6 Highlights From Couche-Tard’s 2nd-Quarter Fiscal 2018

By 
Greg Lindenberg, Editor, CSP

Circle K sign

LAVAL, Quebec -- Integrating CST Brands, embarking on the rebranding of its Corner Stores to the Circle K banner and hiring the company’s first chief marketing officer were among the highlights of Alimentation Couche-Tard Inc.'s second-quarter fiscal 2018 earnings call.

Couche-Tard reported record net earnings of $435.3 million for the quarter, compared with net earnings of $321.5 million for second-quarter fiscal 2017.

"In terms of our overall performance this quarter, the positive contribution from our newly acquired CST network is particularly notable and added to the strong increase of nearly 38% in our adjusted net earnings per share," said Brian Hannasch, president and CEO. "This is even more remarkable in light of the challenges faced by some in our network due to hurricanes Harvey and Irma, and the continued softness in the industry in general. I am deeply proud of how our teams came together during and after these catastrophic storms in order to get our stores back online to serve our communities."

Here are the highlights from the company’s quarterly earnings call …

1. Hurricanes Harvey and Irma

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“During the quarter, our stores network was impacted by two major hurricanes, Harvey in Texas and Irma in Florida,” Hannasch said on the call. “Our stores were impacted mainly through the loss of sales, fuel-supply disruptions and incremental expenses, including property damages, inventory losses and cleanup costs. Overall, 1,300 of our stores were affected at various levels and as a consequence, we lost approximately 3,000 store days in merchandise and service sales and 5,700 store days in fuel sales. Incremental costs reached $4.8 million during the quarter.”

As of Nov. 28, except for two sites in Florida, the company’s entire retail network was back on line and serving customers, Hannasch said.

2. First CMO

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During the quarter, Couche-Tard hired the company’s first chief marketing officer, Kevin Lewis.

“We have seen periods [of softness] like this in the past, typically associated with changes in the economy,” said Hannasch. “Today, we’re certainly seeing broad declines in trips across most retail channels. For us, we believe this is most acute in our lower-income consumers. … Real wage growth in much of our geography has been fairly anemic. … There’s a lot of competition between channels for customers today. That’s why we’re focused on hiring a CMO, bringing him in with strong expertise to help us segment out customers and figure out who is most loyal to us, most valuable to us and how we activate them.”

Lewis brings more than 25 years of international marketing experience working with retail, consumer goods and consumer technology companies. For the past four years, he has been the chief marketing and revenue officer for Bethesda, Md.-based Total Wine & More, an independent wine, beer and spirits retailer. Before that, he was senior vice president of digital for Blockbuster Entertainment.

“As our CMO, Kevin is leading a global network of marketing and merchandising strategies,” Hannasch said. “His team’s main focus over the next year will be to increase traffic to our stores globally. A few of our ongoing initiatives and pilots include our promotional campaigns, developing personalized offers including connecting with customers through our Circle K digital assets [and] driving our bakery program and hot-dog pilots already in several major markets. … I’m confident that Kevin and his team will foster the customer-centric culture across our entire network.”

Couche-Tard has also put Quebec Operations Vice President Stephane Trudel, formerly senior vice president of growth and strategy for CST, in charge of the Canada unit; Vice President Mark Tate, formerly vice president of merchandise support for The Pantry Inc., in charge of the Rocky Mountain unit; and Operations Vice President Paul Rodriguez in charge of the Texas unit, said Hannasch.

“At the highest levels, we’re very consciously mixing people, mixing cultures, and we’re very confident in the recipes we’ve used in the past will be successful here,” said Hannasch.

3. CST integration and synergies

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"The integration of the CST network is going extremely well. Our operation teams are successfully optimizing CST site layouts, implementing some of our key programs into the store, including Polar Pop, our private-label cigarettes, other merchandising programs and also pushing strategic promotions to reverse the trends CST has reported in recent quarters," Hannasch said.

"Our strategies allowed us to reverse the negative traffic trend in less than three months,” he said. “On the synergies side, in less than four months, our annual run rate in cost reductions reached $84 million, which puts us ahead of our initial plan and makes us optimistic that we will reach our initial target of $150 million to $200 million in cost reductions over the three years following the close of the transaction."

These cost reductions should mainly result from reductions in operating, selling, administrative and general expenses, from improvements in fuel and merchandise distribution costs, as well as from the optimization of merchandise supply costs.

Hannasch provided some examples of reverse synergies, which were “what we planned, and maybe a few nice surprises”:

  • Foodservice: “The combination of expertise in food that we have, combined with CST and the journey they were on, makes that food group stronger than ever and will help accelerate our journey there.”
  • Distribution: “The distribution center in San Antonio, which is run by Core-Mark … is a great asset, so we were able to quickly integrate the legacy Circle K sites in that Texas region into that DC for a lot of nice benefits.”
  • Operations: “They’ve got a lot of nice tools, including a labor model that’s more precise and better able to optimize the consumer experience than what we have today, so we’re taking a close look at whether we’d deploy that throughout the rest of North America.”
  • Private label: “Both companies were on that journey, and they’ve got some very interesting SKUs that we’ll be rolling out throughout the entire network.”
  • Fuel: “We think there’s an opportunity to draw more distinction between the fuel brand and the store brand at these sites as we rebrand the network to Circle K.”

“While the cultures may be different, particularly above store level, not one is better than the other, and I think we’re mixing them very well," Hannasch said.

4. Circle K rebranding update

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“We’re preparing to launch the rebranding of Corner Stores to Circle K and Couche-Tard,” Hannasch said on the call.

The company announced in 2015 that it would consolidate its diverse store brands, with the exception of the eponymous Couche-Tard stores in Quebec, under one new global Circle K brand.

“The rollout of our global Circle K brand in Europe has now successfully been completed in the Baltic countries, leaving only Ireland, Poland and Russia to complete, while the U.S. and Canada are steadily progressing and showing great consumer acceptance and strong awareness where the brand is new to the market,” said Hannasch.

Nearly 2,000 c-stores in North America and close to 1,400 c-stores in Europe are now displaying the new global Circle K brand.

5. Distribution disruption

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Some Couche-Tard sites in parts of Canada experienced distribution interruptions during the quarter because of issues related to integrating the Esso, CST and Ultramar locations into the company’s retail network.

“This was an isolated incident around the Quebec province,” Hannasch said. “We have a long history of successfully integrating companies … [but] in Quebec, we made a mistake. While most of the other aspects of integrating the sites into Quebec, for both the Esso and Ultramar-CST assets were flawless, we underestimated the impact of adding both of these networks to our Quebec [distribution center], and we had significant supply disruptions.”

He said the disruption affected sales by more than 1% for the quarter.

“We believe that the issue is largely behind us,” he said. “The operation has been stabilized. We’ve got deliveries back on time, in-stocks are in a good place. So the retail side will be largely isolated to the quarter. We will continue to have some incremental costs as we mitigate certain commodities like milk that we outsourced until we got our business stabilized.”

6. Holiday

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Hannasch also offered an update on Couche-Tard’s pending acquisition of Holiday Stationstores Inc. He said the company expects the deal, subject to customary regulatory approvals and conditions, to close during third-quarter fiscal 2018.

On July 10, 2017, Couche-Tard entered into an agreement with Holiday Cos., Bloomington, Minn., to acquire Holiday Stationstores, which has 522 sites, 374 operated by Holiday and 148 operated by franchisees. It also has a car-wash business with 221 locations, a food commissary and a fuel terminal. Its c-stores are located in Minnesota, Wisconsin, Washington State, Idaho, Montana, Wyoming, North Dakota, South Dakota, Michigan and Alaska.

 “As we become more familiar with the Holiday network, we’re learning about the talented management team and the dedicated employees and exceptional assets of that network,” said Hannasch. “Over the months ahead, we’ll continue evaluating the business and plan an integration process, which will begin immediately upon closing; however, it’s already clear numerous best-practice sharing and opportunities will result from this purchase.”

In terms of new acquisitions, Hannasch said, “We’re very pleased with our progress in deleveraging, but the goal remains to get back to a more normal range of a debt leverage ratio. That said, the appetite is still there to grow this company. That appetite will vary in the near term depending on the geography, the strategic fit and what we think are the underlying returns. … We’ve got a decentralized business, and we’ve also got decentralized shared services. So we have some areas of our company that are very heavily impacted by CST and some that are not. So we would be more open to areas of the country, both in Canada and that U.S., that have not been impacted by CST.”

Laval, Quebec-based Couche-Tard's network includes 9,465 c-stores throughout North America, including 8,135 stores offering fuel. Through Allentown. Pa.-based CrossAmerica Partners LP, Couche-Tard supplies fuel to more than 1,200 locations in the United States. In Europe, Couche-Tard operates a retail network of about 2,750 c-stores and unattended fuel sites across Scandinavia, Ireland, Poland, the Baltics and Russia.