Executive Summary / Key Takeaways

• ARKO Corp. is strategically transforming its business model, leveraging its diversified retail, wholesale, fleet fueling, and GPMP segments to enhance profitability and resilience in a challenging macroeconomic environment.
• A core initiative is the "dealerization" program, converting select retail stores to wholesale dealer sites to capture higher profit margins from fuel supply and rental income, with an expected annualized benefit of $15 million to $20 million at full scale.
• Despite recent headwinds from inflation, consumer spending pressure, and severe weather impacting retail sales and traffic, the company is focused on operational efficiencies, margin expansion in high-contribution categories like OTP and foodservice, and targeted promotional strategies.
• ARKO is investing in organic growth through a new store design pilot, NTI development, and technology enhancements like the fas REWARDS loyalty program and OTP backbar refresh to drive traffic and improve the customer experience in its retained retail portfolio.
• The company maintains substantial liquidity and expects the benefits from its transformation plan and disciplined cost management to support its full-year 2025 Adjusted EBITDA guidance range of $233 million to $253 million, assuming a retail fuel margin of $0.40 to $0.42 per gallon.

ARKO Corp. stands as a significant player in the fragmented U.S. convenience store and fuel retail industry, operating a diverse portfolio across four distinct segments: retail, wholesale, fleet fueling, and GPMP. This multi-faceted structure, a result of strategic acquisitions over the past decade, positions ARKO uniquely against competitors ranging from global giants like Alimentation Couche-Tard (ATD) and national chains like Murphy USA (MUSA) and Casey's General Stores (CASY) to numerous smaller independent operators. While larger peers like ATD benefit from immense scale and MUSA excels in fuel price leadership, and CASY boasts strength in prepared foods, ARKO's competitive stance is defined by its diversified revenue streams and a strategic pivot towards optimizing its existing footprint.

In response to persistent macroeconomic pressures characterized by inflation and constrained consumer spending, ARKO has embarked on a multi-year transformation plan. This strategy is not merely reactive but aims to fundamentally enhance the company's profitability and operational efficiency by re-evaluating its extensive portfolio of over 3,000 locations (including retail, dealer, and cardlock sites). The core of this transformation involves a deliberate shift in channel strategy and targeted investments in the retail segment.

A key pillar of ARKO's strategic evolution is the "dealerization" program. Recognizing that certain retail locations could yield greater profitability under a different operating model, ARKO is converting select company-operated stores to dealer sites within its wholesale segment. This allows ARKO to transition from managing day-to-day store operations and merchandise inventory to focusing on fuel supply agreements and collecting rental income from these sites. The company has made significant progress on this front, converting over 150 stores in 2024 and an additional 59 in the first quarter of 2025. This initiative is expected to deliver a substantial annualized operating income benefit of $15 million to $20 million at full scale, in addition to potential reductions in general and administrative expenses as the retail footprint is refined. This strategic move leverages ARKO's existing wholesale infrastructure and relationships, providing a stable, recurring revenue stream that is less susceptible to the volatility of retail merchandise sales and operating costs.

Complementing the portfolio optimization, ARKO is intensifying its focus on the remaining retail stores deemed strategic for long-term growth. This involves targeted capital allocation guided by a pilot program initiated in 2024. The goal is to enhance the customer experience and strengthen the value proposition, particularly through an expanded and refined merchandise assortment with a focus on food. As part of this, ARKO is developing a new store design pilot in seven locations, with construction starting in the first half of 2025, featuring an enhanced foodservice offering under a new brand, "Fast Craves." This focus on foodservice, where ARKO sees under-penetration as an opportunity, is already showing promise, with strong customer response to recent expansions like Nathan's Famous Hot Dogs and a value-oriented pizza offering.

ARKO's technological differentiation, while perhaps less about cutting-edge hardware compared to some industries, lies in its strategic application of technology and data to enhance customer engagement and operational efficiency. The fas REWARDS loyalty program, with over 2.3 million enrolled members, is a prime example. Enrolled members demonstrate significantly higher spending and visit frequency compared to non-enrolled customers, providing valuable data to inform targeted promotions. The recent "Fueling America's Future" campaign, offering substantial fuel discounts tied to in-store purchases for loyalty members, is a direct application of this strategy, aiming to drive traffic and increase basket size by linking fuel and merchandise sales. Furthermore, the company is leveraging data to optimize its merchandise mix, notably enhancing its Other Tobacco Products (OTP) category through backbar refreshes in over 900 stores by early 2025. This focus is strategic, as OTP offers a significantly higher contribution margin (~20 percentage points) than traditional cigarettes, capturing market share in a shifting consumer landscape. The new store design pilot also incorporates technology to support the enhanced foodservice offering and overall in-store experience.

Financially, ARKO's performance in early 2025 reflected the challenging environment. For the first quarter ended March 31, 2025, the company reported a net loss attributable to common shareholders of $14.090 million, compared to a net loss of $2.008 million in the prior year period. Total revenues decreased by 11.8% year-over-year to $1.83 billion, driven by declines in both fuel and merchandise revenue. Fuel revenue decreased by 11.3% primarily due to lower average fuel prices and fewer gallons sold, impacted by severe weather in early 2025 and the macroeconomic environment. Merchandise revenue saw a more significant 14.5% decrease, largely due to the impact of stores converted to dealers and a decline in same-store merchandise revenues (down 6.9% overall, and 5.2% excluding cigarettes), reflecting reduced customer transactions. Site operating expenses decreased by 8.7%, partially offsetting revenue declines, demonstrating disciplined cost management despite higher snow removal costs. The operating loss widened to $11.764 million from $4.866 million, primarily due to lower same-store merchandise and fuel contribution, although partially mitigated by the benefit from converted stores. Interest and other financial expenses increased significantly, largely due to unfavorable fair value adjustments on warrants compared to the prior year.

Despite the Q1 headwinds, ARKO's diversified segments provided a degree of stability. The Wholesale segment saw a modest increase in operating income, benefiting from the initial impact of retail store conversions which contributed approximately 14 million gallons and offset declines at comparable wholesale sites. The Fleet Fueling segment also saw an increase in operating income, driven by favorable diesel margins at proprietary cardlocks and improved margins at third-party locations following the closure of underperforming sites, despite a weather-related decline in total gallons.

Looking ahead, ARKO's guidance reflects cautious optimism tempered by the ongoing macro uncertainty. The company expects Q2 2025 Adjusted EBITDA in the range of $70 million to $80 million. For the full year 2025, ARKO is maintaining its Adjusted EBITDA guidance range of $233 million to $253 million, assuming a retail fuel margin of $0.40 to $0.42 per gallon. This outlook is underpinned by expectations for continued benefits from the channel optimization program, which is projected to drive mid to high single-digit operating income growth in the Wholesale segment, and resilient performance in the Fleet segment. While same-store retail trends are expected to remain challenged in the near term (merchandise sales down low to mid-single digits, gallons down mid-single digits in Q2), the guidance anticipates that the higher productivity of retained stores and the strategic initiatives will contribute positively. Management noted favorable fuel margins in April and May 2025 ($0.46 per gallon), suggesting potential upside if volatility persists.

ARKO's liquidity position remains robust, with approximately $847 million in liquidity as of March 31, 2025, including $265 million in cash and cash equivalents and significant availability under its credit facilities. This provides flexibility to fund operations, capital expenditures (including investments in the transformation plan and NTIs), and opportunistic share repurchases, such as the approximately 1.3 million shares bought back in Q1 2025. While approximately 49% of its debt is variable rate, exposing it to interest rate risk, the overall liquidity appears sufficient to meet near-term obligations and strategic investments.

The investment thesis for ARKO hinges on the successful execution of its transformation plan. The strategic shift towards a more optimized portfolio, leveraging the higher-margin potential of the wholesale segment for converted stores while focusing retail investments on high-potential locations, offers a clear path to improved profitability and efficiency. The company's efforts to enhance the retail offering through foodservice, OTP, and loyalty programs are critical for driving traffic and increasing basket size in the face of consumer pressure. The diversified business model provides a foundational stability that many single-segment operators lack, with wholesale and fleet fueling contributing reliable cash flows.

However, significant risks remain. The challenging macroeconomic environment could persist longer than anticipated, further impacting consumer spending and traffic across all segments. Competition is intense, and larger, more efficient operators could continue to pressure margins. Fluctuations in fuel prices and supply chain disruptions are inherent risks. The success of the transformation plan relies on effective execution, including the smooth conversion of stores, successful implementation of new retail concepts, and the realization of expected cost efficiencies. Regulatory changes, particularly concerning environmental laws and tobacco products, also pose potential challenges.

Conclusion

ARKO Corp. is navigating a complex market landscape by proactively implementing a strategic transformation designed to optimize its business model and enhance long-term profitability. The core of this strategy, the conversion of retail stores to higher-margin wholesale dealer sites, alongside targeted investments in its most promising retail locations and technological enhancements like the fas REWARDS program and foodservice innovation, positions the company to potentially unlock significant value. While near-term performance is impacted by macroeconomic headwinds and weather, the diversified segment structure provides a crucial layer of stability. The successful execution of the transformation plan, coupled with disciplined cost management and a focus on high-contribution categories, will be key to realizing the expected annualized benefits and achieving the company's 2025 financial targets. For investors, ARKO represents an opportunity to invest in a company actively reshaping itself to drive efficiency and profitability in a resilient, albeit challenging, industry.