Contents
Alimentation Couche-Tard (ATD.to) has a profitable business model that has enabled it to become one of the leading participants in the highly fragmented convenience store space; 7-Eleven, Inc., owned by Japanese Seven & I Holdings through Seven-Eleven Japan Co., Ltd., is the largest industry participant.
I last reviewed ATD in this May 15, 2021 post. With the release of its Q4 and FY2023 results on June 27, it is an opportune time to revisit this existing holding.
NOTE:
- ATD's shares trade on the TSX in Canada and over the counter in the US.
- I acquired an additional 100 shares on July 10, 2023 @ CDN $65.38 CDN/share.
- Operating results are in USD. A USD $1 = CDN $1.3289 conversion rate is used for this article. At the time of my previous post, I used a USD $1 = CDN $1.212 conversion rate.
Business Overview
ATD is the leader in the Canadian convenience store industry. In the United States, it is the largest independent convenience store operator in terms of the number of company-operated stores. It is a leader in the convenience store and road transportation fuel retail industry in the Scandinavian countries (Norway, Sweden and Denmark), in the Baltic countries (Estonia, Latvia and Lithuania), as well as in Ireland and Poland. In Asia, ATD operates a network of company-operated convenience stores in the Hong Kong Special Administrative Region of the People's Republic of China.
It employs ~ 128,000 people throughout its network in 25 countries and territories. At FYE2023, the store count is 14,468 of which ~11,000 stores offer road transportation fuel.
Staffing has been one particular challenge. Fortunately, there has been a notable improvement in the labour situation of late. Candidates in FY2023 topped 1 million versus 670,000 in the prior fiscal year. This is due to:
- more robust internal sourcing of candidates;
- better employer marketing and recruiting tools; and
- changes in the macroeconomic environment.
ATD can now be far more selective with the candidates it hires. Employee turnover decreased 13%+ YoY and further improvements are projected; ATD is piloting innovative approaches, including store, employee store discounts and new manager hiring and training programs.
Acquisition Activity
ATD has grown organically and through multiple acquisitions over the years.
Source: ATD - Investor Presentation - June 2023
Growth through acquisition often presents risks that generally do not arise from organic growth (ie. different systems, cultures, etc.). Several large acquisitions over the years have had abysmal results.
- America Online and Time Warner (2001): US$65B.
- Daimler-Benz and Chrysler (1998): US$36B.
- Google and Motorola (2012): US$12.5B.
- Microsoft and Nokia (2013): US$7B.
- KMart and Sears (2005): US$11B.
- eBay and Skype (2005): US$2.6B.
- Bank of America and Countrywide (2008): US$2B
- Mattel and the Learning Company (1998): US$3.8B
In contrast, ATD has a proven track record of being able to successfully integrate acquired companies and to relatively quickly make them accretive to earnings.
Source: ATD - Investor Presentation - June 2023
Commencing on page 4 of the Q4 2023 Management Discussion and Analysis, we see that ATD has made several recent acquisitions. In addition, the acquisition of 2,193 sites from TotalEnergies SE for a total cash consideration of ~€3.1 billion ($3.4B) is expected to close before December 31, 2023. This acquisition consists of 1,195 sites located in Germany, 566 sites in Belgium, 387 sites in the Netherlands, and 45 sites in Luxembourg; 1,495 sites are company-owned and 698 sites are dealer-owned. For the same sites included in the proposed acquisition, 12% are company-operated and 88% are dealer-operated. The proposed acquisition would comprise 100% of TotalEnergies SE’s retail assets in Germany and the Netherlands, as well as a 60% interest in the Belgium and Luxembourg entities.
Financial Review
Q4 and FY2023 Results
On June 27, 2023, ATD released its Q4 and FY2023 results. Material related to this financial release is accessible here.
Revenue and Profit Mix
The following was ATD's revenue and profit mix at FYE2023.
Source: ATD - Investor Presentation - June 2023
By comparison, the following was ATD's revenue and profit mix at FYE2020.
Impressive Financial Record
ATD is highly disciplined which has led to impressive results over the past decade.
Source: ATD - Investor Presentation - June 2023
ATD has ~$10B of incremental Balance Sheet capacity which bodes well for additional potential acquisitions.
Source: ATD - Investor Presentation - June 2023
On the Q4 2023 Earnings call with analysts, ATD's President, CEO & Director responded as follows to an analysts inquiry about mergers and acquisitions:
'We still love North America. We would be open to South America, Asia as those opportunities would arise. And then opportunistic in Europe, as you saw with the TotalEnergies acquisition. So we'll do 4 or 5 material deals this year. And then again, just our hypothesis is that the competition has to be less than it was a year ago. High-yield money is largely on the sideline, private equity should be largely on the sidelines. So -- and we're in great shape. As Claude said, our balance sheet is robust. We've got plenty of dry powder. And we've got an organization that's capable. So we're ready to do more and just need the right opportunities at the right values.'
Fire & Flower (F&F) Investment
On August 7, 2019, ATD invested CDN $26.0 million (USD $19.5 million) in Fire & Flower Holdings Corp., a leading independent cannabis retailer listed on the TSX. The investment was in the form of unsecured convertible debentures which would result, as at FYE2020 (April 26, 2020) and on a fully-diluted basis, in an 11.3% ownership interest in F&F upon conversion.
The rationale behind this investment was for ATD to understand the market, how to run the stores, and to learn consumer behaviour.
ATD also received common share purchase warrants, that, if exercised under the terms of the investment, would subsequently increase its ownership interest in F&F beyond 50%.
This investment has not gone according to plan and in early June 2023, Fire & Flower Holdings Corp. filed for bankruptcy protection. ATD, which owns slightly more than 35% of F&F, has agreed to give $7.3 million in debtor-in-possession (DIP) financing to fund F&F's proceedings under the Companies’ Creditors Arrangement Act, along with other short-term expenses during this period. This DIP financing comes after ATD and F&F expanded their master licensing agreement in April 2023 thereby giving F&F exclusive rights to negotiate with ATD regarding new retail cannabis businesses and franchise arrangements in Canada.
Further details surrounding the write-down of this investment, the DIP, and the Stalking Horse bid are found on page 7 of the Q4 2023 Management Discussion and Analysis.
NOTE: A stalking horse bid is an initial bid on the assets of a bankrupt company. The bankrupt company chooses an entity from a pool of bidders who will make the first bid on the firm’s remaining assets. The stalking horse sets the low-end bidding bar so that other bidders can not underbid the purchase price.
Credit Ratings
On May 18, 2023, Moody's upgraded ATD's domestic senior unsecured debt from Baa2 to Baa1 (the top tier of the lower medium-grade investment-grade category). S&P Global, however, continues to assign a BBB rating which is the middle tier of the lower medium-grade investment-grade category.
Both ratings define ATD as having an ADEQUATE capacity to meet its financial commitments. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity in which ATD can meet its financial commitments.
These ratings are satisfactory for my purposes.
Dividends and Dividend Yield
ATD's dividend history dating back to September 2013 is accessible here.
With shares trading at $65.38 when I purchased additional shares on July 10, the $0.14/share quarterly dividend yield is sub 1%. This dividend yield is likely to dissuade dividend-focused investors from considering ATD as a potential investment.
Historically, the bulk of ATD's total shareholder return has been generated through capital appreciation. This is unlikely to change in the foreseeable future as ATD's capital allocation priorities favour the retention of funds to fuel continued growth.
At the time of my previous post, ATD had a dual-class share structure.
In December 2021, ATD announced that all 4 co-founders - Alain Bouchard, Jacques D'Amours, Richard Fortin and Réal Plourde – would be at least 65 years old as of December 8 thus triggering a scheduled collapse of the company’s dual-class share structure. Investors who held ATD's Class B shares received Class A versions of the stock on a one-to-one basis; the Class B shares were delisted from the Toronto Stock Exchange (TSX) after the December 7, 2021 market close.
During Q4 and FY2023, ATD repurchased 9.4 million and 52 million shares for $434.5 million and $2.3B, respectively.
On April 26, 2023, the Toronto Stock Exchange (TSX) approved another renewal of ATD's share repurchase program, which took effect on May 1, 2023. The renewed program allows the company to repurchase up to 49.1 million shares, representing 5.0% of the shares outstanding as of April 20, 2023, and the share repurchase period will end no later than April 30, 2024.
After FYE2023, and under the renewed program, 4.1 million shares were repurchased for $204.1 million.
In FY2011 - FY2023, there were 1,129, 1,101, 1,121, 1,136, 1,137, 1,138, 1,139, 1,134, 1,130, 1,125, 1,107, 1,064 and 1,009.5 million shares outstanding. For the 13 weeks ending April 30, 2023, this had been further reduced to 985.4 million shares.
Valuation
ATD's FY2013 - FY2022 diluted PE is 18.48, 27.74, 23.25, 23.36, 21.89, 15.64, 17.65, 13.76, 17.18, and 15.68.
When I wrote my May 15, 2021 post, ATD had generated $1.92 ($2.33 CDN) in diluted net EPS and $1.93 ($2.34 CDN) in adjusted diluted net EPS in the first 3 quarters of FY2021. Full-year diluted EPS guidance from the 14 brokers was $2.13 - $2.43 and a mean of $2.28 ($2.58 - $2.95 and $2.76 CDN). Based on the current ~$43 share price, the forward adjusted diluted PE range was ~14.6 - ~16.7.
FY2022 guidance from 15 brokers was $1.81 - $2.17 with a mean of $1.98 ($2.19 - $2.63 and $2.40 CDN). Using the ~$43 share price the FY2022 forward adjusted diluted PE range was ~16.35 - ~19.6.
ATD ended up generating $2.60 ($3.15 CDN) in adjusted diluted EPS in FY2022.
ATD has now reported FY2023 $3.06 diluted EPS and $3.12 in adjusted diluted EPS. Using a $1.3289 conversion rate, we get ~$4.07 in diluted EPS and ~$4.15 in adjusted diluted EPS. Using my recent $65.38 purchase price, the diluted PE is ~16 and the adjusted diluted PE is ~15.8.
The forward valuations using adjusted diluted EPS estimates from the brokers which cover ATD and my $65.38 purchase price are:
- FY2024 - 14 brokers - mean of $2.86 and low/high of $2.65 - $3.05. If we convert the mean value using the conversion rate reflected above, we get ~$3.80 CDN. The forward adjusted diluted PE is ~17.2.
- FY2025 - 13 brokers - mean of $3.21 and low/high of $2.80 - $3.48. If we convert the mean value using the conversion rate reflected above, we get ~$4.27 CDN. The forward adjusted diluted PE is ~15.3.
Final Thoughts
For the sake of full disclosure, I acquired ATD shares through one of the 'Side' accounts within the FFJ Portfolio on March 23, 2018. I have made subsequent small purchases and have been automatically reinvesting the dividend income. In addition, I acquired ATD shares on January 7, 2021 for a young investor's Tax-Free Savings Account (TFSA).
I have long admired Alimentation Couche-Tard's profitable business model and am confident it will be a far more valuable company several years into the future. Given that I consider shares to be reasonably valued, I have increased my exposure in a 'Side' account within the FFJ Portfolio as noted at the outset of this post. My ATD exposure in the FFJ Portfolio is now 1,223 shares.
I look forward to learning more about ATD's new multiyear strategic plan which includes the renewed focus on cost optimization at the October 11 Investor Day.
I wish you much success on your journey to financial freedom.
Note: Please send any feedback, corrections, or questions to [email protected].
Disclosure: I am long ATD.to.
Disclaimer: I do not know your circumstances and do not provide individualized advice or recommendations. I encourage you to make investment decisions by conducting your own research and due diligence. Consult your financial advisor about your specific situation.
