ARKO Corp. Form 10-Q Summary
Business context and reporting period
ARKO operates convenience stores and supplies fuel to independent dealers through retail, wholesale and GPMP segments. At September 30, 2021, it operated 1,379 retail sites and supplied 1,674 dealer-operated stations across 33 states and the District of Columbia. This unaudited filing covers the three and nine months ended September 30, 2021, compared with the same 2020 periods. Results are affected by acquisitions, including Empire, acquired in October 2020, and ExpressStop, acquired in May 2021; period comparisons therefore do not reflect solely organic growth.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total revenue | $2,035.0 million | $960.1 million | $5,429.2 million | $2,674.2 million |
| Operating income | $54.7 million | $32.1 million | $113.7 million | $71.8 million |
| Net income | $35.6 million | $17.2 million | $46.5 million | $36.8 million |
| Net income attributable to ARKO | $35.5 million | $9.7 million | $46.3 million | $21.1 million |
| Net income per common share, basic | $0.27 | $0.14 | $0.34 | $0.31 |
| Adjusted EBITDA, net of incremental bonuses | $80.2 million | $57.3 million | $198.2 million | $142.8 million |
Q3 fuel revenue was $1,580.4 million and merchandise revenue $434.7 million. Consolidated fuel margin was 22.4 cents per gallon, down from 29.8 cents; merchandise margin improved to 30.6% from 27.9%. For the nine months, fuel margin was 21.5 cents per gallon versus 31.7 cents, while merchandise margin was 29.0% versus 27.2%. The company attributed operating-income growth to stronger fuel and merchandise contribution and acquisitions. Adjusted EBITDA is a company-defined non-GAAP measure.
For the nine months, operating cash flow was $119.5 million, versus $126.5 million. Investing activities used $105.2 million, including acquisition spending and capital expenditures; financing activities used $35.8 million. Capital expenditures were $48.1 million. Cash and cash equivalents were $275.2 million at quarter-end; management reported liquidity of approximately $551 million, including cash, restricted investments and available credit.
Quarter-end debt, net, was $689.6 million, down from $749.8 million at December 31, 2020. Lease liabilities were also substantial: $1,029.2 million for operating leases and $237.6 million for financing leases. Total assets were $2,808.4 million. The balance sheet included $100 million of Series A redeemable preferred stock.
Material changes versus the prior comparable period
- Q3 revenue more than doubled, mainly reflecting the Empire acquisition, higher average fuel prices and additional volume; fuel revenue increased more than 190%. The reported increase is not a like-for-like growth rate.
- Q3 merchandise revenue increased 7.7%, while same-store merchandise sales declined 1.3%. Same-store retail fuel gallons declined 1.4% in Q3; the company cited deliberate volume-and-margin management and closed or converted underperforming stores.
- Q3 operating income rose to $54.7 million from $32.1 million. Higher general and administrative, store operating, and depreciation and amortization expenses partly offset higher contribution.
- Nine-month operating cash flow declined despite higher earnings, reflecting higher tax and interest payments, working-capital changes and annual incentive payments.
- ARKO redeemed its Series C bonds in March 2021 for approximately $79 million, including early-redemption interest.
Outlook, commentary, risks and unusual items
- No formal financial guidance was provided. Management said liquidity and internally generated cash, credit availability and financing were expected to meet foreseeable needs. Capital priorities include acquisitions, store remodeling and maintenance; 2021 fuel-dispenser EMV upgrades were estimated at approximately $10 million gross.
- On October 21, 2021, ARKO issued $450 million of 5.125% senior notes due 2029. Proceeds repaid approximately $223 million outstanding under the Ares facility and $200 million of the Capital One line; remaining proceeds were intended for general corporate purposes. The Ares facility was terminated.
- On November 9, 2021, the company acquired 36 Handy Mart stores and a development parcel for approximately $112 million plus inventory and cash, with real estate financing and leases involving Oak Street.
- Management cited labor shortages, supply-chain disruption, possible renewed COVID-19 effects, fuel-price and margin volatility, competitive pressures, dependence on major fuel and merchandise suppliers, variable-rate debt, and cybersecurity and payment-processing risks. The business is seasonal, with historically stronger operating income in the second and third quarters.
- Environmental obligations were $12.7 million at quarter-end, with estimated recoveries of $5.0 million. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- Income tax expense included an approximately $5.5 million discrete benefit from releasing a valuation allowance. Fair-value changes in warrants and other instruments affected financial results; warrant-related fair-value expense was a notable component of financing costs.
Important facts for investors to verify
- How much reported revenue and Adjusted EBITDA growth reflects Empire and ExpressStop, fuel prices, and other non-organic factors, versus comparable-store performance.
- Fuel and merchandise contribution trends, including the sustainability of fuel margins and same-store sales and the impact of higher credit-card fees and operating costs.
- Post-quarter debt balances, available credit, covenants and interest-rate exposure after the senior-notes issuance and debt repayments.
- Acquisition integration, lease commitments and the terms and economics of Oak Street sale-leaseback transactions.
- Potential effects of supplier concentration, labor and supply-chain constraints, COVID-19 developments, and environmental and cybersecurity exposures.