Wells Fargo Securities Turns Focus to C-store Retailers

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Wells Fargo Securities Turns Focus to C-store Retailers


NEW YORK -- As the convenience channel grows and evolves, Wells Fargo Securities LLC has taken note by initiating coverage of c-store retailers.

"The convenience store industry is in the midst of transitioning from a relative retail backwater industry to one of the most dynamic consumer staples and foodservice retail channels in the [United States]," explained Bonnie Herzog, senior managing director of tobacco, beverage and consumer research at Wells Fargo Securities. "We believe the industry is embarking on a new era of sophistication and growth, and savvy, innovative operators will capture more than their fair share of industry profit."

Turning an eye toward the channel, Wells Fargo Securities has developed a proprietary c-store growth drivers framework that analyzes unit growth opportunities, same-store sales opportunities and margin expansion opportunities, and highlights some key structural factors that should underpin long-term growth and profitability for well-positioned operators.

The firm has tapped Susser Holdings Corp., The Pantry Inc. and Casey's General Stores Inc. to kick off its convenience coverage, Herzog added. She calls Corpus Christi, Texas-based Susser a triple threat: Texas, tacos and transformative retail.

"With a top-tier foodservice franchise in Laredo Taco Co. and a concentrated, but underpenetrated, presence in the dynamic Texas market, we think Susser is one of the most compelling growth stories in the convenience store industry," she said. "Susser's Stripes c-stores have a stronghold in south Texas, and we expect management will pursue broader in-state expansion over the next three to five years, driven by larger format stores, which generate about [two and half times] the cash flow of legacy stores and [return on investment] in excess of 20 percent."

Susser's Laredo Taco Co. is a powerful, valuable brand and its "secret sauce" is a competitive advantage, she added.

"Laredo Taco Co. creates a halo effect for Stripes, since the typical customer purchases four meals per week, visits stores 40 percent more often and purchases additional items in 72 percent of transactions, driving incremental [same-store sales]," Herzog said. "Susser has taken the typical c-store food transaction and elevated it to an experience that engages all of the senses "

As for Cary, N.C.-based The Pantry, operator of Kangaroo Express, Herzog noted early signs of a turnaround. "With a large store base, well-established store locations primarily under the Kangaroo Express banner and a strong core market in the Southeast, The Pantry has the key attributes of a strong convenience store business," she said. "We believe The Pantry is in the early stages of a turnaround as it attempts to rationalize its aged store base and improve its foodservice offerings and fuel volume.”

Also, The Pantry's new fuel price optimization system, which has been implemented in 200 of its stores (13 percent of base), is expected to be in all stores by the end of 2013’s second quarter, she added. "Stores with the new fuel pricing system have been comping above average, and we expect The Pantry could begin to show improvements in its comparable store gallon trends as early as this quarter, which should be a positive catalyst."

The c-store operator has also recently implemented several initiatives to drive stronger same-store sales and margins -- including a ramping up of quick-service restaurants, lifestyle merchandising and remodel initiatives, Herzog said.

"Moreover, we believe The Pantry's relatively new, yet seasoned, management team, will be able to execute on the initiatives and take The Pantry to the next level," she added.

Ankeny, Iowa-based Casey's General Stores is a small town story with big growth plans, according to Herzog.

"Casey's is one of the largest independent convenience store operators in the [United States], with a differentiated business model and a top-tier foodservice operation centered on its proprietary, expanding pizza delivery offering," she said. "We believe Casey's is well-positioned to deliver strong earnings growth over the next few years by virtue of its acquisition-based unit growth strategy, small market focus and multiple profit enhancing in-store initiatives; however, we think these factors are largely reflected in current valuation.

"Moreover, we think modest store unit growth within the company's core markets may limit opportunities to generate incremental long-term earnings growth," she added.