ARKO - NASDAQ

Greetings and welcome to Arko Corp First Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ross Parman. Thank you. You may begin.

Thank you. Good morning and welcome to Arko's first quarter 2023 earnings conference call and webcast. On today's call are Arie Kotler, Chairman, President, and Chief Executive Officer, and Don Bassell, Chief Financial Officer. Our earnings press release, quarterly report on Form 10-Q for the first quarter of 2023 as filed with the SEC and our earnings presentation are available on Arko's website at arkocorp.com. Before we begin today, please note that all first-quarter 2023 financial information is unaudited. And during the course of this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may be identified by the use of words such as will, may, expect, plan, intend, could, estimate, project, and similar references to future periods. These statements speak only as of today and are based on management's current expectations and beliefs and involve risks and uncertainties that could cause actual results to differ materially from those described in these forward-looking statements. Please refer to our press release, our quarterly report on Form 10-Q for the quarter ended March 31, 2023, and our other filings with the SEC, including our Annual Report on Form 10-K 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. Please note that on today's call, management will refer to non-GAAP financial measures including same-store measures, EBITDA, and adjusted EBITDA. 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 our financial information presented in accordance with GAAP. Please refer to our earnings press release for reconciliations of our non-GAAP measures to the most directly comparable GAAP measures and also like to note that we're conducting our call today from our respective remote locations. As such, there may be brief delays, cross-talk 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 Arie.

Thank you, Ross. Good morning, everyone. We appreciate you joining the call. Yesterday, you may have seen two major announcements the Company made that we believe show how well we are positioned to continue executing our growth strategy, well into the future. Our subsidiary, GPM Petroleum has upside its credit line by $300 million to $800 million from syndicate of banks and we also extended the maturity until May of 2028. We also increased and extended the Company's program agreement with Oak Street which can provide up to $1.5 billion to purchase and lease real estate to GPM or its affiliates through September 30, 2024. In aggregate, Arko currently has more than $2 billion in available capital for continued M&A activity, including cash, lines of credit and the extended Oak Street Program Agreement. We are focused on continuing our acquisition strategy to enhance value for our stockholders. Turning to our results. This was another strong quarter for higher merchandise contribution and acquisitions. First quarter same-store merchandise sales, excluding cigarettes grew 7.6%. Same-store sales increased by 3.8%. The increase in same-store sales was driven by continued strong performance in high-margin destination categories including in-depth detail on these categories in our first quarter presentation on arkocorp.com. Some highlights of these destination categories included packaged beverages sales, which increased 9.6%, candy was up 18.3% and beer increased 6.2%. Another key headline is the growth in merchandising contribution dollars of $8.1 million or 7.7% on a same-store basis. Total merchandise margin grew 120 basis points to 30.7% this quarter compared to 29.5% in Q1 2022 We believe that these results show that our numerous marketing and merchandising initiative are working resonating with customers and driving sales growth. Higher merchandise contribution margin and a recent acquisition helped to offset lower fuel contribution and increase in-store operating expenses, resulting in adjusted EBITDA of $47.5 million for the quarter compared to $50.1 million in the prior year quarter, a decline of 5.2%. Total fuel contribution increased to $123.8 million compared to $112.9 million in the prior year quarter, an increase of $10.9 million On a same-store basis including legacy wholesale sites, total fuel contribution dollars were $95.2 million, which declined $15.4 million compared to $110.6 million in Q1 2022. The fuel contribution was lower with the majority of this decline related to elevated fuel margin in March 2022 at same-store retail sites compared to March 2023. TPG was $0.477 per gallon versus $0.373 per gallon in March 2023. This was driven by increase in fuel prices due in part to the invasion of Ukraine. We still believe that structurally higher margin would remain, given increased operating pressures. Going back to our strong in-store performance, I will now update you on our three key merchandising and marketing pillars. Our first pillar is to grow sale in core destination categories with data-driven decision and strong supplier partnerships. Cigarettes are certainly a destination category. However, core destination categories, our refocused investment on resources, such as people, space, and capital. These are packaged beverages, beer, candy, salty snacks, sweet snacks, and alternative snacks. These categories drove 63% of our Q1 same-store sales excluding cigarettes and 43% of our total same-store sales. Our customers expect and deserve for us to have the right assortment, space and value in these categories. Same-store sales in these six core categories grew by approximately 10% in Q1 2023 over Q1 2022. The margin rates in these categories grew 110 basis points in Q1 2023 over Q1 2022. We continue to refine and drive the expansion of these categories across our company-operated stores to ensure that we are offering our customers the right assortment and value proposition. The core criteria of our M&A strategy is to acquire chain, where we can add value. Arko's scale, purchasing power, and merchandising and marketing expertise has enabled the company to improve the performance of stores that we purchase by improving the product assortment, product placement, promotional events, and loyalty. One example of our ability to add value is that our 36 Handy Mart stores in North Carolina, which we acquired in November 2021. As follow-up to detail we shared on our last call, we continue to make progress in the stores. First quarter results at Handy Mart stores were as follows and our all Q1 2023 compared to Q1 2022, our first full quarter of operation. Merchandise sales increased 6.7% and merchandise sales, excluding cigarettes increased 12.2%. Merchandise margin increased 400 basis points to 33.2% compared to 29.2% in the prior-year quarter. Sales of the six core destination categories, I mentioned earlier, grew by 14.9%. We are also encouraged by early results at the Pride stores that we recently acquired and reset. We believe we will have similar results at the TG stores that we are currently in the process of resetting. Moving to the second pillar, our fas REWARDS loyalty program. We implemented a major new upgrade to our loyalty app that was launched March 29 to develop and strengthen relationship with our customers and drive more trips with our existing customers, while attracting new loyal customers We currently enjoy approximately 1.38 million enrolled members. Since the launch of the upgraded app, the number of member enrolling each week has increased in average of approximately 30% compared to pre-launch enrollment. We're also excited to announce our 100 days of summer loyalty enrollment offer that start on May 17. The new customer we enroll with valid email address and phone numbers will be rewarded with $10 in fas BUCKS delivered to their new app wallet which these customers need to spend in our stores on participating categories. We are very excited about this promotional offer, as we know that enrolled marketable members make more trips and spend more in our stores than non-enrolled members. In fact, in Q1 2023, our enrolled members made an average of almost six more trips per month versus non-enrolled members. In Q1 2023, enrolled members spend on average approximately $68.50 more per month than non-enrolled members. Additionally, the Q1 2023 enrolled members increase their average monthly spend by 8.2% compared to Q1 2022. While early, we are encouraged by engagement in the new app, including the redemption of our in-app-only HOT deals as well as use of our new in-app order and delivery functionality. The third pillar is expanding our packaged and fresh food offerings including pizza, chicken, prepared foods, and other options. Same-store franchise sales across all brands increased 24.5% in the first quarter as compared to the prior year. While we have made great progress with our grab 'n' go prepared foods, frozen foods and franchise partnership with Sbarro and Dunkin', we are still in the early stage of defining this strategy along with assortment and price value proposition for the consumer and our go-to-market strategy. Our goal is to become destination for packaged, prepared, and fresh food and we look forward to providing further updates. Our objective is to make continuous improvement in each pillar and position our core convenience store business to continue delivering great results and exceeding our customers' expectation. Right now in the midst of our store operation team annual pride ride. We think of this as going through our stores for spring cleaning. We do this every year including visits and inspection at all of our stores. This event allow us to rally together and prepare for the 100 days of summer, our biggest selling season and to ensure that we are customer ready for the big selling season. Switching gears to EV. We continue to make progress on electric vehicle charging. At the end of Q1, our network included more than 50 charging ports, with plans to add more charging capacity across the country. Turning to M&A. Following the closing of Quarles and Pride acquisition in 2022, we closed the TEG acquisition on March 1, 2023. TEG added 135 convenience stores and expanded our southern retail territory into Alabama and Mississippi, as well as 192 dealer locations. We are pleased with the results of this acquisition so far. The WTG acquisition is anticipated to close in the second quarter. This acquisition will significantly enhance the Company's footprint in attractive western Texas. Now, let me briefly address our proposal to acquire TravelCenters of America. Our intention were consistent with our track record and strategy that has been very successful and has made Arko an acquirer of choice, transparency and open negotiation. We believe our proposal, had we been given an opportunity to perform customary diligent could have provided immediate cash value to TA stockholders at significant premium to the next best offer with no financing contingencies, and for the record, neither our proposal to TA nor any other previous acquisition have ever had financing contingencies Our repeated attempts to engage with TA's management and Board were met with firm resistance, resulting in a more public conversation through press releases and filings rather than productive discussions. We believe a wider group of investors now fully appreciate how rapidly Arko can move to create the right condition for a deal. We appreciate Oak Street and others moving very rapidly along with us. We reserve cash and maintain flexible financing, so we can take advantage when the right opportunity arrive. Given our liquidity, we will continue to evaluate deal concentrating on return on capital consistent with our traditional disciplined approach. We are also investing in our business, we are more committed than ever to driving long-term sustainable inside sales growth, expanding margin and gross profit dollars. Before I hand the call over to Don, and given that we're not currently providing guidance, I want to detail seasonality and reiterate our historical seasonal performance. We believe that historical quarterly cadence is an important factor to consider when evaluating our performance. The first quarter historically is our least active sales period, while the third quarter is our strongest. Using an average of 2021 and 2022, the first quarter contributes about 17% of overall adjusted EBITDA and the second quarter about 28%. The third quarter has historically contributed about 32% and the fourth quarter about 23%. I will now turn the call over to Don.

Thank you, Arie. The Company has continued to record excellent results. Our initiatives are clearly gaining traction. The stable ratable cash flow from the wholesale and fleet fueling segments have enhanced our deal-making flexibility and augments further investment in our core convenience store business. Our balance sheet continues to be strong and we currently have a very good liquidity position. As of March 31, 2023, we had cash and cash equivalents of approximately $256 million. Our outstanding debt excluding capital leases was approximately $809 million, resulting in net debt of $553 million. Additionally, we continue to realize excellent cash flow. For the quarter, net cash provided by operating activities was $15.9 million versus $30.1 million for the first quarter of 2022. This included an investment in working capital associated with the TEG acquisition. Getting into results for our convenience stores, merchandise revenue for the first quarter of 2023 increased to $400.4 million versus $367 million in the prior year quarter. Merchandise margin increased quarter-over-quarter by 120 basis points to 30.7%. Total capital expenditures were approximately $23.4 million for the quarter. This compared to capital expenditures of $20.7 million in Q1 2022. Retail fuel profitability excluding intercompany charges for the first quarter of 2023 declined 1.9% this quarter to $88.1 million. This was a $1.7 million decline versus Q1 2022. There was $11.4 million decrease in same-store fuel profit excluding intercompany charges primarily offset by $10.8 million in fuel contribution from the TEG and Pride acquisitions. The Company maintain relatively strong retail fuel margin of $0.354 per gallon for Q1 2023 compared to $0.375 per gallon in Q1 2022. First quarter convenience store operating expenses increased $18.9 million or 12.1% versus the prior-year quarter due to $15.9 million of expenses related to the TEG and Pride acquisitions and an increase in expenses at same stores, including approximately $6 million or 9.7% of higher personnel costs compared to Q1 2022. The increase in store operating expenses was partially offset by underperforming retail stores that we closed or converted to dealers. Moving to wholesale for the quarter. Wholesale fuel contribution excluding intercompany charges decreased approximately $1.8 million. The relatively new fleet fueling business generated fuel revenues of approximately $127.5 million for the first quarter. Fuel contribution excluding intercompany charges from the fleet fueling sites was approximately $13.8 million for the quarter. Fuel margin cents per gallon excluding intercompany charges for the proprietary cardlock locations was $0.445 per gallon. Net interest and other financial expenses for the first quarter decreased by $2.4 million versus the prior year quarter to $13.6 million. Net loss for the quarter was $2.5 million versus net income of $2.3 million in the prior year period. Adjusted EBITDA was $47.5 million compared to $50.1 million in the first quarter of 2022. In the first quarter, the company repurchased approximately 89,000 shares of our common stock for a total of approximately $700,000. There are approximately $10.3 million remaining under our previously announced $50 million stock repurchase program. Because of our continued results and desire to enhance returns for stockholders, Arko's Board of Directors declared a quarterly dividend of $0.03 per share of common stock to be paid on June 1, 2023 to stockholders of record as of May 19, 2023. And now, I will turn the call back over to Arie

Thanks, Don. I will close by saying that we believe 2023 would be another year of strong performance and growth. I want to thank the company's more than 13,000 employees for their hard work and dedication. Now, we will take your questions.

[Operator Instructions] Our first question comes from Anthony Bonadio with Wells Fargo. Please proceed with your question.

Yes. Hi, good morning, guys. So just quickly on the Oak Street facility to start. Beyond the upsizing versus last year, is there anything else you can tell us about how the terms of the agreement differ from last year? And then anything you can tell us about the new cap rate?

Good morning, Anthony. This is our secret sauce. I mean, the only thing I can say about that is that every deal is going to be different. Right now, we amended the program agreement in order to be attractive and active over here. And as we move along, I'm assuming we're going to be able to provide more information as soon as we start to transact, but we are not sharing at this point any other terms that can actually be competitive.

Understood. And then on the fuel side of the business, can you just talk about your latest thinking on the balance between achieving incremental per gallon gross profit versus potentially driving additional gallon volume? And then in that context, just any color on your price gaps to peers in fuel versus how that's trended historically?

Sure. It's a very good topic and very good question. So maybe I will break it down a little bit by what happened in Q1, because the Q1 basically decline is really in March 2023, as I basically explained earlier. So we enter 2023 with a decrease of 8% -- 8.3% in January. And as we continue to move along towards, basically the cycling of the invasion of Ukraine, I mean, we saw much less decrease in February. For example, the decrease was only 4.7% and as we enter March, the March decrease was only 4.5%. So we are going to be competitive as always. We are always competitive, but you know what, I think what we see over here is that the minute the price of fuel started [technical difficulty] in March, the unleaded price on average was 396. This year, the unleaded price was 329. So I think, in this environment, when the price of fuel is much lower than prior year, I think, we're going to have a little bit more flexibility over here. I think people are going to drive more. And as I said, we will continue to look for gross profit dollars, but at the same time being competitive. And as you can see, we always say that, I mean there is very little correlation, if any, between inside sales and basically an outside sales. I mean, I believe margins are going to continue to be high given that operating expenses are higher. But again, we are making sure that we are ultra-competitive outside and very, very competitive inside and have the great offering for the people to come in

Thanks, Arie

Of course, thank you.

Our next question is from Kelly Bania with BMO Capital Markets. Please proceed with your question.

Hi, good morning. Thanks for taking our questions. Arie or Don, I was just wondering if you could help us and maybe we missed it, just the contribution from Pride and Quarles in the quarter and on an EBITDA basis, just trying to kind of back into what maybe was organic in terms of EBITDA for the quarter. Any help you could do there would be great.

Don, would you like to take it?

Sure, sure. Hi, Kelly. Good morning. We did not specific break out TEG or Pride or Quarles for that because again it's only one quarter of the -- of year-over-year. And I know, it's hard to do from organic models. I think the message that were -- we wanted to pass on is look, we had great merchandise results, we had a very tough fuel margin in March that we're up against and basically because of our acquisitions with Pride, Quarles and TEG, we're able to offset that loss in fuel. So I think if you take anything away from this, I think without specifically doing it, we basically were able to keep our EBITDA very close to last year against all the headwinds we faced. As we go forward, we will consider disclosing those numbers, but again the message to take away is we have this model that can weather the fuel up and downs and that these acquisitions, help us balance that year-over-year.

And just to add further, just to finish the line on this one. We are $15.4 million on gross profit dollar compared to prior year on a same-store and as Don mentioned, we are only $2.6 million on EBITDA to prior year. So as you can see, the $15.4 million was basically offset with inside sales and the help of those acquisitions and that's how we basically finished the quarter very close to the quarter last year.

Got it. And Don, you mentioned the seasonality, the pattern, I guess historically over the last two years. Are you at all suggesting those are good kind of rough frame of reference for this year as well or what would be any other key seasonality items to keep in mind, given the volatility in fuel margins and the comparisons as well as the M&A that's still flowing through?

Sure, sure. So again we're not going to project what they are. We try to give that out, so that you could -- again we're a relatively new public company, and with a lot of acquisitions and things going on. I mean, if you look at '21 and '22, there were acquisitions but there weren't any major things like an Empire like that. It's more just to look at it as a historical past and provide you the historical -- provide the historical information out to the public. I think, what was interesting when you look at seasonality, it's not just -- it's not just sales volume, it's also how the different things happening. For example, in the summer, your merchandise margins are higher because you're buying higher-margin stuff. Typically, you will see lower fuel margins in the first quarter and things like that. The exception being last year. So again, we just want to -- just point that out and bring that to everyone's attention, potential from a historical perspective not as guidance. And again, I know with our acquisitions that sometimes it can be confusing, but I think we've -- at least in my belief we've sort of returned back to a more normal pattern that we've seen, but it's yet to be seen what happens as you know each year provides its own, but certainly the last two or three years have been kind of unique. But we think '21 and '22 again have probably even more, what we are used to seeing.

Okay, that's helpful. And then I'll just ask one more on the inside same-store sales. Can you just give a little bit more color on the breakdown of traffic, inflation, items per basket, just really kind of unpack that same-store sales figure for us a little more.

Yes sure. Arie, do you want to say or do you want me to?

Go ahead.

Okay. So again, we're continuing to see the same pattern we talked about before, we're continuing to see obviously people coming in, and with less trips at a bigger basket and that's also part of what we're trying to drive the loyalty too. I mean, yes there is inflation driven in there and obviously, every time prices go up, we try and pass it on. As most people do, because you can tell, looking just at our personnel expenses are very high, but what we're really focused on is what is it doing in our margin, where are we doing on the GP dollars? Because obviously, we could sell a lot of cigarettes and really both boost our sales and you can look at the increase that come from cigarette. So it's really hard to break apart the inflation piece of it, but we're focused on, as Arie already talked about is the key categories inside the store, and we still think, there's a lot of opportunity inside the store without doing some other things that we can unlock a lot of this, and that's why we stay very, very focused on. I mean all categories, but again on the sales [indiscernible] and making sure, we can extract as much as we can not only from new acquisitions, but also from our base.

And I want to add, Kelly, a couple of points. I think it's important for everybody to know. On the first question that you asked, I just want to point the $0.47 versus the $0.37. I think it's important for everybody to know that we don't anticipate $0.10 difference quarter over the quarter or month after month. This is not something we anticipate. It's really the invasion of Ukraine. We saw all of the sudden a big increase in March. And as I said, things settled at $0.37 basically in March. So I think this is a one-time event that we saw in March. I don't anticipate those things happening on a regular basis. I think, this is something very important and that's the reason out of the $15.4 million really $13 million really happened in March. That's a decrease. That was offset by the acquisition and of course the inside sales. So I think that's comment number one. Number two, regarding to your question, if you're really looking and we describe it actually in the Arko -- if you go to the Arko Corp and you look on our presentation for the month, we basically describe the increase in the core categories. There are six core categories and those six core categories basically represent almost 60% of merchandise sales, excluding cigarettes. I mean candy was up 18.3%. I mean pack bev 9.6%, salty snacks, sweet snacks. I mean, all of those categories by RA margin categories and that's why we were able actually to increase gross profit dollars from these categories. The last thing I wanted to add is that all of the initiative, we kept talking, for example, last year we talked about adding 550 bean-to-cup coffee machines to our stores. So just for everybody's reference, if you're looking on our coffee business, our coffee business Q1 '23 versus Q1 '22 is up 133%. But if you're really looking on those 550 stores that we added bean-to-cup coffee machine, the coffee business over there by cups, cups basically that was sold for $0.99 were up 208,000 cups. It's 100 and almost 55% up basically compared to prior year. So I think all of the initiative and all the things that we're actually pulling to play, not only working. I mean, you see the results and deliver basically this gross -- increase in gross profit dollars and this is what we believe all of those initiatives that that we actually made in 2022, I think now, we're going to start to see basically the fruits for them, including the acquisition. I mentioned Handy Mart that we added around, approximately 700 items to the store. Just for everybody's benefit on Pride, which we just finished to reset the stores couple months ago, we added over 1,000 items to Pride and TEG which we are in a process of resetting, we also on average adding another 1,000 items. This is an increase of almost 20%, 25% increase in items in the store that belong to core categories. So I think, you guys understand where is our focus and what basically -- what we're able to achieve in a very short order.

Thanks, Arie, I'll get back in the queue.

Thank you.

Our next question is from Bobby Griffin with Raymond James. Please proceed with your question.

Good morning, guys. Thank you for taking my questions. I guess, Arie and Don, first, I just wanted to talk and maybe unpack OpEx growth a little bit more. So quarter actually even against tough comparisons had pretty good gross profit growth but OpEx up on a GAAP basis at least 17% year-over-year. Can you kind of talk about some of the drivers in that and are the new acquisitions just bringing on a faster growth of OpEx and is there any opportunities to kind of control that or slow that growth going forward?

Yes. So, great question. So let me try and pick that apart. Okay. So first of all, let's look at retail OpEx. I mean, I think we talked about that most at OpEx, we went up about a huge amount but most of that was, was taking-- if you just take out the -- the portion for TEG and Pride, it was $18 million on -- just on retail. If we take out TEG and Pride, it's about $18 million and then you look at just labor, it was $6 million on same stores. So, and so if you look at the rest that would be a decrease and that's due to stores that we convert to dealer and things like that, but also when you look at our labor increase that's also a good sign too, because one of the things we had versus last year is we had a lot more open positions, so it's not so much as inflation, even though inflation is coming in, it's also filling positions that were not filled. So I think that's a sign, a positive sign too going forward. When you look at G&A, when you take off the expenses for the acquisitions and also the non-cash equity award, G&A is not increasing that much at all. We still believe again with these acquisitions, what we wanted to do is bring them on, and we talked about from a synergy perspective that we want to make sure that they operate as they were, and we still expect to get further synergies from these acquisitions. So a lot of this really is being driven by -- by the acquisitions. Some of this being driven by labor but that labor, I think the message to take away from this is not as much the labor rates going up but more that we're filling positions that were not filled. And that is true both in the store and also in G&A, as well

Don is that the comment about G&A, should we look at the 3.576 in acquisition costs that were called out in the EBITDA bridge as impacting all, those all hit inside the G&A line?

No, those acquisition costs, it hit inside that different line under other expenses. So when you talk about things like, like when I talked about the stock comp expense, I believe that was about $1.4 million that isn't within the G&A line. We've also got the acquisition expenses of the new businesses we brought on too as well, but again what I'm talking about for example, we had a -- many of our competitors did huge issue in hiring people in the field. I mean, because lot of people in the field because managers weren't available. We're having to do double duty. So I think, what you're also seeing is making sure that we have the right amount of people and making sure those open positions are filled, which again I want to go back and emphasize the point, with those positions being filled, it helps us to execute better store level too. So and we've also added some resources too from a technology standpoint, which are going to help us be more efficient in the long run too. So this is not like a linear growth where it just keeps going. We see more synergies definitely coming down the road, and we anticipate those, but there are also some non-cash growth in there and there's also cash just from acquisitions.

Okay. I appreciate the detail. And then I guess secondly, for me and my last question. Arie, I mean, the TA acquisition was obviously a big potential acquisition that you guys looked at. So maybe I was just hoping, you could talk a little bit about your philosophy and the company's philosophy on size of targets that you'd look at especially now considering the new financing you've updated us. And then maybe putting in context of also you have an outstanding share repurchase program out there and the stock is at least in our view, at a pretty compelling valuation. Just so, how do you kind of balance those two aspects?

Yes, I think those two aspects are -- every one of them stand on its own. We have enough liquidity right now to continue with share repurchase on one end, on the other end, we are going to value acquisition probably no different than what we do before. I mean, the TravelCenters acquisition was a big acquisition, it was a great opportunity for us to double the size of this company. Double EBITDA and probably more than double EBITDA, with synergies we probably were able to achieve a lot of synergies over here given our size and given their size. And this is something that we focused. I mean we look on multiply and the multiples were just great and we felt that this is a great opportunity and that's the reason by the way we approach them and try to pursue it because we felt that this is going to make this company much bigger and much stronger. So that was the approach. I don't think anything really change in our approach, Bobby. We're going to continue to pursue small acquisition, mid-sized acquisition, large acquisition given that we have their M&A team out there, I don't think we are basically not paying attention to all of the acquisitions that are in the marketplace. We're going to continue to be disciplined. We're going to continue to basically look on return on our capital to our shareholders. So I don't really think anything changed over here, as you mentioned, the stock price. My opinion, it's probably similar to yours. I think the stock is cheap right now and we will actually evaluate that and see what else need to be done on our end.

Okay. I appreciate the details. Best of luck here in the second quarter

Thank you very much, Bobby. We appreciate your question.

Our next question is from Mark Astrachan with Stifel. Please proceed with your question.

Yes. Hi, good morning, everyone. I appreciate you don't give guidance. I guess I'm curious how the quarter came in relative to your expectations. If there was anything that stood out through the totality of the results relative to what you thought three months ago?

Well, it's a tricky question, Mark. Good morning. First of all, because we are not providing guidance, so it's a little bit difficult for me to answer. I can tell you that the quarter didn't come very close to our expectation. Let me put it this way, very close to our expectation. Not a big surprise, and again I think that we didn't anticipate $0.47. I can tell you that. We were not anticipating $0.47 again in the month of March. So that was not a surprise to us. We still believe that margin CPG will continue to elevate and will continue to be high just because all of the other noise with operating expenses being high. And I think that we were able to offset the $15 million decrease over here that we did anticipate in terms of margin, I think we were able to actually offset them with the acquisition that we had and with the strong inside sales that we were actually able to -- to actually to perform over here.

Got it. Then on the inside store sales, so the core categories that you highlighted in the presentation. I'm curious if you could unpack how much pricing drove the same-store sales growth relative to volumes of those categories and how that potentially plays into -- to margins, but then also as you start lapping the significant inflation-based pricing that a lot of these companies put into place starting a year ago or so at this point, did that contribute to traffic increasing or purchases or conversion of purchases within the store? Thanks.

Well, I can give you the breakdown, but what I can say and I think that's going back and I'm using the coffee just because this is a great example. Okay. When I keep talking about the loyal members for example. And this is the reason why we're pushing so hard with loyal members. We are going to implement this program on May 17, we are going to provide $10 for every customers that will actually come to our stores, enroll, provide his email and telephone number. There is a reason for that and I kept talking about the $0.99 increase. I mean, when you sell 326,000 cups more, which is a 133.7%. You obviously understand that some of it, or a lot of it is actually because of traffic because of loyal customers coming to our stores more often. I mean, you can see it. I mean, loyal customers coming to our stores 6 times more often than the non-loyal customers, there is an increase in basket. I mean, their average purchase in Q1, which is the lowest Q is $68.50, and I think that's actually, I think, tell -- explain the message about increase in other product and sales. When you're talking about increase on cardholders buying coffee, it's 130% more than the cardholders that brought coffee last year, prior-year.

Yes and Mark, let me follow-up on that. Let me follow-up on that. Well and Arie -- Arie -- what Arie says is correct, we cannot break it out, but I can tell you that this kind of increases and we -- when we talk internally, we think it's driven by unit increase mostly. Yes, there is some inflation, but these are actions taken, tactics taken to increase shelf space, to put the right products in, so we actually see more units going, inflation is there, but that's not the biggest part. The biggest part really is more units moving off the shelf.

And just to finish this question, Mark, just to finish the question and you know, we specifically wanted to talk about Handy Mart. This is just an example because remember, we are competing, if you're really looking on our competition on this environment, in this industry, 90 almost 100,000 stores are mom-and-pop and small chains. So we took Handy Mart as an example, because remember, we just -- we finished 23 acquisitions, closing the number 24 sooner, but you're looking on Handy Mart acquisition, since we took over, I mean, we were able to increase gross margin, I mean over here, merchandise margin by 400 basis points since last year. I mean, just, if you're looking on sales, for example. Okay. If you're looking just on sales in Handy Mart, our sales in all of those category grew 14.9%. This is not increase of price. I mean this is really -- a real increase in inside sales and I think, all of those initiative and all of those tactic that we're using over here including all of our marketing initiative and merchandising initiative, they're actually growing sale dramatically over here, especially in those small acquisition. As I said, we have Pride with 31, large location that were just reset. We have TEG with 135 locations that we're finishing to reset right now. I mean we believe, we'll see, we'll continue to see big impacts with all the acquisitions that we just accomplished.

Got it, okay. And just lastly, I'm curious given the volatility in the macro, how that has impacted if at all just M&A, generally, are there more or less the same number of targets out there? Bigger, smaller any sort of change relative to maybe 3, 6, 9, 12 months ago?

I don't see any change, I actually see an increase in M&A activities, M&A opportunities. We all see what happened to interest rates. We all see what is happening over here, and I just think that given interest rate is higher, I believe multiply should actually decrease a little bit, they are settle a little bit and that's what we anticipate at least moving forward, but don't see any decrease whatsoever. I see that actually an increase on the other side because a lot of small change with all of those things that you mentioned. As I've said, I want to make sure no one take it for granted that we were able to achieve those inside sales, grow an increase in margin of 120 basis points. Most of the small chain are not able, as a matter of fact, they are actually going backwards we start because they don't have the economy of scale and they don't have the capacity and they don't have the relationship with the suppliers. So when you don't have those capability, you basically maybe even losing margin given that you don't have economy of scale over here. So, the minute you start struggling, I mean, the first thing you do is try to figure out how do you exit the business.

Right.

I think that's --

Mark. One other thing. And I think, and one thing we really didn't talk about is with the renewal and upsize our GPMP agreement now to 2028 and our bonds that are due in 2029, we have now long-term financing commitments that are not in the short term. So there is no near-term payments we have to get over or whatever. So we, and we've designed it this way also, same thing that what we do with Oak Street. So I think that puts us in a really good position that our cash flow should remain very strong over the years to come with no big balloon payments that we have to make, and that's one of the reasons why we went early on GPMP to get that not only upsize but also to get it extended into 2028.

Got it. Thank you.

Thank you.

Our next question is from William Reuter with Bank of America. Please proceed with your question.

Hi, I have two. So, the first is your merchandise comps were up, I think that this was mostly on inflation, although there was a comment, just a bit ago about units being up as well. So I just wanted a little bit of clarification there. And then two, historically, I think, I view this as a pretty recession-resistant category where you may benefit from some trade-down as much as you benefit from some consumers trading out purchases entirely. I guess, what are your thoughts on that?

So let me -- I just want to clarify my comment that I made earlier. Okay. Yes, there is inflation, we see that. But -- and while we can't break it out. We do know internally that we look at the key categories that we do see more units moving on the higher margin items. Okay. So it's not all inflation because again one of our strategies is to make sure our stores are set with items that consumers want. So I want to make sure the message gets across, this is not all inflation, this is planned. This is making sure that the higher margin items that we're trying to get finished or items that we want consumers to buy, it is also more units moving, as opposed to cigarettes, which we know, the cigarette-smoker -- the units are declining and the prices are going up. And I'm sorry, I'll let you go from there.

Yes, no, that's, you say exactly what I wanted to say that I don't -- I want to be clear, just is not inflation. This is all initiative and all of the things that we're doing, but that's actually going to answer your second question which is, you're absolutely correct. We are a very resilient business. We are in a very, very resilient industry. This is probably the only industry, one of the only industry that during 2008-2009 basically, it didn't decrease. We were not impacted during 2008 and then during inflation, you see what is happening right now. During inflation, people are coming to our stores to buy the typical stuff that they're actually buying. We are a very essential business, I mean people that smoke and they continue to smoke, if it's good or bad, I don't know, they're going to continue to smoke regardless. The same thing goes to the beer category, which is a very big category and you'll see what is happening right now with salty snacks. What is happening with candy? I mean people are not going to stop to eat the small candy bar and it doesn't matter what is happening with recession over here. I think those -- going to happen is that people are actually shifting from going to QSR and restaurants into their local convenience stores, in order to basically buy a sandwich and I think, those are the areas of opportunities for us that we're going to continue to grow. I mean, you know, we have pizza located. We are selling pizza today in 200 locations. We have coffee in most of our location, bean to cup in over 550 location. From a price standpoint, it's $0.99 for loyal members. You can find coffee today for $0.99 for loyal members and again when they come in and buy their coffee, they are grabbing some other things that that they actually wanted to buy. So I actually think our business in inflation should do much better than many other businesses out there.

Sorry, just one more from me, you mentioned that you are seeing more M&A opportunities, you referenced interest rates. Does this mean that valuations of those opportunities are becoming more attractive and coming down or are valuations remaining where they've been over the last year?

You know, it's difficult to answer because maybe for some people valuation in their mind continue to stay high. When it comes to us, I mean, we will continue to basically evaluate those acquisition on what is our return on capital. That's the way we're looking on them. So maybe from a valuation standpoint, valuation didn't -- are not changing a lot. But remember, given our size today and our economy of scale today and our purchasing power today, we probably are able to pay a little bit more than what we paid last year. And what we paid maybe the year before. And again, this is driven just because of our size and just because of our capabilities. That's absolutely. So I think the bigger we are, I think it will give us opportunity to be a little bit more attractive versus some other small chain that don't have the economy of scale over here. But I -- I think that valuation did not change a lot, but again this is just the beginning. Remember, interest rate start increase only last year. We are at 525 right now with the last increase just recent. So I don't think there is a lot of acquisition that happened over the last three or four months, and the ones that happened, I think were relatively for a little bit lower valuation that we saw probably last year but it's not dramatic. I want to be very clear. This is not something dramatic that multiple went from 10 to 5 for example. It's maybe half a multiple or so that's what I basically -- I see over here.

Perfect, thank you.

Thank you.

Our next question is from Hale Holden with Barclays. Please proceed with your question.

Good morning. $0.99 is an unbelievable deal for a cup of coffee, so I just -- I had two questions, the first one on TravelCenters. That's a slightly different model than your core sort of the big 25-acre truck stop lots and I was wondering, as you think about M&A, is there flexible -- or do you continue to have flexibility to think about transactions like TravelCenters that might be a little bit outside of -- what the core Arko is now or should we think about you more on the core cessation side.

TravelCenters was really a unique opportunity, but to be honest with you, there is only one travel center out there. Again, you have the big pilot, the Lowe's and some other big travel centers, but not a lot, not a lot. I mean there are very, very unique company out there and we felt that this is a great opportunity. In terms of fuel, we are selling fuel. We are in the fuel business, we are selling fuel, if you're looking on a revenue, I mean 60% of our revenue come from fuel. So that's not something different for us and I think the similarity in TravelCenters is that 65% of their profit came from the inside sales -- inside sales and services, very similar to us by the way, if you're really looking on our business today around 61% came from the inside sales basically I'm talking gross profit dollars, where they're growing most of the gross profit. There is restaurants over there. We actually felt that from basically expanding our food service offering that might be an opportunity for us. But just remember, we did 24 acquisition, we closed on 23 and we can operate 500 square foot store, and we can operate 6,000 square foot store. So I don't think that the business from an inside sales model, I don't think their business was really different. Again the size matter and the size of this company was something that was very attractive for us. The multiple was very, very attractive for us and that's why we pursue this and I don't think, it's going to be different in the future, we are concentrating on our retail business. There is no question that the majority of our profit comes from our retail business and we're going to continue to pursue any opportunity that is out there.

Okay. And the second question I had was on the -- on labor inflation. And I do understand that's from largely filling empty or open positions, rather than actually wage inflation, but that would suggest, it's a little bit more structural as we go forward and in terms of your cost base. And so I was wondering if you're thinking about that the right way. Is this just a little bit of a step up in labor as you go through this year? Until you can find a way to leverage it down?

Yes I - so let me answer it first. It's a -- well I'd say, it's a combination of both. We still have wage inflation going on there from competitors and all different types of retail operations. My comment was more that it's not just straight wage inflation, it's filling open positions. Just to clarify. Go ahead, Arie.

And just to -- no problem. And just to maybe to add a little bit to it. Remember, we are operating and not in a vacuum. I mean, if you come -- you can come to work for us and you can come -- go work for the guy across the street. So everybody basically are competing on the same person, especially when you go to rural locations. I mean, they can come to work for us, they can go across the street and work in the QSR location across the street. Everybody have the same increase in utilities, in insurance, everybody have the same expense increase. I don't think different enough at the end of the day, it doesn't matter, how big we are. At the end of the day, the cost to operate a store is the cost to operate a store, period. I think the good thing about the increase in -- in basically in labor inside the store is what you exactly see with the increase in inside sales. The minute you have more people working and more people basically filling position, I can assure you that that's going to increase the profitability because that's going to increase the service, that's going to increase the inside sales. When you have one person working in a store, you also need to be on the register and you also need to help customers and you also need to fill the coolers during the day. When you have two people in the store. They can actually split the work and one of them, make sure that you have the right product on the shelf. So and again, this is something that almost every retailer is facing in America right now, especially in our industry. I think the good thing is, as I said that as we continue to see more position fill, I think we're going to see increase in sales, just because of that.

Great, thank you so much. I appreciate it.

Thank you.

Our next question is from Kelly Bania with BMO Capital Markets. Please proceed with your question.

Thanks. I just wanted to fit one more here on gallons. The commentary on the cadence of gallons through the quarter was very helpful, but I was just wondering if you could kind of step back, and as we think about gallons longer term, what would be the conditions or the backdrop that would allow gallons to grow or stabilize in these declines? And Arie, also, you gave a lot of examples of the great work that you're doing inside the store from a margin and merchandising perspective, but as you make these acquisitions, what are happening to gallons? And where do you see gallons going forward for those acquisitions as well as the core kind of base?

Sure. First of all, thank you for coming back, Kelly, for another question. And since we're not providing guidance, and what I tried to provide maybe a little bit more details on what we saw last year and I think maybe that's going to help you. So if you guys remember last year, it just happened almost a year ago, last year in basically in April, the unleaded price was $3.86. We lost approximately 7.7% gallons. Price increase in June to $4.70. We lost 12.7% in gallons last year. Price continued to be high at the high 4.24% in July, between June and July. Around 424, we were at 12.6% down on gallons. The minute the price dropped to 364 in August, we were down 8% and as the price continue to decline, we continue to see a much lower decline in basically in fuel prices. My theory is the following. We are not operating on major highways. We are operating in a lot of rural locations. The minute the price goes above $4, people stop driving. People will walk to their convenience stores or think twice before they actually drive to a convenience stores or to any place, they leave the house with basically those high -- basically prices. So as long as the price of fuel continue to be in the 3s and not go all the way up to $4.70 like we saw in June, I believe that we're going to see very small decline compared to last year. And again, it's all about also being not only competitive. We also going to continue to concentrate on increase of gross profit dollars. So I think the message, Kelly, over here is that it all depends on fuel prices. And by the way, that's going to impact the entire economy over here. It's not just Arko or convenience stores, the entire economy was down dramatically when price of fuel actually exceed $5 on average across the nation. But again, I believe the thing what I see today, I believe that if oil prices and fuel prices continue to stay where they are today, I actually think that we will not see a big drop compared to prior year.

Thank you.

I didn't answer your question regarding to acquisition. When we actually put them on our platform, we're using the same method that we actually use across the entire chain. So it's something, first of all, we are putting those stores on KSS. This is the algorithm software that we put on and usually, those guys do not have any kind of technology, and we are measuring them, we're not making changes on the spot. We are measuring. We are seeing who is the competition and then little by little we start to basically used our methodology over here, which is increasing gross profit dollars as long as we continue to be competitive in the marketplace.

We have reached the end of the question and answer session. I'd now like to turn the call back over to Arie Kotler for closing comments.

Thank you, Robert. Thank you everybody for participating this morning. And we're looking forward to seeing you guys in our stores, especially now, when we are entering 100 days of summer. This is a driving season, drive safe and be safe over there. Thank you.