Arko Corp. (ARKO) Earnings Call Transcript & Summary

Greetings, and welcome to Arko Corp's Second Quarter 2026 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Priya Trivedi, Investor Relations. Thank you. You may begin.

Thank you. Good morning, and welcome to Arko's Second Quarter 2026 Earnings Conference Call and Webcast. On today's call are Arie Kotler, Chairman, President and Chief Executive Officer; and Gallagher Jeff, Chief Financial Officer. Our earnings press release and quarterly report on Form 10-Q for the second quarter of 2026, 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 2025. Before we begin, please note that all second quarter 2026 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 2026 earnings release for various factors that could cause actual results to differ materially from forward-looking statements made during today's call. All 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 non-GAAP basis. Description of the 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 the quarterly report on Form 10-Q for the quarter ended June 30, 2026. 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 GP&P segment. Now I would like to turn the call over to Arie.

Thank you, Priya, and thank you all for joining. Before we begin, I want to welcome Priya Trivedi who recently joined us as our new Head of Investor Relations. Many of you will have the opportunity to connect with Priya, and we are excited to ever on our team. Before turning to the detailed results of the quarter, I want to spend some time on yesterday announcement by APC our approximately 74% owned subsidiary on signing an agreement to acquire the business of U.S. Petroleum Partners or USPP. We believe this planned acquisition is not simply another acquisition. It is a strategic step that accelerate APC's growth plan, expand scale in attractive markets and demonstrates the earning power we believe, can be created from the APC platform. As a reminder, in February, we publicly offered a minority interest in our subsidiary, APC to give investors a clear view of the strength and value of our wholesale, fleet fueling and GP&P businesses. At the time of the IPO, we outlined a clear strategy compound, stable fee-based earnings through disciplined accretive acquisitions while giving Arko shareholders direct participation in the value created by APC. The USPP transaction is exactly the type of opportunity we build APC to pursue. This deal demonstrates each of the key pillars of APC's investment thesis. It deepens supplier relationships, expand APC's stable fee-based business model, utilizes the financial flexibility created through the IPO, builds on a proven acquisition track record and accelerates APC's growth outlook. USPP is a sizable, vertically integrated fuel distribution platform and a highly strategic [ fit ] for APC. The pending acquisition is expected to add approximately 280 million gallons of annual fuel volume increasing APC trailing 12-months gallon stored by approximately 14% by adding more than 400 dealer locations. Upon closing, the addition of the USPP business will not only meaningfully expand APC's scale and presence in the great Lakes region. It will also add 2 few terminals on the Buckeye Pipeline and a transportation fleet that currently handles more than 80% of USPP distributed fuel volumes. By adding terminal and transportation capabilities, APC can participate in more of the refined project value chain, thereby potentially capturing incremental margin opportunities, string loss mile logistics, and add another source of stable fee-based earnings. The consideration at closing will consist of $205 million in cash plus the cost of inventory. Additionally, at closing, APC will issue $30 million in Class A common stock to be in escrow and be released to USPP subject to the acquired business, achieving certain EBITDA based financial targets in the first 4 few quarters after we closed the transaction. This earnout payment is subject to adjustment if the acquired business does not achieve $31.7 million EBITDA and $2.2 million EBITDA generated by certain fuel-related components. EBITDA is defined in the purchase agreement. Also, the earnout may increase if the acquired business achieves results that are greater than these financial targets. We expect the transaction to close later this year to be accretive upon closing and to add approximately $30 million of annual adjusted EBITDA to APC and announced its discretionary cash flow. This is a clear example of the strategic value [indiscernible] APC, a growth vehicle with access to capital and attractive conversion of adjusted EBITDA to discretionary cash flow and a disciplined balance sheet supporting a dividend from which Arko Corp and our shareholders benefit. APC gives us second public platform for value creation while allowing Arko to remain focused on transforming the retail business. Turning now to Arko's results. We operated against a challenging consumer backdrop, a highly volatile fuel pricing environment during the second quarter. Consumer sentiment reached historic lows while prolonged higher fuel prices placed additional pressure on household budgets and influence purchasing behavior. The national average for gasoline prices climbed from $4.24 per gallon in April to nearly $4.61 per gallon in May before finally easing to roughly $3.96 per gallon at quarter end. While trend held relatively steady throughout much of the quarter, the cumulative pressure showed up more visibly in June as retail demand softened. Trips to the pump actually increased as customers fueled up more frequently, but we saw pressure on both gallon sold and in-store spending. Despite these pressures, we closed out the first half of 2026 in a solid position with adjusted EBITDA up 14% to last year. As a reminder, when fuel prices rose rapidly earlier this year, we reacted quickly and disciplined pricing delivered an exceptionally strong first quarter with adjusted EBITDA up 65% year-over-year. We knew that as elevated prices persisted, a portion of that outsized fuel margin benefit would normalize. Through strong execution we minimized the giveback in the second quarter, delivering adjusted EBITDA of $72 million compared to $76.9 million in the prior year period. The year-over-year decline in the second quarter was largely driven by $3.3 million of increased credit card fees on a same-store basis associated with elevated fuel prices. Taken together, first half adjusted EBITDA was $123 million compared to $108 million last year, up a strong 14% year-over-year. The consumer environment tested the model and our results showed the benefit of scale, disciplined pricing and more diversified earning base. We remain focused on what we can control, delivering clear value, maintaining disciplined pricing, managing expenses, and executing initiatives that improved the long-term productivity and cash flow profile of the business. Now turning to the results by segment. In our retail business, [indiscernible] increased 4% as customers fueled up more frequently, though gallon sold remained under pressure and convenient or spending softened in June. Same-store merchandise sales, excluding cigarettes, declined a modest 0.9%. At the same time, disciplined category management, vendors supported promotions, market share gain in several key categories and dealerization program drove merchandise margin to 34.7%, an expansion of 110 basis points versus last year, and delivered nearly flat merchandise margin dollars on a same-store basis. In a pressured consumer environment, maintaining nearly flat same-store merchandise sales, excluding cigarettes, while expanding margin by 110 basis points, it's an important proof point for the quality of our retail execution. Purely remained an important earnings stabilizers during the quarter, and we continue to balance competitive pricing and customer value while maximizing fuel gross profit dollars. Same-store fuel contribution increased slightly compared to the prior year period as an increase in same-store retail fuel cents per gallon margin driven by disciplined pricing and the benefit of our scale more than offset lower same-store gallons. We remain committed using targeted fuel offers to drive traffic, loyalty enrollment and profitable in-store engagement while recognizing elevated fuel prices and associated credit card fees will continue to be headwind. In oil sales, cents per gallon margin increased year-over-year, primarily reflecting higher prompt discount, while gallons declined due to higher retail fuel prices partially offset by retail sites converted to dealer locations to our dealerization program. Fleet Fueling operating income was relatively flat year-over-year as margin compressed this quarter and the prior year period at a higher-than-average margin. Our value proposition remains central to driving traffic and engagement in a pressured consumer environment. We believe we have the best fuel discount program in the country. Through fueling America's future and roll fast rewards members can earn stacable fuel discounts of up to $2 and $0.50 per gallon on as many as 20 gallons by purchasing qualifying items in our stores, which has saved our enrolled members more than $4 million [indiscernible] inception. This is not only a customer value program. It is a traffic loyalty and gross profit engine that string our relationship with high-value customers. The data reinforce why we are so focused on loyalty. In the second quarter, enrolled members average monthly spend was more than 2x higher than nonenrolled members. The numbers of visit and average basket size were almost 50% higher versus nonenrolled members. These are not incremental differences. They represent a fundamentally more valuable customer relationship and a meaningful opportunity to grow repeat traffic, basket attachment and margin over time. In June, we introduced the Tencent Tuesdays, offering in word members a few discounts on Tuesdays, since launch and all gallons sold on Tuesdays have grown double digit demonstrating strong engagement with the loyalty program and its compelling value proposition. We're also leveraging vendor-supported promotion with major vendors and consumer product partners which delivered a further 6% in customer savings while protecting our merchandise margin. We took action in Q2 to win value-seeking customers adding more than 100,000 new members or 5% during the quarter. We will continue working with our supplier partners to help customers save on everyday purchases while driving profitable engagement for Arko. This engagement is already showing up in our financials. Enrolled sales growth and enrolled margin both increased 30 basis points in Q2 compared to Q1. With loyalty, our focus is increasingly on the quality of the engagement, active users, repeat visits, incremental basket attachments, gross profit contribution, vendor funding and measurable return on promotional spend. Behind loyalty, we continue to invest in initiatives designed to modernize our retail offerings, improve customers' experience and a strong long-term store economics. During the quarter, we completed 2 remodels with 12 additional projects currently in progress, and we expect a total of approximately 25 remodels in 2026. Because stores generally stay open during construction, temporary closure of a portion of the sales floor creates a modest headwind to comparable same-store merchandise sales. Completed remodels generated double-digit merchandise sales and gallon grow versus the pre-remodel period reinforcing our confidence that targeted capital investments can unlock higher productivity from the existing store base. We also opened one new to industry retail store during the quarter. Our remodel and new to industry retail location incorporates our fast crave food and beverages offering, updated layout and new technology and operating processes designed to improve store productivity. We are encouraged by the results we are seeing from the NTI opened so far. While several are still in ramp-up stage, we're seeing returns approaching 20%, which gives us confidence as we look to accelerate the program in a disciplined way. To support the continued growth and modernization of the company's store and fueling footprint, we recently added to our real estate development team and accomplished Vice President of Real Estate Development with 30 years of industry experience. Our extensive track record in new store development, capital deployment and strategic growth will support the execution of the company's remodel new to industry stores and new [indiscernible] initiative. As planned, we continue to expand what is one of the largest [indiscernible] platform in the country. We have identified 20 new [indiscernible] location for opening in 2026, have opened 3 new locations in [indiscernible] and have the remaining 17 in various stages of development. We expect to continue adding to this segment because we like the low capital investment, attractive mid-to-high teen expected location and recurring cash flow characteristics of this model. We now offer an announced food service offering in approximately 140 of our stores and expect to expand that to additional locations this year. We remain deliberate in our pace of expansion, prioritizing the regions and [indiscernible] best positioned to maximize margin while incorporating learning along the way. Dealerization remain an important lever in Arko's transformation. During the second quarter, we converted 21 additional retail stores to dealer locations, bringing our total to 471 conversions since the program began in the middle of 2024. We also have approximately 70 additional stores committed under letter of intent, under contract or already converted since quarter end. Each conversion moves us further towards the lower cost, more capital-efficient operating model with stronger cash flow characteristics. While the pace of conversion moderated this quarter, our expectation for the program remained unchanged. Stepping back, I want to reiterate again, we ended the first half of the year in a solid position with adjusted EBITDA up 14% to last year. Our execution through the first half give us conviction in our full year outlook. With that, I will turn the call over to Gallagher to review our second quarter results in greater detail.

Thank you, Arie, and good morning, everyone. As Arie noted, our second quarter results reflected softening in our retail business in June, while APC and disciplined fuel margin management continued to support overall profitability. Adjusted EBITDA was $72 million compared with $76.9 million in the prior year period. Net income was $9.4 million compared with $20.1 million in the prior year period. As a reminder, last year's second quarter included approximately $21 million noncash gain related to a sale leaseback. Despite the softer retail demand, we continue to generate healthy cash flow, manage expenses with discipline and preserve flexibility to invest in our highest return priorities. Looking at our Retail segment. Same-store merchandising sales, excluding cigarettes, were slightly down 0.9% in the prior year period. While same-store merchandising sales overall were 1.7% below the prior year period. Cigarettes continued to decline as expected. But as Arie mentioned, we also saw consumer pressure impact our sales this quarter. We experienced pressure from lower SNAP EBT sales as certain states tightened eligibility rules around benefit purchases. While SNAP EBT accounts for less than 2% of our sales, lower EBT spend in the second quarter produced same-store sales growth ex cigarettes, by approximately 75 basis points in the quarter, primarily across 3 states. We continue to focus on offering our customers value for our loyalty program, leveraging Fueling America's future, incent off Tuesdays and targeted in-store pricing with key partners, working to win on value while protecting our margins. Merchandising margin in the quarter increased 110 basis points versus Q2 2025 to 34.7%, with same-store merchandising margin also increasing to 34.7%, and expansion of 40 basis points compared with 34.3% in the prior year period. This reflected our dealerization efforts, disciplined pricing, favorable product mix and vendor-supported promotions. On retail fuel, same-store gallons were 5.7% below the prior year period. while same-store fuel cents per gallon margin increased 6.5% to $0.487 per gallon from $0.457. A same-store fuel contribution grew to $97.8 million. Turning to expenses. Total retail site level operating expenses were $160 million compared with $176.6 million for the prior year period. Same-store operating expenses were $156.5 million compared with $148.2 million in the prior year period, driven primarily by approximately $3.3 million of higher credit card fees associated with elevated fuel prices, along with slightly higher insurance, personnel costs and rent. On a consolidated basis, G&A expenses were $43.7 million compared to $40.7 million in the prior year period, primarily driven by increased stock-based compensation and normalized incentive compensation. We continue to manage our personnel expenses closely, reducing regular personnel expenses by $1.3 million versus the prior year period. Turning to our Wholesale segment. Operating income increased 7.1% to $24.9 million, from $23.2 million in the prior year period. Gallons were 241 million compared with 252 million and fuel margin increased 8.7% to $0.109 per gallon from $0.101 in the prior year period. In our Fleet Fueling segment, operating income slightly increased 1.6% to $13.3 million from $13.1 million for the prior year period. Fleet Fueling gallons were $36.4 million, broadly unchanged from the $36.3 million in the prior year period. While fuel margin was $0.469 per gallon compared with $0.49 in the prior year period, primarily due to higher-than-average fuel margins in the prior year as well as margin compression during the second quarter of 2026 as index prices declined more quickly than our weighted average inventory cost. Starlight location expansion remains one of our most attractive capital allocation opportunities given its return profile, capital efficient operating model and recurring cash flow characteristics. Our balance sheet remains healthy and provides flexibility to invest in our strategic priorities. During the quarter, we repurchased $38 million of our 5.18% senior notes for $35 million of cash. Following this, we ended the quarter with $246 million of cash and cash equivalents and total liquidity of approximately $1 billion. Subsequent to the quarter end, increased the size of our GPM credit line with P&C by $74 million, bringing the aggregate capacity across our P&C credit lines to $214 million. This liquidity positions us well to fund high-return organic projects, support APC's growth strategy, evaluate additional senior note repurchases and pursue other value-creating opportunities while maintaining a disciplined capital allocation approach. We ended the quarter with $675 million of long-term debt, excluding lease related financing liabilities, a decrease of $29 million versus Q1. Capital expenditures were $33 million in Q2 compared with $45 million in the prior year period. The majority of our capital spending in Q2 continued to be invested in growth initiatives and our capital allocation framework remains consistent and returns focused. Our priorities are completing dealerization and capturing the associated cash flow benefits, investing in high-return remodels, retail NTIs and new card locks and growing food service. We also maintain balance sheet flexibility which allows us to deliver our strategy and execute strategic acquisitions when they meet our disciplined return thresholds, such as APC's planned acquisition of the business of USPP. We are focused on deploying capital only where we believe it can improve the durability, cash generation and long-term value of the business. We are reaffirming our full year 2026 adjusted EBITDA guidance of $245 million to $265 million. Given the current operating environment, we are increasing our outlook for full year retail fuel margin to range between $0.455 to $0.475 per gallon, with higher margins is expected to offset lower retail fuel volumes. Reaffirming guidance in this environment reflects our confidence in the earnings durability of the business and the controllable levers we are executing across retail operated stores and APC. With that, I'll hand the call back to Arie for closing remarks.

Thank you, Gallagher. We delivered a solid first half with adjusted EBITDA up 14% to last year. We maintained disciplined margin, continue to execute our transformation plan and reaffirmed our full year adjusted EBITDA outlook. Most importantly, the key pillars of our investment story are intact. APC is scaling as a public growth platform. Dealerization is improving the cash flow profile of the business. Loyalty is deepening customer engagement and our balance sheet gives us flexibility to pursue value-creating opportunities. We're also excited about yesterday's announcement. The planned acquisition of the USPP business, which we expect will add an annual adjusted EBITDA of approximately $30 million to APC, marks the next phase of growth for both Arko and for APC. We believe it is a clear demonstration of the value we can create through disciplined, accretive M&A as a public company. It adds scale announced vertical integration and reinforces why we believe APC can become an increasingly important value driver for Arko shareholders. Our focus remains on execution capital discipline and the areas within our control. We believe that through a combination of operational discipline, high-return grow initiative and a more diversified earning platform, Arko is continuing to convert its large convenience and fuel network into a more resilient, higher cash flow business positioned to create meaningful long-term value for shareholders. Operator, please open the line for questions.

[Operator Instructions] Our first question today is coming from Bobby Griffin of Raymond James.

Congrats on the deal announcement. I guess, first for me, I wanted to understand a little bit more of the EBITDA guide. Is the deal in there? Because when I look at the second half, implies down EBITDA year-over-year, but it seems like the fuel margin environment is healthy, you guys have made a little progress inside the stores, and then you have that deal as well. So I'm just trying to understand what the puts and takes are assumed in the adjusted EBITDA guide for Arko consolidated for the rest of 2026.

Thanks, Bobby. This is Gallagher. I'll take that one. When we did the guide, we had planned acquisitions but we really did not know the size or the timing of the acquisition, which was part of the reason we had the $20 million range. So based on the timing of close, we do expect some benefits this year, but we've not -- we feel that's captured in the $20 million guidance. So I think the fundamentals of the business are good, and we feel good about delivering that. And the timing of the close will help us for EBITDA, but it's not going to change our guidance.

Okay. And what's the -- or what's the back half pressure then? Like you look at forward first half, EBITDA is up year-over-year as you guys talked about. And then the back half at the midpoint implied down. What's the moving parts there?

Yes. It's primarily uncertainty, Bobby. And we've seen fuel volatility. We've seen customer volatility. We are executing our brands. We are doing our part to drive customers into the stores, both for fuel and for merchandising and APC is delivering. We're just very uncertain now going forward. And month-to-month, it seems to change. So we didn't want to give too much confidence in this uncertain environment other than that we will deliver what we can.

Okay. Fair enough. I guess also I want to ask on the fleet card segment. The down year-over-year margins and I'm not as familiar in the weeds of this business versus traditional retail immediately. But like what was the pressure point, especially in the third-party locations? Like industry margins, it seems from peers, at least at retail are really good in 2Q. What happened with the third-party locations being down pretty big year-over-year?

I'll take that one. So what happens in the fleet tooling with the card losses, many of our deals are OPIS+ pricing. So it's a fixed price when we sell the fuel. So in a falling environment, we end up paying keep more and lose margin in that situation because the price of the customer is fixed in OPIS+ us, whereas our purchase price that could be days or a week before it was higher. So in a volume environment that pressures those margins.

Okay. And then, Arie, on the deal and adding on the significant amount of gallons, I thought the conversation about some of the other capabilities that were brought -- that are going to be brought to the Arko enterprise as well as APC. Obviously, we're interesting -- where do you think -- like how do you think that helps back into the retail network? Is there synergy opportunities as we look at '27 and '28 from these additional gallons and capabilities of sourcing that could offer some fuel benefits back into your retail ownership?

Well, I think the biggest one, Bobby, is economy of scale. If you think about that, this is a huge opportunity for us, not only from a gallon standpoint, also from the relationship with the major oil companies. The USPP business brings 280 million gallons. We are currently selling 2 billion gallon. So as you can imagine, say, efficiency and better cost of goods when you add another 280 million gallons, which is an extra 14% increase to the current gallons in an environment where everybody is trying to capture a gallon, I believe that would be an opportunity for us.

Is there a time of like where you have to -- like your fuel contracts come up and they're up for renegotiation at a certain time, I agree with you on the economy is a sale aspect, but I want to get ahead of ourselves on when that could actually play out?

Bobby, we always negotiate fuel supply contracts. This is not just about timing. Every time you grow, you go back and remember, we have a great relationship for many, many years with the fewer suppliers. That's one thing. The second thing is, don't forget, we are bringing right now also some throughput opportunities for some of those major oil companies. Given that we have more than 50% available terminal capacity in this market, and we have a lot of business in this market in Great Lakes. That's just another meaningful opportunity for us to enhance basically our business. And I just want to remind you that we keep talking about retail, retail. But at the end of the day, APC and basically the retail should complement itself at the end of the day, the better capabilities you actually bring through the business that we are requiring right now, that should provide additional cost of goods, better cost of goods for the overall margin across retail and across, of course, the oil sale business.

The next question is coming from Daniel Giamo of Capital One.

You've talked about the retail store investment with Fast Crave and F&B offering and the SMB offering. As that's had more time to develop, can you give us a sense of any learnings that you've had there? Are there certain F&B products that are performing better than others? Anything additional would be helpful.

Daniel, that's a good question. And as you can imagine, we started with a menu and we continue to reaffirm our menu, I'll call it, day over day, month over month. I think what you see in the results when we're talking about increasing results and interesting margin to 34.7%, it's clearly basically the additional food service offering that we actually had here. There is no question that foodservice pushed the margin with all of the additional high-margin items over here. So I can point you to like a specific items, but I can just tell you that we on a regular basis, we're trying to improve our menu. Don't forget right now with the customer's pressure that we see in the marketplace right now, it's not only the menu rates also the -- basically the value. I'll give you an example. This morning, loyal members can basically purchase a chicken sandwich plus the Coca-Cola drink and [indiscernible] for $5, I don't think you have any kind of offering like this in the country to that. So I mean the goal is not only the menu, the goal is also the value creation that we actually bring to customers, especially now when there is so much pressure out there.

Just to add on that, Arie, Daniel, we're still in a very test-and-learn phase as we roll out food. But one thing we're very happy with is the customer response. We've seen double-digit growth in all those stores both for merchandising sales and in filled gallons when we remodel. So we're very happy with that. One thing we continue to work on is the operations. As already mentioned, make sure the menus right, make sure our cost model supports that sales growth that we're seeing. So we will go faster, this year is really about testing and learning from the menu. And right now, the customer response is really strong.

Okay. Awesome. That's all really helpful. I appreciate that color. And then you had mentioned some retail customer, while it's kind of being stretched volume is down a little bit. So just -- you guys are like a national brand now, right, lots of different states. As kind of we've progressed, are you seeing any kind of softness in particular areas? Or is it kind of a broad-based just slightly.

Yes, I think it's a broad base, it's broad-based. It's not one particular area versus the other. But I think that's, again, that's our goal or basically what we are trying to do over here given our size is to make sure that we're providing value to our customers. I mean I mentioned Fueling America, just for your benefit and everybody's benefit Daniel is that Fueling America since we started provide $4 million savings to our customers. And you know that the #1 item that is very expensive and probably basically put a lot of pressures on every household is fuel spending right now. We have over 70 different offerings inside the store that are attached to Fueling America. I mean you can get up to $2.50 saving basically with those offerings, and you can stack that, and you're talking about a $50 basically discount for purchasing fuel. And those are the things that we need to do and in some areas, of course, where some areas that are more low income, I mean, we probably see people taking more advantage. In addition to that, the $0.10 Tuesday, for example, as we mentioned, since we launched that, we doubled our gallons over there. So we just need to do all of those things in order to help our consumers to go through this time that everybody is under pressure. And hopefully, when price of fuel will come back to normal, I believe we're going to see the trend coming back to normal.