Alimentation Couche-Tard, an owner and operator of convenience stores, is a growth-by-acquisition company that meticulously optimizes its retail experience.
Locations are able to perform well due to the "vices" they cater to and the easy access they provide to customers. Popular vices like cigarettes and "on-the-go" foods are offered in ATD's stores, bringing in a consistent returning customer base.
The growth of electric vehicle adoption is a potential risk to store traffic (particularly those stores that are attached to gas stations), but presents opportunities in larger basket sizes and building out charging infrastructure at ATD locations worldwide.
ATD is shifting its focus away from merger & acquisition ("M&A") levels of the past to favour greater organic growth. We think this is a major positive for the company as it will ensure the finer details in the customer value proposition are maintained.
Key Company Metrics
A set of metrics we constantly keep updated to monitor the investment thesis.
The placement of an ATD convenience store in a customer's day is rather intuitive - a mid-journey stop to fill up on gas and grab a few items on the way home. With this idea, ATD has been able to expand its operations over 13 countries across almost 15,000 locations.
The company began a global rebrand of all its separate store brands found around the world - Circle K, Kangaroo Express, Mac's, and Statoil - under one unified brand, Circle K, in January 2016 (except Quebec). On top of creating one international brand image that customers will recognize and appreciate, the rebrand will bring unique scale advantages to ATD that many players in the highly fragmented convenience store industry will not be able to tap into.
The main benefits the consolidated Circle K brand and almost 15,000 locations bring are:
improved negotiating power with suppliers, helping secure goods at a lower price. This helps improve store margins, increase volume sales, or both;
new stores in ATD's network are able to receive outsized benefits through supply agreement renegotiations as a result of integration into the Circle K umbrella;
improved data and data visualizations, helping ATD make sound inventory decisions while considering local / regional tastes and preferences; and
promotions are standardized across a greater number of locations under one brand, helping to spread awareness while also reducing costs per store to run each promotion.
It may seem that the one major cost pressure ATD is unable to avoid is labour cost increases. Fortunately, the scale of ATD and its focus on technology ensures that optimization tools, practices, and technologies are invested in to offset some of these pressures.
As an example, ATD rolled out a unique labor model that adapts to individual store needs by allocating labor based on key metrics while implementing labor scheduling tools to automate shift scheduling and allow for easy shift-swapping.
ATD also optimizes its size advantage through a lean, decentralized management structure. The company leaves customer-facing issues to autonomous business units while back-office responsibilities, like IT and accounting, are kept away from the store level to lock-in further scale efficiencies.
All these efforts are paying off, with operating margin up considerably over the last decade. Revenue is rising while each dollar of revenue costs less to ATD over time. The perfect growth and margin expansion formula.
Obsession With Excellence
Alimentation Couche-Tard built its empire with savvy M&A, emphasizing convenience in its convenience stores. The brand is well known for its growth-by-acquisition model, dating back to the company's roots. It has an excellent track record of buying smaller stores or chains and integrating them into its global network of stores.
ATD generally avoid "turnaround" stores in need of substantial investment to meet the ATD operational standards. Instead, ATD purchases well-run retailers in prime locations.
Couche-Tard has proven its ability to integrate acquisitions and realize synergies, adding almost 11,000 stores globally through 64 major deals with the likes of ExxonMobil, Esso, and Shell since 2004.
While a common notion exists that says most acquisitions destroy value and erode margins, that would not be the case with ATD. ATD has had expanding margins for almost a decade, meaning it has been integrating acquisitions as well as building new stores that add to rather than subtract from ATD's revenue- and income-generating abilities.
Due to the highly fragmented nature of its business and the low margins that come with it, we believe it is wise of ATD to continue growing through acquisitions. Smaller players either suffer while trying to compete with much larger and more efficient market players, like ATD, or they succumb to the pressure and get acquired by a large consolidator, again, like ATD.
Balance Sheet Strength
Pursuing a growth-by-acquisition strategy is no easy feat. It usually requires strict discipline to predetermined acquisition criteria, and access to tons of capital. For ATD, the capital source of choice is debt.
With such an aggressive acquisition strategy in place, ATD regularly takes on considerable debt to close deals and expand its moat.
We know that without these stores, ATD would not have the scale advantages it has today.
Therefore, the current strength of ATD is in place thanks to its willingness to take on debt, and fortunately, pay it off quickly.
ATD's financial strength and expanding margins help increase the amount of free cash flow that flows in on a yearly basis. After major acquisitions, ATD generally pays down a lot of its debt to maintain a conservative balance sheet.
We believe the net leverage ratio exemplifies this power. With a conservative balance sheet at this scale, we think ATD will remain in game for a long time.
From now until forever, it will likely continue acquiring smaller stores, integrating them, improving them, and gaining synergies to grow its global empire.
Electric Vehicle ("EV") adoption is rising rapidly, but ATD has a plan. ATD has almost 1,000 fast chargers installed in Europe across 240 sites, most of which are located in Norway. The significance of Norway is that it has extremely high EV sales as a percentage of total new car sales. Fortunately these efforts are paying off as ATD is recognized as the #1 charging destination in Europe. We think ATD could emerge a leader in EV charging stations as long as it stays on top of the trend.
The organic / inorganic growth mix is shifting, likely for the better. A known fact, ATD's historical growth was mainly driven through acquisitions. In fact, 70% of growth in the past was from acquisitions. Going forward, management expects about 60% of growth to come from organic efforts, like focusing on the customer journey, product offerings, and growing market share in the US and in new growth markets. It is important for a global brand to focus on the finer details to ensure customers keep coming back. The market is fragmented with low switching costs, so this refocus is a major positive, in our view. Besides, 40% of growth will still come through acquisitions. These actions are prudent and will ensure the long-term moat ATD has will remain in tact.
ATD always stands ready for more M&A. The company sports a bulletproof balance sheet with a low net leverage ratio and billions in cash. Therefore, the opportunity to take on more acquisitions is robust. While the organic / inorganic growth mix is shifting, we are encouraged to see ATD in a superior financial position to take on acquisitions should major opportunities arise or multiple happen to compress to extremely attractive levels.
Growth by Acquisition Strategy
As mentioned, Alimentation Couche-Tard primarily grows through acquisitions. The company strategically levers up the balance sheet by taking on some debt when buying a company and paying it off with the free cash flow generated from the newly integrated locations.
The strategy has worked well and has a proven track record of success, but it may be risky if ATD makes a poor decision with the company or collection of stores it acquires in any given period.
A weak acquisition could result in lower-than-expected synergies, leading to lower-than-expected cash flow. Not only does this dilute the cash flow per store when averaged across the network, ATD may not pay its debt down as quickly to get back to acquiring more stores.
If ATD cannot maintain conservative debt levels, it may miss out on new opportunities that would have proven to be crucial. Execution is everything.
On the other hand, having too many acquisitions may also pose a threat. Any sort of monopolistic activity may raise a flag with global regulators who may block further market consolidation or impose regulations that make it unattractive to do so.
In the beginning of 2021, Couche-Tard was in acquisition talks with French grocer, Carrefour. Very quickly, France's finance minister shut down the proposal as it would have created a powerhouse of a company. ATD holds a sizeable chunk of the North American market while Carrefour had a strong presence in European countries.
ATD is already among the largest convenience store operators globally. With a major acquisition like ATD-Carrefour being denied, it would not surprise us to see other proposed deals get shut down in the future as well.
One of the most popular vices are cigarettes, and convenience stores and gas stations are the go-to for these products.
Fortunately for the collective health of humanity, tobacco smoking has been declining for many years. Unfortunately for ATD, tobacco is a major reason why many people shop at ATD stores.
If the number of tobacco smokers continue to go down, the value proposition to many customers declines.
Also, if ATD does not pivot its business in a fashion that makes up for these losses, its sales may begin to decline over time as well.
Charging at Home
In European countries, charging stations are very prominent among many Circle K locations.
However, many individuals charge their EVs at home, which is a luxury we did not have with gas-powered vehicles. In fact, 80% of electric vehicle users charge their vehicles at home as opposed to charging at a station.
ATD is banking on the idea of encouraging bigger basket sizes and welcoming customers who either want to fill up gas or charge their cars. These customers tend to pick up small items to purchase on top of fuel.
Even if ATD builds out wonderful EV charging infrastructure, it is highly possible these stations will not be frequented nearly as much as they would if gas-powered vehicles were the only vehicles to exist.
This could substantially increase the terminal risk for ATD. However, we think there is still value to convenience stores, as they are a much more convenient alternative to grocery stores or large pharmacy brands. People will certainly not stop visiting convenience stores, they will just visit them less.