ARKO Corp. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2022; unaudited. ARKO operates convenience stores, supplies fuel to independent dealers, and added fleet fueling through its July 2022 Quarles acquisition. At quarter-end it operated 1,383 retail sites, supplied 1,670 dealer locations, and operated 183 cardlock locations across 33 states and the District of Columbia.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $2,449.6 million | $2,035.0 million | $6,962.7 million | $5,429.2 million |
| Operating income | $65.7 million | $54.7 million | $133.3 million | $113.7 million |
| Net income | $25.0 million | $35.6 million | $59.1 million | $46.5 million |
| Net income attributable to ARKO | $24.9 million | $35.5 million | $58.9 million | $46.3 million |
| Adjusted EBITDA (non-GAAP) | $99.5 million | $80.2 million | $228.6 million | $198.2 million |
- Revenue growth was led by fuel: Q3 fuel revenue rose 25.3% and nine-month fuel revenue rose 36.3%, primarily reflecting higher average fuel prices and acquired operations. Merchandise revenue rose 2.6% in Q3 and 2.0% year to date.
- Q3 fuel gallons sold fell to 520.7 million from 539.2 million. Reported consolidated fuel margin increased to 29.8 cents per gallon from 22.4 cents. Merchandise contribution rose to $138.9 million from $133.1 million, with margin of 31.2% versus 30.6%.
- Q3 operating income improved, but net income declined, in part due to income tax expense of $20.9 million versus $4.8 million. The 2022 quarter included an $8.7 million one-time, non-cash tax expense from internal restructuring. Nine-month net income increased despite the same charge.
- Nine-month operating cash flow was $139.8 million, versus $119.5 million. Investing cash outflow was $64.8 million and financing cash outflow was $49.8 million. Cash and cash equivalents were $283.4 million at September 30.
- Management reported approximately $678 million of liquidity: $283 million cash and approximately $395 million of credit availability. Total debt, net, was $733.6 million, compared with $717.0 million at December 31, 2021. The company repaid its $32.4 million PNC term loan during Q3. About 36% of debt bore variable rates; management estimated a 1 percentage-point rate increase would add approximately $2.7 million to annual debt service.
- Balance-sheet operating and finance lease liabilities totaled approximately $1.43 billion. Series A redeemable preferred stock had a $100 million redemption value.
Material changes and management commentary
- The Quarles acquisition closed July 22 for total consideration of approximately $185.0 million, including real estate acquired by Oak Street and leased back to the company. From closing through September 30, Quarles contributed $142.4 million revenue and $6.2 million net income. Purchase accounting remained provisional.
- Higher fuel prices and margins, merchandise contribution, and acquired businesses supported operating results. Same-store fuel gallons declined 9.7% in Q3; management cited volume-and-margin optimization and the closure or conversion of underperforming stores. Nine-month same-store merchandise sales fell 1.8%, although Q3 same-store merchandise sales increased 0.7%.
- Store operating costs increased, including personnel costs and credit-card fees; general and administrative costs also rose. Management cited wage increases, acquisition-related costs, and higher card fees tied partly to higher pump prices.
- ARKO repurchased approximately 4.5 million shares for $40.0 million during the first nine months under a $50 million authorization. It paid common dividends of $0.02 per share each quarter and declared $0.03 per share for payment in December 2022. Future dividends and repurchases remain at the board’s discretion.
- Management described seasonality, with operating income typically strongest in the second and third quarters. It gave no broad earnings or revenue guidance. It expected approximately $8 million of EMV fuel-dispenser upgrade spending in 2022 and $10 million in 2023.
Outlook, risks, and contingencies
- Fuel-price volatility can affect retail margins, demand, dealer purchasing capacity, trade credit, and credit-card expense. Beginning in Q3, ARKO used diesel futures to hedge a limited number of firm purchase commitments; it cautioned that hedging may not be cost-effective and accounting treatment can create earnings volatility.
- Inflation, labor and supply-chain constraints, competition, weaker consumer purchasing power, lower fuel volumes, and severe weather may pressure results. COVID-19’s future effects remained uncertain.
- Environmental obligations were $12.5 million at September 30, with estimated insurance and state-fund recoveries of $4.9 million. Remediation estimates may change. Management said ordinary-course legal matters were not expected to have a material adverse effect.
- After quarter-end, ARKO signed agreements for the proposed TEG acquisition, at approximately $375 million plus inventory, and the Pride acquisition, at approximately $230 million plus inventory. Both remained subject to closing conditions; completion was not assured. Oak Street was expected to fund real estate portions under the company’s program agreement.
- Management stated disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the elevated fuel margins and acquisition contributions persist as fuel prices and volumes change, and how same-store gallons and merchandise trends develop.
- The final Quarles purchase accounting, integration results, and returns on invested capital; and whether the TEG and Pride transactions close, on what terms, and with what effect on debt, leases, and share count.
- Liquidity and debt covenant headroom, sensitivity to variable rates, and the substantial long-term lease commitments.
- Cash conversion and working-capital needs, including the impact of fuel prices on receivables, inventory, and dealer credit.
- Environmental remediation exposure, future capital spending, and the sustainability of dividends and share repurchases alongside acquisition funding needs.
- The effect of the $8.7 million one-time tax charge and other adjustments when comparing GAAP earnings with management’s non-GAAP Adjusted EBITDA.