Private-Label Delights Delek

Reimage of house label figures prominently in year-end earnings report

Published in CSP Daily News

By
Steve Holtz, Online News Director & Beverage Editor

BRENTWOOD, Tenn. -- Continued growth in its private-label sales has Delek US Holdings refreshing its private-label brand image with the hope of capitalizing on that growth and the high margins offered by such products.

"We…plan to offer our customers three levels of products to meet different customer demographics," Edward Morgan, CFO of Delek, said during a fourth-quarter earnings conference call yesterday. "The new label, products and advertising to support this image should start to arrive in our stores by the end of the first quarter."

During 2007, total private-label [image-nocss] sales accounted for 1.4% of all Delek merchandise in 2007, compared to 1.1% for the previous year.

"Our private-label soft-drink sales represented 2.7% of our soft-drink category [in 2007]," Morgan said. "Private-label water represented 5.7% of [the] category. And private-label candy has grown to 5.3% of our total candy sales."

During the call, Delek reported net income for the full-year 2007 of $96.4 million, or $1.82 per diluted share, compared to $93 million, or $1.94 per diluted share for full-year 2006. For the fourth quarter, Delek reported a net loss of $12.1 million, or a loss of 23 cents per basic share, compared to net income of $11.6 million, or net income of 22 cents per diluted share, for fourth-quarter 2006.

Although Delek's fourth-quarter financial performance was not as strong as in the prior quarters of 2007, this was largely due to refining industry specific factors the company faced during the quarter, according to a press release. The refining segment was impacted by, among other things, the sharp increase in crude oil prices and "backwardation" in the crude market.

Delek was able to partially offset the higher crude prices by continuing to optimize its crude slate by processing 11% West Texas sour crude during the quarter and by an increased contribution margin from the retail segment supported, in part, by ethanol blending in the month of December.

"Overall, 2007 was another successful and profitable year for Delek. We furthered our strategic goals by increasing our retail convenience store portfolio and diversifying our refinery holdings through the acquisition and integration of 107 convenience stores and through the acquisition of a 34.6% equity interest in Lion Oil Co.," said Uzi Yemin, president and CEO of Delek US.

"On the retail side, we increased our merchandise margin while maintaining same-store sales growth, and during the fourth quarter began offering E-10 products at approximately 180 of our stores. In fact, beginning January 1, 2008, we were offering E-10 blended fuel in our refining and retail segments and were working toward the offering of E-10 in the marketing segment."

The retail segment contribution margin was $12.1 million for fourth-quarter 2007 compared to $9.0 million for fourth-quarter 2006. Net sales for the quarter were $477.3 million, an increase of 44.4% compared to the same quarter last year.

Merchandise sales for the quarter increased 22% to $103.2 million compared to $84.6 million for the fourth quarter of 2006. The increase was supported by the $18.1 million in merchandise sales associated with stores acquired during 2007 and by a same store sales increase of 0.2%. The merchandise margin for fourth-quarter 2007 was 30.7% compared to 30.8% for the same period last year. For the full year the merchandise margin increased from 30.6% to 31.6%.

Retail fuel gallons sold increased 16.2% to 121.4 million for the fourth quarter 2007 from 104.4 million in fourth-quarter 2006. The increase in gallons sold was primarily driven by sales associated with stores acquired during second-quarter 2007 and by same store gallon growth of 1.3%. Retail fuel margin for fourth-quarter 2007 increased to 13.7 cents per gallon from 8.8 cents per gallon for the same period last year, supported, in part, by the introduction of E-10 blended fuel in fourth-quarter 2007.

"We were encouraged by our ability to be able to realize a higher fuel margin over the prior year, which was nearly 5 cents per gallon higher, and increase our fuel gallons, even with gas prices that averaged more than 32% over the prior year at $2.90 per gallon," said Morgan. "We believe current economic conditions and rising energy prices are exuding pressure on our customers. We also believe that our culture of customer service and creative marketing will continue to differentiate ourselves from the competition."

Yemin added, "In 2007, we continued to build upon the foundation we have established over the years. We anticipate 2008 will be another year of growth for the company, and we believe we have the capability to finance strategic acquisitions and high return capital projects."

About growth and the company's reimaging program for 2008, Morgan said, "In the retail segment, we expect to spend up to $24 million, including $17 million on new construction and raze-and-rebuild projects. This includes eight new raze-and-rebuild stores and 50 to 100 store remodels."

The company recently opened a new 5,000-square-foot prototype store in Alabama, as previously reported in CSP Daily News. "We…have been pleased with the early results, said Yemin. "We expect to open similar stores in Memphis and Chattanooga in the first and second quarters of this year."

Brentwood, Tenn.-based Delek US Holdings owns and operates more than 500 retail fuel and convenience stores in Alabama, Arkansas, Georgia, Kentucky, Louisiana, Mississippi, Tennessee and Virginia, with approximately 93% of its stores concentrated in Tennessee, Alabama and Virginia.

The company operates these stores primarily under the MAPCO Express, MAPCO Mart, East Coast and Discount Food Mart brands, and markets gasoline and diesel under its own fuel brands, as well as the BP, Exxon, Shell and Chevron brands.

By Steve Holtz, Online News Director & Beverage Editor
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