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BRENTWOOD, Tenn. -- Delek US Holdings Inc. had a clear message today regarding the future of its retail segment. During the company's second-quarter 2013 earnings call, the parent of MAPCO Express Inc. said it continues to focus on growing its “mega store” count and does not have intentions to spin off its retail operations any time soon.
"We are in the initial phases of converting our system to these mega stores. … So far, we are happy with the results," said Uzi Yemin, Delek's chairman, president and CEO. He said the business model of 2,000-square-foot stores is gradually "going away" and the company plans to duplicate its MAPCO Mart mega store prototype to other markets, especially in Arkansas.
"It's really premature to think about an IPO [initial public offering] of this system, since we are just now converting the business model to a much more sophisticated convenience store than what we used to have five, seven years ago," said Yemin, adding that the company is primarily interested in acquiring big stores that can implement the brand's private label and foodservice strategy.
Delek’s retail segment markets fuel and merchandise through a network of a convenience store locations operated under the MAPCO Express, MAPCO Mart, East Coast, Fast Food and Fuel, Favorite Markets, Delta Express and Discount Food Mart banners.
At the end of the second quarter, Delek's retail segment operated 370 locations vs. 374 locations at the end of the 2012 second quarter. During its latest quarter, three new large-format stores opened, bringing the company's total openings to five for the first half of this year. An additional five to seven large-format stores are expected to open in the second half of 2013.
"We need at least 100 mega stores to be able to justify this business, and obviously -- at this moment -- we are at 20 to 25. We are going to build 10 this year and probably shoot for 20 next year," said Yemin. "And again, we'll try to make it. I don't know if we can make it this fast. But at the end of the day, I don't think we can justify this business without at least 100 mega stores."
For the three months ended June 30, Delek US reported net income of $46.6 million vs. net income of $67.8 million in the second quarter of 2012.
Delek US' retail segment contribution margin was $16 million in the second quarter, which compares to $18.2 million in the same period last year. Higher fuel margins were partially offset by lower merchandise margins, reducing results on a year-over-year basis, the company reported. Its fuel margin was 19.6 cents per gallon in the latest quarter compared to 18.2 cents per gallon in the prior-year-period.
In addition, its merchandise margin was 28.3 percent in the second quarter, compared to 29.7 percent in the 2012 second quarter. Meanwhile, operating expenses increased to $34.1 million compared to $31.7 million in the year-ago period, primarily due to expenses related to the new large-format stores and advertising expenses related to expansion of its loyalty program, the company stated.