Falling Fuel Demand And Retail Shifts Will Imperil Outlook

Key Takeaways

• Accelerating electric vehicle adoption and regulatory shifts threaten Arko's traditional revenue streams, compressing profits in both fuel and high-margin convenience categories.
  
• Intensifying competition, shifting consumer habits, and rising labor costs risk eroding margins and make future growth more challenging for Arko's current operating model.
  
• Store remodels, dealerization, and focused loyalty programs are supporting higher margins and earnings, while diversified channels and regulatory trends strengthen long-term profit stability.

Catalysts

Through its subsidiary, operates a chain of convenience stores in the United States.

• The accelerating adoption of electric vehicles is set to reduce long-term demand for gasoline, causing Arko's fuel volumes and related revenues to decline year after year, undermining the core profit engine of its retail and wholesale segments.
  
• Heightening health consciousness and regulatory scrutiny around tobacco and sugary products threaten to erode high-margin categories that currently bolster Arko's net margins, driving structural deterioration in earnings quality and compressing gross profits over time.
  
• Ongoing channel optimization and dealerization efforts, while providing short-term G&A savings, ultimately shrink Arko's company-operated retail footprint and make future growth increasingly reliant on wholesale operations, which face intensifying competition and limited pricing power, putting long-run revenue stability at risk.
  
• The rise of e-commerce and delivery alternatives is reducing convenience store foot traffic, and Arko's current promotional strategy-built around deep in-store discounts tied to fuel-may fail to protect or grow same-store sales as consumer behavioral trends shift away from physical visits, ultimately pressuring top-line growth.
  
• Labor cost pressures, including rising minimum wages and persistent inflation, threaten to outpace Arko's cost containment initiatives; combined with industry-wide competition from larger and more technologically advanced peers, this situation is likely to squeeze net margins and produce volatile or declining earnings in the coming years.

Arko Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Arko compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Arko's revenue will decrease by 2.7% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 0.1% today to 0.0% in 3 years time.
• The bearish analysts expect earnings to reach $980.9 thousand (and earnings per share of $0.01) by about August 2028, down from $9.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 676.0x on those 2028 earnings, up from 60.4x today. This future PE is greater than the current PE for the US Specialty Retail industry at 18.6x.
• Analysts expect the number of shares outstanding to decline by 2.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Arko Future Earnings Per Share Growth

Risks

• The dealerization program is driving significant and accelerating G&A cost savings, with more than $10 million in annual structural reductions expected as the initiative matures, directly boosting net margins over time.
  
• Early results from the new-format store remodels and focus on foodservice (Fas Craves) are showing higher-than-average sales and outsized growth in high-margin categories, which could lead to sustainable increases in profit margins and earnings as more stores are converted or remodeled.
  
• The loyalty program and targeted promotions are materially increasing both trip frequency and basket size among enrolled customers, with members spending nearly 50% more on average and visiting 3 more times per month, which supports higher long-term same-store sales and revenue growth.
  
• Channel optimization in the wholesale business and the stability of fleet and wholesale fuel segments are driving incremental top-line and operating income growth even amid broader retail segment softness, strengthening overall company earnings performance.
  
• OTP (other tobacco products) is contributing robust year-over-year sales and gross margin growth, and as regulatory crackdowns reduce illicit sales by competitors, Arko's legal positioning and back bar investments could yield ongoing margin expansion and help offset declines in cigarette sales, supporting long-term profit resilience.

Valuation

• The assumed bearish price target for Arko is $4.5, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Arko's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $9.0, and the most bearish reporting a price target of just $4.5.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $7.5 billion, earnings will come to $980.9 thousand, and it would be trading on a PE ratio of 676.0x, assuming you use a discount rate of 12.3%.
• Given the current share price of $4.85, the bearish analyst price target of $4.5 is 7.8% lower.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.