Transformative Store Strategy And Loyalty Boost Propel Profit Margins And Long-Term Growth

Key Takeaways

• Transformation to dealer sites and foodservice expansion highlights potential profit and margin improvements.
  
• Loyalty program focus and NTI store investment aim for enhanced revenue through increased customer retention and organic growth.
  
• Sustained inflation and reduced consumer spending could hinder Arko's revenue growth and profitability despite promotional efforts and challenges in retail sales.

Catalysts

Operates convenience stores in the United States.

• ARKO's transformation plan to convert retail stores to dealer sites is expected to realize higher profits through fuel supply agreements and rental income, potentially benefiting wholesale and retail segment operating income by $15 million to $20 million, possibly boosting net margins.
  
• The company's expansion of their Foodservice offering, and strong customer response indicates potential for increased same-store sales and improved gross margins, given the higher profitability of food items.
  
• ARKO's focus on growing its loyalty program, which has shown that enrolled members spend 80% more than non-members, could drive higher revenue through increased customer retention and spending frequency.
  
• The ongoing optimization of their cigarette and Other Tobacco Products (OTP) offerings, such as expanding OTP back bar space, is expected to support margin expansion due to OTP's higher contribution margins compared to traditional cigarettes.
  
• ARKO's investment in new-to-industry (NTI) stores and remodel program pilot could indicate future organic growth streams, potentially impacting long-term revenue and earnings through expanded retail presence and enhanced customer experience.

Arko Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Arko's revenue will decrease by -2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.2% today to 0.8% in 3 years time.
• Analysts expect earnings to reach $70.2 million (and earnings per share of $0.59) by about November 2027, up from $18.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $78.4 million in earnings, and the most bearish expecting $7.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.2x on those 2027 earnings, down from 42.6x today. This future PE is greater than the current PE for the US Specialty Retail industry at 15.1x.
• Analysts expect the number of shares outstanding to grow by 0.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.86%, as per the Simply Wall St company report.

Arko Future Earnings Per Share Growth

Risks

• ARKO is experiencing persistent consumer pressure due to inflation and increased prices for essentials like fuel and groceries, which could negatively impact revenues as consumer spending remains restricted.
  
• The company observed a reduction in retail merchandise sales by approximately 7.3% year-over-year, with a decline in same-store merchandise sales, potentially affecting revenue and net margins.
  
• Despite promotional efforts, high single-digit declines in same-store transactions indicate challenging traffic trends, which could hinder future revenue growth.
  
• The company's adjusted EBITDA decreased compared to the previous year, primarily due to lower retail fuel and merchandise contribution, impacting earnings.
  
• ARKO's net income for the quarter fell significantly compared to the previous year, primarily due to lower retail fuel and merchandise contributions and higher net interest and financial expenses, affecting their overall profitability.

Valuation

• The analysts have a consensus price target of $7.94 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 $6.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $8.4 billion, earnings will come to $70.2 million, and it would be trading on a PE ratio of 18.2x, assuming you use a discount rate of 10.9%.
  
• Given the current share price of $6.8, the analyst's price target of $7.94 is 14.3% 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.