EQUITY RESEARCH
November 23, 2022 Earnings Update
ALIMENTATION COUCHE-TARD INC.

Noisy Quarter; Healthy Outlook
Our Conclusion

Though there were a handful of items that added noise to the ATD thesis - slower Europe, higher opex, narrower U.S. fuel margin gap to OPIS - none of them materially change our views or outlook for the business. We are encouraged by the strong U.S. merchandise growth and healthy GM% performance, driven by important pillars for ATD - fresh food and data analytics. Our estimates are updated and our price target is tweaked to $73 (from $75). ATD remains Outperformer rated.

Key Points
Mixed Picture In Europe Due To Softer Consumer: Europe posted mixed
top-line results as consumers adjust behaviour for elevated inflation (average volume per fill -15%, lower penetration of premium fuel). However, smaller fills are driving more visits (+2%-3%) and have been supportive of merchandise comps, which came in better than expected (+2.9% vs. consensus +2%). Importantly, management indicated the c-store channel has faired “very well” and has taken share from grocery, underscoring the strength of inside sales even during periods of economic weakness. We model Q3 merchandise SSS growth of 3.5% but have lowered our SSV growth estimate to -4.5%.


Organic Growth Initiatives Paying Off In the U.S.: The highlight of the
quarter was the U.S. merchandise SSS, which grew 5.6% and accelerated 60 bps sequentially on a three-year stack. Importantly, ATD’s initiatives aimed at driving store traffic are paying off. Fresh Food, Fast is delivering SSS growth >20%, and others like Sip & Save are driving repeat trips and further enhancing overall basket. We expect the broad-scale launch of loyalty in H2/F23 will be a further positive catalyst.

On the flipside, U.S. fuel margins posted its narrowest gap to OPIS since the onset of the pandemic. We believe the underperformance stems primarily from the significant volatility in industry margins during the quarter (range 27.8 cpg-75.9 cpg) as opposed to weaker underlying fundamentals. The company continues to make progress on its Circle K fuel rebranding work (now >3,500 sites) and on strengthening its relationship with Musket, which now includes ownership of four fuel storage terminals. We remain positive on the long-term cash generation capabilities of the fuel business.

Puts And Takes On SG&A, But Generally Moving In The Right Direction:
Organic SG&A increased 8.1% Y/Y due to 1) wages, 2) European energy
costs, and 3) strategic initiatives. Importantly, ATD is making continued
progress on labour costs and is focused on controlling the controllables (i.e., energy saving initiatives and reduction in store manager administration work) within the context of today’s operating environment. The European energy crisis remains the wildcard, but we believe management will be able to at least partially mitigate this headwind, and we model a 5% increase in organic SG&A for Q3, which reflects a slight improvement in the three-year CAGR from Q2.