Lower Fuel Margins Suppress Couche-Tard Q3 Net Earnings

LAVAL, Quebec -- Despite a drop of 5.33 cents per gallon in U.S. motor fuel margins, which deprived its net earnings of $37.0 million, Alimentation Couche-Tard's third quarter's net earnings decreased by $16.3 million, the company said yesterday.

Couche-Tard's net earnings for its third quarter of fiscal 2010 were $54.8 million, down 22.9 percent. During the comparable period last fiscal year, motor fuel gross margins in the U.S. were relatively high, whereas this year's margins are in the low average of expectations based on historical margins, according to the convenience store chain.

This decrease was partially offset by increased same-store merchandise sales in the U.S. and Canada from the contribution of stores acquired, and a lower income tax rate.

"Overall, third quarter's results are satisfying considering the motor fuel gross margin recorded in our U.S. markets. Despite a drop in U.S. motor fuel margins compared to the same period last fiscal year, we considerably improved our performance," stated Alain Bouchard, president and chief executive officer. "On an annual basis, margin is in line with our expectations based on historical margins, which average 13 to 15 cents per gallon. It is therefore important to remember that it is advisable to analyze this component on a longer period. As a matter of fact, since the beginning of fiscal 2010, the average margin in the United States is 14.54 cents per gallon."

Raymond Pare, Couche-Tard's vice president and chief financial officer, indicated: "It is even so extraordinary to see that we increased our earnings per share for the first three quarters despite the fact that our results were deprived of $85.0 million after income taxes because of lower fuel margins. We are evolving in a difficult economic situation but we continued to deliver solid sales and profitability indicators. As a matter of fact, we have decreased operating expenses under our control for a fourth quarter in a row, which is quite satisfying. Must we add that historically, motor fuel margin represents only 20 percent to 25 percent of total gross margin. The largest part of our earnings comes from merchandise and service sales, which are less volatile."

During the third quarter of fiscal 2010, Couche-Tard along with Shell Oil Products US created a joint venture, RDK Ventures LLC, to operate 100 convenience stores in the greater Chicago metro area, including 69 company-operated stores and 31 stores operated by third parties. All of the company-operated stores will be operated by Couche-Tard's Midwest Division under the Circle K banner, while Shell-branded products will continue to be marketed and sold. The stores held by Shell were transferred over to the joint venture through a combination of purchased and contributed fee and leased sites.

Also during the quarter, Couche-Tard acquired another three stores through three distinct transactions, and on Jan. 12, signed an agreement with Accel Marketing LLC to acquire eight stores in central North Carolina. The Accel transaction is anticipated to close in April and is subject to standard regulatory approvals and closing conditions.

Other highlights of the third quarter included:

-- Revenues amounted to $4.9 billion, up $1.0 billion, an increase of 26.2 percent compared to the third quarter of fiscal 2009. The increase is chiefly the result of a $632.0 million rise in motor fuel revenues resulting from a higher average retail price; the positive impact of $154.0 million from a stronger Canadian dollar; and a $112.0 million increase generated by acquisitions as well as the growth of same-store merchandise revenues in the U.S. and Canada, and same-store motor fuel volume in Canada.

-- The growth of merchandise and service revenues for the third quarter of fiscal 2010 was $162.6 million, an increase of 10.5 percent compared to the same period of the previous fiscal year, of which $33.0 million was generated by acquisitions and $78.0 million by the appreciation of the Canadian dollar against its U.S. counterpart.

-- Same-store merchandise revenues rose 3.0 percent in the U.S., attributable to the increase in tobacco retail prices following the increases in taxes on these products. As for the Canadian market, the increase in same-store merchandise revenues was 4.9 percent.

-- Motor fuel revenues increased by $860.9 million, or 36.5 percent, in the third quarter of fiscal 2010. The higher average retail price at the pump in the United Stated and Canada created a rise in revenues of $632.0 million.

-- Acquisitions contributed 27.0 million additional gallons in the third quarter of fiscal 2010, or $78.0 million in revenues, in addition to the increase in revenues of $76.0 million generated by the appreciation of the Canadian dollar against its U.S. counterpart. As for the same-store motor fuel volume, it dropped slightly by 0.2 percent in the United States and increased by 1.4 percent in Canada.

-- The consolidated merchandise and service gross margin remained stable at 33.0 percent. The U.S. gross margin was 32.9 percent, slightly higher than the 32.8 percent recorded in the previous fiscal year. In Canada, the margin fell to 33.1 percent, a 0.6-percent decrease due to a less profitable product mix, which put downward pressure on the percent margin while remaining positive in absolute amount given the increase in terms of units sold.

-- Couche-Tard said in both the United States and Canada, revenues and gross margin reflect that its merchandising strategy is in tune with market competitiveness and economic conditions within each market, improved supply terms as well as its revenue mix.

-- The motor fuel gross margin for Couche-Tard's company-operated stores in the United States decreased significantly by 5.33 cents per gallon, from 18.21 cents per gallon last year to 12.88 cents per gallon this quarter. It should be noted that last year's gross margin was rather high. In Canada, the margin rose, reaching Cdn 5.16 cents per liter compared to Cdn 4.38 cents per liter in the third quarter of fiscal 2009.

-- Operating, selling, administrative and general expenses increased 7.9 percent compared with last fiscal year. These expenses increased 2.8 percent due to acquisitions, while they increased 4.5 percent and 1.8 percent, respectively, because of the appreciation of the Canadian dollar and the increase in electronic payment modes expenses. Excluding these items, expenses decreased 1.2 percent. Moreover, excluding expenses related to electronic payment modes for both comparable periods, expenses in proportion to merchandise and service sales represented 31.3 percent of sales this fiscal year compared to 32.6 percent last fiscal year.

First Three Quarter of Fiscal 2010
As for the first three quarters of fiscal 2010, revenues dropped by $351.0 million, a decrease of 2.7 percent compared to the first three quarters of fiscal 2009. The decline is mainly the result of a $1.4 billion decrease in motor fuel revenues resulting from a lower average retail price. This factor was partially offset by a $734.0 million increase in revenues generated by acquisitions; a $21.0 million positive impact of the stronger Canadian dollar; as well as by the growth of same-store merchandise revenues and motor fuel volume in both the United States and Canada, the retailer stated.

Merchandise and service revenues in the first three quarters rose $322.7 million, a 7.7-percent increase compared to the same period last fiscal year, for reasons similar to those of the third quarter, including an increase in same-store merchandise revenues of 2.7 percent in the United States and 4.2 percent in Canada.

Motor fuel revenues decreased $673.7 million, or 7.8 percent, for the first three quarters of fiscal 2010. Lower average retail prices led to a $1.4 billion drop in motor fuel revenues, while acquisitions contributed 205.0 million additional gallons, or $546.0 million in revenues, in addition to the $14.0 million increase in revenues from the appreciation of the Canadian dollar against its U.S. counterpart. As for the growth in same-store motor fuel volume, it was 1.5 percent in the U.S. and 2.0 percent in Canada.

The consolidated merchandise and service gross margin was 33.1 percent for the first three quarters. More specifically, it was 32.8 percent in the United States, an increase of 0.3 percent, and 33.9 percent in Canada, a decrease of 0.6 percent. In Canada, as indicated by Couche-Tard's in its first quarterly report, the gross margin this fiscal year compares to a margin that benefited from non-recurring amounts in the first quarter of fiscal 2009 related to obligations toward dealers in the Western Canada division, as well as from retroactive adjustments to certain suppliers rebates.

As for the 40-week period ended Jan. 31, the motor fuel gross margin for Couche-Tard's company-operated stores in the United States decreased 5.0 cents per gallon, from 19.54 cents per gallon last fiscal year to 14.54 cents per gallon this fiscal year, a drop of 25.6 percent. In Canada, the margin rose, reaching Cdn 5.44 cents per liter compared with Cdn 4.76 cents per liter for the comparable period of fiscal 2009.

The average motor fuel margin since the beginning of fiscal 2010 is in line with Couche-Tard's expectations based on historical margins, according to the company.

Operating, selling, administrative and general expenses with respect to the first three quarters of 2010 increased by 2.2 percent compared with the comparable period of the previous fiscal year. These expenses increased 5.6 percent due to acquisitions and 0.3 percent due to the appreciation of the Canadian dollar, while they decreased 0.9 percent due to the drop in electronic payment modes expenses. Excluding these items, expenses decreased 2.8 percent. Moreover, excluding expenses related to electronic payment modes for both comparable periods, expenses in proportion to merchandise and service sales represented 29.6 percent of sales during the first three quarters of fiscal 2010, compared to 31.0 percent during the comparable period in fiscal 2009.

Couche-Tard said its prudent management of controllable expenses, as well as sustainable cost reduction measures it has put in place, are the main reasons for these decreases. "This performance is quite satisfactory, especially considering that expenses, excluding the impact of acquisitions, exchange rate and electronic payment mode expenses, have decreased for a fourth consecutive quarter, without affecting the service we offer our clients," the company stated in a news release issued yesterday.

Looking ahead to the last quarter of its fiscal year 2010, Couche-Tard expects to pursue its investments with caution in order to, amongst other things, improve its network. Given the economic climate and its attractive access to capital, the retailer believes it's well positioned to realize acquisitions and create value. However, the chain said it will continue to exercise patience in order to benefit from a fair price in view of current market conditions.

The company also intends to keep an ongoing focus on its supply terms and operating expenses. And finally, in line with its business model, Couche-Tard intends to continue to focus its resources on the sale of fresh products and on innovation, including the introduction of new products and services in order to satisfy the needs of its large clientele.

Couche-Tard currently operates a network of 5,883 convenience stores, 4,142 of which include motor fuel dispensing. Stores are located in 11 large geographic markets, including eight in the United States covering 43 states and the District of Columbia, and three in Canada, covering all 10 provinces..

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