Susser's Q3 Positive Despite Pressures

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Susser's Q3 Positive Despite Pressures

By Mehgan Belanger - 11/04/2009
CORPUS CHRISTI, Texas -- Despite increasing margin pressure on in-store categories and at the pump, along with increasing unemployment and competition in its markets, convenience store operator Susser Holdings Corp. reported positive results for the third quarter ended Sept. 27, 2009, and its executives remain confident of the company's performance in the coming quarters.

Same-store sales for the convenience store chain rose 4 percent over the year-ago quarter, while in-store merchandise sales from all stores rose 6.3 percent to $201.2 million during the third quarter 2009. The increases in retail merchandise sales was partly driven by the increase in federal excise taxes on cigarettes, which went into effect April 1, as well as strong sales of packaged drinks and beer, the company stated.

"During the third quarter, we continued to see solid growth in our same-store sales, although at a slightly slower pace than in recent quarters," Sam L. Susser, president and CEO, said during a conference call with investors yesterday. "During the quarter, we saw continuing pressure on our merchandise margins in several product categories, including foodservice, packaged drinks, beer and cigarettes, as we responded to more aggressive competitor pricing, and our customers' clear migration to more value-priced products."

Susser's retail merchandise margin dropped to 33 percent vs. 34.9 percent a year ago, and that was due in part to the increase in cigarettes' selling price and increased sales of lower-margin value items, according to Susser Holdings.

Third quarter operating income increased over the prior year, reaching $21.1 million, compared to $19.8 million in the third quarter 2008. Third quarter revenue for Susser Holdings was $882.1 million, down from the $1.2 billion seen in the third quarter of 2008, primarily due to the "significant decline" in average retail and wholesale fuel prices compared to a year ago, the company stated. The drop reduced fuel revenues by a combined $400.8 million, according to the company. However, lower fuel revenues related to price were partly offset by higher merchandise sales, along with increased fuel volumes sold at retail and wholesale compared to a year ago.

The convenience store chain's net income was $6.5 million, slightly down from the $6.9 million for the third quarter of last year. Third quarter adjusted EBITDA (earnings before income, taxes depreciation and amortization) totaled $33.1 million, up compared to the $31.8 million seen in the third quarter 2009. Companywide, gross profit reached $119.8 million, a 0.5-percent increase from last year's third quarter, according to the company.

"Although third quarter results were strong, we did experience softening in sales trends as we progressed through the quarter. We are clearly seeing a considerably more challenging economic environment emerging in the past three or four months and it doesn't seem to have abated," Susser said. He also noted unemployment figures jumped over 300 basis points over the past 12 months across its core markets, and unemployment in the chain's core customer segments -- in the construction, trucking, and oil and gas industries – are most likely higher than Texas' unemployment level of 8.2 percent.

"That said, the c-store industry remains recession resistant. But we are not immune to changes in consumer behavior," Susser added. "In response to the challenging sales climate, we have seen competitors take an increasingly aggressive stance on price, and we are responding appropriately to maintain and grow our market share."

Regarding fuels, retail store fuel volumes increased 7.3 percent in the third quarter 2009 compared to a year ago, to 175.3 million gallons. Average gallons sold per store increased 5.5 percent to 343,800 in the third quarter. Retail fuel revenue totaled $427.6 million, down 31 percent, and was attributed to a 35.7-percent drop in average retail prices for fuel. Retail fuel gross margin during the quarter dropped to 19.7 cents per gallon, compared with 22.3 cents per gallon a year ago. When including credit card expenses in these figures, third quarter 2009 retail fuel gross margin totaled 15.8 cents per gallon, vs. 17.1 cents per gallon a year prior. Retail fuel gross profit was $34.6 million, compared to $36.4 million in the third quarter of 2008.
Also during the quarter, Susser Holdings added 12 new retail units, bringing its total number of stores to 527. Of the new units, seven were part of the 25-store Quick Stuff package acquired from Jack in the Box Inc., while four additional newly constructed stores opened during the quarter and one additional site was purchased and remodeled.
Meanwhile, the company currently has two stores under construction, with expectations to begin construction on two or three additional large-format stores before the end of the year.
In its wholesale operations, Susser added 17 new dealer sites and discontinued eight, for a total of 381 dealer sites at the end of the quarter. Seven new wholesale dealer sites were added in connection with its acquisition of the Jack in the Box locations, adding to the 11 Susser previously supplied fuel to prior to the purchase.
Meanwhile, Susser Holdings entered into sale-leaseback transactions totaling $5.2 million for two newly constructed stores located in South and Central Texas, while it also completed a sale/leaseback transaction in October for $2.7 million.
In addition, Susser Holdings adjusted its annual guidance for 2009, and now expects merchandise same-store sales growth between 3 percent and 4.5 percent, with average gallons per store increasing 2 percent to 4 percent. It also adjusted the number of new retail stores it expects to open down from between 12-16 sites to between 12-15 locations.
Citing the company's successful fourth quarter 2008, Susser said: "This next quarter will be challenging for us to come up against, and we have adjusted our full-year guidance accordingly." He also noted that based on positive leading indicators in Texas, and better than average state unemployment levels, recessionary pressures may ease sometime in 2010.

"Capital markets are improving and we believe the market for mergers and acquisitions in our industry is likely to improve over the next couple of years," he added.

In other earnings news, Jericho, N.Y.-based Getty Realty Corp. reported its preliminary financial results for the third quarter and nine months ended Sept. 30. Net earnings increased $1.7 million to $12.2 million for the quarter, compared to $10.5 million for the year-ago quarter. For the nine months ended September 2009, net earnings increased $3.2 million to $35.7 million, compared to $32.5 million for the same period the prior year.

Earnings from continuing operations increased $0.8 million to $10.7 million for the third quarter 2009, up from the $9.9 million seen in the quarter ended Sept. 30, 2008.
The increases in net earnings for the third quarter and the nine months of 2009 were primarily due to increased gains on dispositions of real estate, lower interest expense and reductions in various operating expenses compared to the respective prior-year periods, the company stated. However, the gains were partially offset by a $1.1 million impairment charge included in the nine months ended Sept. 30, 2009.

The quarterly results were minimally impacted by the Sept. 25 acquisition of 36 Exxon-branded gas station and convenience store properties in Prince George's County, Md., Getty stated. The consolidated balance sheet as of Sept. 30, however, includes an aggregate of approximately $49.0 million related to the acquisition, as well as the $49.0 million of debt incurred to finance the transaction.

"We are pleased to be adding these high-quality, Exxon-branded properties to our portfolio," Leo Liebowitz, Getty chairman and CEO, said in a statement. "This transaction reflects our long-term commitment to profitable growth through strategic acquisitions. We expect this acquisition to be accretive to annual net earnings, FFO and AFFO."

Funds from operations (FFO), rose $0.5 million to $13.4 million for the third quarter 2009, and were up compared to the $12.9 million for the respective prior-year period. Adjusted funds from operations (AFFO) also increased $0.7 million to $12.9 million in the third quarter of this year, slightly over the $12.2 million generated in the year-ago period. Changes in FFO for the quarter were primarily due to the changes in net earnings, but excluded decreases in depreciation and amortization expense, along with increases in gains on dispositions of real estate.

The increase in AFFO for the third quarter 2009 also excludes decreases in deferred rental revenue and net amortization of above-market and below-market leases.

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