RICHMOND, Va. — ARKO Corp. President, Chairman and CEO Arie Kotler attributes the success of the company’s fiscal third quarter of 2023 to the execution of key marketing and merchandising strategies, and continued integration of its newly acquired businesses.
For the quarter, same-store merchandise sales, excluding cigarettes, increased 1 percent when compared to the third quarter of 2022. Total same-store sales were impacted by approximately $2 million in increased investments in customer acquisition related to expanding membership in the fas REWARDS loyalty program. This caused a reduction in same-store merchandise sales of approximately 0.4 percent and same-store merchandise sales excluding cigarettes of approximately 0.6 percent.
Merchandise margin increased by 50 basis points in the quarter vs. 31.7 percent in the third quarter of 2022. Merchandise gross profit contribution grew by $21.8 million for the quarter, or 15.7 percent, as compared to the year-ago period.
During the company's most recent earnings call, Kotler highlighted the three key pillars of ARKO's marketing and store initiatives that have contributed to strong in-store performance. They are:
1. Grow sales in core destination categories through data-driven decisions and strong supplier partnerships
During the third quarter, the six core destination categories — packaged beverages, candy, salty snacks, packaged sweet snacks, alternative snacks and beer — accounted for 53 percent of merchandise contribution. Same-store sales for these categories increased by 2.4 percent compared to the same quarter of 2022.
"These concentrations allow us to focus our initiative on categories that we believe will move the needle. We have a deliberate approach to these categories using data-driven decisions in our execution. We leverage our strong supplier partnerships and our results speak for themselves," Kotler said. "Year over year, we have continued to grow contribution dollars from these categories. Over the last three years our concentration of merchandise contribution from these categories has expanded approximately 570 basis points and merchandise contribution for these categories has grown at approximately 17 percent compounded annual growth rate."
2. Drive increased frequency and total spend through order and delivery, and relevant in-store and in-app personalized deals via the fas REWARDS program
ARKO added more than 365,000 enrolled members during the quarter, ending the period with 1.85 million total enrolled fas REWARDS members. This is a 50 percent increase in enrolled members since the end of Q3 2022. The increase is attributable to the retailer’s strong $10 loyalty enrollment promotion, Kotler commented.
"In addition, I'm very pleased that our loyalty members are taking greater advantage of the value we offer and participated in more of our member-only promotional activity this quarter," the chief executive said, noting that during the quarter, active enrolled members made an average of more than four more trips per month compared to our nonenrolled members. "For the same period, they also spent on average $41 per month, more than nonenrolled members."
ARKO is targeting 3 million enrolled members by the end of 2024.
3. Develop high-margin food programs
Last month, ARKO wholly owned subsidiary GPM Investments LLC appointed Richard Guidry to the newly created role of senior vice president of foodservice.
"We believe his distinguished track record and long experience underscore how serious we are about nailing the strategy, growth and execution of our foods business," Kotler said. "Since joining GPM, he has been getting up to speed, meeting with partners in the organization, meeting with our suppliers partners, visiting stores and even working shifts to better understand how our stores operate.
"We see the development of our strategy around food as a multiyear opportunity, with wins along the way. We are extremely excited to welcome Richard to the team and look forward to sharing more as we work with Richard to further develop our full service strategy," he added.
Other Q3 2023 Financials
Overall, for the third quarter, ARKO reported:
Net income of $21.5 million compared to $25 million in the third quarter of 2022.
Adjusted EBITDA was $91.2 million vs. $99.5 million for the year-ago period primarily due to reduced fuel contribution at same stores, with retail cents per gallon of 40.3 cents during Q3 2023 vs. 44.8 cents in Q3 2022.
Retail fuel profitability increased $3.8 million to $121.3 million. Same-store fuel profit was $99.4 million vs. $116.1 million for the same quarter of 2022.
Operating expenses increased 17.2 percent to $30.2 million. This was primarily due to $34.4 million of expenses related to recent acquisitions, offset by a decrease of $1.7 million in expenses at same stores, mainly driven by lower credit card fees and underperforming retail sites that were closed or converted to dealers.
Turning to the merger-and-acquisition front, during the quarter, ARKO closed the books on its 25th acquisition since 2013. On Aug. 15, the retailer acquired seven company-operated stores from Speedy's.
Looking particularly at the integration of Quarles Petroleum to its portfolio, the acquisition generated approximately $24 million in adjusted EBITDA in the last three quarters, ARKO reported.
"Since closing on the acquisition in July 2022, we have already earned back our entire portion of the cash consideration paid for that transaction," Kotler shared.
Richmond-based ARKO operates in four reportable segments: retail, which includes convenience stores selling merchandise and fuel products to retail customers; wholesale, which supplies fuel to independent dealers and consignment agents; fleet fueling, which includes the operation of proprietary and third-party cardlock locations, and issuance of proprietary fuel cards that provide customers access to a nationwide network of fueling sites; and GPM Petroleum, which sells and supplies fuel to its retail and wholesale sites and charges a fixed fee, primarily to its fleet fueling sites.