RICHMOND, Va. — ARKO Corp.'s robust in-store performance for the first quarter of 2023 is attributable to the convenience store chain's execution of strategies to grow its core convenience store business through value propositions, customer service and a merchandising mix that is resonating with customers and creating sales growth, Arie Kotler, chairman, president and CEO, said during the company's latest earnings call this month.
First quarter same-store merchandise sales, excluding cigarettes, grew 7.6 percent, while same-store sales increased by 3.8 percent. The increase in same-store sales was driven by continued strong performance in high-margin destination categories. Some highlights of these destination categories included packaged beverages (up 9.6 percent), candy (up 18.3 percent) and beer (up 6.2 percent).
Merchandise gross profit contribution grew by $8.1 million for the quarter, or 7.7 percent, on a same-store basis when compared to the same period last year. Merchandise margin increased 120 basis points to 30.7 percent for the quarter vs. 29.5 percent year over year.
"We believe that these results show that our numerous marketing and merchandising initiatives are working, resonating with customers and driving sales growth," Kotler said.
Other earnings the Richmond-based company reported included:
Adjusted EBITDA was $47.5 million for Q1 2023 vs. $50.1 million in Q1 2022, a decline of 5.2 percent.
Operating income for the quarter was $9 million vs. $19.3 million year over year.
Wholesale fuel contribution decreased by approximately $1.8 million for the quarter.
Operating expenses increased $18.9 million, or 12.1 percent, primarily due to $15.9 million of expenses related to the Pride Convenience Holdings LLC and Transit Energy Group acquisitions and an increase in expenses at same stores, including $6.0 million, or 9.7 percent, year over year, of higher personnel costs.
Supporting Long-Term Growth
As part of its long-term growth strategy, on May 2, ARKO's subsidiary GPM Investments LLC entered into a third amendment to the program agreement with affiliates of Oak Street, a division of Blue Owl Capital. The amendment extends the term of the agreement and provides for an aggregate up to $1.5 billion of capacity from the date the amendment was signed through Sept. 30, 2024.
Additionally, ARKO subsidiary GPM Petroleum LP renewed and extended its revolving credit facility with a syndicate of banks led by Capital One, National Association. The credit line was increased by $300 million to $800 million, and its maturity was extended to May 2028.
In aggregate, ARKO currently has more than $2 billion in available capital for continued merger and acquisition activity, including cash, lines of credit and the extended Oak Street program agreement.
The M&A Pipeline
During the quarter, ARKO closed its 23rd acquisition since 2013. The $370 million deal for Transit Energy Group added approximately 135 c-stores to its network and expanded ARKO's footprint to Alabama and Mississippi. The deal also included 192 dealer locations and a transportation business that supports the retail and wholesale business.
Looking toward the second quarter of 2023, ARKO expects to close on its acquisition of WTG Fuels Holdings LLC, which was announced during the last quarter of 2022. The deal would add 24 company-operated Uncle's c-stores across western Texas.
The transaction would also include WTG's GASCARD-branded fleet fueling network, including 66 proprietary fleet fueling cardlock sites strategically located in large industrial areas in west Texas and southeast New Mexico, and 43 private cardlock sites.
Kotler briefly addressed ARKO's proposal to acquire TravelCenters of America Inc. (TA), noting the company's intentions were consistent with its track record and strategy that has been very successful and "has made ARKO an acquirer of choice, transparency and open negotiation."
"We believe our proposal, had we been given an opportunity to perform customer diligence, would have provided the immediate cash value to TA stockholders at significant premium to the next best offer with no financing contingencies. And for the record, neither our proposal to TA nor any other previous acquisitions have ever had financing contingencies," he noted.
"Our repeated attempts to engage with TA's management and board were met with firm resistance resulting in a more public conversation through press releases and filings rather than productive discussions. We believe a wider group of investors now fully appreciate how rapidly ARKO can move to create the right conditions for a deal," Kotler continued.
The executive said that given ARKO's liquidity, the company will continue to evaluate deals, concentrating on return on capital consistent with its traditional disciplined approach.
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.