ARKO Corp. quarterly report, Q1 FY2023

ARKO Corp. — First-Quarter 2023 Form 10-Q

Reporting period: Three months ended March 31, 2023; unaudited. ARKO operates convenience stores, supplies fuel to dealers, and runs fleet-fueling locations. At quarter-end it reported 1,531 retail stores, 1,852 dealer fuel-supply locations, and 183 cardlock sites. The March 1 TEG acquisition added 135 stores, 192 dealer locations, and related commercial fuel and distribution operations.

Financial performance and liquidity

Metric	Q1 2023	Q1 2022
Total revenue	$2,088.5 million	$1,972.8 million
Operating income	$9.0 million	$19.3 million
Net income (loss)	$(2.5) million	$2.3 million
Net income (loss) attributable to common shareholders	$(4.0) million; $(0.03) per share	$0.8 million; $0.01 per share
Adjusted EBITDA (non-GAAP)	$47.5 million	$50.1 million
Cash from operating activities	$15.9 million	$30.1 million

Revenue rose 5.9%; fuel revenue increased 4.9%, merchandise revenue 9.1%, and other revenue 18.5%. Acquisitions contributed to growth.
Merchandise contribution increased to $123.0 million from $108.2 million; merchandise margin improved to 30.7% from 29.5%. Consolidated fuel margin was 24.6 cents per gallon, compared with 24.7 cents.
Operating margin was approximately 0.4% versus 1.0% in the prior-year quarter. Higher store and general and administrative expenses, together with lower fuel contribution at existing operations, outweighed merchandise growth and acquired earnings.
Cash and cash equivalents were $255.9 million at March 31, down from $298.5 million at year-end; restricted cash was $15.8 million. Management reported approximately $580 million of liquidity, including about $321 million of line availability.
Debt, net of financing costs, was $808.6 million, compared with $752.0 million at December 31, 2022. Senior notes carry a 5.125% coupon and mature in 2029. About 42% of debt bore variable rates; management estimated a 1 percentage-point rate increase would raise annual debt service by about $3.4 million.
Lease obligations were substantial: $1,448.4 million in operating lease liabilities and $230.2 million in financing lease liabilities at quarter-end. The company also had $100 million of Series A redeemable preferred stock.

Material changes and significant transactions

TEG was acquired for approximately $370 million, plus inventory and adjustments. The preliminary acquisition accounting recorded identifiable assets and liabilities, with no goodwill; valuations remained provisional. The acquired business contributed $76.9 million of revenue and immaterial net income after closing through quarter-end.
TEG transaction financing included $55 million drawn on the Capital One line, deferred consideration of $45.8 million, and Oak Street funding for real estate that ARKO leased back. The resulting operating lease and off-market sale-leaseback financing liability add to the company’s lease and financing commitments.
Operating cash flow decreased by $14.2 million year over year. Investing used $153.3 million, largely reflecting the TEG acquisition, while financing provided $92.3 million, including borrowing and sale-leaseback proceeds. Capital expenditures were $23.4 million.
After quarter-end, on May 5, 2023, the Capital One revolving facility was increased from $500 million to $800 million and its maturity extended to May 2028; further expansion to $1 billion is subject to additional commitments and conditions.

Outlook, commentary, and risks

The filing provides no quantified full-year earnings or revenue guidance. Management said liquidity and internally generated cash were expected to meet needs for the foreseeable future, while noting future performance and financing access depend on economic and market conditions.
Management expects approximately $14 million of current-year spending to upgrade substantially all fuel dispensers to EMV compliance. Capital priorities also include acquisitions, store remodels and rebuilds, and maintenance.
Management anticipated the pending WTG Fuels acquisition could close by the end of Q2 2023, subject to customary conditions and transition planning; completion was not assured. The proposed TravelCenters of America transaction was not under negotiation after TA rejected ARKO’s proposal.
Management attributed weaker operating results partly to lower fuel contribution versus the unusually strong Q1 2022 fuel-margin environment, including the impact of the war in Ukraine on prior-year fuel markets. Same-store retail fuel gallons declined 5.8%, although the monthly decline moderated during the quarter. Inflation, labor costs, fuel-price volatility, competition, seasonality, and acquisition integration remain relevant risks.
Other exposures include variable-rate debt and restrictive debt covenants, environmental remediation and storage-tank obligations, and long-term lease commitments. Environmental obligations were $11.8 million, partly offset by $5.0 million of expected recoveries. The company said ordinary-course legal matters were not expected to have a material adverse effect.
Management reported disclosure controls were effective as of March 31, 2023, with no material change in internal control over financial reporting. The board declared a $0.03-per-share dividend for payment in June; continuation is discretionary.

Important facts for investors to verify

Whether TEG integration and the pending WTG acquisition deliver expected returns, and whether TEG’s provisional purchase accounting changes materially.
Whether fuel margins and same-store volumes recover, and how merchandise growth and higher personnel costs affect operating profitability.
Actual available borrowing capacity, borrowing costs, covenant headroom, and the effect of the post-quarter Capital One facility amendment.
Cash generation after acquisition spending, capital expenditures, dividends, preferred dividends, and debt service; also track the $45.8 million deferred TEG consideration and major lease obligations.
Potential changes in environmental liabilities, acquisition-related commitments, and the company’s discretionary dividend and share-repurchase activity.