ARKO Corp. Q2 FY2021 Earnings Call

Greetings, and welcome to Arko’s Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Chris Mandeville, Managing Director of Investor Relations at ICR. Thank you. You may begin.

Thank you. Good morning, and welcome to Arko’s second quarter fiscal year 2021 earnings conference call and webcast. On today’s call are Arie Kotler, Chairman, President, and Chief Executive Officer; and Don Bassell, Chief Financial Officer. By now, everyone should have access to the company’s earnings press release that was filed with the SEC this morning and is also available on the Investor Relations section of Arko’s website at www.arkocorp.com. Before we begin, please note that all second quarter 2021 financial information is unaudited. And during the course of this call, management may make forward-looking statements within the means 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, and similar references to future periods. These statements speak only as of today 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 today’s press release, the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, and other filings with the SEC 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. Except as required by federal securities laws, Arko does not undertake to publicly update or revise any forward-looking statements subsequent to the date made as a result of new information, future events, changing circumstances, or for any other reason. Please note on today’s call, management will refer to non-GAAP financial measures, including same-store measures, EBITDA, and adjusted EBITDA. While the company believes the non-GAAP financial measures provide useful information for investors, the presentation of this information does not intend it to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. Please refer to today’s press release for reconciliations of our non-GAAP measures to the most directly comparable GAAP measures. I would also like to note that we are conducting our call today from our respective remote locations; as such, there may be brief delays, crosstalk, or other minor technical issues during this call. We thank you in advance for your patience and understanding. And now, I would like to turn the call over to Arie.

Thank you, Chris, and good morning everyone. On today’s call, I will briefly review our financial highlights for the quarter ended June 30, 2021, and provide an update on our business. Don would then review our financial results in more detail before we take your questions. I would like to start by thanking our over 10,000 associates company-wide for rising to the occasion and once again, continuing to execute in a challenging environment brought on by COVID-19 and several other dynamics. Let’s review a few of these challenges and how we successfully navigated them. To start, much like the rest of the economy, we are experiencing a very tight labor market. To address this, we have implemented several hiring initiatives, including $500 sign-on bonuses, fast rewards points to existing associates, overtime hours, and job fairs, along with hiring an additional team of 10 full-time recruiters. Next was the Colonial Pipeline cyber attack, which disrupted fuel supply in the Southeast for several days and continued shortages of transportation drivers. Our fuel logistics team leveraged our strong fuel supplier and transportation partnerships to minimize disruptions, successfully secure supply, and continue to manage supply efficiently on an ongoing basis. Supply chain disruptions in store merchandise were also persistent, related to continued driver and labor shortages, as well as lack of availability in certain raw materials. However, the marketing department also leveraged strong supplier partnerships and conducted regular supply chain calls with our top suppliers. Solutions included extended delivery times, project substitution, and inventory buildup to ensure we met our customer’s needs. Lastly, there’s COVID-19. When it comes to the pandemic, the top priority is the safety of our associates and customers. To that end, we continue to encourage and educate our associates on the importance of getting vaccinated. As a new variant of the virus continues to spread, we are ready and prepared with PPE supplies, such as masks, sanitizers, and wipes, to meet the needs of customers and our employees. In spite of these challenges, once again, our business model proved resilient, and we are very pleased to report strong results for the second quarter of 2021. Our adjusted EBITDA was $75.7 million for the quarter versus $68.5 million, up over 10% versus the prior year period, supported by strong results in overall profitability of our Empire acquisition, which is currently exceeding our expectations along with continued in-store sales and margin growth. We experienced another quarter of merchandise margin expansion of 140 basis points and a solid 2.4% increase in same-store merchandise sales. Importantly, we realized further sequential acceleration in our two-year stack to 7.4% from 6.2% for same-store merchandise sales. Excluding cigarettes, our results are even more impressive, with same-store sales of 4.3% and 10.2% on a one and two-year basis. Additionally, we have an increase in same-store sales of higher margin other tobacco products of 6.3% from the prior year with a category margin increase of 170 basis points, which is in line with market trends of cigarette consumers converting to other tobacco products. Let me now add some color to the three key drivers of our insight sales and margin. The first one is process improvement. We have implemented new processes to include annual category reviews, annual top-to-top supplier meetings, annual planogram resets to ensure new items execution, and additional marketing resources to ensure all categories are receiving the appropriate amount of attention. The second one was consumer-facing initiatives, having grown through acquisition, granting select opportunities for growth, and we are in the process of executing them. They include adding approximately 525 grab-n-go coolers and 650 freezers for frozen food, revised fountain assortment in over 250 stores, expanding our partnership with DoorDash, which is now available at 684 sites, including 84 sites in Virginia that now deliver beer, and expanded OTP offerings and a non-value food offering and assortment driven by process improvements. And the third one, of course, is supplier partnerships. In May, we extended and restructured our Core-Mark wholesale supply agreement. This is particularly impactful as the agreement aligned our sales growth and profitability incentives. In addition, we awarded Core-Mark 190 additional stores, allowing us to consolidate down to two wholesalers. Retail gallons sold dropped 27% compared to a year ago, reflecting continued increases in consumer mobility as we are now in the summer driving season and the economy as a whole has received an increase in vaccinations. On a same-store basis, gallons were up 11.9%. And despite a fairly considerable run-up in fuel prices throughout the quarter, our fuel margin was quite resilient, having come in at $34.03 per gallon for retail. Switching gears to our longer-term strategic growth initiative, beginning with M&A, we have an aggressive yet disciplined M&A strategy as our priority is deploying capital at very attractive returns. We have many M&A opportunities in the pipeline that we are actively exploring, and I look forward to talking about this in the future. The Empire acquisition we closed in October 2020 is outperforming our expectations. We have been very pleased with the acquisition from both synergies and growth perspective, as we’ve managed to renegotiate three major fuel contracts and add 52 net new dealers since we closed, with 19 of those coming just in the second quarter alone. Our recent acquisition of 60 convenience stores under the highly regarded brand ExpressStop in Michigan and Ohio closed during the quarter and added over $26 million in revenues and $800,000 in net income for the quarter. This is a high quality operation and a brand well regarded within the communities to which it services. On a remodel and new store prototype initiative, as stated previously, we believe that we have significant embedded opportunity to optimize our store base and invest capital prudently through remodeling stores. We opened our second remodel site at the end of the second quarter, and while very early, we are pleased with the preliminary results. Among other upgrades, the new sites include the following features: new interior and exterior design, newly incorporated store daily featuring fried chicken, pizza, and hot grab-n-go inclusive of breakfast and snacking items, a bean-to-cup coffee machine with a selection of always fresh coffee, and the walk-in beer cave featuring easy access to a large variety of cold beer, craft beer, and seltzer offerings. And of course, we expanded the fountain assortment featuring 16 flavors in chewy ice. Our third site, which is a Rise and Rebuild, is expected to open within the next two months. This site will be a 5,600-square-foot travel center, nearly two times larger than our average store, with 26 fueling positions located on six acres of land in Rock Hill, South Carolina, just off Interstate I77. Two additional sites have completed the design phase and are in the permitting process. Construction on those sites is planned to begin by the end of the third quarter. Three additional sites are in the design phase and will be moving to permitting shortly. Planning for 2022 has already begun, including the addition of resources to increase the scale and pace of remodels. Lastly, we have our fas REWARDS loyalty program. As a reminder, we relaunched the loyalty program last November focusing on developing lasting customer relationships and positively influencing consumer behavior by driving incremental trips and increases in basket size. We are currently enrolling approximately 5,000 new fas REWARDS members each week, now having access to 480,000 enrolled members, and we communicate with them on a regular basis. I’m excited to share with you some of our early results. Since relaunch, our enrolled customers are visiting our stores over four times more often than non-loyal customers, and their average spend per trip is two times larger. In conclusion, I'm very pleased that we are continuing to demonstrate our strengths and capabilities as we navigate through a constantly changing consumer environment. I hope you are as excited as I am about our multiple growth opportunities, which we believe position us well for the future. I would like now to turn the call over to Don who will walk you through our financial results.

Thanks, Arie. It's great to be speaking with you all today about our strong second quarter results. Total revenue excluding fuel was $449 million, a 10.4% increase from the prior year period. This was the result of strong same-store merchandise sales growth of 2.4% on top of 5% growth in the prior year period and the ExpressStop and Empire acquisitions, which contributed 9.6% to the overall 10.4% increase. This was partially offset by a decrease from underperforming sites that were either closed or converted to dealer-operated sites. Merchandise margin dollars increased by $15.3 million versus the prior year, while margin expanded approximately 140 basis points to 28.7%, largely due to a lower reliance on cigarettes and a higher contribution from packaged beverages, other tobacco products, and other center store items. The ExpressStop and Empire acquisitions contributed $10.1 million, while same-store sales increased by $6.9 million, which was offset by sites that we closed or converted to dealer-operated sites. Retail fuel profitability, excluding intercompany charges for the quarter, increased $2.2 million or 2.5% on increased volume, a function of our 11.9% increase in same-store fuel volumes as well as ExpressStop and Empire’s contributions offset by a reduction in fuel margin to $34.03 per gallon versus a record-setting $42.05 per gallon from the prior year. For the second quarter of 2021, wholesale fuel profitability, excluding intercompany charges, increased approximately $20.9 million compared to the prior year period, with the majority coming from the Empire acquisition, which contributed approximately $20.6 million to the growth. Fuel contribution from non-consignment agent locations grew by $11.7 million compared to the prior year due to a 207 million-gallon increase in fuel volume. Fuel margin cents per gallon for these locations increased by $0.02 versus the second quarter of 2020 due to the increased prompt pay discount on fuel invoices related to the increased cost of fuel. Fuel contribution from consignment agent locations grew by $9.2 million compared to the prior year due to an increase in volume of 37 million gallons, although fuel margin cents per gallon declined to $4.07 versus a record-setting $30.01 per gallon from the prior year. Second quarter store operating expenses increased by $28.6 million or 22.7% versus the prior year, primarily due to approximately $20 million of incremental expenses related to the ExpressStop and Empire acquisitions. General and administrative expenses increased by $11.3 million or 55.2% for the quarter as compared to the prior year, primarily due to expenses associated with the ExpressStop and Empire acquisitions, annual wage increases, and incentive accruals and stock compensation expenses. Net interest and other financial expenses decreased by $0.5 million to $12 million in the quarter, primarily due to favorable fair value adjustments of $2.3 million and lower foreign currency losses, which were partially offset by higher interest expense from incremental debt in 2021. Second quarter net income was $25.5 million compared to $21.9 million for the prior year. Incremental earnings in the second quarter related to strong results from the Empire acquisition, coupled with strong same-store merchandise margin, with partial offsets coming from higher expenses, including depreciation related to acquisitions. Minority interest was almost eliminated versus the prior year, primarily as a result of the merger in late December 2020. Adjusted EBITDA was $75.7 million, an increase of $7.2 million or 10.5% compared to the second quarter of 2020. Higher same-store merchandise margin contribution and $22 million from the Empire acquisition were partially offset by the previously mentioned reduced fuel margin as well as higher credit card fees. Our balance sheet remains strong. On June 30, the company's total liquidity was approximately $509 million, consisting of cash and cash equivalents of $229.4 million plus $31.8 million of restricted investments and approximately $248 million of unused availability under our lines of credit. Outstanding debt was $685.7 million, resulting in net debt of $424.5 million. For the first six months of 2021, net cash provided by operating activities was $59 million versus $101.9 million for the first six months of 2020. The decrease was primarily due to working capital changes related to higher fuel costs and increased volumes. In addition, there were approximately $7.9 million higher tax payments, $11.9 million of higher net interest payments, including $5.2 million related to the early redemption of Israeli bonds. Operating cash flow was also impacted by approximately $13.6 million of incentive payments. 2020 included a favorable working capital adjustment of approximately $16 million, which went away in Q3 2020. Capital expenditures were $32.6 million for the six months ended June 30, 2021, compared to $20.5 million for the prior year period. We ended the quarter with 1,381 retail sites and 1,647 wholesale sites. I am very proud of the dedication of our team and the profitable growth momentum the business demonstrated by our strong financial results as we continue our journey as one of the largest and most successful convenience operators in the country. And with that, I'll turn it back over to Arie.

Thank you, Don. We are excited to continue the strong execution against our priorities as we drive growth and increase shareholder value. Thanks for joining the call today and your interest in Arko. I will now turn it over to the operator for questions.

Thank you. Our first question comes from Bobby Griffin with Raymond James. Please proceed with your question.

Good morning, thank you for taking my questions, and congrats on a strong quarter. Arie, I guess first I want to unpack the merchandise margin performance a little bit more, pretty impressive growth year-over-year. Can you maybe dive into a little bit more details of what's driving the expansion of merchandise margin and then more importantly, what opportunities do you see going forward over kind of the next one or two years for where merchandise margin could go? Is it possible that works its way into the low-30s like some of your peers?

Sure. I'm going to answer that. As I mentioned on the call, the excess cigarette numbers came back very strong. We are at 4.3% same-store sales on cigarettes. And as you can see, the margin – the high margin comes from packaged beverages coming from grab-n-go. For example, our grab-n-go same-store sales are up 51.3% compared to last year, and the margin increased from 31.4% to 37.8%. That's just one example. The other example is same-store sales on frozen foods that I mentioned. I've been talking about adding freezers all along, and again, we are at 43.7%, with a margin increase from 30.9% to 35.4%. As we continue to move from cigarettes, our percentage of cigarette sales continue to come down, and we see an increase in merchandise sales that’s going to continue to drive the margin up substantially. The same thing goes for nicotine. We keep talking about OTP, and as you can imagine, as consumers stop buying cigarettes, they are moving to other types of nicotine. I mentioned that we saw an increase of over 6.3% in other tobacco products with a margin increase of even better 170 basis points. Yes, I think we’re going to continue to see that as we move along because I remember last year, a lot of people were pantry loading cigarettes and beer during this time period. So the more people that are out there, the more people are going to continue to basically purchase merchandise inside the store at the center of the store from much higher margin.

Okay. And then what about on – I understand there are still a very tiny base only a few of them done. But what about on the remodel stores? What are the merchandise margins look like there versus kind of the core average? If there's any color to help us understand as those become a bigger and bigger part of your stores, what the potential margin upside could be inside those stores?

Yes. As you know, we are really too early into our second store, just opened six weeks ago. It's a little bit too early, but I think the mix within the store, as I mentioned, I mean, we added all of the items that I mentioned earlier are basically high-margin items. We've talked about the food, for example, the food service. So we added that grab-n-go; we added pizza; we added fried chicken. Those are really high-margin items that added to the stores. We also added more assortment of fountain drinks. We extended, of course, the beer cave; all of those things that I mentioned are much higher margins than basically what we see for the rest of the store. So there is no question that the more stores we remodel, the more features like this we're going to continue to add to the stores. There’s no question that we expect the margin to expand because of that.

Okay. And then how many, you mentioned that the plans were good for 2022, but do you have a number you can share on how many remodels you might be able to get done in 2022? Or you’re targeting?

We don't have the final number at the moment, but this is something that we are working on right now.

Okay. And I guess lastly, for me you called out labor in the prepared remarks, and understanding of the tight labor environment for everybody right now, has it hindered results at all? Is it more just a challenge that you're working through, have you had to cut store hours or anything like that for us to keep in mind?

Sure. We are not different than any other retailer, as you can imagine. And as you guys remember, I've been mentioning from the beginning of our calls, the one thing that's our different priority from the rest is that we were not fully involved in food service. We decided to shift gears towards grab-n-go and frozen foods, where less labor is required. This is our business. I mean, we have the challenges like everybody else, and we continue to work through those challenges. Yes, we did reduce the hours in around 75 stores, but those hours were reduced just because we felt that in those particular stores, the third shifts, I'm talking about after 11 o'clock at night, we just felt there was really no reason to keep those stores open from a profitability standpoint. We always look at profitability, and this is really what we did over here. Other than that, we continue to work through all of those issues, and we know how to manage our business. This is what we're doing.

Let me just add on to Arie’s point about the reduced hours. They're not significant. We're trying to shave them in the morning and the evening, and we're in the process of starting to restore those hours now. So, I think they're being done strategically where it makes sense where we're having problems, but it wasn't like cutting out massive hours. It was just being done where we had particular issues. We're already in the process of restoring some of those stores that we cut the hours on.

Understand. I appreciate the details. Best of luck here in the second half.

Thank you. Our next question comes from Kelly Bania with BMO Capital. Please proceed with your question.

Good morning. Thanks for taking our questions. Just had a couple here. First, just the comment about the integration of wholesale. I think running ahead of expectations. Maybe just wondering if you could elaborate a little bit more on what you're seeing there and just your expectations now for wholesale and Empire. Now that you've had a little more time under the belt?

Sure. Don, would you like to take this?

Sure. I'd be happy to. Kelly, I think the biggest thing that we found is number one, obviously, when we look at total gallons, we're signing up a lot more accounts. You heard Arie talk about 52 new accounts since inception. I mean, we've got a very aggressive team on the ground signing them up. So that's really been helping us as the additional fuel volume. Obviously, we've benefited from the higher margin levels than we anticipated. But the biggest boost that we've found out of all of this is just, what we thought would be true is proven to be true plus more is that we've got a very aggressive team on the ground that's bringing out a lot of new business.

Perfect. And in terms of gallons – or, sorry, go ahead.

Just to add, Kelly. I mentioned the three supply contracts that we were able to negotiate. Remember, those things are not going only on the wholesale business, they're actually going to impact also the retail business. And as you can see, we reported a very high CPG margin for the quarter. So just to note that as well.

And good point, Arie, I’m sorry I left that out. And I want to point one thing out that is ongoing too. It's not just that we've gotten done what we think we expected to get done, but as we know agreements expire, and this will be ongoing. So I think between the combination of the gallons, and again, as Arie mentioned, which is very important to be, that was our plan to go out and aggressively negotiate, and we've got the target of what we thought we would get done. This isn't a thing that will keep on giving us benefits going forward as agreements come up for closer expiration.

Okay. That's very helpful. I guess maybe just to follow up on the retail business, I guess one, would you attribute that sequential acceleration in fuel margins to the supply contracts or anything else? I know it's always hard to know, but I guess what would you attribute that sequential exploration? And then can you also just talk about gallons on the retail side and how those are coming in line with your expectation, and maybe where we are on a gallon standpoint versus 2019 kind of on a pro forma basis with everything?

Sure. So let me start, I'll let Don answer the second piece of your question. But let me start with basically, with the gallons. As your understanding of profitability is something that we are always laser-focused on. We want to make sure that while we focus on profitability, we're not losing gallons because of that. We manage the gallons market-by-market, region-by-region. And as we look at demand over there, there are some pockets where we see opportunities, and as we see opportunities to keep margin it. I said over $0.30 basically range. This is something that we continue to do on a daily basis. And as I said, at the end of the day, there is no question that people are driving less, people are working from home more and we don't have the same mobility that we saw probably in 2019. Because of that, we are trying to go at least after the margin in areas that we think we can. I will let maybe Don answer the second piece of the question.

Sure. So Kelly, on a gallon basis, we're not back to 2019 levels. I mean, obviously, we saw a nice increase but I think again, it's a different story by area. I don't know that we'll in the short term get back to the 2019 levels. I think we're experiencing a new reality, especially with the new variant out there. I think companies have now put off going back to work plans. People are changing habits, but what we're doing is, as Arie talked about, is for us, it's maintaining the volumes that we're steadily growing and have been pretty stable, but we're also trying to maximize the gross profit out of that. So we're very competitive out there. We're not outside of the balance of the market. But we're not – who knows if we'll get back to 2019 levels; we're not there yet, but we are growing.

Yes. I just want to add one more thing just to finish the sentence on this one. I think I mentioned it probably at the beginning of 2021. I mentioned that right now we see a tight labor environment, and when you have a tight labor environment, there is no question that a lot of the comps are actually more involved with foodservice, given that you have shrink labor which means that a lot of people are not able to continue to get the same results that they get within the stores. The area that we're going to see probably an extension will be outside the store, which is the fuel margin. This is something that we've been seeing for the past 15 months as you know.

Great. That's very helpful. Just also wanted to ask on the labor, just obviously a big topic. Maybe can you just help us understand where turnover is, and can you quantify the impact of maybe the sign-on bonuses and costs that you're kind of maybe hopefully dealing with on a transitory basis?

Sure. So at the moment, we are not commenting on turnover numbers, but one thing I can tell you is that we actually see an increase in basically we are adding more people than we term. We have more people that are being hired than the number of the people that actually turn over here. The $500 bonus, of course, is something that we measure for the past few weeks and it's been working when I say it's been working is basically, when you hire those people, in order for them to get the $500, they need to stay a period of time with us. We see that a lot of those people are actually staying and keeping their job. In addition to that, the other thing is really making sure that we have enough recruiters to hire people. The applications are coming in, and especially now we feel that – and we see that in the last couple of weeks, and I think we're going to see more. There are almost 7.5 million people that for the time being their unemployment benefits are going to expire by the end of August, beginning of September. We believe we're going to see an increase in application volume coming in, and this is the reason that we hired all of those recruiters. We want to ensure that our store people are focused on their work and not on hiring. Because of that, we took that responsibility away from the store manager so they can focus on the store and on their customers.

Yes. And Kelly, one of the things that we’ve been able to do that’s been very successful is make that hiring decision and offer on the spot. Because the market’s so fluid and people are getting so many offers, we’re able to interview, make that hiring decision, and give that offer right then. One of the things we found is, if you’re taking more than a day or so to get back to the employee, they’ve already got another job. So I think that’s been very critical. And as we’ve talked about, since that $500 bonus has come into effect, we’re really tracking net hires because that’s really important to us. Are we increasing the labor force? So I think we have – it was an uphill battle, and I think we’re now on – still a wall issue. We’re on the downside of that hill.

Great. That’s very helpful. And then just last one for me. In terms of the remodels, I mean, it’s really expected to kind of ramp more aggressively next year, but just any update on the costs that you’re seeing for materials or just the overall outlook for remodels and the pace there that you’ve provided in the past. Just any change in the expectations there.

There are no changes in expectation. I just want to remind everyone that we decided to do 10 stores this year not because of a lack of basic pay or lack of basic availability. We decided to do that because we want to make sure that we measure the right concept. So what we’re dealing with over the past few months is really, we’re making sure we have the right concept in place. And then we’re going to increase the pace over here. This is what we’re doing. Just for your benefit, in the last couple of stores, we really put everything that you can imagine within the store, and we try to test all kinds of concepts to make sure that this is the right concept. I think we’re getting very close to making some decisions about that, about what’s like the final concept on that. The minute we have the final concept, I think we’re going to be able to start to increase the pace of the year.

Thank you. Our next question comes from Luke Lemoine with Capital One Securities. Please go ahead with your question.

Hey, good morning, Arie and Don. Really good quarter. Just curious, was the Colonial Pipeline impact your results, and any way you could maybe quantify the impact?

I don’t think the Colonial Pipeline actually impacted the results. If you remember, it was a week of some issues in the Southeast. But remember, we are very well diversified. I know it was all over the news, and people were running, even in Florida, which is not impacted by the Colonial Pipeline. People were just running all over to gas stations to fill gas. I think it was more panic buying than anything else. Again, given our size and given that we are diversified, we were able to use our connections and our contacts within our logistic department. We were able to bring projects from some other states that we do business with just next to the Southeast. But I don’t think there was any major impact that happened during this quarter because that’s the challenge that we had to deal with probably for two weeks during the first few days of the cyber attack. Then, following that, again, the problem of getting projects and making more products available to our stores. But I don’t think that was something so impactful.

Yes. And to follow up, Luke, I mean, essentially what happened was if there wasn’t in the news, I don’t think there was as big of a problem. Essentially, all the inventory transferred out of tanks and into people’s cars. So, there were huge spikes in sales when those announcements came out. Then, once everything calmed down, I think net-net, it really didn’t have an impact, but it was just – really, if you think about it, it was just a shift of fuel which actually helped us. Because, when you convert over to summer fuels, you have to turn your tank. In a lot of ways, it helped us turn our tanks over. But I think the news panic caused more issues than anything else. People were just topping off tanks and panic buying. So again, it was an incident that concerned us, but I don’t think it had major results.

Yes. The shortage came because all of a sudden, if you’re selling x amount of gallons on a daily basis, and all of a sudden you’ve got a 300% increase in sales during this time. So it doesn’t matter. You cannot fill the tanks and expect a 300% increase in a very short order. That’s usually what happens. And this is similar to what we see during hurricane season, when a hurricane actually hits, that’s usually what we see over there.

Thank you. Our next question is coming from the line of Mark Astrachan with Stifel. Please proceed with your question.

Thanks and good morning, everyone. Wanted to ask firstly about just the retail fuel margin and just how to broadly think about that. The numbers obviously bounced around a bit; it remains pretty good across the industry. Anything that we should be thinking about or keeping in mind as it relates to your business specifically, relative to what we’re seeing more broadly?

No. I think, as I said earlier, I think that at the end of the day, we are competing with the rest of the markets. We are in line with the rest of the market. And as I said, I think that the more people that rely on basically inside sales, the inside high-margin items like food service, the more people rely on that, the more they can get those results back to the 2019 numbers. I think that margin is going to continue to expand outside. And again, I don’t have a crystal ball. Of course, I don’t know what’s going to happen next month. But the only thing I can say is that this is something that’s been going on for the past 15 months, and again, we don’t expect that to stop anytime soon.

Okay. And switching over to store acquisitions, I appreciate the earlier commentary on the opportunities out there. Any sense of pace of acquisitions going forward? I mean, to the extent that you can talk about it? I feel like it’s been maybe a little bit slower out of the gate than history. And so, if there are a lot of opportunities out there, then should we be expecting that to accelerate from where we are?

Sure. Just to answer your comment. I don’t think it’s slower. I think that it’s consistent. We do two to three acquisitions a year. This is something that we’ve been mentioning all along. We already finished the first one, we finished the first one already in May. We continue to basically grow through acquisition. Remember, we mentioned adding just 19 contracts or sell contracts during this quarter. The other thing that you need to take into account over here is basically that now when we have the wholesale business as well, we target – we have a 20% target return. If the target comes from increasing the wholesale account versus just retail accounts, we are going after that. We are trying to be very, very careful. I mean, it’s not just doing acquisitions; it’s doing the acquisitions and continuing to deploy our capital to receive the returns that we saw in the past. I don’t think we’re going to have any slowdown. I don’t expect any slowdown at least from what you guys saw in the past.

Right. And Mark, also to add on, I think Arie said this in the past. I mean, the pipeline has been very robust. So obviously, there are deals we’re looking at all the time. There’s no shortage of deals. There’s no shortage of deals that we’re working on. Like I said, there’s more to come down the road as some of these become as we finish them, get through, and see if we’re the successful bidder and finish all the due diligence. So there’s no shortage of deals out there. And I think the environment given a lot of things has not slowed that down at all.

Yes. And I just want to mention, given that we have a lot of liquidity over here and given that we are very liquid, doesn’t mean that we need to do deals that do not make sense. I mean, we are not going to change our strategy. I mean, we have a high return on investment threshold, and we’re going to continue to basically fuel this threshold to benefit us. This is something to take into account. We will not do crazy deals just to make deals. We will do the right deals and continue to provide the return that we actually show all along.

Got it. Okay. And I guess just lastly, and then a follow-up to that other question. So on the remodels, I think some competitors have commented on just supply chain challenges, labor shortages. Any thoughts there, especially if you think about ramping the remodel pace into 2022? Anything that would prevent that from happening near-term? And then on – back on the deals, just to follow up there. What is it about some of the deals that you’re looking at that you’re passing on? Are there any sort of big-picture things that maybe aren’t working out return profiles, etc.?

Yes. So let me basically start with the remodel. I don’t think our remodel pace is going to slow down. I mean, we have the same challenges like everybody else. But again, I don’t see any reason to believe that things will slow down. Again, we’re no different than the others. However, as I mentioned, we need to make sure that we have the right concept. And all along from what I said, we’re going to do the first 10 stores not because of challenges or because of pace or because we don’t have the capability of doing that. As I said, we want to make sure that we see at least a 20% return on investment on the concept, and those things take some time. As you can see, we did two stores so far; the second one just opened six weeks ago. We’re getting ready to test another concept, which is a 5,600-square-foot store. It’s a travel center; it’s a different concept. The minute we actually refine all of those concepts and sign off, and make sure that this concept is the concept that we feel comfortable that’s going to drive us into the future, we’re going to be able to start to pace them. I don’t think we’re going to have any slow down other than making sure we have the right concept.

Yes. And Mark, I wanted to add one thing on the first question you had. There are components of remodels, which will go in many of our stores that we’re taking advantage of when we see opportunities to buy supplies of them that we’re going after and buying them. So we are taking advantage of that and not sitting back and saying, whatever. We have had several cases where we’ve gone out and bought certain equipment that we know we’re going to need, whether we remodel it, or whether we’re just going to put in our existing stores as part of a marketing program. So we are doing that proactively.

Yes. And by the way, this is being said also for acquisition, Mark, just for your benefit. Everybody knows that there is some shortage in computers, EMV stats, and things like that. And like I mentioned, we’re doing the same thing over here. I mean, we know that this is basically our DNA; acquisition is part of our DNA. And we make sure that we keep enough supply in place to ensure that when the opportunity actually happens, we are not able to close because of a shortage in supply. So we are actually keeping more inventory basically at the moment.

Okay, great. Thanks, all.

Thank you. We have reached the end of our question-and-answer session. So I’d like to pass the floor back over to Arie for additional closing comments.

Thank you very much. Thank you everybody for participating. Just before we end over here, I’d like to say that our thoughts are really with those affected by the virus in the U.S. around the globe. I want to make sure everybody tries to keep safe. I mean, this variant is really contagious, and we need to ensure that everybody is just keeping safe over here. Thank you for participating and goodbye.

Ladies and gentlemen, this does conclude today’s teleconference and webcast. Once again, we thank you for your participation, and you may disconnect your lines at this time.