Murphy USA's Merchandise Profits Accelerate in Q2

EL DORADO, Ark. — Murphy USA Inc. performed well during the second quarter of 2017 against the backdrop of robust retail margins, president and CEO Andrew Clyde announced during the company's earnings call Aug. 3.

"Our strong results in the second quarter demonstrate the substantial earnings power of our low-cost, high-volume business model during the periods of favorable retail fuel margins," Clyde said. "Meanwhile, our merchandise profits are accelerating while per-store operating costs continue to decline, creating further upside operating leverage while reducing the company's earnings volatility during periods of challenging fuel margins."  

Over all, Murphy USA's net income was $55.6 million, or $1.51 per diluted share in the second quarter compared to $46.3 million, or $1.17 per diluted share in the same quarter of 2016.

Total EBITDA for the quarter was $129.1 million, up from $108.6 million in the same period a year ago, and up sharply from the first quarter of 2017 results of $30.3 million. 

On the fuel side of the business, total retail fuel contribution increased 57.2 percent during the quarter, as falling product prices created a more favorable market structure and margin environment vs. the consistently rising wholesale prices of the same period last year, according to Clyde. Total network retail gallons sold in the quarter increased 2.5 percent due to new store growth, offsetting average per store month retail volume declines of 2 percent.

The executive attributed the decline to trends in some areas of its network, including:

• Falling product prices led to less aggressive pricing;
• Macro demand for gasoline improved modestly from the first quarter;
• The tactics and behaviors of some competitors becoming more aggressive;
• Volume loss, particularly in some of the highest-performing markets that would be the most attractive to competitive new entry and new builds in the Southeast; and
• Shifts in immigration trends and lower economic activity impacting the Southwest market.

Despite these trends, Murphy USA saw positive growth in its merchanise portfolio. Total merchandise sales increased 2.8 percent to $605.7 million in the second quarter 2017 from $589.5 million in the second quarter 2016. Total merchandise margins increased a record 16.1 percent vs. 15.7 percent one year ago.

Non-tobacco sales were up 4.8 percent on an average per store month basis, driving a 2.3-percent increase in per store margins. Tobacco margins were up 2.6 percent on a same-store sales basis, but down 0.3 percent on an average per store month basis.

When asked during the Q&A portion of the earnings call about the driving force behind Murphy USA's merchandise margin, Clyde cited the company's success to smartening up around some of its center store opportunities, namely its product mix.

"We just did a reset on our kiosks for non-tobacco and non-beverage items, which was long overdue. The store managers that I spoke with in the days after were really excited about the next mix of products," he explained.

Operating expenses before credit card fees fell by 2.4 percent on a per store basis during the quarter. "We do expect these comps to get a little more difficult as we start to cycle the benefits of our labor model in 2016, which largely took place in the second half," the executive noted. "However, we still have areas to focus on at the store level which are very meaningful opportunities to continue to drive cost and our breakeven requirement down lower."

Keeping in line with Murphy USA's goal of opening 40 to 50 new stores a year, the convenience store operator put a welcome sign on five new locations during the second quarter. This brought the company's year-to-date total to 10 new stores.

Of the 17 high-performing sites that were taken down in the first quarter for raze and rebuild, 12 have reopened with the remaining five expected to be up and running by mid-August, Clyde estimated. The three remaining slated for raze and rebuild will go down in the third quarter and should be open by the end of the year.

Additionally, of the approximately 240 three-door super coolers Murphy USA plans to install this year, 138 have been completed and the reminder should be completed by year's end.

Clyde also offered insight on the timing of a rewards program rollout. Murphy USA is currently in the midst of designing a program, although it is unable to release the name of the pilot markets. The chief executive did, however, express the level of difficulty when creating a rewards program.

"I think the key thing to remember is when you're an everyday, low-price retailer and your customer comes to you for a low price, you're not going to be able to do what the majority of loyalty programs have done in the space, which is raise prices to all the customers and then discount to those who are participating in loyalty," Clyde explained, noting that most retailers can be successful in that type of rewards program because it is designed around price discrimination, but Murphy USA plans to set itself apart from other "me too" programs that are out there today.

"More to come on that, but we've committed to not implement a 'me too' model, but rather something that adds to the already loyalty and stickiness we have as an everyday low-price retailer," he said.