Alimentation Couche-Tard Inc T.ATD

TD

[retiredcf]

Have a $71.00 target. GLTA

Alimentation Couche-Tard Inc.

(ATD-T) C$62.24

Fuel Margins Expected to Drive Consensus EPS Beat Event

• Couche-Tard reports Q3/F23 results on March 15 after market close. We now see EPS (f.d.) rising 26% y/y to $0.88 (up from $0.74 on higher U.S. fuel margin assumptions) vs. $0.70 LY. Consensus is $0.80 (range: $0.74-$0.88).

• Conference call on March 16 at 8:00 am ET: 888-390-0549 or 416-764-8682, passcode 59090454.

  Impact: NEUTRAL

  We forecast a 10%/26% y/y increase in Q3/F23 adjusted EBITDA/EPS, mostly on y/ y improvements in fuel margins. We expect:

• SSV to decline 1.5%/2.0%/5.0% y/y in the U.S./Canada/Europe (remaining ~14%/ ~16%/~12% below pre-pandemic levels). High pump prices and continuing work- from-home trends are preventing a full demand recovery. Amidst what still appears to be a rational competitive environment, fuel margins in all geographies have been more than making up for the lower volumes and the rapid opex growth. In the U.S., we now forecast fuel margins of $0.480/gal (up from $0.420/gal previously) vs. $0.410 LY, which would push U.S. fuel gross profit up 15% y/y and more than 46% above pre-pandemic levels.

• SSSG of +5.5%/+1.0%/+3.5% in the U.S./Canada/Europe from the expanding fresh food offer, inflation, improving mix, and data-driven analytics that deliver effective promotional strategies and price optimization, offset by some tradedown, as well as a migration back to tobacco's black market in Canada.

• SG&A to rise 2.4% y/y, but up ~7% in constant currency on higher credit card fees, wages, and rents, partly offset by lower employee retention costs y/y. This would represent a moderation in the growth rate vs. Q2.

  TD Investment Conclusion

  We still see ATD as a solid defensive investment. The shares are up +5% YTD (best return within our coverage) but are still only trading at 15.3x our NTM EPS vs. historical averages of ~17x and below its publicly traded c-store peers. While we expect EPS growth to moderate, particularly as we get into F2024 and it laps tougher fuel margin comps, in-store SSSG is expected to remain healthy. The strong balance sheet and FCF should allow it to repurchase close to 10% of its float annually and/ or leave the door open to accretive acquisitions.