Earnings Call Transcript - ARKO Q2 2025

Operator, Operator

Greetings. Welcome to Arko Corp.'s Second Quarter 2025 Earnings Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce Jordan Mann, Senior Vice President of Corporate Strategy, Capital Markets, and Investor Relations. Thank you, sir. You may begin.

Jordan Mann, Senior Vice President, Corporate Strategy, Capital Markets, and Investor Relations

Thank you. Good afternoon, and welcome to Arko's Second Quarter 2025 Earnings Conference Call and Webcast. On today's call are Arie Kotler, Chairman, President, and Chief Executive Officer; and Rob Giammatteo, Executive Vice President and Chief Financial Officer. Our earnings press release and quarterly report on Form 10-Q for the second 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 second 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 second 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 basis and on a non-GAAP basis. Descriptions of those non-GAAP financial measures that we use, such as adjusted EBITDA and reconciliations of those 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 June 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 exclude intercompany charges by our subsidiary, GPMP. And now I would like to turn the call over to Arie.

Arie Kotler, Chairman, President, and Chief Executive Officer

Thank you, Jordan, and thank you all for joining. Like many in our industry, in the second quarter, we continued to navigate a challenging macro environment marked by geopolitical events, persistent inflation, mixed consumer sentiment, and restrained personal consumption. Through it all, our team remained focused and executed with discipline, as reflected by our financial performance this quarter with adjusted EBITDA above the midpoint of our guidance. In this environment, we have seen more price sensitivity, greater reliance on loyalty-driven offers, and continued movement towards value-based purchasing. We stayed grounded by focusing on execution, merchandising discipline, loyalty-led engagement, and controlling expenses, including smarter labor scheduling and tighter cost management at the store level. We expanded merchandise margin by 80 basis points year-over-year, driven by category mix, effective promotions through the work our team is doing with our suppliers, and our continued optimization of assortment through back bar resets and loyalty target offers, all while being responsive to evolving consumer needs. We were pleased with improved performance in most of our core categories, and we believe performance reflects the effectiveness of our promotions and our focus on driving growth in key categories. While the second quarter reflected many ongoing pressures, we saw consecutive improvement from May to June, and we are seeing further improvement as we enter the third quarter. Through late July, early third-quarter trends in both same-store gallons and inside sales have been more favorable than what we experienced in Q2, with same-store sales growth for July, excluding cigarettes, up slightly year-over-year. Total merchandise same-store sales trend in July was 3 percentage points better than total merchandise same-store sales for the second quarter, which was the best comparable performance we've seen in the last 18 months. It's still early, but we are encouraged by what we're seeing so far. Our team remained focused on executing our transformation strategy, which includes advancing our dealerization program, investing in our retail stores by bringing our new format store and our foodservice Fas Craves brand to life. In addition, we are applying targeted promotions both in stores and at the pump to deepen customer engagement. These efforts are enabling us to navigate today's operating environment while positioning the business for sustainable long-term growth. Dealerization remains a central component of our long-term transformation plan. We continue to focus on converting select company-operated stores to dealer locations, where we believe the long-term economics are more favorable for those stores under our wholesale segment. Since launching this initiative last year, to date, we have converted more than 300 stores, and we currently have approximately 200 additional sites that we expect to convert under letter of intent or contract for conversion with a further meaningful pipeline for conversion ahead. As previously disclosed, once fully scaled, we continue to 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 as we fully scale this program. We continue to believe that by transitioning select stores to dealer locations, we are unlocking long-term value. We previously noted that our dealerization program will facilitate targeted capital investment into our retail stores. As part of this, we are very excited to introduce new format stores, which include a bold and innovative remodel designed to elevate the customer experience and better reflect our commitment to food service, convenience, efficiency, and community connection. We developed this new format over many months with our internal team and outside consultants, including learning from customer focus groups. This new format includes a complete remodel inside and outside the store, a modernized layout, and we have introduced our new food and beverage concept, Fas Craves, which elevates our food and beverage offering to grow food service as a differentiator across our network. We opened our first new-format store on June 25 in Ashland, Virginia. And while it has only been opened a short time, we are pleased with its initial performance. Early results show outperformance in foodservice and dispensed beverages, as well as key categories like candy, packaged beverages, and alternative snacks relative to the rest of our stores. Our second new format store opened this morning in Mechanicsville, Virginia. Importantly, we have identified the next tranche of stores to be remodeled in the new format, focusing on improved customer experience and with food service as a focus, which we believe is a critical area of opportunity for Arko. We are in various stages of engineering designs and layout on this next tranche of stores. Turning to our new-to-industry stores. Last week, we opened our second new location this year. This NTI in Kinston, North Carolina, incorporates almost all elements of our new store format. We continue to advance the other NTIs in our pipeline and have begun working on three more of these NTI stores, two of which are expected to open in the second half of 2025. In addition to executing our dealerization program and remodel investments, we're beginning to see positive momentum across other core initiatives for this year. This includes focusing on high-margin categories like OTP, and food, and enhancing our loyalty ecosystem to better engage customers. Our Fueling America's Future campaign continues to engage customers and drive improved loyalty enrollment growth, trip, and basket size. This program provides up to $2 per gallon in fuel discounts up to 20 gallons to enrolled loyalty members who purchase qualifying in-store items. Average daily enrollment in our FAT Rewards program increased more than 50% from the period prior to the campaign. When utilizing the Fueling America's Future promotions, our enrolled loyalty members made an extra trip per month and spend on average more than 15% more than our typical enrolled loyalty member during the second quarter. Importantly, we are seeing improved sales on our qualifying items that are tied to our Fueling America's Future promotions. Turning to our loyalty program as a whole. During the quarter, enrolled Fas Rewards members spent on average approximately 50% more in the second quarter of 2025 and visited an average of approximately three more trips per month compared to non-members. Overall, we added more than 38,000 new members in the quarter, bringing total enrollment to approximately 2.35 million members, up 10% from the end of Q2 last year. These results underscore the effectiveness of our loyalty platform in an environment where consumers are looking to stretch every dollar, and this is why we continue to focus on enrollment initiatives like Fueling America. Our team is continuing to optimize promotional offers and sharpen messaging to drive even deeper engagement. Diving deeper into OTP, our stores are benefiting from expanded assortments, revised space allocation, high-value promotions, and a more effective visual merchandising strategy, which has been significantly improved by our back bar refresh and incentive program for district and store managers. OTP remains a key growth lever for in-store margin and customer engagement. Over the quarter, OTP was one of our top-performing categories for same-store sales growth and same-store contribution growth. Taking all our strategies as a whole, they are guided by experienced leadership and brought to life every day by a dedicated operations team focused on enhancing the customer experience. Turning to fuel. Industry-wide demand remained soft in the second quarter, with national retail fuel volumes down approximately 4% and our volumes reflected that trend. While gallons declined, our CPG margin increased compared to the prior year period, reflecting the benefit of our scale and our strategic pricing. This margin performance helped offset some of the impact of lower volume on retail fuel contribution. As I mentioned before, we saw consecutive improvement in same-store gallon growth from May to June, and this improvement continued into July. Our wholesale and fleet segments continue to perform through a combination of our dealerization program and robust fuel margin compared to the prior year. These two segments continue to provide stable and reliable cash flow for our business. We continue to believe our stock is an attractive investment. In the second quarter, we repurchased 2.2 million shares. We believe that our disciplined capital allocation strategy, aligned with the strength of our transformation plan and consistent operational execution, position us well to deliver long-term shareholder value. I will now turn the call over to Rob to review financial results for the second quarter and review our thoughts for the third quarter and full year 2025.

Rob Giammatteo, Executive Vice President and Chief Financial Officer

Thank you, Arie. Good afternoon, everyone. Turning to the second quarter 2025 results. Adjusted EBITDA was $76.9 million for the quarter compared to $80.1 million in the year-ago period, with the decrease caused primarily by lower retail merchandise contribution. At the segment level, our Retail segment contributed operating income of approximately $80.4 million compared to $87.9 million in the year-ago period. Same-store merchandise sales, excluding cigarettes, were down 3% versus the year-ago period, while total same-store merchandise sales were down 4.2%. Same-store margin rate was up approximately 50 basis points versus the prior year. Same-store fuel contribution was down approximately $0.8 million with a 6.5% decline in gallons, mostly offset by an increase of $0.026 per gallon. Same-store fuel margin was $0.45 per gallon for the quarter. Same-store operating expenses were down approximately 0.8%. Turning to our wholesale segment. Operating income was $23.2 million for the quarter versus $21.3 million in the year-ago period. Fuel margin was $0.101 per gallon versus $0.09 in the year-ago period. Gallons were up 3.9% for the quarter, driven by our channel optimization program, which contributed more than 19 million gallons for the quarter or almost 8% of total wholesale gallons. Excluding channel optimization, gallons were down approximately 4.1% at comparable wholesale sites. We continue to be pleased with the impact of our channel optimization program, which has driven approximately $4.5 million in incremental profit contribution for the first half of 2025. As Arie mentioned, we continue to expect that at full maturity, this program will deliver in excess of $20 million in incremental operating income across our combined retail and wholesale segments. This outlook excludes additional G&A efficiencies we expect over time as we transition to a smaller retail segment footprint. Moving on to our Fleet segment. Operating income was $13.1 million for the quarter versus $13.7 million in the year-ago period, with total gallons down 6.8% to the prior year. Fuel margin was very strong for the quarter at $0.49 per gallon, up from $0.459 in the year-ago period. Total company general and administrative expense for the quarter was $40.7 million versus $42.4 million in the year-ago period. Net interest and other financial expenses for the quarter were $19.5 million compared to $21.4 million in the year-ago period, with the decrease primarily related to lower average interest rates in the second quarter of 2025 and higher interest income generated. Net income for the quarter was $20.1 million compared to $14.1 million for the year-ago period, with the increase driven primarily by a noncash gain related to the expiration of a purchase option received in 2021. Please reference our press release for a detailed reconciliation from total company net income to adjusted EBITDA. Turning to the balance sheet. Excluding lease-related financing liabilities, we ended the second quarter with $916.4 million in long-term debt. We maintained substantial liquidity of approximately $875 million, including $294 million in cash on hand at quarter end, along with remaining availability on our lines of credit. Total capital expenditures for the quarter were $45.3 million, which included the purchase of 22 fee properties at favorable terms. Turning to third quarter guidance. We expect total company adjusted EBITDA to be in the range of $70 million to $80 million based on the following key segment assumptions. First, for our retail segment. We expect our third quarter average retail store count to be approximately 1,220 sites. On a per-average-store basis, we expect merchandise sales to be up mid-single digits, reflecting the higher productivity of retained stores versus the year-ago period, partially offset by same-store merchandise sales performance, which is positioned down modestly. Again, on a per-average-store basis, we also 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 low to mid-single digits. We are modeling total retail fuel margin in a range of $0.425 to $0.445 per gallon. For our wholesale segment, we expect mid- to high-teen percentage operating income growth in the third quarter, driven by our ongoing channel optimization work. And finally, for our Fleet segment, we expect third quarter operating income growth to be up low single digits with gallons roughly in line with the prior year on higher expected cents per gallon. We are maintaining our full-year total company adjusted EBITDA guidance in a range of $233 million to $253 million. And with that, I'll hand it back to Arie for closing remarks.

Arie Kotler, Chairman, President, and Chief Executive Officer

Thanks, Rob. I'm proud of the way our team continues to deliver in the face of ongoing challenges. We are deepening customer engagement. Our promotional efforts are yielding results, and we're making progress on our transformation roadmap. We are entering the second half of the year with clear priorities and a focus on creating lasting value. We will now open it up to questions.

Operator, Operator

Our first question is from Bobby Griffin with Raymond James.

Bobby Griffin, Analyst

I guess, Arie, first for me, I wanted to maybe dive into your comments on July. Pretty notable change there, at least through the one month of the new quarter. Curious if you can unpack it further on what's maybe driving that industry trends versus the channel optimization, some of the new programs coming on? Because to your point, I don't think we've seen ex-cigarette merchandise sales close to flat in a very long time, and even gallons seem to be getting a little bit better.

Arie Kotler, Chairman, President, and Chief Executive Officer

Yes, you are absolutely correct. We observed improvement from May to June and from June to July, and this is likely the best progress we've seen over the past 18 months. While we can't be sure if this change is due to a sudden turnaround, I believe that the value and messages we are conveying through Fueling America, along with our offerings, assortments, and promotions, are very strong. These are driving trip frequency. For instance, loyalty trip frequency has increased, with spending rising from $73.83 to $110, which is nearly a 50% increase. We're looking at almost three additional trips per month among both loyal and non-loyal members. There's a notable rise in customers buying the qualified products associated with Fueling America, which are typically higher-margin items. For example, this month we are promoting a deal where if you buy two candies for $6, you get $0.50 off per gallon, which includes brands like Skittles and M&M. Additionally, purchasing two packs of Marlboro earns $0.25 off per gallon. I hope this reflects the efforts we've put in over the past few months, and it certainly appears to be very positive. We aim to build on this momentum.

Bobby Griffin, Analyst

And then, Rob, maybe just switching gears to the channel optimization, kind of a two-part question. I don't think you guys want to give a full number of how many stores you think you can move to dealer. But maybe to help us think about it, are you identifying more stores today than you maybe identified six months ago? And if the program does run through '26, do you have to wait until '26, or do we have to wait until '26 to see some of the G&A savings start to flow out? Or can that start to flow out earlier, and you could view the program at scale sooner?

Rob Giammatteo, Executive Vice President and Chief Financial Officer

Yes. Thanks, Bobby. So no, I think the program store list, as we said, we're not putting out the full number yet, but it's been defined for a good period of time now, and it's now about execution. And Arie had in his prepared remarks what is under contract, and then there's a substantial amount still after. So I think we know what that number is. We've known what that number is, and we're executing on it. In terms of G&A savings, no, we already are seeing savings in G&A in the second quarter. You can see the total G&A number was down. That number is inclusive of a certain amount of the restructuring expense that is in. So we are seeing it already. So things that are directly related to stores, field leadership, things that are directly one-to-one related, we're going to see real time. Things that are like prepaid annual software licenses, we will see when we get into 2026. So again, that pace of G&A will accelerate as we continue, but we are seeing some of it already. I would estimate we're probably 25% to maybe a third of the way through the first tranche of savings. And I do believe there's going to be more. So again, this is just the first tranche that we see. And as we get deeper into the smaller footprint, we will continue to look for opportunities on that front.

Bobby Griffin, Analyst

And then lastly, for me, just CapEx, the 22 fee properties, I mean, we saw the absolute dollar number step up year-over-year meaningfully in and up sequentially. So any color just on how big of the 22 fee properties were and driving that? And just thoughts on exactly kind of what that is for the business, and help me understand that better.

Arie Kotler, Chairman, President, and Chief Executive Officer

You're referring to the 22 properties that we purchased?

Bobby Griffin, Analyst

Yes, on the CapEx. I'm trying to understand the run rate for core CapEx. This quarter, it increased sequentially, but you also noted the purchase of 22 properties. I'm looking for clarification on what is considered normal and what was due to that property acquisition.

Arie Kotler, Chairman, President, and Chief Executive Officer

Bobby, the amount for the property is approximately $22 million. Earlier this year, we mentioned that our total CapEx for the past two years was around $110 million to $115 million. While we don't give specific guidance for CapEx, if you exclude that $20 million to $22 million, you will see that we are on a similar track as in the previous two years. These purchases were strategic opportunities at favorable cap rates, which we actively seek as they arise. However, this is a one-time occurrence. We financed it through M&T, so it does not affect our cash position; we balanced it with financing.

Operator, Operator

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

Daniel Guglielmo, Analyst

The first one, you all mentioned macro headwinds and shifting consumer spending in the press release, but the July commentary was positive. For the guidance next quarter and the full year, what type of macro and consumer spending environment are you all assuming? Just trying to get a sense of what's kind of built in there for your assumption.

Rob Giammatteo, Executive Vice President and Chief Financial Officer

Yes. As mentioned in our prepared remarks, merchandise sales for the third quarter showed a slight decline in same-store sales. We are focusing on higher productivity stores, but we remain cautious about the macro environment, as we are experiencing modest negative same-store sales performance. We are not discussing the fourth quarter right now. However, since February, with a few exceptions in May, we have observed a consistent month-on-month improvement in our merchandise comp sales trend. The question is whether this positive trend will continue as we move further into the second half of the year or if it will stabilize. We feel more confident about Q3 based on our performance in July and where we currently stand. For the fourth quarter, we will have a clearer view as we progress deeper into the third quarter, and we are not providing guidance for that quarter at this time.

Daniel Guglielmo, Analyst

And then the second one is on the transformational plan. We've seen it kind of drive down the site operating expenses line. And I know labor is a big piece of that line, especially kind of with demand increases in the summer. How have wages trended this summer versus last summer kind of when thinking about the business?

Rob Giammatteo, Executive Vice President and Chief Financial Officer

Yes. We've seen consistent wage performance up in that 3% range, and that's been consistent quarter-on-quarter for some time now, since we got clear of the pandemic. So that's kind of a baseline inflationary pressure that we're seeing about 3%. So as you think about the operating expense itself being down, the decreased hours as our field organization deals with lower top-line demand, we do reduce hours, and that is partially offset by the increased rate that we're seeing.

Daniel Guglielmo, Analyst

As a follow-up to your comments about the transformation plan, are you anticipating diminishing returns as you address the remaining stores, given that you've already tackled the more straightforward issues? How are you approaching this?

Rob Giammatteo, Executive Vice President and Chief Financial Officer

I don't think we're anticipating a lower benefit. Arie, do you have an opinion on that? I believe each deal is unique, it depends on the circumstances.

Arie Kotler, Chairman, President, and Chief Executive Officer

Yes, let me add to that. There are direct costs associated with the stores that we are transitioning. For example, when we transition ten stores, we eliminate specific managerial roles. Additionally, in the back office, we typically have two accounting personnel for every ten stores. As we scale up to eighty stores, we would also remove a regional manager. So, there are many roles directly linked to operations. Therefore, as we reduce the number of stores, we will naturally decrease general and administrative expenses, and that's part of what we expect to achieve.

Rob Giammatteo, Executive Vice President and Chief Financial Officer

And Arie, I think he's trying to find out if we start seeing the deals becoming less favorable as we move further into the optimization program. So again, I don't think we should expect that.

Arie Kotler, Chairman, President, and Chief Executive Officer

No, no, no. No. We are sharpening our pencil all the time. I mean, at the end of the day, if you think about it, the plan that we put together over here, we're talking about 500 stores in around a year to 18 months. I mean this is a big project. This is a big project for us. And I think the reason we are moving forward very successfully is because we have the second segment, which is the wholesale segment that help us tremendously over here. But so far, like I said, so far, we are very, very pleased with the traction. And like Rob said, I mean, we expect to continue to see benefits just ramping up further over here.

Operator, Operator

Our next question is from Anthony Bonadio with Wells Fargo.

Anthony Bonadio, Analyst

So I wanted to start out with fuel margins. I know you guys had another strong quarter on that front. But I think industry data has maybe been a little softer than one might think, just given breakeven dynamics and how soft gallons have been. So can you guys just talk a little bit more about what you're seeing out there competitively on the fuel side and whether you've seen any change there as the year has progressed?

Arie Kotler, Chairman, President, and Chief Executive Officer

I'll start, and then I'll let Rob maybe finish with some remarks. So if you're looking on the industry in Q2, the national demand was down 4%. That's the national demand. I understand we were a little bit down compared to the national demand. We are very, very competitive, very, very competitive. I think the software and the systems that we have in place help us to just optimize and maximize gross profit dollars over here, making sure that we continue to be competitive. And as you can see, this particular quarter, we were basically trending close to basically $0.45. So I think we see an improvement in fuel margin. We see so far, July, the same thing goes to July. We saw improvement month after month, but July, we basically saw a decline that is basically half of what we saw in Q2. So not only that we were able to expand margin, we also see an improvement in basically in fuel gallons decrease in July. And we hope that's going to be sustainable. That's what we hope.

Robert Giammatteo, Executive Vice President and Chief Financial Officer

Anthony mentioned that the CPG can increase significantly during times of volatility. For instance, in April of the second quarter, we experienced a $0.07 year-on-year increase, which significantly boosted profitability in that month. Given the current uncertain geopolitical environment, while there may be some pressure on gallons, that uncertainty can indeed support higher CPG.

Anthony Bonadio, Analyst

So it sounds like people are sort of behaving rationally still.

Arie Kotler, Chairman, President, and Chief Executive Officer

Well, I think people have the same issues with trends. If you are 4% or 6%, you still have a trend down. And I think when you have trend down, people need to pay. The smaller guys are probably like everybody else, need to pay their bills. And in order to pay the bills, the only way to make it happen is you need to increase margin. And that's what we've been seeing. I mean, listen, the margin is up almost $0.035 in Q2. And we continue to see strong margin going into July, very similar margin going into July. So we expect or we hope that margin will stay strong for the remaining quarters.

Anthony Bonadio, Analyst

And then I just wanted to touch on OTP or alt nicotine. I think there was some rhetoric out of the FDA recently on an increased focus on the illicit market. So can you just talk a little bit more about what you're seeing in that category? And just any thoughts on a potential crackdown there and how you guys might be positioned to benefit from that?

Arie Kotler, Chairman, President, and Chief Executive Officer

Yes. So if you remember, Anthony, at the beginning of the year, I made the big remarks regarding our back bar refresh in basically in many of our stores in almost 1,000 stores. Since that, I can just tell you that OTP was a very, very strong category for us in Q2. OTP was up basically 2.6% in sales. And at the same time, our margin was up 170 basis points. So this is a category that, at least for us, we are paying a lot of attention to this category. And I think those crackdowns can only help us against competition. Some of the competitors, I can tell you, I've been seeing that for a long period of time that some of the competitors are selling some illegal OTP products. We're, of course, selling only legal products. And I think it's about time that we start to see some enforcement over there. But regardless, like I said, OTP for us was a very successful story since we refreshed the back bar offer more variety. And like I said, I mean, it's a big success, and it's a big contributor to the gross profit dollars over here in Q2.

Robert Giammatteo, Executive Vice President and Chief Financial Officer

Just the OTP penetration is 10% of the total assortment versus cigarettes, and more in the 26%, 27% range. But the contribution margin from OTP was essentially equal to cigarettes. So as we continue to comp positive there, it's going to contribute more and more as we go forward to really mitigate some of the downside with cigarettes, the structural decline in cigarettes.

Operator, Operator

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

Benjamin Wood, Analyst

This is Ben on behalf of BMO and Kelly Bania. Just wanted to circle back on the dealerization and just try to understand, is the pace of dealerizations going in line with the original plan? I think you're targeting now more than 500 stores, but you mentioned dealerizations are expected into 2026. So is the message that the total number is consistent with the long-term or with the prior communications, but is this maybe a slower pace? Also just trying to understand is this total number, is that all part of the $20 million savings target? Or should we expect you to update that savings as you guys get deeper into this?

Arie Kotler, Chairman, President, and Chief Executive Officer

I'll let Rob discuss the $20 million, and then I basically give you my two cents regarding the pace. We are very pleased with the pace, but I'll let Rob jump in.

Rob Giammatteo, Executive Vice President and Chief Financial Officer

Yes. Ben, the number that we shared in excess of $20 million is the fully executed program. So while we haven't shared the total store count, that is inclusive of all the stores. So again, in excess of $20 million, but you should not expect us to be updating that number. That's consistent with what we're seeing so far in terms of run rate, and that's where we expect to end up.

Arie Kotler, Chairman, President, and Chief Executive Officer

Yes. And Ben, regarding the pace, as I mentioned earlier, just think about it 500 stores in 18 months, this is unheard of. I mean, it's going in accordance with our plan. Like I said, we are very, very pleased with that. What sometimes take a little bit longer is just getting licenses and putting everything in place. I mean, we want to make sure that all of the dealers that are taking over some of those stores, they are fully equipped and fully licensed. We don't want to be in a position that God forbid, they lose a license and they lose sales. For us, this is a long-term play, and we want to make sure that those guys continue to make money, and we want to make sure that they get all of their licenses in order to continue to operate from the minute that we stop operating.

Benjamin Wood, Analyst

Could you provide some details on the new store format for the NTIs and remodels? How does the square footage compare to the average store in your portfolio? What about the labor needed? How many employees will be required to run it compared to your store average? I'm trying to understand the complexity of this new food service in relation to your other store-based operations.

Arie Kotler, Chairman, President, and Chief Executive Officer

Sure. We opened the first store last month on June 25. This store didn't require any changes to its size as it was already large enough, over 3,000 square feet. We simply added a beer cave and additional freezers, along with the necessary food service equipment. We had previously added a deli, which we converted to our new concept. We remodeled both the interior and exterior of the store without increasing its size. In the stores we opened this morning, we did manage to add extra space compared to the original layout. Regarding labor, we'll share some pictures later. We utilize a shared labor model, which means we only need one person to operate the food service concept established here.

Benjamin Wood, Analyst

Is it correct to assume what percentage of the remaining store base, after you've completed this dealerization, would qualify for this full remodel?

Arie Kotler, Chairman, President, and Chief Executive Officer

We are currently in the process of structuring and engineering our plans, and we believe that most of the stores we intend to keep will be suitable for our strategies. When we developed this plan, we considered that we have various types of stores with different square footage, allowing us to tailor the food service concept accordingly. At this moment, we have identified another batch of around 25 stores in the same region where we began, specifically in the Virginia market, focusing on the Richmond area. Our objective is to complete this group and move forward. We are confident that the stores we are retaining in our retail segment can accommodate the customization of the food service concept and the enhancements we introduced in our last two prototypes, which we launched recently. This was also a factor in deciding to dealerize some stores that we felt were not compatible with this new concept or format we have introduced.

Operator, Operator

Our next question is from Hale Holden with Barclays.

Hale Holden, Analyst

I just had two on other tobacco products. I was wondering, I did hear those comments at the beginning of the year, and I was wondering where you are in the bar rollout and/or how much more work you had to do to get the allocation space allocation to the product, or if you were fully built out at this point?

Arie Kotler, Chairman, President, and Chief Executive Officer

We are fully focused on the stores we are retaining, which is approximately 1,000 locations. We have completed our work on the back bar and finished this project by the end of Q1 or the beginning of Q2. We're done with that phase and are now looking to add more variety to our offerings throughout the year.

Hale Holden, Analyst

And then on the store conversions that Ben was just asking about, any thoughts, Arie, on what would constitute a success in terms of either merchandise sales lift or same-store lift versus maybe where the control group is?

Arie Kotler, Chairman, President, and Chief Executive Officer

Sure. First of all, traffic. One of the reasons behind it, of course, is making sure that we increase traffic. Success will turn to be an increase inside margin because adding food service over here, by definition, the gross margin on food service is much higher than basically what we saw before. So the success for us will be increase foot traffic, increase the basket size associated with that, expand our food service. So far, we get very nice results. I can tell you that the store that we opened just last month on June 25, just in the month of July, sales excluding cigarettes in that particular store are up 6% compared to prior year. So that's for us. So far, we are very, very pleased with what we're seeing over here.

Hale Holden, Analyst

Great. I'd love to see some pictures in the next quarter deck. It's hard for me to see them from the satellite photos outside.

Operator, Operator

We have reached the end of our question-and-answer session. I would like to turn the conference back over to Arie for closing remarks.

Arie Kotler, Chairman, President, and Chief Executive Officer

Thank you for joining, everyone. We are focused. We are on track, and we are excited about what's ahead of us. Have a great evening.

Operator, Operator

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.