Earnings Call Transcript - ARKO Q3 2025

Operator, Operator

Greetings, and welcome to the Arko Corp. Third Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ashleigh McDermott, Vice President, Financial Reporting. Please go ahead.

Ashleigh McDermott, Vice President, Financial Reporting

Thank you. Good afternoon, and welcome to Arko's Third Quarter 2025 Earnings Conference Call and Webcast. On today's call are Arie Kotler, Chairman, President and Chief Executive Officer; and Jordan Mann, Interim Chief Financial Officer and Senior Vice President of Corporate Strategy, Capital Markets and Investor Relations. Our earnings press release and quarterly report on Form 10-Q for the third quarter of 2025 as filed with the SEC are available on Arko's website at www.arkocorp.com. During our call today, unless otherwise stated, management will compare results to the same period in 2024. Before we begin, please note that all third quarter 2025 financial information is unaudited. During this call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Please review the forward-looking and cautionary statements section at the end of our third quarter 2025 earnings release for various factors that could cause actual results to differ materially from forward-looking statements made during our call today. Any forward-looking statements made during this call reflect our current views with respect to future events, and Arko is under no obligation to update or revise forward-looking statements made on this call, whether as a result of new information, future events or otherwise, except as required by law. On this call, management will share operating results on both a GAAP and a non-GAAP basis. Descriptions of those non-GAAP financial measures that we use, such as adjusted EBITDA and reconciliations of these measures to our results as reported in accordance with GAAP are detailed in our earnings release or in our quarterly report on Form 10-Q for the quarter ended September 30, 2025. Additionally, management will share profit measures for our individual business segments along with fuel contribution, which is calculated as fuel revenue less fuel costs and excludes intercompany charges by our subsidiary, GPMP. And now I would like to turn the call over to Arie.

Arie Kotler, Chairman, President and CEO

Thank you, Ashleigh, and thank you all for joining. Our team delivered a strong quarter of execution, staying disciplined and focusing on what we can control. Stepping back, we're operating in an environment where consumers are still feeling stress as reflected in consumer sentiment data throughout this year. This has resulted in more deliberate shopping behavior, greater price sensitivity, and increased reliance on loyalty-driven offers. These dynamics are consistent with what we're hearing across the industry, and they're shaping how we approach promotions and value across our business. It's important to recognize that consumer behavior is not uniform across our footprint. We're seeing healthier trends in the Northeast, Southeast, and Mid-Atlantic, while in the Midwest and other select markets remain under pressure, reflecting broader regional differences in household budgets and fuel demand. Industry feedback suggests these patterns are consistent across the channel, particularly in rural markets where store traffic remains under pressure. Despite these headwinds, we are executing on our controllable to ensure our long-term opportunities remain intact. Our same-store sales, excluding cigarettes for the quarter, was nearly flat, representing the best comp performance we've seen in the last 18 months. We continue to believe Arko's transformation plan will make our business stronger, more efficient, and better aligned with consumer trends. Now, I will provide an update on the core elements of our transformation plan, beginning with dealerization. Dealerization continued to be one of the most meaningful drivers of our plan. Since the middle of 2024, we've converted approximately 350 stores as of September 30, 2025, with an aggregate of approximately 185 additional sites committed for future conversion, which are currently under a letter of intent or contract, or have been converted since the end of the quarter. The early performance from locations that transitioned 6 or more months ago continues to meet our expectations and validates the benefits of this approach, both in reduced overhead and improved operating efficiency. Beyond these initial stores dealerized or under letter of intent or contract, we see an additional opportunity to round out our dealerization strategy in 2026 with a meaningful number of conversions to come. As we have stated before, once fully scaled, we expect this program to deliver a cumulative annualized operating income benefit of more than $20 million before G&A. As our dealerization efforts continue, we have identified more than $10 million in expected annual structural G&A savings with the opportunity for additional upside. As we continue to execute the dealerization program, we expect the benefits will increase and be fully reflected in our financial performance and free cash flow generation moving forward, particularly given the savings from maintenance CapEx. Dealerization remains central to how we plan to drive more consistent returns and long-term value creation for shareholders. Our Fueling America's Future campaign and fas REWARDS loyalty platform continue to play a central role in deepening customer relationships and driving engagement in our retail stores. These programs not only help us stay relevant with consumers who are seeking more value in every trip they drive incrementally but also provide a valuable lever, which we believe can improve same-store sales performance over time. Average daily loyalty enrollment for our fas REWARDS program grew 37% in the quarter and 43% from the beginning of the promotion compared to the average daily loyalty enrollment prior to the campaign. During the quarter, we saw continued fas REWARDS members growth, adding nearly 35,000 new enrollees to reach approximately 2.4 million total enrolled members at quarter end. Our enrolled customers spend approximately $110 per month or 53% more compared to nonmembers, and pump-to-store conversion is at 55% of visits year-to-date for enrolled members. These engagement metrics reinforce the value of the program and highlight the behavior differences that make fas REWARDS a key contributor to in-store performance. As consumers remain increasingly value conscious, our loyalty program meets their demand for everyday savings and convenience, while reinforcing Arko's relevance at the pump and in-store. Fueling America's Future remains an ongoing part of our value strategy into 2026. While we've seen continued growth in loyalty engagement, we also recognize that total program penetration is still developing, creating a runway for future growth. To build on this momentum, we plan to launch a new version of our app by the end of the first quarter of 2026. This platform will introduce enhanced technology and new benefits, including improved reporting, personalization, gamification, and geofencing capabilities, just to name a few, that we expect will deepen customer engagement and drive incremental traffic. Our investments in other tobacco products and refreshed back bar layout also continue to drive positive results. Our OTP basket grew by approximately 16% compared to the same quarter last year. OTP same-store sales were up 6.6% as compared to the same quarter of last year, along with a margin rate increase of more than 300 basis points. Our redesigned back bars deliver better product visibility and modern presentation and stronger promotions. This initiative is a key highlight in our merchandising strategy. It's driving incremental traffic, higher margins, and improved category mix while allowing us to compete more effectively in a value-conscious environment. During the quarter, we made steady progress on our store remodel program. Our first remodel location reopened earlier this year. One additional location opened in early August 2025, and a third location is planned for the fourth quarter of 2025 with several more that are moving through permitting and construction phases and are planned to open in the first half of 2026. While only 2 of our new format stores are complete and operating, we are pleased with the results thus far. The growth we are experiencing by category in these stores has been as planned and has continued to improve. These new format stores are built around a food-forward model that emphasizes grab-and-go breakfast, lunch and snacking, bakery, pizza, and an expanded dispensed hot, cold, and frozen beverages assortment, all supported by improved layout and a better overall customer experience. Turning to our new-to-industry stores, we continue to expand our presence through select and targeted opportunities. We opened a Dunkin' store and 2 new-to-industry stores so far this year and have begun working on 3 more NTI stores, of which 2 are targeted to open in the fourth quarter of 2025. Our latest NTI location in Kingston, North Carolina exceeded our plan for the quarter with food and beverage contributing 23% of merchandise sales, which is multiples higher than the food and beverage contribution of our same-store network. These investments are focused on high-traffic, high-visibility sites where we can introduce the full Arko offering from fresh food to fuel and loyalty-driven promotions supported by a modern, scalable design. Turning to fuel performance, our results reflected broader industry demand trends this quarter. Our disciplined pricing strategy and network optimization drove strong per gallon margin performance, allowing us to deliver solid fuel contributions even as gallons modestly declined. The quarter ended with same-store gallons trend better than Q2, with September performance improving from August. Our approach remains consistent, prioritizing profitability over volume and leveraging our scale to capture opportunities when market conditions allow. As the dealerization rollout continues, we're also seeing the benefits of our more diversified and stable fuel contribution base across our retail, wholesale, and fleet fueling channels. Our wholesale and fleet fueling businesses remain strong contributors and key growth engines for Arko. Dealerization-driven site conversion has expanded our wholesale footprint, driving mid- to high single-digit growth in wholesale fuel contributions. The fuel distribution industry is highly fragmented, providing ample opportunity for acquisition given our size and scale. In fleet fueling, disciplined customer management and pricing supported stable margins and consistent volumes even amid softer industry fuel demand. Looking ahead, we're advancing a number of new cardlock locations for 2026, reflecting the attractive recurring cash flow profile of this business and its growing role in Arko's long-term strategy. We continue to see compelling value in our common stock and repurchased approximately 935,000 shares in the third quarter. We have the flexibility to continue investing in our highest return opportunities, dealerization, remodels, and strategic growth in wholesale and fleet fueling while maintaining a balanced approach to shareholder returns. Our priorities are clear; strengthening the balance sheet, executing on our transformation plan, and driving sustainable long-term value creation. I will now turn the call over to Jordan to review financial results for the third quarter and discuss our outlook for the fourth quarter and full year 2025.

Jordan Mann, Interim CFO

Thank you, Arie. Good afternoon, everyone. Before I begin, I'd like to note that this is my first earnings call as Interim CFO. I'm grateful for the opportunity to step into this role and continue working closely with Arie and our leadership team. Now turning to third quarter 2025 results. Adjusted EBITDA was $75.2 million for the quarter, slightly above the midpoint of our guidance. This compares to $78.8 million in the year-ago period, with the decrease caused primarily by softer retail performance. At the segment level, our retail segment contributed operating income of approximately $77.5 million compared to $85.1 million in the year-ago period. Same-store merchandise sales, excluding cigarettes, were down 0.9% versus the year-ago period, while total same-store merchandise sales were down 2.2%. Both showed sequential improvement from the second quarter. Same-store merchandise margin rate was up approximately 60 basis points versus the prior year. Same-store fuel contribution was down approximately $1.3 million for the quarter with a 4.7% decline in gallons, partially offset by an increase of $0.015 per gallon of fuel margin. Same-store fuel margin was $0.438 per gallon for the quarter. Same-store operating expenses were up approximately 1.8% for the quarter. Turning to our wholesale segment, operating income was $24.1 million for the quarter versus $20.3 million in the year-ago period. Fuel margin was $0.096 per gallon, in line with the year-ago period. Gallons were up approximately 7.5% to the year-ago period, driven by approximately 24.5 million incremental gallons from retail sites converted to dealers since the middle of 2024. Excluding channel optimization, gallons were down approximately 2.7% at comparable wholesale sites. We continue to be pleased with the impact of our channel optimization program, which has driven approximately $6.5 million in incremental operating income before G&A for the first 9 months of 2025. For our fleet fueling segment, operating income was $12.2 million for the quarter versus $12.6 million for the year-ago period, with total gallons down 1.6% as compared to the prior year period. Fuel margin for the quarter was $0.458 per gallon, up from $0.435 per gallon in the prior year period. Total company general and administrative expenses for the quarter were $40 million versus $38.6 million for the year-ago period. The year-over-year increase in G&A was driven by a $1.7 million increase in share-based compensation expense. As we continue the dealerization of our company-operated stores, we expect to see the favorable impact on our G&A moving forward. Net interest and other financial expenses for the quarter were $20.1 million compared to $23.6 million in the year-ago period, with the decrease primarily related to lower average interest rates in the third quarter of 2025 and a decrease in fair value adjustments primarily related to our warrants. Net income for the quarter was $13.5 million compared to net income of $9.7 million for the year-ago period. Please reference our press release for a detailed reconciliation of net income to adjusted EBITDA. Turning to the balance sheet. Excluding lease-related financing liabilities, we ended the third quarter with $911.6 million in long-term debt. We maintained substantial liquidity of approximately $890 million, including approximately $307 million in cash on hand at quarter end, along with remaining availability on our lines of credit. Total capital expenditures for the quarter were $24.9 million. Looking at our guidance. For our fourth quarter, we expect adjusted EBITDA to be in the range of $50 million to $60 million. This guidance is based on the following key segment assumptions. First, for our retail segment. We expect our Q4 2025 average retail store count to be approximately 1,150 sites. On a per store average basis, we expect merchandise sales to be up low to mid-single digits, reflecting the higher productivity of our retained stores versus the year-ago period, partially offset by same-store merchandise sales performance, which is positioned down low to mid-single digits. Again, on a per store average basis, we expect gallons to be up mid-single digits, reflecting the higher productivity of retained stores versus the year-ago period, partially offset by same-store gallon performance, which is positioned down mid-single digits. We are modeling total retail fuel margin in the range of $0.425 to $0.445 per gallon. For our wholesale segment, we expect mid-teens operating income growth driven by our ongoing channel optimization work. For our fleet fueling segment, we expect operating income growth to be down mid- to high single digits, driven by gallons roughly in line with the prior year on a lower cents per gallon compared to the elevated environment last year. Turning to the full year, we are updating our adjusted EBITDA guidance to a range of $233 million to $243 million. This updated range reflects our performance year-to-date. With that, I'll hand it back to Arie for closing remarks.

Arie Kotler, Chairman, President and CEO

Thanks, Jordan. I'm proud of the way our team continues to execute through a challenging environment. We've maintained discipline, managed our controllable, and stayed focused on the long-term transformation of our business. As we look ahead, our priorities are clear; complete our dealerization program, continue driving loyalty-led engagement, and execute the next phase of our growth strategy. We're entering the final quarter of the year with focus, momentum, and confidence in the action we're taking to position Arko for 2026 and beyond. Operator, please open the line for questions.

Operator, Operator

Our first question is from Bobby Griffin with Raymond James.

Robert Griffin, Analyst

Jordan, congrats on the appointment. I guess, first, I wanted to talk a little bit about the store remodels. You gave out an interesting stat there about, I believe, the merchandise side of things and the foodservice popping up as a percentage of sales. What is the opportunity or what's the pathway to kind of accelerate this? When you look at 7 stores in your store base, it's pretty tiny. So how can we accelerate this? And kind of what's the timeframe along that given that you're seeing some good results from the early pilots?

Arie Kotler, Chairman, President and CEO

Sure. Well, we started with 7 stores. And as I mentioned earlier, we are already working at the moment increasing the number of stores in the region that we're working on. We are seeing encouraging results, no question about it. We mentioned the foodservice. So the NTI that we opened in Kingston out of the gate just exceeded the 20% food and beverage mix target. That was our target as long as those stores perform for the first 12 months, but for some reason, this store really, really exceeded the performance. Because of that, we are working on additional stores that will come along immediately as we complete the first 7 stores. We're already working on the next set of stores. And I'm assuming that, that's going to be probably another 20 to 25 stores that will come on board immediately after the 7. But the name of the game, of course, is going to be food service, food service, food service and core categories. This is really what we are going to concentrate on going into 2026.

Robert Griffin, Analyst

Okay. And I want to maybe switch gears and hit on the dealerization aspect a little bit. I believe you disclosed 185 more under letters of intent and then you think there's an opportunity to continue some of this work in '26. I mean without putting a number out there of how many potential stores, I'm just curious, when you look at the book of retail stores that are not up for dealerization that you will keep when you're ultimately done with this work, what is the difference in those stores' performance on a comp basis? Because investors do have concerns here about the same-store sales of the retail network. And I know there's a lot of things moving around. So if you could share anything on gallons or merchandise or even CPG of what the potential portfolio looks like versus kind of what the results we're seeing now, that would be helpful.

Arie Kotler, Chairman, President and CEO

Yes, I cannot comment, Bobby, in particular on the stores. But what I can say is that we are targeting stores that we actually can have economy of scale. In the script, I mentioned earlier that there are some differences between regions in the country. If you're looking at different regions in the country, we feel that the Northeast, Southeast, and Mid-Atlantic states are areas that we have a lot of economy of scale. The market is affected by the economy standpoint, and we feel that there is a lot of opportunity for us. That's the reason we started the 7 stores pilot in the Mid-Atlantic states in Virginia. We believe those are the stores that we're going to continue to grow in this part of the country. We're seeing better results from same-store sales, gallons, margins, and core categories. We see great results in those parts of the country, and those are the areas that we would like to invest more in and get more out of them. I think the most important thing about dealerization is there are a few things that I would like to reiterate on this call. We took a meaningful amount of stores. We're converting them to dealer. We are increasing this segment; we have the wholesale segment and the fleet segment, but we're increasing the wholesale segment. Not only that, we see also an increase in EBITDA in those basically moving from retail to wholesale; the conversion to cash flow is also much higher. I just want to remind you that we spend about $20,000 to $25,000 per store for maintenance CapEx annually. So if you think about it, we're talking about 550 stores that we are converting from retail to dealer, and not only that, we're talking about a $20 million or so in EBITDA uplift, we are also talking about spending less money on maintenance CapEx. The number I just quoted is probably between $15 million and $20 million that we will not have to spend. The conversion from retail to wholesale significantly improves cash flow, and we need to highlight that because cash flow is vital for us as we progress.

Robert Griffin, Analyst

Yes, that makes sense. Lastly, Arie, in your prepared remarks, you mentioned the fleet card segment as a potential area for new location growth in 2026. I'm interested in getting more details on that opportunity. How much potential do you see there? Is it all organic growth, or could there be opportunities for small acquisitions in that area? I'm curious about what that opportunity could look like in the coming years.

Arie Kotler, Chairman, President and CEO

I'm talking about building additional sites. As you know, this fleet segment is very fragmented. There are not a lot of companies like us that are operating in this arena. I think we are one of the largest in the country. We have today 280 sites. We see many opportunities in the market that we operate and outside the markets we operate. Just for your benefit, to build a cardlock, it costs between $1 million to $2 million. That's the cost to build a cardlock, versus when you build a new-to-industry store, you're talking about $6 million to $8 million. The cardlock is much, I'll call it, less expensive on one end. On the other end, it's also unmanned. We operate those 280 cardlocks. We entered this in 2022, and we generate a lot of cash and free cash flow from those assets. We just see that this is another great opportunity for us to increase the number of cardlocks that we operate. We already identified 5 going into 2026, and the idea is to build more in 2026. As I said, currently, we found 5 that we are actually tackling at the moment, and the same goes for the wholesale segment. We are spending a lot of time moving stores and figuring out the best way to position our company in the wholesale segment.

Operator, Operator

Our next question is from Benjamin Wood with BMO Capital Markets.

Benjamin Wood, Analyst

This is Ben on behalf of Kelly Bania and BMO, and congrats, Jordan, as well. I wanted to start with the improvement on some of the organic metrics you saw sequentially. Wondering if you can help frame how much of that improvement was better store trends versus benefiting from having maybe a better performing or more efficient store base as a result of the dealerization.

Arie Kotler, Chairman, President and CEO

Sure. I will start with some remarks, and then I will let maybe Jordan jump in if he has anything else to add. I think the performance that you see was the best quarter for the past 18 months from a trend standpoint. It's not only that sales excluding cigarettes were almost flat compared to the prior year; the mix of products sold has been improving. We've seen significant growth in categories like OTP, which was up 6.6% with a margin improvement of 300 basis points. In addition, we have outperformed in many categories like candy and pack beverages, which are driving the margin up. So it's not only that the performance is better; it's also the product mix that is better, which drives margin improvement. We have been doing extensive work in 2025, starting with OTP, and continuing with Fueling America. The loyalty platform that we have is selling items with higher margins. Between the back bar investment and the Fueling America campaign, we are experiencing quarter-over-quarter improvement in results, and it reflects in higher margins.

Jordan Mann, Interim CFO

Yes, Ben, the only thing I would add is if you look at the prepared remarks and the guide from last quarter, we talked about same-store underlying sales and same-store gallon trends. On an average per store basis, we were roughly in line with what we guided, which means to me that the productivity of those stores was in line with what we expected if not a little bit better. So you are seeing the benefit from higher productive stores in that base of stores that we've retained.

Benjamin Wood, Analyst

Great. That's helpful. And just as a quick follow-up on that, are you able to give any details on the monthly cadence and how things are looking quarter-to-date? I know we started July off pretty strong, I believe we talked about, but how did the rest of the quarter end up as far as cadence?

Arie Kotler, Chairman, President and CEO

Well, I think July was very strong. I think August declined a little bit, but I think September started to improve. Overall, the quarter was good. Unfortunately, August was a bit lighter than July. However, September started to show improvement. That's how we ended up the quarter with very, very close to flat on sales, excluding cigarettes. At the same time, we also managed to improve our CPG during this quarter; our CPG is $0.023 better than the prior year.

Benjamin Wood, Analyst

That's great. Arie, you've provided a lot of insights into the efforts to enhance gross margin, which have consistently exceeded our expectations. I'm curious about what you consider the potential upper limit for your gross margins. While it seems that promotions are contributing positively, are you still maintaining competitive pricing throughout the store? Please discuss the sustainability of the margins.

Arie Kotler, Chairman, President and CEO

Yes, we continue to be competitive. The margin increase is really from the heavy promotions that we're doing with our vendors. I can tell you that we started Fueling America with a certain number of vendors. As we began to show results and as vendors saw how they could gain market share, more suppliers decided to join the program. Going into 2026, Fueling America will continue to be one of our top promotions. The improvement you see is sustainable, and a lot of effort is put into this, thanks to our category managers and our team working hard to put those programs together. We have expanded merchandise margin in multiple consecutive quarters, and I believe this improvement is sustainable as we will continue to focus on our promotions.

Operator, Operator

Our next question is from Daniel Guglielmo with Capital One Securities.

Daniel Guglielmo, Analyst

Just following up on the various capital spend projects, so remodeling stores, new NTI retail, and new NTI cardlock. Is there one of those project types that you think offers the best returns right now? And how do you think about CapEx allocations for each into '26 and '27?

Arie Kotler, Chairman, President and CEO

Daniel, we started with those 7 stores. We spend around $1 million to $1.1 million on those stores. We are focusing on food service. As we move forward into 2026 and as we add more stores, the idea is to scale it and adjust costs accordingly. Our focus remains on maintaining flexibility to deploy capital towards high-return opportunities. The 7 stores are not significant, but as we progress, we measure the return on investment on each capital project. We utilize the projects that we expect will provide the best return. Converting over 500 stores will eliminate approximately $15 million to $20 million in maintenance CapEx. This frees up cash for us to invest in other projects to increase our return.

Daniel Guglielmo, Analyst

Great. I appreciate that. And it actually segues into my next question. So I know that the majority of the dealers that take over the converted retail stores are mom-and-pops. In this difficult consumer environment, has their appetite for taking on conversions changed at all? And then maybe you can just remind us why these dealers can take on the lower-margin properties and still make the economics work for their businesses.

Arie Kotler, Chairman, President and CEO

I don't think it's the lower margin, by the way, Daniel. It's not particularly lower margin. We have decided to take stores that do not meet our return on investment criteria. We have also chosen stores that indicate we don't have a large concentration. The amount of mom-and-pop stores in percentage has not really changed; it remains around 65% to 70%. These operators are very entrepreneurial; they focus on one or two stores, dedicating their time to improvement and innovation, which allows them to achieve success. For us as a large company, we have to maintain consistency, which limits our ability to introduce varied products in different stores and different regions. Hence, there are still 65% to 70% of stores that are mom-and-pop.

Operator, Operator

There are no further questions at this time. I'd like to hand the floor back over to Arie Kotler for any closing comments.

Arie Kotler, Chairman, President and CEO

Thank you very much, everybody, for participating this evening in our earnings call. I wish you all the best and happy holidays ahead.

Operator, Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.