Profit From Well Executed Acquisitions

Alimentation Couche-Tard is one of the leading Canadian companies operating more than 16,000 convenience stores worldwide. It is the largest convenience store operator in the U.S., by the number of company-operated stores.

Alimentation Couche-Tard runs more than 14,880 stores throughout North America and Europe. In addition, the company also operates more than 2,100 stores under the Circle K banner in 14 other countries and territories under licensing agreements. Couche-Tard supplies road transportation fuel to approximately 1,300 locations in the U.S. and offers stationary energy and aviation fuel. The company caters to over 9 million global customers daily, offering them merchandise and services (25% of 2019 revenues), fuel (73%) and other (2%). The company operates its convenience store chain under several banners like Circle K, Couche-Tard, Holiday, Ingo, etc.

As a leading independent convenience store operator, Couche-Tard has a coast-to-coast presence in 48 states in the U.S., ten provinces in Canada. By geography, the U.S. is its largest market accounting for 69% of 2019 revenues, followed by Europe (19%) and Canada (12%). The company operates through Couche-Tard and Mac’s brands in Canada and Circle K globally. 

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Revenue Growth & Market Exposure

Starting out with just one store four decades back, today Couche-Tard has a successful chain of convenience stores in 26 countries with a recognized brand name. Its Circle K brand carries a strong reputation with a loyal customer base in Scandinavian and Baltic countries. With nearly four decades of experience, Couche-Tard has adapted to changing customer habits and preferences. Food, beverage, car wash and fuel are Couche-Tard’s key product categories. Its car wash is an important business in more than 2600 locations worldwide and Esso and Holiday acquisitions have further expanded its car wash footprint in North America. The company has a soundtrack record of successful acquisitions over the last decade.

Alimentation Couche-Tard is expanding globally on the back of its successful diversified businesses. There are plenty of opportunities for the company to diversify and cross-sell its products. The company is well placed to benefit from the emerging trends of e-mobility. It has increased the number of charging stations to 400 in Europe. Alimentation Couche-Tard’s fuel business is one of its other successful businesses, registering a growth of nearly 25% CAGR in gross profit in the last eight years. It is also expanding its food business. The company is investing in technology to digitize its supply chain and other business lines to improve the overall customer experience. It is expecting to drive future growth from Asia. Alimentation Couche-Tard is growing aggressively and has entered into master license agreements with Cambodia, Saudi Arabia, and Mongolia.

Alimentation witnessed a significant decline in traffic and fuel volumes with the pandemic stay-at-home orders across the U.S., Europe, and Canada. It, however, was positively impacted by higher fuel margins as a result of higher crude prices and average purchases in the merchandise and services segment. The company continued to expand the Circle K Fuel brand across North America with more than 2,300 Circle K Fuel branded sites currently. Alimentation completed the rollout of a loyalty program in Circle K Fuel brand to all U.S. markets providing everyday discounts to its customers.

The company is well-positioned to adjust to the changing shopping behaviour of its customers such as larger average basket sizes and consolidated trips. It has expanded home delivery to third parties with more than a thousand sites now having home delivery capability globally. With a focus on offering and customer journey, Couche-Tard is targeting a more balanced growth in the future on the back of a higher share of organic growth.

Dividends

While Alimentation Couche-Tard is a Canadian dividend aristocrat, it is also a dividend achiever which is more impressive. Its dividend yield stands at 0.66% while its dividend payout ratio is very low at 11%. Couche-Tard has grown its dividend payouts at ~22% CAGR over the last ten years and its last dividend hike was 12%. It has grown its dividend by more than seven times since 2011.

Alimentation’s strong cash flow generation supports its future growth plans. The company ended the quarter with a strong financial position. Well diversified operations across geographies, strong focus on growing high margin categories, and scalable rollout of new global convenience brand Circle K should drive growth and aid future dividend hikes. The company continues to transition to a single global brand with 85% of U.S. stores, all of the European stores, and 88% of Canadian stores operating under the global Circle K brand at present.

The convenience store sector is highly fragmented in the U.S. and Alimentation is favourably positioned to gain from its increased acquisition activities. The company is growing organically as well as through acquisitions and has a soundtrack record of successful acquisitions and capturing synergies over the last decade. Since 2004, Couche-Tard has successfully completed 60 deals. It has also grown its number of stores rapidly to nearly 16,000 now, from just 500 stores two decades ago. 

Growing demand for food should act as a tailwind for this Dividend Aristocrat. A proven business model, an extensive store network, and a reputed brand name form a deep moat around Alimentation Couche-Tard’s business. 

Competition

Alimentation Couche-Tard faces intense competition from convenience store chains, gas station operators, food retailers, QSRs, pharmacy chains, etc. both locally as well as internationally. In Europe and Canada, the convenience store sector is dominated by a few major players and it will be difficult for newcomers to compete with Couche-Tard’s operational scale and large geographical footprint. It enjoys a leading market position in a majority of the markets it serves. George Weston, Loblaws Companies, North West Company, and Metro Inc. are Alimentation Couche-Tard’s top competitors. Unlike its peers, Couche-Tard’s business is relatively immune from the significant growth of e-commerce businesses such as Amazon.com as most of its merchandise is consumed within an hour of the purchase.

Bottom Line

Given its large scale and geographic diversification, Alimentation is well-positioned to offset industry headwinds. The consumer staple company’s convenience sales actually grew in the last two recessions. The company has a sound track record of successful synergies from transformative acquisitions and also has a solid pipeline of current opportunities. As a leading global retailer, the company benefits from its proprietary product portfolio, unique food and beverage offerings, a large and expanding geographic footprint, and an iconic brand name. Increased activities around acquisitions and expansion further strengthen the company’s footprint and position it well to continue its dividend-paying streak in the future. 

Dividend Adjusted Chart by StockRover.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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