jordan Mann (SVP of Corporate Strategy and Investor Relations)

Yeah. So we don't give guidance on CapEx, but if you look at Q4 2024 versus Q4 2023, and full year 2024 versus full year 2023, you'll find those numbers were relatively consistent. And I think it's reasonable for you to assume that some of the spend in 2024 related to EMV compliance, things related to accretive electric vehicle programs that were available prior administration, some of those spending dollars will be reallocated towards some of those more strategic store remodel program, things of that nature. And again, just looking at history, 2023 and 2024, CapEx very much in line with itself. And I think it's reasonable for you to assume positive cash build based on if you model that view.

Hale Holden (Managing Director and Head of US Fundamental Credit Research)

Great. Thank you so much. I appreciate it.

Jordan Mann (SVP of Corporate Strategy and Investor Relations)

You're welcome.

Robb E. Giammatteo (EVP and CFO)

Thank you.

Operator (participant)

Next question is from William Reuter from Bank of America. Please go ahead.

William Reuter (Managing Director and Senior Research Analyst)

Hi. I think I only have one. Given the new dealerization program, is this pretty much a strategy which you are moving forward with without regard to the external environment? Meaning, are you still evaluating other alternatives, whether they be acquisitions or divestitures? Do all of those of large numbers of stores or of all the retail stores, would more transformative transactions potentially still be on the table?

Jordan Mann (SVP of Corporate Strategy and Investor Relations)

Absolutely. Absolutely. Nothing changes. As I mentioned, this transformation plan is something that we started in the middle of last year. And what we're doing right now, we're basically executing. We're starting the dealerization program around third quarter last year. And we're just basically continuing according to our plan right now. But yes, nothing is off the table. I mean, we are going to evaluate everything based on return on investment, of course. And if it's a great opportunity that becomes available, absolutely. We have the team available. We have the liquidity. And M&A is also part of our plan over here.

William Reuter (Managing Director and Senior Research Analyst)

So I guess that would imply that both directions that I described, which is either a larger acquisition or alternatively a sale of a huge majority or a bunch of stores at a time, both of those would still be on the table. Is that right?

Jordan Mann (SVP of Corporate Strategy and Investor Relations)

Besides the second piece, on the table right now, we don't have the second piece. The piece that we have on the table right now is dealerization, making sure that we continue with our transformation plan. And if there is a large acquisition, we would be more than happy to look into it. Absolutely.

William Reuter (Managing Director and Senior Research Analyst)

Got it. Okay. That's all for me. The rest were already asked. Thank you.

Jordan Mann (SVP of Corporate Strategy and Investor Relations)

Thank you.

Operator (participant)

This concludes the question and answer session. I'd like to turn the floor back to management for any closing comments.

Jordan Mann (SVP of Corporate Strategy and Investor Relations)

Okay. Thank you very much, operator. Thank you very much, everybody, for participating. I had a lot of questions from you guys regarding to Fueling America's Future. And I really hope that you guys are going to visit our stores and explore the opportunities. I mean, we are providing up to $2 off a gal, up to 20 gal, $40 off per fill-up. And it's a great opportunity for you guys to visit our stores. In the meantime, have a good evening. Thank you.

Arie Kotler (Chairman, President, and CEO)

This concludes today's teleconference. You may disconnect your lines at this time. Thank you again for your participation.