Alimentation Couche-Tard Profits From Well Executed Acquisitions

Alimentation Couche-Tard is a leading Canadian company operating convenience and fuel retailing 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 14,200 stores throughout North America and Europe and has operations in more than 26 countries and territories. The company operates well-known brands like Couche-Tard, Circle K, and Ingo. 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 (~27% of revenues), fuel (71%), and others (1%). The company is a leading player in Canada, Scandinavia, the Baltics, and Ireland and also has operations in Poland and Hong Kong.

As a leading independent convenience store operator, Couche-Tard has a coast-to-coast presence in Canada and is located in 47 states in the U.S. By geography, the U.S. is its largest market accounting for ~70% of revenues, followed by Europe (18%) 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 handles ~130,00 car washes and sells ~41 million gallons of fuel each day.

Alimentation Couche-Tard is expanding globally on the back of its successful diversified businesses. The company commands a market share of just 5% in the US, which leaves enough room for future expansion. There are plenty of opportunities for the company to diversify and cross-sell its products.

Alimentation Couche-Tard’s fuel business is one of its other successful businesses. It is also expanding its food business. Alimentation acquired seven company-operated stores during the last quarter and completed the construction of 13 stores and relocation of 10 stores.

The company is investing in technology to digitize its supply chain and other business lines to improve the overall customer experience. Alimentation is expecting to drive future growth from Asia and completed the acquisition of Circle K HK in this regard.

ATD.B Growth

Alimentation witnessed a significant decline in traffic and fuel volumes with the pandemic-induced stay-at-home orders across the U.S., Europe, and Canada. Fuel volumes remained adversely affected in areas with continued lockdowns while other areas strengthened as the year progressed.

The company continued its efforts towards rebranding Circle K and is targeting to establish itself as an innovative retailer. Alimentation also made good progress on its food development goals and is expanding the Fast priority program in Fresh Foods to an additional 3,000 stores in the near future. It has a pipeline of 66 stores under construction which should open in the upcoming quarters. The company also rolled out the loyalty program in the Circle K Fuel brand to all U.S. markets providing everyday discounts to its customers.

Alimentation is well-positioned to generate merchandise sales growth while adjusting to the changing shopping behavior of its customers such as larger average basket sizes, consolidated trips, adapted product offerings. The company expects increased demand in tobacco, packaged beverage, alcohol, and grocery products to continue.

Dividends

Alimentation Couche-Tard is a Canadian dividend aristocrat. The company continued to return cash to shareholders by way of dividends and share repurchases. Its dividend yield stands at a modest 0.85% 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 25%. 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. Alimentation Couche-Tard continues to transition to a single global brand with 86% of U.S. stores, all of the European stores, and 89% 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 favorably 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, Alimentation Couche-Tard has added more than 10,200 stores globally. It has grown its number of stores rapidly to more than 14,000 now, from just 500 stores two decades ago. 

Merchandise pricing, promotion and assortment, the profitable ramp-up of stores, and convenience offering in high foot traffic locations should support Alimentation Couche-Tard’s business.

Alimentation Couche-Tard (ATD.B) historical yield
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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, Loblaw 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

Alimentation Couche-Tard’s consumer staple convenience sales grew in the last two recessions and given its large scale and geographic diversification, Alimentation is well-positioned to offset industry headwinds. The company has a sound track record of successful synergies from transformative acquisitions and also has a solid pipeline of current opportunities.

The company’s strong cash flows support its CapEx and growth plans. It also has significant growth opportunities globally, with a focus on U.S. and Asia.

Alimentation Couche-Tard (ATD.B) historical pe

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