Core-Mark looks ahead to growing sales and margins while leveraging costs to drive growth.
Core-Mark Holding Co. Inc. released its third quarter financial results ending Sept. 30, 2018.
Core-Mark is one of the largest marketers of fresh and broad-line supply solutions to the convenience retail industry in North America.
“Our third quarter profitability was strong as we were able to expand margins, capitalize on a significant holding gain opportunity and leverage our operating expenses despite flat sales. We continue to benefit from our ability to grow same store sales and gain market share wins with the independent store base while building a pipeline of new larger market share opportunities,” said Scott McPherson, president and CEO. “Looking ahead we are focused on our core strategic objectives: growing sales and margins faster than the industry, expanding our leadership position in category management solutions and leveraging costs to drive profitable growth.”
Third Quarter Results
Net sales decreased 0.9% to $4.27 billion compared to $4.31 billion for the same period in 2017. Non-cigarette sales increased 3.4% driven by the increasing popularity of alternative nicotine delivery products, which drove growth in Health, Beauty & General sales of 34.5%. Non-cigarette sales were 32.7% of total net sales for the third quarter of 2018 compared to 31.4% of total net sales for the same period in 2017. Cigarette sales decreased 2.8% driven by declines in cigarette consumption. In addition, the expiration of the Kum & Go distribution business in April 2018 decreased non-cigarette and cigarette sales by 4.3% and 1.4%, respectively.
Gross profit increased 5.2% to $233.8 million compared to $222.2 million for the same period in 2017. The increase in gross profit was driven by an increase in non-cigarette sales to existing customers and a $7.4 million one-time cigarette tax stamp inventory holding gain. This was offset by higher LIFO expense and a decrease in cigarette inventory holding gains. Gross profit margin increased 32 basis points to 5.47% of total net sales from 5.15% for the same period in 2017, driven by a shift in sales mix towards higher margin non-cigarette products and the aforementioned inventory holding gain. Remaining gross profit, a non-GAAP financial measure, increased 2.8% to $227.7 million from $221.6 million.
The Company’s operating expenses were $198.9 million compared to $196.8 million for the same period in 2017. The slight increase in operating expenses was driven by increases in employee bonus and stock compensation expense and higher transportation costs offset by productivity gains in warehousing operations. Operating expenses as a percentage of net sales increased to 4.7% compared to 4.6% for the third quarter of 2017 due to the shift in sales mix to non-cigarette products, which have lower price points than cigarettes.
Net income was $23.7 million compared to $13.7 million for the same period in 2017, a 73.0% increase. The improvement was driven by increased non-cigarette sales to existing customers, a net increase in inventory holding gains, leverage in overall operating expenses, and the Tax Cuts and Jobs Act, which reduced income tax expense by approximately $4.4 million for the quarter. Adjusted EBITDA, a non-GAAP financial measure, increased 23.2% to $59.0 million compared to $47.9 million for the third quarter of 2017.
First Nine Months of 2018
Net sales increased 5.9% to $12.3 billion compared to $11.6 billion for the same period in 2017. Non-cigarette sales increased 15.6% while cigarette sales increased 1.8%. Non-cigarette sales were 32.9% of total net sales compared to 30.2% for the same period in 2017.
The increase in non-cigarette sales was driven by an increase in sales to existing customers and net market share gains, including the additions of Farner-Bocken and Walmart Inc., partially offset by the expiration of the Kroger distribution agreement. Health, Beauty & General sales increased 33%, benefiting from the increasing usage of alternative nicotine delivery products. In addition, Food and Fresh sales increased 9.5% and 11% respectively, compared to the same period in 2017. The increase in cigarette sales was driven by Farner-Bocken and a 4.8% increase in the average sales price per carton, offset by a 7.4% decrease in carton sales for the remaining business.
Gross profit increased 11.7% to $650.5 million from $582.3 million for the same period in 2017. Gross profit margin increased 28 basis points to 5.29% from 5.01% for the same period in 2017, driven by the acquisition of Farner-Bocken, which has a higher sales mix of food products compared to Core-Mark’s average distribution center, and the shift in sales mix toward higher margin non-cigarette items for the remainder of the business. Remaining gross profit increased 11.1% to $646.6 million from $581.8 million.
The Company’s operating expenses for the first nine months of 2018 were $595.7 million compared to $542.6 million for the same period in 2017. The increase was due to the Farner-Bocken acquisition and higher distribution expenses, partially offset by productivity gains and other operational improvements at our warehouses. Operating expenses as a percentage of net sales increased to 4.8% compared to 4.7% for the first nine months of 2017 due to the shift in sales mix to non-cigarette products, which have lower price points than cigarettes.
Net income was $33.4 million compared to $22.7 million for the same period in 2017, a 47.1% increase. Net income benefited from the Farner-Bocken acquisition, the increase in non-cigarette sales to existing customers, operational improvements, and the Tax Cuts and Jobs Act partially offset by the expiration of the Kroger distribution agreement and a decline in the consumption of cigarettes. Adjusted EBITDA, a non-GAAP financial measure, was $125.7 million compared to $97.6 million for the first nine months of 2017, a 28.8% increase.
Dividend
Core-Mark announced today that its Board of Directors has approved an $0.11 cash dividend per common share, or $0.44 annually, an increase of 10% from the prior dividend. The dividend is payable on Dec.14, 2018 to stockholders of record as of the close of business on Nov. 20, 2018.
Guidance for 2018
The Company has updated its guidance for the full year of 2018. Annual net sales for 2018 are now expected to be between $16.2 billion and $16.4 billion, compared to $16.6 billion to $16.8 billion previously forecast. Diluted EPS for the year are estimated to be between $0.88 and $0.96 compared to prior expectations of $0.84 to $1. Diluted EPS excluding LIFO expense are expected to be between $1.31 and $1.40 compared to prior expectations of $1.13 to $1.29. The Company raised the low end of Adjusted EBITDA expectations to $162 million while maintaining its high end expectations of $167 million. Key assumptions have also been updated. The Company has raised its LIFO expense forecast from $18 million to $27 million, and expects 46.2 million diluted outstanding shares as opposed to the 46.4 million shares estimated previously. Projections of a tax rate of 25% remain the same. Capital expenditures for 2018 are expected to be approximately $30 million.
Conference Call and Webcast Information
Core-Mark will host an earnings call on Tuesday, Nov. 6, 2018 at 9 a.m. Pacific time during which management will review the results of the third quarter of 2018. The call may be accessed by dialing 1-800-588-4973 using the code 47690849. The call may also be listened to on the Company’s website at www.core-mark.com.
