ARKO Corp.

Greetings. Welcome to ARCO's third quarter fiscal year 2021 earnings conference column webcast. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero from your telephone keypad. Please note, this conference is being recorded. At this time, I'll now turn the conference over to Chris Mandeville, Managing Director of Investor Relations. Chris, you may now begin.

Thank you. Good morning and welcome to ARCO's third quarter fiscal year 2021 earnings conference call and webcast. On today's call are Ari Kotler, Chairman, President and Chief Executive Officer, and Don Vassell, Chief Financial Officer. By now, everyone should have access to the company's earnings press release that was furnished to the SEC this morning and is also available on the investor relations section of ARCO's website at www.arcocorp.com. Before we begin, Please note that all third quarter 2021 financial information is unaudited. And during the course of this call, management may make forward-looking statements within the means of the Private Security Litigation Reform Act of 1995. These statements may be identified by the use of words such as will, may, expect, plan, intend, could, estimate, and similar references to future periods. These statements speak only as of today, are based on management's current beliefs and expectations and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to today's press release, the company's annual report on Form 10-K for the fiscal year ended December 31st, 2020, and the company's other filings with the SEC for a detailed discussion of the risks that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. Except as required by federal securities laws, ARCO does not undertake to publicly update or revise any forward-looking statements subsequent to the date made as a result of new information, future events, changing circumstances, or for any other reason. Please note that on today's call, management will refer to non-GAAP financial measures, including same-store measures, EBITDA, adjusted EBITDA, and adjusted EBITDA net of incremental bonuses. While the company believes these non-GAAP financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today's press release for reconciliations of our non-GAAP measures to the most directly comparable GAAP measures. I would also like to note that we are conducting our call today from our respective remote locations. As such, there may be brief delays, crosstalk, or other minor technical issues during this call. We thank you in advance for your patience and understanding, and now I'd like to turn the call over to Ari.

Thank you, Chris, and good morning, everyone. On today's call, I will briefly review our financial highlights for the quarter ended September 30th, 2021, and provide an update on our business. Don will then review our financial results in more detail before we take your questions. To start, we report record merchandise revenue and net income for the third quarter. Our adjusted EBITDA net of incremental bonuses increased nearly 40% to $80.2 million for the quarter, driven by both profitable growth in-store and at the pump for our retail segment, as well as continued outperformance by Empire in our wholesale segment. In-store, we experienced another quarter of meaningful merchandise margin expansion, where we generated merchandise margin in excess of 30%, The 270 basis points in merchandise margin expansion to 30.6% not only reflect our continued emphasis on leveraging analytics to purposely and strategically drive greater sales of higher margin categories, such as packaged beverages, candy, other tobacco products, and grab-and-go, but also our efforts to optimize margin within key categories as well. Looking at our top 10 categories by Insight Sales, which account for nearly 90% of our total merchandise sales, we managed to deliver notable margin expansion to our strategic merchandising decision, pricing, and improved purchasing economics. In light of certain COVID-related demand aberrations in the prior year period, I'd like to focus on our two-year stock same-store merchandise sales excluding cigarette trend as a more accurate indicator for the underlying health of our business, and a better barometer to evaluate our performance given the company's strategic focus on driving higher margin sales. On a two-year stock basis, same-store merchandise sales, excluding cigarettes, increased 8.7%, with dollar growth most notably driven by training in other tobacco products, packaged beverages, and candy. From a growth rate perspective, we have continued to see considerable gains in frozen food, grab-and-go products, and alternative snacks as our various process improvement and announced merchandising efforts, inclusive of our continued expansion of grab-and-go coolers and freezers, continue to pay dividends. In our retail fuel operations, gallons sold were up 15% versus the prior year period, reflecting the addition of our Express Stop and Empire acquisition. Fuel margin, excluding intercompany charges, was strong for the quarter, up 3.5 cents versus the prior year period to 34.5 cents per gallon. The net result was that we delivered strong gross profit growth of over $21 million, or 28% in retail fuel profitability for the quarter. Moving to some of our longer-term strategic growth initiatives. On a remodel and new store prototype initiative, we continue to make steady progress on what we believe is a significant embedded opportunity to optimize our store base. We have completed two remodels, and we expect to have our first 10 completed by early 2022. While our pace has been modest, it has been intentional. We are being very methodical to ensure that we have the right prototype to optimize profitability and provide our customers with an enhanced shopping experience. However, as we have already begun engineering and redesigned phases for 45 additional stores, we believe we can move quickly, accelerating growth and unlocking additional value for our stockholders over the next several years. Regarding our Fast Rewards loyalty program, we remain pleased with the considerable progress we've made in so little time. Recently, we have grown over a half a million enrolled members, doubling our members base since the beginning of 2020. We have continued to see very positive responses from our engaged members with our loyal customers showing a considerably higher rate of visiting our stores and with a larger basket. As we begin to plan for the coming year, we have identified series of upgrades for our loyalty program, which we believe will only further strengthen both our analytical insights and the value we provide to our most loyal consumers. Turning to our inorganic growth opportunity, we remain focused on pursuing discipline IROI M&A. In fact, just yesterday, we acquired 36 company-operated Andymart convenience stores and gas stations, plus one under development, all of which are located in North Carolina. Of the total $112 million purchase price plus the inventory and cash in the stores, Oak Street is paying $100 million for the real estate of 29 of the sites, and we are paying Oak Street $6 million per year to rent these sites from them. We pay the remaining $12 million purchase price using cash on hand. We also believe that there remains a robust pipeline of assets that are available for potential acquisition. As is always the case, we are actively exploring several opportunities and our priority is deploying capital at a very attractive return. As such, we will remain highly disciplined in how we pursue any deal. Touching briefly on our two other deals we closed in the past 13 months, Empire and Express Stop, Empire has continued to outperform our expectations, both from a synergies and growth perspective, and we believe there remains considerable opportunity to extract additional values. In the last several months, we've pre-negotiated three major fuel contracts representing approximately 30% of our gallons, while we've also added 79 net new dealers since we acquired the Empire business, with 27 of those additions coming in the third quarter of 2021 alone, and additional 13 contracts signed that we have yet to benefit our P&L. On Express Stop, 41 of 53 stores have gone through merchandise reset to standard planograms that we believe will increase sales and margin at these sites. Taken together, I'm very pleased by what we have accomplished year to date. I'm excited by the organic and inorganic opportunities that lie ahead to fuel our growth, and I'm committed to remaining a steward of capital, allocating funds based primarily with focus on return on capital. I would like now to turn the call over to Don, who will walk you through our financial results.

Thanks, Ari. It's great to be speaking with you all today about our strong third quarter results. Merchandise revenue increased by 7.7%, primarily due to the Express Stop and Empire acquisition. Merchandise margin dollars increased by $20.3 million versus the prior year, while margin expanded 270 basis points to 30.6%, largely due to a lower reliance on cigarettes and higher contribution from packaged beverage, other tobacco products, and other center store items, as well as improved purchasing economics. The Express Stop and Empire acquisitions added $12.7 million in merchandise contribution, while same stores increased by $8.7 million, which was offset by sites that were either closed or converted to dealer-operated sites. Retail fuel profitability, excluding intercompany charges for the quarter, increased $21.2 million, or 28%, with Empire and Express Stop accounting for $18.5 million of the increase, coupled with same stores increasing by $3.7 million. Retail fuel margin for the quarter was 34.5 cents per gallon versus 31 cents per gallon for the prior year. For the third quarter of 2021, wholesale fuel profitability, excluding intercompany charges, increased approximately $22 million compared to the prior year period, with substantially all the growth coming from the Empire acquisition. Fuel contribution from non-consignment agent locations grew by $12 million compared to the prior year, driven by approximately 206 million gallon increase in fuel volume and a half a cent increase in fuel margin per gallon for these locations versus the third quarter of 2020 due to an increase in the prompt pay discount related to the increased cost of fuel along with increased rebates. Fuel contribution from consignment agent locations grew $10 million compared to the prior year due to an increase of volume of 37 million gallons and an increase of fuel margin cents per gallon of 1.1 cents. Third quarter store operating expenses increased $32.7 million, or 24.8% versus prior year, primarily due to approximately $26.8 million of incremental expenses related to the Express Stop and Empire acquisitions, in addition to higher credit card expenses. General and administrative expenses increased $7.3 million, or 28.7% for the quarter as compared to prior year. primarily due to expenses associated with the empire acquisition, annual wage increases, incentive accruals, and stock compensation expenses. Net interest and other financial expenses increased by $4.2 million for the quarter versus the prior year, primarily related to higher interest expense from more outstanding debt and fair value adjustments of $1.1 million. Third quarter net income was $35.6 million compared to $17.2 million for the prior year. Incremental earnings in 2021 were related to strong contributions from the Empire acquisition, coupled with strong same-store merchandise gross margin and fuel margin, with partial offsets coming from higher expenses, including credit card fees and depreciation related to acquisitions. Minority interest was almost eliminated versus prior year, primarily as a result of the business combination with Haymaker in December 2020. Adjusted EBITDA net of incremental bonuses was $80.2 million, an increase of $22.9 million, or 39.9% compared to the third quarter of 2020. Higher same-store merchandise and fuel margin contribution and approximately $23 million from the Empire acquisition was partially offset by higher credit card fees and higher general administrative expenses, primarily related to annual raise increases and incentive accruals. Our balance sheet remains strong. In October, we completed a debt offering of $450 million and used the net proceeds to repay in full the $223 million term loan with RE Capital Corporation, and $200 million of our line of credit with Capital One. And the remaining proceeds are intended to be used for general corporate purposes. On September 30th, the company's total liquidity was approximately $551 million, consisting of cash and cash equivalents of $275.2 million, plus $31.8 million of restricted investments, and approximately $244 million of unused availability under our lines of credit. Outstanding debt was $689.6 million, resulting in net debt of $382.6 million. As a result of our bond offering in October, our liquidity increased by $200 million due to the partial paydown of our Capital One line of credit. For the first nine months of 2021, net cash provided by operating activities was $119.5 million versus $126.5 million for the first nine months of 2020. The decrease was primarily due to working capital changes related to higher fuel costs and increased volumes. In addition, there were approximately $12.2 million of higher net tax payments and $16 million of higher net interest payments, including $5.2 million related to the early redemption of the Israeli bond in the first quarter of this year. Operating cash flow was also impacted by approximately $13.6 million of incentive payments. Capital expenditures were $48.1 million for the nine months that ended September 30, 2021, compared to $28.8 million for the prior year period, and included the purchase of certain fee properties. We ended the quarter with 1,379 retail sites and 1,674 wholesale sites. I'm pleased that we have demonstrated our strength and capabilities through yet another quarter of solid financial results as we continue to execute on our journey as one of the largest and most successful convenience store operators in the country. And with that, I'll turn it back over to Ari.

Thanks, Don. I'd like to close by thanking our over 10,000 associates company-wide. They were a driving force behind what success we realized in the quarter and will prove instrumental in our executing against what we believe remains a significant and exciting long-term growth outlook. Thanks for joining the call today and your interest in ARCO. I will now turn it over to the operator for questions.

Operator? Thank you. We'll now be conducting the question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Thank you. And our first question comes from the line of Bobby Griffin with Raymond James. Please proceed with your questions.

Good morning, everybody. Thanks for taking my questions, and congrats on a good quarter. Ari, I just wanted to maybe touch on the merchandise margin improvement again in retail and ask for a little bit more detail. And then I guess secondly, was there anything unique with the mix of the products this quarter that might not be sustainable going forward? Or do you look at kind of the mix of your items this quarter as possible? quote-unquote normal, and that should be sustainable so these type of margin improvements could be consistent or, you know, held onto?

Sure. Good morning, Bobby, and it's a great question. I think it's sustainable, and the reason for that, you know, it's really what we have discussed over the past, you know, few quarters since the beginning. If you're really looking over here, when a same store sells X cigarettes, we continue to perform exactly in accordance to our strategy. If you look at Q3 2020 versus Q3 2021, our concentration on cigarettes is actually down. I mean, right now the concentration, we are actually at 36% cigarette sales versus 37.9%. So the strategy worked, which means that we are selling more cigarettes basically item of the center of the store. And, you know, in particular, if you're looking on 90%, basically of our merchandise sales, actually those are the ones that really drove the margin over here. So there is no question that the minute you all concentrate less on cigarettes and, you know, concentrate more on other products, you know, X cigarettes, there is no question that the margin will expand. And I think that's what you see over here. And I'm expecting margin to continue to grow you know, as we move forward over here. Okay, very good.

And then I guess also I want to maybe just touch on OpEx and where you guys are from the labor situation. I know we talked last time about some initiatives you're working on from the hiring standpoint. Maybe just any updates around labor and how you're managing the OpEx expense side of that going forward would be helpful.

Sure. Don, would you like to take it?

Sure, sure. Let me do that. Bobby, if you look on a same-store basis, the biggest increase for us in OpEx by far was credit cards. Obviously, with the price of fuel going up, that accounted for a big jump in OpEx. And we did have over a 5% jump in OpEx for salaries and wages, but that's a little bit lower than what we expected. I mean, obviously, we do expect that OpEx will grow, but it has not. you know, outpaced what we expected to do in this year. Obviously, it's a tough labor market. You know, we know we're having to compete for, you know, for employees, but by far the biggest driver in OpEx this quarter was credit cards versus salaries and wages.

Okay. And Don, maybe just remind us, we're all on the same page, that your credit card fees, does that fall into store operating expenses on the consolidated income statement?

Yes, it does. You know, for management reporting, we don't do that, but for gap reporting, it does fall into operating expenses.

Okay, perfect. Yep, we'll note that. And then I guess just lastly for me, any comments on October? I mean, the fuel margins here this quarter were impressively very strong despite kind of a rising oil environment. We've seen a little bit of compression in the OPUS data for October. Just curious kind of what you guys have seen over the last four or five weeks from a fuel margin perspective.

Hello. We can't really comment on October. You know, we can only talk about, you know, everything related to Q3. But what we can comment is that, you know, if you're looking at what happened in Q3, the same thing that, you know, you guys have been saying over here, quarter after quarter, we are very, very analytical. We are going after, you know, of course, you know, gross profit dollars. And, you know, and that's, I think, the name of the game over here. I mean, this is what we are concentrating. We are concentrating on increased profitability At the same time, just want to touch, you know, you probably hear, you know, we renegotiated three of our supply contracts, which represent around 30% of our gallons. And, you know, those things, of course, help us to increase our margin and at the same time be very competitive. So that's what I can tell you about at least our gross profit dollars and our increase in profitability related to basically to CPG. You see the jump over here?

Perfect. That's helpful. I appreciate Ari, and congrats on getting those renegotiations done. Best of luck in the fourth quarter. Thank you very much, Bobby.

Our next question is from the line of Mark Asher Chan with CIFL. Pleased to see you with your questions.

Yeah, thanks, and good morning, everyone. I guess one sort of directional follow-up on the last line of questioning is, how do we think about the benefit, if any, in your merchandise margins from pricing? I guess I'm thinking about it in terms of whether you're raising list prices on product and stored offset, your own rising inflation pressures. And then the suppliers are obviously taking price up on just about everything. So do you benefit from that as well? I mean, do they share some of that pricing with you all? And is that reflected in the merchandise margins as well?

Well, it's an interesting question, Mark. Yes, the suppliers are increasing prices, and we are trying to be very careful with increasing prices. We are actually working in a competing environment, and this is something that we're facing over here. I think, as I said, I think the margin increase is not because of supply chain or just increase of prices. That's not related to the increase in margin. The increase in margin is really related to the mix that we are seeing over here. we are just able to basically to sell more products, less cigarettes, more products, more OTP. For example, if you're looking on OTP, which you all know that the OTP margin is around 30%, I mean, our OTP business was up 7.7% quarter over quarter. And I think that's really the reason for the increase in margin over here. It's concentrating less on cigarettes and be able to increase the baskets on customers that, you know, coming in the store. So it's not necessarily because of just increasing prices.

Mark, one other thing to add on that, too. You can look across the board. I mean, you know, we've talked about our frozen foods, the grab-and-go. I mean, those sales are through the roof, which are high margin. You know, the sales are increasing, you know, tremendously. Also on candy. So a lot of items. It's not just one thing we're doing. It's a lot of strategies across the board. But, you know, as already said, We're being competitive on cigarettes. It's not that we're not being competitive, but we're seeing a lot more switch over to OTP. We do think this is a sustainable push. Obviously, you never know what the future can hold, but it's not just trying to push up as much as we can because we still need to remain competitive out there in the market.

One thing to comment, Mark. Just one comment to mention over here. As you guys remember, for the past two quarters, I've been talking about the you know, adding 680 freezers and 525 grab and go coolers. I mean, if you're really looking on our same store sales, just on grab and go, you know, our same store sales are up 46.1% with an increase of margin. If you're looking on the frozen food, our sales are up 72.5%. So everything that we've been talking about over the past, you know, two or three quarters, you know, finally now you actually see the results because as you can imagine, you know, it takes time to install them. And the one thing I can tell you with the supply chain issues and the all nine yards, we were able to actually locate the product, bring the product and install the product. And we see great results. And of course, increase of margin. I mean, that's basically what we've been seeing over here, you know, and that just demonstrates that, you know, we are in the weeds. I mean, we have a great team of people over here that made sure that with all of the supply chain issue, we were able to perform.

Yeah, that's helpful. I guess related to that too, you had touched on it. So the other sort of common theme we keep hearing about beyond just inflation is supply chain challenges as well. So beverages, candy, et cetera, seemingly impacted. Did that have any impact on the business? And related to that, the relationship that you have with your wholesale supplier now, which has changed a little bit for the better? Has that helped as well in terms of offsetting some of those potential challenges?

You know, first of all, yes, of course, you know, restructuring our agreement with Cormark, you know, of course, helped us tremendously to increase margin. But I really think that the big thing over here is, you know, I always tell people that, you know, retail is detail. And, you know, when everything is great, you know, everybody operating probably under, you know, on the same level. When things are a little bit shaky over here, you see, you know, what kind of operator we are. You know, we are in the weeds. We are thinking ahead of, basically ahead of time. And we are able to get those products and solicit those products. And, you know, our team is working around the clock from a merchandising standpoint to a fuel standpoint. They're really working around the clock. And, you know, that's the reason, you know, you see those results. We just demonstrate that we have a great operating team and a great marketing team over here that's handling merchandise and able to get the product. It's not easy. I don't want to sound that everything is easy, but we are able to execute based on, you know, basically on the team that we got actually with us.

Yeah, okay. Thank you. And just lastly, on a completely unrelated topic, the Oak Street relationship is interesting beyond the piece relating to the acquisition overnight, but also the disclosure and the release about they had purchased and leased to you $150 million of real estate. Is there more opportunity to do that? I guess the other broader question is why then do you get a reduction of rent versus whoever else is owning that? Is that because of the relationship, because you're going to work with them going forward, that they're giving you more favorable terms? Maybe just talk about that as well as the opportunity for that in the future.

First of all, yes, of course, given the size of the commitment, we got, of course, better terms, given the billion-dollar commitment. But as you guys remember, we have all kinds of rights of first refusal, all kinds of rights of first offer. We have offers, opportunity to buy the real estate, an option to buy the real estate. And when we do those things, as I said, we're thinking ahead. And, you know, the bigger you get, you know, the better terms you get at the end of the day. And what we were able to execute this quarter, actually with Oak Street, is, you know, we were able to take upon those, you know, those options that we had from different sellers. And we were able to buy the real estate for a better, you know, of course, a better cap rate. And because of that, we were able to save $2.3 million in annual rent, you know, moving forward. this is only on $150 million basically of real estate over here. So, uh, you know, we, we, we're going to continue to execute upon that. You know, of course we decided to take the big ones right away off the table, but you know, this is of course continued to be an opportunity for us to reach out to some of the, uh, landlords and try to basically, you know, either buy the properties from them or try to get better terms. But, uh, you're right on the spot. I mean, at the end of the day, Some of them may decide that they want to sell and some of them may decide that they better just reduce the rent because we become bigger and better.

To add on to what Ari said, we knew this was in the works and obviously couldn't mention it until it was final, but the other advantage of besides reducing the rent, we actually got a bunch of properties free and clear too. It added to our total fee store base. A total positive and I think there were a lot of questions whenever I saw this. You have this $1 billion commitment. What are you going to do with it? There's lots of things we can do with it, and this is one of the ways we can do it positively to impact the business.

Just for your benefit, Mark, we added around 55 locations with the two transactions with Oak Street. We added another 55 pieces of real estate to our real estate base right now in addition to that that we actually own right now at the company.

Got it. Very helpful. Thanks, guys.

Sure. Thank you.

Thank you. As a reminder, if you'd like to ask a question today, please press star 1 from your telephone keypad. Our next question is from the line of Kelly Bania with BMO Capital Markets. Please proceed with your questions.

Hi. Good morning. Thanks for taking our questions. I just wanted to ask about same-store sales, obviously a focus on less on cigarettes and more on the higher margin categories and maybe also some dynamics of cycling, some stronger cigarette trends last year. Just curious if you could talk a little bit about your outlook there on the same store sales front. Should we expect a similar dynamic to continue for the next couple of quarters or even longer term with the emphasis on the cigarette category?

Sure. Good morning, Kelly. You know, the way I think, you know, the way we are thinking about that, as I said, I mean, our strategy was always to try to decrease, or not to decrease, to try to increase sales at cigarettes, you know, with the loyalty card that we enrolled over a year ago. because we knew that at the end of the day when we do that and when we had the grab-and-go and the frozen food and the QSR and all of the things that the initiative that we're doing over the past two quarters, we knew that obviously we'll be able to shift sales from cigarettes basically to other sales, ex-cigarettes. I believe we're going to continue to see this trend moving forward. As I mentioned, we are right now finishing a roll-up of the rest of the freezers, and grab-and-go, and as we see a very, very big increase over here in same-store sales that we had at the grab-and-go coolers and frozen food freezers, I think that we're going to continue to see over here an increase of sales at cigarettes in the next quarters ahead of us. That's my belief.

Yeah, and Kelly, just to reemphasize what we've always said, we're very competitive on cigarettes. It's not that we're trying to you know, say we don't want the cigarette buyer. We do want the cigarette buyer. But, I mean, you've seen, I mean, there have been numerous price increases this year. There's talk of, you know, increasing the federal excise tax. I hear some of that's come back. But, you know, obviously it puts a crunch on the consumer's pocketbook. And you see the increase in OTP. You know, we don't have, you know, defendants saying, okay, this person switched over. But you see our increase in OTP sales versus cigarette. We just know that as a category, cigarettes are declining. So we're trying to remain competitive to keep that consumer coming in our store. while at the same time making sure that we're offering other alternatives and OTP products for them to have and also have other offerings that will be appealing for people to come into. But by no means do we want to discourage the cigarette consumer from coming to our store. We want to be very price conscious about what we're offering out there, but at the same time giving them more things to buy when they come in.

Oh, sorry. That's very helpful. Also just wanted to ask again about gallons and how you think that you performed from a gallon perspective, maybe in your markets and how that compared to peers, both maybe at retail and wholesale, and just maybe help us understand gallons on a pro forma basis relative to 2019 sales. Where do you stand both at retail and wholesale, and when do you think you'll get back to that 2019 level?

Go ahead, Don.

Kelly, I don't know that we'll ever get back to the 2019 level, and that's just our belief. I mean, I think we've seen, I call it the great return to work, you know, sort of not happening. Again, this is just our belief. We're seeing, obviously seeing our wholesale base, our wholesale dealers are growing are doing well, and we believe that obviously things like diesel will continue to do well. So that's really to be seen in the future because you still have a big block of workers just not going to work. So that's yet to be seen. It's hard for us to project that, and no one can make a projection, but at least it's our belief that it's going to be tough to get back to that 2019 level unless we see people going back to the office and doing things like that, which is still, you know, remain to be seen. So as we talk about, you know, we're looking to optimize what we have, again, while still being competitive in the markets we are. So it's really – we're coming out of a, you know, a once-in-a-hundred-year pandemic where, you know, people thought they'd be coming back, coming back, coming back, and all of a sudden they're not coming back. So, you know, obviously, you know, we're going to play in those markets and we're going to be there. The thing I'm really pleased about is how much fuel we're signing up on the wholesale side. I mean, we're increasing our gallon, increasing – And that's really the focus is that's where we can really grow our gowns. So that's a yet to be seen, but I think until that issue of, you know, do people return to work gets addressed, and, again, who knows about that, that that will really answer the question of 2019. But in my belief, I don't know that you really will ever get there, but that's just my personal belief.

Yeah, and Kelly, just to be clear over here, first of all, you know, basically our customer base and our store base, it's more a rule and secondary market. The second thing is that we are absolutely competitive. I mean, this is what we're seeing, and this is what I've been telling from the beginning of the pandemic, that at the end of the day, people are driving less, buying less gallons, but the margin basically expands because of that. I think that the minute we're going to start to see a shift in gallon increase, we might be actually seeing a small decrease in CPG because of that. But I think even the consumer today, it's really, you know, is less cautious about, you know, the store price as they used to be probably in 2019. In 2019, people will drive an extra five miles just to basically grab five pennies. That's not what we see right now.

That's very helpful. And just, I know it's maybe early for 22, but obviously remodels stepping up next year is a big part of the plan, as I understand it. And just want to hear an update, if possible, about your expectation for that acceleration and remodels, the cost of those remodels, the equipment, and just is that trajectory look on path relative to your expectations?

Yes, so we are on target in terms of opening. We are opening the third store. If you guys remember, last quarter I mentioned that we are in the process of opening the third store. This is a 5,600-square-foot store just off Highway 77 between North and South Carolina. This store is scheduled to open basically in the next couple of weeks. So we are on target on that. As I mentioned... we are going to complete the 10 stores that we mentioned. We may have a slight delay of, I will call it a couple of months. And again, everything is just because we are learning a lot and we are price engineering. But in terms of the rest of the stores, as I mentioned, we have 45 stores right now that we are already in plans. for 2022. We also, you know, went ahead and ordered equipment to make sure that we would not have any supply chain issues. But it's really, you know, everything we're doing over here is purposely. I mean, we want to make sure that when we price engineer and when we actually, you know, use those prototypes, you know, we're going to be able to duplicate them in a very efficient way. So, so far, as I said, you know, nothing changed basically in terms of, you know, in terms of our planning over here.

Yeah, and Kelly, just to add a little bit more onto that, and I think where the concern in the market is for the supply chain, you know, we don't have a, we still believe that, you know, we'll be able to do this. The question is going to be, you know, how the supply chain reacts over the next two to three quarters. I mean, obviously that's a concern, and we'll have to monitor that. But at the same time, we're able to look at what we're doing, and I think as we said, we've got 45 sites already under engineering and design. But, you know, we never know what's going to hold up in the supply chain, you know, as we go through. So we'll have to look at that as we go forward. But, again, we look at this as this is a temporary issue due to the supply chain, but the whole concept itself is still, you know, very viable, and we're pleased with what we've seen so far, and we'll react to it as, you know, as the supply chain allows us to. But we're not slowing down because we're getting the designs done, at least 45 of them right now.

Great. That's very helpful. And just last one for me. Can we just have an update on how you would characterize staffing levels at your stores, turnover, and just generally the wage environment and how you feel about that going forward?

you know, I can't comment on, you know, turnover right now, but what I can say is that we are very competitive. We are operating our stores. We are not closing stores. You know, if you're looking in some areas that people end up closing store earlier, you know, we don't face those things. We're just, you know, managing through the storm over here. You know, there are areas that we had to offer $500 for people to sign in and work for five hours. I'm sorry, $500 for $500. There are areas that we had to increase the $500 to $1,000 in order to keep people basically in place. So, you know, it's a competitive environment, and I think we are managing very well over here, you know, making sure that our stores, you know, are open. And, again, if you ask me what's going to happen moving forward, I think, you know, I think things will settle at the end of the day. At the end of the day, things will settle. No different than the supply chain. I just think that this is – a temporary issue that everybody is just facing right now. And, you know, at some point, you know, things will basically get relief over here.

Yeah. Kelly, I think the biggest thing that helped us through all this was adding, you know, 10 full-time resources to do recruiting. Because what we found is that people have so many opportunities for offers is that we want to be able to make the offer on the spot. And I think if you wait too long to make an offer to somebody, that's when you lose them. So that has been a real plus for us by putting those resources in place. We did that back early in the summer, and I think it's paid a lot of dividends for us. So being able to interview an employee and offer them a job right then I think has made a big difference.

And just to comment on that, Kelly, remember that's one of the reasons that we decided to go with Grab and Go and frozen food and basically fresh food versus opening big kitchens over there. That's exactly one of the reasons that we decided to go. So because remember, we can operate our stores with a limited amount of basically of associates.

Thank you.

Thank you.

At this time, we've reached the end of the question and answer session, and I'll turn the call over to Ari Kotler for closing remarks.

Thank you to all participants on the call today. I would like to wish you a wonderful day.

This will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time and have a wonderful day.