No Slowdown for Susser

Despite net loss, retailer sees strongest quarterly merchandise margin in more than six years

Published in CSP Daily News

By
Greg Lindenberg, Online Editor

CORPUS CHRISTI, Texas -- Susser Holdings Corp. has reported that its total first-quarter 2008 merchandise sales—including a full-quarter's contribution from Town & Country Food Stores—increased 80.8% to $168.8 million, versus $93.4 million a year earlier for the standalone Susser operation. On a same-store basis, merchandise sales increased 8.2% from first-quarter 2007.

"We have achieved some meaningful improvements in contracts as [they relate] to the Town & Country purchase, and a couple of those arrangements will also extend over the legacy Stripes stores," Sam L. Susser, [image-nocss] president and CEO saidduring the company's first-quarter earnings conference call. "So our overall buying position has definitely improved...and wefeel likethat position is sustainable."Total revenues for the combined organization increased 89.3% to a record $1 billion, from $528.6 million in first-quarter 2007. Gross profit increased 74.7% to $91.5 million, compared with $52.4 million in the year-ago quarter from standalone Susser operations.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) increased 113.2% to $16.6 million, compared with $7.8 million in the prior year's first quarter, reflecting the Town & Country contribution along with the strongest quarterly merchandise margin in over six years of 33.6%.

The company recorded a first-quarter net loss of $3.4 million, versus a net loss of $2.4 million in the year-earlier quarter. Net income was impacted by slightly lower gross profit from retail fuel sales, increased credit-card expense and higher interest expense related to the fourth-quarter 2007 acquisition of Town & Country.

To show more comparable results, Susser has provided selected pro forma financial results as if the Town & Country acquisition had taken place on Jan. 1, 2007. On a pro forma basis, Susser would have reported a net loss of $2.5 million for first-quarter 2007 and adjusted EBITDA of $17.2 million.

"Our above-average same-store sales growth and our increased merchandise margin of 33.6% in the first quarter demonstrate that our primary markets in South and West Texas are not seeing the kind of economic slowdown that has impacted other parts of the country," said Susser. "In fact, although rising oil and refined product prices are putting pressure on the broader economy—and putting pressure on our retail fuel margins and credit card fees—our oilpatch markets in West and Southeast Texas and Southern Oklahoma are seeing a boost in economic activity from higher energy prices."

He added, "We will, however, remain vigilant as we look for any sign of a consumer slowdown, and we intend to manage our business and our capital outlays prudently and conservatively."

And, Susser said, "We remain on track with our integration program for Town & Country, and we are pleased with the performance of those stores in West Texas and Eastern New Mexico since we closed the transaction last November. We are starting to see improvement in our merchandise margins from improved supply contracts and in-store merchandising efforts, and we continue to look for additional opportunities for savings. We also have just started the final phase of our systems integration, which should be completed this quarter and allow us to complete our corporate personnel reductions and relocations as planned this summer."

During the call, Susser said, "We lowered the range of our new store build count to 12 to 18 stores for this calendar year…. We have run into some issues on certain properties, such as curb cuts and planning issues that have affected our ability to open as many new sites as we previously forecasted in 2008. Some of these sites will ultimately get pushed to 2009."

During first-quarter 2008, the company opened three new retail units, bringing the company's total store count to 507 as of March 30. One additional store opened on May 1, and four more stores are under construction or under contract for purchase. In addition to the three new restaurants opened in the new stores, the company opened restaurants in one existing store and closed one, bringing the total number of stores with restaurant operations to 285, or 56% of all stores at the end of the first quarter.

Susser told the conference call participants, "In addition to organic growth, we will continue to pursue acquisitions on a strategic basis."

In its wholesale operations, Susser added two new dealer sites and discontinued six during the first quarter, for a total of 383 dealer sites in operation at March 30. New sites typically outperform wholesale locations that are closed or where fuel supply is discontinued.

Subsequent to the end of the first quarter, Susser Holdings completed sale/leaseback transactions totaling $19.6 million for seven retail stores. These latest transactions bring total proceeds from sale/leasebacks year-to-date to $26.5 million. Susser also has recently received, subject to customary conditions, commitments for up to an additional $45 million of sale/leaseback funding for the remainder of 2008. "We expect to do another $20 million to $45 million of sale/leaseback transactions later this year," CFO Mary Sullivan said during the conference call.

Also in early May, Susser increased its revolving credit facility from $90 million to $120 million. This increase will provide Susser with additional liquidity and flexibility in the face of rising working capital requirements due to sharply higher motor fuel prices. As of May 6, the company's borrowing base supported the use of approximately $105 million of the $120 million revolver, and there was approximately $62 million of availability. The company remains comfortable with its current liquidity position, it said.

Over the past few months, the company has achieved several milestones in the integration of Town & Country. It announced and is currently implementing a streamlined management structure; it achieved purchasing synergies on numerous supply agreements; it is in the process of consolidating food purchasing and distribution with Stripes' suppliers; it remerchandised stores and have added a number of new products to increase sales and profitability; and more.

C-store merchandise sales totaled $168.8 million during the first quarter, an increase of 80.8% on a reported basis and 13.8% on a pro forma basis. Same-store merchandise sales for Stripes locations alone increased 8.2% from the year-earlier quarter and 8.4% on a pro forma basis. The strong growth in sales for the retail merchandise segment was led primarily by increases in packaged drinks, cigarettes, beer and food service. Sales trends also benefited from a favorable weather comparison.

Total merchandise gross profit for the first quarter, net of shortages, totaled $56.7 million, an increase of 89.1% on a reported basis and 17.1% on a pro forma basis.

Net merchandise margin on a combined store basis increased to 33.6% for first-quarter 2008, an increase of approximately 150 basis points on a reported basis and 100 basis points on a pro forma basis.

Retail fuel volumes increased to 169.3 million gallons for the quarter, up 66.3% on a reported basis and 8.2% on a pro forma basis. Average gallons sold per retail location increased 7.2% from a year ago on a reported basis and 4.6% on a pro forma basis. The favorable per-store comparison is in part due to the re-branding of the Company's fuel islands to the Valero brand during the year-earlier quarter as well as strong overall customer traffic.

Retail fuel revenues increased to $519.8 million, up 131.3% on a reported basis and 47.1% on a pro forma basis. Fuel revenues were driven by the Town & Country contribution, higher Stripes volumes and an 86-cents-per-gallon increase in the retail price of fuel versus a year ago, or 81 cents on a pro forma basis.

Gross margins for fuel were flat at 11.9 cents per gallon on a reported basis but down from a pro forma 13.7 cents per gallon a year ago, reflecting strong first-quarter 2007 margins in Town & Country's West Texas markets. Retail fuel gross profit was $20.2 million, an increase of 66.7% on a reported basis and a decrease of 5.6% on a pro forma basis. Susser reports retail fuel margins before credit-card and other fuel-related expenses.

"Performance from our wholesale fuel business continues to be strong and provide a good complement to the retail business," Susser said on the call. Wholesale fuel volumes sold to Susser's 383 dealers and other third-party customers increased 2.3% year-over-year to 114.1 million gallons. Wholesale fuel revenues increased 48.0% to $302.6 million as a result of both the volume increase and an 82-cents-per-gallon increase in average wholesale fuel selling prices. Wholesale fuel gross margin was 4.9 cents per gallon, versus 3.8 cents per gallon a year earlier. Wholesale fuel gross profit increased 30% to $5.6 million, reflecting higher wholesale fuel selling prices and the slightly higher volumes.

"Town & County did not have a significant wholesale business, and we will be looking at future opportunities in those markets once we get past the heavy lifting with the integration," Susser added during the call.

Corpus Christi, Texas-based Susser Holdings is a third-generation, family-led business that currently operates more than 505 c-stores in Texas, New Mexico and Oklahoma under the Stripes and Town & Country banners. Restaurant service is available in 285 of its stores, primarily under the proprietary Laredo Taco Co. and Country Cookin' brands. The company also supplies branded motor fuel to more than 380 independent dealers through its wholesale fuel division.