Arko Corp. (ARKO) Earnings

Management highlights

Bullet points: - Retail performance shows healthier business with improving trends. Fuel was a significant earner, with retail cents per gallon 47.9% and same-store fuel contribution up ~20%. Gallons pressured early by weather but improved. Fueling America's Future discount fuel campaign and loyalty programs like Fast Rewards are key. Enrollment in Fast Rewards increased 98% in Q1. Remodels and new to industry locations are part of long-term growth strategy. Early performance from remodels is encouraging. Fleet fueling with new card locks is an attractive use of capital. - Q1 net loss $5.6 million vs $12.7 million prior year, adjusted EBITDA ~$51 million, up ~65% from prior year. Retail same-store merchandising sales excluding cigarettes increased 0.4% (strongest ex-cigarette in 2 years). Merchandising margin up 70 basis points. Disciplined cost management: total retail site-level operating expenses down 12%, G&A expenses down 4%. Wholesale segment benefited from dealerization. Fleet fueling has durable cash flow.

Guidance

Bullet points: - First quarter results reflected strong execution and improving trends but too much market uncertainty to update four-year guidance at this point. - Remain focused on continuing to execute, capturing structural benefits of dealerization, and allocating capital to deliver strong returns.

Segment performance

Retail segment: Same-store merchandising sales down 0.5% for the quarter, but same-store merchandising sales excluding cigarettes increased 0.4%; merchandising margin 33.9%, up 70 basis points from prior year. Same-store gallons for retail fuel down 3.2% year over year but improved sequentially, fuel transactions up ~7% in March, same-store fuel contribution up 20%, retail cents per gallon 47.9 cents. Wholesale segment: Operating income ~$23 million, benefited from dealerization. Fleet fueling segment: Operating income ~$12 million, increase of 9% year over year, fleet fuel margin 49.3 cents per gallon, gallons declined 3.2% due to weather events.

Risks & headwinds

Bullet points: - Weather disruptions affected merchandising and fuel trends in Q1. Difficult to quantify storm-related impacts on sales volumes and fuel gallons.

Analyst Q&A

• Q: Hey, guys. Thanks for taking the questions this morning. Congrats on some of the progress showing up in the business. Good to see. I guess first I wanted to maybe just touch on the dealerization aspect. And now that we really are starting to see the inflection point in the operations on a consolidated basis, does the end kind of pie of savings still look the same from a G&A standpoint that we've talked about in the past and from the SG&A standpoint? Are you actually now kind of getting in the weeds and seeing that there might be more low-hanging fruit or more upside to some of those original estimates?

  A: Good morning, Bobby. Thank you for this question. Thank you for participating. So as we mentioned before, Bobby, the transformation plan that we put together in 2024, we kept talking about a $20 million upside over there when actually when this transaction is actually going to take place. So far, as you can see over here, And as we disclose, approximately $30 million benefits already is in place, given the 12 months. As I mentioned, we have 75 additional locations that we are about to basically execute. Some of them are under LOI. Some of them are under basically contract already. So I think the goal is really to complete that with maybe some additional others between now and the end of the year. And I think that's really the plan at the moment. If things will actually come later on and we see additional opportunities, of course we will execute on them. That's something that we always take into account. But I think we're going to stick to our plan at the moment.

• Q: And then Ari, so that puts你 round numbers, puts you call it a thousand stores at retail. Like when you get to that level, then kind of what's the go forward, you know, call it, I don't know if I want to call it plan, but the go forward kind of initiatives. You know, you got the remodels that are starting to accelerate. You got some of the merchandising work. You got loyalty. So maybe help us think about once we kind of get to this thousand store base at retail with those additional 75 stores to go. you know, what is the moving parts or the initiatives that will be the focus point going forward there for us to grade the business on?

  A: Sure, sure. So, you know, what we did, like I said, going back to the transformation plan since 2024, when we actually put the plan together, you know, the goal was to basically to move approximately 500 plus stores from basically from the retail business to the wholesale business, concentrate on areas that we are, you know, we have economy of scale, concentrate on areas that we can win, concentrate in areas that, you know, I'll call it, you know, more competitive for us, you know, in terms of scale, in terms of, you know, basically where we operate, concentrate on promotions. And as you can see right now, you mentioned a thousand stores, as you can see right now, The portfolio that we actually kept are the jewel of the jewel of the jewel when it comes to those stores. The goal will be moving forward to continue to grow and to continue to invest in those stores. As you can see, we are basically remodeling an additional 25 stores this year. The goal will be to build NPI around those stores. And the goal will be to continue to actually to execute around those stores. I can tell you that, you know, if you think about that, uh, you know, the majority of the portfolio, a large portion of the portfolio is basically East coast, mid Atlantic states, Southeast and Southwest. And that's all, that's basically the concentration. And that's what we would like probably to continue moving forward and just build around that. There is no question about that. You know, we are very well capitalized when it's come to it, as Gallagher mentioned, over $270 million, basically just cash on hand. And we have plenty of liquidity, up to $1.1 billion to continue to actually grow the business. Okay, Bob, just to add. Oh, go ahead, Gregor. Sorry about that. Really quickly. No, it's okay. And我 already covered it well. There's three big benefits we're starting to see in the business. One is operating expenses. As those stores get dealerized, it lowers our operating expenses. Second is G&A, as you mentioned. We are more focused. Lean organization, G&A. So the third, which I think you hit on with Ari, is it focuses our investments on retail stores that are positioned to win. So whether it's remodels, merchandising initiatives, the loyalty program, the approximately 1,000 stores that are left can focus the capital on those and hopefully return very quickly to growth. We're almost there this quarter, but it really allows us to focus the investments to drive growth in those retail stores.

• Q: On the remodels, you know, I think we took that number up a little of what we're targeting to now do. Can you share any of the early stats you're seeing as the lift from these remodels? You know, we've talked in the past about the capital for kind of a soft remodel versus a hard remodel, so I'd imagine that's roughly about the same. But what about just the lifts now that you've got maybe a little bit more data on what you're seeing?

  A: Sure, sure. So I can just talk about the early performance from the recent remodel. Like, you know, like we mentioned, we are very, very encouraged with that. You know, it's, of course, it's proved that the minute you actually invest in food service and you put food service formats forward, that's drive higher sales, stronger, basically, food performance. As a matter of fact, when people come into the stores, they're actually, you know, leaving the stores and going to the pub. And it just helps us with better store-level economics. There is no question. Now, the plan for 2026, which we mentioned, you know, approximately 25 stores remodeled, the whole idea is to continue concentrating on adding food service into those stores. Because the minute你 invest in food service and you add food service into those stores, you're bringing more traffic. you have better customer engagement, and there is other items that are actually being attached to basically to the food service when people are actually coming to the store. So that's really going to be the goal moving forward to make sure that in all of those stores that we are touching right now and we are remodeling right now, you know, we're going to be adding food service. In addition to all of those promotions that we mentioned earlier, I mean, all of those promotions are very, very, very, beneficial for us, especially in this environment when fuel prices are actually going up. All of those promotions attached to PacBev, for example, when you purchase food, we talked about Fueling America. Think about it, Bobby, when you buy two Gatorade right now and get 50 cents off per gallon in this environment, you're talking about $10 off when you purchase 20 gallons over here. This is really, really important. So again, All of those things will be very beneficial for us into 2026. And, Ari, I'm going to try to pin you down a little more. So basically, when you remodel a store, you put in the fast craves and that stuff you're working on, you see a lift in merchandise, same-store merchandise sales as well as same-store merchandise gallons? A: Yeah, absolutely. I'll jump in on that one. Yeah, you know, the first ones we did last year, we saw about 12% increase in merceding sales overall and 14% in gallons versus the pre-period. Some categories were up 20%, 30%. So we continue to see really good results, which is why we're accelerating the program. Every store is different. The level of remodels are different, but we're very happy with what we're seeing, which is why we're trying to do even more. Very good. I've taken enough time. I appreciate it. And one more thing, Bobby. One more thing, since you got me excited about that. When we talk about food service, it's not just the word food service. It's also to make sure that we have delicious value meals. I mean, we launched in Q1, we launched meals at $3, $4, $5, $6. I mean, think about it. You come to our stores in the afternoon to buy a chicken sandwich and a drink for $5. I mean, you can actually come to our stores and buy a drink, you know, like coffee or a cold drink and a sandwich, breakfast sandwich for $4. So, you know, those are very, very important components. It's not just to add food service. It's also to make sure that you actually bring value to the consumers. Thank you. I appreciate the details. Best of luck here and to you guys. Thank you very much, Bobby. Thanks, Bobby.

• Q: Hi, everyone. Thank you for taking my questions. Broader consumer trends have been mixed in this kind of complex macro environment. Can you just dig in a little more into your retail customer trends? Are you seeing strength in certain regions? And do you have any additional insights on April trends?

  A: Sure, sure. So let我 start with the first one about consumer, basically trend. So I'm putting the weather aside for a second. I can tell you that before the volatility in price and gas prices, January started very, very strong. Those excluding cigarettes were basically above 5%. And then, of course, we got impacted by the weather. And then going into March, with the volatility of fuel pricing, you know, we actually see customers' trips actually increasing because of that, just because the price of fuel is up. And, you know, customer trips are up. We see, you know, basically an increase in penetration inside the stores because, you know, customers are coming more often because of that. And that brings我 to basically the consumer and Fueling America and all of the promotional activities that we are doing over here when it comes to cigarettes and OTP, you know, everything. I mean, you know, I mentioned earlier today that cigarettes trends are actually up. I believe this is the first time for a long period of time that cigarettes actually trends are up. Cigarette trends are actually down. So I believe the promotional activity, Danielle, that we are actually having over here in our stores Along with all of the other promotions that we're doing actually bring traffic. And, you know, for me, traffic means that we are grabbing market share from somewhere else. The same thing goes to fuel. You know, we mentioned that, you know, fuel for this is like first time for a long period of time. You know, we've been trending even a little bit better than basically the office average. So, again, I just think that that's a mix of all of the other things and all of the initiatives that we are doing in the stores. to bring those customers in while, you know, everybody feels the pressure. Dan, let me just jump in a little bit. And the customers are under pressure. And I think we are having to take action to keep that traffic up, as I already mentioned, provide promotions, provide discounts that they can get in the store and using fuel. But you do see, especially as gas retail price elevates, we need to differentiate, and we're continuing to put our promotions out there that will continue to drive the traffic, hopefully in-store and with fuel through Fueling America. And we had some really strong pockets of geography. We did have that weather noise, but some Indiana, Kentucky parts of Ohio were very strong. Our southeast continues to be very strong, and some of what we call our Texarkana regions, which is Arkansas, Louisiana are also continuing to be performing. So we had a lot of very positive parts of the country and some that are a little more sluggish. But like我 said, we're taking action now and not waiting on the customer. We're trying to drive value for them. They continue to bring their trips, both gallon and merchandise, to ARCA. That's great. I really appreciate all that color. That's really helpful. And just as, I guess, a follow-up to that, Can you talk about how the dealers have been able to navigate this complex environment? I know they're kind of smaller entrepreneurs with less resources, so I'm curious if they've seen more headwinds in their businesses this year. A: Well, there is no question that, you know, those dealers are having the same challenge like everybody else. But remember, the environment that we are living in is that almost 65%, 70% of the stores in America are operated by, you know, basically by those dealers. So I think all of those guys are just,你 know, basically in the same boat. And, you know, when price, you know, goes up and we see volatility, there is no question that, you know, they're probably going to have a little of a decline in gallons, but that's going to be offset by an increase in CPG. So, you know, that's the way they're managing the business, and this is the way they've been managing their business for, you know, for the last probably 50 years. But there is no question, Daniel, that prices of fuel have to come down at some point. You know, we saw that, you know, for the past,你 know, we are here for,你 know, a public company for the past five years. You know, I've been around the block for over 20 years. It's a cycle. It's a cycle. And,你 know, we,你 know, at some point the price,你 know, will come down and consumers and,你知道, and basically those dealers are going to continue to drive gallons, drive cells as they have before. Great. I appreciate all that insight. Thank you. Thank you, Daniel. Thank you.