The Five Elements of Murphy USA's Strategy
NEW YORK — Murphy USA Inc. has been busy since it was spun off from Murphy Oil Corp. in August 2013. And the retailer will be anything but idle in the coming years.
Speaking at the Raymond James 37th Annual Institutional Investors Conference in New York on Tuesday morning, Andrew Clyde, president and CEO of El Dorado, Ark.-based Murphy USA — which has 1,135 sites, the majority located in close proximity to Walmart Supercenters in 23 states across the South and Midwest — explained that the retailer's strategy for winning in today's very competitive market has five elements:
1. Organic growth vs. acquisitions;
2. Diversifying merchandise mix from a strong tobacco base;
3. Cost leadership position;
4. Capabilities to create advantage from volatility of the fuel business; and
5. Investing for the long term.
"When you take that strategy together, we have a business model that has been resilient to and takes advantage of the underlying fuel price volatility," Clyde said.
Regarding organic growth, Murphy USA's strategy also now encompasses its recently announced independent growth plan — which combines modest unit-level growth and shareholder-friendly distributions. Under the plan, Murphy USA will be pursuing locations in front of supercenters, purchasing from third parties as it has done in the past, but not acquiring more land from Walmart, the CEO detailed.
"This is a really simple business at the end of the day, so we like to think about our value-creation formula in real simple terms as well. How do we grow earnings and earnings per share?" Clyde said. "First, it's about growth. It's about organic growth at the unit level and, with this independent growth plan, selecting sites that are going to be in the highest-return markets."
At the same time, Murphy USA continues to make "meaningful upgrades" to its network, which is adding to its per-site comp.
According to Clyde, Murphy USA's core business is made up of its fuel contribution, fuel breakeven requirement and other corporate costs. From the fuel contribution standpoint, in a flat to declining demand environment, growth is largely about growing share through new units. The advantage the retailer has is in its cost of goods acquired through proprietary supply chain, and it captures margin through volatility, he reported.
Murphy USA's fuel breakeven is a function of its merchandise gross-margin growth and cost leadership, he added.
GROWING & REINVESTING
Unit growth will continue long-term in the form of the company's Express-branded stores. Murphy Express stores are not on sites acquired from Walmart and are not tied into the credit card and gift card programs.
Overall, in 2015, Murphy USA built 73 stores, plus one raze-and-rebuild. It has 58 stores left to build from the "up to 200 new stores" agreed upon in a deal with Walmart in 2012.
"The balance of our growth this year, and the majority of your future growth, is going to be Express stores where we acquire locations from third parties, but they are still in proximity to supercenters, which is this great demand aggregator, traffic generation for these price-sensitive customers," Clyde told investors at Tuesday's conference.
Aside from new builds, the retailer has been, and will continue to, reinvest in its network. Starting in 1997, most of Murphy USA's stores were built on four-tenths of an acre, with four pumps and a 112-square-foot kiosk. "...Our new [kiosk] stores are 200-square-foot kiosks with coolers in front, and most of our stores now are 1,200 square feet. There's a great opportunity to do raze-and-rebuilds on the older stores," Clyde noted, pointing out the company executed its first last year.
Initial raze-and-rebuild candidates will have higher traffic, better-than-average fuel margins, great potential for merchandise uplift, and the company can increase its fuel volume with more diesel dispensers and a better fuel mix.
Murphy USA has identified 135 sites for raze-and-rebuild, roughly 10 percent of its portfolio. The company will do 10 stores this year and move to 20 stores a year starting in 2017, according to Clyde.
The retailer has also been conducting a refresh program at the same time Walmart upgraded its supercenters, but the past year has seen a ramp-up in this initiative.
When it became a standalone company, Murphy USA realized it had "underinvested in its network and it was starting to show, especially with the higher than average industry throughput of our locations," the chief executive acknowledged.
To get out in front of this, the company in 2015 launched a refresh program targeting 300 stores — which it will continue for the next two to three years.
"It updates the look and the feel. It makes it a better look and feel for the customer and we've been able to demonstrate 1-percent uplift in store fuel volumes as well as our merchandise sales," Clyde said. "And because of some of the improvements, we will have lower maintenance costs over a 10-year period."
Other reinvestment programs include: installing LED lighting; adding super coolers; and the rollout of a new security system networkwide.
"This is a business where you have to continually invest and many of the old legacy sites you see out there, their owners have taken a more invest-and-forget approach. If you want to stay vital in this business, you have to continue to invest," Clyde said.
Concluding that Murphy USA "has not been standing still; we've been very active since the spin," Clyde also used Tuesday's investor presentation to highlight the company's new five-year supply contract with Core-Mark Holding Co., negotiated in 2015, and the installation of super coolers in front of its older kiosks, which double the capacity of beverages and add higher-margin products to the mix.