Couche-Tard Takes Three-Step Approach to Growth

LAVAL, Quebec — Despite the headwinds faced by the overall retail industry, Alimentation Couche-Tard Inc. continues to build on its reputation with a three-pronged approach to success, according to President and CEO Brian Hannasch.

Speaking during the company's third-quarter earnings call for its 2017 fiscal year, Hannasch pointed to Couche-Tard's expertise in acquiring and integrating companies it can develop, organic growth, and its ability to control expenses as the retailer's formula for winning. 

"We will continue to focus on these three success factors. I am proud of the work the teams have been doing throughout the network, all working with one goal in mind which is to make Couche-Tard and the Circle K brand the world's preferred destination for convenience and fuel," he said.

Couche-Tard's reported net earnings for the third quarter of fiscal 2017 were approximately $303 million, compared to $301 million for the third quarter of fiscal 2016 — an increase of 0.7 percent. These numbers exclude certain items for both comparable periods, according to Hannasch.

"This performance was driven by our acquisitions, continued organic growth, and solid expense control, as well as by the impact of a lower income tax rate for the quarter," he explained. "The performance was offset by lower fuel margins, primarily in the U.S. but also in parts of Europe as we saw persistent increased product costs through the quarter, while increases in retail prices lagged."

According to the chief executive, it is hard to paint the latest quarter with a broad brush.

"The quarter was not the same picture month to month. And we saw January, like we've seen some of our other competitors, be the weak point in the quarter and in some areas surprised us with the weakness," he said.

Breaking out the company's three core geographies, Hannasch cited several key points:

• Canada: Traffic was relatively weak compared to the United States and Europe, with Canada being the only market with negative traffic growth and negative traffic.
• Europe: Traffic and baskets remain positive. Excluding Ireland, gross profit percentage grew in the quarter when compared to the prior year.
• United States: Traffic was positive in each month of the quarter, with January being a weaker month for certain regions. West Coast stores were affected by an unusually wet period and the change in the legal age to buy tobacco products in California.
   

INITIATIVES UPDATE

Despite some softness in the industry, Couche-Tard is making headway on its ongoing initiatives like the rollout of the global Circle K brand and an increased focus on foodservice.

Since announcing it was going to bring its global holdings under a new Circle K banner in September 2015, the retailer has rebranded nearly 2,000 convenience stores. To date, the efforts have hit 910 stores in Scandinavia and are "delivering strong results," Hannasch explained, pointing to Denmark as an example of the results.

In Denmark, the new Circle K brand not only replaced the Statoil brand, but the Shell brand as well. "Market traffic is actually up 4 percent in the quarter and again that's taking down a 100-year-old Shell brand and a very well-known Statoil brand, so we're very pleased particularly with Scandinavia, and we'll start the rest of Europe kicking off as always next month," the CEO stated. 

Moving to its U.S. efforts, Couche-Tard has completed the rebranding of 1,000 c-stores out of a goal of 1,900. "We are behind," he acknowledged, citing permitting and weather delays, and issues with fully ramping up a new supply chain contract in the Southeast.

"We expect to close a majority of that gap before the end of the fiscal year, finishing about 1,700 of the planned 1,900 locations in the U.S," Hannasch said. "And then we'll continue obviously as we enter our new fiscal year with another 2,500 or so locations planned for the coming year."

Couche-Tard also continues to progress on the foodservice side. The retailer now has 1,229 sites offering its prepared fresh foods program through a pact with a third-party commissary. "This year, our goal is to roll out 202 [sites]; to date, we rolled out 156, so I think we're in good shape to meet our target there," he said.

In addition, the retailer has placed its Simply Great Coffee program in all of its European stores and has decided to shift the program's rollout to Ireland, where a recent visit showed encouraging results at the roughly 20 sites that now feature the beverage offering. 

"We will focus on finishing Ireland. And then in the U.S., we had a plan this year of 505 locations and through the third quarter, we've rolled 409," Hannasch reported.

Couche-Tard's Made To Go kitchen concept is now available in 10 sites, open primarily in Texas, Arizona and the North Carolina markets; and its refreshed bakery concept — Bakery 2.0 — is available in all of the retailer's sites in Europe.

"In the U.S., we have a plan this year of 580 locations with fresh pastries. We've completed 140. We have a very large install with a third-party provider that we used in Arizona and have brought to the East Coast. So, we expect to meet our goal of 580 additional sites with fresh bakery here in the U.S. by the end of the year," explained Hannasch.

M&A OPPORTUNITIES

With the closing and integration of 278 Esso locations in Canada finished, and the progress Couche-Tard has made in its integration of The Pantry Inc. in the U.S. and Topaz Energy Group Ltd. in Ireland, the retailer is now preparing to close on its $4.4-billion acquisition of CST Brands Inc. and its purchase of 53 Cracker Barrel convenience stores in Louisiana. Both deals are expected to be completed early in Couche-Tard's 2018 fiscal year.

However, the retailer may not be done on the merger-and-acquisition front. Without commenting on specifics, Hannasch said the company's structure and discipline around integration positions it to conduct additional deals — depending on location.

"The way we structure our business units in our shared service center, which include IT and accounting, we are able to take on 1,000 different geographies concurrently without significant risk on that side," he explained. "I'd say one, the capability is there. Two, I think North America is still a very attractive market for us to develop, in that we like the consumer, we like the environment here."

That being said, Couche-Tard is likewise keeping an eye on potential deals in Europe and "while it's not a priority today, if the right opportunity were to rise in Asia, we'd love to have a platform very similar to Statoil to participate in Asia on an equity basis," the CEO added.

As of Jan. 29, Laval-based Couche-Tard's network consisted of 8,081 convenience stores throughout North America, including 6,710 stores with road transportation fuel dispensing. Its North American network is comprised of 15 business units, including 11 in the United States covering 41 states and four in Canada covering all 10 provinces.

In Europe, Couche-Tard operates a broad retail network across Scandinavia, Ireland, Poland, the Baltic states, and Russia through 10 business units. As of Jan. 29, Couche-Tard's network in Europe consisted of 2,766 stores, the majority of which offer road transportation fuel and convenience products, while the others are unmanned automated fuel sites that only offer road transportation fuel.

In addition, under licensing agreements, close to 1,700 stores are operated under the Circle K banner in 13 other countries and territories worldwide.