ARKO Corp. — Q1 2022 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2022, compared with Q1 2021. ARKO operates convenience stores and supplies fuel to independent dealers. At quarter-end it operated 1,396 retail sites and supplied 1,625 dealer locations across 33 states and the District of Columbia.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Total revenue | $1,972.8 million | $1,484.4 million |
| Operating income | $19.3 million | $13.2 million |
| Net income (loss) | $2.3 million | $(14.7) million |
| Net income (loss) attributable to common shareholders | $0.8 million; basic EPS $0.01 | $(16.1) million; basic EPS $(0.13) |
| Adjusted EBITDA | $50.1 million | $42.3 million |
| Operating cash flow | $30.1 million | $11.3 million |
| Capital expenditures | $20.7 million | $17.5 million |
- Fuel revenue rose 43.6% to $1,583.5 million, while merchandise revenue increased 2.1% to $367.0 million. Fuel revenue and fuel costs include fuel taxes.
- Fuel contribution margin was 24.7 cents per gallon, versus 20.1 cents; merchandise contribution was $108.2 million, with a 29.5% margin versus 27.4%.
- Fuel gallons sold were 456.9 million versus 448.3 million. Retail same-store fuel gallons declined 3.1%, and same-store merchandise sales declined 3.5% (excluding cigarettes, they increased 0.1%).
- Cash and cash equivalents were $241.2 million and short-term investments $59.1 million at March 31. Management reported approximately $744 million of liquidity, including approximately $444 million available under credit lines.
- Total debt, net, was $716.8 million, including $40.9 million current. This excludes substantial lease obligations: operating lease liabilities totaled about $1,120.9 million and financing lease liabilities about $234.6 million.
Material changes and management commentary
- Revenue growth principally reflected higher average fuel prices and contributions from the 2021 acquisitions; fuel volume at same stores was lower. Management said volatile fuel prices supported historically high fuel margins in Q1 2022.
- Operating income and Adjusted EBITDA improved, supported by stronger fuel and merchandise contribution and approximately $4.0 million of Adjusted EBITDA from the 2021 acquisitions. Higher personnel costs, credit-card fees and general and administrative expenses partly offset the improvement.
- Net interest and other financial expenses, net, fell to $16.0 million from $28.6 million. The comparison benefited from lower warrant/deferred-share fair-value charges and the prior-year $4.5 million expense for early redemption of Series C bonds.
- Cash from operations increased to $30.1 million. Investing used $23.9 million, including a $5.0 million deposit on the proposed Quarles acquisition; financing used $21.8 million, including $13.1 million of share repurchases and $2.5 million of common dividends.
Outlook, risks and contingencies
- No formal financial guidance was provided. ARKO expected the approximately $170 million Quarles asset acquisition, plus inventory, to close in late Q2 or early Q3 2022, subject to customary conditions; the filing states closing is not certain. Oak Street was expected to fund approximately $130 million for 39 sites, with ARKO financing approximately $40 million plus inventory.
- Management cited seasonality: operating income has historically been stronger in Q2 and Q3 than Q1 and Q4. It also described foodservice expansion opportunities, including an expectation to add 50 Sbarro locations in 2022.
- Fuel-price volatility, competition, labor and supply-chain constraints, COVID-19 developments, weather, and dependence on principal suppliers may affect results. ARKO does not hedge fuel prices and said higher fuel prices can increase credit-card expense and reduce demand.
- Approximately 36% of debt bore variable rates. Management estimated a 1 percentage-point rate increase would raise annual debt service by approximately $2.6 million.
- Environmental obligations were $12.6 million, partly offset by $5.0 million of estimated recoveries. Management said ordinary-course legal matters were not reasonably expected to have a material adverse impact. No material changes to reported risk factors were disclosed.
Important facts for investors to verify
- Whether elevated fuel contribution margins persist as fuel prices and competitive conditions change, and how same-store fuel and merchandise trends develop.
- Quarles transaction closing, funding and integration, and the effect of the Oak Street lease arrangements on future costs and liquidity.
- Debt covenants, variable-rate exposure and liquidity availability, alongside significant operating and financing lease commitments.
- The continued cost impact of labor, credit-card fees and supply disruptions, and the progress and cost of planned store and fuel-dispenser investments.
- The sustainability of dividends and repurchases: the Board retains discretion over dividends; the $50 million repurchase authorization had $38.0 million remaining at quarter-end.