EL DORADO, Ark. — A low-cost business model, low pricing and location allowed gasoline and convenience-store retailer Murphy USA Inc. to report record earnings in second-quarter 2020, despite a 25% decline in fuel gallons sold.
“Murphy USA’s record second-quarter performance once again demonstrated the competitive advantages of our distinctive business model and customer positioning,” said President and CEO Andrew Clyde. “Fuel margins significantly outpaced volume declines due to COVID-19-related demand destruction even as commodity prices rose sharply in May and June. As volume recovers in July to over 90% of prior-year levels reflecting our everyday low-price positioning and more favorable geographies and locations, robust fuel margins continue to generate higher-than-normal fuel contribution for Murphy USA.”
El Dorado, Ark.-based Murphy USA reported net income was $168.9 million in the second quarter, compared to net income of $32.7 million, in second-quarter 2019.
Here’s a breakdown of Murphy USA’s record quarter …
1. Business model
On Murphy USA’s quarterly earnings call, Clyde explained why the company’s business model is so effective. “We have an ultra-low fixed-cost model, which enables and supports our everyday low-price position, which in turn allows us to be even more competitive, advantaged and attractive to customers during this period when they need additional value the most,” he said.
“Further, we are seeing lower variable cost, primarily maintenance, loss prevention and to a lesser extent utilities, reflecting the lower customer traffic and accordingly less use in wear and tear” during the pandemic, he said. “Our people cost at the store level have increased slightly, and we would expect that given the higher merchandise sales and higher commissions that come with those sales, and we're always pleased to pay more commissions to our store managers and associates, because it means they are selling more merchandise and controlling costs.”
Last week, at a store managers’ and field leaders’ town hall, Clyde announced that Murphy USA will be providing additional enhanced commissions in the third quarter to reward and encourage employees to stay focused on the customer and sales.
Meanwhile, Clyde offered some guidance going forward.
“Our outlook for the remainder of 2020 and 2021 remains very positive as the underlying structural basis for these trends further solidifies,” he said. “With a strong cash position and flexible balance sheet, Murphy USA remains well positioned to accelerate its balanced strategic capital allocation priorities over the next few years, including the previously announced growth in new-to-industry sites.”
Total retail gallons decreased 25.7% quarter to quarter, while volumes on a same-store sales basis decreased 27.4%. For second-quarter 2020, total fuel contribution, which is retail fuel margin plus product supply and wholesale results including renewable identification numbers (RINs), was 38.3 cents per gallon (CPG) compared to 14.7 CPG in the same period in 2019.
Total fuel contribution dollars increased 93.6%, or $156.9 million, in second-quarter 2020 compared to second-quarter 2019. Retail fuel margins of 31.7 CPG were 136.6% higher than in second-quarter 2019, which helped increase total retail fuel contribution dollars by $116.4 million to $268.8 million.
Retail fuel volumes were lower during the quarter compared to prior-year volumes primarily due to stay-at-home restrictions in the company’s areas of operation, which began lifting in most areas toward the end of the quarter, the company said.
In reporting first-quarter 2020 earnings. Murphy USA management withdrew the company's retail fuel volume guidance due to the ongoing pandemic and an inability at that date to project volume recovery for the remainder of 2020.
Based on the gradual recoveries of volumes seen since the mid-April time frame, Murphy USA now projects an estimated full-year’s guidance of 217,500 to 222,500 average gallons per store per month for its retail fuel volumes. Guidance changes are predicated on continuing the slow ramp-up of fuel volumes that the company has experienced since the middle of the second quarter continuing into July, it said.
Merchandise contribution dollars grew 12.2% to $118.4 million, compared to $105.5 million in the prior-year quarter, on average unit margins of 15.4%, due to higher sales across the chain.
Merchandise sales and margins have kept record pace as prior and current investments in tobacco categories led to further acceleration of additional market share gains while innovation in general merchandise and recovering traffic boosted non-tobacco categories, the company said.
Total merchandise contribution dollars per store on a same-store basis increased 11.9% when compared to second-quarter 2019. Strong tobacco performance has led to higher overall merchandise margins than expected previously, said the company.
Tobacco contribution increased 19.2% on a same-store basis due to higher unit volumes, generating higher sales and margin during the current period. “Our multi pack and carton cigarette offers have become a destination trip for consumer, and second-quarter result compare strongly against the already impressive high-single-digit contribution gains we put up last year,” said Clyde.
“Without question, COVID showed that our tobacco business is entirely uncorrelated with fuel traffic,” he said. “ On the other hand many of our non-tobacco offers are more fuel dependent as you might expect, but a few key categories showed outside gains.”
Non-tobacco contribution improved 1.8% primarily due to strong performance in the lottery and general merchandise categories when compared to the prior year’s quarter.
During the quarter, sales and margins grew in lottery, beer and the general merchandise categories including mask and hand sanitizers. “While the good news is we sold much more of these products, the less good news is they were predominantly lower margin category, specifically lottery, where sales were up 31%, but came with a mid-single-digit unit margin. … Nevertheless we're thrilled with the performance and will gladly accept lower average unit margins when growing total contribution dollars due to more sales and to more customers.
For categories more highly correlated with fuel traffic, such as candy and packaged beverages, sales are improving along with fuel volumes so far in July. “As we look out into the second half of the year and into 2021, we expect better performance from these higher-margin categories,” he said.
And while COVID-related restrictions are affecting the chain’s fresh food offer, “we are not sitting on our hands simply waiting to heat up the roller grills again,” said Clyde. “We are taking this opportunity to evaluate and overhaul our food and dispensed beverage offer across the existing network with a specific focus on optimizing our new larger 2,800-square-foot format. With new talent and capabilities, these opportunities will represent significant potential for incremental growth and margin in 2021 and beyond.”
4. Station openings
Murphy USA opened three new stores and razed and rebuilt eight locations during second-quarter 2020, The company divested all nine stores in Minnesota to a private company for an immaterial gain. It has 11 new sites and six raze-and-rebuild sites under construction.
Its store count stands at 1,485 in 26 states, consisting of 1,152 Murphy USA sites and 333 Murphy Express sites. A total of 17 stores are currently under construction, which includes 11 new retail locations and six kiosks undergoing raze-and-rebuild that will return to operation as 1400-square-foot stores.
In evaluating its portfolio, Murphy USA decided that Minnesota represented “subscale geography” for the company. “We had nine stores; many of them were old kiosks,” Clyde said on the company’s earnings call. “The sad challenge of having a kiosk in Minnesota is you have to put a heater in the super coolers, so the soda pops don't explode in the winter. And we had some low-performing stores. We had also built a couple of new stores as part of the Walmart 200 programs, and when we looked at it through the various factors in that market, decided that we would be better off packaging all nine stores together versus dealing with the three lower-performance stores.”
Organic growth has experienced a slight shift, but the company still expects its total combined store count to be near 55 for the full year. To reach those store counts and be prepared for future growth, it said it expects to raise the low end of its capital expenditures range by $25 million.