WESTLAKE, Texas — Given the uncertain and rapidly evolving effects of COVID-19 on economic conditions, resulting in a decline in year-over-year sales volume, Core-Mark Holding Co. Inc. is taking “aggressive” steps toward reducing operating costs to better align with current sales volume trends. The company is withdrawing its full-year 2020 financial guidance provided March 2, 2020, and is not offering an updated outlook, the convenience-store distributor said.
“Despite an initial retail surge in early March, we have now faced three consecutive weeks of material year-over-year volume declines,” said Scott McPherson, president and CEO, in providing an update on the effects of the pandemic. “We have taken aggressive actions to align our cost structure with the declining volume trends, while maintaining high levels of service to our customer partners and preserving the strength of our balance sheet.”
Following an acceleration in year-over-year sales growth through the first few weeks of March, Core-Mark experienced a decline in year-over-year sales volume through the last week of March and into the first two weeks of April. For the week ending April 10, the company experienced a year-over-year sales decline of approximately 12%, reflecting a 7% decline in cigarette sales and a 20% decline in non-cigarette sales.
“While the vast majority of Core-Mark’s customers are convenience retailers that continue to operate as essential businesses, the unprecedented impact of COVID-19, including an increase in the level of shelter-in-place orders by states, provinces, cities and counties, has resulted in a significant downturn in miles driven, resulting in a decline in convenience retail store visits across North America,” McPherson said.
Core-Mark anticipates a continued decline in year-over-year sales trends until shelter-in-place orders are lifted and normal consumer traffic resumes, he said. The change in product mix caused by COVID-19 will have a negative effect on gross profit margin given the recent sales trends that reflect a larger decline in non-cigarette sales relative to cigarette sales. Also, resulting from the crisis, the company said it is incurring material costs related to employee personal protective equipment, an escalation in facility sanitation processes and employee costs related to quarantines.
Approximately 70% of Core-Mark’s 2019 operating expenses were driven by employee wages and benefits, many of which are variable and can fluctuate with volume levels, the company said. Core-Mark has reduced hours worked for nonexempt employees in addition to making headcount reductions. Along with right-sizing the workforce to address the pandemic, Core-Mark suspended employer contributions to the company’s 401(k) plan and revised vacation policies. It is also eliminating nonessential business expenses including travel, meetings and events and other discretionary expenditures.
“Core-Mark believes that these actions will help to mitigate the impacts of COVID-19 while maintaining the company’s ability to provide the high level of service our customers expect and preserve Core-Mark’s ability to scale up operations upon the eventual economic recovery,” the company said.
Core-Mark also has taken actions to help preserve liquidity, including deferring non-critical capital expenditures, reducing inventory levels to align with sales volumes and managing accounts receivable. The board has reduced director cash compensation for the remainder of 2020. And it is suspending its share repurchase program.
The company has approximately $55 million remaining under its $60 million share repurchase authorization. The company has no plans to modify its quarterly dividend, it said.
Core-Mark has a strong balance sheet and financial flexibility, it said. The company believes it has the liquidity needed to manage through the duration of this crisis. On April 10, it had approximately $400 million available under its $750 million revolving credit facility, which does not mature until March 2022. The company’s current availability under its credit facility was reduced by a short-term build of cigarette inventory of approximately $100 million in response to Altria’s temporary facility closure in March, Core-Mark said.
“As the COVID-19 crisis continues to evolve, our primary focus is on the health and safety of our employees, our customers and the communities in which we serve,” said McPherson. “Although no one can adequately prepare for a national crisis of this scale, I am confident in our ability to emerge quickly, propelled by the incredible efforts of our more than 8,000 dedicated associates and the resilience of our committed customers across the U.S. and Canada.”
Westlake, Texas-based Core-Mark is a marketer of food and merchandise and supply solutions to the convenience retail industry in North America. It offers a full range of products, marketing programs and technology solutions to about 42,000 customer locations in the United States and Canada through 32 distribution centers. The company services traditional c-stores, drugstores, box or supercenter stores, grocery stores, liquor stores and other specialty and small-format stores that carry convenience products.