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AC

ARKO Corp. (ARKO)·Q2 2024 Earnings Summary

Executive Summary

  • Q2 2024 adjusted EBITDA was $83.8M, above the company’s guidance range of $70–$77M, driven by higher retail fuel margins and merchandise margin expansion, despite softer same‑store volumes .
  • Net income was $14.1M and diluted EPS was $0.11; total revenues were $2.39B, down year‑over‑year on lower fuel revenues; merchandise margin rose to 32.8% .
  • Management maintained full‑year 2024 adjusted EBITDA guidance under the revised definition ($235–$275M including ~$15M non‑cash rent) and guided Q3 adjusted EBITDA to $70–$86M with retail fuel margin of 38–44 cpg .
  • Strategic catalysts: multi‑year transformation plan (store design pilots, dealer conversions ~40 sites by Q3), continued food service expansion (Nathan’s hot dogs to >460 stores), dividend of $0.03/share and buyback authorization expanded to $125M with $25.7M remaining as of 6/30/24 .

What Went Well and What Went Wrong

  • What Went Well

    • Adjusted EBITDA exceeded guidance ($83.8M vs $70–$77M) on stronger retail fuel margin capture (41.6 cpg vs 39.7 cpg YoY) and merchandise margin expansion to 32.8% .
    • Food service initiatives showed traction: pizza program drove SSS pizza sales +19% and units +36% vs prior program; Nathan’s hot dogs rolled out to >460 stores with hotdog SSS up ~16% YoY; food and dispensed beverage contribution dollars +9% and margin rate +400 bps YoY (management commentary) .
    • Segment profitability improved: Wholesale operating income rose to $9.1M (adjusted $21.3M); Fleet operating income rose to $11.8M (adjusted $13.7M), supported by margin and WTG volume .

  • What Went Wrong

    • Same‑store merchandise sales declined mid‑single digits (-5.1% total; -4.0% ex‑cigarettes) and same‑store transactions fell ~8% amid consumer pressure and inflation, partially offset by higher average ticket and margin rate expansion .
    • Same‑store retail fuel gallons fell 6.6% vs national OPIS ~ -4.2%, with SSS fuel contribution down ~$3.3M; broader gallon softness persisted despite acquisitions adding volume .
    • Total revenues decreased YoY (fuel revenues down) and site operating expenses increased +2.4% YoY (acquisition‑related +$7.4M), though same‑store expenses fell 0.5% .

Financial Results

MetricQ2 2023Q1 2024Q2 2024
Total Revenues ($USD Billions)$2.469 $2.072 $2.388
Net Income ($USD Millions)$14.5 $(0.6) $14.1
Diluted EPS ($USD)$0.11 $(0.02) $0.11
Adjusted EBITDA ($USD Millions, historical definition)$86.2 $36.6 $83.8
Adjusted EBITDA ($USD Millions, revised definition)$82.5 N/A$80.1
Merchandise Margin (%)31.9% 32.5% 32.8%
Retail Fuel Margin (cents per gallon)39.7 36.4 41.6
Retail KPIsQ2 2023Q1 2024Q2 2024
Same‑Store Merchandise Sales YoY+0.7% -4.1% -5.1%
Same‑Store Merchandise ex‑Cigarettes YoY+3.8% -3.0% -4.0%
Merchandise Revenue ($USD Millions)$484.6 $414.7 $474.2
Merchandise Contribution ($USD Millions)$154.7 $134.9 $155.8
Same‑Store Transactions YoYN/AN/A~-8% (mgmt)
Retail Fuel Gallons Sold (000s)293,584 255,464 283,481
Same‑Store Retail Fuel Gallons YoY-2.6% -6.7% -6.6%
Retail Fuel Contribution ($USD Millions)$116.6 $92.9 $118.0
Segment Operating Income ($USD Millions)Q2 2023Q2 2024
Retail (Operating Income)$77.9 $73.8
Retail (Operating Income, as adjusted)$92.6 $87.9
Wholesale (Operating Income)$6.8 $9.1
Wholesale (Operating Income, as adjusted)$19.7 $21.3
Fleet (Operating Income)$9.3 $11.8
Fleet (Operating Income, as adjusted)$11.0 $13.7

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Adjusted EBITDA (revised definition including non‑cash rent)Q3 2024N/A$70–$86M; assumes retail fuel margin 38–44 cpg; includes ~$3.5M non‑cash rent New methodology introduced
Adjusted EBITDA (revised definition)FY 2024N/A$235–$275M; includes ~$15M non‑cash rent; corresponds to $250–$290M under historical methodology Maintained (methodology change)
Adjusted EBITDA (historical definition)Q2 2024$70–$77M (issued in Q1) Actual $83.8M Raised vs guidance (beat)
DividendQuarterly$0.03/share (Q1) $0.03/share payable 8/30/24, record 8/19/24 Maintained
Share RepurchaseProgram SizeExpanded to $125M (Q1) ~$25.7M remaining as of 6/30/24 Active, remaining capacity

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2023)Previous Mentions (Q1 2024)Current Period (Q2 2024)Trend
Consumer pressure/inflationHighlighted rural/low‑income exposure; focus on value offers Hesitant consumer; SSS down; margin mix shift Continued pressure; SSS and transactions down despite promotions Persistent headwind
Fuel margin strategy (CPG)Optimize contribution vs gallons; record prior years Guided 37–40 cpg Q2; midpoint ~1 cpg below 2023, expecting expansion vs Q1 Delivered 41.6 cpg; Q3 guide 38–44; FY H2 37–45 cpg Structurally higher CPG
Food service initiativesPizza launch planning; bean‑to‑cup expansion Pizza $4.99 loyalty; food service rollouts; no incremental labor noted Pizza uplift; Nathan’s hot dogs rollout to >460 stores; food/beverage contribution +9% Positive traction
Loyalty programEnrolled >2M; bigger baskets Continue to drive enrollment; $4.99 pizza exclusive to loyalty Re‑introducing $10 sign‑on incentive; loyalty sales roughly flat YoY but incremental contribution Re‑accelerating
Dealer conversionsConverting lower‑quintile stores, reduce OpEx/G&A More aggressive plan; economic benefits, retain gallons/rent ~40 stores targeted by end Q3; ~$2M better profitability on first 40 Scaling up
Procurement/pricingCore categories; supplier partnerships Zone pricing capability, procurement leverage in plan Common procurement platform across segments; indirect savings opportunity Execution in progress
M&A posture5 deals in 18 months; disciplined Larger deals only; focus on organic Tuck‑ins (SpeedyQ, etc.); continued flexibility (Capital One line/Oak Street) Opportunistic

Management Commentary

  • “We delivered adjusted EBITDA that exceeded our second quarter guidance… as we navigate [a] challenging macroeconomic environment… [we] achieved merchandise margin rate growth while providing much needed value to our customers.” – Arie Kotler, CEO .
  • “Starting with this 10‑Q, we will now be including the non‑cash portion of rent expense in our calculation of adjusted EBITDA… approximately $15 million for fiscal year 2024.” – Rob Giammatteo, CFO .
  • “We already have approximately 40 retail stores that we expect to have completed by the end of the third quarter… [dealerization] benefit is going to be approximately $2 million better than what they’re doing right now.” – Arie Kotler .
  • “For the second quarter, fuel margin was below $0.38 in April and jumped above $0.43 for May and June… July finished in the $0.42 to $0.43 range.” – Arie Kotler .

Q&A Highlights

  • Procurement/platforms: All segments centralized on a common procurement platform; transformation program aims for savings, particularly indirect .
  • Dealer conversions economics: Better profitability via rent and fuel supply economics; potential “key money” in some cases; retain gallons; G&A/site OpEx reductions .
  • Guidance assumptions: Structurally higher retail fuel margins (midpoint ~41 cpg for H2); merchandise comps modeled down mid‑single digits for the year; Q3/FY ranges incorporate non‑cash rent in EBITDA .
  • Organic growth in wholesale/fleet: Ongoing opportunities to add sites organically and via M&A; fleet card business expanding (WTG) .
  • Food service/loyalty: Pizza driving sampling and bundles; Nathan’s hot dogs rollout; loyalty promotions re‑accelerated to drive traffic and basket .

Estimates Context

  • S&P Global (Capital IQ) consensus EPS and revenue estimates for Q2 2024 were unavailable at retrieval due to request limits; therefore estimate comparisons are not presented. In lieu of consensus, ARKO’s actual adjusted EBITDA exceeded company guidance ($83.8M vs $70–$77M), primarily due to stronger retail fuel margin capture .
  • Where estimates may need to adjust: Given delivered retail fuel margin of 41.6 cpg and management’s commentary on structurally higher margins into Q3/H2, models with lower CPG assumptions may need upward revisions; conversely, merchandise SSS trends imply cautious near‑term inside sales assumptions .

Key Takeaways for Investors

  • Execution outweighed volume softness: Strong fuel margin capture and merchandise margin expansion offset consumer‑driven declines in transactions and same‑store volumes, enabling an EBITDA beat vs guidance .
  • Margin framework inflecting: Management cites structurally higher fuel margin (CPG) through summer and guides Q3/FY accordingly, a key lever for earnings resilience when gallons are soft .
  • Transformation plan is a near‑term catalyst: Store design pilots (Q4 start), dealerization (~40 stores by Q3) and pricing/procurement initiatives should support margin/ROI and free capital for higher‑return investments .
  • Food service scaling: Pizza and Nathan’s hot dogs are driving mix and margin gains; continued bundling and loyalty incentives can lift basket and contribution dollars .
  • Capital allocation remains shareholder‑friendly: Dividend maintained ($0.03) and buyback capacity remains ($25.7M as of 6/30/24), supported by ~$806M liquidity and undrawn ABL .
  • Segment diversification adds stability: Wholesale and Fleet segments posted YoY operating income gains, offering hedge against retail volatility .
  • Modeling implications: Raise CPG assumptions toward guided ranges; temper inside sales/gallons near‑term; incorporate EBITDA methodology change (non‑cash rent now included) in forecasts and comps .

Appendix: Additional Q2‑Relevant Press Releases

  • ARKO named to Fortune 500 for third consecutive year (No. 453), reflecting multi‑year revenue growth supported by acquisitions and footprint expansion .
  • Subsequent event: New Handy Mart store opening in Newport, NC (Aug 28), aligning with retail expansion and food service focus; offers value pizza and Nathan’s hot dogs with loyalty discounts .