Alimentation Couche-Tard experienced merchandise and service gross margin increases of 0.5% in the U.S, 3.4% in Europe and 0.2% in Canada.
Alimentation Couche-Tard Inc. has officially released the financial results for the third quarter ending Jan. 31, 2016. The company’s financial report revealed that the company experienced significant growth and accrued substantial earnings throughout the quarter. Solid company growth was driven by a number of factors, including the team’s delivery of exceptional customer service amidst the competition. Additionally, Couche-Tard’s new global brand, Circle K, has begun to alter the convenience landscape in the southeastern U.S. The company’s integration of The Pantry has also proven to deliver positive results, and the company has also made great progress in its expansion outside of the U.S., in Europe and Canada.
Overview of the Third Quarter of Fiscal 2016
For its third quarter, Couche-Tard has announced net earnings of $274 million or 48 cents per share on a diluted basis, up 10.4% over the corresponding period of fiscal 2015. The results for the third quarter of fiscal 2016 were affected by a $27.2 million pre-tax curtailment gain on defined benefits pension plans obligation, a $22.9 million income tax expense stemming from an internal reorganization, a $10.4 million pre-tax write-off charge in connection with a fuel rebranding project, a $10.1 million pre-tax accelerated depreciation and amortization expense in connection with the Corporation’s global brand initiative, a $9.2 million pre-tax charge on early termination of certain fuel supply contracts as well as a $4.1 million pre-tax net foreign exchange loss. Results from the third quarter of fiscal 2015 included a $16.6 million pre-tax net foreign exchange loss, a $16.1 million income tax expense stemming from an internal reorganization, a $10.4 million pre-tax loss from the disposal of the aviation fuel business, an $8.1 million pre-tax restructuring expense, a $2.6 million pre-tax curtailment gain on defined benefits pension plans obligation as well as a $0.6 million pre-tax negative goodwill.
Excluding these items as well as acquisition costs from both comparable periods, net earnings for the third quarter of fiscal 2016 would have been approximately $301 million (53 cents per share on a diluted basis) compared with $289 million (51 cents per share on a diluted basis) for the third quarter of fiscal 2015, an increase of $12 million, or 4.2%. This increase is attributable to the solid contribution from acquisitions, including The Pantry Inc. store network and to strong organic growth from both convenience store and fuel operations. These contributions were partially offset by lower road transportation fuel margins in the U.S., higher operating expenses to support our strong growth, the negative net impact from the translation of revenues and expenses from our Canadian and European operations into U.S. dollars and by the impact of the higher consolidated income tax rate.
“This quarter has been strong on many fronts. Our teams continue to deliver a great customer experience amidst a lot of competition, resulting in solid growth in merchandise and services gross profits and in fuel volumes. Our new global Circle K brand has begun changing the convenience landscape in the southeastern U.S. where we are on track to reimage over 400 stores before the end of the fiscal year,” said Brian Hannasch, president and CEO. “I have seen first-hand that our new global brand not only fuels enthusiasm among our employees but also among our customers, who are congratulating our teams when they visit our rebranded sites. In Europe, where we are changing from the established Statoil brand to Circle K, our two pilot stores in Norway are already generating very encouraging responses from customers.”
“Back in the southeastern U.S., our integration of The Pantry continues to deliver very positive results and our review of fuel partners and agreements in this region is now complete. As a result, we are changing the fuel branding on more than 1,000 of our stores. This decision has generated some up-front costs in relation to the early termination of existing agreements and the replacement of fuel signage and equipment,” continued Hannasch. “However, we believe the investment is well worth it as it will very quickly pay for itself through the significant synergies we anticipate from higher fuel volumes and better pricing conditions.”
“Finally, right after the end of the quarter, we have welcomed approximately 2,000 new colleagues and 444 stores to the Couche-Tard family with the closure of the purchase of Topaz on Feb. 1. Furthermore, just last week, we announced our intent to further expand in Canada significantly. We have reached an agreement with Imperial Oil for the acquisition of 279 of their Esso-branded sites in Ontario and Quebec,” Hannasch said. “Conditional to its approval by the regulatory authorities, this acquisition would allow us to expand our network and reach more customers in Canada than ever before.”
“As we near the end of another remarkable fiscal year with three consecutive quarters growth, our return on equity is high, the momentum of our business remains strong and our people remain focused,” Hannasch concluded.
The Pantry Inc.
The results for the 16 and 40-week periods ending Jan. 31, 2016 include those of The Pantry, which the company acquired on March 16, 2015.
Purchase price allocation and adjustments to results previously reported
During the third quarter of fiscal 2016, the purchase price allocation of The Pantry was adjusted and finalized to reflect the company’s fair value assessment of the assets acquired, the liabilities assumed and the goodwill for the transaction. The adjustments made to the preliminary purchase price allocation did not have a significant impact on previously reported results.
Synergies and cost reductions initiatives
Couche-Tard is actively working on realizing identified cost reductions opportunities in connection with The Pantry acquisition in addition to realizing available synergies through growth of in-store sales and fuel volumes in this geographic area, improving operations, sharing business awareness and each company’s best practices, and optimizing supply conditions.
The company expects to achieve a minimum of $85 million in cost reductions before income taxes over the 24-month period following the acquisition. Since the acquisition, Couche-Tard has already taken actions that should allow the company to record annual cost reductions, which are estimated at approximately $63 million, before income taxes. Cost reductions were recorded, estimated at approximately $20 million, before income taxes, during the 16-week period ending Jan. 31, 2016, and at approximately $43 million, before income taxes, since the acquisition. These cost reductions mainly reduced operating, selling, administrative and general expenses and, to a lesser extent, the cost of sales. These amounts do not necessarily represent the full annual impact of all initiatives.
Merchandise and service supply costs
In addition to the cost reductions discussed above, Couche-Tard has taken actions which should allow the reduction of annual merchandise and service supply costs by approximately $24 million, before income taxes. These reductions should mainly result from economies of scale as well as from the negotiation of improved supply conditions. Realized savings amounted to approximately $7 million, before income taxes, for the 16-week period ending Jan. 31, 2016, and to approximately $14 million, before income taxes, since the acquisition.
Fuel branding, supply and distribution
Towards the end of the third quarter, the company finalized the review of its fuel branding, supply and distribution strategy for the Southeastern region of the U.S., which was initiated following the acquisition of The Pantry. As a result of the review, the company changed the fuel branding for more than 1,000 stores in this region. Consequently, some existing fuel supply agreements were terminated and new contracts were entered. This decision will allow Couche-Tard to realize significant synergies through higher fuel volumes and better pricing conditions. As a result of these changes, the company paid $9.2 million for the early termination of existing fuel supply contracts, which negatively impacted earnings for the third quarter of fiscal 2016. Additionally, results for the third quarter include a write-off charge of approximately $10.4 million, resulting from the replacement of fuel signage and equipment before the end of their useful lives. A significant portion of the costs for the new assets will be assumed by new fuel suppliers. Anticipated synergies associated with the strategy are expected to quickly repay for these charges.
Replacement of store equipment
Following extensive and thorough analysis, it was concluded that some of the store equipment and signage acquired as part of The Pantry acquisition would need to be replaced or upgraded before the end of their current useful lives in order to implement some programs and to ensure a consistent offering and branding across the markets that The Pantry stores operate in. These replacements and upgrades are expected to improve the customers’ experience and support growth objectives. In connection with this plan, the depreciation period for the assets the company plans to replace or upgrade has been shortened to reflect current replacement and upgrade plans, resulting in a higher depreciation expense for the third quarter and in a slightly higher expected depreciation expense for the next two fiscal years.