Business Overview and History

ARKO Corp, a Fortune 500 company, has solidified its position as one of the largest convenience store operators in the United States. With a strategic focus on retail and wholesale fuel distribution, the company has navigated the challenges of the dynamic market landscape and continues to deliver sustainable growth.

ARKO Corp traces its roots back to 2002 when it was founded as GPM Investments, LLC, a Delaware limited liability company. Initially operating as a regional convenience store operator in the Mid-Atlantic states, the company embarked on an aggressive expansion strategy through acquisitions. From 2013 to 2024, GPM Investments completed an impressive 26 acquisitions, significantly expanding its footprint across the United States.

This acquisition-driven growth strategy allowed GPM Investments to rapidly increase its presence, operating over 1,400 retail convenience stores by 2022 under various regional brand names. A pivotal moment in the company’s history came in 2020 when GPM Investments was acquired by ARKO Corp., a newly formed Delaware corporation. This acquisition provided GPM Investments with access to additional capital and resources, further fueling its growth trajectory.

Throughout its history, ARKO Corp. has faced the challenge of operating in the highly competitive and fragmented convenience store industry. To differentiate itself from large national chains and numerous regional and local operators, the company has focused on enhancing its food service offerings. This strategy has included the addition of branded quick-service restaurants in many of its locations, providing a unique value proposition to customers.

Another significant challenge that ARKO Corp. has successfully navigated is the volatility in fuel prices. As a major retailer of motor fuels, the company’s profitability is directly impacted by fluctuations in wholesale and retail fuel prices. In response, ARKO has developed sophisticated fuel pricing and procurement strategies to mitigate the impact of these market forces on its bottom line.

Despite these industry challenges, ARKO Corp. has demonstrated remarkable growth and performance. In 2023, the company reported total revenues of $9.41 billion, a testament to its successful expansion and operational strategies. This impressive financial performance has earned ARKO Corp. a place on the Fortune 500 list for three consecutive years, ranking #453 in 2023. This recognition further solidifies ARKO’s position as one of the largest and most successful convenience store operators in the United States.

As of September 30, 2024, the company operated 1,490 retail convenience stores, supplied fuel to 1,830 dealer locations, and operated 281 cardlock locations across more than 30 states in the Mid-Atlantic, Midwestern, Northeastern, Southeastern, and Southwestern regions of the United States.

ARKO’s growth strategy has been fueled by a series of strategic acquisitions, including the 2023 acquisitions of Transit Energy Group, WTG Fuels Holdings, and the SpeedyQ Markets chain. These acquisitions have strengthened the company’s presence in key markets and diversified its revenue streams. In 2024, ARKO also announced plans to convert approximately 150 of its retail stores to dealer sites by the end of the year, a move that is expected to generate an annualized benefit of $8.5 million to the combined wholesale and retail segments.

Financial Performance and Ratios

ARKO’s financial performance has been a mixed bag, with the company reporting net income of $23.14 million for the nine months ended September 30, 2024, a decrease from $33.44 million in the same period of 2023. However, the company’s adjusted EBITDA for the nine-month period stood at $192.01 million, down from $214.47 million in the prior-year period.

For the most recent fiscal year (2023), ARKO reported revenue of $9.41 billion, net income of $34.37 million, operating cash flow of $136.09 million, and free cash flow of $24.89 million. In the most recent quarter (Q3 2024), the company generated revenue of $2.28 billion, net income of $9.67 million, operating cash flow of $109.16 million, and free cash flow of $79.89 million.

Year-over-year changes for Q3 2024 show a 13.1% decrease in revenue compared to Q3 2023, primarily due to lower fuel prices and volumes. Net income decreased by 55.0% compared to Q3 2023, driven by lower fuel and merchandise contribution. However, operating cash flow increased by 37.0% compared to Q3 2023, mainly from changes in working capital, while free cash flow increased by 39.3%, reflecting the increase in operating cash flow.

Liquidity

The company’s liquidity position remains strong, with $292 million in cash and cash equivalents and $577 million in available credit facility capacity as of September 30, 2024. ARKO’s current ratio stood at 1.63, while its debt-to-equity ratio was 2.33, indicating a moderately leveraged capital structure. The company’s quick ratio is 1.13x.

ARKO has access to a $140 million PNC Line of Credit, which was undrawn as of September 30, 2024, and an $800 million Capital One Line of Credit, with $418.70 million available as of the same date.

Operational Highlights and Transformation Initiatives

During the third quarter of 2024, ARKO continued to focus on its multi-year transformation plan, which includes the conversion of retail stores to dealer sites, targeted capital allocation towards strategic retail store investments, and an increased focus on pricing and procurement strategies to support ongoing merchandise margin growth.

The company exceeded its target of converting 40 retail stores to dealer sites by the end of the third quarter, completing 51 such conversions. By the end of the fourth quarter, ARKO expects to convert an additional 100 retail stores, which is expected to result in an annualized benefit of $8.5 million to the combined wholesale and retail segments.

ARKO’s foodservice initiatives, including the expansion of its private-label pizza program and the introduction of Nathan’s Famous hot dogs, have also shown promising results. The company’s loyalty program, fas REWARDS, has continued to grow, with approximately 2.23 million enrolled members as of the end of the third quarter of 2024.

Segment Performance

Retail Segment For the three months ended September 30, 2024, the retail segment generated $1.42 billion in total revenues, a decrease of 14.5% compared to the prior year period. This was driven by a 14.4% decrease in fuel revenue to $929.78 million, primarily due to a 6.6% decrease in same-store fuel gallons sold and a 0.33 per gallon decrease in the average retail fuel price. Merchandise revenue for the retail segment decreased 7.3% to $469.62 million, mainly due to a 7.7% decrease in same-store merchandise sales. The retail segment’s operating income was $71.02 million, a 12.8% decrease from the third quarter of 2023.

For the nine months ended September 30, 2024, the retail segment generated $4.14 billion in total revenues, a 5.8% decrease from the prior year period. Retail operating income decreased 11.1% to $178.61 million.

Wholesale Segment For the three months ended September 30, 2024, the wholesale segment generated $727.40 million in total revenues, a 14.6% decrease compared to the prior year period. Wholesale operating income decreased 18.5% to $8.17 million, as fuel contribution declined $3.0 million, or 23.4%.

For the nine months ended September 30, 2024, the wholesale segment generated $2.17 billion in total revenues, an 8.2% decrease from the prior year period. Wholesale operating income of $24.26 million was relatively flat compared to the first nine months of 2023.

Fleet Fueling Segment For the three months ended September 30, 2024, the fleet fueling segment generated $128.27 million in total revenues, a 13.4% decrease compared to the prior year period. Fleet fueling operating income increased 22.8% to $10.84 million, as fuel contribution improved by $1.9 million, or 21.6%.

For the nine months ended September 30, 2024, the fleet fueling segment generated $405.27 million in total revenues, a 1.5% increase from the prior year period. Fleet fueling operating income increased 15.3% to $30.65 million.

GPMP Segment For the three months ended September 30, 2024, the GPMP segment generated $1.19 billion in total inter-segment revenues, a 19.3% decrease compared to the prior year period. GPMP operating income decreased 5.3% to $25.58 million.

For the nine months ended September 30, 2024, the GPMP segment generated $3.58 billion in total inter-segment revenues, a 10.2% decrease from the prior year period. GPMP operating income decreased 2.6% to $74.66 million.

Risks and Challenges

ARKO faces several risks and challenges, including the highly competitive and fragmented convenience store industry, changes in consumer preferences and behavior, the volatility of fuel prices, and the potential impact of macroeconomic factors such as inflation and rising interest rates on consumer spending.

The company’s reliance on a limited number of fuel suppliers and the potential for supply chain disruptions also pose risks to its operations. Additionally, ARKO’s acquisition strategy and the integration of acquired businesses carry inherent risks and could impact the company’s financial performance if not executed effectively.

Outlook and Guidance

For the fourth quarter of 2024, ARKO expects its adjusted EBITDA to be in the range of $53 million to $63 million. This guidance reflects the company’s expectations for EBITDA growth in its Wholesale and Fleet segments, driven by the accumulating benefit of its retail-to-wholesale channel optimization efforts and continued strength in fuel margin in its Fleet segment.

The company’s full-year 2024 adjusted EBITDA guidance range is $245 million to $255 million, with the midpoint of the range being $5 million below the company’s beginning-of-year guidance, primarily due to reduced expectations for fourth-quarter same-store merchandise sales.

ARKO expects Q4 same-store sales to decline in the low to mid-single-digit range and retail fuel margin in Q4 to be between $0.38 and $0.42 per gallon. The company reported adjusted EBITDA of $78.8 million for Q3 2024, which was at the midpoint of their guidance.

Industry Trends

The convenience store industry has seen steady growth, with a CAGR of 4-5% over the past 5 years. However, the industry has also faced headwinds from macroeconomic factors such as inflation and rising interest rates, which have impacted consumer spending.

Conclusion

ARKO Corp has demonstrated resilience and adaptability in the face of a challenging macroeconomic environment. Its strategic focus on retail convenience store operations, wholesale fuel distribution, and ongoing transformation initiatives position the company for long-term success. While the company navigates near-term headwinds, its strong liquidity, diversified revenue streams, and commitment to operational excellence suggest a promising outlook for ARKO’s future. The company’s diversified business model, with retail, wholesale, fleet fueling, and internal fuel supply segments, has helped it navigate the challenging macroeconomic environment. While the retail and wholesale segments faced volume and margin pressures, the fleet fueling segment delivered strong performance, and the GPMP segment continued to provide a stable source of fuel supply and distribution. ARKO remains focused on optimizing its retail footprint, expanding its foodservice offerings, and leveraging its multi-faceted operations to drive profitability.

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