CA - Alimentation Couche-Tard: The Canadian Convenience Store Consolidator

2023-12-09 06:55:22 ET

Summary

• Alimentation Couche-Tard's Q2 2024 earnings report shows mixed results, with net earnings slightly higher than last year.
• Merchandise revenues were up 1.0%, but same-store merchandise revenues dipped in the U.S. and Europe.
• The company's valuation is higher than its peers, suggesting potential overvaluation but long term prospects are still strong.

Introduction

Alimentation Couche-Tard ( ANCTF ) ( ATD:CA ), a significant player in the global convenience store industry, recently unveiled its Q2 2024 earnings report. Couche-Tard is known for its extensive network of convenience retail and fuel sites, which it has grown through a long history of strategic M&A deals to consolidate market share.

Its basic convenience store business model, coupled with a deep M&A pipeline and strong operational execution, has helped the company deliver a stellar total return to its investors.

In fact, its returns have been so strong that this Canadian company has outperformed the tech-heavy S&P 500 by more than 200% over the past 10 years. Now, that's an accomplishment few can boast!

The report reveals a nuanced financial landscape, reflecting both triumphs and challenges in areas like net earnings, sales, and strategic acquisitions. Couche-Tard's Q&A session sheds light on other crucial aspects, from the performance of its loyalty program to insights on market conditions and mergers.

In this article, I will comprehensively examine Alimentation Couche-Tard's operating performance, challenges, and opportunities, delve into its financial performance, evaluate potential risks, and scrutinize its valuation compared to industry peers.

Company Overview and Q2 2024 Update

With a vast presence spanning more than 14,000 stores, Alimentation Couche-Tard extends its operations across a diverse global landscape, including North America, Europe, and Asia. The company runs corporate stores under well-known brands such as Couche-Tard, Circle K, and On the Run, along with several affiliated brands like Mac's Convenience Stores, go!, 7-jours, Dairy/Daisy Mart, Becker's, and Winks.

Alimentation Couche-Tard just unveiled its Q2 2024 earnings report, and there's a mix of ups and downs in the numbers. Net earnings for the quarter landed at $819.2 million, or $0.85 per diluted share, a tad higher than last year's $810.4 million or $0.79 per share. The result of this small increase is more of the same... earnings per share continue their march higher, now sitting at $4.2 despite being around $1 a share just one decade ago.

It's predictable growth like this that investors crave.

Revenues

Total merchandise and service revenues hit $4.1 billion on the sales front, up by 1.0%. But it's a mixed bag for same-store merchandise revenues. The U.S. and Europe saw a bit of a dip (0.1% and 0.2%, respectively), while Canada enjoyed a 1.6% increase.

It was addressed in the Q&A section of the call that tobacco sales remain a drag on merchandise sales growth. Company CEO Brian Hannasch acknowledged industry-wide issues, including normal demand attrition, aggressive price increases by suppliers, and a more cautious consumer. The company emphasized holding its share in the face of these challenges and outlined tactical approaches, such as providing good value to customers to drive volume.

It should be noted that while the merchandise business is a large source of profits for the company, due to the sheer volume of gas sold, that lower-profit business (gas) makes up a much larger portion of the revenues.

Margins

Let's talk margins. The merchandise and service gross margin had a nice bump in the U.S. (up 0.8% to 34.8%) and Europe (up 0.3% to 38.6%), holding steady in Canada at 33.2%. So, the total consolidated merchandise and service gross profit was up 2.8% compared to Q2 2023.

In fuel, there were some fluctuations. Same-store road transportation fuel volumes dropped in the U.S. (1.5%) and Europe (0.9%), but Canada saw a 3.0% increase. However, helping to offset volume declines in some markets, road transportation fuel gross margin improved, contributing to a 2.1% bump in total consolidated fuel gross profit.

As you can see in the chart above, the result of their diligent work on margins is that their profit margins have substantially improved compared to 10 years ago.

Balance Sheet

On the financial front, Couche-Tard's long-term liabilities continue to grow slowly, while cash levels seem to be dwindling. This combination is unfavorable in light of their M&A ambitions and the higher interest rate environment we find ourselves in.

Evidently, Couche-Tard is powering forward as they acquired 112 convenience retail and fuel sites in the U.S., showing an eye for even more external growth. As such, it'll be important for investors to continue to monitor how they are funding this growth.

Further Earnings Call Highlights

Innercircle Program and Loyalty

During the Q&A session, one focus was on Innercircle's early performance (the company's new loyalty program). Brian Hannasch, the CEO, highlighted the program's success, reporting 8 million sign-ups within five months. The results from the Florida market, the initial launch location, indicated positive trends, with growing fuel volume, increased merchandise traffic, and expanding basket sizes for Innercircle members compared to non-members.

Investors may find this information useful for assessing the program's impact on customer engagement and its potential contribution to market share growth. If Innercircle can improve customer loyalty in the fuel segment, it may contribute to margin expansion in what has historically been a low-margin business.

Market Conditions and M&A Prospects

Questions related to market conditions and M&A dynamics gave investors insights into Couche-Tard's growth strategy. The management expressed optimism about the M&A prospects, citing the successful MAPCO acquisition and the upcoming acquisition of Total's convenience stores.

They highlighted a decentralized model enabling the pursuit of multiple opportunities simultaneously. Changes in multiples and the impact of higher interest rates on valuation were discussed, with the company ultimately indicating a favorable environment for potential future acquisitions.

In other words, they think the M&A machine has more room to run.

Keeping the M&A machine running will be critical to supporting its best-in-class returns on capital, which I believe contributes to the stock's valuation premium. At 16.11% Couche-Tard's ROIC is one of the strongest I've seen in retail and speaks to the virtues of their model.

Competitive Landscape in Beverage Categories

One final topic that was discussed on the call was the competitive landscape in dispensed and packaged beverage categories, focusing on Couche-Tard's positioning against competitors like QSRs and grocery stores. The CEO identified QSRs as primary competitors in dispensed beverages, emphasizing the need to be sharp on pricing given the competition. In the packaged beverage space, grocery stores were highlighted as significant competitors.

Valuation

Source: Peers and Metrics as Identified by Seeking Alpha

In the realm of valuation metrics, Alimentation Couche-Tard stands out as a company commanding a strong premium in comparison to its peers. The P/E (GAAP) ratio of 18.19 and a Price/Sales ratio of 0.81 over the trailing twelve months position the company at or near the upper echelon within the industry, implying a potential state of overvaluation. This trend extends to the forward-looking metrics, notably the Enterprise Value to EBITDA ratio of 10.5, which is much higher than peers, reinforcing the idea that investors attribute a significantly higher value to the company's earnings potential.

As mentioned, it's vital to consider Alimentation Couche-Tard's historical success in strategic mergers and acquisitions and strong returns on capital, which have likely played a role in the company consistently trading at a premium compared to its peers.

Conclusion

To wrap it up, it's my view that an investment in Alimentation Couche-Tard is a bit of a mixed bag. While showcasing a robust M&A platform and commendable returns on invested capital, I believe the company's current elevated valuation compared to peers suggests potential overvaluation. Despite historical success driving a premium, achieving further outperformance from here may pose challenges.

Couche-Tard remains an intriguing prospect with long-term potential, but cautious consideration is warranted.

I rate Alimentation Couche-Tard a "Hold"

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