Strategic Initiatives Pay Off for Murphy USA

EL DORADO, Ark. — Nearly one year after revealing its strategy for succeeding in today's competitive market, Murphy USA Inc. is seeing its efforts pay off.

"When we held this call one year ago we noted that we would see the impact of several improvement initiatives in 2016 results and I can proudly say we delivered these benefits to our shareholders, and there is more to come in 2017," Andrew Clyde, president and CEO, said during the company's earnings call on Thursday.

The two most impactful initiatives were "the dramatic improvement" in merchandise margins — partially driven by a new supplier contract — and the roll out of Murphy USA's labor model, which "dramatically reduced store operating expenses," he explained, "each of which helped make our business more resilient during times of weakness and more competitive over the long term."

Over all, Murphy USA's net income was $43.8 million, or $1.14 per diluted share in the fourth quarter of 2016 compared to $66.7 million of net income or $1.58 per diluted share in the fourth quarter of 2015. For the full year 2016, net income was $221.5 million, or $5.59 per diluted share compared to $176.3 million or $4.02 per diluted share in 2015.

According to Clyde, the fourth quarter had its challenges but there were some key takeaways from 2016. Last year the company added 67 new stores for a roughly 5-percent unit growth. Murphy USA also continued to enhance its retail network through its raze-and-rebuild program, 120 super cooler installations and more than 300 refreshed sited.

For growth in 2017, Murphy USA has "line of sight" for between 45 and 50 new stores along with 15 to 20 raze-and-rebuild projects, many of which are already underway, he added.

In addition, the company managed an increase of 120 basis points to its merchandise margins. On $2.3 billion of sales, that equates to roughly $28 million of margin expansion vs. 2015, Clyde explained. 

Also, through store-level efficiencies implemented in its labor model, the company drove down operating expenses — before credit card fees — by 4.1 percent on a per-store basis, he said, noting that this reduction in costs comes at a time when the industry is experiencing significant cost pressures.

"Taken together, these two initiatives provided nearly $40 million of benefits helping to offset fuel margins, which were more than a penny below the mid-point of our expectations of 12.75 cents per gallon," Clyde explained. "The best measure of these improvements to our business is the almost full penny per gallon reduction in our fuel breakeven margin metric. At 1.6 cents per gallon for 2016, we have improved our breakeven costs at more than 50 percent from 3.4 cents per gallon since the spinoff."

That has strengthened the resiliency of the company and laid a solid foundation for long-term earnings growth, he added.

When it comes to fuel, retail margins were weak, but Murphy USA was able to provide "relatively strong margins of 11.6 cents per gallon in an environment where gas prices rose about 80 cents per gallon from the low in February 2016 to the high at yearend," Clyde explained.

"This margin resiliency in a down market is attributable to the discipline and structure around regional prices and other value-added initiatives around transportation and other costs," the chief executive said.

Looking at merchandise sales and margins on an average per store monthly basis, merchandise sales were down 4.8 percent in the fourth quarter and 2.2 percent for the year. However, margins were 1.5 percent in the quarter and 5.7 percent for the year.  Also, non-tobacco margins were slightly down for the fourth quarter on a per-store basis. 

"Beyond the tobacco category, we had suggested on our last call that we expected all-in margins to decline sequentially in the fourth quarter but reported results were a bit below our forecast due to a variety of one-time factors," Clyde said. "These include rebate timing, softer beverage sales, and write-offs of old e-cigarette inventories."

According to Clyde, despite a challenging fourth quarter, Murphy USA is entering the new year with "a great deal of momentum and commitment" to continue sales and margin expansion by:

• Adding more 1,200-square-foot stores to our network with a higher-margin assortment of non-tobacco products;
• A restructured promotional program that will drive higher activations;
• Accelerated super cooler installations that will optimize our facings for higher-margin beverages and increase our shelf rebates; 
• Segmenting the product offer on a regional basis; and
• Piloting a loyalty program later this year.

"Together, this approach will drive higher conversion from the fuel pump to the store, improve basket size, and optimize price and margin with more tailored offers and assortment," Clyde explained.