ARKO Corp. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2023. The unaudited filing was signed November 6, 2023. ARKO operates convenience stores, supplies fuel to dealers, and runs fleet-fueling locations. At quarter-end it operated 1,552 stores, supplied 1,825 dealer locations, and operated 295 cardlock locations across more than 30 states and Washington, D.C. Unless stated otherwise, financial amounts below are in millions of dollars.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $2,622 | $2,450 | $7,180 | $6,963 |
| Operating income | $44.1 | $65.7 | $92.7 | $133.3 |
| Net income | $21.5 | $25.0 | $33.4 | $59.1 |
| Net income attributable to common shareholders | $20.0 | $23.5 | $29.0 | $54.6 |
| Diluted EPS attributable to common shareholders | $0.17 | $0.17 | $0.24 | $0.43 |
| Adjusted EBITDA (non-GAAP) | $91.2 | $99.5 | $224.9 | $228.6 |
- Revenue and margins: Q3 revenue rose 7.0%, with merchandise revenue up 13.6% and fuel revenue up 5.4%. Fuel gallons sold increased, partly reflecting acquisitions, but the company-wide fuel margin declined to 27.4 cents per gallon from 29.8 cents. Merchandise margin improved to 31.7% from 31.2%. For the first nine months, fuel margin was 26.3 cents per gallon versus 27.3 cents; merchandise margin was 31.5% versus 30.4%.
- Cash flow: Nine-month operating cash flow was $78.8, down from $139.8. Investing used $263.4, primarily for acquisitions and capital spending; financing provided $88.4. Cash and restricted cash totaled $220.4 at September 30, down from $316.8 at year-end 2022.
- Debt and liquidity: Debt, net, was $828.1, compared with $752.0 at December 31, 2022. Cash and cash equivalents were $204.2. Management reported approximately $827 of liquidity, including cash and $623 of available credit. The Capital One revolving facility was increased to $800 and extended to May 2028; $461.2 was available at quarter-end. The company also has significant lease obligations: balance-sheet operating and finance lease liabilities totaled approximately $1,718.
- Other capital items: ARKO repurchased approximately 3.1 million shares for $23.5 during the nine months and paid $10.8 in common dividends. Its $100 share repurchase authorization had $37.5 remaining at September 30. A $0.03-per-share dividend was declared for payment in December.
Changes versus the prior comparable period
- Q3 revenue growth did not translate into higher earnings: operating income fell 32.9%, net income fell 14.0%, and Adjusted EBITDA fell 8.3% year over year. Management attributed the pressure chiefly to lower same-store fuel contribution, partly offset by acquisition contributions.
- For the first nine months, revenue increased 3.1%, while operating income declined 30.4%, net income declined 43.4%, and Adjusted EBITDA declined 1.6%. Management cited weaker fuel contribution at same stores and legacy wholesale locations, higher personnel and general and administrative costs, and acquisition-related operating costs.
- Merchandise contribution grew, supported by acquisitions and improved merchandise margins. Same-store fuel gallons declined 5.3% in Q3 and 4.5% for the nine-month period; same-store merchandise sales increased 0.1% and 1.4%, respectively.
- The year-over-year comparisons include acquisitions at different points in each period. 2023 acquisitions included Transit Energy Group (TEG), WTG Fuels, and seven Speedy stores; Pride was acquired in December 2022. TEG and WTG purchase accounting remained provisional at quarter-end.
Outlook, management commentary, and risks
- The filing provides no specific earnings or revenue guidance. Management says it expects liquidity and internally generated cash, supplemented by credit availability, to meet foreseeable needs, while continuing to pursue acquisitions, remodels, rebuilds, and maintenance investment.
- Management highlighted opportunities to improve foodservice and organic store performance; it appointed a Senior Vice President of Food Service in October 2023. The fas REWARDS program had approximately 1.85 million enrolled members at quarter-end.
- Key exposures include volatile fuel prices and margins, inflation and reduced consumer purchasing power, labor costs and staffing, competition, seasonal and adverse weather effects, supplier concentration, acquisition integration, and variable-rate debt. Approximately 44% of debt bore variable interest rates; management estimated a 1 percentage-point rate increase would raise annual debt service by about $3.7.
- Environmental obligations were $14.1, with estimated related recoveries of $7.6. Management characterized ordinary-course legal matters as routine and did not expect a material adverse impact. The filing reports no material changes to the risk factors from the 2022 Form 10-K.
- Management concluded disclosure controls were effective, but excluded TEG from the controls evaluation because of the timing of its acquisition. TEG represented approximately 11% of total assets and 8% of nine-month revenue, per the filing.
Important facts for investors to verify
- Whether the weaker same-store fuel volumes and margins persist, and how much earnings depend on future fuel-market conditions.
- How the TEG, WTG, Speedy, and Pride acquisitions perform after integration, including completion of provisional purchase accounting and realization of expected benefits.
- Whether operating cash flow can recover from the year-over-year decline while funding acquisitions, capital expenditures, debt service, dividends, and repurchases.
- Exposure to higher interest rates, refinancing and covenant constraints, and the scale and cash burden of lease commitments.
- The final environmental remediation costs and recoverability of estimated insurance and state-fund reimbursements.
- The effect of TEG’s exclusion from the quarter-end disclosure-controls evaluation and the planned integration of its controls.