Economy Catches Up to Susser

But expecting quick recovery; "worst of economic downtown may be behind us"

Abbie Westra, Director, Editorial, CSP

CORPUS CHRISTI, Texas -- Despite a strong first part of 2009, the economypaired with unfavorable weathercaught up to Susser Holdings Corp. in the fourth quarter. The company reported a 1.2% decline in same-store merchandise sales for the quarter, vs. a 6.5% increase a year ago. Merchandise sales from all stores increased 9.5% to $201.4 million; retail merchandise margin was 32.7%, vs. 34.6% for the same period in 2008.

"We finally began to feel the full impact of the nationwide economic downturn across all of our markets during the fourth quarter," said Sam L. Susser, president [image-nocss] and CEO, in a statement. "The company's business is historically seasonal, producing the bulk of its operating cash flow in the second and third quarters."

But the economy, bad weather, cigarette inflation, rising fuel costs compared to Q4 '08, aggressive competition from restaurants and other retailers and down-trading customers put additional pressure on margins.

Susser said in an earnings call last Friday that it is difficult to compare against 2008, a very strong year in the company's history. Further, he believes "the worst of the economic downtown in our region may be behind us."

"In each month from July to December, we experienced sequentially lower comparable merchandise sales, but we have seen stabilization over the past six weeks." Overall for Q4, customer counts were down by a couple percentage points, and transaction size was up a%.
"Last quarter was tough no doubt about it, but for the year we delivered our 21st year in a row in same-store sales increases, and we're pretty optimistic that this year will be No. 22."

A bright spot for the 525-store chain, which operates in New Mexico, Oklahoma and Texas, was the continuing rebranding of Town & Country Food Stores to Stripes (70 by year-end) and 47 Country Cookin' locations to the Laredo Taco Co. proprietary concept; 50 more Country Cookin' locations will be changed to Laredo Taco in 2010, with the balance switching over in 2011.

"We're continuing to experience very, very positive customer reaction to the rebranding program," even in the communities most affected by the hardships of last year, said Susser.

In November and December, merchandise sales trends in rebranded stores outperformed Town & Country stores by more than six percentage points. The company saw a shift of more than 20 percentage points in items purchased between Country Cookin' and Laredo Taco sales.

Company-wide, foodservice is in about 58% of stores and represents about 20% of sales, "so it's close to 30% in the stores with restaurants, maybe 25 and 30% of gross profit dollars would be a little more accurate."

And 40 of the rebranded stores are at the point where the change can be quantified, said Susser. "It's very clear that those stores are outperforming the other locations, especially in the number of units sold, which helps drive related merchandise sales and margins."

Beyond the rebranding program, Susser Holdings also invested time and energy on cutting operational costsparticularly important in the face of a higher-than-normal labor-to-merchandise ratio, which Susser attributed to the minimum wage increase and the company's slow reaction to traffic declines. With the help of an upgrade to its IT platform, the company is focusing on stricter labor-hour requirements; a next-day, out-of-stock system to notify stores when they did not sell a top-30, high-volume item the day before; and speed-of-service methods and online training modules at Laredo Taco.

Through streamlining labor hours, new personnel requirements (such as more stores per supervisor) and other operational changes the company saw $2 million in administrative savings, and the 2010 goal is to improve the administrative burden by an additional 15%. Voluntary turnover was also down 20 percentage points over 2008.

When asked about potential for future mergers/acquisitions, Susser said he has a dialogue going with a number of parties, but that the company is remaining conservative.

"We are very ready and excited about the next challenge, also hopeful that there will be more opportunity in the M&A marketplace coming out of this recession. One naturally follows the other. Although optimistic about the coming year because of a few anecdotes that we have behind us, we'd really like a really good, strong quarter of same-store sales growth and so forth in the bag before financially we leaned in and got real aggressive in pushing along the M&A prospects or opportunities," he said.

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Abbie Westra, CSP/Winsight By Abbie Westra, Director, Editorial, CSP
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