Q1 2024 Arko Corp Earnings Call
Mhm.
[music].
Uh huh.
[music].
Speaker Change: Thank you good afternoon, and welcome to Arco's first quarter 2024 earnings conference call and webcast.
Arie Kotler: On today's call are already Kotler, Chairman, President and Chief Executive Officer, Rob <unk>, Executive Vice President and Chief Financial Officer.
Arie Kotler: 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 <unk> website at Www Dot Arco Corp Dotcom.
Arie Kotler: During our call today, unless otherwise stated management will compare results to the same period in 2023.
Arie Kotler: Before we begin please note that all first quarter 'twenty 'twenty four 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.
Arie Kotler: Please review the forward looking and cautionary statement section at the end of our first quarter 'twenty 'twenty four earnings release for various factors that could cause actual results to differ materially from forward looking statements made during the call today.
Arie Kotler: Any forward looking statements made during this call reflect our current views with respect to future events and Arco is under no obligation to update or revise forward looking statements made on this call.
Arie Kotler: Whether as a result of new information future events or otherwise.
Arie Kotler: On this call management will share operating results on both a GAAP and on a non-GAAP basis.
Arie Kotler: 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.
Arie Kotler: 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.
Arie Kotler: 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 G. P. M. P and now I would like to turn the call over to Ari.
Arie Kotler: Yeah.
Ari: Thank you Jordan and thank you all for joining us this afternoon.
Ari: We performed as we expected during the first quarter and remain focused on managing our controllable challenging macro environment.
Ari: What performance trends that we shared in February improved modestly throughout March we continued to see as he turns consumer adjusting to persisting inflationary pressure.
Arie Kotler: 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.
Arie Kotler: We believe that the operation on an announcement that we are implementing will not only help to.
Arie Kotler: The guide does reduce microeconomic environment, but will also lay the foundation for the multiyear transformation plan, we are developing to accelerate.
Arie Kotler: Our organic growth.
Arie Kotler: Turning to the first quarter 2024 at the format, we generated $36 $6 million and adjusted EBITDA.
Arie Kotler: 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 four 6% on a two year stock excluding cigarettes.
Arie Kotler: Additionally, our ongoing efforts to enhance the assortment mix drove significant merchandise margin rate expansion, which offset the decline in same store American banks out delivering the market merchandise contribution growth over the prior year period.
Arie Kotler: We also made progress on all three of our merchandising pillars.
Arie Kotler: Growth of our fast rewards loyalty program acceleration on our core destination merchandising categories and expansion of our food offering.
Arie Kotler: We expect these efforts to drive traffic to our stores and to improve profitability.
Arie Kotler: But these pillars will remain central to our merchandising strategy I would like to utilize more time on this call to focus on the larger structural changes we are initiating.
Arie Kotler: We have been an aggressive acquirer over the last 10 years closing on 26th acquisition to build scale.
Arie Kotler: We bolstered our core REIT that a segment if additional line of complementary businesses in the form of ourselves and fleet fueling segment.
Arie Kotler: Since going public in 2020 through March 31, 2024, we have added on a net basis 200 tend to beat those doors to 119 or set aside and 296 called local location.
Arie Kotler: Additionally over the last three years, we converted more than 40 retail stores. So all of a sudden network.
Arie Kotler: Coming off the experienced rapid acquisition driven expansion. It is now time to aggressively focus on accelerating organic growth.
Arie Kotler: We intend to execute the next stage in our strategy by refining our value proposition into one that's more clearly resonates with our customers while leveraging our unique multi segment operating model.
Arie Kotler: I would now like to give some color on how we're developing multiyear transformation plan, we referenced on our last conference call, which will be fully shared during our Investor day later this year with more detail provided in between.
Arie Kotler: Earlier this year, we kicked off here or at least eight minutes 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 sub segments of our retail stores.
Arie Kotler: We expect that this investment will support our efforts to grow share in expanding market.
Arie Kotler: Maintain our competitive positioning in more stable markets.
Arie Kotler: 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.
Arie Kotler: We will leverage what we learn about our customers to alpine and non stop customer value proposition.
Arie Kotler: Along with the design and operations of our stores.
Arie Kotler: If we can focus on foodservice.
Arie Kotler: The pilots will focus on five to seven stores weekend, one of our region with the goal of a region wide rollout before ultimately and expansion.
Arie Kotler: First our retail footprint.
Arie Kotler: The end result will be selectively and methodically make meaningful investment in our store base to drive traffic and improve profitability.
Arie Kotler: Finishing up on capital allocation, we are advancing the construction of the three new stores that we mentioned on our last conference call.
Arie Kotler: We expect MTI will become increasingly important as we work to navigate competitive dynamics.
Arie Kotler: Concurrently we are focused on both our pricing and procurement strategies are of course, our retail stores to support the ongoing merchandize margin rate growth.
Arie Kotler: We believe there are opportunities to optimize pricing to drive topline growth and we are evaluating dawn pricing capability to match pricing strategies to meet 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.
Arie Kotler: Together, we've been more aggressive and focused capital investments and strategic subsegment of our stores. We believe we are creating a more competitive retail network.
Arie Kotler: We also plan to more fully leverage our unique business model.
Arie Kotler: Typically our wholesale segment, which has matured nicely since our Empire acquisition in 2020.
Arie Kotler: As we review our portfolio of stores, we have indentified, a meaningful number of locations that we believe will deliver more profitability as dealer side within our oldest daughter Stagger man then by continuing to operate as a retail site.
Arie Kotler: Converting these stores to dealer sites like Cal offers the.
Arie Kotler: Attunity is to significantly reduce operating expenses and corporate G&A.
Arie Kotler: This more aggressive approach to dealer site conversion is currently underway and we expect to provide updates on a quarterly basis moving forward.
Arie Kotler: Before I hand off to Rob I want to address the installment payment for acquisition of <unk>.
Rob: T. G. I said that closed in March of 2023 as I believe there was confusion around the registration of shares and the subsequent repurchase.
Arie Kotler: Full details can be found in our public filings.
Rob: The Bottomline is we satisfy the $15 million of deferred purchase price originally provided for in the purchase agreement for a total of $36 5 million.
Arie Kotler: To elaborate in accord integrated the purchase agreement on February 12, 2024, we're required to notify the TG seller why don't we would pay the first $25 million installment payment in shares or in cash.
Arie Kotler: Our closing share price that day, it was $8.36 and we elected to pay in shares to create additional liquidity in the stock while preserving cash for strategic investment.
Arie Kotler: On March 1st we issued $3 4 million shares to T. G at the price per share of $7.31.
Arie Kotler: It was based on a 10 day, we walked calculation in accordance with the Formula in our purchase agreement.
Arie Kotler: However, we continued to experience a decline in our stock price over the following week.
Arie Kotler: Given our confidence in our business as well as the long term opportunity before us.
Arie Kotler: We repurchased these shares on March 26 for $5.66 per share or a payment of approximately $19 $3 million.
Arie Kotler: I'm currently.
Arie Kotler: It's an agreement with the T G seller to satisfy the second $25 million installment payments originally due in March 2025 fire at U S price of $17 $2 million.
Arie Kotler: I'm happy to take questions. After our prepared remarks, Andy of Das remains unclear, but we believe we were able to capitalize on an opportunity to deliver value to our stockholders.
Arie Kotler: With that note we continue to believe our share price does not fully reflect the underlying body off our business.
Arie Kotler: During the quarter, we repurchased four 8 million shares for a total of $28 $3 million.
Arie Kotler: Under our existing 100 million dollar stock repurchase program.
Arie Kotler: I am pleased to announce that our board has approved an expansion of our repurchase program to allow us to repurchase of up to $125 million of our common stock.
Arie Kotler: I'd like to finish by thanking the team here for all of their hard work.
Arie Kotler: Now I'll turn the call over to Rob.
Rob: <unk> financial results for the first quarter and touch upon our thinking on the second quarter and full year 2024.
Rob: Thank you Lori and good.
Rob: Good afternoon, everyone.
Rob: Jumping right into first quarter 2024 results.
Rob: As already 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.
Rob: 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.
Rob: At the segment level, our retail segment contributed approximately $33 8 million in operating income compared to $41 6 million in the year ago period.
Rob: Adjusted operating income for the quarter was $46 5 million compared to $54 1 million a year ago period.
Rob: Total retail merchandise sales and merchandise contribution were up approximately three 6% and nine 7% respectively.
Rob: With merchandise contribution you're benefiting from significant rate expansion of 180 basis points.
Rob: Retail segment fuel gallons and fuel contribution were up two 6% and five 5% respectively to the year ago period.
Rob: Increases in merchandise sales and fuel gallons were driven by acquisitions that closed in 2023.
Rob: Which contributed $3 4 million in retail segment adjusted operating income for the quarter.
Rob: Same store merchandise sales, excluding cigarettes were down 3% versus the year ago period, while total same store merchandise sales were down four 1%.
Rob: 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.
Rob: Same store fuel contribution was down approximately $2 8 million for the quarter with a decline in gallons, partially offset by stronger year on year fuel margin per gallon.
Rob: Same store fuel gallon demand was down six 7% for the quarter compared to national Opus, which was down five 9%.
Rob: Fuel margin of 37 C. P. G was up 1.3, CPG from the year ago period, and improved sequentially throughout the quarter, reaching $38 one CPG for the month of March.
Rob: Same store operating expenses were up three 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.
Speaker Change: Moving on to our wholesale segment.
Speaker Change: Operating income was $7 million for the quarter compared to $7 6 million in the prior year period.
Speaker Change: Adjusted operating income was $18 3 million for the quarter versus $18 6 million in the year ago period with total gallons up one 7% driven by acquisitions.
Speaker Change: Gallon growth was partially offset by lower fuel margin per gallon of 9.2 C. P. G, which was down 0.4 as TPG from the year ago period.
Rob: For our fleet segment operating income was $8 million for the quarter compared to $8 4 million in the prior year period.
Rob: 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 W. T G acquisition.
Rob: Gallon growth was offset by fuel margin performance, which while healthy at 38 C. P. G faced the challenging comparison to prior year performance of 42 point for CPG, where we had significantly elevated diesel margins.
Rob: Total company general and administrative expenses for the quarter was $42 2 million versus 44 million in the year ago period with a year on year increase primarily related to acquisitions that closed in 2023, along with consulting support for the development of our multi year transformation plan.
Rob: Net interest and other financial expenses for the quarter were $2 5 million compared to $13 6 million in the year ago period.
Rob: The significant year on year reduction was driven by the lower valuation of warrants related to the current Arco share price along with the retirement of our remaining T. G purchase obligation on the favorable terms that are referenced earlier.
Rob: Yeah.
Rob: Net loss for the quarter was 0.6 million compared to $2 5 million for the year ago period.
Rob: Please reference our press release for a detailed reconciliation from total company net loss to adjusted EBITDA.
Rob: 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.
Rob: Our 140 million ABL remains completely undrawn as we manage working capital needs from operating cash flow.
Rob: We maintained 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.
Rob: Of this total liquidity of approximately $425 million is attached to our capital one line, which is reserved for M&A activity.
Rob: Together with our outstanding Oak Street commitment of almost $1 5 billion, we remain comfortable that our balance sheet is more than adequate flexibility to support both ongoing organic growth initiatives and M&A.
Rob: Including investment capital total capital expenditures for the quarter were $29 2 million.
Rob: Turning to forward guidance for our second quarter, we expect total company adjusted EBITDA to be in a range of $70 million to $77 million.
Rob: 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.
Rob: As referenced in our most recent earnings call our full year earnings outlook corresponds to an average retail fuel margin of 36 C. P. G. On the lower end and 40 C. P. G on the higher end of our guidance range for the year to go period.
Rob: With that I'll hand, it back to Ari for closing remarks.
Ari: 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.
Ari: Over the past decade, our focus has been acquisitive as we add scale 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.
Ari: We are committed to further driving shareholder value by improving the organic growth and profitability of our business and.
Ari: And we look forward to sharing our strategic transformation plan during our Investor Day later this year.
Rob: That we will open it up to questions.
Speaker Change: Thank you at this time, if you would like to ask a question. Please press the star and one on your telephone keypad you may remove yourself from the queue at any time by pressing star to once again that is star one to ask a question, we'll pause for a moment to allow questions to queue.
Speaker Change: Our first question comes from Bobby Griffin with Raymond James.
Robert Kenneth Griffin: Good afternoon, everyone. Thanks for taking my questions.
Robert Kenneth Griffin: Alright, I first want to talk a little bit about the merchandise comps of negative 3% extra cigarettes can you talk a little bit about what you're seeing from your customer I know, there's a lot of moving parts right now in the economy, but if some of the weakness here trade down among items, you know smaller basket sizing anything.
Speaker Change: There that you're seeing kind of across different geographies to help us kind of gather kind of what's going on from the core customer.
Speaker Change: Sure.
Speaker Change: I'll, let operates a little bit and then I'll, let Rob maybe jump in but you.
Speaker Change: You know I think everybody has seen since the Q4.
Speaker Change: Going all the way to Q1, even though Q1 is probably the lowest Q.
Speaker Change: You know, we see the micro economic challenge, we see D inflation pressure, especially in markets that we do business and I was involved with low income.
Speaker Change: So yes people are trending down.
Speaker Change: Fueled by the way doesn't help us as well and you know the increase basically in price of fuel. That's another actually I think that actually impact that their purchasing habits.
Speaker Change: So I think people are spending less money.
Speaker Change: And I think that's one of the reason that we actually emphasize over here.
Speaker Change: If youre looking on a two year stack, our two year stack, it's actually four 6% excluding cigarettes. The reason I keep talking about excluding cigarettes.
Speaker Change: Because the minutes, we are selling the I call. It the high margin items and as you can see over here, we were able to actually to finish the quarter.
Speaker Change: With a basically a minus 3% excluding cigarettes, but we were able to increase margin on a same store basis by 150 basis points. I mean, we basically were able to increase margin company wide by 180 basis points from 30.7 last quarter to $32 five.
Speaker Change: Five.
Speaker Change: And as you can see over here you know the decrease in sales, we were able to basically compensate for that and selling I marginal items. So I think people are smoking less but I think we have the value proposition and you know all of the initiatives that marketing.
Speaker Change: Z shrink over here, especially the 499 pizza that we just launched in January.
Speaker Change: So you have that that's basically bring more people in the door in terms of increasing basically salaries of high margin items.
Speaker Change: And you know that's the reason I keep saying this industry is very resilient I mean, we see right now softness across.
Speaker Change: Across the retail industry.
Speaker Change: But again I think this is something that that Ben you know every few years and we just need to you know to basically to.
Speaker Change: You know to actually to walk through the challenge and make sure that we continue to bring valuable promotions.
Speaker Change: Our customers and I can tell you that this is the one thing that our team.
Speaker Change: Gently working especially now going into a 100 days of summer I mean, the amount of valuable promotion that we have already right now for 100 days of summer I don't think I ever saw anything like this in my career.
Speaker Change: Yes, Bobby I would just add on I didn't see anything significant between the categories I think its a transaction issue where transactions are down. So I think it's more of a macro issue that we're seeing versus assortment.
Speaker Change: Okay, and then I mean are we talked last time, maybe just kind of how are you guys thinking about it as it plays out for the year just trying to maintain the stacks I mean I was kind of the last conversation we had about some of these aspects or anything you can share about April and early may trends.
Speaker Change: Yeah, I think look April looked a lot like Q1 is it started off the first couple of weeks and then we saw it start to inflect a little bit in turn turn more positive in the second half. So I think that we're seeing some acceleration off of what the trend was weaker in Q1, but again it was kind of a thing.
Speaker Change: Two months with weaker in the first half and then a little bit stronger in the back half. So we're still watching it closely as.
Speaker Change: As you might imagine the next 30 days, we're going to be in the peak selling season, we'll know a lot more at that point, but at this point, we feel okay with how we got the rest of the year positioned.
Speaker Change: Alright, that's helpful. And then lastly, Rob just trying to unpack the guidance a little bit I, obviously haven't had the time to flow. It all through the model you can come up with the numbers, but like is there something offsetting some of the fuel margin because the EBITDA came in at least below our model for <unk> and in the retail side a cents per gallon is is in line with kind of what we're speaking some things.
Rob: Maybe there's is there more pressures inside opex or is there. Some you know any other offsets that are worth calling out as we kind of clean up the two key numbers for ourselves.
Rob: Yeah look what I shared Bobby for the full year at the last call. We said that the Q2 through Q4 gallons would be down 5% rate, we based that on the fiscal 'twenty three results that longer term trend.
Speaker Change: Our year to go period, where youre basing on that debt flat two year stack.
Speaker Change: We are putting to <unk> point, a lot more promotional activity behind the pizza program to drive sampling and we believe that's going to have a meaningful impact in the second and third quarter.
Speaker Change: Did share that for the year, we expect the retail CPG midpoint to be down one CPG from 2023, and we are modeling increased merch margin rate. The rest of the way Q2 through Q4, albeit at a slightly lower rate than what we saw in the first quarter. So not a lot has changed from what we talked about in the first in the first.
Speaker Change: The fourth quarter call back in February so maybe it will chat offline on some of the other the other questions.
Speaker Change: Yeah, I guess I guess, just what's the any major change in Opex environment, I guess I always get worse.
Speaker Change: We're modeling Opex in total company G&A up low single digits for the year.
Speaker Change: And that's the same as you talked about okay. Perfect. That's helpful and I was just trying to unpack those things I. Appreciate the details are best of luck here I'm in the second quarter.
Speaker Change: Thanks, Bobby.
Speaker Change: Our next question comes from Anthony Bond idea.
Anthony Bonadio: With Wells Fargo.
Anthony Bonadio: Yeah, Hey, guys, so sort of piggybacking on Bobby's question on guidance I wanted to dig in on the gas margin guidance a little bit can you just talk about maybe what you're seeing so far in the quarter.
Anthony Bonadio: It's getting you to that Q2, 37% to 40 cent per gallon or Inge.
Anthony Bonadio: And then given that's a little more constructive of late just like looking at industry data.
Anthony Bonadio: I guess why is that 36 to 40 is still the right number for the year just any updated thoughts on how youre thinking about margin dynamics would be helpful.
Speaker Change: Yeah look I think if I, if I could predict.
Speaker Change: I could predict that I'd be in a different place, but I think look we were coming up against last year, which saw significant acceleration in the second and third quarter, specifically, we were up against a 40% to 41 CPG in the second and third quarter. So we do expect and we are modeling things to expand from where we were in the first quarter, we've seen some encouraging things recently with.
Anthony Bonadio: With rack to retail, where we think it's a higher higher level supported in the first quarter, but we're expecting it to be as I mentioned, one sent down the midpoint being one sent down to last year and you can look over last year ran around 43, 41, 2% and $39 five in the second third and fourth quarter. So that's kind of how we're looking at things.
Anthony Bonadio: Okay and by the way I'm Tony.
Speaker Change: I think the one thing to remember is our strategy our strategy basically didn't change we were able to capture an extra 1.3 cent per gallon on a same store going from.
Tony: 35.7 to 37 cents per gallon comp.
Tony: Companywide $36 four versus the 35.4, so we were able to capture an extra penny over here companywide, a while you know basically trending very very close to towards the basically to the opus national average over here.
Tony: So we're going to continue to try and capture margin continued to be very competitive of course.
Speaker Change: Okay got it that's helpful. And then I just wanted to ask about inside margins a little more it looks like Q1 was a new record on inside margins keeps.
Tony: Can you just maybe dig in a little bit on some of the underlying drivers there.
Tony: Then how youre thinking about the ability to sustain that expansion as we model the rest of the year.
Tony: We're not providing details as you know are about you know exactly how we thought the market I think the most important thing to say is that with cigarette decline.
Tony: As I mentioned, you know, it's basically continuation of core categories I kept talking about the 499 pizza, which is a very very valuable item and we're basically selling high margin item more than cigarettes.
Tony: And I think that's what would drive the margin over here and I remember I know, we kept talking about foodservice concentration. We just started we just started pizza or just the with just the beginning you know we are getting ready to launch the nation there Nathan hotdog.
Tony: And to our stores, we were able to add 105.
Tony: Bakery items, two additional stores so as long as we continue to add more and more marginal items and that's what we're doing and that's what we're focused over here, that's what's going to drive basically the margin up.
Tony: And then just to be clear, we don't expect that level of accretion in the fourth quarter as we're not modeling that at least but we're continuing to drive to always point to drive the foodservice penetration, which we think has significant opportunity for us versus where we think the industry is.
Speaker Change: Understood. Thanks, guys.
Speaker Change: Thank you. Thank you.
Speaker Change: Our next question comes from Ben Wood with BMO capital markets.
Benjamin Wood: Hey, Thank you for taking our questions here I wanted to follow up a little bit on the inside of the store trends, but specifically with the pizza rollout from last quarter any color you can share at this point is any sales lift youre seeing incremental labor or shrink.
Speaker Change: I will start there.
Speaker Change: We don't see any incremental labor at the moment, we just like I said, we launched the pizza in January.
Speaker Change: Our third week of January we launched the beta just before that the football.
Speaker Change: We're very happy with the we basically with the results so far.
Speaker Change: This pizza program grown to become a <unk>.
Speaker Change: Strong category since we launch it.
Speaker Change: It's a great offer to our customers and like I said, we're going to use this are basically the pizza program, we're going to use for.
Speaker Change: 100 days of summer.
Speaker Change: And just to elaborate I mean, we're talking about very high value promotion for example, when you buy <unk>.
Speaker Change: <unk> Pepsi.
Speaker Change: Two packs, a 12 pack of Pepsi Youre going to get basically a free pizza and all of those promotions are being supported by the CPG company that are supporting us over here.
Speaker Change: So the idea is really to drive and drive and drive and drive more pizza cells.
Speaker Change: With all of the high margin item that we see.
Speaker Change: Across that and I believe that the more inflationary pressure, we see over here I believe that's going to become a very big sell for us moving forward.
Speaker Change: Okay.
Speaker Change: And then so.
Speaker Change: In gears, a little bit can you just walk us through the thought process behind converting some of your retail sites and dealer side can you just a little bit more depth.
Speaker Change: Any color on the magnitude I know I know you said it was meaningful but are there specific markets or or banners you can share at this point.
Speaker Change: And then just trying to get a sense for.
Speaker Change: Maybe what the spread is between the performance at some of your retail sites, but what were some of the benchmarks you guys used to address which.
Speaker Change: Each sites.
Speaker Change: You know you would convert versus what you thought you would you would retain in the fleet.
Speaker Change: Sure sure sure first of all I, just maybe high level just to basically mentioned that you know this is not something new that we actually did this is something we used to doing the past as I mentioned earlier, we converted in the past the less performing stores in some geographies that are less attractive for us while we don't have scale.
Speaker Change: So this is something that was done in the past I think what they.
Speaker Change: The goal and this is something I mentioned on the last call. The goal is really to drive organic grow and invest in our best stores and concentrate on the best stores in our fleet.
Speaker Change: So as part of our transformation plan.
Speaker Change: We basically I or a consulting firm a very rapid double consulting firm to help US you know we've been dealing with working with them over the past few years a few months.
Speaker Change: And over the past few months the idea is really for them to challenge us to challenge our fleet.
Speaker Change: To learn a little bit more about the markets that we have.
Speaker Change: We are stronger in some markets and maybe we carry a little bit into some other markets. So we don't have the scale in some markets. So the idea really is to take some of the stores and we identified some of them some of the stores that are <unk>.
Speaker Change: Sickly performing less than the other.
Speaker Change: We are not sure that there is a lot of upside in some of those stores to invest money because I don't believe that the return on capital is going to be there and.
Speaker Change: And given that we have the <unk> platform over here and that's provided US an advantage. So they remember we have 800 customers every one of those customers become potential dealer. The idea is really to go ahead and deal or is some of those stores as we did in the past.
Speaker Change: We're going to be able to basically reduce operating expenses because of that we're going to be able to reduce G&A because of that.
Speaker Change: And at the end of the day, we just going to make more money in our riding dam as also location versus retail location remember, we're going to still keep the basically the food the fuel volume because the stores. It's still arent. There are control, we're going to keep the fuel volume, you're just going to be a long term arrangement with some of those.
Speaker Change: And what would it be actually keeping to scale over here.
Speaker Change: We didn't determine the amount of stores at the moment, but what we are planning on doing on a quarterly basis, we're going to update you guys on how many stores. We decided to dealer is then what's basically the impact because of that.
Speaker Change: Thank you I appreciate all the color.
Speaker Change: Of course, thank you Beth.
Speaker Change: Our next question comes from Carew Martinson.
Karru Martinson: With Jefferies.
Karru Martinson: Good afternoon.
Karru Martinson: When you talked about optimizing pricing to drive topline zone pricing.
Karru Martinson: What's the impact that you are looking for both on the top margin and also on the gross margin line.
Karru Martinson: Yes. Thanks for the question, we're not sharing that level of detail today, that's going to be more as we get into the investor day, but certainly you can understand there's a lot of folks who do this matching customer segments and the pricing and the various stores. So the work that's been done that I was talking about it has a lot of detailed customer market research done in terms of what type of customer how does it.
Karru Martinson: Match with our with our brand promise our brand delivery in China understand again, where we can be perhaps more aggressive on pricing, where we need to.
Karru Martinson: At the end of the lesson and understand a lower a lower segment customers. So it's going to be it's something we think is a significant opportunity fleet wide and we think it is going to make more sense to resonate with our customers, especially the more cost sensitive ones, who are being impacted in the inflationary environment. So more to come as we get to Investor day, and that's going to be one of the one of the items, we're gonna be diving into.
Speaker Change: Okay, but that is built into the guidance that you have for the year correct.
Speaker Change: No.
Speaker Change: Something that capability. So it was already mentioned the transformation there is quite a bit of capabilities that would be one of the capabilities part of the transformation program.
Speaker Change: Okay.
Speaker Change: And then just on the share buyback authorization, just just so unclear it looks like you had about.
Speaker Change: Left on the author was the original 100 million. So is the 125 million.
Speaker Change: A brand new program or is it the $25 million expansion from the original $100 million.
Speaker Change: It's a $25 million expansion.
Speaker Change: Thank you very much I appreciate it thank you very much guys.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Hale Holden.
Hale Holden: With Barclays.
Hale Holden: Afternoon, I had two questions. The first one is what do you.
Hale Holden: So if retail sourced to deal our eyes them and maintain the wholesale relationship.
Hale Holden: Does that result in a cash inflow to the company or is there just simply a reduction in G&A expense.
Hale Holden: It's both I mean first of all your increased profitability I mean, when you do when you do something like that.
Hale Holden: You know you're able to increase profitability because you don't have you don't carry the operating expense you don't carry the G&A.
Hale Holden: So it's basically will increase profitability and an increase of course at the cash flow will be here and in many times are maybe key money attached to it also so it's a favorable across the board.
Speaker Change: Alright, so that's kind.
Hale Holden: What I was asking there there can be like a key payment back to you.
Speaker Change: Sure sure sure at the end of that.
Speaker Change: Just to be clear.
Speaker Change: I know the vast majority of that is we're not selling the business I mean, we still basically either collecting rent.
Speaker Change: Or basically are in some cases by the way we may add a consignment arrangement that we actually going to split.
Hale Holden: Basically some of the profit twenty-three related to fuel.
Hale Holden: Okay.
Speaker Change: And my second question was.
Speaker Change: Yeah.
Speaker Change: You know as you guys think about.
Speaker Change: This small trial that you are doing for them.
Speaker Change: The new store format, that's going to grow.
Speaker Change: Is the expectation that you found that our operating cash flow or would we see you potentially increased borrowing to accelerate it.
Speaker Change: I think we have plenty of liquidity right now you're probably going to see us.
Speaker Change: Using our operating cash flow for that I mean, that's that's the deal.
Speaker Change: Okay, great. Thank you very much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Mark Astrachan Stifel.
Mark Stiefel Astrachan: Yes, Thanks afternoon guys.
Mark Stiefel Astrachan: Wanted to just ask a bit more on the in store sales, how youre seeing traffic.
Mark Stiefel Astrachan: Versus ticket and any sort of changes there and what potentially is driving a little bit of the softness that's the first question.
Speaker Change: Yeah. So mark we're seeing as I mentioned earlier transactions are down and again, that's been offset a little bit by average ticket on the upside but transactions have been the driving force on the downside.
Mark Stiefel Astrachan: Is that materially different over the last I guess in the last two quarters versus maybe prior three or four quarters order of magnitude.
Mark Stiefel Astrachan: Youre going to have to forgive me for that one for being new in terms of we just put some of the analytics in place. So all of that could be something we could follow up on for you.
Mark Stiefel Astrachan: Okay.
Speaker Change: And then maybe just too.
Mark Stiefel Astrachan: Bigger picture question.
Mark Stiefel Astrachan: If you could remind us just on how the foodservice sales so the prepared stuff in store.
Mark Stiefel Astrachan: Tends to risk.
Mark Stiefel Astrachan: Respond any tougher Mac.
Mark Stiefel Astrachan: Macro environment, where the consumers, maybe squeezing a little bit more out of their dollars.
Speaker Change: Well I think that's the reason.
Mark Stiefel Astrachan: We are basically offering value over here I mean, that's the reason we are concentrating on pizza. That's the reason we are concentrating on hotdogs Thats. The reason we are concentrating on our bakery.
Mark Stiefel Astrachan: Bakery items, we're really trying to provide chicken forget of course, the famous chicken, we really trying to provide value to our customers bundle to our customers I mean thats. The reason I mentioned for example, the.
Mark Stiefel Astrachan: Today for example, if you go to our stores.
Mark Stiefel Astrachan: You can pick up a two liter.
Mark Stiefel Astrachan: Pepsi, where fat pizza for $5.99 I mean, this is a great value for our customers and I think that's really what we have to drive over here because people are looking for basically for those.
Mark Stiefel Astrachan: Opportunities people are actually coming to our stores because of that but remember we have the loyalty members.
Mark Stiefel Astrachan: Over 2 million members that getting everyday those basically those valuable promotion.
Mark Stiefel Astrachan: This is will drive those people into our stores and we keep saying that we didn't talk about that but we keep saying that if you're looking on that just in this quarter. You know, we basically so that the the average enrolled royalty transaction sides were.
Mark Stiefel Astrachan: 34% greater than did not enrolled members and I think those promotions basically whats driving them into our stores.
Speaker Change: Got it and just lastly.
Speaker Change: Within your markets I mean, maybe focus on just the markets where you are more concentrated.
Speaker Change: How do you think you fared versus some of your competitors from a fuel gallon consumption standpoint.
Speaker Change: I ask it in part.
Speaker Change: Wondering whether youre seeing a bit of shift away from from.
Speaker Change: Retailers, which are.
Speaker Change: A little bit more value from a gas standpoint does that constrict the number of folks to go into the stores at those.
Speaker Change: Locations may be or are part of bigger retailers is there a bit of a share shift too.
Speaker Change: Towards grocery and kind of.
Speaker Change: More traditional means of grocery shopping compared to prepared foods and anything you can offer there would be helpful.
Speaker Change: So and I'll give you a high level answer on that Okay. I think that in many many markets that we operate are actually rural areas.
Speaker Change: Where we are the the fact that we are the actually the grocer.
Speaker Change: So there is no question that people are looking for better pricing. There is no question about it but that's the reason I ask.
Speaker Change: As I mentioned earlier.
Speaker Change: <unk> National average was five 9% down and we were minus 6.7 and are very close to August. The Golan is we're just not there.
Speaker Change: And the idea is and we actually see the other way around that we believe that the more people coming into our stores to get those valuable promotion.
Speaker Change: There is a good chance that actually you're going to go outside we are trying to tie by the way the food sales the inside sellers to great promotion I mean for example, we are working with our CPG company that every time you buy a product inside the store you get some sense of gallons over there.
Speaker Change: So I just think that.
Speaker Change: You know that some of the larger operator.
Speaker Change: Again without mentioning any name.
Speaker Change: They're trying to basically mitigate the decline by very aggressive pricing, but I can just tell you that the very aggressive pricing.
Speaker Change: Going to sacrifice their fuel contribution dollars and this is significantly by the way.
Speaker Change: And we just don't see any reason to do that because we see what basically that the demand is not there and when the demand is not there just to lower prices and make less money you know mark that was never our model since you know us.
Speaker Change: Got it that's helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: We have no further questions in the queue at this time I would now like to turn the call back over to today's presenters for any additional or closing remarks.
Speaker Change: Thank you very much operator, and thank you.
Speaker Change: All of you guys for joining the call.
Speaker Change: By the way Great question really great questions today.
Speaker Change: Given that it's after five o'clock.
Speaker Change: We are trying to do over here, we're trying to give as much insight as we can into our performance.
Speaker Change: To help investors understand our a compelling growth story over here I can tell you that we have.
Speaker Change: A big plan ahead of US we have a lot of initiative add of us. During this year, we are adding towards the 100 day of summer.
Speaker Change: Which is basically our best season, and we're looking forward to talk to you guys again in the next quarter.
Speaker Change: Have a great afternoon everybody.
Speaker Change: This does conclude today's program. Thank you for your participation you may disconnect at any time.
Speaker Change: [music].
Speaker Change: Uh huh.
Speaker Change: Hum.
Speaker Change: Hum.
Speaker Change: [music].
Speaker Change: Hum.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Hmm.
Speaker Change: [music].
Speaker Change: Hum.
Speaker Change:
Speaker Change: Hum.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: [music].
Speaker Change: Uh-huh.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: [music].