LAVAL, Quebec -- Brian Hannasch, CEO of convenience-store leviathan Alimentation Couche-Tard Inc., dropped some hints Tuesday during the company’s latest earnings conference call about expanding into new and existing markets—including in the United States—while tightening up its retail network.
“We continue to build on our solid reputation on three key elements,” he said. “First, our expertise in acquiring and integrating companies, which we will continue to develop with [previous acquisitions] Esso, the Pantry and CST [Brands]. Second, our organic growth. And third, our ability to control expenses. We will continue to focus on these three success factors.”
He wove these elements into his comments about the company’s recent transactions, offering varying degrees of detail on the strategy around acquisitions, divestments and integration.
Here are highlights from Couche-Tard’s third-quarter 2017 earnings call …
1. Acquisitions: CST Brands
Couche-Tard is working to get all of the required approvals to finalize its acquisition of San Antonio-based CST Brands Inc. and is “confident” that the transaction will close in early fiscal 2018.
“Our teams continue to work hard, actively planning the transition and identifying potential synergies and best practices,” Hannasch said. “We’ve confirmed there's a lot of talent at CST, and we're getting great collaboration from CST management and their teams, which has been a key factor in the process and situation is [set] to close and hit the ground running.”
2. Acquisitions: Esso
On Sept. 7, 2016, Couche-Tard received approval from the Canadian Competition Bureau to acquire 278 Esso sites from Imperial Oil for approximately $1.3 million (228 in Ontario, mostly in the Greater Toronto Area, and 50 in the Greater Montreal area). The company successfully integrated the sites by the end of October 2016, it said.
“The transition went very smoothly, and we've experienced very positive results from consumers to our rebranding and merchandising initiatives, and we anticipate delivering very solid gains in the months to come from this acquisition,” said Hannasch.
3. Acquisitions: More U.S.? Asia next?
Hannasch also commented on Couche-Tard’s appetite for more acquisitions.
“Our structure and discipline around integration positions us well to do additional deals,” he said. “But it really depends on where they're at. The way we structure our business units. … We are able to take on a thousand different geographies concurrently without significant risk. So the capability is there. I think North America is still a very attractive market for us to develop in that we like the consumer, we like the environment. And while it's not a priority today, [if] the right opportunity were to rise in Asia, we'd love to have a platform very similar to Statoil.
“We’ll continue to watch for opportunities and as long as we don't feel that we're risking integration of an existing network, which is first and foremost our priority. We would certainly take a look at other deals.”
Although it is known as an acquisition juggernaut, Laval, Quebec-based Couche-Tard is also looking at select divestment as it moves ahead with integrating acquired chains into its network.
“There will be some divestment harvested” from the Esso network, Hannasch said, as well as from the CST network. And the divestment could go even further, he hinted.
“We've taken a project on to really look at our entire real-estate portfolio globally and take a hard look at any nonstrategic assets that may be sitting out there. And we do a good job I think year to year, but in the context of bringing CST on, we're going to take a really hard look, and you'll see us in the coming months come out with a strategy to divest some noncore assets as part of that purchase."
Couche-Tard also has reached its 24-month integration objectives for The Pantry c-store chain in the Southeastern United States. Hannasch said the company has reached its targeted synergies for The Pantry acquisition and “is confident to surpass them.”
The company has met a cost-reduction annual run rate objective of $85 million and surpassed its merchandise and services supply cost-reduction objective of $27 million, as well as its target for fuel synergies associated with the fuel rebranding of approximately 1,000 stores in the Southeast.
“Integration was a real success story,” Hannasch said. “The rebranding of the fuel in the stores has also gained momentum and will be largely complete by the end of this fiscal year. Sites that have been fully rebranded on both the fuel and the store brand are showing very strong trends.”
Couche-Tard is nearing the 2,000-store mark in the rebranding of its sites to the new, single Circle K global convenience-store brand.
More than 1,000 stores in North America and 910 stores in Europe now display the new brand, Hannasch said.
“In the U.S., our goal was 1,900 locations, so we are behind,” he said, citing weather—hurricanes, ice storms, thunderstorms in the Southeast and the West—and supply chain issues for the delay in meeting the goal, especially with The Pantry/Kangaroo Express sites in the Southeast.
“We are accelerating the pace in the United States,” Hannasch said. “We expect to close a majority of that gap before the end of the fiscal year, finishing about 1,700 of the planned 1,900 locations in the U.S. And then we’ll continue obviously as we enter our new fiscal year with another 2,500 or so locations planned for the coming year.”
7. The numbers
For the third quarter ending Jan. 29, 2017, Couche-Tard reported net earnings of $287 million, compared with net earnings of $274 million for its third quarter ending Jan. 31, 2016, an increase of $13 million or 4.7%.
“This performance was driven by our acquisitions, continued organic growth and solid expense control as well as by the impact of lower income tax rate for the quarter,” said Hannasch. “The performance was offset by lower fuel margins primarily in the U.S., but also in parts of Europe as we saw persistent increases in product costs through the quarter while increases in retail prices lagged."
For the quarter, same-store merchandise revenues increased by 1.9% in the United States, compared with 5% for the same period in 2016. Merchandise and service gross margin decreased by 0.4% in the United States, from 33.3% in third-quarter 2016 to 32.9% in third-quarter 2017.
Same-store road transportation fuel volumes grew 2.8% in the United States during the quarter, compared with 6.2% the previous year. Road transportation fuel gross margin decreased by 1.57 cents per gallon (CPG) or 7.9% in the United States to 18.33 CPG from 19.90 CPG.
The company showed a “strong” quarterly performance in cost control with an increase of 1.9% on a comparable basis.
Couche-Tard’s network includes 8,081 c-stores throughout North America, including 6,710 stores with road transportation fuel dispensing. Its North American network consists of 15 business units, including 11 in the United States covering 41 states and four in Canada covering all 10 provinces. In Europe, Couche-Tard operates a broad retail network of 2,766 stores across Scandinavia, Ireland, Poland, the Baltics states and Russia through 10 business units.