Arko Corp. (ARKO) Q3 2026 Earnings Call Transcript

Operator: Greetings, and welcome to the ARKO Corp Third Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star 0 on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Priya Trivedi, Senior Vice President, Investor Relations. Thank you. You may begin.

Priya Trivedi: Thank you. Good morning, and welcome to ARKO Corp's Third Quarter 2026 Earnings Conference Call and Webcast. On today's call are Arie Kotler, Chairman, President, and Chief Executive Officer, and Galagher Jeff, Chief Financial Officer. Our earnings press release and quarterly report on Form 10-Q for the third 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 third 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 statement section at the end of our third quarter 2026 earnings release for various factors that could cause actual results to differ materially from forward-looking statements made during our call today. 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. Descriptions 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 September 30, 2026. Additionally, management will share profit measures as our individual business segments, along with- Turn the call over to Arie.

Arie Kotler: Thank you, Priya, and good morning, everyone. We delivered a very good quarter, closing the first nine months of the year with Adjusted EBITDA of approximately $199 million, an increase of $15.6 million, or 8.5%, to prior year. Third quarter Adjusted EBITDA was $75.7 million, which was above prior year. Our retained store portfolio, which are stores we do not expect to be converted to dealer locations, delivered growth in merchandise sales, excluding cigarettes, of approximately 0.8%, and has delivered year-over-year growth in each quarter of this year. Our subsidiary, ARKO Petroleum Corp, or APC, which we currently own approximately 74%, also performed very well, with strong results across wholesale and fleet fueling. Earlier in the third quarter, APC entered into an asset purchase agreement to acquire the business of U.S. Petroleum Partners, which we refer to as USPP. We achieved these results despite a volatile fuel environment. Regular gasoline ended the quarter at approximately $4.31 per gallon, about $1.32 above last year, while diesel exceeded $6.50 in September. Against this backdrop, our team remained focused on areas within our control. We managed fuel margins with disciplined and executed targeted in-store initiatives, which helped offset the impact of industry-wide lower retail fuel volumes and higher credit card fees. Our year-to-date performance, current business trends, and the expected closing of the USPP acquisition give us confidence to raise the low end of our full-year guidance. Now, let's turn to our third quarter results. Turning to retail, in fuel, we remain focused on maximizing gross profit as elevated prices pressure demand. While gallons decline across the industry, our same-store fuel margin increased 10.4% to $0.488 per gallon, driving a 2.7% increase in same-store fuel contribution, or $2.6 million. We continue to balance competitive street pricing with disciplined margin management. Through our Fueling America's Future marketing campaign, we also offered discounts of up to $2.50 per gallon, providing customers compelling, industry-leading fuel savings in this challenging environment. Inside the stores, our focus was also on value. We increased promotional spend in our stores by approximately 16% versus last year's third quarter. We also redesigned our promotions to communicate clear value, reach more customers, and encourage larger baskets. We broadened eligibility for certain promotions to non-loyalty members, expanded targeted in-app offers, and worked with our vendor partners to bundle promotions across categories. These promotions allow customers to earn greater fuel savings as they add qualifying items to their basket while protecting merchandising margin. Loyalty is an important part of this strategy. fas REWARDS members visit approximately two times more frequently, carry baskets that are over 45% larger, and spend over $100 per month on average, more than twice the spend of non-enrolled customers. We added approximately 70,000 new enrolled members during the quarter, increasing enrollment by approximately 3%. We also continue to invest in higher-margin categories. We are expanding our food service offering, which is now in approximately 145 stores with delis, offering a more robust food service menu. In other tobacco products, we expanded our assortment and shifted more space towards products with higher growth rates, supporting category growth and a more favorable merchandise mix towards this higher-margin category. We also sharpened our value proposition in packaged beverages. These investments are improving overall merchandise mix and helping drive both sales and merchandise margin. We continue to see the results of these efforts. Our retained store portfolio delivered merchandise sales growth, excluding cigarettes, of approximately 0.8%, and has now generated year-over-year sales growth in each quarter this year. Just as importantly, same-store merchandise margin increased by 50 basis points to 34.8% as compared to last year, marking our 12th consecutive quarter of year-over-year merchandise margin expansion. Positive retained store comps and expanding merchandise margins are exactly what we want to see from our retail transformation. Turning to dealerization, which remains central to our retail transformation, we have dealerized approximately 500 stores since the program began mid-2024. We expect to continue to convert a meaningful number of additional stores and be largely complete by the end of 2027. This allows us to focus our people and capital on a stronger core portfolio of company-operated retained stores. This retained store portfolio continues to outperform the store to be dealerized by over 230 basis points in merchandise sales, 330 basis points in gallons, and generates the majority of the retail segment's operating profit. We are investing in our retained store portfolio. We expect to complete more than 25 remodels this year, with 11 already completed. Based on initial results, remodels are generating low double-digit sales growth. We are also investing in new-to-industry stores and opened three NTI retail stores during the first nine months of 2026, and plan to open four NTI Dunkin' stores between now and early 2027. Based on initial results, these NTI retail stores are generating return on investment approaching 20%. These stores incorporate our fas craves food and beverage offering and updated layout. We remain disciplined with our capital allocation, prioritizing markets and projects where we see the strongest return. Wholesale delivered another strong quarter. Blended fuel margin increased 11.4% to $0.107 per gallon from $0.096 per gallon last year. Higher margin more than offset lower gallons, driving total fuel contribution of $26.7 million, up 6.6% from last year. Dealerization continued to add volume to this business as stores transitioned from company-operated retail locations to wholesale dealer locations. Fleet fueling also performed well. Approximately 80% of volume in this business is diesel. Despite record diesel prices, gallon declined only modestly compared to last year, demonstrating the relative stability of demand from our commercial customers. Fuel margin increased approximately 6.2% to $0.486 per gallon from $0.458 per gallon last year. This is a low-capital, cash-generative business. We have opened five new cardlock locations in the first nine months of 2026. Two locations were added in October, and currently, we have an additional 16 locations in various stages of planning and development. This project requires relatively low capital investments and is expected to generate mid-to-high teens returns. Before turning it over to Galagher, let me briefly review why we believe the USPP business is such a strong strategic and financial fit for APC. USPP is a vertically integrated fuel supply and distribution platform serving customers throughout the Great Lakes region. Upon closing, the business is expected to add approximately 280 million gallons of annual fuel volume across approximately 400 dealer locations. Increasing APC's trailing 12-month volumes as of September 30, 2026, by approximately 14%. We expect USPP to contribute approximately $30 million of annualized Adjusted EBITDA, with strong conversion to discretionary cash flow, creating a meaningful step-up in APC's scale and earnings power. The acquisition will also add assets, including terminals in Novi, Michigan, and Toledo, Ohio, plus a transportation fleet that delivers more than 80% of its distributed volume. These assets will expand our position across the fuel value chain and increase our relevance with major fuel suppliers. APC continued to work towards the closing of the transaction, which is expected to occur during the fourth quarter of fiscal year 2026. Overall, we made solid progress in the quarter. Retail trends improved, our retained store portfolio delivered another positive comp, merchandise margin expanded, wholesale and fleet fueling performed well, and APC entered into an asset purchase agreement to acquire the business of USPP. Through the first nine months, Adjusted EBITDA was approximately $199 million, up 8.5% from last year. Given our year-to-date performance, current business trends, and the expected closing of the USPP acquisition, we are raising the low end of our Adjusted EBITDA guidance from $245 million to $250 million, and now expect our full-year 2026 Adjusted EBITDA to be in the range of $250 million-$265 million. With that, I will turn the call over to Galagher to review our financial results and updated outlook in greater detail.

Galagher Jeff: Thank you, Arie, and good morning, everyone. Third quarter Adjusted EBITDA was $75.7 million, up from $75.2 million in the prior year. Higher retail fuel and merchandise margins, along with stronger contributions from wholesale and fleet fueling, helped offset lower retail fuel volumes and approximately $3.1 million of incremental same-store credit card fees associated with elevated fuel prices. Net income was $14.3 million compared with $13.5 million in the prior year period. In our retail segment, same-store merchandising sales, excluding cigarettes, were essentially flat for the quarter, while overall same-store merchandising sales declined 1.4%. As Arie highlighted, our retained store portfolio performed better, with merchandising sales, excluding cigarettes, increasing 0.8%. This portfolio has delivered positive comps, ex-cigarettes, in every quarter this year, and it's the portfolio of retail stores we see as the future of the business. Total merchandising margin in the quarter increased 110 basis points to 34.8%, while same-store merchandising margin increased 50 basis points to 34.8%. The improvement reflects favorable category mix and the investments we have made across food service, other tobacco products, loyalty, and vendor-funded promotions. Same-store retail fuel gallons declined in the quarter as elevated prices continued to weigh on demand across the industry. However, disciplined pricing across our stores increased same-store fuel margin by 10.4% to $0.488 per gallon from $0.442, resulting in same-store fuel contribution of $98.3 million, an increase of approximately $2.6 million in same-store fuel contribution compared to the prior year period. Turning to expenses. Total retail site-level operating expenses were $160.3 million compared with $172.9 million for the prior year period. Same-store operating expenses were $156.7 million compared with $150.6 million in the prior year period. The increase was primarily attributable to the $3.1 million of incremental credit card fees associated with elevated retail fuel prices, along with slightly higher personnel costs, rent, and utilities. Excluding credit card fees, same-store operating expenses increased approximately 2.2%, with store labor up just 1.3% versus Q3 last year, which includes incremental investments in labor to support the expansion of our food service offering. We continue to manage G&A expenses across the business. Corporate G&A expenses were $40.8 million, up 1.8% from the prior year period. The increase was entirely driven by normalized incentives as well as higher stock-based compensation in this year as compared to last year. We continue to manage our personnel expenses closely, reducing payroll expenses by 2.9% versus the prior year period. Wholesale operating income increased 7% to $25.8 million. Gallons declined to 249.2 million from 260.4 million, while fuel margin increased 11.4% to 10.7 cents per gallon from 9.6 cents. The improvement in margin more than offset the impact of lower volume. In our fleet fueling segment, operating income increased 8.9% to $13.3 million from $12.2 million in the prior year period. Fleet fueling gallons were 36.2 million, down slightly from 36.6 million in the prior year period, while fuel margin increased approximately 6.2% to 48.6 cents per gallon compared with 45.8 cents in the prior year period. Given its capital-efficient model, recurring cash flow profile, and attractive expected returns, cardlock expansion remains a high-priority organic investment within our capital allocation framework. Turning to our balance sheet, we ended the quarter with $184 million of cash and cash equivalents. During the quarter, we opportunistically repurchased $62.1 million of our 5 and 1/8 senior notes for $56.8 million of cash, and ended the quarter with $625 million of long-term debt, excluding lease-related financing liabilities. Capital expenditures in the quarter were $41.4 million, compared with $24.9 million in the prior year period. The majority of our capital spending in the quarter continues to be directed towards growth initiatives, primarily retail store remodels and investments in NTI retail stores, as well as new cardlocks as we accelerate our organic growth and the purchase of fee properties. Our capital priorities remain high-return remodels, new-to-industry retail stores, new cardlock locations, and expansion of food service. We will continue to allocate capital toward projects that meet our return thresholds while preserving balance sheet flexibility to drive the long-term value of the business. From a liquidity perspective, we ended the third quarter with $1 billion of total liquidity, providing significant flexibility to fund high-return organic growth, support APC's expansion, reduce debt, and pursue other value-creating opportunities. Looking ahead to the remainder of the year, based on our year-to-date performance, business trends, and the expected closing of the USPP acquisition, we're raising the low end of our Adjusted EBITDA guidance for fiscal year 2026 from $245 million to $250 million, resulting in a revised range of $250 million-$265 million. We now expect full-year retail fuel margin of 47-49 cents per gallon. With that, I'll hand the call back to Arie for closing remarks.

Arie Kotler: Thank you, Galagher. We are making progress across each of our strategic priorities. Our retained store portfolio is performing well, dealerization is creating a more focused and cash-generative retail business, wholesale and fleet fueling continue to provide stable, diversified earnings, and the expected closing of the USPP acquisition are all expected to contribute to APC scaling as growth and cash-generative platform. We remain focused on execution, disciplined capital allocation, and creating long-term shareholder value. Operator, please open the line for questions.

Operator: Thank you. At this time, we will conduct our Q&A session. To ask a question, press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Your first question comes from Bobby Griffin with Raymond James. Please state your question.

Robert Griffin: Good morning, guys. Thanks for taking the questions. I guess, Arie and Galagher, I want to first maybe start with the dealerization aspect. It looks like if I am kind of monitoring the language a little bit as we have gone through the quarters, the program maybe is extended a little longer than we originally thought. I think you called out in the release there is still a meaningful opportunity left in front. You are going to be done by the end of 2027 now. I believe we kind of had the program going through early 2027, maybe even ending in 2026. So, can you maybe just talk about that for a little bit? Are you finding more stores and more opportunities, additional savings, anything there to help us think about the dealerization program? It looks like that has more opportunity in front of it.

Arie Kotler: Sure. Good morning, Bobby. Thank you for the question. As you all know, since we started the program, we dealerized approximately 500 stores as we started in August 2024. Those stores that we converted were just not strategic for us. As we continue to move forward, we just refined the numbers. We still have 55 additional sites committed under letter of intent. As we continue to focus and as we continue to see results, we just refined the numbers, and that is why we decided to extend our program a little bit and extend the amount of stores in some areas that we just felt that we should focus our time, focus our people, focus our capital in areas that we believe there is just additional growth. So, we become a little bit more maybe selective. in some of the other areas that we didn't think about them before. All of those initiatives are just making sure that we are delivering better results on the retained stores, as you can see over here for the past three quarters. Those retained stores continue to show favorable comps.

Robert Griffin: Okay, that's helpful. Galagher, I wanted to spend a second or two unpacking that retained store side of things. I think you guys called out that the merchandise comps, ex-cigarettes, have been positive all year for retained stores, which is better than the collective comps, which gives you that implied retained store performance is doing better. What is happening with same-store gallons of the retained stores versus the total comp gallons that I see from the business?

Galagher Jeff: Bobby, good question. We do want to talk about retained stores a lot more as we finish dealerization. We think that's the future of our retail business and what's most meaningful to everyone. Our gallons have also outperformed around 300 basis points, 320 basis points versus the divested stores. In Q3, they did outperform OPIS. The OPIS percent was down around 6% for the quarter, and our retained stores performed better in gallons there also. We continue to see good results, and as you talked about with Arie, we're working thoughtfully. The gallon strength is there along with the merchandise sales.

Robert Griffin: Okay, is it fair to think about, I think same-store gallons were down 7% collectively. You're saying a same-store base-

Galagher Jeff: Yeah. Better than OPIS, and OPIS was down six.

Robert Griffin: Okay, perfect. That's helpful. I guess, I don't know if you're going to be able to answer this or not, just given what's been signed and what's not, but is there any way to tell us what the number is in? How many stores are considered retained stores?

Arie Kotler: Well, we have right now 1,038 stores that are-

Robert Griffin: Yep

Arie Kotler: basically the current store count. Like I said, we have 55 additional stores that are under a letter of intent. We don't have the numbers that we can provide at the moment because we continue to refine this number. But like I said, it's probably going to be, I would say, if I have to guess, it's probably going to be around 900 stores at the end of the day. Again, this is just a guess.

Robert Griffin: Okay. That's-

Arie Kotler: Bobby, maybe I want to add one more thing, just because we keep talking about retained stores and non-retained stores. I just want to add that the retained stores generated the majority of basically the operating profit. When I say the majority, I'm talking about maybe 99%-98%, just to be clear.

Robert Griffin: Yep. Okay.

Arie Kotler: It's not about the amount of stores, it's really the quality of the stores. And those stores, we work really, really hard to transfer them. And as you can see, having a positive 0.8% sales, excluding cigarettes, while we also increase margin, it's something remarkable for us.

Robert Griffin: Yes, that's encouraging to hear. I guess lastly for me, I appreciate all the time this morning, it's more of just a guidance or what's implied in the guidance type question, Galagher. If we take the APC guide for the year, the midpoint, and we take the ARKO guide for the year, the midpoint for the ARKO consolidated, we can obviously back into what's implied for the retail division. That looks like it's down pretty notably year-over-year from what was reported in Q4 of 2025. Obviously, a lot of things are moving around with the store count, so I'm just trying to see if there's something going on there, because it looks like a pretty notable drop, a lot more than we've seen all year, honestly, for the retail segment. Is there anything further to unpack there from a timing standpoint, cost pressure standpoint, or anything there?

Galagher Jeff: Yeah, I'll start, and then Arie can weigh in. We feel good about year-to-date, Bobby. We've had three quarters that are delivering growth over last year. Q3 was solid also. Last year's Q4 was very strong. I think our CPG jumped 6% versus the prior year, one of the highest quarters of CPG for the year. We continue to see volume pressure, which we considered as we, Q3 and Q4. We're also at the timing of the USPP acquisition. We're still not closed there yet. We expect it to close in Q4. All those variables really make us comfortable with the range we put out there, and we do want to deliver a number that we tell you. So, we're trying to be comfortable with that range and not be too aggressive as we go into Q4.

Arie Kotler: Let me just jump in, Bobby, just with your comment. I don't think that's the case, given that there is a different amount of stores that you add in basically in Q4 2025 to the amount of stores that you have right now. I think there is a shift between retail to basically to APC. That's, I think, that's maybe the case at the end of the day.

Robert Griffin: Okay, that's helpful. I think it's that. I mean, we're looking on an average store basis as well, but admittedly, we don't have the perfect store set based on what we get in the disclosures. That's helpful. That plus the retail gallons, I think, helps answer the question some. Thank you again for the time, and I appreciate, Arie, the additional disclosure on the retained stores. I know it's something I've pushed you guys for, and it's helpful, so thank you for providing that.

Arie Kotler: I still want to add one more thing for you, Bobby, if you don't mind, just one more thing.

Robert Griffin: Of course.

Arie Kotler: Speaking loud.

Robert Griffin: It's your call.

Arie Kotler: Given that, no. Given that our comps are up, given that our fuel margin gross profit dollars is up. Given that, at the end of the day, we have less stores, I believe that, again, I believe there is basically a shift between the two. Margin, and we continue with the pressure and with all of that, we are actually able to increase margin. Remember, this is the 12th consecutive quarter that we are able to increase margin with this pressure. I think all of that, it's just a mix, and the help of our basically support vendor partners over here. I think this is something incredible. We have a lot of promos related to our loyalty members. As I mentioned earlier, the business is very, very healthy. The retained stores are very, very healthy, and you see it through the results over here. Again, I think that, and I will look at the numbers again after this call, but like I said, I think the retained stores are doing much better than what we saw basically last year.

Robert Griffin: Yep. Very well. Well, I appreciate the details, and I am sure we will talk again here, but yeah, thank you. Best of luck in 4Q.

Arie Kotler: Thank you, Bobby.

Operator: Your next question comes from Daniel Guglielmo with Capital One Securities. Please state your question.

Daniel Guglielmo: Hi, everyone. Thank you for taking my questions. I think in the opening remarks, you mentioned that 145 stores have food service. Thinking out longer term, what percentage of the retained portfolio do you expect will have food service, and what would be the expected timeline to get there?

Arie Kotler: Good morning, Dan. We have 145 stores today that we have delis. In many of our stores, more than 500 stores, we have some kind of food component already. The idea is really to expand fas craves, and this is something that we're doing as we continue to remodel stores. Again, I cannot give you the exact number, but I can tell you it's hundreds of stores. As I said, right now, many of those stores have food component from anywhere from roller grills to basically to sandwiches, and the idea is just to expand it.

Galagher Jeff: Dan, just to add, the remodels we are opening this year all have enhanced food service. To me, that is a lot of headroom out there because the higher margin, the higher sales we get from those, it is still relatively a small number. It is only going to grow. We expect it to really help our sales and margin. The margin growth is primarily through mix, selling more profitable products and not price. So it is through growing OTP and some more profitable nicotine categories, plus food. Looking forward, we expect that to continue to benefit both sales and margin.

Arie Kotler: Yeah, the margin at our deli rates right now, it is around close to 50%. That is their benefit.

Daniel Guglielmo: Okay, great. Yeah, that is really helpful. Then as a follow-up to Bobby's earlier gallons question, I think you all use a third-party system to price fuel on a daily basis at your stores. So in this kind of volatile pricing environment, have you had to adjust or tweak the way that you are using that pricing system? Do you know if wholesale partners kind of use a similar pricing strategy?

Arie Kotler: Well, when it comes to fuel, this is something that we have been doing all along since the beginning of, since 2020. I mean, our job is to actually maximize GP dollars over here. This is the objective over here, to maximize total fuel contribution, while we are remaining very competitive in the marketplace. So, we are not just managing cent per gallon, we are also looking on basically gallon in isolation. I think everybody is facing the same thing as Galagher mentioned earlier. OPIS was down 6% this quarter. As you can imagine, Daniel, when price of fuel, it is above $4, $4.35, as you can imagine, everybody is under pressure and everybody need to figure out a way how to basically end their year with the same profitability. Everybody have expenses. I think every one of those guys is expanding his margin as well in order to basically to maximize gross profit dollars. I think with our systems, we are maybe a little bit more efficient than some others. We did not change anything. We are just trying to maximize gross profit dollars and at the same time making sure that we are competitive in the market that we are. I think that is why our loyalty members and our Fueling America's campaign become very, very important during this time. I can tell you that, for example, that on Tuesday, we are running $0.10 off Tuesday in addition to Fueling America's, and we see a nice basically increase in population because of that. We are just trying to maximize gross profit dollars and at the same time trying to help our consumer when they are very under pressure right now, given the price of fuel. I think what will happen at some point when the price ease, you are going to see basically the opposite. You are going to see an increase in fuel gallons and a decrease in basically in fuel margin. That is typically what happens.

Daniel Guglielmo: Great. Thank you. Appreciate all that color. That is helpful.

Arie Kotler: Thank you.

Operator: Thank you. Ladies and gentlemen, that was our last question for the day. I will now hand the floor back to Mr. Kotler for closing remarks.

Arie Kotler: Thank you very much, everybody, for participating this morning. We are looking forward to meet you and see you again in our next quarter.

Operator: Thank you. With that, we conclude today's call. All parties may disconnect. Have a good day.