CIBCEQUITY RESEARCH
June 29, 2022 Earnings Update
ALIMENTATION COUCHE-TARD INC.
Fuel Margins For The Win
Our Conclusion
Couche-Tard reported mixed Q4 results with weaker U.S. fuel volumes offset
by excellent U.S. fuel margins. This was a consistent theme in the pandemic,
though a sequential volume deceleration adds noise. SG&A inflation also
picked up, and our forecast for opex rises materially. Ultimately, we believe
these conditions are supportive of higher U.S. fuel margins and as a result,
increase our estimates again, including bumping our long-term assumption to
33cpg (was 30cpg). Our F23 estimates moderate, and our price target moves
to $58 (was $64) based on an average of F23E+F24E. With optionality in the
balance sheet as another potential catalyst, ATD stays Outperformer rated.
Key Points
Mixed Q4, Reflecting Inflationary Operating Environment: Q4 results
were noisy, with weaker U.S. fuel volumes falling well short of expectations
and decelerating materially from run-rate stacked results. On the flipside,
U.S. fuel margins surged and bested the OPIS industry benchmark by the
second-highest spread in company history. This stems from the surge in fuel
prices, along with accelerating operating expense inflation.
Higher Gas Prices Weigh On Fuel Volumes: Consumers are increasingly
feeling the effects of higher gas prices as evidenced by a slowing of the
recovery in miles driven, fewer gallons per visit, a shift to discounters and a
trade down from premium fuel. While smaller fills mean more trips, which
supports the merchandise business, ATD’s largely suburban network also
runs the risk of losing volume to low-price players (i.e., COST), and is more
sensitive to drivers opting for alternatives. We believe fuel volumes will
recover in time, but the path to recovery is uncertain.
Fuel Margins Are Volatile, But Will Likely Remain Elevated: One highlight
of the Q4 print was 46.1cpg U.S. fuel margin and the 9.1cpg outperformance
relative to OPIS, a mark only bested by the first quarter of the pandemic.
ATD’s initiatives on procurement, trading and marketing are clearly paying
off, and we believe these initiatives can support continued outperformance,
particularly in periods of high volatility. Furthermore, ongoing cost headwinds
(credit card fees and other opex) are leading to higher breakeven industry
fuel margins and are supportive of a rational competitive environment. Net,
we are comfortable again increasing our margin assumptions for our
forecasts and valuation.
SG&A In Focus, Cost Pressures Mounting But Will Moderate: Q4 opex
was well ahead of our expectations and was the highest two-year CAGR of
any quarter in F22. About one-third of the increase aids growth initiatives,
which support higher gross profits in both merchandise and fuel. However,
the company has also had to spend to attract and retain labour, and higher
fuel prices mean significantly higher credit card fees. Though the worst is
likely over, a higher run rate leads to a materially higher opex estimate in our
model, which is a primary driver of lower F23E EPS.