CIBC Raise Target Running Well And Revving For More
Our Conclusion
Couche-Tard’s strong Q4 results emphasize the resilience of its operations in
all consumer environments. Merchandise same-store sales (SSS) growth was
modestly short of expectations, though we chalk that up to a stagnating
tobacco category. Even still, margins excelled. ATD continues to have multiple
organic growth drivers and we expect healthy SSS to hold. Fuel margins were
excellent, and we again tick up our long-term assumption (used in our
valuation) for the U.S. to 36cpg. Our price target goes to C$78 (from C$76)
based on an average of F2024+F2025. ATD is Outperformer rated.
Key Points
Organic Initiatives Can Support Merchandise Comps And Margins:
Price inflation has been an important contributor to merchandise SSS during
F2023. As we shift to disinflation, we believe ATD’s organic initiatives have
runway and can continue to drive repeat customer traffic despite a likely pick-
up in competition from QSRs and dollar stores. Fresh Food, Fast continues
to post double-digit sales growth while initial sign-ups from Inner Circle
loyalty members in Florida are promising (>1.2MM members in three weeks),
with plans to expand the program in the coming months.
Furthermore, merchandise margins surprised to the upside and improved on
a sequential basis across all regions. Though there are structural factors
contributing to this increase (i.e., lower tobacco sales), we believe an
expanded beverage offering, lower shrink from prepared foods, and growing
private label (+27% sales growth Y/Y in Q4, 7% of inside sales) can support
a healthier and more stable margin profile going forward.
SG&A Headwinds Moderating: Organic SG&A was up +9.9% in Q4 largely
driven by an extra week. But after accelerating through F2023, the three-year
CAGR for organic SG&A dollar growth was flat (on a 12-week comparable
basis), showcasing the benefits from moderating inflation but also ATD’s cost
containment initiatives. Another incremental tailwind to reported SG&A
dollars through at least H1/F24 will be lower credit card fees as ATD laps
elevated fuel prices last year. With inflation expected to continue moderating,
we expect growth in SG&A dollars to slow in F2024.
Well Positioned For Further M&A, Even With TotalEnergies:
Management was optimistic on the outlook for M&A with the intention of
completing four to five “material” deals this year. Though targets of all sizes are
under consideration, we note that ongoing industry headwinds (i.e., fuel
demand below 2019 levels, declining tobacco sales, and rising costs) favour
large-scale operators and support the continued consolidation of the industry.
Casey’s included helpful industry data in its Investor Day deck, noting that 69%
of U.S. c-stores are run by operators with 50 or fewer locations. We estimate
pro forma leverage sits at ~1.9x today, leaving ~$2B of deal capacity vs. the
target threshold of 2.25x, but up to $10B of deal capacity if we assume net
leverage of 3.5x.