CIBC Raise TargetAs you may have guessed, I've been away for awhile so had some catching up to do. This should be the last one for today. GLTA
EQUITY RESEARCH
August 31, 2022 Earnings Update
ALIMENTATION COUCHE-TARD INC.
Prepared For All Conditions
Our Conclusion
Fuel margin dollars were the key driver of ATD’s Q1 earnings beat, but cost
control was excellent, and merchandise same-store sales (SSS) growth was
better than we forecast. Higher fuel prices have wreaked havoc on consumer
behaviour but we believe results again reinforce ATD’s relevance with
consumers, even in a period of slower tobacco sales. The market has waited
patiently for M&A and we believe conditions are generally favourable. Robust
cash flow pushed leverage down slightly Q/Q, even from low levels. Our
price target moves up to $75 (was $69), and ATD is Outperformer rated.
Key Points
Fuel Margins Sound Amidst Energy Market Volatility: Declining gas
prices were a tailwind to profitability in Q1 and with wholesale gasoline prices
continuing to decline, we expect not only U.S. fuel prices to continue to drift
lower (now at $3.84 vs. $3.88 last week) but also fuel margins to remain
robust over the near term. Hurricane season has the potential to reverse the
downward trend in gas prices, but even if volatility in energy markets picks
back up, ATD has demonstrated it can – and should – continue to outperform
the industry. The rebrand to Circle K fuel has paid off and has runway
(~3,500 sites today vs. nearly 5,000 expected by F2025) and multiple trading,
procurement and distribution initiatives further support leading profitability.
Playing Offense Amid Elevated Inflation: Consumers have been adjusting
their gasoline buying behaviour for broad-based inflationary pressures (U.S.
SSV -4%, traffic up 5%, gallons per trip -10%, less premium fuel). We have
been cautious on how these shifts might affect merchandise sales but were
pleased with improving three-year U.S. merchandise SSS growth stack. We
believe management is taking an even more proactive approach towards
managing pricing, promotions, and assortment, leveraging improved access
to data and analytical capabilities.
Labour Conditions Improving; Inflation Likely Peaked But Persistent:
Couche-Tard has done an excellent job navigating a difficult labour
environment and management noted that access to labour has been
consistently improving. We expect opex increases to remain elevated for the
remainder of F2023 but lower fuel prices (at least for now), declining
retention bonuses and overtime, and easier Y/Y comparisons should mean
that we have seen the peak of Y/Y SG&A increases.
Strong Balance Sheet Provides Flexibility for M&A and Shareholder
Returns: Couche-Tard continues to generate healthy levels of free cash flow
($2.1B in the LTM) despite elevated capex and a robust NCIB. With $2.2B in
cash on the balance sheet and net leverage at 1.3x (vs. target leverage of
2.25x), we see ATD as well positioned financially should opportunities for
M&A materialize. In line with its track record, we expect management to
remain disciplined on the prospects for value creation above anything else