CIBC UpgradeEQUITY RESEARCH
June 20, 2022 Earnings Update
ALIMENTATION COUCHE-TARD INC
Q4 Preview: Volatility Rises, But We Expect Consistent
Execution
Our Conclusion
ATD will report its Q4 results on Tues, June 28, after market close. A call will
be held on Wed., June 29, at 8:00am; the dial-in number is 416-764-8682,
access code: 37095248#. We are raising our Q4 EPS estimate to $0.51
(from $0.39, consensus $0.49) to reflect stronger-than-expected industry fuel
margins, partially offset by higher credit card fees due to higher gas prices.
We also raise our price target to $64 (from $56) due to an increase in our
long-term U.S. fuel margin assumption. ATD remains Outperformer rated.
Key Points
An Overview Of Key P&L Drivers In The Current C-store Landscape:
Aside from the Q4 print, we believe investors will be focused on the outlook
of key earnings drivers within the context of today’s operating environment:
• Gas Prices & Miles Driven: U.S. gas prices are hitting new highs almost
weekly and now sit near $5 a gallon. This has raised the ongoing debate
of potential “demand destruction.” CASY recently noted that it is starting
to see “some erosion in volume in the low-single-digit range” but only in
regions where gas prices are well above $5. Lateral to ATD: Apart from
the West Coast (~12% of ATD’s U.S. network) where gas prices are
above $5.50, the majority of ATD’s c-stores are in regions where gas
prices currently sit between $4.60 and $4.90. Thus, we do not expect
demand destruction is a material issue yet. Furthermore, increased
mobility should be a tailwind to ATD’s largely suburban network.
• Merchandise Same-store Sales (SSS): While higher gas prices could
be a headwind for merchandise sales, history has shown us that inside
sales have remained resilient even during recessionary periods.
Furthermore, IRI data continues to show healthy sales momentum in key
U.S. c-store categories, though this is largely due to higher prices.
Lateral to ATD: U.S. merchandise SSS was a standout last quarter, and
we believe ATD’s multiple initiatives (i.e., localized pricing, Fresh Food,
Fast) have ample runway despite the uncertain environment. These
initiatives, along with a favourable mix shift (more prepared foods, single-
serve beverages) are tailwinds to merchandise margins.
• U.S. Fuel Margins: Since March, fuel margins have been volatile due to
adverse swings in energy and wholesale prices. For context, U.S. fuel
margins averaged 37cpg during ATD’s Q4 but through the first seven
weeks of Q1, OPIS has averaged 25cpg (range: 16.3cpg to 31.8cpg).
Lateral to ATD: While added resources to trading and the rollout of Circle
K branded fuel are tailwinds, we believe deeper supply chain integration
(including distribution, trading and ATD’s partnership with Musket) is a
distinct advantage, particularly in this volatility. Essentially (through
vertical integration) ATD can purchase fuel below rack (wholesale)
prices, which have exhibited greater levels of price stability, helping it
reduce swings in fuel margins and outperform peers. We believe this will
serve as a distinct advantage to ATD, especially if large inequities in the
gasoline market become pronounced during the summer months.