NEW YORK -- While fuel margins for retailers have shrunk greatly over the past weeks, a recent analysis by industry analyst Bonnie Herzog suggests this should not affect growth significantly for convenience stores overall.
In a recent research note, Herzog, senior analyst at Wells Fargo Securities LLC, New York, cited data from Oil Price Information Service (OPIS) showing fuel margins for publically owned c-store retailers such as Casey's General Stores, CST Brands, The Pantry and Murphy USA declining sharply through first-quarter 2015. This is as gasoline prices have reversed their longest decline since 2009 and are slowly ticking upward.
Herzog and her team examined what effect declining fuel margins have on the earnings, valuation and stock prices of retailers. The verdict? "There should be no cause for alarm from investors."
The analysis settled on five main conclusions, which Herzog says should apply broadly to the entire c-store industry. They include:
1. Fuel margins affect c-store earnings, both positively and negatively. In the case of Casey's, Herzog found a "fairly strong correlation" between the chain's fuel margins and earnings per share (EPS). As an example, for every one-cent-per-gallon change in fuel margins, Casey's saw an average 31-cent change in annual EPS. Wells Fargo estimates that a one-CPG change in fuel margin had an average 17-cent effect on CST's EPS. And at The Pantry, every one CPG change in its fuel margin resulted in an average 45-cent effect to EPS.
2. Earnings growth outpaces fuel-margin growth. After examining a trailing 12 months of earnings growth, the Wells Fargo team found that EPS has increased consistently ahead of fuel margins.
At Casey's, quarterly EPS growth from first-quarter 2009 through second-quarter 2015 averaged 11.3%, compared to 3.3% growth for fuel margins during this same period, which Herzog credits to the chain's improved operations and merchandising.
"We believe that the recent drop in retail gas prices has further fueled in-store sales as consumers leverage higher disposable income inside c-stores on [merchandise] and food," Herzog said in a research note. "Further, c-stores have benefitted from the shift mix to higher-margin [merchandise] sales, which has grown profitability incrementally higher than sales."
At CST, fuel margin grew faster than EPS, likely because of how its former parent company, refiner Valero, managed c-store operations, emphasizing volume instead of margin. And at The Pantry, which has been in the middle of a turnaround, an analysis of EPS was challenging because of its volatility.
3. During negative EPS growth, multiple contraction is limited. At Casey's, valuations have been less volatile than quarterly EPS growth. CST's multiple has expanded since its spinoff from Valero, regardless of fuel margins, which Herzog credits to improved operations. And at The Pantry, which has had several quarters of negative earnings, its multiple contracted modestly with bigger drops in fuel margins.
4. Big declines in fuel margin usually don't trigger big stock declines. From first-quarter 2009 to second-quarter 2015, when Casey's fuel margins fell more than 10% vs. the prior quarter, its stock actually traded up slightly on average. Similarly, CST and The Pantry's stock has also managed to grow during fuel-margin declines.
5. Low gas prices boost in-store sales. Wells Fargo also found a correlation between merchandise sales and fuel gallons. Looking at the past 10 quarters, whenever average fuel sales were up year-over-year for Susser Petroleum (now Sunoco LP), Casey's, CST and The Pantry, merchandise sales per store grew an average of almost 5%, vs. 3% for quarters with negative year-over-year fuel sales.
"Further, based on our analysis of personal consumer expenditures (PCE) in the U.S., for every 10% drop in retail gas price, PCE goes up 23 [basis points]," said Herzog. "Therefore, we would expect tens of billions of dollars of incremental consumer spending in Q1, which should directly positively impact c-store sales."
Members help make our journalism possible. Become a CSP member today and unlock exclusive benefits, including unlimited access to all of our content. Sign up here.