Q2 2023 Arko Corp Earnings Call
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Greetings and welcome to Arco Corp, second quarter 2023 earnings Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
This conference is being recorded I would now like to turn the conference over to your host Ross apartment. Thank you you may begin.
Thank you good morning, and welcome to Arco's second quarter 2023 earnings conference call and webcast.
Todays call are art, Kotler, Chairman, President and Chief Executive Officer, and Don Myself, Chief Financial Officer, Our earnings Press release quarterly report on Form 10-Q for the second quarter of 2023 as filed with the SEC and our earnings presentation are available on Arcos website at Arco Corp, Dot com before we begin.
Please note that all second quarter 2023 financial information is unaudited and during the course of this call management may make forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995. These statements maybe identified by the use of words, such as will May expect plan intend could estimate.
Project and similar references to future periods. These statements speak only as of today and are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward looking statements. Please refer to our press release, our quarterly report on Form 10-Q for the state.
Quarter ended June 30th 2023, and our other filings with the SEC, including our annual report on Form 10-K for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today. Please note that on today's call management will refer.
non-GAAP financial measures, including same store measures EBITDA and adjusted EBITDA, while the company believes these non-GAAP financial measures provide useful information for investors. The presentation of this information is not intended to be considered in isolation or as a substitute for our financial information presented in accordance with GAAP. Please.
Refer to our earnings press release for reconciliation of our non-GAAP measures to the most directly comparable GAAP measures I would also like to note that we're conducting our call today from our respective remote locations.
There may be brief delays cross talk or other minor technical issues. During this call. We thank you in advance for your patience and understanding.
Now.
Like to turn the call over to Ari.
Thank you Ross good morning, everyone. We appreciate you joining the call.
First I'd like to thank our approximately 14000 employees for their hard work and dedication, which I see firsthand everyday.
We have had a busy first half of 'twenty to 'twenty, three and continued to execute our strategy of creating long term shareholder value.
Great conviction that we are doing the right things.
We have a deliberate focus on improving the performance of our retail stores and putting our customer service and experience to our marketing and merchandising strategy.
And of course executing on accretive M&A transaction.
Looking at our performance I'm extremely happy with our results this quarter adjusted EBITDA for the quarter was $86 $2 million compared to $79 million in the prior year quarter, an increase of 9.1%, including recent acquisition I encourage you to review our Aaron.
The release in which we provide more color when all of our recent acquisitions contributed to our performance.
Do you have like this quarter or.
Our strong organic growth in merchandise gross profit, which was upset by lower organics June gross profit and increased labor expense.
Our retail stores.
We continue to see.
The positive results of our many initiatives.
Our strong and experienced merchandising and marketing team continued to work to maintain our trajectory of generating more gross profit inside our stores by.
By focusing their efforts on our three strategic key pillars.
Boring selves in core destination categories are fast rewards loyalty program and expanding our food and beverage service.
As a result American.
Merchandise gross profit dollars grew to $135.6 million.
A 5% increase on a same store basis as compared to Q2 2022.
Merchandize margin on a same store basis grew 130 basis points to.
31, 9% compared to 30.6% in Q2 2022.
I'm very proud of these results.
This quarter same store merchandise sales, excluding cigarettes grew 3.8% same store sales increased by 0.7% compared to Q2 2022.
We can see there is store to be a same store beginning in the first quarter in which the store had a full quarter of activity in the prior year.
I want to underscore.
Why do we believe that the same store sales excluding cigarettes is an important metric for judging our performance.
Our marketing and merchandising initiatives intentionally focused on our core destination categories, which are packaged beverages.
Candy salty snacks package, sweet snacks alternative snacks and beer.
We measure our retail success on our ability to grow sales and profitability outside of cigarettes and in our core destination categories.
We have executed on our strategy growing merchandise sales and gross profit while decreasing our exposure to cigarettes.
Carriage you to look at our second quarter presentation on Oracle called Dot Com, where we have provided some information about this trend and outperforming.
I will leave it at some key metrics with all numbers.
Bearing Q2, 2023 so Q2 'twenty 'twenty over the last three years.
As a result of our strategy as a percentage of total merchandize cell core destination categories have increased from 38, 4% to 44.6%.
Cigarettes decreased from 38, 2% to 29.6% of total merchandize stout.
It's skewed towards Twenty-twenty grew.
Gross profit dollars from core destination categories have grown 67%, while gross profit dollars from cigarettes, if only increased 79%.
In the same timeframe all other categories gross profit dollars have grown approximately 32%.
Gross margin in core destination categories.
Expended approximately 546 basis points.
Cigarette gross margin has expanded by approximately 148 basis points.
Turning to the progress of our three key merchandising and marketing pillars.
Our first pillar is to grow sales in core destination categories with data driven decision execution and a strong supplier partnerships.
We define our core destination categories, those categories, where we invest resources such as people know.
G space capital.
Same store sales in these categories for Q2 this year increased by five 6% as compared to the prior year period with 12.2% same store growth you can be in.
Fortunately margin in these core destination categories on a same store basis grew 150 basis points year over year.
These categories were approximately 65% of our Q2 same store sales, excluding cigarettes, and 45% of our total same store sales.
We work to ensure that our stores meet our ice based assortment standout.
Score a destination categories and that we offer our customers the right assortment and value proposition.
This reinforces my belief that we are doing the right things by way of assortment and marketing.
D C D Arco way.
<unk> implemented in our recent acquisition.
We previously provided an update on our success at Endy marks this is not the one off we.
We are seeing similar progress in our newly acquired Pride location, well, we added approximately 1000 items into stores.
Dislocation merchandise margin increased 290 basis points to 34, 8% compared to Q1 2023.
Moving to the second pillar of our fast rewards loyalty program. We are very pleased with the results from the major upgrade of our loyalty App, which went live on March 28, we believe that the program develops and announced our relationship with our customers drives more trip with our existing customers and attract.
New loyal customers.
To support the growing our loyalty program on May 17, we launch our 100 days of summer loyalty enrollment Docker and new customers were involved with a valid email address and phone number.
I'll be more than $10 in fast box delivered to their new App wallets.
We are seeing increased cadence of enrollment and importantly of marketable loyalty members.
At the end of Q2 of this year, we had one point 48 million enrolled members and we are just getting started.
Marketable members, which are loyal customer with whom we can't communicate are up approximately 37% over the prior year period and tenant off percent higher than the prior quarter. In fact, since we launched our new App in March we added more than 205000 net enrolled market that the members.
We know that's been rolled market had been members make more trips and spend more in our store than not enrolled members.
In Q2 enrolled members made an average of almost six more trips per month.
Versus non and board members for the same period. They also spend on average more than $60 per month more than non enrolled members.
Given the increased frequency and spend a friend of all members. We are very excited about the upside opportunities as our program gains more traction.
Our third pillar is expanding our food and beverage services.
And we are making great progress.
Includes branded food franchises.
Package, fresh and frozen food offering including Pizza chicken.
Roller grill, and hot cold and frozen dispense beverages.
Though we had a lot of appetite to grow our food and beverage offering.
I want to I like our existing capabilities.
We currently have 150, plus branded food franchises.
160, plus in store dailies.
100, and a 60 plus or grab and go units.
100, plus called grab and go units.
370, plus all of their grill.
And over 700 bean to cop coffee stores.
We have expanded into cup coffee by 135 stores since the first quarter of 2023.
Branded franchise food sales increased 10 points, 4% on a same store basis in the second quarter as compared to the prior year, our grab and go sell a increased 13.4% in Q2 'twenty twenty-three as compare to the pre a prior year period, we are happy with this performance, but no we have more.
To achieve and plan to grow in this category, particularly in a way that allow us to control our own destiny.
We are targeting approximately 120 more stores.
All of realism idea and year end of 2020 three.
We have targeted an additional approximately 230 stores before there have been two cup coffee expansion by the end of 2020 three.
We continue to challenge ourselves on our food and beverage service offering and how we can continue to improve our objective is to improve our performance in each pillar.
I believe this will position our core convenience store business.
Further growth delivering great results, while exceeding our customers expectation.
As you know I like to get out with the team keep our fingers on the pulse, it's our retail stores and check the performance of our operation.
I in February senior Executive recently surprised visited many stores.
We walk into the stores unannounced.
Thanks to our associates and managers and truly inspect any store each store.
I believe we have made a lot of progress on our merchandise execution, but believe we still have more to go.
We understand that excellent customer experience and service is a necessity and is core to our business the.
The operations team go ease for merchandising and marketing plans to be closely followed and mix and assortment in each location executing to our strategy and always in stock.
We will continue to invest in updating key areas. The first stores that we believe are essential for continued growth.
We are more committed than ever driving long term sustainable inside sales growth expanding margin and gross profit dollars and we know that there is runway for improvement and growth.
Turning to fuel total fuel contribution increased to $156 million compared to $138 million in the prior year quarter, an increase of 25 $2 million.
At our stores on a same store basis retail fuel gross profit for Q2 was down 5.1% as compared to the prior year period.
This reflects the impact from both decline in gallons sold of two 6% and slightly lower cent per gallon. One point was sent on a same store basis.
Both as compared to the prior year period.
I will note that according to all these data.
Volume is down year over year in each of the region in which we operate.
Second quarter retail cents per gallon on a same store basis was 40.3 cent against 41.4 cents in the prior year period, as we continue to cycle elevated cents per gallon from 'twenty to 'twenty two.
We still believe that structurally higher margin will remain.
Margin the operators, what their cost structure and operating pressures.
One of the main factors of decent assessment.
Looking ahead for Q3, we do not expect retail fuel margin as remarkable as the prior year period.
Q3, 2022 we net that retail center got on a 44.8 said, which was exceptional and we do not believe that margin is reflective of a normal quarter.
Always we continue pursuing our strategy of fuel gross profit optimization.
Turning to M&A following the closing of the clause and fried acquisition in 'twenty 'twenty. Two we closed the T. G acquisition on March 1st 2023.
<unk> added 135 convenience stores and expanded our starter and retail territory into Alabama and Mississippi.
We also added 181 dealer location.
As I mentioned earlier, we are encouraged by early results the pride stores that we recently reset our staff.
Dr.
We believe we will have a similar result at a T G stores.
We recently reset.
W. T G, which we closed on June six 2023.
Added 24 company operated convenience stores and significantly and not as the company's footprint into the attractive Western Texas market.
This is our second closing in 2023.
We expect these two had approximately $14 $9 million of adjusted EBITDA on an annualized basis, including expected synergies.
As part of this acquisition, we added 68 gas card branded split Julien <unk> sites and 43 private called look sites.
One of the largest fleets tooling operation in West Texas.
Approximately 75% of 2022 fueled by volume of diabetic D G called local location where diesel.
In addition, the Duluth D G business issues fuel cards that provide customers with access to a nationwide network of fueling sites.
Our gross fleet fueling segment expects to leverage its leading marketing and operation knowledge. The managed fleet fueling sites in.
And it creates value for our customers.
We see a major opportunity to leverage our expertise of course to improve the operation at our newly acquired called look sites.
This is clearly a complementary acquisition.
And we are pleased with the results so far.
During the second quarter G. P M petroleum upside its credit line by $300 million to $800 million and extended the maturity until may of 'twenty 'twenty eight.
There is $602 million of availability under our line of credit as of June 32023.
In all Arco currently has access to more than $2 billion in available funding for continued M&A activity.
We continue to see tremendous opportunity ahead of us in our acquisition strategy with a deep pipeline of potential opportunities.
We believe our successful track record of making accretive acquisition will continue to enhance value for our stockholders.
Lastly, I.
I like to welcome our new prime location to our footprint.
On June 30th we opened our newest location in South Windsor, Connecticut.
Carries those in the area to come visit.
Dislocation is beautiful.
<unk> 5000 square foot store.
Indoor and outdoor seating to enjoy Chester chicken and our food and beverage program.
The location is equipped with a drive through to offer our guests even more convenient.
There are 40 parking spaces for our customers.
Retail fuel pumps and 10 I.
I flow diesel pumps, along with a truck parking area.
We have additional new units in the pipeline that are in various stages of development and I look forward to adding more into the future.
One last point before I turn the call over to Don.
We continued to make progress on electric vehicle front.
As we are always monitoring the E V transition I will know that there is very limited penetration in our core footprint.
That said.
We assessed the installation on a site by site basis I know you said view on return on capital.
We were among the first to install EV charging capabilities in Wisconsin, and we now have 15 EV charging location with 62 reports across nine states.
I remain excited about the many achievable opportunities in front of us. Thank.
Thank you for your time today and with that I will now turn the call over to Don.
Thank you Ari.
As there are many initiatives continue to gain traction as the company has continued to report excellent results.
Our balance sheet continues to be strong and we currently have a very good liquidity position as.
As of June 32023, we had cash and cash equivalents of approximately $220 million, our outstanding debt, excluding capital leases was approximately $824 million, resulting in net debt of $604 million.
Further we enjoy the benefit of our Oak Street program, which I mentioned earlier on the call.
Additionally, we continue to realize excellent cash flow for the quarter net cash provided by operating activities was $31 million versus $42 $1 million for the second quarter of 2022.
This includes the investment in working capital sorry, with associated with the W. T G acquisition as well as higher net interest and tax payments in the quarter over prior year period.
Getting to the results of our company can't stores.
Merchandise revenue for the second quarter of 2023 increased to $484 $6 million versus $431.8 million in the prior year quarter merchandise margin increased by 150 basis points as compared to the prior year quarter to 31, 9%.
Total capital expenditures were roughly $27 $6 million for the quarter. This is compared to capital expenditures of $24 $5 million in Q2 2022.
Retail fuel profitability, excluding intercompany charges for the second quarter of 2023 increased 11, 4% this quarter to $116 $6 million.
This includes a decrease of $5.2 million and same store fuel profits, excluding intercompany charges more than offset by $19 million in fuel contributions from acquisitions. The company maintained relatively strong retail fuel margin of 43 cents per gallon for the second quarter compared to $41.04.
Per gallon on a same store basis in Q2 2022.
Second quarter convenience store operating expenses increased $29 $5 million or 17, 5% versus the prior year quarter, primarily due to $29 $8 million of expenses related to the recent acquisitions.
Approximately $3 $2 million increased expenses at same stores.
Mainly driven by approximately $4 $2 million or six 5% of higher personnel costs compared to Q2 2022.
The increase in store operating expenses was partially offset by underperforming retail stores that we closed or converted to dealers.
I'd like to pause here and give some color around our labor costs.
We like others in the industry have faced wage inflation.
Our average hourly wage increase the dollar 15 hour in Q2 or approximately 10% of same store basis as compared to the prior year period as we continue to invest in our employees.
We've made a concerted effort to wisely use ours why does it use ours and decrease overtime hours as we continue to sell up and positioned.
Moving to wholesale for the quarter wholesale fuel contribution excluding intercompany charges decreased approximately $2 $5 million compared to the prior year period.
This was primarily due to lower prompt pay discounts related to lower fuel costs and to flat and declining fuel volumes at legacy wholesale sites.
Partially offset by $5 $4 million contributed by our recent acquisitions.
The relatively new fleet.
Fleet fueling business generate fuel revenues of approximately $121 $1 million for the second quarter.
Fuel contribution excluding intercompany charges from the fleet fueling sites was approximately $14 $4 million for the quarter.
Fuel margin cents per gallon, excluding intercompany charges. The proprietary card lock locations was 43.9 cents per gallon.
Net interest and other financial expenses for the second quarter increased by $12 $8 million versus the prior year quarter to $22 million. The majority of this is related to approximately $7 million due to a favorable fair value adjustments in the prior year quarter.
Net income for the quarter was $14 $5 million versus net income of $31.8 million in the prior year period, primarily due to an approximately $15 million increase in depreciation and amortization expenses in connection with recent acquisitions and the favorable fair value adjustments in the prior year.
Sure.
Adjusted EBITDA was $86 $2 million compared to $79 million in the second quarter of 2022.
In the second quarter, the company repurchased 1.487 million 349 shares of our common stock.
For a total of approximately $11 $2 million. There are as of June 32023, approximately 40 $941 million remaining under our previously announced Upsized $200 million stock repurchase program.
Because of our continued strong results and desire to enhance returns for stockholders, we announced on Friday that Arcos Board of directors declared a quarterly dividend of three cents per share of common stock to be paid on September one 2023 to stockholders of record as of August 15th 2023, and with that I'll turn the call back over to Ari.
Thanks Dawn.
Close by saying that we believe 2023 to be another year of strong performance and growth.
I'm very proud of our continued progress as a company.
Now we will take your question.
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 one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press star two if you'd like to remove your question 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 poll for questions.
Our first question comes from Carew Martinsen with Jefferies. Please proceed with your question.
Good morning.
When we look at the same store sales on the merchandise front, how much of that do you feel was pricing versus the traffic that youre getting in.
Good morning, Peru.
Good question. So I think it's a mixed bag I mean, it sounds or opt in part due to inflation.
At the same time.
We also see some units declined about there are some subcategories units grow.
Such as energy drinks ease off that four 7%, while they've really got a 14, 5%.
And the single beer is our optical point you know do you have a 5%. So I think you know.
It's really a mixed bag between inflation and some categories go down and in some categories basically our over here and that's the reason.
You know why we are adding assortment and using category management to add higher margin I can talk makes over here, it's really all about consumer behavior, and we tried to follow consumer behavior to make sure that we keep them they'll be here and yeah, we still struck strategically working really really hard over here.
Sure the consumer two iron margin project.
Especially to our loyalty program, that's really something that we're working really hard to plan a to plan ahead.
And when you look at that footprint.
How much opportunity is there to add kind of those branded food franchise offerings and how did those stores that have them perform relative to the rest of them.
The network.
Sure.
So you know we.
We actually are review each and every store.
Visual basis.
We have today are over a 160 different inside the store.
You know our first thing that we're doing is we're actually transforming some of our current daily and their footprint of course.
To better menu offering.
Such as you know for example, Duncan up you know we had a you know we.
We continue to build dunkin in the Tri City area, we see a great opportunity over there and we continue to build a new one.
Basically and add them to our to our footprint.
I think at the end of the day, we are really really trying to figure out a structure.
Our food and beverage service offering you know based on the consumer behavior.
And and as I said earlier I mean, we have over 150 branded food franchises at the moment.
And you see what happened to sales I mean, it sounds are up 10, 4%.
Quarter over quarter. So it's really we are moving along based on demand again.
<unk> pipeline of opportunities that break that there'll be add that you know we were talking about the beam to cop, a coffee outlet stores by exactly.
Coffee Cups are up 71 point, 35% year over year.
Which is approximately 278.
Thousands more cops up you know we have for this year and other 120 stores that we are going to edge roller grill do you have another 230 stores that we are going through ads B to cup.
You know basically to the offering.
We have a huge runway ahead of us.
Okay and then just lastly, do you ever go third quarter very strong performance is there anything that we should be aware of as we cycle that that quarter are things that we would call out on a comparison basis.
Yeah.
As you know we are not talking about Q.
Tier three ground up provided guidance over here I think the you know the one thing about that that channel is Nicole.
You know with fuel margin last quarter, if you remember fuel margin in a second I'm sorry in third quarter 2022.
I really feel margin, we're just remarkable.
You know given that the the nationality.
The price back in the end of June beginning of July was above $5 a gallon in Denver saw a big drop in a very short order between I recall at the beginning of July to the end of July beginning of logos are.
So I think it goes and no remarkable that basically are a cents per gallon I don't believe you're going to see that in Q3 2023, but as you see even in the Q2 'twenty 'twenty a tree.
We can be very very close to 40 cents per gallon over here. So it's slightly below you know.
What we basically still in Q2.
But you know it's.
At the same time, you know shifting to merchandize you see what happened to merchandize sales.
Our inside sales excluding cigarettes are up tremendously a margin you know quarter after quarter after quarter, we continue to increase margin and I think some of the results from the inside sales and with our initiative I think are going to overcome some of the up and up.
TPG short there's got to be broadly so between you know 2022 to 2023.
Thank you very much guys I appreciate it.
Thank you.
Our next question is from Ben would with BMO capital markets. Please proceed with your question.
Hey, Good morning. This is Ben on behalf of me and Kelly. Thank you for taking our questions and we definitely appreciate all the additional transparency on the acquired growth.
We first wanted to dig in on that now that you've kind of closed all the deals and had at least a couple of them for a quarter or two any changes to the <unk>.
Previously disclosed EBITDA run rate target.
And then in general how is the synergy capture coming relative to expectations and can you just refresh us on where we should expect to see those in the P&L and the timing of the big chunks.
Sure given that they had done was working really hard with our team.
Additional disclosure there'll be here I will let Don answer the question.
Thanks, and Hey, Ben and just know a lot of this was based on discussions with you, especially another analyst how we can get a lot more more transparency.
About what's going on obviously not all of this we are realizing synergies.
On the acquisition, but we're not done yet we still have a lot more to do.
I think one of the things I have already talked about we're not here to talk about the opportunities.
Putting additional items in the stores, but we also have.
You know theres been tremendous upside with pride.
As we talked about we also have not yet fully realized the G&A synergies that we're looking for because a lot of these are so new but you know there are several things we can point to and talking about things that are not yet there for example, putting our loyalty programs.
Into T G putting them into.
Put them into W. T. G. You know theres a lot of open runway, but we've gotten a lot of the synergies just from the from the from the from from what we've gotten from a cost standpoint, but obviously theres a lot more to add.
Okay.
That's great.
And then just switching gears quickly.
On the labor disclosure that you went through that I believe you mentioned, our average hourly wage increase 10% in <unk> can you.
Do you know where does that put you relative to peers and who is your biggest competitor on the labor front just trying to gauge. If this was a catch up or or could get ahead and tried it yet what the risk is if these wages run higher.
Yeah. So Ben that's a great question, it's something we talk about all the time and our competitors are everybody. Its not just our competitors in the industry. It's fast theaters, it's Walmart to everybody because you know anybody paying an hourly wage.
I I think I think the thing a couple of things to point out number one yes, we were up six 5% in Q2, but that's down the cadence is down from Q1, where we were at nine 7% and something else.
It's important to point out is our overtime has decreased a tremendous amount and that goes towards I think the quality of life that we're getting the people in and also getting temp services and things like that so people aren't having to be taxed to those hours. So we we we always do wage surveys. We you know we're not the lowest we're not the highest but we.
We you know we go market by market.
And be competitive and for the employees, we want but we also want to make sure that those employees have a good quality of life.
That's great. Thank you very much.
Yeah.
Our next question comes from Bobby Griffin with Raymond James. Please proceed with your question.
Good morning, everybody. Thanks for taking my questions and congrats on a nice balanced quarter I guess, Don just a follow up on the Opex side of things and the labor like what do you. What do you think that a healthy same store operating expense growth rate is for this industry are what you would target is it is it three or 4% or are we still kind of in.
Where same store are going to have to grow a lot higher than that I'm, just trying to get a better feel for what the core business should grow over time and then we can layer on that the acquisitions as we model them in yes, yes, and Ben Thanks.
This is this is a question we struggled with with all the time, because obviously you know while we had a slowdown of.
Wage growth.
I'm, sorry, I apologize Bobby I don't know.
No worries.
While we while it was mainly driven by $4 $2 million and higher personnel costs. We also had a benefit because credit cards were down okay.
We didn't have those those high rates out there so.
So look we think we have opportunities on on because of our size and because of everything else that that you know and as we consolidate to lower those costs going forward. The biggest unknown is gonna be labor, but again as we look and go forward I think we you know and in my opinion, we've kind of hit that peak and are starting to move downward, but you know there could be.
Economic conditions that could affect that but I think one of the things that as I point to and I think I talked about with Ben just before is is that we have slowed that growth from $9 seven down to into.
The mid sixes and that we have increased the average hourly wage and the other thing I want to point out is that is that we.
We.
Went from a model, where we were trying to do incentives.
And stay on bonuses and and then also.
And trying to put it into the wage so I think that.
The opportunities we have because the cost of turnover is huge and that's something we don't talk about a lot and so our turnover is down and that's going to slow down.
Operating expense growth and we've put a lot of resources at that two two.
To do so so filling opening positions with committed associates is essential in providing excellent customer service and that's what we're really focused on.
Okay I appreciate that and then secondly for me are you I mean, we we've closed here a good bit of acquisitions in the last year. So just recently closed one here in June can you maybe talk about where you're at from the M&A journey and as we sit here today does there need to be a pause for integration or do you still have the bandwidth to be aggressive out there.
From M&A, if there are opportunities.
So if you remember that Bobby I keep saying, it's almost on every call. That's our DNA, that's really the Arco basically our core DNA acquisition. You know we continue to grow through acquisition and I think that's one of the reason why most of the industry.
It's down a little of that are you know quarter after quarter on their EBITDA.
You know, we know that the CPG was a little bit elevated prior year, we continue to basically grow EBITDA given our you know basically acquisition that might go over here.
We just finished a to upsize our credit line by $300 million.
800 million dollar and we extended the maturity to 2028, we have $602 million of availability under our line of credits.
As of June 30 of 2023, we're sitting on a lot of cash we have.
The Oak Street a cat.
Todd.
You know our agreement that we just renewed recently so we have over two.
$2 billion.
And available funding to continue M&A activity, we will continue the M&A activity you know our team was built.
To integrate those locations.
And we're going to continue to do so we're going to continue to do so and you know we you know we're going to go.
You need to add more.
You know more basically labor to it and you know we're going to increase.
Team on the integration side, but there is no reason for us to stop.
And as you know anytime soon.
Okay, and then lastly for me you know I was looking through some of the newly disclosed data about the recent acquisitions and a second everybody else's comments I appreciate that disclosure when you look at pride, the merchandize margins, notably higher than maybe some of the consolidated stores or the consolidated average for the company at 34, 8%. So it was there is there an opportunity there to.
I guess, we're kind of reverse synergies or cross learnings and can you maybe talk about what pride as well to drive that higher merchandise margin and if there is any opportunity to kind of take some of that expertise and put it back into more of the core Arco stores.
Sure sure. So I think that's the one.
The number one thing to remind everybody our sales.
Cigarette sales concentration in the northeast, it's probably a little bit lower than some other areas in the country. So I think the one thing that you're seeing pride.
We added over 1000 different items.
Into that makes over here.
And Andy Marty if you remember, we talked about adding 700 items and tried to we added more than 1000 items through that mix, we added more foodservice or expand more foodservice and being two cup coffee to the mix. So I think the basket than the mix concentration over there.
A little under different are there some other areas in the country and that's the reason the margin, it's a little bit higher and no question, we increased margin by adding doors. That's basically those additional product to the store, but I think there is one thing Bobby that I think I have to mention.
Besides us all of the good things that we're doing and adding product and assortment that making sure that we have the right product. You know we are a loyalty, it's a big piece to it and I keep talking about loyalty I think it's very important to emphasize the basically the sellers excluding cigarettes.
That we try to do basically two point almost quarter over quarter over quarter.
And the reason I said that is because if you're really looking on our sales excluding cigarettes whenever it since Q2 'twenty 'twenty, we are up on average four 6% while at the same time scale.
Basically the cigarette sales on average since Q2 2020 are down three 6%. So what I'm trying to say is that we have a huge huge huge increase in the core category and those core categories by the way are they wanted to driving the margin up.
This is what where we are focusing and that's the reason we keep.
Showing in mentioning that.
You know the cigarettes.
Basically Sal this is James.
Q2, 'twenty 'twenty, we're down from 38, 2% to 29, 6%.
This quarter and that's very important because that's what drives the margin the minute you sell more of the core category, that's what's going to drive the margin and that's basically what you see in pride.
Yes, that's the reason that the margin is higher because the core categories are up tremendously.
Bobby one a quick quick note I mean, there's things that pride that we're already looking at transfer I mean, they have their own bakery, where they have a very extensive you know they they they even make.
Pistachio Muffins, I mean, which I've never seen before in my life and we're already looking at how do we take some of that out to our sites in Connecticut, and expand that that their commentary and their bakery. So theres key learnings, we can take from each of our acquisitions sort of reverse engineer back into our core stores.
Thank you I might have to try one of the muffins, but I appreciate the details done right and best of luck here going forward.
Thank you I appreciate it.
Our next question comes from Anthony bought a deal with Wells Fargo. Please proceed with your question.
Hey, good morning, guys and Echo everyone's comments on the added disclosure so thanks for that.
So not to beat a dead horse on gross margins here, but it does look like this was the highest.
Merch margin quarter, you guys have ever had I definitely seems to speak to some of the stuff you're doing strategically inside the store. So can you just help us parse out some of the biggest contributors to that.
150 bps expansion, we saw in the quarter and then is that 31% to 32% range sort of a good way to think about the run rate for the business in the back half of the year.
Sure. Thank you. Thank you Anthony.
You know I think you know the one thing that we did very well and continues to do very well is as I say, it's finding the right assortment and making sure that we have the right assortment based on consumer behavior. We.
We saw a nice increase in different categories like alternative snacks was up 3.9% Candy, which is you know one of the biggest.
Biggest category for us for a long period of time Kennedy was up 12, 2%.
Perfect that was up five 2% I mean, fac sweet snacks was up seven 3% that I remember all of those core categories. As we call them are really the one that drove the margin up tremendously and continue to drive the margin I mean would you be looking from Q2, 'twenty 'twenty or 2021.
We can see we keep increasing margin substantially.
And again the reason for that it's really those core categories. That's why we keep talking about them.
Wanda driving the margin.
And you know if you're looking on a basically on the gross profit.
Group you know basically.
67%.
And if youre looking on same store sales over here, we are five 6% of those core categories.
Okay. That's helpful. Thank you and then just quickly on M&A, you've now closed.
A handful of deals that were announced at the end of last year, but it does seem like things have quieted down a bit at least in terms of new deal announcements to date, maybe that's just a function of timing, but can you just talk a little bit more about what you're seeing.
In terms of deal flow and valuations has that moderated at all.
And then just any color that you could give us there would be helpful.
Well we are we are.
Close to acquisition just from July to December 2022, and already closed and not just through acquisition as soon as the technically March to June there was a large acquisition I mean, if you're looking on P. G. E. G was 135 company operated stores and over 100.
Dealers are.
I don't see any slowdown.
In the marketplace.
I think that a there is a robust pipeline out there and of course, you know we continue to evaluate and pursue a all of that but again I don't think anything slow down I. Just think that that you know everybody got used to probably our core reporting for acquisition a year ago.
Two already but.
As I said, we are we have tremendous amounts of opportunities that are ahead of us when it comes to acquisition.
And the pipeline excellent I can assure that makes so much sorry.
Of course, thank you Anthony.
Our next question comes from Mark Astrachan with Stifel. Please proceed with your question.
Yeah, Thanks, and good morning, everybody.
Just following up on the last couple of lines of questions. There M&A wise maybe.
Maybe remind us about strategy on build versus buy as you just to start please.
Sure.
So as I mentioned earlier, the M&A strategy didn't really change doesn't change I mean, we are basically evaluating each and every opportunity.
They come along.
You know given the footprint and given the size of our company.
We are always always always committed a.
Driving long term shareholder value, which means that if there are opportunities to deploy capital gain.
Industry stores like the one that we just that failed.
In Connecticut.
The first store that we open six months after seven months. After we actually we took this opportunity.
So that's that's one thing that we're doing we continue to evaluate not only new to industry stores. We also continue to evaluate race to raze and rebuild which you know we did a couple already.
And again.
Every time, there is an opportunity.
Basically reviewing it based on return on capital and we can we can deploy our capital.
Ti and a raise and rebuild and in acquisition. There is no particular older I mean, we can basically.
Do it all.
At the same time.
One thing I want to mention Mark because you know I I forgot to talk about that is the function of remodel.
You know as everybody remember cost.
The remodeled stores was up tremendously since the beginning of Covid and what we decided to do is the function remodel which is for example, instead of waiting to remodel a store you know we had been to cup coffee to our stores.
You know we had the we had the grab and go all cooler as we added the freezer right we.
We are adding.
Locations with franchise food.
You know we're eating pizza, we are adding key can roller grill. So we don't stop and wait we just do all of those things that drive margin.
And this is what the customer is looking for right now and we're making sure that we keep the pace with customer it basically.
Hey, Matt.
Yeah.
Got it great and then.
Remind us.
If gas prices, increasing a little bit here how to think about.
The conversion of our shoppers coming into the store any impact there.
And somewhat related to that where are we.
Today in terms of just conversion not necessarily relating to higher gas prices just in general conversion of folks who are buying gas that are coming in to shop, and how does that evolve.
Stores were.
I guess just to put sort of high level investments have been made to hit your other points with varying degrees of investments in store. Thank you.
Sure sure. It's a good question. So you know what we believe as we continue to expand our offering inside the stores like foodservice loyalty you know loyalty is a very big component, we believe that making sure that we have the right offering inside the stores.
May drive the fuel customers you know in the past, we were talking about customers coming to the stores.
Well, what we see right now it's actually the tremendous offering.
We have inside our box.
We believe actually reflect on the fuel customers outside then you would basically so I think we saw it in Q2 in this Q.
You know the gallons were down only two 6% and if youre looking on the past two quarters, we really really decreased up basically the local talent and look what happened to our inside sales.
No.
That's I think you know.
I think that that's the driver will be here, making sure you have the right offering will drive the customers outside and what's around making sure with our loyalty basically program. There is a lot of offerings in our loyalty dot if you buy something inside the stores that you would actually provide you up to 2025.
Outside for fuel and I think that that's something that is helping us tremendously over here.
Got it and then just.
Just lastly on your reminder, about it.
Hmm.
<unk> sales impact higher gas price please.
Hey, guys can you ask the question again, I'm, sorry, I didn't hear.
Yes, just wanted to get the answer to your question about how to think about the inside stores with rising gas prices historically, how has that impacted it.
But that's by definition every time you have that.
Our gas prices outside the store.
It's always impact sales, but I don't think it's tremendous it's like dramatically like we actually sold last year.
Yes prices are above $3.
Areas are basically very close before but not.
Similar to what we saw we received last year and again.
We are focusing on delivering the right value inside the stores, that's our focus and I think that's very very potent.
Got it okay. Thank you.
Thank you Mark.
Our next question is from Alex Arnold with Odeon Capital. Please proceed with your question.
Hey, guys I guess I just wanted to twist. The M&A question, a little differently in an environment, where access to capital is drying up and you guys have great access to capital do you do you see a scenario where your advantage or is pricing changing in the market at all.
It's a good question that we didn't see any slowdown in terms of participants.
Compared to what we saw in the past I mean, I'm, assuming that you know some a competitor.
Maybe having a little bit of a hard time with <unk>.
Excess to capital, but you know so far I don't see anything to change.
In the marketplace so far.
Plenty of people with basically capital availability to do those acquisition again I think when it comes to the larger acquisition.
I just think this is probably an area that we have some kind of advantage per system others. Both on the small acquisition I think the.
They're the same.
And basically our competitor our scale there.
So how about if you look at the seller dynamic where you know you had some through some portion of the owners out there that are going into a refi at a much higher rate environment.
Are there any for selling our more impetus to sell.
Not that we are aware of not that we are aware of and again this is not something that.
I think what we see over here is smaller player.
<unk> actually continued to to be challenge, we see operational challenges that you know we you know we always see.
That's the reason I kept talking about the <unk>.
Margin fuel margin. That's the reason why your margin is up because all of the small operators are basically challenge.
They don't have the same offering that we show over here. They don't have the gross profit dollars inside the stores that we are continuing to show over a year and I think about because they are a challenge I think that's really what drive them to refinance I think operational challenges versus the <unk>.
Interest rate.
That's all from me Thanks, a lot.
Thank you.
We've reached the end of the question and answer session I would now like to turn the call back over to Ari Cutler for closing comments.
Thank you everybody for your participation. This morning, we'd like to wish you guys, a safe and enjoyable summer.
This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.