Name: ARKO Corp. Q1 2024 Earnings Call
Start: 2024-05-07T21:01:00.000Z

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) .

Financial Results

Metric	Q1 2023	Q3 2023	Q4 2023	Q1 2024
Total Revenues ($USD Millions)	$2,088.5	$2,622.1	$2,233.2	$2,072.5
Net Income (Loss) ($USD Millions)	$(2.5)	$21.5	$1.1	$(0.6)
Diluted EPS ($USD)	$(0.03)	$0.17	$(0.00)	$(0.02)
Adjusted EBITDA ($USD Millions)	$47.5	$91.2	$65.5	$36.6
Retail Fuel Margin (cpg)	35.4	40.3	39.2	36.4
Retail Merchandise Margin (%)	30.7%	31.7%	32.9%	32.5%

Segment revenue and operating income (Q1 2024 vs Q1 2023):

Segment	Revenues Q1 2023 ($MM)	Revenues Q1 2024 ($MM)	Operating Income Q1 2023 ($MM)	Operating Income Q1 2024 ($MM)	Operating Income, as adjusted Q1 2023 ($MM)	Operating Income, as adjusted Q1 2024 ($MM)
Retail	$1,262.4	$1,255.8	$41.6	$33.8	$54.1	$46.5
Wholesale	$691.3	$671.4	$7.6	$7.0	$18.6	$18.3
Fleet Fueling	$128.4	$134.6	$8.4	$8.0	$10.0	$9.8

Selected KPIs (Retail Q1 2024 vs Q1 2023):

KPI	Q1 2023	Q1 2024
Fuel Gallons Sold (MM)	248.9	255.5
Same-Store Fuel Gallons (% YoY)	-5.8%	-6.7%
Fuel Contribution ($MM)	$88.1	$92.9
Fuel Margin (cpg)	35.4	36.4
Merchandise Revenue ($MM)	$400.4	$414.7
Merchandise Contribution ($MM)	$123.0	$134.9
Merchandise Margin (%)	30.7%	32.5%
Same-Store Merchandise Sales (% YoY)	+3.8%	-4.1%
Same-Store Merchandise ex-Cigarettes (% YoY)	+7.6%	-3.0%
Same-Store Site Operating Expenses ($MM)	$167.1	$172.6

Liquidity and balance sheet (Q1 2024):

Liquidity ~$764M (cash ~$184M; lines availability ~$579M); net debt ex-lease ~$700M; outstanding debt $885M; capex ~$29.2M for the quarter .
Program agreement capacity up to ~$1.5B with Oak Street through 9/30/2024 .

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Adjusted EBITDA ($MM)	Q2 2024	N/A	$70–$77	New
Retail Fuel Margin (cpg)	Q2 2024	N/A	37–40	New
Adjusted EBITDA ($MM)	FY 2024	$250–$290 (initiated Feb-2024)	Maintained $250–$290	Maintained
Retail Fuel Margin (cpg)	FY 2024	36–40 (initiated Feb-2024)	Maintained 36–40	Maintained
Net Income Guidance	FY 2024	Not provided	Not provided (due to FV adjustments, D&A)	Maintained
Dividend	Q1/Q2 2024	$0.03/share (Q1 declared; paid Mar 21)	$0.03/share (pay May 31; record May 20)	Maintained
Share Repurchase Program	Ongoing	$100M (expanded May-2023; ~$29M remaining at YE 2023)	Expanded to $125M post-Q1	Raised

Earnings Call Themes & Trends

Topic	Previous Mentions (Q3 2023, Q4 2023)	Current Period (Q1 2024)	Trend
Consumer/macro demand	Loyalty investments and margin focus; OPIS down, same-store gallons down; inflation headwinds noted	Hesitant consumer; transactions down; early-quarter softness improving in late April; OPIS down ~5.9%, ARKO -6.7%	Persistent headwinds, some late-month stabilization
Merchandise margin expansion	Margin up 50 bps in Q3; +240 bps in Q4; core destination categories focus	Record inside margin; pizza rollout; bakery expansion; Nathan’s hot dogs relaunch upcoming	Structural margin tailwinds via mix/food service
Fuel margin dynamics	Retail cpg 40.3 in Q3; 39.2 in Q4; strategy to optimize gross profit dollars	Q1 retail cpg 36.4; guidance Q2 37–40; FY midpoint down ~1 cpg vs 2023	Normalization vs elevated 2022–23; still constructive
Pricing and procurement	Not detailed	Evaluating zone pricing and procurement scale to improve COGS and top line	Capability build (to be detailed at investor day)
Dealer conversions	Not emphasized	More aggressive conversions of select retail sites to wholesale dealer to cut OpEx and G&A; potential “key money”	Accelerating to enhance profitability
Regulatory/legal	N/A	Virginia gaming income elimination cited as EBITDA headwind	Discrete headwind in Q1
Capital allocation	Buyback $100M, dividend $0.03; strong liquidity	Buyback expanded to $125M; dividend maintained; substantial liquidity	Shareholder returns reinforced

Management Commentary

Transformation plan: “More aggressive and targeted capital allocation toward strategic sub-segments of its retail stores… pilot program to improve customer experience… with plans to expand refined offering across larger store network” .
Dealer conversions: “Converting these stores to dealer sites at scale offers the opportunity to significantly reduce site operating expenses and corporate G&A” .
Pricing/procurement: “We are evaluating zone pricing capabilities… working on sourcing strategies to leverage our scale to improve cost of goods” .
Valuation and buybacks: “We firmly believe our current valuation does not fully reflect the underlying value… Board… expansion of our share repurchase program to $125 million” .
Food service: “$4.99 pizza… we… added 105 bakery items… upcoming re-launch… hot dog… anchored by Nathan’s Famous” .

Q&A Highlights

Inside sales softness: Transactions down across categories; macro/inflation pressure and fuel price impacting basket; margin expansion offset some sales declines .
Guidance build: Q2–Q4 modeled with mid-single-digit same-store gallon declines and EPS margin midpoint ~1 cpg below 2023; merch margin expansion expected to continue but at a slower rate than Q1 .
April trends: Early April mirrored Q1 softness, inflected more positive in second half; watching peak selling season .
Dealerization economics: Conversions increase profitability and cash flow; potential “key money” payments; retain fuel volume via long-term arrangements .
Zone pricing capability: Not embedded in 2024 guidance; part of transformation program capabilities .

Estimates Context

Wall Street consensus (S&P Global) for Q1 2024 and forward periods was not retrievable at the time of analysis due to SPGI daily request limits; therefore, explicit beat/miss vs consensus cannot be assessed here (Values retrieved from S&P Global were unavailable due to request limits).

Key Takeaways for Investors

Margin resiliency remains a core strength: retail fuel cpg held at 36.4 and inside margin reached 32.5% despite volume softness—watch Q2/Q3 margin trajectory vs guidance range (37–40 cpg) .
Mix and food service initiatives are structurally expanding merchandise margin; monitor pizza, bakery, and Nathan’s hot dogs penetration and attachment rates through summer .
Transformation plan and dealer conversions should lower OpEx/G&A and improve ROIC; updates each quarter and investor day later this year will be catalysts .
Liquidity and capital flexibility are robust (>$760M liquidity; ~$1.5B Oak Street capacity); shareholder returns continue via $125M buyback and dividend .
Near-term trading: Q2 margin realization vs guidance and same-store volume stabilization are key to sentiment; any evidence of inside sales recovery and continued margin rate would be supportive .
Medium-term thesis: Organic growth pivot, capability build (zone pricing/procurement), and portfolio optimization (dealerization) can re-rate earnings quality while sustaining margin leverage .
Watch discrete headwinds (Virginia gaming elimination) and wage/repair/maintenance costs; management expects continued merch margin expansion but at a slower pace .

ARKO Corp. (ARKO)·Q1 2024 Earnings Summary