ARKO's Positive Q3 Driven by Three Key Pillars of Marketing & In-Store Initiatives

Allocating square footage and loyalty promotions for core categories is an essential strategy.
Danielle Romano
Managing Editor
Danielle Romano profile picture
Logos for Arko Corp and GPM Investments

RICHMOND, Va. — ARKO Corp. President, Chairman and CEO Arie Kotler attributes the success of the company's fiscal third quarter to multiple initiatives, a favorable product assortment, and loyalty and marketing programs that are resonating with customers.

For the quarter, same-store merchandise sales, excluding cigarettes, increased 4.3 percent when compared to the third quarter of 2021. The uptick was driven primarily by strong in-store sales of frozen foods, center-store items including sweet and salty snacks, alcohol and other tobacco products. The categories drove merchandise margin to increase an all-time high of 60 basis points, and total merchandise contribution to increase approximately 4.3 percent to $138.9 million when compared to the same quarter of 2021.

During the company's most recent earnings call, Kotler highlighted the three key pillars of ARKO's marketing and store initiatives that have contributed to strong in-store performance. They are:

1. Carefully managing core destination categories, including packaged beverages, candy, snacks and nicotine.

ARKO invests in the assortment square footage allocated from merchandising and loyalty promotions for these categories.

Additionally, on the heels of a successful rollout of open-air coolers and freezers, frozen food same-store sales increased 60 percent during the third quarter of 2022 vs. the third quarter of 2021.

"The goal is to be the go-to convenience store in our geographic footprint and increase our market share of these in-demand categories," he said.

2. Drive increased frequency and total spend through order-and-delivery, and relevant in-store and in-app personalized deals via the fas REWARDS program.

According to data tracking, when customers enroll in the fas REWARDS program, which has 1.2 million members, ARKO sees incremental month-over-month growth in basket size.

Tying ARKO's bean-to-cup coffee program into the fas REWARDS loyalty program, Kotler reported that for the quarter, the number of enrolled loyalty customers who made their first recorded coffee purchase jumped 55.6 percent, and unique customer coffee purchases by enrolled members increased 57.1 percent, while their net total coffee spend rose approximately 51 percent.

ARKO is currently testing a new loyalty app before a chainwide rollout.

"The new app we launched has a strong enrollment offer to encourage new customers to sign up for great savings," the chief executive said. "We know that when our customers enroll, we have an opportunity to increase their trip frequency and total spend."

3. Develop high-margin food programs.

ARKO is continuing to expand its pizza offering through Sbarro. During the quarter, the company opened five Sbarro pizza restaurants in remodeled deli areas. Year to date, 13 Sbarro locations have opened, with plans for an additional five locations during the fourth quarter.

Additionally, ARKO has 377 stores with roller grills for hotdogs and tornados; 199 stores that sell pizza by the slice; and 146 stores that offer fried chicken and hot breakfast sandwiches.

"We believe a strong food offering and value proposition can position us to compete even more in food service," Kotler noted.

Other Q3 2022 Financials

Overall, for the third quarter, ARKO reported net income of $25 million compared to $35.6 million in the third quarter in 2021. Adjusted EBITDA increased 24.1 percent to $99.5 million vs. $80.2 million for the same period of 2021.

Total fuel gross profit grew 21.5 percent, or $20.8 million, to $117.5 million and same-store fuel profit increased to $17.8 million year over year. Fuel margins increased 29.9 percent from the comparable quarter in 2021 to 44.8 cents per gallon during the most recent quarter.

Operating expenses were up $20.1 million, or 12.9 percent, vs. the prior year due to incremental expenses related to the Handy Mart acquisition ARKO closed in November 2021, and an increase in expenses at the same-store level, including an increase of $10.3 million, or 17.4 percent, in personnel costs, and $2.8 million, or 13.9 percent increase, in credit card fees.

"The increase in store operating expenses was partially offset by underperforming retail stores that we closed or converted to independent dealers," noted ARKO Chief Financial Officer Don Bassell.

A Robust Acquisition Pipeline

ARKO continued to execute its systematic growth strategy intended to create long-term shareholder value with two acquisitions announced since the end of the second quarter.

In September, GPM Investments LLC, a wholly owned subsidiary of ARKO, reached an agreement to acquire approximately 150 c-stores from Transit Energy Group (TEG). The agreement also includes fuel supply rights to approximately 200 dealers, commercial, government and industrial customers, as well as TEG's bulk storage, distribution and transportation assets, all in the southeastern United States.

The move expands GPM's footprint to Alabama and Mississippi.

A month later, GPM struck a $230 million deal, plus the value of inventory, for Springfield, Mass.-based Pride Convenience Holdings LLC, operator of 31 c-stores in New England. The acquisition will expand ARKO's footprint into Massachusetts, making it the 34th state in which the company will operate.

During the quarter, GPM also closed on its acquisition of Quarles Petroleum Inc. The deal included 121 proprietary Quarles-branded cardlock sites, 63 third-party cardlock sites for fleet fueling operations and 46 independent dealer locations.

"The company's scale and resources allow us to pursue multiple opportunities at one. This is an advantage that we believe enable us to deliver great results for our stockholders," Kotler said. "Investments in well-established chains with brand equity and longstanding ties to their communities are key to our model and performance. … The overall deal pipeline today has many potential acquisitions. We expect to continue executing our acquisition strategy."

Since 2013, Richmond-based ARKO has grown its convenience store footprint from approximately 200 stores in seven states into one of the largest convenience store operators in the U.S., with approximately 1,380 company-operated stores in 33 states and the District of Columbia during the course of 21 acquisitions.

About the Author

Danielle Romano
Danielle Romano is Managing Editor of Convenience Store News. Read More