Currently have a $69.00 target. GLTA

Alimentation Couche-Tard Inc.

(ATD-T) C$62.62

Outsized Fuel Margins Expected To Deliver 34% EPS Growth Event

  • Couche-Tard reports Q2/F23 results on November 22 after market close. We now see EPS (f.d.) rising 34% y/y to $0.87 (up from $0.74 on higher U.S. fuel margin assumptions and slightly lower U.S. employee retention costs) vs. $0.65 LY. Consensus is $0.83 (range: $0.65-$0.92).

  • Conference call November 23 at 8:00 am ET: 888-390-0549 or 416-764-8682, passcode 78045775.

    Impact: NEUTRAL

    We forecast a 19%/34% y/y increase in Q2/F23 adjusted EBITDA/EPS, mostly on y/ y improvements in fuel margins. We expect:

  • SSV to decline 2.6%/3.4%/4.5% y/y in the U.S./Canada/Europe (remaining ~12%/ ~13%/~8% below pre-pandemic levels). High pump prices and continuing work- from-home trends are preventing a full demand recovery. Amidst what still appears to be a rational competitive environment, fuel margins in all geographies have been more than making up for the lower volumes and the rapid opex growth. In the U.S., we now forecast fuel margins of $0.530/gal (up from $0.450/gal previously) vs. $0.377 LY, which would push U.S. fuel gross profit up 33% y/y and more than 60% above pre-pandemic levels on a per-store basis (and up over 50% in total).

  • SSSG of +5.2%/-1.6%/+0.6% in the U.S./Canada/Europe from the expanding fresh food offer, inflation, improving mix, and data-driven analytics that deliver effective promotional strategies and price optimization, offset by some trade- down, as well as a migration back to tobacco's black market in Canada.

  • SG&A to rise 2.8% y/y, but up ~9% in constant currency mostly on higher credit- card fees, wages, and rents, partly offset by lower employee retention costs y/y. We see the growth rate moderating in H2/F23.

    TD Investment Conclusion

    We see ATD as a solid defensive investment, although it has had a good run YTD (second best return within our coverage) and, at 16.5x our NTM EPS, it is trading closer to historical averages of ~17x and roughly in line with its publicly traded c-store peers. We still see attractive near-term earnings growth and the potential catalyst of putting its underleveraged balance sheet to better use via strategic acquisitions – we believe that the latter may be partially priced in already given existing speculation. We acknowledge our target return does not align with our recommendation and will revisit our recommendation, target price, and estimates following quarterly results.