Alimentation Couche-Tard Inc.
Skilled drivers: Tone of FQ2 call constructive, reiterating favourable outlook heading in to 2024
Our view: Tone of management on this morning’s FQ2 conference call was confident notwithstanding consumer headwinds. We remain highly constructive on the stock heading into 2024 with the expectation that wobbly demand trends, notably tobacco, will disproportionately impact lower tier players, further enabling industry fuel margin strength, sustaining momentum in favour of large operators with scale and ability to surface value for consumers, and further improving the M&A backdrop. ATD is featured on the RBC Top 30 Global Ideas for 2023, and both RBC Strategy Canadian Focus List and RBC CM Canadian FEW Portfolio. Full FQ2 details and outlook here.
Key points:
Forecourt: Traffic trends to the forecourt remained positive Y/Y but higher fuel prices sequentially drove a contraction in average fills, symptomatic of stretched consumer wallets. Early into FQ3, prices have moderated globally resulting in better volumes. Partnership with Musket continues to surface supply efficiencies and widen the spread vs the industry, with ATD recently completing one of its largest fuel RFPs in NA, which speaks to the scale advantage on the sourcing side while benefiting from expanding industry margins.
Backcourt: US belt tightening, notably against the backdrop of inflation and the student loan situation, resulting in transient softness in certain categories, notably combustible tobacco. Excluding combustibles, US SSS would have been positive LSD in the quarter (reported: -0.1%). The company is making tactical investments in this key traffic building category to drive share. Private label expansion and innovation across categories remains a critical growth vector, particularly in the current environment. US PL growth DD, Canada +30% Y/Y in FQ2.
Management also highlighted solid in-store trends in Europe with both positive traffic and sales, SSS +3.5% ex-Hong Kong (reported Europe and other: -0.2%). Hong Kong headwinds transient with tough comp due to prior-year government intervention to support consumer spending, higher tobacco taxes driving pantry loading, lower tourism, and weather events.
Inner Circle: Balancing speed of rollout with learnings with 8 MM sign- ups five months into the program launch. Early results indicate positive share growth, higher fuel volumes, growing merchandise traffic, and larger baskets vs non-Inner Circle sites. With mid-teens conversion in both merchandise and fuel, and with over 3k sites NT the program should be a key traffic, loyalty, and value driver heading into 2024.
M&A backdrop constructive with higher financing rates helping normalize valuations and narrow the pool of bidders. We estimate ATD BS capacity in excess of $10 B PF MAPCO and TotalEnergies.