Big picture – industry profit growth continues to be driven by strong profitability on the fuel side of the business; the segment profit growth was strong (+10%) despite softer results inside the store and fewer gallons pumped.
- Consumers are cutting pumped gallons per visit and frequenting the stores less, resulting in a degradation in the conversion ratio and in-store comp-sales.
- The promotional intensity for the in-store offering has also heightened, hitting the gross margin rate.
- As gas prices once again moved higher mid-July (after Couche-Tard’s reporting period), industry and Circle K in-store visits took a step down. Circle K has been less impacted due to its footprint. Moreover, in-market, like Texas, it’s outperforming traffic-wise.
Alimentation Couche-Tard July 19th-end quarterly results were reported today; this note will focus on its US business (Circle K) and the broader C&G industry for the period and since. Big picture – industry profit growth continues to be driven by strong profitability on the fuel side of the business; the segment profit growth was strong (+10%) despite softer results inside the store and fewer gallons pumped. (EPS growth was +15%.) For the period, fuel gross profits increased +24% to exceed in-store profits (1.1X vs. 0.9X LY); fuel penny-profit increased to $0.53 per gallon from $0.44 last year, but comp-gallons declined -1.6% (vs -2.1% LQ). Store merchandise comp-sales were only +1.7% (vs +3.4% LQ), and less than expected. Outperformance came from energy drinks and nicotine products (+double-digits). They are using some of the favorability in gas margins to invest in greater value / lower prices inside the store. CFO Filipe Da Silva said, “As consumers place greater emphasis on value, we continue to see spending shift toward promotional and lower ticket purchases with fewer discretionary items making their way into the basket. While these categories represent a relatively modest portion of sales, they tend to carry higher margin profiles and therefore, have a greater impact on overall margin performance.”
On the consumer and product choices, CEO Alex Miller said, “That shift in selective spending behavior is also reshaping the category mix. Packaged carbonated soft drinks as well as traditional center store categories such as salty snacks and packaged sweets remain softer than historical levels as consumers become more deliberate in what they put in their baskets…. I certainly think GLP-1 drugs are having an impact on those categories. And we did see -- they were softer in this quarter than they were the previous quarter.”
Miller went on to say, “Although customers purchased fewer gallons on average, they continue to choose our network, reinforcing the relevance of our value proposition and customer offer as our fuel business continued to generate attractive gross profit. Despite softer demand, our U.S. same-store volumes outperformed most peers and our fuel margins remained well ahead of our competitive set.” That tells us that visitors to the pump are coming more frequently with fewer gallons and in-store visits per gas pad visit.
The following chart shows that in-store visits for Circle K have been lagging gas pad visits since March, with the gap widening into yesterday’s data. Industry-wide, there’s a gap, but it wasn’t widening until mid-July when in-store visits shifted from around +2% growth to a -1.5% decline. The second chart shows the trend in four large states. California, with its already idiosyncratic high gas price, has seen a dramatic decline in in-store visits. Even Texas, which consistently outperformed the national level, is now experiencing a softer trend than the nation. (Circle K deceleration in Texas was only -100bps.) We suspect that the fewer gallons per visit dynamic is flattering the gas pad visits and making the pad-to-store conversion appear worse. That said, the in-store visits, especially in California, are especially bad. Chevron is #1 in California; we will carefully scrutinize its Q3 earnings results. Casey’s (Illinois, Iowa, and Missouri) reports next week and it will be interesting to hear what they have to say.
Lastly, on Circle K’s new hot food initiatives and with PepsiCo and Guy Fieri, Miller said, “As I think about the Flamin' Hot launch, what gives us encouragement as we think about our food, we think about -- you hear us talk to compelling value in our meal deals, and you clearly see those resonating with consumers as we grow those platforms. What also is finding midpoint price and more premium-priced items to bring into our mix that can help with margins and deliver additional sales growth beyond just the compelling value offers that I believe we've shown we have real capability in. Flamin' Hot Wings, the LTOs that we've launched with Guy Fieri and what we have in line to do that, I think we see a path to hit at these different levels of food and contribute to our goal to grow 3 to 4x food versus our core C-store. We grew food 5.2% in the U.S. We grew hot foods over 11% in the U.S.”
