ALIMENTATION COUCHE-TARD INC.
FQ2 Preview: Fuel Margin Strength Continues
Our Conclusion
ATD will report its FQ2 results on November 28 after market close, with a
conference call the following day at 8 a.m. ET. Dial-in # is 416-764-8682;
passcode 39933045#. The quarter ran 12 weeks from July 24 to October 15.
We are updating our FQ2 EPS estimate to $0.76 (from $0.68), primarily to
reflect stronger-than-expected U.S. fuel margins (was 40cpg, now 46cpg).
We have also updated our model for unfavourable FX, which clips our F2025
EPS estimate by six cents. We also boost our long-term U.S. fuel margin
assumption to 40cpg (prior 38cpg) and our price target rises to C$88 (prior
C$79) based on a 22x P/E multiple on our F2025E EPS (previous average
F2024E+F2025E). We will update our model with FQ2 results.
Key Points
U.S. fuel margins once again exceeded expectations, with OPIS coming
in at 43.6cpg for ATD’s FQ2. Most of this outperformance came in the final
three weeks of the period (which averaged 60.6cpg) and this momentum has
continued into FQ3, which has averaged 51.5cpg in its first four weeks. We
have also increased our FQ3 U.S. fuel margin estimate to 45cpg.
ATD has materially outperformed OPIS in each of the last two periods
(by 9cpg and 13cpg, respectively). However, there does appear to be some
seasonality to this outperformance, with FQ4 and FQ1 averaging a 9.4cpg
gap (range 7.5cpg-13.3cpg) while FQ2 and FQ3 average 2.9cpg (range
0.8cpg-5.8cpg). While we have been unable to determine a potential cause
for this pattern, we thought it notable enough to highlight. We have only set
our U.S. fuel margin estimate 2.4cpg above OPIS for this reason, though we
view this as relatively conservative and a source of potential upside. This
outperformance is certainly an important point for investors.
We expect moderate U.S. merchandise same-store sales (SSS) growth
in the U.S. to continue as tobacco declines (industry -8% volume in Q3),
partially offset by growth in beverages and food. We expect Europe to
remain challenged as well, with consumer caution and inflation larger factors.
Canada should lead the way again, boosted by the easiest last-year
comparisons of any region.
Operating expense leverage should remain strong, with ATD’s efforts on
process efficiency and labour scheduling supporting a more favourable
labour market. The opportunity from cost optimization was an area of focus
at last month’s Investor Day and is an important pillar in the “10 For The Win”
targets. We forecast organic growth of 3.5%, down slightly from 3.7% in FQ1