ARKO Corp.

actually to walk through the challenge and make sure that we continue to bring valuable promotions for our customers. And I can tell you that this is the one thing that our team constantly working, especially now going into 100 days of summer. I mean, the amount of valuable promotion that we have ready right now for 100 days of summer, I don't think I ever saw anything like this in my career.

Yeah, Bobby, I just add on. I didn't see anything significant between the categories. I think it's a transaction issue where transactions are down. So I think it's more of a macro issue that we're seeing versus assortment.

Okay. And then, I mean, we talked last time maybe just kind of how are you guys thinking about it as it plays out through the year, just trying to maintain the stacks. I mean, that was kind of the last conversation we had about some of these aspects. Is there anything you can share about April and early May trends?

Yeah, I think, you know, look, April looked a lot like Q1 as it started off the first couple weeks, and then we saw it start to inflect a little bit and turn more positive in the second half. So I think that we're seeing some acceleration off of what the trend was weaker in Q1. But again, it was kind of a tale of two months with weaker in the first half and a little bit stronger in the back half. So we're still watching it closely. As you might imagine, the next 30 days we're going to be in the peak selling season. We'll know a lot more at that point. But at this point, we feel okay with how we've got the rest of the year positioned.

All right, that's helpful. And then lastly, Rob, just trying to unpack the guidance a little bit. I obviously haven't had a time to flow it all through the model yet and come up with new numbers, but like the, is there something offsetting some of the fuel margin? Because the EBITDA came in at least below our model for 2Q and the retail side of cents per gallon is in line with kind of what we're speaking. So I'm thinking maybe there's, is there more pressures inside OpEx or is there some, you know, any other offsets that are worth calling out as we kind of clean up the 2Q numbers for ourselves?

Yeah, look, what I shared, Bobby, for the full year at the last call, we said that the Q2 through Q4 gallons would be down 5%, right? We based that on the fiscal 23 results, that longer-term trend. You know, our year-to-go period, we are basing on that flat two-year stack. You know, we are putting, to Ari's point, a lot more promotional activity behind the pizza program to drive sampling, and we believe that's going to have a meaningful impact in the second and third quarter. It did share that for the year we expect the retail CPG midpoint to be down one CPG from 2023, and we are modeling increased merge margin rate the rest of the way, Q2 through Q4, albeit at a slightly lower rate than what we saw in the first quarter. So not a lot to change from what we talked about in the fourth quarter call back in February. So maybe we'll chat offline on some of the other questions.

Yeah, I guess just what's the – is any major change in the OpEx environment?

I guess that's what I was getting at. We're modeling OpEx and total company G&A up low single digits for the year.

And that's the same as we talked about. Okay, perfect. That's helpful. I was just trying to unpack those things. I appreciate the details. Best of luck here in the second quarter. Thanks, Bobby.

Our next question comes from Anthony Bonadio with Wells Fargo.

Yeah, hey guys. So sort of piggybacking on Bobby's question on guidance, I wanted to dig in on the gas margin guidance a little bit. Can you just talk about maybe what you're seeing so far in the quarter that's getting you to that Q2 37 to 40 cent per gallon range? And then given that's a little more constructive of late, just like looking at industry data, I guess why is that 36 to 40 still the right number for the year? Just any updated thoughts on how you're thinking about margin dynamics would be helpful.

Yeah, look, I think, you know, if I could predict it, I'd be in a different place. But I think, look, we were going up against last year, which saw significant acceleration in the second and third quarter. Specifically, we were up against a 40 and a 41 cent CPG in the second and third quarter. So we do expect and we're modeling things to expand from where we were in the first quarter. We've seen some encouraging things recently with RAC2Retail where we think it's a higher level supported than the first quarter. But we're expecting to be, as I mentioned, one cent down, the midpoint being one cent down to last year. And you can look at what last year ran. It ran 40.3, 41.2, and 39.5 in the second, third, and fourth quarters. So that's kind of how we're looking at things.

And by the way, Anthony... I think the one thing to remember is our strategy. Our strategy basically didn't change. We were able to capture an extra 1.3 cents per gallon of same store, going from 35.7 to 37 cents per gallon. Company-wide, 36.4 versus the 35.4. So we were able to capture an extra penny over here company-wide. while basically trending very, very close to basically to the Opus national average over here. So we're going to continue to try and capture margin and continue to be very competitive, of course. Okay, got it.

That's helpful. And then I just wanted to ask about inside margins a little more. It looks like Q1 was a new record on inside margins. Can you just maybe dig in a little bit on some of the underlying drivers there? and then how you're thinking about the ability to sustain that expansion as we model the rest of the year.

We're not providing details, as you know, about exactly how we got the margin. I think the most important thing to say is that with cigarette decline, as I mentioned, it's basically continuation of core categories. I kept talking about the $4.99 pizza. which is a very, very valuable item. And we're basically selling high-margin item more than cigarettes. And I think that's what drives the margin over here. And remember, we kept talking about food service concentration. We just started. We just started. Pizza was just the beginning. We are getting ready to launch the Nathan hot dog into our stores. We were able to add 105 you know, bakery items to additional stores. So as long as we continue to add more and more high marginal items, and that's what we're doing and that's what we're focused over here, that's what's going to drive basically the margin up.

And, Anthony, just to be clear, we don't expect that level of accretion in the forward quarters. We're not modeling that at least, but we're continuing to drive, to Ari's point, to drive the food service penetration, which we think is a significant opportunity for us versus where we think the industry is.

Understood. Thanks, guys.

Thank you.

Thank you. Our next question comes from Ben Wood with BMO Capital Markets.

Hey, thank you for taking our questions here. I wanted to follow up a little bit on the inside-of-the-store trends, but specifically with the pizza rollout from last quarter. Any color you can share at this point is any sales lift you're seeing, incremental labor or shrink? We'll start there.

We don't see any incremental labor at the moment. You know, we just, like I said, we launched the pizza in January, you know, third week of January. We launched the pizza just before the football, you know, basically. We're very happy with the, you know, with basically the results so far. You know, this pizza program, you know, going to become a very strong category since we launched it. It's a great offer to our customers. And like I said, we're going to use this, basically the pizza program, we're going to use for 100 days of summer. And just to elaborate, I mean, we're talking about very high value promotions. For example, when you buy, you know, 12 pack of Pepsi, two packs of 12 pack of Pepsi, you're going to get basically a free pizza. And all of those promotions are being supported by the CPG company that are supporting us over here. So the idea is really to drive and drive and drive and drive more pizza sales with all of the high marginal items that we see across that. And I believe that the more inflationary pressure we see over here, I believe that's going to become a very big sell for us moving forward.

Okay. That's, that's helpful. And then, um, switching gears a little bit, can you just walk us through the thought process behind converting some of your retail sites into dealer sites and just a little bit more depth, uh, any color on the magnitude? I know, I know you said it was meaningful, but are there specific markets or banners you can share at this point? And then just trying to get a sense for. maybe what the spread is between the performance at some of your retail sites, but what were some of the benchmarks you guys used to address which sites, you know, you would convert versus which sites you would retain in the fleet?

Sure, sure, sure. First of all, I just maybe for a high level just to basically mention that, you know, this is not something new that we actually did. This is something we used to do in the past. As I mentioned earlier, we converted in the past less performing stores in some geographies that are less attractive for us, or we don't have scale. So this is something that was done in the past. I think the goal, and this is something I mentioned on the last call, the goal is really to drive organic growth and invest in our best stores and concentrate on the best stores in our fleet. So as part of our transformation plan, You know, we basically hire a consulting firm, a very reputable consulting firm to help us. You know, we've been dealing, working with them over the past few years, a few months. And over the past few months, you know, the idea is really for them to challenge us, you know, to challenge our fleet, you know, to learn a little bit more about the markets that we have, you know, we are stronger in some markets and maybe we carry a little bit in some other markets or we don't have the scale in some markets. So the idea really is to take some of the stores and re-identify some of them, some of the stores that are, you know, basically performing less than the other. We are not sure that there is a lot of upside in some of those stores to invest money because I don't believe that the return on capital is going to be there. And given that we have the all-sell platform over here and that provides us an advantage, remember, we have 1,800 stores customers, every one of those customers become a potential dealer. The idea is really to go ahead and dealerize some of those stores as we did in the past. We're going to be able to basically reduce operating expenses because of that. We're going to be able to reduce G&A because of that. And at the end of the day, we're just going to make more money running them as wholesale location versus retail location. Remember, we're going to still keep basically the fuel volume because the stores are still under our control. We're going to keep the fuel volume. It's just going to be a long-term arrangement with some of those dealers while we're actually keeping the scale over here. We didn't determine the amount of stores at the moment, but what we are planning on doing on a quarterly basis, we're going to update you guys on how many stores we decided to dealerize and what's basically the impact because of that.

Thank you. I appreciate all the color.

Of course. Thank you, Ben. Our next question comes from Carew Martinson with Jefferies.

Good afternoon. When you talked about optimizing pricing to drive top line zone pricing, What's the impact that you're looking for both on the top margin and also on the gross margin line?

Thanks for the question. We're not sharing that level of detail today. That's going to be more as we get into the investor day, but certainly you can understand there's a lot of folks who do this matching customer segments and the pricing in the various stores. So the work that's been done that Ari was talking about has a lot of detailed customer market research done in terms of what type of customer, how does that match with our brand promise, our brand delivery, and trying to understand again, where we can be perhaps more aggressive on price and where we need to, you know, be a little less and understand a lower segment customer. So it's going to be, you know, it's something we think is a significant opportunity fleet-wide, and we think it's going to make more sense and resonate with our customers, especially the more cost-sensitive ones who are being impacted in the inflationary environment. So more to come as we get to investor data. That's going to be one of the items we're going to be diving into.

Okay. But that is built into the guidance that you have for the year, correct?

No, so that's something, a capability. So as Ari mentioned, the transformation, there's quite a bit of capabilities. That would be one of the capabilities, part of the transformation program.

Okay. And then just on the share buyback authorization, just so I'm clear, it looked like you had about a million left on the original 100 million. So is the 125 million... a brand new program or is it that 25 million dollar expansion from the original 100 million it's a 25 million dollar expansion okay thank you very much appreciate it thank you very much guys thank you our next question comes from hill holden with barclays good afternoon um i had two questions the first one is um when you uh

flip retail stores to dealerize them and maintain the wholesale relationship, does that result in a cash inflow to the company, or is there just simply a reduction in G&A expense?

It's both. I mean, first of all, you increase profitability. I mean, when you do something like that, you know, you're able to increase profitability because you don't carry the operating expense, you don't carry the G&A, so it basically will increase profitability and increase, of course, the cash flow over here.

And in many times, there may be key money attached to it also. So it's favorable across the board.

All right. So that's kind of what I was asking. There can be like a key payment back to you in some cases.

Sure. At the end of the day, just to be clear, I know the vast majority of that, we're not selling the business. I mean, we're still basically either collecting rent or basically in some cases, by the way, we may have a consignment arrangement that we actually gonna split basically some of the profits when it's related to fuel.

Okay, my second question was, as you guys think about this small trial that you're doing for the new store format that's gonna grow, Is the expectation that you'd fund that out of operating cash flow, or would we see you potentially increase borrowing to accelerate it?

I think we have plenty of liquidity right now. You're probably going to see us using operating cash flow for that. I mean, that's the deal.

Okay, great. Thank you very much.

Thank you. Our next question comes from Mark Asherton with Stifel. Yeah, thanks.

Afternoon, guys. I wanted to just ask a bit more on the in-store sales, how you're seeing traffic versus ticket, any sort of changes there, and what potentially is driving a little bit of the softness? That's the first question.

Yeah, so, Mark, we're seeing, as I mentioned earlier, transactions are down, and, again, it's been offset a little bit by average ticket on the upside, but transactions have been the driving force on the downside.

Is that materially different over the last, I guess, the last two quarters versus maybe prior three or four quarters in order of magnitude?

You're going to have to forgive me for that one for being new in terms of we just put some of the analytics in place. That could be something we could follow up on for you. Okay.

And then maybe just a bigger picture question. If you could remind us just on how the food service sales, so the prepared stuff in-store, tends to respond in a tougher macro environment where the consumer is maybe squeezing a little bit more out of their dollars?

Well, I think that's the reason we are basically offering value over here. I mean, that's the reason we are concentrating on pizza. That's the reason we are concentrating on hot dogs. That's the reason we are concentrating on bakery items. We're really trying to provide chicken. Forgot, of course, the famous chicken. We're really trying to provide value to our customers, bundle to our customers. I mean, that's the reason I mentioned, for example, today, for example, if you go to our stores, you can pick up a two-liter Pepsi with a pizza for $5.99. I mean, this is a great value for our customers. And I think that's really what we have to drive over here. Because people are looking for, basically, for those opportunities. People are actually coming to our stores because of that. Remember, we have the loyalty members, over two million members that getting every day those valuable promotions. And this is what drives those people into our stores. And we keep seeing that. We didn't talk about that, but we keep seeing that. If you're looking on just in this quarter, You know, we basically saw that the average enrolled loyalty transaction size were 34% greater than the non-enrolled members. And I think those promotions basically were driving them into our stores.

Got it. And just lastly, within your markets, I mean, maybe focus on just the markets where you're more concentrated, how do you think you fared versus some of your competitors from a fuel gallon consumption standpoint. And I ask it in part wondering whether you're seeing a bit of shift away from retailers which are offering a little bit more value from a gas standpoint. Does that constrict the number of folks that go into the stores if those locations maybe are part of bigger retailers? Is there a bit of a share shift towards grocery and kind of a more traditional means of grocery shopping compared to prepared foods? Anything you could offer there would be helpful.

I'll give you a high-level answer on that. I think that in many, many markets that we operate are actually rural areas where the fact that we are actually the grocer. There is no question that people are looking for better pricing. There's no question about it. But that's the reason, as I mentioned earlier, You know, Opus national average was 5.9% down, and we were minus 6.7. You know, very close to Opus. The gallons were just not there. And, you know, the idea is, and we actually see the other way around, that we believe that the more people coming into our stores to get those valuable promotions, there is a good chance that they're actually going to go outside. We are trying to tie, by the way, the food sales, the inside sales to, you know, great promotion. I mean, for example, we are you know, working with our, you know, CPG company that every time you buy a product inside the store, you get some cents off gallons over there. So, you know, I just think that, you know, that some of the larger operator, you know, again, without mentioning any name, you know, they're trying to basically mitigate the decline by very aggressive pricing. But, you know, I can just tell you that the very aggressive pricing are going to sacrifice their fuel contribution dollars. And this is significantly, by the way. And we just don't see any reason to do that because we see basically that the demand is not there. And when the demand is not there, just to lower prices and make less money, you know, Mark, that was never our motto since you know us.

Got it. That's helpful. Thank you.

Thank you.

We have no further questions in the queue at this time. I would now like to turn the call back over to today's presenters for any additional or closing remarks.

Thank you very much, operator. Thank you, all of you guys, for joining the call. By the way, great questions, really great questions today, given that it's after 5 o'clock. You know, what we are trying to do over here, we're trying to give as much insight as we can into our performance. to help investors understand our compelling growth story over here. I can tell you that we have a big plan ahead of us. We have a lot of initiative ahead of us during this year. We are heading towards 100 days of summer, which is basically our best season. And we're looking forward to talk to you guys again in the next quarter. Have a great afternoon, everybody.

This does conclude today's program. Thank you for your participation. You may disconnect at any time.