Consumer difficulties weigh down Couche-Tard’s results

(Montreal) Alimentation Couche-Tard revealed results significantly lower than analysts’ expectations while consumers are going through a difficult period. Management assures that this is a temporary setback.

Experts anticipated a decline in sales at convenience stores at a time when households are closely monitoring their spending. Disappointing fuel margins in the United States, however, took some analysts by surprise.

President and CEO Brian Hannasch was reassuring Thursday during a conference call with analysts to discuss the results for the third quarter, which ended February 4. The bad quarter would not jeopardize the objectives of its five-year strategic plan unveiled last fall, according to him.

“This weakness we are seeing from consumers is transitory. We don’t think it will last for several years. »

The Laval-based company wants to generate annual earnings before taxes, interest and depreciation (EBITDA) of US$10 billion by the end of the 2028 financial year, compared to US$5.8 billion in 2023.

In a context of sharply rising costs of living, in-store sales declined in the main regions where Couche-Tard is present. Sales at stores open at least a year fell 1.5% in the United States, 1.2% in Canada and 0.3% in Europe.

This is the first time “in more than 10 years” that Couche-Tard has revealed a decline in these three regions, underlines analyst Martin Landry of Stifel. It points out that the decline in comparable sales in the United States is less than the 2.7% drop posted by competitor 7-Eleven. “This is reassuring and suggests that this is a generalized weakness in the industry. »

Mr. Hannasch notes a decline in spending by less fortunate consumers, particularly those receiving social assistance through an electronic card in the United States.

Snacks sold under this electronic card program have seen a 40% decline compared to last year, underlines the manager. “It’s a sign that consumers are more price sensitive. »

Couche-Tard is not the only Quebec company to experience a drop in volume in the share of customers receiving social assistance in the United States. The Montreal franchisor MTY also experienced this situation in its fast food brands south of the border. “The government is allocating fewer resources to these programs, which has an effect on our activities,” reported its president and CEO, Éric Lefebvre, in February.

Promotions on cigarettes

Couche-Tard reports that the decline in cigarette sales continues in a context where the number of smokers is decreasing, but Mr. Hannasch says that promotional offers in the United States in this category are starting to bear fruit.

“We are excited to participate in Altria’s (a major cigarette manufacturer) loyalty program, which allows us to distribute electronic coupons to millions of our customers. »

This is not the first time that the manager has reiterated his desire to use promotional strategies to increase his market share in the United States in a declining sector. In Quebec, this type of promotion is prohibited for public health reasons.

The strategy had also been denounced by the American Lung Association. “Nicotine is one of the most addictive substances and most smokers want to quit. When we have companies doing promotions, it’s one more obstacle that the industry knowingly uses to keep them dependent,” denounced the association’s public policy manager, Michael Seilback, last June.

Low margins on fuels

Falling fuel margins in the United States also disappointed analysts, but they increased in Canada and Europe.

“The biggest surprise came from the margins,” notes analyst Irene Nattel of RBC Capital Markets. That’s only 1 US cent per gallon more than the industry, despite Couche-Tard’s better profile in terms of supply and ability to dictate prices. »

As with in-store sales, Hannasch says this is a temporary situation. He called the quarter “boring” in terms of energy price volatility. “No hurricane, no issues with a refinery. »

“When prices rise, our margins decrease,” he explains. When prices fall, our margins increase. When prices do nothing, margins start to compress. It’s been like that my whole career. »

Analysts remain optimistic

Analysts agree that the quarter was disappointing, but their confidence does not seem to be shaken, according to comments from six analysts consulted.

“We believe that all issues are temporary and that conditions should improve,” summarizes Desjardins Capital Markets analyst Chris Li.

In a difficult context, management demonstrated “exceptional capacity” to manage its costs, notes Mme Nattel. Comparable operating expenses fell 1.6%. His colleague at Scotiabank, George Doumet, points out that this drop in costs occurs in a context of high inflation.

TD Securities analyst Michael Van Aelst expected a difficult quarter and that this setback would cause the stock to decline. He believes the stock’s decline will “open an entry point” for investors.

Couche-Tard published net profit on Wednesday, after the markets closed, down 15.5% to US623.4 million. Adjusted earnings per share came to 65 US cents. Revenues, for their part, fell 2.2% to US19.6 billion, while new acquisitions offset part of the revenue losses.

Before the results were released, analysts had expected revenue of US20.9 billion and adjusted earnings per share of US84 cents, according to financial data firm Refinitiv.

The stock was down $4.85, or 5.95%, at $76.67 on the Toronto Stock Exchange Thursday morning.

Company in this dispatch: (TSX: ATD)


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