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Couche-Tard Benefits From Acquisitions

Inside store, foodservice buoys performance amid tobacco woes

LAVAL, Quebec -- Couche-Tard will continue to look at small and medium-sized acquisitions in the United States and Europe, focusing on reducing its debt to, as Raymond Pare, vice president and CFO put it during the company's earnings call on Tuesday, "seize any interesting opportunity that could show up."

Company strengths outweighed industry weaknesses for Alimentation Couche-Tard Inc. during its second quarter of fiscal 2013, which ended Oct. 14. The company announced diluted net earnings per share of 94 U.S. cents, a 54.1% increase over last year's 61-cent earnings per share.

The increase in earnings came from contributions from acquisitions--including the purchase of 2,000-unit Statoil Fuel & Retail in Norway--the growing contribution of merchandise and service margin, strong expense management and a lower income tax rate.

But the positive earnings come despite challenges around the cigarette category and a slight decline in U.S. same-store motor fuel volumes.

"We are confident that the volatilities smooth out over the quarters and the margin is pretty steady year over year," Pare said.

Same-store merchandise revenues were up 0.4% in both the United States and Canada. But take tobacco products out of the equation, and U.S. stores saw a 2.7% increase.

Fuel same-store volume declined by 0.5% in the United States, "reflecting once again the uncertainty around the economy and also the relatively high prices at the pump," said Alain Bouchard, president and CEO.

Consolidated merchandise and service gross margin was up 26%, posting at 34.2%. Margin in the United States increased by 0.5% to 33.2%. In Canada, it decreased by 0.2% to 33.7%.

Bouchard credits foodservice with the company's increase in merchandise and service contribution despite the challenges around the cigarette category and "still-fragile economic conditions."

"We are very, very impressed with the progress in foodservice in all divisions. [Vice president of foodservice] Joe Chiovera is doing a great job … so I think this trend will continue for a long, long time," Bouchard added.

Meanwhile, as tobacco remains a thorny category, Couche-Tard has found strength in its private-label cigarette brand, Crown. "It is an integral part of our strategy and continues to grow through the U.S. network," said Pare.

"Our private-label [cigarette] is doing great actually, better than planned. But still on the other hand the manufacturers are at war in the market and this is hurting everybody, all retail. Us more probably because of the nature of our corporate stores and the way we are diversified geographically," said Bouchard. He also cited a "technicality" in the company's contractual agreement that is yet to be resolved with manufacturers.

Overall, while traffic is down, the basket ring is up, and while stores are losing total basket sales from lost cigarette buyers, none of the other in-store categories are directly affecting same-store sales like tobacco.

"Tobacco is certainly the one we need to resolve," Bouchard said.

By the end of November, Couche-Tard will have added nearly 2,350 stores to its arsenal since the beginning of fiscal 2013, including 29 stores in Florida, 27 stores in Washington state, and Statoil's 2,000 stores in Scandinavia, Russia, Poland and the Baltics. As it continues its benchmarking analysis of these new European assets, the company expects to see $150 million to $200 million in synergies over the next three years.

Overall, Bouchard and Pare were hesitant to offer a status report on earnings in Europe. "With my conservative side, I would prefer to wait a little bit before reporting any numbers … to make sure we're not reporting something not yet materialized," said Pare.

Laval, Quebec-based Couche-Tard's network currently includes almost 6,200 c-stores throughout North America, including approximately 4,500 stores with fuel. It has agreements for the supply of motor fuel to more than 350 sites operated by independent operators. Its North-American network consists of 13 business units, including nine in the United States covering 40 states and the District of Columbia (under the Circle K banner) and four in Canada covering all 10 provinces (under the Couche-Tard and Mac's banners). Through its acquisition of Statoil Fuel & Retail, Couche-Tard also operates a broad retail network across Scandinavia (Norway, Sweden, Denmark), Poland, the Baltics (Estonia, Latvia, Lithuania) and Russia.

Click here to view the full earnings release.

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