Couche-Tard Could Buy ... ?

Strong quarterly results, CEO hints spark yet another round of acquisition speculation

Greg Lindenberg, Editor, CSP

LAVAL, Quebec -- "Fiscal 2014 has started well for Couche-Tard," Alain Bouchard, president and CEO, said during the company's earnings call. For its first quarter of fiscal 2014, Alimentation Couche-Tard Inc. announced strong net earnings of $255 million, up $152.1 million or 147.8% over net earnings of the first quarter of fiscal 2013.

The strong results have analysts and other industry observers pondering how soon it will be before Couche-Tard makes another acquisition.

The company’s performance indicated the first signs of stabilization after its Statoil Fuel and Retail acquisition a year ago, CIBC analyst Perry Caicco said in a note to clients obtained by said The Financial Post.

"Since investors are focused on the next acquisition, it is important that the last acquisition is performing," he said. "Couche-Tard is probably one more strong quarter away from being in a position to make a sizable acquisition such as Hess. Having said that, timing is not predictable, and the company will not overpay just to grow."

Analysts have speculated Couche-Tard has been eyeing Hess Corp.'s 1,350 U.S. convenience store and gas station locations since May, when the New York City-based company announced its intention to exit its retail, energy marketing and energy trading businesses.

"The stabilization of Statoil was critical after three questionable quarters, and obviously needs to be sustained," Caicco said. "One quarter does not make a trend, but at least the company is beginning to allay the fears that they might make another sizable acquisition before Statoil is repaired."

Analyst Keith Howlett of Desjardins Securities said the first quarter reflected a good response to customer initiatives in Europe, including new merchandising and fuel programs. "Additional value-creating acquisitions are probable," he said in a research note cited by the newspaper.

On the call, Bouchard would not name names, but he teased, "Each month, we are regaining more and more of the financial flexibility we had before we acquired [Statoil], which put us in a good position in light of the many acquisitions [possibilities] we are currently analyzing, some of which seem promising."

He added, "We are working on many [possible deals] as usual on both continents. We see other retailers also active in some markets. Multiples are quite volatile, depending on asset quality or geography or retailer appetite to buy assets. So [they are] very, very active markets. But some are a bit too pricey for us."

Couche-Tard's net earnings increase is mainly attributable to the contribution from acquisitions as well as to Couche-Tard's sound management of its expenses, the company said. This was partially offset by lower merchandise and service and road transportation fuel margins, the increase in financial expenses attributable to the additional debt that Couche-Tard incurred to finance the acquisition of Statoil Fuel & Retail as well as by expenses it incurred to promote future growth and improve efficiency in Europe.

Couche-Tard said that although they were lower than in the previous quarters, it expects these expenses to continue to decrease over the course of the next quarters following the completion of these projects.

"We are satisfied with the results of the first quarter. The numerous improvement efforts deployed in Europe enabled us to turn around the negative trend in in-store sales as well as fuel volume," said Bouchard. "Whether through benchmarking, exchange of best practices or implementation of new and sustainable in-store merchandising strategies, our teams demonstrated creativity and open-mindedness helping us to achieve and surpass our goals, which is especially satisfying considering the unfavorable economic climate in Europe. Our major initiatives, namely 'Coin Offer' promoting in-store fresh-food offering, and 'miles,' our new fuel brand, are showing promising results and definitely contributed to the growth of the quarter."

He added, "In North America, we have been very active in terms of pricing strategies to support in-store traffic growth, which has allowed us to record an increase in same-store merchandise sales, but which also had the adverse impact of reducing our margin percentage of the first quarter. The work done by our teams in order to grow sales is very good, especially in light of the weak growth recorded by several players in the retail industry during the last few months."

He said on the call, "In North America, where major players in the retail industry are showing limited growth, we are proud to report an increase in same-store sales of 2.7% in the United States and 0.7% in Canada." (Same-store sales grew 1.9% in Europe.)

Merchandise and service gross margin stood at 32.2% in the United States, 34% in Canada and 40.6% in Europe.

Same-store road transportation fuel volume was up 1.2% in the United States, up 1.8% in Europe and down 0.4% in Canada. Road transportation fuel gross margin stood at 19.42 cents per gallon in the United States, 10.26 cents (U.S.) per liter in Europe and 5.52 cents (Canadian) per liter in Canada.

Concerning North American market share, he said, "Market share is always top of mind. We are gaining market share in almost all our U.S. markets. The good news is that we are not losing any [market share] in any of the markets. This is due to our initiatives and mico-merchandising. ... We are quite active in making sure that we keep our traffic growing."

Click here to view the full financial release.

Laval, Quebec-based Couche-Tard's network currently includes approximately 6,200 c-stores throughout North America, including approximately 4,500 stores with fuel. 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, Couche-Tard also operates a retail network across Scandinavia (Norway, Sweden, Denmark), Poland, the Baltics (Estonia, Latvia, Lithuania) and Russia.