Dealerization And Loyalty Campaign To Drive Future Customer Engagement

Key Takeaways

• Arko's dealerization program and OTP expansion focus on optimizing profitability and improving margins, driving positive long-term earnings impact.
  
• Investments in loyalty programs and food service innovations aim to boost traffic, customer engagement, and long-term revenue growth.
  
• Challenging economic conditions and reduced demand could pressure Arko's revenue and profitability despite ongoing business transformations like the dealerization program.

Catalysts

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

• Arko's dealerization program, which involves converting select retail stores to dealer sites, is expected to generate an annualized benefit exceeding $20 million to combined wholesale and retail segment operating income. This strategy allows Arko to optimize its portfolio and enhance profitability across the platform, ultimately impacting earnings positively.
  
• The expansion of Arko's Other Tobacco Product (OTP) category, which is a higher-margin segment compared to traditional cigarettes, led to a 200-basis point improvement in gross margin for the OTP category in the fourth quarter. This focus on higher-margin items is expected to improve net margins over time.
  
• The Fueling America’s Future campaign aims to grow Arko’s loyalty program and drive traffic to stores through significant promotions that offer fuel discounts, potentially increasing revenue through higher merchandise and fuel sales.
  
• Investments in enhanced food service offerings, including pilot stores and new promotional strategies around food items, aim to boost repeat purchases and customer engagement. This could improve revenue and customer loyalty, contributing to long-term growth.
  
• Strategic supplier partnerships and optimized merchandising strategies in the tobacco category are driving market share gains. These actions are expected to enhance gross margins, particularly with increasing promotional activity in high-demand product categories.

Arko Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arko's revenue will decrease by 3.9% annually over the next 3 years.
• Analysts are assuming Arko's profit margins will remain the same at 0.2% over the next 3 years.
• Analysts expect earnings to reach $18.1 million (and earnings per share of $0.16) by about May 2028, up from $15.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 64.3x on those 2028 earnings, up from 31.3x today. This future PE is greater than the current PE for the US Specialty Retail industry at 15.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Arko Future Earnings Per Share Growth

Risks

• Challenging macroeconomic conditions, including persistent inflation and constrained consumer spending, could suppress consumer demand and negatively impact revenue.
  
• Decline in same-store merchandise sales and fuel volume suggests a contraction in demand that could pressure overall revenue and profitability.
  
• Ongoing transformations, such as the dealerization program, may take time to reflect positive contributions, implying short-term strain on net margins until fully realized.
  
• Lower retail fuel and merchandise contributions, as reflected in decreased adjusted EBITDA, could indicate challenges in maintaining profit levels.
  
• Weather impacts and ongoing economic pressures could result in further negative trends in consumer mobility and spending, posing risks to overall earnings.

Valuation

• The analysts have a consensus price target of $7.312 for Arko based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $11.0, and the most bearish reporting a price target of just $4.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.7 billion, earnings will come to $18.1 million, and it would be trading on a PE ratio of 64.3x, assuming you use a discount rate of 11.4%.
• Given the current share price of $4.08, the analyst price target of $7.31 is 44.2% higher.
• 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.