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Lower Margins Hit Murphy’s Bottom Line

Tobacco, loyalty moves show promise as fuel pricing gets new direction
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EL DORADO, Ark. -- Despite lower fuel margins depressing third-quarter earnings in 2018 vs. the year prior, officials with Murphy USA Inc. said efforts in the tobacco category and with its loyalty pilot are showing great promise.

Revenue for third-quarter 2018 was $3.8 billion vs. $3.2 billion in third-quarter 2017, Mindy West, executive vice president and CFO for El Dorado, Ark.-based Murphy USA, said on the company's earnings call on Nov. 1. The revenue increase was largely due to higher retail-gasoline prices and to a lesser extent, higher merchandise sales, she said. Average retail-gasoline prices per gallon during the quarter was $2.61 in 2018 vs. $2.22 in 2017.

Adjusted earnings before interest, taxes depreciation and amortization (EBITDA), however, was $105.2 million in the third quarter vs. $147.4 million in the same period in 2017. “EBITDA for this quarter was lower primarily due to lower oil and fuel margins, which ran [about 16 cents] per gallon vs. [21 cents] per gallon in the prior year,” she said. “Accordingly, both net income and earnings per share were also lower.”

Looking at fuel results, Andrew Clyde, president and CEO for Murphy USA, reported higher same-store volumes in 2018 owing largely to the timing and “relative severity” of Hurricanes Harvey and Irma in 2017 vs. weather events in 2018. “However, these volumes were not accompanied by the same margins we saw in the year ago period,” Clyde said. “Nevertheless, retail margins of [14 cents] per gallon were actually fairly resilient given the rising-price environment witnessed through most of the second half of the year.”

Clyde said that while volumes showed a 1% improvement over the prior year, they did not meet expectations. As a result, the company has reorganized its fuel business to include “new leadershipin pricing to address this long-standing priority and are developing a laser focus on sharpening our pricing tactics at the store level.”

Meanwhile, the merchandise business delivered “exceptional results,” Clyde said. “Average-unit margins were 16.8%, a new record and a 70-basis point improvement over the prior-year quarter.”

The tobacco category was “exceptionally strong,” as the company has been “maximizing our participation [in] manufacturer programs [that] provide the best values to our customers,” Clyde said.

Murphy Drive Rewards

Besides the tobacco category, Clyde said the pilot of its Murphy Drive Rewards loyalty program is showing promise. While it is too early to see an impact on financials, he said they have revealed several compelling insights:

  • The app and technology are providing a simple, frictionless interface that customers like and will be highly scalable.
  • Customer and SKU-level data is providing significant insights for how to engage unique-customer segments and target offers.
  • The most loyal Murphy customers have embraced the program with “great enthusiasm.” With this group starting to make extra trips.
  • From the chain’s “lower-share of wallet” customers, the company is seeing about an extra gallon per month.
  • Across some of its largest merchandising categories, the chain is seeing more units sold per engaged customer.
  • Across all transactions, Murphy is seeing a larger basket size.

Murphy USA operates more than 1,400 stores under the Murphy USA and Murphy Express banners. Its stations are typically located near Walmart stores as part of a now-defunct partnership, while Murphy Express stores are stand-alone stations. Murphy USA stations tend to be smaller, kiosk-format stores, while Murphy Express stations are larger convenience stores.

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