ARKO Outlines Transformation Plans
RICHMOND, Va. — ARKO Corp. is working on a new transformation plan that will accelerate the company's previously announced organic growth strategy.
Earlier this year, Chairman, President and CEO Arie Kotler said ARKO's focus will be to further push, refine and improve performance across its existing network as its unlocks the value of its retail segment.
Fast forward to the Richmond-based retailer's first-quarter 2024 earnings call, held May 7, and Kotler reported that ARKO has kicked off a holistic performance review of the business to evaluate the significant opportunity it believes exists within the retail store network. The company is in the process of developing a plan with a more aggressive and targeted allocation of capital toward strategic subsegments of its retail stores.
"We expect that this investment will support our efforts to grow share in expanding markets and maintain our competitive positioning in more stable markets," the chief executive said.
In partnership with a national consulting firm, ARKO will develop and execute a pilot program to improve its customer experience and value proposition, with plans to expand the refined offering across the company's larger store network.
Additionally, the retailer aims to fully leverage its multisegment operating model through more active conversion of retail stores to dealer sites within its wholesale segment to improve profitability.
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According to Kotler, the company has converted more than 40 retail stores to its wholesale network over the past three years. The conversion of the c-store sites is due to ARKO's belief that these locations "will deliver more profitability as dealer sites" and provides the opportunity to "significantly reduce" the sites' operating expenses and corporate general and administrative expenses.
"Over the past decade, our focus has been acquisitive as we have scaled to become one of the leaders in the convenience store industry. We now believe it is the right time to leverage our unique multisegment operating model to unlock the embedded value more fully within our retail store network," Kotler said.
ARKO, the parent company of GPM Investments LLC, has closed on 26 acquisitions over the past 10 years.
On the Retail Front
As consumers continue to face inflationary pressures, ARKO is aggressively positioning itself to navigate these near-term headwinds as the company continues to believe in the longer-term opportunities offered by the resilience of the c-store industry, Kotler emphasized.
Merchandise margin grew approximately 180 basis points to 32.5%, supported by key marketing and merchandising initiatives. They are:
1. Growing sales in core destination categories. The company's core destinations include packaged beverages, candy, salty snacks, packaged sweet snacks, alternative snacks and beer.
2. Using the fas REWARDS loyalty program to develop and strengthen the relationship with customers. ARKO is gearing up for the launch of its annual "100 Days of Summer" promotion, which is available to fas REWARDS members across its footprint.
3. Expanding its packaged and fresh food offering. In addition to the recent launch of a new pizza program in which fas REWARDS loyalty members can purchase a premium, 12-inch pizza fresh or frozen for $4.99, the convenience retailer is gearing up for the relaunch of its hot dog and roller grill program anchored by Nathan's Famous as its new supplier. Additionally, the retailer brought bakery items to an additional 105 stores.
As a result of these efforts, same-store merchandise sales, excluding cigarettes, decreased 3% and overall same-store merchandise sales decreased 4.1% for the first quarter of 2024 vs. the first quarter of 2023.
Merchandise gross profit contribution for Q1 increased $12 million, or 9.7%, driven by $11.3 million in incremental merchandise contribution from the businesses acquired in 2023 and an increase in merchandise contribution on a same-store basis of approximately $900,000.
Other Q1 2024 Financials
Overall, for the quarter ended March 31, ARKO reported:
- Net loss was $600,000 vs. $2.5 million for the year-ago period.
- Adjusted EBITDA for the quarter was down to $36.6 million, with the variance driven by lower fuel contribution, regulatory statewide elimination of Virginia gaming income and increases in same-store operating expenses.
- Merchandise revenue increased 3.6% to $414.7 million.
- Operating expenses increased $22.5 million, or 12.8%, primarily due to $18.5 million of incremental expenses related to acquisitions closed in 2023.
- Retail fuel contribution increased 5.5% to $92.9 million, with margin increasing to 36.4 cents per gallon from 35.4 cents.
- Same-store retail fuel gallons sold decreased 6.7% compared to a decrease in national OPIS average same-station fuel gallon volume of approximately 5.9%.
"Our first-quarter results reflect our ongoing efforts to navigate the current macroeconomic environment, while aggressively positioning ARKO for future organic growth and improved profitability," Kotler said. "Over the past decade, we have gained significant scale through acquisitions and believe there is meaningful value embedded within our network of retail stores. We have a strong balance sheet and substantial available liquidity, which we plan to use to selectively and methodically increase our investments in our retail store base to drive traffic and improve profitability."
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Richmond-based ARKO operates in four reportable segments: retail, which includes convenience stores selling merchandise and fuel products to retail customers; wholesale, which supplies fuel to independent dealers and consignment agents; fleet fueling, which includes the operation of proprietary and third-party cardlock locations, and issuance of proprietary fuel cards that provide customers access to a nationwide network of fueling sites; and GPM Petroleum, which sells and supplies fuel to its retail and wholesale sites and charges a fixed fee, primarily to its fleet fueling sites.
ARKO owns 100% of GPM Investments LLC.