Yahoo Finance Arko Corp. (NASDAQ:ARKO) Q1 2024 Earnings Call Transcript
Arko Corp. (NASDAQ:ARKO) Q1 2024 Earnings Call Transcript May 12, 2024
Arko Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings. Welcome to the Arko Corp. first quarter 2024 earnings conference call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to Jordan Mann, Senior Vice President of Corporate Strategy, Capital Markets and Investor Relations. Thank you. You may begin.
Jordan Mann: Thank you. Good morning 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.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 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 exclude intercompany charges by GPMP. And now, I would like to turn the call over to Arie.
Arie Kotler: Thank you, Jordan, and thank you all for joining us this afternoon. We performed as we expected during the first quarter, and remain focused on managing our controllable in this challenging microenvironment. 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 these 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 announce assortment mix drove significant merchandise margin rate expansion, which offset the decline in same-store merchandise sales, delivering modes merchandise contribution growth over the prior year period. We also made progress on all three of our merchandising pillars, with continued growth of our fast reward loyalty program, acceleration on our core destination merchandising categories, and expansion of our food offering.
We expect these efforts to drive traffic to our stores and to improve profitability, but 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 202o through March 31, 2024, we have added on a net 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 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 five to seven stores within one of our regions, with the goal of a regionwide 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 three 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, then by continuing to operate as retail sites. Converting these stores to dealer sites at scale offers the opportunity 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 TEG assets that closed in March of 2023, as I believe there was confusion around a 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 TEG 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 TEG at the price per share of $7.31, which was based on a 10-day (we-work) calculation, in accordance with the formula in our purchase agreement.
However, we continued 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 26 for $5.66 per share, or a payment of approximately $19.3 million. Concurrently, we reached an agreement with the TEG 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 the 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 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.
Rob Giammatteo: 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. Adjusted operating income for the quarter was $46.5 million compared to $54.1 million in a year ago.
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 the decline in gallons partially offset by stronger year-on-year fuel margin per gallon. Same-store of 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 in 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 cashflow. 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, where our second quarter we expect total company adjusted EBITDA to be in a range of $70 million to $77 million. And for full-year 2024, we are maintaining our full-year guidance range for total company adjusted EBITDA in the range of $250 million to $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: 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.
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