MAPCO 'Mega' Momentum

Delek US building core-market pumpers as 3Q margins declined, expenses increased

Greg Lindenberg, Editor, CSP

BRENTWOOD, Tenn. -- Delek US Holdings Inc.'s new construction initiative for its MAPCO Express convenience stores "remains ongoing," said executive vice president and CFO Mark Cox during the company's third-quarter 2011 earnings call yesterday.

"We continue to build new stores in our core markets. Before yearend, we intend to open our first new store, near Little Rock, that can be supplied by the El Dorado [Ark.] refinery," he said.

The store, in Sherwood, Ark., is the first of the company's large-capacity "mega stores," added president and CEO Uzi Yemin. He said that the company intends to build "10 to 12" stores a year, most ("six or seven" a year) in Arkansas. All of them will be supplied by the newly acquired Lion Oil.

For the three months ended September 30, 2011, Delek US reported net income from continuing operations of $92.5 million, or $1.58 per diluted share, versus a net loss from continuing operations of $9.9 million, or a loss of 18 cents per basic share, in third-quarter 2010.

"Delek US generated record net income during the third quarter, supported by significant contributions from the company's refining segment," Yemin said.

Refining segment contribution margin increased to $176.1 million in third-quarter 2011, versus a loss of $1.1 million in third-quarter 2010. The year-over-year increase in segment contribution margin was attributable to the inclusion of the acquired Lion Oil in the company's consolidated statement of operations, higher refining system throughputs, improved Gulf Coast refined product margins, access to cost-advantaged domestic crude sources and strong sales of refined products.

Retail segment contribution margin declined to $15.6 million in third-quarter 2011, versus $18.7 million in third-quarter 2010. Third-quarter 2011 results were impacted by declines in the company's retail fuel and merchandise margins, in addition to increased credit-card expenses resulting from higher retail fuel prices, when compared to third-quarter 2010.

"Despite a significant year-over-year increase in fuel prices during the period, MAPCO generated it's ninth consecutive quarter of same-store merchandise sales growth," said Cox.

Same-store merchandise sales increased 2.4% in third-quarter 2011, when compared to the prior-year period.Same-store foodservice sales increased 18.8% in third-quarter 2011, as the company increased the concentration of fresh-food quick-serve restaurant (QSR) concepts to approximately 20% of the store base. The company operated QSR sites at approximately 20% of store locations during this year's third quarter.

Same-store sales of private-label products increased more than 30% in third-quarter 2011, when compared to third-quarter 2010, and comprised 4.3% of total merchandise sales in the period, versus 3.3% in the prior-year period.

Merchandise margin declined to 29% in third-quarter 2011, versus 30.1% in the prior-year period, due in part to lower margins in the cigarette category, a category that comprises more than 30% of the company's merchandise sales.

Same-store retail fuel gallons sold increased 3.2% in third-quarter 2011, when compared to the prior-year period. The increase in same-store fuel volumes was partially attributable to a more competitively priced fuel offering. The company's retail fuel margin was 18.8 cents per gallon in third-quarter 2011, versus 19.6 cents per gallon in the prior-year period.

"In recent months, we've adopted a more aggressive approach toward retail fuel pricing as a way of driving increased traffic into our stores," said Cox. "We believe this strategy is partially responsible for our same-store fuel gallons growth during the quarter, in an environment where elevated retail fuel prices have exceeded prior-year levels."

He added, "Retail fuel margins benefited from a steady decline in the price of crude oil during the third quarter, with margins approximately 20 cents per gallon in both August and September."

At the conclusion of third-quarter 2011, the retail segment operated 384 locations, versus 430 locations in the prior-year period. Of the 384 locations, 168--or 44% of the store base--is either a reimaged location or a large-format prototype.

Delek US, Brentwood, Tenn., is a diversified downstream energy business focused on petroleum refining, the wholesale distribution of refined products and convenience store retailing. The refining segment consists of refineries operated in Tyler, Texas, and El Dorado, Ark., with a combined nameplate production capacity of 140,000 barrels per day. The marketing and supply segment markets refined products through a series of owned and third-party product terminals and pipelines. The retail segment supplies fuels and merchandise through a network of approximately 384 company-operated c-store locations operated under the MAPCO Express, MAPCO Mart, East Coast, Fast Food & Fuel, Favorite Markets, Delta Express and Discount Food Mart brand names.