Alimentation Couche-Tard Inc.

(ATD-T) C$60.10

Solid Outlook Relatively Unchanged After Slight Q2/F23 Miss Event

Lowering our EPS forecasts by ~1%, mostly to assume the unfavourable forex, which pushed European fuel margins lower, while higher U.S. fuel margins offset higher opex inflation expectations going forward.

Rolling our 16x-17x valuation out another quarter boosts our target price to C$71.00 (from C$69.00).

Impact: NEUTRAL

There were both positive and negative trends that emerged in the quarter. Fuel volumes were weak in Europe (where energy-conservation efforts and high prices are changing consumer behaviour, including reducing miles driven) and Canada (lapping a tough comp, while also realizing that the Couche-Tard/Circle K fuel brand is not resonating with customers in Quebec/Maritimes and needs to be repositioned to offer better value), and normalized opex growth re-accelerated a little (still expected to moderate sequentially in H2/F23). Most of these headwinds are believed to be temporary. On the positive side, U.S. merchandise SSSG (+5.6% reported and ~6% excluding hurricane impact) was encouraging, riding on a successful expansion of the Fresh Food, Fast program (growing well over 20%), effective promotions, and inflation. Europe SSS also outperformed expectations (+2.9% despite reduced mobility) and U.S. fuel margins continue to more than offset elevated opex inflation.

We see H2/F23 SSSG averaging 5.2%/1.4%/3.9% in U.S./Canada/Europe on healthy growth in Fresh Food offer and price optimization. Modestly positive SSSG in Canada should resume in H2/F23, particularly in Q4/F23, as it starts lapping periods of higher illicit channel tobacco sales. H2/F23 volumes are expected to remain 14%/16%/12% below pre-pandemic levels in U.S./Canada/Europe. Normalized opex growth is expected to moderate to ~6% (from the +7.7% seen in H1/F23) in H2/F23 before reaching ~3% in Q2/F24. Q3/F23 U.S. fuel margins are trending higher than what we are building into our model; so there is upside to our numbers if the industry remains rational.

TD Investment Conclusion

Even after their +13% run YTD, we still see ATD shares as a solid investment, considering: 1) it is still trading only at 15.8x our NTM EPS, below the historical average of ~17x and publicly traded c-store peers; 2) the strong balance sheet and FCF should allow it to repurchase close to 10% of its float annually and/or leave the door open to accretive acquisitions.